Wednesday, November 14, 2007

Where Cleveland went wrong
It's too easy to blame the city's housing collapse on Rust-belt economics. How bad government and greed made it one of the nation's foreclosure capitals.

By Les Christie

CNNMoney.com

CLEVELAND (CNNMoney.com) -- As the Treasurer of Cuyahoga County in Ohio, Jim Rokakis spends a lot of his time trying to deal with Cleveland's foreclosure crisis.

When asked recently just how bad it is, Rokakis unfurled a six-foot by four-foot Cleveland city plot map. Each lot was covered with dots of red ink where foreclosed homes filled the plots. From a few feet away, the map looked heavily freckled, while some neighborhoods nearly melted together in crimson masses.

Foreclosures hit Cleveland early and hard. By the summer of 2007, it had four of the top 21 ZIP codes for foreclosure filings in the United States. According to RealtyTrac, the city's 44105 ZIP, known as the Slavic Village, was the hardest hit U.S. community with 783 filings.

What made Cleveland the nation's foreclosure epicenter?

Like most rust-belt cities, it's suffered serious economic setbacks. The city lost jobs at more than three times the national rate during 2001 through 2003 and has not had a meaningful recovery since, according to Richard DeKaser, chief economist at Cleveland-based mortgage lender National City Corp. The state of Ohio recorded a quarter of all U.S. manufacturing job losses since 2001.

Add considerable population shrinkage: With 450,000 people, Cleveland has fewer than half the residents it boasted in 1950, when only six cities in the nation were larger.

Still, Rokakis and others don't buy the "It's the economy, stupid," explanation.

All over the state, even in prosperous communities, foreclosure filings at least quadrupled in 70 of the state's 88 counties over the past 11 years, according to Zach Schiller, of Policy Matters Ohio, an economic think tank. "They grew even when the economy was doing better," he said.

According to Rokakis, Cleveland got hammered because lax governmental oversight from the state allowed Wild-West lending. "No one was watching," he said. "There was no sheriff in town. The state legislature was dominated by banking interests."

Cleveland tried to enact local anti-predatory lending ordinances in 2002, but national lenders then abandoned the market, according to Mark Wiseman, who heads the Cuyahoga County Foreclosure Prevention Program, which is part of the county treasurer's office.

One bank representative, speaking under condition of anonymity, said the ordinances would have put local lending criteria well above and beyond the national standards. The lenders wanted no part of that.

Wiseman said banking lobbyists got the state legislature to nullify the local ordinances. Until this year, Ohio was one of only two states that did not include mortgage borrowers in their consumer protection statutes. And when the state passed anti-predatory lending laws in 2006, the punitive damages part of the law was gutted during the lame duck legislative session at the end the year.

The latest effort to rein in the mortgage industry is a compact drawn up by the governor and state attorney general's office last Spring. It asked that lenders, who helped create the predatory lending crisis, help keep Ohioans in their homes.

The plan's relatively mild provisions include such steps as notifying borrowers about resetting adjustable rate mortgages (ARMs) six months in advance. But, according to Paul Richman, senior executive for government affairs for the Mortgage Bankers Association, too many of the other compact provisions were unworkable.

The plan required servicers to pay incentives for mortgage workout counselors to encourage them to find solutions that kept people in their homes, mandated specific staffing levels and required dedicated caseworkers for each client so borrowers would always have a specific contact person to call.

And, there was a question as to how much legal weight the document carried. None of 20 mortgage servicers and lenders targeted have yet agreed to sign on.

For Rokakis, this long-term lack of accountability enabled lenders to continue to make bad loans virtually unchecked. These included many subprime, hybrid ARMs, also called "toxic ARMs," products he considers predatory.

Rokakis told of a 78-year-old Cleveland woman recently saddled with an unaffordable, 30-year ARM arranged by her minister, a mortgage broker. "I asked him why," said Rokakis, "you would give an elderly woman an ARM. He said, 'She wanted the house.'"

Rokakis shook his head. "I want a date with Uma Thurman," he said, "but you have to be realistic."

The lending industry views subprime, hybrid ARMS, not as inherently predatory, but as credit-repair products that give risky borrowers affordable rates, enabling them to establish credit worthiness and then refinance into fixed-rate loans.

But for many financially inexperienced ARM borrowers in Cleveland, and across the nation, it didn't work that way. Some didn't understand how much their adjustable payments would rise. They also encountered difficulty when they wanted to refinance, especially as home prices stagnated.

Some loans were untenable from the start, granted based on applications with no documentation from the borrower. Consumers, urged by mortgage brokers and other originators, sometimes fudged their own figures. In others, reports indicate that mortgage brokers simply forged papers to win loan approvals.

But even the staunchly pro-consumer Rokakis admitted that predatory lending victims are not entirely blameless for their own problems.

With times hard, "People were looking for a way to make a living," he said. "There were all these 'Buy real estate with no credit and no down payment deals.' The way to wealth was real estate."

Speculation took off, and expectations ran wild before they were dashed.

According to Mark Seifert, executive director of the East Side Organizing Project, which provides foreclosure prevention services, his staff used to look out the window just before groups of troubled home owners were due in to attend counseling sessions.

"We'd see Escalades, Range Rovers, Cadillacs out in the parking lots" he said.

Now Rokakis's office is dealing with the aftermath. "One guy came in wanting Wiseman's help to save 12 separate properties," many of which he bought on speculation, entirely on credit with none of his own cash invested.

He's not the only one. Now that prices have been falling for the past couple of years, far too many homeowners have found themselves in the same boat. Now the only option they have is foreclosure.