Mortgage crisis guts Cleveland neighborhoods
By Jerry Zremski - NEWS WASHINGTON BUREAU CHIEF
CLEVELAND — Thirteen homes on East 52nd Street have windows made of wood now. Snow drifts high onto 13 doorsteps, many of which haven’t been crossed since thieves ripped out the plumbing to sell for scrap.
East 52nd Street is just one of countless streets in this city’s Slavic Village and other neighborhoods across Cuyahoga County that look like they’ve been hit by a very selective natural disaster.
Three houses in a row will be abandoned and ripped-up, and then four more will be neat and lived-in, and then the pattern will repeat itself again and again on street after street.
All told, local officials estimate there are 10,000 abandoned homes in Cleveland all of a sudden. Chalk it up to a man-made disaster, born of greed, that turned America’s real estate market into a big, bulging bubble. Now the bubble has burst, and the nation is possibly on the edge of a recession as a result. More immediately, the real estate market has collapsed in places like Cleveland and Detroit. Meanwhile, Buffalo has experienced comparatively minimal damage from the subprime mortgage meltdown and the resulting tidal wave of foreclosures.
Nearly 3 percent of metro Cleveland’s homes fell into foreclosure last year, compared with less than half a percent in metro Buffalo. Experts said the speculators that ravaged Cleveland seemed to think there wasn’t enough money to be made in a slow-growth market like Buffalo.
It also helped that Buffalo authorities had the means to go after slumlords. “Houses are so cheap here,” said Common Council President David A. Franczyk, adding that speculators who have broken the law in Buffalo have paid the price for it.
In Cleveland, meanwhile, no one was watching as disaster rolled in.
“I like to compare it to a tsunami coming off Lake Erie and destroying 10,000 homes,” said Frank Ford, senior vice president of Neighborhood Progress, a Cleveland group that fights to revitalize city neighborhoods. “If that happened, every presidential candidate would have been here yesterday, talking about this,” Ford said at a City Council forum on the issue last week.
Boom town mentality
Thursday, the Mortgage Bankers Association reported that home foreclosures nationwide soared to an all-time high in the final three months of 2007. The proportion of all mortgages that slipped into foreclosure set a record, 0.83 percent, from October through December. The previous high, 0.78 percent, came in the July-through-September period.
The foreclosure crisis is the talk of Cleveland and Detroit, which somehow got caught up in the same boom town mentality that led high-rollers in Vegas to bet on housing prices going up so far and so fast that a no-down-payment “subprime” mortgage and its exploding interest rate would be easy to manage.
That mentality never took hold in Buffalo, and to hear people in Cleveland talk, Buffalo should count its blessings.
“The housing market here has just stopped completely,” said Marie Kittredge, executive director of the Slavic Village Neighborhood Development Corp. “It’s just completely frozen.”
And it’s all because subprime loans made Cleveland’s housing market, and many others around the country, artificially hot.
With the city experiencing a renaissance in the 1990s, housing prices here leaped 32 percent between 1993 and 2000. In Buffalo during that same period, housing prices grew a mere 2.5 percent. “We didn’t have nearly the same kind of housing boom that other places did,” said Richard Dietz, economist at the Federal Reserve Bank of Buffalo.
That lack discouraged the growth of subprime lending in Buffalo in several ways.
For one thing, about half of all subprime loans go to homeowners who refinance to cash in on the equity in their homes. In Buffalo, homeowners had less equity and less reason to refinance.
Secondly, houses are so cheap in Buffalo that fewer people would need to resort to an exotic mortgage.
And finally, Buffalo’s 1990s real estate slump appears to have left large numbers of real estate speculators looking elsewhere, to where the growth prospects looked better.
In Cleveland, countless speculators thought they could buy a cheap city home, rent it for a few years and then sell it for a big profit. About a third of subprime loans went to such speculators, said Jim Rokakis, the Cuyahoga County treasurer.
Cleveland officials saw this real estate “flipping” phenomenon growing through the 1990s and passed a law to try to prevent potential abuses in 2001. Dayton and Toledo did the same thing — but a year later, the State Legislature overturned those laws.
Rokakis still remembers the dozens of real estate and banking lobbyists who assembled in the State Capitol to defeat the law. “They won, and it was off to the races,” Rokakis said. “There was no sheriff in town.” And as a result, real estate lawlessness turned Cleveland — and to a lesser extent, other Ohio cities — upside down.
Encouraging flipping
Real estate appraisers, who until 2006 didn’t need a license or any training to do business in Ohio, grossly overvalued properties to encourage flipping from one investor to the next.
And subprime lenders, who offered unusual mortgages with low down payments and low initial interest rates that would only explode later, poured into Ohio, where the state consumer protection law didn’t cover real estate sales until last year.
Some lenders didn’t even check their buyers’ credit ratings. And as a result, plenty of people bought a first home or investment properties they wouldn’t be able to afford once those interest rates started rising.
That started happening two years ago, and foreclosures skyrocketed. Cuyahoga County, which typically recorded a couple thousand foreclosures a year, has seen more than 27,000 in the last two years.
In contrast, Buffalo has seen about 3,000 foreclosures in that time.
Many of Cleveland’s foreclosures occurred because of fraud, local real estate experts said. A dizzying array of schemes were hatched to lure unsuspecting investors and unprepared first-time homebuyers, and allow more sophisticated speculators to flip properties.
That didn’t happen to the same extent in Buffalo for one simple reason. “You had an attorney general who was willing to prosecute this stuff, and we didn’t,” Rokakis said.
Now-Gov. Eliot L. Spitzer, while serving as attorney general, aggressively prosecuted — and convicted — Buffalo slumlords such as Robert Palano and Scott Wizig. And that fact has had a lasting psychological effect.
“Speculators are afraid to come to my district because they know someone will come down on them,” said Franczyk, who noted that tough judges and the city’s Anti-Flipping Task Force appear to have discouraged wrongdoing.
Franczyk acknowledged, however, that Buffalo took such a tough stance on predatory lending after seeing its own wave of bad loans and foreclosures in the 1990s. A study by the Federal Reserve Bank found foreclosures in Buffalo quadrupled during that time, with most of them concentrated on the East Side and West Side.
But that wave was a ripple compared with what Cleveland experienced. “In practical terms, it’s hit us like a natural disaster,” said Chris Warren, chief of regional development for the City of Cleveland. “The devastation is manifest: 10,000 abandoned properties in Cleveland and thousands of our citizens uprooted with grievous impacts on their personal wealth and well-being.”
And it’s not just the people who’ve lost their homes who are suffering.
Citywide, the murder rate is at a 13-year high. One of the victims was Joe Krasucki, who, on his 78th birthday last March, thought he heard vandals stripping the aluminum siding off his house, just like they had done to countless abandoned homes in Slavic Village. When Krasucki went outside to investigate, a gang of teenagers beat him so badly that he died several days later.
It all leaves people who’ve worked to revive Slavic Village — a sprawling neighborhood that looks in parts like Broadway-Fillmore and in parts like North Buffalo — feeling angry and scared.
“The vacant and vandalized houses are more than just eyesores; they make the neighborhood unsafe to play in,” said Julie Smith, a local member of ACORN, the Association of Community Organizations for Reform Now. “I don’t let my children go out and play in the neighborhood.”
And yet local officials say the worst criminals aren’t the ones roaming the streets of Cleveland.
Rokakis likened the barons of Wall Street to Colombian drug lords. At his State of the City speech last week, Cleveland Mayor Frank Jackson compared them to Mafia bosses.
They blame Wall Street for encouraging the growth of subprime lending by packaging the loans into “mortgage-backed securities” that investors flocked to, apparently thinking that the decade’s real estate boom wouldn’t end.
But it ended as soon as the payments on those subprime loans started to move higher, creating a ripple effect that stretches nationwide. Home values have fallen in many communities, and the mortgage-backed securities that investors once loved are now at the root of Wall Street’s doldrums.
“I have no sympathy for Wall Street,” Jackson said. “I have no sympathy for people who live large off the misery and suffering of other people.” As if to prove his point, Jackson has sued 21 investment banks — including Goldman Sachs, Merrill Lynch and HSBC — saying they created a public nuisance by investing in subprime loans.
Similarly, Buffalo is suing 28 lenders in hopes of getting them to take responsibility for abandoned properties in the city.
In Buffalo, housing prices increased 4 percent last year, while they remained flat in Cleveland.
“We’re a fairly stable market,” said John L. Leonardi, executive vice president of the Buffalo Niagara Association of Realtors.
There’s nothing stable about Cleveland, however. Homes are being abandoned now even in Shaker Heights, long one of the city’s finest suburbs. And homes in Slavic Village can be had on the Internet now for as little as $3,000 — the kind of price that attracts would-be slumlords.
“Our challenge now is to convince people that this is still a great place to live,” said Kittredge, of Slavic Village Development.
That’s not the only challenge. With much of the city now looking hollowed-out, Cleveland not only has to repair its neighborhoods but its psyche.
“It will take years, if not decades, to repair this physical and emotional damage,” said Lindsey Sacker of Empowering and Strengthening Ohio’s People, a group that fights predatory lending.
News Washington Bureau Reporter Lindsey McPherson contributed to this report. .
jzremski@buffnews.com
By Jerry Zremski - NEWS WASHINGTON BUREAU CHIEF
CLEVELAND — Thirteen homes on East 52nd Street have windows made of wood now. Snow drifts high onto 13 doorsteps, many of which haven’t been crossed since thieves ripped out the plumbing to sell for scrap.
East 52nd Street is just one of countless streets in this city’s Slavic Village and other neighborhoods across Cuyahoga County that look like they’ve been hit by a very selective natural disaster.
Three houses in a row will be abandoned and ripped-up, and then four more will be neat and lived-in, and then the pattern will repeat itself again and again on street after street.
All told, local officials estimate there are 10,000 abandoned homes in Cleveland all of a sudden. Chalk it up to a man-made disaster, born of greed, that turned America’s real estate market into a big, bulging bubble. Now the bubble has burst, and the nation is possibly on the edge of a recession as a result. More immediately, the real estate market has collapsed in places like Cleveland and Detroit. Meanwhile, Buffalo has experienced comparatively minimal damage from the subprime mortgage meltdown and the resulting tidal wave of foreclosures.
Nearly 3 percent of metro Cleveland’s homes fell into foreclosure last year, compared with less than half a percent in metro Buffalo. Experts said the speculators that ravaged Cleveland seemed to think there wasn’t enough money to be made in a slow-growth market like Buffalo.
It also helped that Buffalo authorities had the means to go after slumlords. “Houses are so cheap here,” said Common Council President David A. Franczyk, adding that speculators who have broken the law in Buffalo have paid the price for it.
In Cleveland, meanwhile, no one was watching as disaster rolled in.
“I like to compare it to a tsunami coming off Lake Erie and destroying 10,000 homes,” said Frank Ford, senior vice president of Neighborhood Progress, a Cleveland group that fights to revitalize city neighborhoods. “If that happened, every presidential candidate would have been here yesterday, talking about this,” Ford said at a City Council forum on the issue last week.
Boom town mentality
Thursday, the Mortgage Bankers Association reported that home foreclosures nationwide soared to an all-time high in the final three months of 2007. The proportion of all mortgages that slipped into foreclosure set a record, 0.83 percent, from October through December. The previous high, 0.78 percent, came in the July-through-September period.
The foreclosure crisis is the talk of Cleveland and Detroit, which somehow got caught up in the same boom town mentality that led high-rollers in Vegas to bet on housing prices going up so far and so fast that a no-down-payment “subprime” mortgage and its exploding interest rate would be easy to manage.
That mentality never took hold in Buffalo, and to hear people in Cleveland talk, Buffalo should count its blessings.
“The housing market here has just stopped completely,” said Marie Kittredge, executive director of the Slavic Village Neighborhood Development Corp. “It’s just completely frozen.”
And it’s all because subprime loans made Cleveland’s housing market, and many others around the country, artificially hot.
With the city experiencing a renaissance in the 1990s, housing prices here leaped 32 percent between 1993 and 2000. In Buffalo during that same period, housing prices grew a mere 2.5 percent. “We didn’t have nearly the same kind of housing boom that other places did,” said Richard Dietz, economist at the Federal Reserve Bank of Buffalo.
That lack discouraged the growth of subprime lending in Buffalo in several ways.
For one thing, about half of all subprime loans go to homeowners who refinance to cash in on the equity in their homes. In Buffalo, homeowners had less equity and less reason to refinance.
Secondly, houses are so cheap in Buffalo that fewer people would need to resort to an exotic mortgage.
And finally, Buffalo’s 1990s real estate slump appears to have left large numbers of real estate speculators looking elsewhere, to where the growth prospects looked better.
In Cleveland, countless speculators thought they could buy a cheap city home, rent it for a few years and then sell it for a big profit. About a third of subprime loans went to such speculators, said Jim Rokakis, the Cuyahoga County treasurer.
Cleveland officials saw this real estate “flipping” phenomenon growing through the 1990s and passed a law to try to prevent potential abuses in 2001. Dayton and Toledo did the same thing — but a year later, the State Legislature overturned those laws.
Rokakis still remembers the dozens of real estate and banking lobbyists who assembled in the State Capitol to defeat the law. “They won, and it was off to the races,” Rokakis said. “There was no sheriff in town.” And as a result, real estate lawlessness turned Cleveland — and to a lesser extent, other Ohio cities — upside down.
Encouraging flipping
Real estate appraisers, who until 2006 didn’t need a license or any training to do business in Ohio, grossly overvalued properties to encourage flipping from one investor to the next.
And subprime lenders, who offered unusual mortgages with low down payments and low initial interest rates that would only explode later, poured into Ohio, where the state consumer protection law didn’t cover real estate sales until last year.
Some lenders didn’t even check their buyers’ credit ratings. And as a result, plenty of people bought a first home or investment properties they wouldn’t be able to afford once those interest rates started rising.
That started happening two years ago, and foreclosures skyrocketed. Cuyahoga County, which typically recorded a couple thousand foreclosures a year, has seen more than 27,000 in the last two years.
In contrast, Buffalo has seen about 3,000 foreclosures in that time.
Many of Cleveland’s foreclosures occurred because of fraud, local real estate experts said. A dizzying array of schemes were hatched to lure unsuspecting investors and unprepared first-time homebuyers, and allow more sophisticated speculators to flip properties.
That didn’t happen to the same extent in Buffalo for one simple reason. “You had an attorney general who was willing to prosecute this stuff, and we didn’t,” Rokakis said.
Now-Gov. Eliot L. Spitzer, while serving as attorney general, aggressively prosecuted — and convicted — Buffalo slumlords such as Robert Palano and Scott Wizig. And that fact has had a lasting psychological effect.
“Speculators are afraid to come to my district because they know someone will come down on them,” said Franczyk, who noted that tough judges and the city’s Anti-Flipping Task Force appear to have discouraged wrongdoing.
Franczyk acknowledged, however, that Buffalo took such a tough stance on predatory lending after seeing its own wave of bad loans and foreclosures in the 1990s. A study by the Federal Reserve Bank found foreclosures in Buffalo quadrupled during that time, with most of them concentrated on the East Side and West Side.
But that wave was a ripple compared with what Cleveland experienced. “In practical terms, it’s hit us like a natural disaster,” said Chris Warren, chief of regional development for the City of Cleveland. “The devastation is manifest: 10,000 abandoned properties in Cleveland and thousands of our citizens uprooted with grievous impacts on their personal wealth and well-being.”
And it’s not just the people who’ve lost their homes who are suffering.
Citywide, the murder rate is at a 13-year high. One of the victims was Joe Krasucki, who, on his 78th birthday last March, thought he heard vandals stripping the aluminum siding off his house, just like they had done to countless abandoned homes in Slavic Village. When Krasucki went outside to investigate, a gang of teenagers beat him so badly that he died several days later.
It all leaves people who’ve worked to revive Slavic Village — a sprawling neighborhood that looks in parts like Broadway-Fillmore and in parts like North Buffalo — feeling angry and scared.
“The vacant and vandalized houses are more than just eyesores; they make the neighborhood unsafe to play in,” said Julie Smith, a local member of ACORN, the Association of Community Organizations for Reform Now. “I don’t let my children go out and play in the neighborhood.”
And yet local officials say the worst criminals aren’t the ones roaming the streets of Cleveland.
Rokakis likened the barons of Wall Street to Colombian drug lords. At his State of the City speech last week, Cleveland Mayor Frank Jackson compared them to Mafia bosses.
They blame Wall Street for encouraging the growth of subprime lending by packaging the loans into “mortgage-backed securities” that investors flocked to, apparently thinking that the decade’s real estate boom wouldn’t end.
But it ended as soon as the payments on those subprime loans started to move higher, creating a ripple effect that stretches nationwide. Home values have fallen in many communities, and the mortgage-backed securities that investors once loved are now at the root of Wall Street’s doldrums.
“I have no sympathy for Wall Street,” Jackson said. “I have no sympathy for people who live large off the misery and suffering of other people.” As if to prove his point, Jackson has sued 21 investment banks — including Goldman Sachs, Merrill Lynch and HSBC — saying they created a public nuisance by investing in subprime loans.
Similarly, Buffalo is suing 28 lenders in hopes of getting them to take responsibility for abandoned properties in the city.
In Buffalo, housing prices increased 4 percent last year, while they remained flat in Cleveland.
“We’re a fairly stable market,” said John L. Leonardi, executive vice president of the Buffalo Niagara Association of Realtors.
There’s nothing stable about Cleveland, however. Homes are being abandoned now even in Shaker Heights, long one of the city’s finest suburbs. And homes in Slavic Village can be had on the Internet now for as little as $3,000 — the kind of price that attracts would-be slumlords.
“Our challenge now is to convince people that this is still a great place to live,” said Kittredge, of Slavic Village Development.
That’s not the only challenge. With much of the city now looking hollowed-out, Cleveland not only has to repair its neighborhoods but its psyche.
“It will take years, if not decades, to repair this physical and emotional damage,” said Lindsey Sacker of Empowering and Strengthening Ohio’s People, a group that fights predatory lending.
News Washington Bureau Reporter Lindsey McPherson contributed to this report. .
jzremski@buffnews.com
