Consequences of the Foreclosure Crisis

Real estate owned (REO) properties, such as this house in District Heights, Maryland, are often in need of maintenance and proper signage to be marketable. Image courtesy of Shanti Abedin, National Fair Housing Alliance. On October 22, 2013, editors and contributors to a new book, From Foreclosure to Fair Lending, participated in a panel discussion as part of the Office of Fair Housing and Equal Opportunity’s (FHEO’s) Speaker Series. The panel reviewed fair housing issues related to the recent foreclosure crisis and the renewed effort to realize the objectives of the Fair Housing Act. Shanna Smith, president and chief executive officer of the National Fair Housing Alliance (NFHA) and one of the book’s contributors, discussed her organization’s investigation into the maintenance and marketing of real estate owned (REO) properties in minority neighborhoods compared with those in predominately white neighborhoods.

NFHA’s early research in 2009 showed great disparities in the way foreclosed properties were being maintained in white neighborhoods compared with black neighborhoods, and a 2010 NFHA report on eight banks in four cities confirmed the problem: banks and financial institutions were neglecting REO properties in minority neighborhoods. Freddie Mac stood out as the notable exception to this unfortunate trend; the organization recognized its exposure, corrected the practice, and continues to maintain all of its properties. Continuing investigation discovered the same disparate treatment in additional cities.

In 2012, NFHA filed a HUD complaint against several banks for discriminatory practices in their maintenance and marketing of foreclosed properties. Only one of the banks, Wells Fargo, agreed to settle the claim, acknowledging that it hadn’t been maintaining properties in minority neighborhoods to the same standard as those in white neighborhoods. Wells Fargo agreed to take corrective action and paid more than $40 million to settle the complaint, with $27 million being returned to the affected neighborhoods in the form of grants through NFHA and the fair housing centers that had joined in the complaint. These grants will remediate the damage done by Wells Fargo’s unequal treatment of the properties. Of the remaining settlement funds, $11.5 million is also going to community relief, through HUD, to support neighborhoods in an additional 25 cities. Crucial to the favorable outcome of NFHA’s claim was HUD’s confirmation that unequal treatment in the maintenance and marketing of REO properties violates the Fair Housing Act.

The lack of upkeep on the REO property in District Heights, Maryland stands in contrast to well-maintained neighboring homes. Image courtesy of Shanti Abedin, National Fair Housing Alliance.NFHA documented the disparities in the maintenance and upkeep of REO properties using a checklist that included issues such as curb appeal, broken windows, gutters, water damage, and accumulated trash. The slides accompanying Smith’s presentation demonstrated the pattern of neglect of REO properties in working and middle-class minority neighborhoods, which stood in sharp contrast with other, well-kept properties in the same neighborhoods.

When a bank forecloses on a home, it becomes the owner of record; under the Fair Housing Act, this ownership makes the bank responsible for ensuring that the lawn is mowed, the trash is picked up, the property is reasonably secure, and any needed repairs are addressed promptly. Without proper upkeep, an unsecured, vacant, and neglected home may attract vandalism and other criminal activity, adversely affecting the property values of surrounding homes.

Because real estate agents don’t show homes that have fallen into disrepair and neglect to prospective buyers looking for an affordable place to live, many of these homes are instead purchased at auction by investors, who pay well below market rates for them. As Smith pointed out, these investors often purchase large numbers of these homes, perform the required upkeep and repairs, and rent or resell (flip) the properties at market rate for a substantial profit. This process shuts out ordinary affordable home seekers, who are denied one of the primary means of traditional wealth building for American families. When these properties are converted to rentals, wealth is effectively removed from the community and transferred to absentee landlords.

Recognizing that fallout from the foreclosure crisis appears to have landed disproportionately on the shoulders of minority homeowners and home seekers, NFHA continues to research lenders’ maintenance practices, extending its investigation to properties in 46 cities.

This panel discussion, as with all events in FHEO’s Speaker Series, is in keeping with FHEO’s mission: to create equal housing opportunities for all persons living in America by administering laws that prohibit discrimination in housing on the basis of race, color, religion, sex, national origin, disability, and familial status.