Rehabilitation Lending Activity in Cleveland: an Alternative Policy Response to the Foreclosure...

8/2/2019 Rehabilitation Lending Activity in Cleveland: an Alternative Policy Response to the Foreclosure Crisis

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REHABILITATION LENDING ACTIVITY IN CLEVELAND:an alternative policy response to

the foreclosure crisis

February 2012

DAVID L. MOORE, ESQ.MATTHEW P. YOURKVITCH, ESQ.

In partnership with:

Cleveland Action to Support Housing, Inc.

Laurentum Group, Ltd.


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ABOUT CLEVELAND ACTION TO SUPPORT HOUSING

Cleveland Action to Support Housing (CASH) is a nonprofit organization that serves property owners in

the city of Cleveland. Since 1977, CASH has worked in cooperation with nonprofit communitydevelopment corporations, the city of Cleveland, and local financial institutions to provide homeowners

with low-interest rate loans for home improvement purposes. Through its role as fiscal agent and projectmanager, CASH leverages its resources with community partners, aiming to create new and innovative

program opportunities in the housing finance and rehabilitation market.

This study was made possible through the generous support of the Cleveland Foundation. Many

individuals, financial institutions, nonprofit organizations, community development corporations, andofficials from the city of Cleveland also participated in this study, and we thank you for your support.Lastly, we would like to give special thanks to Marcia Nolan and the CASH Steering Committee for theiractive involvement and assistance throughout this project.

Copyright 2012. This study was produced by Laurentum Group, Ltd. All views expressed herein are those of theauthors and do not necessarily reflect the views of CASH or the Cleveland Foundation.


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I. Introduction

Since 2008, cities across the country have been ravaged by foreclosures, and, like many industrial cities,the city of Cleveland, Ohio has been particularly affected. In response, public and private stakeholders

have championed a plethora of research, legislation, and funding initiatives designed to aid recovery and

encourage stabilization, and there are many academic studies that assess the same. To date, though, theseefforts have aimed at resolving foreclosures and remedying the growing number of vacant and abandoned

properties. Rather than duplicating those efforts, this study is intended to complement their contributions

by focusing on incremental neighborhood stabilization through proactive rehabilitation lending.

This study surveys the rehabilitation lending market in Cleveland and examines residential, homeimprovement lending activity between 2008 and 2010. Our objective is to assess rehabilitation efforts

and evaluate the general lending needs for the repair and rehabilitation of properties in northeast Ohio.Throughout, we examine opportunities to maximize rehabilitation lending and identify strategies to assist

with the stabilization of the local real estate market.

Since the foreclosure crisis peaked in 2008, many participants in Clevelands housing delivery system

have observed a significant decline in rehabilitation lending. Our analysis suggests that theseobservations are accurate. In particular, data from institutional lenders shows a measurable decline in

home improvement lending activity across all segments, while our interviews confirm that meaningfulimpact is impeded by the lack of affordable access to home improvement lending products. All in all, weconfirm that sustainable rehabilitation is a collaborative effort. In order for existing efforts to have a

positive impact, all participants in the housing delivery system, including lenders, borrowers, governmentofficials, and community organizations, must make a joint effort to re-invest in Cleveland neighborhoods

and Cleveland communities.

Because this report is intended to survey rehabilitation-lending activity, our goal is to provide afoundation on which additional research can build. By surveying the Cleveland market, we present a new

series of information that is ripe for further research and is capable of informing strategic rehabilitation

initiatives moving forward.

We have divided this report into seven sections. In Sections II and III, we examine institutional lending

data and present our analysis of rehabilitation lending in Cleveland. In Sections IV and V, we examine

barriers to rehabilitation lending and discuss methods for increasing aggregate lending and improvingaccess to affordable rehabilitation loan products. In the final sections, Section VI and VII, we present a

broad, policy-based strategy for supporting local reinvestment and offer additional recommendations forfurther study.


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II. Methodology

Our analysis relies heavily on institutional lending data, but is informed through qualitative discussions.

We examined reported lending activity in the city of Cleveland from 2008 through 2010, as this

timeframe represents those years immediately following the peak of the mortgage crisis in Cleveland andcontinuing through the current recovery.

In analyzing institutional lending data, we rely on data from the Home Mortgage Disclosure Act (HMDA)and from Northeast Ohio Community and Neighborhood Data for Organizing (NEOCANDO) provided

by Case Western Reserve Universitys Center on Urban Poverty and Community Development. The

HMDA data consist of information reported by the nations largest home-loan originators. Most lendersthat operate in a metropolitan statistical area must file annual summary reports of their lending activity,including data on home improvement loans. In their reports, lenders include information about loan

characteristics, such as the amount of a loan requested, the disposition of the application (e.g., approved,

denied, and withdrawn), loan pricing, lien status, and certain socioeconomic and demographic data ofapplicants.

1Similarly, NEOCANDO compiles social and economic data from several different sources,

including the HMDA, and links to data provided by public agencies for the entire seventeen-countynortheast Ohio region, including Cuyahoga County, which encompasses Cleveland.

We also invited more than 70 individuals and organizations to participate in this study, including

participants in the housing delivery system and individuals who study the results of the housing delivery

system and assess lending policies. Nearly two-thirds of these individuals and organizations responded toour invitation. Those who did respond include loan officers, lending professionals, public officials,housing advocates, academicians, and representatives from the Federal Reserve Bank of Cleveland.

Although these data and interviews provide a detailed assessment of home improvement lending in the

city of Cleveland, this study tells only part of the story. For several reasons, actual lending activity duringthis timeframe will vary from our assessment. First, our analysis relies entirely on lending activityreported under the HMDA, meaning that we do not account for all financing activity. 2 For instance, not

all institutions are required to report their lending activity, though the HMDA data does capture lending

by independent finance companies, credit unions, and traditional banking institutions. Likewise, HMDAdata does not account for home improvements financed through alternative, non-institutional channels,such as through credit cards, personal savings, or peer-to-peer borrowing. Second, we examine lendingactivity for residential, one-to-four family units and exclude multi-family units, which are often indicative

of investor activity. By limiting our assessment in this way, we underreport total activity in favor of moreaccurately reporting non-investor activity. These limitations suggest that our study presents a

conservative assessment of total rehabilitation activity.

1 The HMDA requires institutions to classify loans as home purchase loans, home improvement loans, orrefinancings. In this study, we limit our examination to home improvement loans.

2 One limitation to HMDA data is how home improvement loans are reported. Under the HMDA, homeimprovement loans are reported only when there is an explicit purpose of repairing, rehabilitating, remodeling, or

improving a residential structure. These loans include cash-out refinances and home equity lines of credit, but

only when a portion of the funds will be used for home improvement purposes. However, home improvement loans

do not include acquisition-rehab loans, where the loan proceeds are used for both purchasing and improving a

structure; in this case, lenders report the loan as a home purchase loan. As a result, this study does not analyzeacquisition-rehab loans as part of this study. 12 C.F.R. pt. 203, Comments 203.2(h)-7, 203.2(g)-5, 203.4(a)(7)-3.


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Finally, it should be noted that our study assesses lending activity and does not examine how loan

proceeds are actually used. Although we expect home improvement loan originations to be an indicator ofrehabilitation efforts in Cleveland, it is possible that loans originated for one purpose are actually used foranother purpose. Consequently, our assessment may not truly reflect actual rehabilitation activity.

III. Overview of Lending Activity

A. Trending Disinvestment

Between 2008 and 2010, home improvement lending in Cleveland has decreased by more than fiftypercent, and it has come at a cost of more than $10 million. The data confirm that financial institutionshave constrained their lending activity, thereby foreclosing many borrowers from the credit markets that

facilitate lending in urban, low- and moderate-income areas like many parts of Cleveland.

As Table 1 indicates, lenders are originating fewer loans each year and are denying an increasingly large

percentage of applications. In 2008 and 2009, nearly 2 of every 3 applications (65%) were denied. In2010, this figure jumped to nearly 3 of every 4 applications (nearly 74%). Although this downward trend

is not unexpected, the rate at which it is occurring is alarming. Between 2008 and 2010, origination rates- the total number of originations relative to the total number of applications - slowed by nearly 10%.

During this same period, denial rates leaped 12%, outpacing originations.

Using applications as an indicator of demand for home improvement loans, we observed a similaraversion to rehabilitation products by consumers as we did by lenders. Figure 2 shows the total number

of home improvement loan applications, originations, and denials between 2008 and 2010. By 2010,applications for home improvement loans decreased nearly 54% from their peak in 2008, while total

originations declined nearly 58%.

Figure 2: Number of home improvement loans by applications and disposition

B. Flexibility Across Lien Types

After reviewing lending activity in the aggregate, we can begin to assess the role that liens play inrehabilitation lending. In particular, evaluating the lien status is one way to ostensibly gauge the overall

3140

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Applications Denials Originations

Trends in Number of Applications, Denials, and Originations

2008 2009 2010


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impact of lending volume on property values and market recovery. As mentioned earlier, while

applications and originations have declined year over year, these figures both vary depending on whetherthe loan requested is secured or unsecured.

Between 2008 and 2010, applications for unsecured loans and for loans in second priority each increased

relative to all applications. Despite a drastic drop in real numbers, by 2010, applications for these loans

increased as a percentage of all applications by nearly 3.5% for second loans and more than 7.5% forunsecured loans. This trend is positive when compared to first priority loan applications, which dropped

by more than 13% relative to all home improvement loan applications received during this time period.

In terms of overall investment, unsecured loans present considerable opportunity for market impact.

When comparing total applications across lien types, unsecured loan applications were originated nearly27% of the time, which was more often than applications for loans secured either by first liens (20%) orsecond liens (18%). In total, nearly half of all home improvement loans originated between 2008 and

2010 were unsecured and one quarter were loans in second priority. Figure 3 depicts the percentage of

home improvement loans originated in each of the three years, by each loans respective lien type.

Although origination rates for second loans and unsecured loans were each lower in 2010 than they were

in prior years, our research confirms that consumer appetite for these loans remains consistent with, andeven stronger than, that of prior years. This three-year trend may also suggest that lenders have a growing

appetite for unsecured home improvement loans.

Figure 3: Percent of home improvement loans originated, by lien type

C. Impact on Low- and Moderate-Income Borrowers

Interviews with participants in the housing delivery system indicated that many individuals are having

increased difficulty obtaining home improvement loans. Aside from tighter lending standards andchanges made in response to an uncertain economic environment, several participants questioned the

relationship between lending standards and borrower characteristics.

In evaluating borrower profiles, we wanted to determine whether Clevelands population of willingborrowers is being served as adequately in 2010 as it was in 2008. To do this, we examined the

distribution of home improvement loan applications, originations, and denials by applicant income over

22.64% 19.76% 17.66%

20.12%16.10% 17.41%

25.27%30.31% 25.17%

2008 2009 2010

Origination Rate by Lien Type

Senior Junior Unsecured


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this three-year period. We also examined the same distribution by applicant income, but using U.S.

Department of Housing and Urban Developments Median Family Income levels as upper bounds ofdetermination. Tables 4 and 5 detail these distributions.

Between 2008 and 2010, we observed an upward shift in the distribution of applications and originations

to low- and moderate-income borrowers. Table 4 shows that, in 2008, about 60% of applicants reported

annual income of less than $47,000, and by 2010, this share increased to 65%. Notably, though, thepercentage of applications submitted by borrowers earning less than $24,000 each year jumped from 17%

in 2008 to over 26% in 2010. Although applications proportionately increased among lower-incomeborrowers, originations did not follow suit. In all three years, approximately 50% of borrowers reported

income of less than $43,000, and 16% of those borrowers reported income of less than $25,000. The

consequence of this downward trend can be further observed by looking at the percentage of applicationsdenied during this period. By 2010, 70% of all denials were concentrated among applicants who reportedincome of less than $47,000, a figure that is nearly 10 percentage points higher than its 2008 level.

Because the median household income in Cleveland is just shy of $34,000, and since more than 26% ofthe Cleveland population lives below the poverty level, we wanted to observe how lenders have

responded to low- and moderate-income borrowers during this time period.3

Between 2008 and 2010, we

observed an increase in the concentration of applications and originations by and among low- andmoderate-income borrowers. As shown in Table 5, in 2010, originations to low-income borrowers

increased from more than 25% to nearly 30%, while originations to low- and moderate-income borrowers

increased from 57% to more than 62%. Nevertheless, this slight increase is outpaced by adisproportionate increase in denials to low-income applicants (increasing to 47% from 32%) and to low-and moderate-income applicants (76% in 2010, up from nearly 64% in 2008). While this jump in denials

may be attributable to several factors, our interviews and research indicate that a greater percentage of

low- and moderate-income applicants are finding it increasingly difficult to accommodate recent changesto institutional lending standards.

D. Phantom Census Tracts

One way to assess the magnitude of investment is to examine loan demand and loan originations acrosscensus tracts. Although we cannot account for the shadow lending market, such as home repairs financed

through savings or credit cards, we expect reported lending activity to serve as a leading indicator forsubsequent private investment. We believe that by identifying these geographical concentrations, and

also their distinctions, participants in the housing delivery system can begin to develop more effective and

strategically targeted lending and support programs.

Looking at the census tract level confirms that lending varies significantly across different regions of thecity. In particular, Clevelands west side is markedly distinct from Clevelands east side in terms ofapplications, originations, and total investment. On average, between 2008 and 2010, applications per

census tract on the citys east side dropped from around 12 to 5, while the citys west side experienced a

decline from about 18 to around 9. Average originations dropped by nearly half on the citys west side

(from 4.8 to 2.48) and by more two-thirds on the citys east side (from 2.35 to 0.75). These figurestranslate to more than $16.7 million in rehabilitation efforts on the west side, compared to $13.4 millionon the east side.

Additionally, throughout this three-year period, it is worth noting that total loan applications on the east

side (3,592) outpaced total loan applications on the west side (2,978), though relatively more originations

3 NEO CANDO, Center on Urban Poverty and Community Development, MSASS, Case Western ReserveUniversity, Quick Profile Economic Status, available athttp://neocando.case.edu.


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occurred on the west side than on the east side (812 compared to 655). Furthermore, originations per one

thousand households averaged 3.45 on the west side and just 2 on the east side. The disparity in thesefigures can be better understood by considering the rate of vacancies and non-owner-occupied homes inthe city. For instance, in 2010, there were 27,964 vacant housing units on the citys east side (23.18%),

while only 39% of east-side homes were owner occupied (36,271 units). By comparison, vacancy rates

on the citys west side were less than 14% in 2010, while the percentage of homes that were owner-

occupied was in excess of 50% (12,081 vacant and 37,647 owner-occupied units, respectively).4

Of the 224 census tracts in Cleveland, lenders reported they received at least one application for homeimprovement loans from all but 30 tracts in 2008 and all but 34 in 2009. Significantly, though, this figure

jumped to 50 tracts in 2010. When considering originations for these three years, the number of census

tracts without any reported lending activity was nearly double the number of census tracts without anapplication. In 2008, there were 61 census tracts without any originations; there were 87 in 2009, and 105in 2010. In each case, the majority of these phantom census tracts are found on the east side of

Cleveland, where nearly 5% of all residential households received a notice of foreclosure filing at some

point between 2008 and 2010. This geographical disparity is illustrated in Figures 6, 7, and 8, whichshow GIS maps for the city of Cleveland, overlaying total loan applications, originations, origination

rates, and origination amounts by census tract for each of the three years.

E. Evaluating Lender Response

Because Cleveland has been particularly affected by the foreclosure crisis, we wanted to determine howthe recovery has influenced lenders in the region and assess whether there is a meaningful distinction

between local lenders and non-local lenders. By examining those institutions with reported lending

activity between 2008 and 2010, we can begin to assess one significant factor that influences the volume

of home improvement lending in the region: lender concentration. Overall, a total of 70 lendersoriginated 1,467 home improvement loans between 2008 and 2010. Of these lenders, the number of

home improvement loans originated ranged from 1 to 142. The average number of loans originated perlender was 15.77, while the typical, median, number was 4.

As the fallout from the foreclosure begins taking hold, fewer lenders comprise a greater share of the totalmarket. In 2008, over 37 lenders originated at least one loan. By 2010, this figure dropped sharply to 20,

while a smaller number were originating a greater percentage of all loans; many of the institutions thatoriginated only one or two loans in the prior years were no longer active in 2010. When compared to

2008 levels, each lender, on average, originated 4 fewer loans in 2010 (19.4 in 2008 compared to 15.1 in

2010). Table 9 provides a list of lenders who originated at least one loan in a given year, ranked by totaloriginations for each of the three years. As shown in Figure 10, this reduction equates to a 66% drop in

total rehabilitation investment, from $16.4 million in 2008 to $5.5 million in 2010.

Despite this decrease, there is relative consistency among those financial institutions active in each of the

three years we reviewed. All in all, the great majority of originations remain concentrated among a few

lenders. Table 11 shows that, over this three-year period, 10 lenders originated nearly 85% (1,241) of all

home improvement loans in the city of Cleveland. Moreover, of these 10 lenders, all but one - CapitalOne N.A - originated at least one loan in each of the three years.

5

4 NEO CANDO, Center on Urban Poverty and Community Development, MSASS, Case Western Reserve

University, Quick Profile Economic Status, available athttp://neocando.case.edu.5 In December 2008, PNC Bank acquired Cleveland-based National City Bank. Prior to the consolidation, PNC

did not have any home improvement lending activity in the city of Cleveland. For this study, we attribute the pre-acquisition operations of National City to its successor, PNC.


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Figure 10: Originations of home improvement loans in thousands of dollars

Table 11: Top 10 lenders of home improvement loans, by lien type, and ranked by total

originations, between 2008-2010

Importantly, each of the 10 institutions identified in Table 11 have obligations under the CommunityReinvestment Act to serve the needs of their local communities, though only 6 are evaluated for their

activity in Cleveland6, and just 4 have a principal office location inside of Ohio. When considering

lending efforts in low- and moderate-income census tracts and loan distribution among low- andmoderate-income borrowers, three institutions - Dollar Bank, KeyBank, and Third Federal - received a

performance rating of Outstanding on their most recent CRA examination.7

Nevertheless, nearly every

institution offers a rehabilitation-loan product and many have publicized lending commitments to the cityof Cleveland. While it is difficult to assess the relationship between locality and rehabilitation investmentactivity, there seems to be a noteworthy distinction between institutions that have a steadfast presence in

the Cleveland community and the others.8

6 We determined whether an institution was active in the Cleveland MSA by referencing each institutions most

recent Community Reinvestment Act examination, considering both full-scope and limited-scope reviews.7 CRA-performance ratings are based on each institutions most recent examination: Dollar Bank (May, 2009),

KeyBank (July, 2008) and Third Federal (July, 2008).8 This distinction has been noted in several contexts, including the relationship between location and high-cost

subprime lending. Coulton C., T. Chan, M. Schramm, and K. Mikelbank, 2008, Pathways to Foreclosure: A

$16,427

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$2,280 $1,833 $1,832

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$18,000

2008 2009 2010

Thousands of Dollars for Loan Originations

Total

Average


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IV. Barriers to Rehabilitation Lending

While our data and quantitative assessment provides a significant amount of insight into the rehabilitation

lending market, it does not explain the reason that applications and originations continue to decline. In anattempt to understand the reasons for this downward trend, we conducted interviews with individuals who

participate in the housing delivery system, including representatives of city, county, and state

government; lenders active in consumer, commercial, and home-purchase mortgage lending; andinvestors, developers, and real estate professionals. We also interviewed individuals who develop andstudy the results of housing delivery and lending policies, including persons affiliated with governmental

agencies, think tanks, educational institutions, and research foundations. Through these interviews, we

identified several barriers to rehabilitation lending; however, we chose to focus on four that have wide-reaching implications and intersect with the others.

A. Self Selection

Perception is a powerful influencer, and our research suggests that the perception of lending markets, of

the economy, and of the local housing market has discouraged many otherwise willing borrowers frominvesting in their homes. Factors such as unemployment rates and job loss, increasing foreclosures,

vacancies, abandonments, and tax delinquencies have had an obvious, deleterious effect on the housingdelivery system, and these external factors play a significant role in shaping perception.

9

Our interviews suggest that many potential borrowers have a negative perception toward conventional

lending and banks in general. This attitude, coupled with exposure to pervasive media reports of the

Great Recession and the foreclosure crisis, appears to have a deterrent effect on potential borrowers,as they avoid incurring any additional debt obligations amidst economic uncertainty. Similarly, severalrespondents indicated that, many times, potential borrowers mistakenly believe they do not qualify for a

loan and will often postpone both the application process and also the necessary repair work. Ourresearch also supports the observation that negative experiences with the lending process may discourage

ongoing rehabilitation efforts, such as cases involving credit-worthy applicants who are denied a

rehabilitation loan because their equity has evaporated. Together, these factors are ingredients for harmfulself-selection, though they may be overcome through the enhanced transparency and relationship-basedapproaches we discuss in Section V.

B. Information Disparity

Our research indicates that decisions by individual applicants, after submitting an application, may be onefactor contributing to the decline in home improvement loan originations. In analyzing total investment,

we examined the number of applications that were withdrawn either before or after approval between2008 and 2010. Figure 12 shows the total number of these applications. During this time period, between

5% and 10% of all applications were withdrawn by the applicant or were approved without a subsequentorigination. Although our data assessment provides some insight into what is occurring, it does notexplicitly address why borrowers are abandoning their applications. Several respondents confirmed our

Longitudal Study of Mortgage Loans, Cleveland and Cuyahoga County, 2005-2008, Cleveland, Case Western

Reserve University, Center on Urban Poverty and Community Development (finding that nonlocal lenders wereresponsible for more higher cost lending, and also foreclosures, than were local lenders, between 2005 and 2008).

9 One recent study begins to quantify these external factors and examine their relationship to property values in

Cleveland. See Whitaker, S. and T. J. Fitzpatrick IV, 2011, The Impact of Vacant, Tax-Delinquent and Foreclosed

Property on Sales Prices of Neighborhood Homes, Working Paper 2011-23, p.7, Federal Reserve Bank of Cleveland

(While foreclosures may lower surrounding home values, vacancy and abandonment have long been recognized bypractitioners as more important roadblocks to revitalizing distressed neighborhoods).


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assessment that borrowers are growing increasingly frustrated with the lending process and are

withdrawing their applications before a lending decision is reached. One stated that applicantsoccasionally receive financing from other sources and another reported that a plurality of applicants citedinterest rate and fees as reasons for withdrawing.

Each of these reasons, though, more plausibly explain the number of applications voluntarily withdrawn

before an approval decision has been reached than they do the number of approvals where a loan was notoriginated. Identifying potential causes for these un-originated loans should aid in developing strategies

that support applicants through loan origination.

Figure 12: Combined number of home improvement loan applications that were voluntarily

withdrawn by applicants and number of applications approved, but not originated

C. Uncertain Appraisals

During our interviews, many respondents cited the current appraisal process as a barrier to expanding loan

originations. Because appraisals affect everything from loan-to-value ratios to market perception, webelieve that a fluid appraisal process can stimulate investment activity. According to CoreLogic, 22.3%of Ohio homes have a negative-equity share and 6.2% have less than five-percent equity.

10Further, a

review of the home-improvement lending programs offered by lenders in Cleveland, indicates that typicalloan-to-value ratios approximate 95%. Consequently, a small difference between appraisals may have a

significant influence on any given lending decision.

Respondents agreed that the most extensive problem with the current appraisal process is the inability toensure that qualified appraisers are used. In particular, respondents identified geographic competency

and comparable sale assessments as areas presenting the most concern. Several respondents identified

appraisal management companies, independent organizations that perform the appraisal ordering andreview process, as contributing to the problem. In light of enhanced regulatory oversight, many

10 CoreLogic,New CoreLogic Data Reveals Q2 Negative Equity Declines in Hardest Hit Markets and 8 Million

Negative Equity Borrowers Have Above Market Rates, Sept. 13, 2011, Table: Q2 2011 Negative Equity By State,available athttp://www.corelogic.com/about-us/researchtrends/asset_upload_file591_13850.pdf.

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Home Improvement Loan Applications Withdrawn Before and After Approval



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institutions find the services provided by appraisal management companies to be beneficial. However,

many respondents expressed concern over how appraisal management companies randomly assignappraisers from a pool of local and non-local professionals, stating that this random selection often resultsin appraisers who are unfamiliar with local market characteristics and the unique attributes that affect

each property. The concern is that this process leads to inaccurate valuations and a difficulty in

reconciling the appropriate market range, while also demanding additional diligence and attention by the

appraiser. Although we were unable to measure the extent, if any, that the current appraisal process hasimpeded rehabilitation lending, it may be worth exploring whether streamlining the process by using

appraisers who are knowledgeable of local markets has potential to hasten the recovery and increase totalinvestment, by normalizing LTV and restoring market confidence among prospective applicants.

D. Neighborhood Blight

All in all, we believe neighborhood blight to be the most pervasive barrier to home improvement lending

because of its impact on all phases from market demand to underwriting, to the sustainability of

investment. Funding residential real estate rehabilitation and restoring foreclosed properties, withoutaccounting for the deterioration in surrounding properties, may create nothing more than merely the

illusion of recovery, leading ultimately to unsustainable redevelopment. Therefore, it is equally important

to systematically address blight in concert with the rehabilitation of foreclosed and vacant properties.

V. AFFORDABILITY AND ACCESSIBILITY

Healing from the fallout of the financial crisis means not only preserving the existing housing stock, butalso providing homeowners with the proper tools to accomplish this objective. As described earlier in

this study, low- and moderate-income individuals are impacted the most by liquidity contractions,housing value declines, and economic blight. Our research suggests that improving access to flexible,affordable, and effective rehabilitation loan products is a critical first step to community revitalization.

This process begins with understanding borrowers and their relationship in the community. In less than

prosperous economic times, preservation and sustainability become key factors that influence lendingdecisions. For this reason, it is important to distinguish between two types of borrowers and identifywhich group faces the greatest challenge in fulfilling its societal obligation of preservation and

sustainability: individuals with poor credit history, sustained unemployment, or large amounts of debt orindividuals who simply do not fit the traditional credit mold [e.g., receive earnings in cash, do not use

credit cards, or have little credit history]. In this case, which borrower poses a greater credit risk? Whichborrower is more or less likely to fulfill its dual obligation of preservation and sustainability?

Our research seems to indicate that individual idiosyncrasies play less of a role in lending decisions than

they otherwise appear: both categories of borrowers - all borrowers - are underserved relative to prior

years. Often, borrowers in both categories are treated the same, and their individual circumstances are notassessed. With additional diligence, lenders can identify which of the two categories a particular applicant

belongs and ultimately make more informed decisions. Still, our interviews confirm that some lenders areusing this approach. For instance, FirstMerit Bank has developed alternative methods for assessing thecredit risk of borrowers in the second category, thereby expanding access to rehabilitation products. This

shift indicates that expanding financial access in a population of underserved consumers is plausible,

though such expansion on a broad, industry-wide scale means moving beyond conventional notions ofrisk assessment and collaborating to develop new products that are sensitive to an evolving borrower. 11

11 Our study is not the first to examine distinctions between borrowers and propose a targeted approach to

lending. At least one prior study observes a relationship between local lenders and low-income borrowers, finding


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One way to achieve this diversification and improve affordable access to rehabilitation-lending productsis to pursue a relationship-based model that is founded on partnerships with community organizations.

Nonprofit organizations such as Cleveland Action to Support Housing (CASH), Cleveland Restoration

Society (CRS), and Neighborhood Housing Services of Greater Cleveland (NHS) are embedded in local

communities and have relationships with many low- and moderate-income borrowers. These

organizations educate and inform; they provide intensive technical assistance and connect potentialborrowers to appropriate lenders based on particular needs and circumstances.

During our interviews, many professionals in the housing delivery system expressed appreciation for the

noticeable benefits of nonprofit financial intermediaries and the commitment by financial institutions

offering dedicated home-repair loan programs. Our conversations also revealed that many professionalsbelieve these organizations play a critical role in overcoming common challenges to rehabilitationlending. In particular, these challenges include identifying the most appropriate vehicle from a wide array

of lending products and increasing overall awareness of product availability. Successfully overcoming

these challenges, however, requires transparency and collaboration between lenders and communitypartners, whereby each collects, shares, and markets relevant program and product information for the

benefit of borrowers. In the future, such collaboration and assistance may become a valuable resource for

borrowers and lenders alike, facilitating access to conventional loan products, slowing the rate ofabandoned applications, and ensuring the underlying assets - both the home and the community - receive

the expected benefit. Furthermore, this increased transparency and data sharing has the potential to assist

lenders with not just satisfying, but exceeding, their loan-goal commitments with the city of Cleveland.

In addition, developing targeted rehabilitation lending programs, such as unsecured programs, has

potential for expanding access to affordable rehabilitation products. During the course of our interviews

and research, we identified several financial institutions that offer targeted home repair lending programs.Each of the financial institutions we identified has a formal rehabilitation-lending program, only a handful

offer an unsecured vehicle, but several offer rehabilitation products through a partnership with nonprofitorganizations, such as CASH, CRS, and NHS. By comparison, many of these financial institutions arenotably absent from the list of institutions identified earlier in Tables 9 and 11, which depict the

concentration of rehabilitation lending activity by financial institution. Because our data extends onlythrough 2010, this absence may be of no significance, though a more complete examination of these

programs, including an assessment of their affordability and accessibility to low- and moderate-incomeborrowers and across diverse census tracts, may be warranted.

VI. MOVING FORWARD

As recovery continues and the housing market attempts to find stability, we must not forget aboutpreserving our existing assets. As the benefits of Clevelands rehabilitation efforts begin to be noticed,

traditional notions of the typical borrower and the standard lending vehicle should also evolve. The

most effective remedial measures to aid in this dual evolution may not involve leaps of innovation, but

rather incremental improvements to traditional products and processes that may be directed at the middleor bottom of the income pyramid and facilitated through community partners.

From this study, our research strongly suggests that affordability and accessibility are factors that

continue to influence rehabilitation lending in the city of Cleveland. While low-cost lending vehicles are

that borrowers who receive loans from local banks have a reduced likelihood of defaulting. O. Emre Ergungor and

S. Moulton, 2011,Beyond the Transaction: Depository Institutions and Reduced Mortgage Default for Low-IncomeHomebuyers, Working Paper 2011-15, Federal Reserve Bank of Cleveland.


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preferable to costly alternatives, these low-cost products may not be flexible or easily accessible, resulting

in potential borrowers seeking higher-cost products or indefinitely postponing the repair process. Ourfindings indicate that enhancing the affordability and accessibility of home-repair lending may beaccomplished through collaboration between lenders, community-based organizations, and public

institutions. However, as the need for community revitalization grows and the market for rehabilitation

lending evolves, our regulatory and policy responses must be crafted to ensure preservation and

sustainability, while also supporting affordability and accessibility to necessary loan products. To do this,it is important to understand the local economic environment, while giving appropriate consideration to

the involvement of private enterprise.

VII. RECOMMENDATIONS FOR FURTHER STUDY

(1) Evaluate the relationship between home improvement lending activity and property values in the

city of Cleveland. In order to accurately examine this relationship, we must account for a greaterpercentage of unreported financing activity, which requires examining the data beyond that which

is reported under the HMDA. To do this, there must be cooperation among industry participants,including institutional lenders, the city of Cleveland, and nonprofit community development

corporations. Only by thoroughly assessing all available data, over an extended period of time,can we begin to strategically target rehabilitation investment and determine the total amount of

investment necessary to impact the market.12

By determining the total amount of investment

necessary to impact the market, we can begin to concentrate investment efforts and assess the rolethat rehabilitation lending will play in the housing recovery.

(2) Examine the socio-economic status of applicants, borrowers, and census tracts across the city.Understanding how these factors influence borrower and lender perception can be useful in

developing targeted lending programs. Our research demonstrates that targeted loans - loans thatare tailored to the specific needs of individual communities across diverse census tracts - mayhave a noticeable impact on local stabilization efforts.

(3) Develop strategies to overcome clouded titles and facilitate access to traditional loan and grantfinancing for the purpose of rehabilitation. Additional research needs to be conducted in order toassess the extent that individuals are denied access to financing because of title-clearing issues,such as issues relating to title transfers, title encumbrances, deed types, and land contracts. Our

research suggests that low- and moderate-income borrowers may not hold clear title to theirproperties and that scrupulous investors target low- and moderate-income census tracts, engaging

in land-contract transactions without heeding the statutory protections. The result is continueddeterioration, as these targeted individuals cannot take advantage of the financial and technical

assistance programs that support other Cleveland homeowners and facilitate rehabilitation.

(4) Explore opportunities to develop strategic partnerships and leverage resources across

organizations and entities, such as the Cuyahoga County Land Reutilization Corp, nonprofit

community development corporations, and institutional lenders. As described earlier, thisrecommendation necessarily involves collaboration across organizations and includes analyzing

programs administered by community partners and evaluating how rehabilitation investmentfunds are strategically leveraged across the city.

12 The value of collaboration in data collection and ongoing research has been repeatedly identified as a

necessary component of any solution; we believe its value also holds true here. Coulton, C. and K. W. Hexter, 2010,

Facing the Foreclosure Crisis in Greater Cleveland: What Happened and How Communities are Responding,Federal Reserve Bank of Cleveland.


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Table 1 Trends in home improvement loan applications, originations, and denials in Cleveland, by loan

type, between 2008 - 2010


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3140

2056

718

1970

1302

447

1460

1079

302

0

500

1000

1500

2000

2500

3000

3500

Applications Denials Originations

Trends in Number of Applications, Denials, and Originations

2008 2009 2010

Figure 2 Number of home improvement loans in Cleveland, by applications and disposition


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22.64% 19.76% 17.66%

20.12%16.10% 17.41%

25.27%30.31% 25.17%

2008 2009 2010

Origination Rate by Lien Type


Figure 3 Percent of home improvement loans originated in Cleveland, by lien type


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Table 4 Distribution of home improvement loan applications, originations, and denials among all

applicants in Cleveland, using applicant income as upper bounds of determination


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Table 5 Distribution of home improvement loan applications, originations, and denials among low- and

moderate-income applicants in Cleveland, using HUD Median Family Income as upper bounds of

determination


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Figure 6 Geographic distribution of home improvement loan applications, originations, origination rates,

and origination amounts, by census tract, as compared to the city of Cleveland for 2008


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Table 9 Lenders of home improvement loans in Cleveland, by lien type, ranked by total originations


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Table 9a Lenders of home improvement loans in Cleveland, by lien type, ranked by total originations


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Table 9b Lenders of home improvement loans in Cleveland, by lien type, ranked by total originations


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$16,427

$8,193

$5,533

$2,280 $1,833 $1,832

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2008 2009 2010

Thousands of Dollars for Loan Originations

Total

Average

Figure 10 Originations of home improvement loans in Cleveland in thousands of dollars


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Table 11 Top 10 lenders in Cleveland, by originations of home improvement loans, between 2008 - 2010


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127

5134

79

60

21

108

79

16

0

20

40

60

80

100

120

140

2008 2009 2010

Home Improvement Loan Applications Withdrawn Before and After Approval


Figure 12 Combined number of home improvement loan applications in Cleveland that were voluntarily

withdrawn by applicants and number of applications approved, but not originated

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