Lost Homes:

How Housing Crisis has hit the East Side and North End of St. Paul

LOST HOMES:
May 2012

How the Housing Crisis has hit the East Side and North End of St. Paul

Table of Contents: Introduction Subprime Mortgage Lending Foreclosures Vacant Houses Home Values Recommendations 4 5 7 8 9 10

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INTRODUCTION & SUMMARY OF FINDINGS:

The subprime mortgage meltdown has resulted in a record number of foreclosures and plunged the United States into the worst financial crisis since the Great Depression. St. Paul has not been immune from this crisis, and the North End and East Side neighborhoods have been hit the worst.
Subprime lenders targeted lower-income and minority homeowners for high cost loans. In some cases, the subprime lenders were owned or bankrolled by mainstream financial institutions such as Wells Fargo and US Bank, whose loans were more likely to be in predominantly white neighborhoods. One out of every six of the refinance loans made by Wells Fargo on the East Side and North End were made by its finance company Wells Fargo Financial. In contrast, Well Fargo Financial accounted for just one out of every fourteen of Wells Fargos refinances in the Twin Cities metro area.1 Subprime loans stripped homeowners of their wealth and led to an epidemic of foreclosures. The number of foreclosures in Ramsey County skyrocketed from 632 in 2005 to a peak of over 3,000 in 2008.2 Although the number of foreclosures has passed its peak, it appears that there will be thousands more in the next few years. Since last April, the East Side and North End have had more foreclosure filings and sales than other neighborhoods in St. Paul.3 Foreclosures ravaged neighborhoods and left behind a trail of vacant homes. There are over 1,200 vacant residential buildings in St. Paul.4 Ward 7 has more vacant buildings than any other ward in the city.5 Over 60% of the vacant residential buildings are in Wards 5, 6, and 7.6 The unprecedented numbers of foreclosures and vacant homes caused a steep and continuing decline in home values throughout the city, but especially in minority neighborhoods. Homes in the East Side, North End, and Thomas-Dale neighborhoods experienced the greatest loss of value, dropping 50% since 2006, whereas homes in the Mac-Groveland, Highland, and St. Anthony Park neighborhoods lost the smallest percentage of their value, less than 20%.7

LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul

SUBPRIME MORTGAGE LENDING

A number of reports have documented the startling racial This created a shameful pattern of profiteering; preying on and economic disparities in mortgage lending. Residents the most vulnerable among us, and creating a devastating of low-income and minority neighborhoods were much impact on already-struggling neighborhoods. more likely than residents in upper income and predominantly white neighborhoods to receive a high-cost subprime o One out of every six of the refinance loans made by Wells 8 loan. Fargo on the East Side and North End of St. Paul (Wards 5, 6, and 7) were made by its finance company Wells Fargo The vast majority of subprime loans were for refinances, Financial. In contrast, Well Fargo Financial accounted for rather than home purchases. For instance, from 2005 to just one out of every fourteen of Wells Fargos refinances 2007, Wells Fargo Financial made a total of just two home in the Twin Cities metro area.10 purchase loans in the entire Twin Cities metro area.9 Subprime loans were promoted as a way to consolidate debt, Wells Fargo provide money for home improvements, or for household or personal needs, rather than being sought by borrowers as In July 2011, the Federal Reserve Board assessed an $85 a way to lower their interest rates or lock in a fixed rate. million civil penalty against Wells Fargo, the largest fine the Federal Reserve has ever imposed in a consumer case.11 The There are circumstances where refinancing to use some Federal Reserve charged that between 2004-2008 Wells of the equity in ones home makes sense, but cash-out re- Fargo Financial steered customers into more expensive subfinances were rife with potential for abuse by lenders. Too prime loans even though they qualified for better rates. As often homeowners with significant amounts of equity were part of its settlement with the Federal Reserve, Wells Fargo convinced to refinance under conditions that left them con- will have to repay up to $200 million to customers that it siderably worse off than they were before. In some cases, overcharged.12 homeowners were sold refinance loans which produced just a few thousand dollars in cash at closing, but which re- Previously, the Illinois Attorney General sued Wells Fargo financed their existing mortgages at higher rates, high fees, for steering African-American and Latino homeowners to and often with abusive loan terms. higher cost subprime mortgages while giving white borrowers who had similar incomes lower cost loans. The suit While subprime lenders sometimes appeared to be small- charged that Wells Fargo drained wealth from families and time storefront operators, the masters behind subprime neighborhoods and added to the stockpile of boarded-up lending could be found among some of the worlds largest homes . . . 13 financial institutions. Sometimes these institutions had direct ownership of subprime lending subsidiaries, such as An analysis of Wells Fargos lending practices in the Twin Wells Fargo and Wells Fargo Financial. In other cases, these Cities suggests a pattern of subprime lending with dispainstitutions bankrolled subprime lenders by investing in rate impacts on minority neighborhoods. Wells Fargo has them directly, such as with US Bank and New Century Fi- served upper income and predominantly white neighbornancial. hoods through its bank, providing prime loans with good terms and low rates. In contrast, Wells Fargo has served The refinance loans made through the bank had greater con- low-to-moderate income and minority neighborhoods discentrations in predominantly white neighborhoods, while proportionately through its finance company, Wells Fargo the loans made through the subprime lender were more Financial, which makes higher rate subprime loans. concentrated in lower-income and minority neighborhoods.

LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul

US Bank
US Bank was a major investor in New Century Financial, the poster child for bad practices in the mortgage industry. By 2007, when the company filed for bankruptcy, New Century was the second largest subprime mortgage lender in the country.14 In 1998 and 1999 when it was difficult for subprime lenders to raise capital, US Bank came to New Centurys rescue and invested $40 million in the company. US Bank reaped a profit of nearly $18 million from this investment within just a few years.15 In contrast to US Bank, New Century, which made loans with high rates and enormous fees, made a large percentage of its loans to minority neighborhoods. From 2004 to 2006, New Centurys last year of business, almost half of the refinances New Century made in St. Paul were in minority neighborhoods. Whereas just 14% of US Banks refinances in St. Paul were in minority neighborhoods.16
Wells Fargo & Wells Fargo Financial Refinance Loans in St. Paul:17

US Bank & New Century Refinance Loans in St. Paul:

LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul

FORECLOSURES
The number of foreclosures in Ramsey County sky- The regulators found that mortgage servicers were rocketed from 632 in 2005 to a peak of over 3,000 in only reaching a minority of delinquent homeowners 2008. Although the number of foreclosures has passed with their foreclosure prevention efforts. its peak, Ramsey County still experienced over three times more foreclosures in 2011 than in 2005, and it Nearly three years into the foreclosure crisis, we appears that there will be thousands more in the next find that more than 60% of homeowners with serifew years. ously delinquent loans are still not involved in any loss mitigation activity.24 A recent Star Tribune article noted that there may be an increase in foreclosures coming in Minnesota. The As the foreclosure crisis has exploded, mortgage serarticle attributed the decline in foreclosures in part to vicers have failed to adequately meet the number of the hold that lenders put on foreclosures due to the delinquent homeowners. In a recent GAO survey of robo-signing scandal, and quoted a real estate expert non-profit housing counselors, for example, seventywho said that theres definitely another round of fore- six percent of the counselors reported that overall closure coming down the pipeline.18 their clients had a negative or very negative experience with the mortgage servicers. The most comForeclosures in Ramsey County19 monly cited problems were of homeowners receiving Year: 2005 2008 2011 inconsistent or confusing information, speaking to a Number of Sheriff s Sales: 632 3,023 2,078 different representative each time they called, of servicers losing their paperwork, and of the decisionThe areas in the Twin Cities that have been the most making process taking too long.25 affected by foreclosures are the North Side of Minneapolis and the Payne-Phalen neighborhood on St. Even worse, the Office of the Comptroller of the CurPauls East Side.20 In St. Paul, the zip codes with the rency (OCC) conducted examinations of the foreclomost foreclosure activity since last April are all on the sure processes of US Bank and Wells Fargo and found East Side.21 that both banks engaged in unsafe or unsound practices26, such as: Zip Code Foreclosure since April 2011 55106 406 Filing legal affidavits in which bank employees made 55119 229 assertions that they claimed, falsely, were based on 55117 214 personal knowledge or review of the relevant records According to a national study by the Center for Re- Filing numerous affidavits courts that were not sponsible Lending approximately 8 percent of Af- signed in the presence of a notary rican-American and Latino families have lost their Failing to devote adequate oversight, internal conhomes to foreclosure compared to 4.5 percent of white trols, policies and procedures to their foreclosure profamilies.22 cesses Failing to sufficiently oversee outside lawyers and Many of these foreclosures can and should be avoided. other third-parties handling foreclosures A report from state regulators stated: In addition the OCC found that Well Fargo: [T]oo many homeowners experience foreclosure Initiated foreclosures without always ensuring that when finding an alternative solution would be in the mortgage documents met legal requirements interest of both the homeowner and the mortgage Failed to devote sufficient financial, staffing and manholder. Preventing these unnecessary foreclosures agerial resources to its foreclosure processes would help not only the struggling homeowners and mortgage investors, but also the neighborhoods and local governments that bear the indirect costs of foreclosures.23
LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul 7

VACANT HOUSES
Foreclosures not only impact the individual homeowners but also local governments, neighbors, and other property owners. Especially when a foreclosure leaves a home vacant and unsecured, it can cost cities and counties tens of thousands of dollars. where he had gone to settle a drug debt. In December, a homeless man died after starting a fire in a vacant house in Minneapolis.28

In contrast to St. Paul, Minneapolis has many fewer vacant buildings and charges property owners a much higher vaForeclosures result in decreased revenue for cities and coun- cant building fee. ties through lower property values, delayed and uncollected taxes, and unpaid services. At the same time that foreclosures City Properties on Citys Vacant Building List29 mean less revenue for cities and counties, they also impose additional requirements to those cities and counties for in2004 2008 2012 creased policing, building inspection, demolition, property St. Paul 370 2,000 1,291 maintenance, and managing the foreclosure process. Minneapolis 286 857 851 After peaking in 2008, the number of vacant houses has Vacant Building Registration Fee30 started to decline, but there are still almost four times more St. Paul $1,200 properties on St. Pauls vacant building list than there were Minneapolis $6,746 in 2004. If St. Pauls vacant building registration fee were the same as 27 Vacant and Boarded Buildings in St. Paul that in Minneapolis, it would result in over $7 million a year Year 2004 2008 2012 in extra revenue for St. Paul.31 Buildings 370 2,000 1,291 The vacant buildings are disproportionately concentrated on the North End and East Side of St. Paul. Over sixty-percent of the vacant residential buildings are in Wards 5, 6, and 7. The largest number of vacant residential buildings in St. Paul is in Ward 7.
Ward

7 6 1 5 2 4 3

#Vacant Residential Bldgs

293 238 228 226 143 63 22

24.1% 19.6% 18.7% 18.6% 11.8% 5.2% 1.8%

% of total vacant

Vacant homes have been the site of numerous crimes. In addition to burglary and trespassing, there have been several high profile incidents in St. Paul recently. In March, police charged nine men and teens with dragging a 14 year old girl into a vacant home and sexually assaulting her. That same month, a man was killed on the porch of a vacant home
LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul 8

HOME VALUES
The unprecedented numbers of foreclosures and vacant homes caused a steep and continuing decline in home values throughout the city, but especially in minority neighborhoods. A recent report from the Pew Research Center found that the bursting housing bubble and the decline in home values and equity resulted in decreases in average American household wealth of:33 66% for Latinos from $18,400 to $6,300 53% for African-Americans from $12,100 to $5,700 16% for whites from $135,000 to $113,000

From 2005 to 2009 the median level of home equity that Latino homeowners had nationally was cut in half from $99,983 to $49,145. For African-American homeowners, the median level of home equity declined from $76,910 to In St. Paul, homes in the Daytons Bluff, Payne-Phalen, $59,000 during this period. For white homeowners, it de- North End, and Thomas-Dale neighborhoods experienced creased from $115,364 to $95,000.32 the greatest loss of value, dropping 50% since 2006, whereas homes in the Mac-Groveland, Highland, and St. Anthony Park neighborhoods lost the smallest percentage, dropping less than 20%.34

In total, St. Paul has lost over $61 billion in home value, which could drain $46.3 million in annual tax revenue from Ramsey County and $15.5 million in annual tax revenue from the city.35

Single Family Home Prices

Neighborhood April 2006 January 2012

Change from 2006 to 2011

Dollar %

Thomas Dale Daytons Bluff Payne Phalen North End Greater East Side Battle Creek St. Paul City West Side Summit-University West 7th Midway Como Merriam Park St. Anthony Macalester-Groveland Highland Summit Hill

$168,000 $170,500 $182,000 $180,500 $186,50 $207,500 $205,300 $187,000 $212,800 $186,500 $196,500 $233,000 $305,100 $341,500 $306,000 $301,500 $490,200

$77,600 $81,900 $93,200 $95,200 $99,900 $113,200 $122,600 $112,400 $133,500 $117,400 $130,600 $167,600 $225,500 $268,900 $245,500 $247,000 $408,200

-$90,400 -$88,600 -$88,800 -$85,200 -$86,600 -$94,300 -$82,700 -$74,600 -$79,300 -$69,100 -$65,900 -$65,400 -$79,600 -$72,600 -$60,500 -$54,500 -$82,000

-53.8% -52.0% -48.8% -47.3% -46.4% -45.5% -40.3% -40.0% -37.3% -37.1% -33.5% -28.1% -26.1% -21.3% -19.8% -18.1% -16.7%
9

LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul

RECOMMENDATIONS
1) The state of Minnesota, counties, and cities should 3) Local governments, school boards, and public agenadopt a foreclosure mediation program to prevent un- cies should require that any banks they do business with necessary foreclosures. meet responsible lender criteria that includes using best practices for foreclosure prevention. There is growing recognition of the effectiveness of foreclosure mediation programs in preventing unnecessary fore- 4) Local governments, school boards, and public agenclosures. The number of states and municipalities that have cies should require that any banks they do business pubsuch programs continues to grow, and there are now juris- licly disclose information regarding its foreclosures, indictions in 24 states that have foreclosure mediation. cluding: a. The number of homeowners eligible for loan modificaForeclosure mediation benefits all of the involved parties: tions - Servicers avoid a long and costly foreclosure process since b. The number that received or were denied permanent more than 70 percent of mediated cases reach a settle- modifications ment.36 c. The principal and/or rate reduction in each modifica- More than half of homeowners in mediated cases get to tion keep their homes, while those for whom that is not a sus- d. A breakdown for each of the above categories by the race, tainable option also benefit by negotiating a graceful exit ethnicity, and census tract of the in how and when they move out. homeowners. - For government, mediation can reduce the number of vacant homes and stabilizes property values and tax revenue. 5) Mortgage servicers should comply with the following In 2009 the Minnesota legislature passed the HomeownerLender Mediation Act which would have required lenders to offer homeowners the opportunity to participate in nonbinding mediation before the lender could foreclose, however Governor Time Pawlenty vetoed the bill.37 best practices for foreclosure prevention: a. Stop foreclosure proceedings while they are evaluating a borrowers eligibility for a loan modification or other foreclosure prevention options b. Respond within 72 hours to requests or inquiries about loan modifications Under the Act, lenders would have been required to serve c. Ensure that the loan modification process takes less than a mediation notice to the homeowner and filed proof of it 30 days with the Attorney Generals office. Homeowners would d. Modify troubled loans so that they are for no more than have 20 days after this to file a request for mediation. If the the value of the home homeowner does not request it, then the lender could pro- e. Allow tenants of foreclosed properties to continue to rent ceed with the foreclosure. the property until it is sold f. Take steps to ensure that its loans are not being used for Although a state level mediation program would be optimal property flipping or foreclosure rescue scams. in that it could benefit from an economy of scale and would serve the largest number of homeowners, cities and counties can implement their own mediation programs. 2) Minneapolis charges property owners $6,746 annually to register vacant buildings, while St. Paul charges just $1,200. The city of St. Paul should increase its vacant building registration fee to offset the significant costs to the city of vacant buildings, but also to reduce the number of vacant buildings by spurring owners to sell or rehab their properties.
LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul 10

WORKS CITED
1 Home Mortgage Disclosure Act data from 2004-2006 2 Foreclosures in Minnesota: A Report Based on County Sheriff s Sale Data, February 15, 2010, Housing Link, p. 8 3 Realtytrac.com, Foreclosure statistics for pre-foreclosure, auction, and bank-owned properties, 4 Data from city of St. Paul Vacant Building Registration List March 12, 2012, 846 single family, 307 duplexes, 64 multi-family 5 Data from city of St. Paul Vacant Building Registration List March 12, 2012 6 Data from city of St. Paul Vacant Building Registration List March 12, 2012 7 Zillow Home Values Index, calculated March 21, 2012 8 Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures, Debbie Gruenstein Bocian, Wei Li, Carolina Reid, Center for Responsible Lending, November 2011, p. 11. Income is No Shield Part III. Assessing the Double Burden: Examining Racial and Gender Disparities in Mortgage Lending, National Council of Negro Women and National Community Reinvestment Coalition, June 2009, p. 1. Unequal Opportunity Lenders? Analyzing Racial Disparities in Big Banks Higher-Priced Lending, Andrew Jakabovics and Jeff Chapman, Center for American Progress, September 2009, p.1. 9 Home Mortgage Disclosure Act data 10 Home Mortgage Disclosure Act data 11 Wells Fargo, Countrywide Mortgage Settlements Give Homeowners a Bit of Relief, Daily Finance on AOL.com, Catherine New, July 22, 2011 12 Up to 10,000 customers, up to $20,000 each, equals $200 million 13 July 31, 2009 Press Release, Madigan Sues Wells Fargo for Discriminatory and Deceptive Lending Practices 14 New Century, Biggest Subprime Casualty, Goes Bankrupt, Bloomberg, April 2, 2007, Bradley Keoun and Steven Church. 15 U.S. Bancorp Profits Handsomely from Its Investment in New Century, National Mortgage News, March 11, 2002, Brad Finkelstein 16 Home Mortgage Disclosure Act data 17 Based on Home Mortgage Disclosure Act (HMDA) data for first lien conventional refinance loans 18 More home foreclosures on horizon in Minnesota, Star Tribune, Jim Buchta, April 16, 2012 19 Foreclosures in Minnesota: A Report Based on County Sheriff s Sale Data, February 15, 2010, Housing Link, p. 8, and 2011 Foreclosures in Minnesota: A Report Based on County Sheriff s Sales Data, February 24, 2012, p. 5 20 Fostering Equitable Foreclosure Recovery, Sarah Treuhaft, Kalima Rose, and Jennifer Tran, Policy Link, January 2012, p. 14 21 Realty Trac. Includes pre-foreclosure notices and sheriff s sales 22 Speculators, Not CRA, Behind Foreclosures in Black Neighborhoods, September 7, 2011, American Banker, John I. Gilderbloom and Gregory D. Squires 23 Analysis of Mortgage Servicing Performance, Data Report No. 4, January 2010, State Foreclosure Prevention Working Group 24 Redefault Rates Improve for Recent Loan Modifications, State Foreclosure Prevention Working Group Memorandum on Loan Modification Performance, August 2010 25 GAO-11-367R Survey of Housing Counselors about HAMP, May 26, 2011, United States General Accounting Office 26 United States of America, Department of the Treasury, Comptroller of the Currency, Consent Order AA-EC-11-18 In the Matter of US Bank National Association, and United States of America, Department of the Treasury, Comptroller of the Currency, Consent Order AAEC-11-19 In the Matter of Wells Fargo Bank N.A. 27 In housing meltdown, cities turn into buyers, Star Tribune, Chris Havens, February 7, 2010 and City of St. Paul vacant building list as of March 1, 2012, http://www.stpaul.gov/index.aspx?NID=2272 28 Vacant houses not always emply, Star Tribune, April 30, 2012, Chao Xiong. 29 In housing meltdown, cities using federal money to address foreclosures, Star Tribune, September 18, 2010, Chris Havens, City of St. Paul vacant building list as of March 1, 2012, http://www.stpaul.gov/index.aspx?NID=2272 , and Minneapolis List of Vacant and Condemned Properties as March 2, 2012, http://www.ci.minneapolis.mn.us/www/groups/public/@regservices/documents/webcontent/convert_254314.pdf 30 Minneapolis Directors Fee Schedule, p. 6 31 The Minneapolis annual fee is $5,546 higher than the St. Paul fee. There are 1,291 vacant buildings current on St. Pauls vacant building registration list. $5,546 x 1,291 = $7,159,886 32 Wealth Gap Rise to Record Highs Between Whites, Blacks, Hispanics, Pew Research Center, July 26, 2011 33 Wealth Gap Rise to Record Highs Between Whites, Blacks, Hispanics, Pew Research Center, July 26, 2011 34 Zillow Home Values Index, calculated March 21, 2012 35 According to Zillow.com, the value of the average home in St. Paul has declined $82,700 from April 2006 to January 2012. There are 74,000 single family, duplex, triplex, condo units, and townhomes in the city of St. Paul, according to the Wilder Research Centers Census Facts. This calculates to a total of $6.1 billion in total lost home value. Using the Ramsey County tax rate of 1.01% of a homes value, the loss in value means $61.8 million in lost property taxes. The city receives about 25% of the total property tax. http://www.stpaul.gov/DocumentView.aspx?DID=17200 36 Walk the Talk: Best Practices on the Road to Automatic Foreclosure Mediation, Alon Cohen, Center for American Progress, November 2010 37 Minnesota AG to push for Foreclosure Mediation, Housing Wire, Jon Prior, January 8, 2010 LOST HOMES: How the Housing Crisis has hit the East Side and North End of St. Paul 10

This study was published by ISAIAH, a faith-based coalition of more than 100 member congregations that works for economic and racial justice throughout the State of Minnesota.
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