Lost in the system: How the deck has been stacked against foreclosed houses in Detroit

Eric Seymour, the 2015 Robert Kahn Fellow for the Scientific Study of Social Issues, is examining how private lenders and federal entities handled the recent rash of foreclosed properties in Detroit, and what this suggests for the future.

Miniature house with chain and padlock around it.

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Large numbers of Detroit homeowners lost their properties to foreclosure in the recent economic recession, and many of those houses ended up empty and deteriorating, leading to increased crime and lower property values in the city.

But why exactly do foreclosures have that impact? When large numbers of houses in a region are repossessed by banks and federal institutions, what are the policies and practices that produce the long vacancy periods, poor maintenance, and heavily discounted sale prices that so negatively impact neighborhoods?

Eric Seymour, a doctoral student in Urban and Regional Planning at the University of Michigan, hopes to answer those questions. He also wants to know how approaches and outcomes in Detroit differed between private lenders, who were understandably focused on the bottom line, and governmental lenders, who have a mandate to work with neighborhoods and homeowners.

For the last year, Seymour has been poring over Detroit-area real estate data, interviewing real estate brokers, investigating housing sites, and studying federal rules and regulations.

Among his findings: County real estate transactions data show that there were about 70,000 mortgage foreclosures in Detroit from 2005 to 20013; some of the properties went through foreclosure more than once. And most of these houses, Seymour says, were not bought by other homeowners. “The vast majority of properties in cities like Detroit—where you have a weaker housing market—end up in some kind of institutional ownership,” he says.

Eric Seymour, Photo by Michael McIntyre/ISR.

Eric Seymour, Photo by Michael McIntyre/ISR.

Of the 70,000, more than half were repossessed by private lending institutions. But Fannie Mae and Freddie Mac, the two hybrid public/private entities, accounted for about 17,000 of the foreclosures. Another 10,000 were under HUD, the Department of Housing and Urban Development, which takes over when FHA-insured loans go into default. “The federal government had a great opportunity to intervene due to the number of properties it actually owned in these places,” Seymour says.

Yet Seymour’s initial research indicates that not only did private lenders do little to preserve communities, the supposedly neighborhood-oriented governmental entities also did little to intervene. For example, it typically took a year or more for HUD to acquire an FHA-insured property from a lender once it had gone into foreclosure. Lenders are supposed to make sure properties are in marketable condition before HUD will settle the insurance claims and take ownership. But with so many foreclosed properties to process, Seymour says, banks did substandard work or none at all. When HUD demanded more, the properties often just sat idle, falling into greater disrepair.

Perhaps a bigger problem, Seymour says, was the indiscriminate selloff of Detroit properties, regardless of a house’s condition or the relative stability of its neighborhood. Fannie Mae and Freddie Mac—hybrid public-private entities that have been criticized for favoring profit over their public mission—routinely sold foreclosed properties en masse to real estate intermediaries with no stake in the area. These shell companies then sold blocks of houses to investors as far away as Singapore, China, and the UK, promising buyers a burgeoning rental and real estate market that didn’t exist, and understating the sales price on the Detroit end to avoid paying local property transfer taxes.

“I expected to see a lot of sad stories about what happened with the foreclosed properties, regardless of which entity was responsible for them,” Seymour says. “But the nature and the scale of some of these investor activities has been the most surprising thing to me.”

Seymour will complete his research, with the support of the 2015 Robert Kahn Fellowship for the Scientific Study of Social Issues, over the next few months. He hopes his findings will lead to change. For starters, he says, HUD needs to find a way to expedite its acquisition of properties. And Fannie Mae and Freddie Mac need to look beyond the bottom line. “With the volume of properties that they touch,” he says, “they need to have a neighborhood-oriented foreclosure disposition policy.

“It’s such an extreme case,” he adds, “and there’s so much stress put on these different systems, that we can see the pressure points and the flaws. And then we can make visible what would otherwise be invisible, and suggest policy recommendations based on those things.”

Lost in the system: How the deck has been stacked against foreclosed houses in Detroit