The Feb. 24 edition of the New York Times featured an article that focused on foreclosed properties in New Haven, which is the third-largest city in Connecticut but the Nutmeg State's leader in regard to foreclosed properties: 2.12% of New Haven County households entered some stage of foreclosure in 2007.
In response to the rising tide of foreclosures, Mayor John DeStefano Jr. created a task force that is considering a course of action. Kudos to the mayor for taking a proactive approach.
However, the Times reports the task force is favoring a three-pronged approach that includes an increase in foreclosure counseling services, the exploration of potential litigation against the lenders and servicers whose borrowers went into foreclosure, and the creation of a municipal fund, perhaps up to $10 million, that would buy foreclosed properties and turn them into rentals or affordable housing.
As I see it, the task force came up with one great idea and two bad ideas.
Let's start with the great idea: foreclosure counseling services. Despite the severity of the foreclosure crisis, too many people are still unaware that assistance is available from a number of sources. New Haven's municipal government (and Connecticut's state government) would do well to crank up their outreach programs and get the word out to borrowers who are facing foreclosure. Clearly, it would also be in everyone's best interest if this effort was coordinated with the lenders and servicers.
Which leads me to the first bad idea: weighing the possibility of lawsuits against the lenders and servicers. According to the Times, the task force is using Yale law students to investigate the potential targets of litigation. The lawsuit net, if it is cast, will be on the tight side: roughly 40% of New Haven's foreclosed loans are traced to seven financial services companies.
This course of action is a mistake at many levels: it scapegoats the companies that stand to lose a lot of money in the foreclosures, it assumes criminal activity on the part of the financial services industry despite no obvious evidence to support that notion, and it creates an adversarial relationship with the parties who should be treated as equal partners in solving this crisis. It also absolves borrowers from being responsible for getting into transactions that they could not support.Â
The second bad idea is having the city buy the foreclosed properties and then play landlord. Yes, it is in no one's best interest to allow the foreclosed properties to remain vacant. And, yes, New Haven (like many cities) is lacking in rentals and affordable housing.Â
But, then again, New Haven's government had ample opportunity to improve the quantity and quality of local affordable housing long before the foreclosure crisis occurred. But not unlike many cities, it dropped the ball on that effort. Asking the local government to fill this void at such short notice is a huge task, particularly in today's rough economy when the municipal budget is very tight.
Strangely, the task force is concerned that outside investors are purchasing the foreclosed properties – the Yale law students are being dispatched to determine if this is happening. (Fifty foreclosed properties in New Haven have been auctioned off since last October). But unless New Haven's laws are different from the rest of the country, I believe outside investors have every right to buy whatever is up for sale. And who's to say that an outside investor (especially someone with experience in nonprofit housing) can't do a better job than the city government?
Here's my advice to New Haven's powers-that-be: send the Yale students back to their classes, work together with the mortgage banking industry and, above all, don't panic. After all, if 2.12% of New Haven County households entered some stage of foreclosure in 2007, that means 97.88% of the local households did not.
In New Haven, as in other locations around the U.S., the solution to the foreclosure crisis is within reach only if everyone works together and avoids trying to pick fights. Calm heads, cooperation and intelligent planning will accomplish more than nasty lawsuits and speculative fears.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com)
