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

2720 East 22nd Street Minneapolis, MN 55406 | (612) 333-1260 | www.isaiahmn.org

Introduction

Subprime Mortgage Lending

Foreclosures

Vacant Houses

Home Values

Recommendations

Table of Contents:

May 2012

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INTRODUCTION & SUMMARY OF FINDINGS:

e subprime mortgage meltdown has resulted in a record number of foreclosures and plunged the UnitedStates into the worst financial crisis since the Great Depression. St. Paul has not been immune om thiscrisis, 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 andUS 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 weremade by its finance company – Wells Fargo Financial. In contrast, Well Fargo Financial accounted for just one out of every fourteen of Wells Fargo’s refinances in the Twin Cities metro area.1

Subprime loans stripped homeowners of their wealth and led to an epidemic of foreclosures.

e number of foreclosures in Ramsey County skyrocketed from 632 in 2005 to a peak of over 3,000 in2008.2 Although the number of foreclosures has passed its peak, it appears that there will be thousandsmore in the next few years.

Since last April, the East Side and North End have had more foreclosure filings and sales than otherneighborhoods in St. Paul.3

Foreclosures ravaged neighborhoods and le behind a trail of vacant homes.

ere 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

e unprecedented numbers of foreclosures and vacant homes caused a steep and continuingdecline in home values throughout the city, but especially in minority neighborhoods.

Homes in the East Side, North End, and omas-Dale neighborhoods experienced the greatest lossof value, dropping 50% since 2006, whereas homes in the Mac-Groveland, Highland, and St. AnthonyPark 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 4

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A number of reports have documented the startling racialand economic disparities in mortgage lending. Residentsof low-income and minority neighborhoods were muchmore likely than residents in upper income and predomi-nantly white neighborhoods to receive a high-cost subprime

loan.8

e vast majority of subprime loans were for refinances,rather than home purchases. For instance, from 2005 to2007, Wells Fargo Financial made a total of just two homepurchase loans in the entire Twin Cities metro area.9 Sub-prime loans were promoted as a way to consolidate debt,provide money for home improvements, or for householdor personal needs, rather than being sought by borrowers asa way to lower their interest rates or lock in a fixed rate.

ere are circumstances where refinancing to use someof the equity in one’s home makes sense, but cash-out re-finances were rife with potential for abuse by lenders. Toooen homeowners with significant amounts of equity wereconvinced to refinance under conditions that le them con-siderably worse off than they were before. In some cases,homeowners were sold refinance loans which produced

just a few thousand dollars in cash at closing, but which re-financed their existing mortgages at higher rates, high fees,and oen with abusive loan terms.

While subprime lenders sometimes appeared to be small-time storefront operators, the masters behind subprimelending could be found among some of the world’s largestfinancial institutions. Sometimes these institutions haddirect ownership of subprime lending subsidiaries, such as

Wells Fargo and Wells Fargo Financial. In other cases, theseinstitutions bankrolled subprime lenders by investing inthem directly, such as with US Bank and New Century Fi-nancial.

e refinance loans made through the bank had greater con-centrations in predominantly white neighborhoods, whilethe loans made through the subprime lender were moreconcentrated in lower-income and minority neighborhoods.

is created a shameful paern of profiteering; preying onthe most vulnerable among us, and creating a devastatingimpact on already-struggling neighborhoods.

o One out of every six of the refinance loans made by Wells

Fargo on the East Side and North End of St. Paul (Wards 56, and 7) were made by its finance company – Wells FargoFinancial. In contrast, Well Fargo Financial accounted for

just one out of every fourteen of Wells Fargo’s refinancesin the Twin Cities metro area.10

Wells Fargo

In July 2011, the Federal Reserve Board assessed an $85million civil penalty against Wells Fargo, the largest fine theFederal Reserve has ever imposed in a consumer case.11 e

Federal Reserve charged that between 2004-2008 WellsFargo Financial steered customers into more expensive sub-prime loans even though they qualified for beer rates. Aspart of its selement with the Federal Reserve, Wells Fargo

will have to repay up to $200 million to customers that itovercharged.12

Previously, the Illinois Aorney General sued Wells Fargofor steering African-American and Latino homeowners tohigher cost subprime mortgages while giving white bor-

rowers who had similar incomes lower cost loans. e suitcharged that “Wells Fargo drained wealth from families andneighborhoods and added to the stockpile of boarded-uphomes . . .” 13

An analysis of Wells Fargo’s lending practices in the TwinCities suggests a paern of subprime lending with disparate impacts on minority neighborhoods. Wells Fargo hasserved upper income and predominantly white neighbor-hoods through its bank, providing prime loans with goodterms and low rates. In contrast, Wells Fargo has served

low-to-moderate income and minority neighborhoods dis-proportionately through its finance company, Wells FargoFinancial, which makes higher rate subprime loans.

SUBPRIME MORTGAGE LENDING


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US Bank

US Bank was a major investor in New Century Financial,the poster child for bad practices in the mortgage indus-try. By 2007, when the company filed for bankruptcy, NewCentury was the second largest subprime mortgage lenderin the country.14

In 1998 and 1999 when it was difficult for subprime lendersto raise capital, US Bank came to New Century’s rescue andinvested $40 million in the company. US Bank reaped aprofit of nearly $18 million from this investment within justa few years.15

In contrast to US Bank, New Century, which made loans with high rates and enormous fees, made a large percent-age of its loans to minority neighborhoods. From 2004 to2006, New Century’s last year of business, almost half of the

refinances New Century made in St. Paul were in minorityneighborhoods. Whereas just 14% of US Bank’s refinancesin St. Paul were in minority neighborhoods.16

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

Wells Fargo & Wells Fargo Financial Refinance Loans in St. Paul:17


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The number of foreclosures in Ramsey County sky-

rocketed from 632 in 2005 to a peak of over 3,000 in

2008. Although the number of foreclosures has passed

its peak, Ramsey County still experienced over three

times more foreclosures in 2011 than in 2005, and it

appears that there will be thousands more in the next

few years.

A recent Star Tribune article noted that there may be

an increase in foreclosures coming in Minnesota. The

article attributed the decline in foreclosures in part to

the hold that lenders put on foreclosures due to the

robo-signing scandal, and quoted a real estate expert

who said that there’s “definitely another round of fore-

closure coming down the pipeline.”18

Foreclosures in Ramsey County19

Year: 2005 2008 2011Number of Sheriff ’s Sales: 632 3,023 2,078

The areas in the Twin Cities that have been the most

affected by foreclosures are the North Side of Min-

neapolis and the Payne-Phalen neighborhood on St.

Paul’s East Side.20 In St. Paul, the zip codes with the

most foreclosure activity since last April are all on the

East Side.21

Zip Code Foreclosure since April 2011

55106 406 55119 229

55117 214

According to a national study by the Center for Re-

sponsible Lending approximately 8 percent of Af-

rican-American and Latino families have lost their

homes to foreclosure compared to 4.5 percent of white

families.22

Many of these foreclosures can and should be avoided.

A report from state regulators stated:

“[T]oo many homeowners experience foreclosure

when finding an alternative solution would be in the

interest of both the homeowner and the mortgage

holder. Preventing these unnecessary foreclosures

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

The regulators found that mortgage servicers were

only reaching a minority of delinquent homeowners

with their foreclosure prevention efforts.

“Nearly three years into the foreclosure crisis, we

find that more than 60% of homeowners with seri-

ously delinquent loans are still not involved in anyloss mitigation activity.”24

As the foreclosure crisis has exploded, mortgage ser-

vicers have failed to adequately meet the number of

delinquent homeowners. In a recent GAO survey of

non-profit housing counselors, for example, seventy-

six percent of the counselors reported that overal

their clients had a “negative” or “very negative” expe-

rience with the mortgage servicers. The most com-

monly cited problems were of homeowners receiving

inconsistent or confusing information, speaking to adifferent representative each time they called, of ser-

vicers losing their paperwork, and of the decision-

making process taking too long.25

Even worse, the Office of the Comptroller of the Cur-

rency (OCC) conducted examinations of the foreclo-

sure processes of US Bank and Wells Fargo and found

that both banks engaged in unsafe or unsound prac-

tices26, such as:

Filing legal affidavits in which bank employees made•

assertions that they claimed, falsely, were based on

personal knowledge or review of the relevant records

Filing numerous affidavits courts that were not•

signed in the presence of a notary

Failing to devote adequate oversight, internal con-•

trols, policies and procedures to their foreclosure pro-

cesses

Failing to sufficiently oversee outside lawyers and•

other third-parties handling foreclosures

In addition the OCC found that Well Fargo:

Initiated foreclosures without always ensuring that•

mortgage documents met legal requirements

Failed to devote sufficient financial, staffing and man-•

agerial resources to its foreclosure processes

FORECLOSURES


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Foreclosures not only impact the individual homeowners but also local governments, neighbors, and other propertyowners. Especially when a foreclosure leaves a home vacantand unsecured, it can cost cities and counties tens of thou-sands of dollars.

Foreclosures result in decreased revenue for cities and coun-ties through lower property values, delayed and uncollectedtaxes, and unpaid services. At the same time that foreclosuresmean less revenue for cities and counties, they also imposeadditional requirements to those cities and counties for in-creased policing, building inspection, demolition, propertymaintenance, and managing the foreclosure process.

Aer peaking in 2008, the number of vacant houses hasstarted to decline, but there are still almost four times moreproperties on St. Paul’s vacant building list than there were

in 2004.

Vacant and Boarded Buildings in St. Paul27

Year 2004 2008 2012Buildings 370 2,000 1,291

e vacant buildings are disproportionately concentratedon the North End and East Side of St. Paul.

Over sixty-percent of the vacant residential buildings are in

Wards 5, 6, and 7.

e largest number of vacant residential buildings in St.Paul is in Ward 7.

Ward #Vacant Residential Bldgs % of total vacant

7 293 24.1% 6 238 19.6% 1 228 18.7% 5 226 18.6% 2 143 11.8%

4 63 5.2% 3 22 1.8%

Vacant homes have been the site of numerous crimes. In ad-dition to burglary and trespassing, there have been severalhigh profile incidents in St. Paul recently. In March, policecharged nine men and teens with dragging a 14 year old girlinto a vacant home and sexually assaulting her. at samemonth, a man was killed on the porch of a vacant home

where he had gone to sele a drug debt. In December, ahomeless man died aer starting a fire in a vacant house inMinneapolis.28

In contrast to St. Paul, Minneapolis has many fewer vacant buildings and charges property owners a much higher va

cant building fee.

City Properties on City’s Vacant Building List29

2004 2008 2012St. Paul 370 2,000 1,291

Minneapolis 286 857 851

Vacant Building Registration Fee30 St. Paul $1,200

Minneapolis $6,985

If St. Paul’s vacant building registration fee were the same asthat in Minneapolis, it would result in over $7 million a yearin extra revenue for St. Paul.31

VACANT HOUSES


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Single Family Change from

Home Prices 2006 to 2011

Neighborhood April 2006 January 2012 Dollar %

Thomas Dale $168,000 $77,600 -$90,400 -53.8%

Dayton’s Bluff $170,500 $81,900 -$88,600 -52.0%

Payne Phalen $182,000 $93,200 -$88,800 -48.8%

North End $180,500 $95,200 -$85,200 -47.3%

Greater East Side $186,50 $99,900 -$86,600 -46.4%

Battle Creek $207,500 $113,200 -$94,300 -45.5%

St. Paul City $205,300 $122,600 -$82,700 -40.3%

West Side $187,000 $112,400 -$74,600 -40.0%Summit-University $212,800 $133,500 -$79,300 -37.3%

West 7th $186,500 $117,400 -$69,100 -37.1%

Midway $196,500 $130,600 -$65,900 -33.5%

Como $233,000 $167,600 -$65,400 -28.1%

Merriam Park $305,100 $225,500 -$79,600 -26.1%

St. Anthony $341,500 $268,900 -$72,600 -21.3%

Macalester-Groveland $306,000 $245,500 -$60,500 -19.8%

Highland $301,500 $247,000 -$54,500 -18.1%

Summit Hill $490,200 $408,200 -$82,000 -16.7%


HOME VALUESe unprecedented numbers of foreclosures and vacanthomes caused a steep and continuing decline in home val-ues throughout the city, but especially in minority neigh-

borhoods.

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$59,000 during this period. For white homeowners, it de-creased from $115,364 to $95,000.32

A recent report from the Pew Research Center found thathe bursting housing bubble and the decline in home valuesand equity resulted in decreases in average American household wealth of:33

66% for Latinos from $18,400 to $6,30053% for African-Americans from $12,100 to $5,700

16% for whites from $135,000 to $113,000

In St. Paul, homes in the Dayton’s Bluff, Payne-PhalenNorth End, and omas-Dale neighborhoods experiencedthe greatest loss of value, dropping 50% since 2006, whereashomes in the Mac-Groveland, Highland, and St. Anthony

Park neighborhoods lost the smallest percentagedropping less than 20%.34

In total, St. Paul has lost over $6.1 billion in home value, which could drain $46.3 million in annua

tax revenue from Ramsey County and $15.5 mil-lion in annual tax revenue from the city.35

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1) e state of Minnesota, counties, and cities shouldadopt a foreclosure mediation program to prevent un-necessary foreclosures.

ere is growing recognition of the effectiveness of foreclo-

sure mediation programs in preventing unnecessary fore-closures. e number of states and municipalities that havesuch programs continues to grow, and there are now juris-dictions in 24 states that have foreclosure mediation.

Foreclosure mediation benefits all of the involved parties:- Servicers avoid a long and costly foreclosure process sincemore than 70 percent of mediated cases reach a sele-ment.36

- More than half of homeowners in mediated cases get tokeep their homes, while those for whom that is not a sus-

tainable option also benefit by negotiating a “graceful exit”in how and when they move out.- For government, mediation can reduce the number of va-cant homes and stabilizes property values and tax revenue.

In 2009 the Minnesota legislature passed the Homeowner-Lender Mediation Act which would have required lendersto offer homeowners the opportunity to participate in non-

binding mediation before the lender could foreclose, how-ever Governor Time Pawlenty vetoed the bill.37

Under the Act, lenders would have been required to servea mediation notice to the homeowner and filed proof of it

with the Aorney General’s office. Homeowners wouldhave 20 days aer this to file a request for mediation. If thehomeowner does not request it, then the lender could pro-ceed with the foreclosure.

Although a state level mediation program would be optimalin that it could benefit from an economy of scale and wouldserve the largest number of homeowners, cities and coun-

ties can implement their own mediation programs.

2) Minneapolis charges property owners $6,985 annu-ally to register vacant buildings, while St. Paul chargesjust $1,200.e city of St. Paul should increase its vacant building regis-tration 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.

3) Local governments, school boards, and public agen-cies should require that any banks they do business withmeet responsible lender criteria that includes using bestpractices for foreclosure prevention.

4) Local governments, school boards, and public agen-cies should require that any banks they do business pub-licly disclose information regarding its foreclosures, in-cluding:

a. e number of homeowners eligible for loan modifica-tions

b. e number that received or were denied permanenmodifications

c. e principal and/or rate reduction in each modifica-tiond. A breakdown for each of the above categories by the raceethnicity, and census tract of thehomeowners.

5) Mortgage servicers should comply with the followingbest practices for foreclosure prevention:

a. Stop foreclosure proceedings while they are evaluating a borrower’s eligibility for a loan modification or other foreclosure prevention options

b. Respond within 72 hours to requests or inquiries about

loan modificationsc. Ensure that the loan modification process takes less than30 daysd. Modify troubled loans so that they are for no more thanthe value of the homee. Allow tenants of foreclosed properties to continue to rentthe property until it is soldf. Take steps to ensure that its loans are not being used forproperty flipping or foreclosure rescue scams.

RECOMMENDATIONS


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Home Mortgage Disclosure Act data from 2004-2006 “Foreclosures in Minnesota: A Report Based on County Sheriff ’s Sale Data,” February 15, 2010, Housing Link, p. 8 Realtytrac.com, Foreclosure statistics for pre-foreclosure, auction, and bank-owned properties,Data from city of St. Paul Vacant Building Registration List March 12, 2012, 846 single family, 307 duplexes, 64 multi-family

Data from city of St. Paul Vacant Building Registration List March 12, 2012 Data from city of St. Paul Vacant Building Registration List March 12, 2012 Zillow Home Values Index, calculated March 21, 2012 “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures,” Debbie Gruenstein Bocian, Wei Li, Carolina Reid, Center forResponsible Lending, November 2011, p. 11. “Income is No Shield Part III. Assessing the Double Burden: Examining Racial and GenderDisparities 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 ChapmaCenter for American Progress, September 2009, p.1.Home Mortgage Disclosure Act data

Home Mortgage Disclosure Act data “Wells Fargo, Countrywide Mortgage Selements Give Homeowners a Bit of Relief,” Daily Finance on AOL.com, Catherine New, July 222011 Up to 10,000 customers, up to $20,000 each, equals $200 million July 31, 2009 Press Release, “Madigan Sues Wells Fargo for Discriminatory and Deceptive Lending Practices”“New Century, Biggest Subprime Casualty, Goes Bankrupt”, Bloomberg, April 2, 2007, Bradley Keoun and Steven Church.

“U.S. Bancorp Profits Handsomely from Its Investment in New Century,” National Mortgage News, March 11, 2002, Brad Finkelstein

Home Mortgage Disclosure Act data Based on Home Mortgage Disclosure Act (HMDA) data for first l ien conventional refinance loans “More home foreclosures on horizon in Minnesota,” Star Tribune, Jim Buchta, April 16, 2012 “Foreclosures in Minnesota: A Report Based on County Sheriff ’s Sale Data,” February 15, 2010, Housing Link, p. 8, and “2011 Foreclosurin Minnesota: A Report Based on County Sheriff’s Sales Data”, February 24, 2012, p. 5 “Fostering Equitable Foreclosure Recovery,” Sarah Treuha, Kalima Rose, and Jennifer Tran, Policy Link, January 2012, p. 14 Realty Trac. Includes pre-foreclosure notices and sheriff’s sales “Speculators, Not C, Behind Foreclosures in Black Neighborhoods,” September 7, 2011, American Banker, John I. Gilderbloom andGregory D. Squires “Analysis of Mortgage Servicing Performance”, Data Report No. 4, January 2010, State Foreclosure Prevention Working Group “Redefault Rates Improve for Recent Loan Modifications,” State Foreclosure Prevention Working Group Memorandum on Loan Modifiction Performance, August 2010 GAO-11-367R Survey of Housing Counselors about HAMP, May 26, 2011, United States General Accounting Office

United States of America, Department of the Treasury, Comptroller of the Currency, Consent Order AA-EC-11-18 “In the Maer of USBank National Association”, and United States of America, Department of the Treasury, Comptroller of the Currency, Consent Order AA-EC-11-19 “In the Maer of Wells Fargo Bank N.A.” “In housing meltdown, cities turn into buyers,” Star Tribune, Chris Havens, February 7, 2010 and City of St. Paul vacant building list as ofMarch 1, 2012, hp://www.stpaul.gov/index.aspx?NID=2272“Vacant houses not always emply,” Star Tribune, April 30, 2012, Chao Xiong.

“In housing meltdown, cities using federal money to address foreclosures,” Star Tribune, September 18, 2010, Chris Havens, City of St. Pau vacant building list as of March 1, 2012, hp://www.stpaul.gov/index.aspx?NID=2272 , and Minneapolis List of Vacant and CondemnedProperties as March 2, 2012,hp://www.ci.minneapolis.mn.us/www/groups/public/@regservices/documents/webcontent/convert_254314.pdf Minneapolis Director’s Fee Schedule, p. 6e Minneapolis annual fee is $5,546 higher than the St. Paul fee. ere are 1,291 vacant buildings current on St. Paul’s vacant buildingregistration list. $5,546 x 1,291 = $7,159,886

“Wealth Gap Rise to Record Highs Between Whites, Blacks, Hispanics,” Pew Research Center, July 26, 2011 “Wealth Gap Rise to Record Highs Between Whites, Blacks, Hispanics,” Pew Research Center, July 26, 2011 Zillow Home Values Index, calculated March 21, 2012 According to Zillow.com, the value of the average home in St. Paul has declined $82,700 from April 2006 to January 2012. ere are 74,00single family, duplex, triplex, condo units, and townhomes in the city of St. Paul, according to the Wilder Research Center’s “Census Facts.”is calculates to a total of $6.1 billion in total lost home value. Using the Ramsey County tax rate of 1.01% of a home’s value, the loss in value means $61.8 million in lost property taxes. e city receives about 25% of the total property tax. hp://www.stpaul.gov/Documen View.aspx?DID=17200 Walk the Talk: Best Practices on the Road to Automatic Foreclosure Mediation,” Alon Cohen, Center for American Progress, November2010“Minnesota AG to push for Foreclosure Mediation,” Housing Wire, Jon Prior, January 8, 2010

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2720 East 22nd Street Minneapolis, MN 55406 | (612) 333-1260 | www.isaiahmn.org

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

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