Minnesota Purchase Offer Reo Property

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					     Vacant Properties:
Fiscal Impacts and Solutions
                 Presentation by
        John Kromer, Senior Consultant
          Fels Institute of Government
(for the National Vacant Properties Campaign)

          National League of Cities
Finance, Administration, and Intergovernmental
               Relations (FAIR)
     Spring Steering Committee Meeting
                 May 9, 2008

The National Vacant Properties Campaign provides
  information, tools, and technical assistance to
  support vacant property revitalization efforts.

More information:
Campaign activities include:

• Site assessments of local/regional policies and
• Convening of state and national conferences.
• Information-sharing and problem-solving.

Contact person: Jennifer Leonard at
Related Fels Institute activities:
• Vacant property investment strategies.
   – Reading, PA:
• Housing preservation/code enforcement strategies
   – Allentown, PA :
• Public policy research and development
   – Philadelphia’s Ten-Year Tax Abatement:
  Background: Bernanke’s Report
“Foreclosure proceedings were…up 53 percent from
  2006, and the rate of foreclosure starts looks likely
  to be yet higher in 2008”

      - Federal Reserve Chairman Ben S. Bernanke
                                  May 5, 2008

Text of speech available at
 Areas with highest increase in rates of delinquency between 2004 and 2007:
California, parts of Nevada, Arizona, Colorado, Florida, upper Midwest, New
Increased mortgage delinquencies linked with increased unemployment:
 Parts of New England, Minnesota, Michigan, Wisconsin, and Nevada.
Increased mortgage delinquencies linked with sharp decline in housing values:
 Florida, California, Nevada, Michigan, parts of New Mexico and Colorado.
                Fiscal Impacts
Impact #1: Declining Property Values

3,750 Chicago foreclosures in 1997 and 1998 reduced
  nearby property values by $598 million ($159,500
  per foreclosed house).

  Source: “The External Costs of Foreclosure: The Impact of
  Single-Family Mortgage Foreclosures on Property Values”
               Fiscal Impacts
Impact #2: Revenue Shortfall

• To address $55 million projected budget shortfall,
  City of Sacramento has ordered hiring freeze and
  ended some discretionary spending.

• To address $220 million deficit, Fairfax County,
  VA considering cuts in school district budgets.

                          The New York Times, January 24, 2008
               Fiscal Impacts
Impact #3:
Vacant-Property Maintenance Expense
• City of St. Paul spending $2 million annually to
  inspect, secure and maintain vacant buildings (not
  including police/fire services).
• About one-third of the 1,819 foreclosed buildings
  in 2007 were registered as vacant.
City official: "Nuisance properties are coming faster
  than we can handle"
                               Star-Tribune, April 9, 2008
Federal Legislation
Congressman Frank’s Proposal:

  – Require lenders to write down mortgages to
    market value.
  – Then facilitate refinancing through FHA
    mortgage guarantees.
  – Provide states and cities with grants and loans
    for foreclosed-property acquisition.
State Programs
Housing finance agencies offer fixed-rate mortgages,
 housing counseling, and closing cost assistance.
Key questions re eligibility:
  – For borrowers who need it, is assistance
    available before reset of adjustable rate mortgage?
  – Is assistance available after reset of adjustable
    rate mortgage?
  – Are borrowers with late payments eligible?
  – Is there a minimum credit score requirement?
State Programs
Example: NJ HOPE
Administered by NJ Housing and Mortgage Finance
  – Assistance available after ARM reset.
  – Borrower may have up to three 30-day late or
    one 60-day late payments on mortgage during
    the past 12 months.
  – No minimum credit score requirement.

More information:
Local Intervention
Residential Mortgage Foreclosure Diversion Pilot
  Program designed by Philadelphia Court of
  Common Pleas

Owner-occupied foreclosure properties are withheld
 from sale until owner is offered housing counseling
 services and a Conciliation Conference is held.

            Counseling is Key
Old-school focus of housing counseling: credit repair
  to enable first-time homebuyers to meet
  conventional mortgage underwriting standards.

This approach was appropriate when urban single-
  family housing market was weak, when lenders
  were local, and when 1990s subprime lending
  surge hadn’t begun.
           Counseling is Key
New focus of housing counseling:

• Relationship-building to educate consumers about
  communication with lenders and public agencies.
• Product evaluation to enable consumers to learn
  about the pros and cons of available financing
• Money management to improve saving and spending
           Counseling is Key
To be effective, housing counseling should be:
• Administered by a citywide network of nonprofit
• Not affiliated with lending institutions.
• Funded by government and charitable
• Staffed by full-time counselors who are certified
  through training programs.
• Diversified, to address different renter and
  homeowner housing issues.
            Counseling is Key
Longer-term housing counseling priorities:
• Conduct a periodic independent evaluation of
  counseling agency training, certification, staffing,
  and scope.
• For counselors with demonstrated capabilities,
  support professional development, specialization,
  and career-building.
• Support money management skills-building as part
  of the public school curriculum, beginning in lower
       What to do in your City
1. Evaluate the problem in context.

•   Not all metropolitan areas are experiencing a
    “foreclosure crisis.”

•   The level of foreclosure activity does not
    necessarily correlate with the level of “urban
    distress” in the metro-area economy.
      What to do in your City
Rank of selected MSAs by Third-Quarter 2007
   Foreclosure Activity:

1. Stockton, CA
2. Riverside/San Bernardino, CA
3. Las Vegas, Paradise, NV
75. New Orleans
82. Philadelphia
93. Buffalo/Cheektowaga/Tonawanda
97. Birmingham/Hoover, AL
                                    Source: RealtyTrac.
       What to do in your City
2. Intervene strategically.
•   Consider a court-supported diversion program to
    allow opportunity for borrower counseling and
    subsequent financing workouts.
•   Seek city “right of first refusal” on foreclosure-
    eligible properties prior to auction.
•   Explore opportunities to negotiate fair market
    value purchase of lender REO properties.
•   Pursue owner-to-renter strategies to sustain
    occupancy and reduce displacement and housing
       What to do in your City
3. Strengthen housing counseling.

•   Create a stable public/private funding base.
•   Evaluate agency performance.
•   Reward top-performers with organization-
    building and career advancement opportunities.
       What to do in your City
4. Address absentee-owner speculation
•   Institute pre-sale inspection/code compliance
•   Require absentee owner’s “local agent” to have
    legal exposure (not limited to service-of-process
•   Create a reliable blighted property review and
    acquisition process.
•   Coordinate with judiciary to give code
    enforcement process some “teeth.”
  More information:
John Kromer, Senior Consultant
  Fels Institute of Government
   University of Pennsylvania
       (215) 573-7240

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