Home Economics 

How the national mortgage crisis is eating away at home values, property taxes, and neighborhoods and what local government is planning to do about it.

As executive director of the Southeast Memphis Community Development Corporation (CDC) in Hickory Hill, Beanie Self has worked with victims of foreclosure for several years.

"This was an area targeted specifically by predatory lenders," she says. "Most of the [foreclosures] we've seen have been people who are just overextended. They probably should not have been in a home-ownership situation."

But recently, she's seen a change.

"What's scary to me is that in the last few weeks, we're getting more telephone calls from middle-class people who have been in a stable home-ownership situation and have lost their jobs.

"If someone has no job, there's nothing we can do."

Self isn't the only one scared.

Last week, Memphis and Shelby County held a joint summit on home foreclosures to discuss the current crisis and how to spend $12 million in federal neighborhood stabilization funding.

"Foreclosures lead to further decline in neighborhoods," says Robert Lipscomb. Lipscomb is head of the Memphis Housing Authority and the division of Housing and Community Development, as well as chief financial officer for the city. "It's going to have a huge ripple effect," he adds. "We have to do something about it."

Besides the well-documented human cost of families being put out on the street, foreclosures have a very real cost to cities due to increased municipal services (fire and police protection for vacant houses), declining property values, and a smaller tax base.

Data from Chandler Reports and The Daily News show that there were 3,800 Shelby County foreclosures in 2005, 5,250 in 2006, and 5,850 in 2007. Numbers presented at the foreclosure summit indicated that there were already 7,100 foreclosures since the beginning of this year and approximately 58,000 from 2000 to 2008.

Some foreclosures happened because buyers bought more home than they could afford, made possible through nontraditional loans. In other cases, senior citizens tapped into their home equity to finance house renovations. Some homeowners fell victim because of personal circumstances, such as job loss or divorce. But many of the area's foreclosures stemmed from subprime loans made to low-income borrowers with poor credit ratings.

Some borrowers were likely intimidated by traditional loan products, Self speculates. They might have been renters who wouldn't have thought about buying a home unless a friend — and mortgage broker — approached them.

"A few years ago, people were selling mortgages like Tupperware and making their money off the fees," Self says.

Locally, Frayser's 38127 zip code leads the area in the highest percentage of foreclosures, followed closely by South Memphis' 38109, Southeast Memphis' 38118, and North Memphis' 38128.

Those areas could be considered places traditionally at risk for foreclosures. But a disturbing statistic shows that the problem is spreading.

Cordova's 38016 zip code ranked 10th in the number of foreclosures in 2007, according to Chandler Reports data. However, between 2005 and 2007, the area experienced a 119 percent increase in the number of foreclosures.

"We saw the trend expand into inner-ring suburbs like Hickory Hill," Emily Trenholm, executive director of the Community Development Council of Greater Memphis, says. "In the last few years, we've seen it expand to farther-out suburbs such as Cordova."

If the broken-windows theory on crime is true, an increase in foreclosures can bring a rise in crime. Vacant homes can attract both squatters and intruders.

"Every HUD house I've looked at has the copper stripped out of it," Self says, "and the air conditioning units are gone."

The city and county expect to receive a combined $12 million in HUD neighborhood stabilization program (NSP) funds to combat the effects of foreclosures.

click to enlarge p._18_cover_story_1-2.jpg

Under the program, the money can be used to purchase and redevelop foreclosed properties, establish land banks of foreclosed property, demolish blighted structures, and redevelop land. The funding cannot be used for maintenance on land banks, to pay back-taxes, or for foreclosure prevention activities.

Because of the credit crunch, however, many of the rehabbed foreclosed homes probably will have to become rentals or lease-to-own properties.

In addition to the funding, Lipscomb says local government is preparing for an increase in area homelessness and is even contemplating a class-action lawsuit against lenders and brokers.

"The lawyer in me is about to come out," says Shelby County mayor A C Wharton. "We're going to sue somebody if I have anything to say about it. ... I'm for whatever it takes."

Webb Brewer of Memphis Area Legal Services thinks a lawsuit could be successful. In a series of foreclosure cases with 18 local plaintiffs and more than 30 defendants — the first of which was filed in 2000 — the plaintiffs were recently awarded $3 million.

The cases were based on a RICO (Racketeer Influenced and Corrupt Organizations) Act claim that mortgage brokers, appraisers, real estate agents, and lenders conspired to ensnare people in exploitative loans.

The city of Baltimore also has a case pending in which it sued Wells Fargo, alleging that lenders participated in reverse red-lining.

"Two factors they relied heavily on there — a high degree of racial segregation in housing and a historical lack of access to traditional banks — I think exist in Memphis," Brewer says. "We feel like we could make a very strong case in Memphis for disproportional bad terms for African-American borrowers."

Under the Baltimore case, as well as similar cases in Cleveland and San Diego, or a case brought by Shelby County, the jurisdiction would have to quantify the economic damage and prove that damage is attributable to the banks.

In Memphis and Shelby County, where the tax base rests on home values, the economic impact could be frightening. The county will be undergoing a property reappraisal next year (see "The Perfect Storm," p. 20), and it's expected that many homeowners will challenge the reappraisal.

County assessor Cheyenne Johnson might not want to call it yet, but, judging by a booklet given out at the foreclosure summit, local government is steeling itself for a hard hit: "The potential impact on the local tax base has yet to be determined, but there is little doubt that government revenues will decline as a result of declining property and/or sales tax revenue," it says.

Frayser CDC head Steve Lockwood recently appealed the assessments of three properties the CDC bought. The first two were assessed at $50,000 with houses on them but are now vacant lots.

Lockwood took pictures of the vacant lots, and they were reassessed at $7,000. The other property — which still had a home on it — was also valued at $50,000.

"I bought it for $15,000, and it [was reappraised] at $35,000 now. The For Sale sign sat out for a month. It was worth $35,000, and I wouldn't have paid $35,000. ... I'm buying another house tomorrow for $15,000. That's not a gift — that's what the value of the homes are."

At the same time, experts think municipal services will increase in cost with an increased demand for police and fire services, as well as other social services, such as programs for the homeless.

Brewer presented information that a single mortgage failure can generate municipal costs of more than $30,000.

In addition to proving an economic impact, a Shelby County court case would probably try to enjoin lenders from going forward with foreclosures without a court-supervised mediation.

"One issue is the economic harm to the government," Brewer says. "The other is the hemorrhage of people losing their homes to foreclosure."

How much have foreclosures impacted the overall Memphis housing market?

Jules Wade, executive vice president of the Memphis Area Association of Realtors, says there are now two distinct housing markets: the traditional market and the foreclosure market.

"The bulk of volume in foreclosure sales is having a dramatic effect on the pricing of property, but if you take the foreclosures out, I would estimate a 3 to 4 percent drop overall for traditional 'arm's-length' transactions," he says.

When you throw foreclosures into the mix, however, Wade estimates the drop is 15 to 17 percent.

And though there may be two distinct markets — buyers making an offer on foreclosed properties generally wait four to five weeks for an answer from the bank instead of the traditional 24 to 48 hours — there is no doubt that foreclosures are having a dramatic impact on the entire market.

Richard Evans is head of the University of Memphis' Center for Real Estate Research. He told the foreclosure summit's attendees that the effect of foreclosures would probably not be catastrophic for this area.

"It's worse than it was in the past, but in a lot of housing markets, the number of foreclosures has doubled," he says.

In other areas of the country, the housing market zoomed up at a rate of 8 to 12 percent each year before crashing when interest rates on adjustable rate mortgages went up or "balloon" payments came due.

The Shelby County housing market has been growing at a rate of about 2 to 3 percent each year, hardly what could be called a bubble. Evans suggests that with the foreclosures and the mortgage crisis the area might get a year of zero growth.

"Prices aren't falling terribly for those people who can market their house. If you can get a real estate agent and tolerate it being on the market for 150 days, they can get it sold not at a giant loss," he says. "The people taking terrible losses are the ones who get sick or laid off, and they have to dump the house."

But the wild card is the overall economy.

"I believe we'll see what we've seen. The market will be very slow, with hardly any growth in housing prices," Evans says. "There is a chance that the U.S. Treasury will fail in their effort to stabilize the financial markets. In which case, all bets are off as to how bad it gets."

See also:

A Good Time to Buy? by Bruce VanWyngarden
Innocent Victim by Bianca Phillips
The Perfect Storm by John Branston

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