The quaint house on Idaho Avenue hadn't changed much since Frances Espinoza last saw it.
The grass in the small front yard wasn't quite overgrown, but still unkempt. A tan, out-of-place piece of siding patched the outside wall beneath the left-front window, and a cluster of roofing shingles did the same under another window on the right.
Cracks in the white paint revealed the ash-colored, wooden skeleton of the house.
"They haven't really done anything to it," Espinoza said. "You can see there's a lot of problems."
"They" meaning mortgage servicers.
The industry has long known of problems with vacancy and blight, even before the latest housing collapse. Behind-the-scenes responses — including code enforcement and neighborhood outreach — have met varying degrees of success. Yet the NFHA's recent complaints bring new, unflattering attention to the issue.
Problems with vacant homes are epidemic in many cities' minority neighborhoods, the NFHA said. After roughly nine months inspecting 1,000 homes, the NFHA said it found homes located in predominantly minority neighborhood weren't in as good of shape or marketed as well as those in mostly white neighborhoods.
"It's the same pattern," NFHA CEO Shanna Smith said. "You find that they don't put for sale signs up in communities of color. They're not maintaining the lawn, cleaning the trash."
But many within the mortgage and housing industry contest the NFHA's findings, saying they make don't make decisions of whether to clean up or repair a property based solely upon where it's located.
The NFHA accused Wells Fargo and U.S. Bancorp, through Department of Housing and Urban Development complaints, of discriminatory practices in their maintenance of real estate owned properties — complaints of wrongdoing that both Wells and U.S. Bancorp strongly deny. The NFHA said more complaints could come against other mortgage servicers and property managers, as part of an investigation funded by Fannie Mae and HUD grants.
The dilemma of managing vacant REO properties puzzles and presents problems for many, including the asset holders.
"The banks and servicers are looking for answers, too," said Cary Sternberg, a senior vice president at Bank of America, though not speaking on behalf of the company. "But the answers have to be reasonable, and the answers have to make financial sense along with upholding their community responsibilities."
THE INDUSTRY REACTS
For their part, the NFHA's Smith said her group wanted to use this study and the HUD discrimination complaints, under the Fair Housing Act, as a way to get Wells Fargo and U.S. Bancorp to the table, regardless of whether the alleged discrimination is intentional. A complaint simply means HUD will investigate the dispute, and the two parties will sit down for talks to try and reconcile any allegations.
If that process fails, HUD may choose to file a lawsuit, or the NFHA could sue on its own.
"If somebody wants to fight, that's fine," Smith said. "That could take years to get a solution, and it's just better for the neighborhood if we could get something done quickly."
Spokespeople for Wells Fargo and U.S. Bancorp said the companies hadn't yet received specific information on which of their properties were involved in the NFHA study.
"We don't have a good sense of exactly what it is that we're dealing with," Wells Fargo spokesman Tom Goyda said. "It's really impossible to respond specifically to this point."
Both banks also point to their frequent status as a trustee on a loan that has been pooled and sold into a mortgage security. In these cases, the banks said the responsibility to maintain a foreclosed, vacant property would fall on someone else — typically the mortgage servicer responsible for managing the loan. But neither said race or location are taken into account when they make decisions regarding property maintenance.
The NFHA left open that possibility in its report.
"Wells Fargo conducts all lending and servicing activities in a fair and consistent manner, without regard to race," Wells spokesman Goyda said.
Others in the industry responded similarly. Alan Jaffa, CEO of Safeguard Properties, said the property preservation company doesn't discriminate in its practices. He said Safeguard wouldn't work with a company that would attempt to instruct them to ignore or neglect certain neighborhoods.
Freddie Mac, meanwhile, said it doesn't have preservation and marketing policies that apply to some neighborhoods and not others. "A lot of people always ask, 'So how do you decide when to repair a home?'" said Eric Will, who directs REO sales for Freddie Mac's HomeSteps program. "We don't have any blanket policies that say, in this neighborhood, we don't do repairs."
DISPARATE IMPACT CLAIMS
Discrimination, on its surface, has a sharp social connotation. It suggests a conscious decision made to undercut someone based on their race, ethnicity or other characteristics.
"In my experience, it's never blatant like that," said Espinoza of the North Texas Fair Housing Center.
Legally speaking, "blatant" discrimination is characterized as so-called disparate treatment, wherein someone deliberately discriminates against another party. But in a disparate impact claim—such as that alleged by the NFHA—a plaintiff can claim discrimination even when there's no intent to discriminate, according to Chris Willis, a lawyer with Ballard Spahr.
Willis, who represents lenders in consumer financial services cases, said policies can be race neutral on the surface, but can still have an unintentded, unequal impact on parts of the population. Apartment landlords made this argument recently in a lawsuit against the city of St. Paul, Minn., after ramped-up code enforcement regulations drove rents higher at affordable housing complexes.
The new regulations, landlords argued, crowded out low-income and minority tenants. The case made it all the way to the U.S. Supreme Court, but the city dropped its appeal because it feared a decision in its favor could undermine civil rights.
Ballard Spahr's Willis called the NFHA's REO claim novel, but thought it might make for a difficult fair housing argument.
"I would say that's a little bit of a stretch," Willis said.
Undaunted, the NFHA's Smith said the maintenance of only certain properties does fall under the Fair Housing Act. Failing to maintain a vacant property not only impacts the value of the home next door, but could also endanger the tax base in the area, meaning schools and other property-tax-supported services could suffer, she said.
THE NFHA INVESTIGATION
The housing crisis has clearly taken its toll on the nation's minority populations. In a study by the Center for Responsible Lending, researchers found that Latino and African-American borrowers are twice as likely to have lost their home to foreclosure than whites. And even among good-credit borrowers, blacks and Latinos were three times as likely to receive a subprime loan between 2004 and 2008.
Bank of America, acting on behalf of defunct lender Countrywide, paid $335 million late last year to settle a Justice Department lawsuit regarding discriminatory lending practices.
In nearly every city the NFHA looked at for its own vacant property maintenance study, it said African-American and Latino neighborhoods scored lower than white neighborhoods, findings that the NFHA said remained even among newer properties.
In Dallas, the house on Idaho Avenue, in a mostly African-American community, received a score of 75—deemed a "C" and slightly above the average 74.1 rating for all similar neighborhoods in the city. (Neighborhoods were rated on a 100-point scale.)
It's unclear what exactly happened to the home and when it became vacant in a state largely known within the mortgage industry for its speedy foreclosure process. Dallas County records show that the deed on the house transferred from an individual owner to Bank of America Home Loans Servicing on May 17, 2010. The home came under the auspices of HUD on March 14, 2012, according to an agency spokesman.
Bonnie Jones, who has lived next door to the Idaho Avenue property since 1992, guessed the home had sat vacant since sometime in 2009. The last owner, the 81-year-old said, stripped the house of much of its valuables when he left, taking bathroom fixtures, the air conditioner and even the flowers outside.
The property had also deteriorated considerably since it became vacant. The lining on some windows had rotted beneath the black, iron bars that covered them. A pole in the middle of the front yard lacked the lamp that formerly sat atop it.
SENSITIVITIES EXPLAINED
Banks and mortgage servicers have more than just a civic duty to do right, said Sternberg, a long-time asset manager for mortgage servicers. They have to strike a balance between that and their responsibility to their stockholders and investors, inevitably concerned only about the corporate bottom line.
The NFHA has "one agenda, and that's not to say the agenda is bad," Sternberg said. "The issues that are involved are very sensitive."
In certain situations, if an REO property is located in an area with a high vandalism risk, Sternberg said it might make more sense not to make a repair. That to him isn't a case of disparate impact, but rather sound business logic.
"It doesn't make sense to continually fix a window to have it broken [again]," Sternberg said.
Blight leads to further problems, and not just for the neighbors. Properties become a tougher sell and are harder to keep up to code according to Eric Miller, executive director of the National Association of Mortgage Field Services, an industry trade group.
Ultimately the neighborhood a property is located in comes along with any home purchase, Miller said. And with 18.5 million vacant homes nationwide, according to the Census Bureau, odds are pretty good that many neighborhoods across the U.S. have multiple vacant homes.
"If there are other properties that are blighted in that area … that investment could be potentially watered down," Miller said. "There are certain areas you're not going to prevent damage from occurring."
That makes it increasingly important to maintain a relationship with a local city's code enforcement team, said Rob Behrend, head of REO sales for Homeward Residential, formerly American Home Mortgage Servicing. The code officer's uncertainty over the home's actual servicer can delay needed repairs.
"That code violation could take a month before it gets to me," Behrend said.
Often county or city records give the wrong contact information, a common complaint from code officials, according to Michael Halpern, director of community initiatives at Safeguard. Vendors, including Safeguard, offer access to a liaison system that facilitates contact between servicers and local municipalities.
The goal, Halpern said, is to maintain full transparency on both ends. He said Safeguard is even trying to reach out directly to elected officials.
But vandalism isn't a just problem in blighted neighborhoods, Freddie Mac's Eric Will said. He said in at least one suburb, people targeted the government-sponsored enterprise's homes and stole heating and air-conditioning units.
In some communities, with consultation from brokers, Will said Freddie Mac will avoid posting signs on a vacant home in the hopes of deterring would-be burglars.
"You don't have to be concerned about vandalism just in inner-city, urban neighborhoods," Will said.
Low-value homes can also present an economic quandary, according to Sternberg. With the cost of repairs needed to bring an REO property up to a lendable standard, the margin might not be enough to outpace the lower sale price if sold as-is to an investor.
From an economic perspective, it can be hard to fault a lender for making a decision to leave a property as-is, said Brian Hurley, president at New Vista Asset Management. The company promotes homeownership for minorities, as well as households with low-to-moderate incomes.
Hurley said if no one makes an investment in blighted neighborhoods — which often have strong racial and ethnic correlations — the ruin doubles upon itself. Most people, he said, understand the long-term costs of this process.
"Someone has to be accountable to step up to the plate and say, 'I'm going to stop the cycle,'" Hurley said. "I think institutions understand that there is a great desire on the part of America at large to see them do the right thing."
FREDDIE SETS AN EXAMPLE
The National Fair Housing Alliance's complaints of disparate impact hinge, in part, on whether it can demonstrate other practices can achieve the same business ends, Willis, the lawyer, said.
But many of the changes companies could make are already in place elsewhere, the NFHA said, often citing Freddie Mac as a good example in its investigation. The mortgage giant has developed a mutual relationship of sorts with the NFHA, trading information back and forth.
"We want our homes to look as good or better than other homes in the neighborhood," Freddie Mac's Will said. "Our goal is not to sell homes at deep discounts because that hurts communities."
A number of measures, Will said, can help stave off REO blight. Freddie prefers to contract with local vendors in the community, he said, and give them authority to make emergency repairs — even without prior consent from Freddie Mac itself.
The GSE also wants its listing brokers to make a point of reaching out to neighbors, typically posting contact info in case of a problem with the property.
"I don't think these things are necessarily rocket science," Freddie Mac's Will said. "It's about effectively managing your portfolio of loans."
Of course, Freddie's biggest investors — the federal government and the American taxpayer — might have different priorities than those of large, public financial institutions. But Sternberg said no lender or servicer would ever tell a preservation vendor not to keep a house up to code.
"I just don't believe that there's any bank or servicer in the country that's knowingly doing that," Sternberg said. "They're doing everything to be a good citizen with the constraints that they have."
Pure, bottom-line economics don't always translate to homeownership on the other end of an REO sale. Community advocates, like the NFHA, would prefer to see a home go to an owner-occupant, as ownership rates fall to pre-bubble lows.
The declining trend in homeownership has been especially tough for African-American and Latino households, according to Census Bureau data. While roughly 73.5% of white households owned a home in the first quarter of 2012, blacks and Latinos saw significantly lower shares of 43.1% and 46.3%, respectively.
Add that onto the adverse effect of the housing crisis and lost equity on minority populations' wealth. Pew Research Center reported median wealth fell by more than half for African-American and Latino households from 2005 to 2009, but dropped by just 15% among whites.
Household wealth, particularly in middle-income, minority communities, is dominated by families' investment in their homes, New Vista's Hurley said.
The NFHA's investigation frequently cited what it believes is a lessened effort to actively market REO properties in minority neighborhoods, making fewer homes available for possible owners.
"We don't want to have our communities devastated by absentee landlords, absentee investors who are not taking care of the home," NFHA's Smith said.
Back in Dallas, however, luck changed for the home on Idaho Avenue. Shortly after HUD took it over, a for-sale sign appeared in the front yard.
"This is the first time anybody's taken interest in it since it became vacant," said Bonnie Jones, the next-door neighbor.
At an asking price of $20,000, Bonita Foucher, the listing agent, received a number of inquiries on the home. Within three weeks, she got a signed contract.
Foucher said she couldn't say much about the buyer, other than that it's an owner-occupant like most of the other homes up and down Idaho Avenue.
"We used to have all-time highs for homeownership for Latinos and African- Americans and whites," Smith said. "If we're going to start a recovery, we need to have properties in good shape."
