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Redlining: Redefined

Fair housing groups say banks have neglected foreclosed homes in black neighborhoods, those hardest hit by the recent foreclosure crisis. If they’re right, it could mean further damage to minority communities and the decimation of black wealth for generations to come.

By Robin Amer

When James Kpoto bought his house in Minneapolis’ Jordan neighborhood in 2001, he knew he had made a terrible mistake. He moved to the 2300 block of Ilion Avenue North at the advice of his uncle, also an immigrant from Liberia. But his uncle didn’t tell him how bad crime was there — worse than in most other areas according to police data.

“There were shootings and killings almost every day,” Kpoto recalls. “It was scary.”

Kpoto considered “walking away” from his house, despite a $95,000 mortgage. A local police officer encouraged him to start a block club instead. Kpoto was shocked when more than 15 people showed up to the first meeting.

Today, Kpoto, 58, is proud of his part of Jordan, a mostly black low- to middle-income neighborhood where the average resident makes just more than $30,000 a year: “You can see how quiet this block is compared to other blocks.”

Looking among colorful prewar homes and manicured lawns dotted with tiger lilies and blue bells, signs of a second crisis emerge – one that threatens the financial stake and sweat equity Kpoto and his neighbors have invested.

The difference is the upkeep

The 2008 foreclosure crisis hit black and brown neighborhoods hard: Some neighborhoods in cities such as Baltimore, Dayton or Memphis look like hollowed-out versions of their former selves, with blocks decimated by multiple vacancies, empty lots, crumbling houses, trash and debris. But in white neighborhoods across town, even in ones hit by the foreclosure crisis, there are often far fewer signs of blight. In places like Willow Grove in suburban Philadelphia or Fairview Shores outside of Orlando, there are fewer board-ups, less trash. For Sale signs dot neat, green lawns.

Some people attribute these differences to homeowner indifference in these communities or the inevitable result of so great a crisis. Others see systemic discrimination at work. As a result, fair housing groups have accused the nation’s largest banks of discriminating against minority neighborhoods like Jordan across the country by systematically neglecting foreclosed homes in black neighborhoods — while properly maintaining foreclosed homes in white ones.

Since 2011, a consortium representing 220 fair housing groups has filed a series of complaints with the U.S. Department of Housing and Urban Development alleging select banks discriminated against minority neighborhoods by failing to maintain and market foreclosed homes the same as they did in predominantly white communities. Those banks — Wells Fargo & Co., Bank of America Corp., Deutsche Bank AG and U.S. Bancorp — ended up with foreclosures in cities ranging from San Francisco and Miami to Charleston and Denver.

“Vacant and poorly maintained bank-owned properties mar once vibrant, well-maintained neighborhoods,” says a 2011 complaint filed by the Washington-based National Fair Housing Alliance. “But this problem has not affected all neighborhoods equally.”

For example, in NFHA’s (pronounced NAH-fah) complaint against Deutsche Bank, the group said nearly 67 percent of foreclosures in Toledo’s black neighborhoods had broken windows, while 17 percent of foreclosures in white neighborhoods did. The fair housing group also found that 77 percent of Bank of America foreclosures in black neighborhoods in Oakland, California ,were littered with trash, yet just 46 percent of foreclosures in majority white neighborhoods were found in that condition. The Wells Fargo complaint reported 31 percent of homes in Miami’s black and Latino neighborhoods, like Miami Gardens and Opa-Locka, had broken locks, making the properties vulnerable to squatters and looting. In white Miami neighborhoods, such as Cutler Bay, houses were left unsecured just 17 percent of the time.

If true, the consequences would be especially severe for black homeowners like Kpoto. Although he and his neighbors have held on to their own homes through foreclosure crisis, they are vulnerable to the effects of living around so much blight.

Because minorities were targeted for subprime loans at greater rates than whites, minority neighborhoods experienced higher rates of foreclosure during the crisis than white neighborhoods. This phenomenon, in turn, led to a higher concentration of vacant homes.

Foreclosures, even well-maintained ones, drag down actual and assessed values, and potential sale prices of homes nearby. A 2005 Woodstock Institute study found homes on the same block as even one foreclosure declined in value between 0.9 and 1.14 percent. For a home worth $100,000, that would translate to as much as $1,140 in lost value just by being next to even one vacant house. More foreclosures magnify the effect, according to analysts at the housing think tank.

Although many cities,including Minneapolis, have gradually seen home prices rebound since the 2008 downturn, the bounce-back is uneven. Home prices in high-foreclosure neighborhoods have risen slower than home prices in neighborhoods with fewer foreclosures. In 2006, city records show the estimated the market value of one house on Kpoto’s block at $161,200. That was before the real estate bubble burst. Now its estimated value has dropped by more than a third to $102,000.

The consequences of this kind of decline have been especially severe for black families, who, as a group, have a disproportionate amount of wealth invested in their homes compared with whites. A 2011 Pew Research Center study found that the foreclosure crisis and the resulting loss of home equity caused black families to lose more than half — 53 percent — of their household wealth, compared with just 16 percent for white families, who have a greater share of their overall wealth invested in stocks, bonds, retirement funds and savings accounts.

Kpoto is emblematic of how much black homeowners depend on the wealth that is their home to fuel their American dreams. When he immigrated to the United States, Kpoto was allowed to bring his wife, Theresa, and their four youngest sons, leaving his oldest, Alvin, an adult and therefore ineligible to accompany is parents. Two years later, Alvin came over on a student visa, and to pay for his son’s college education at Alabama A&M University in Huntsville, Kpoto refinanced his $95,000 mortgage for $150,000.

Kpoto still owes $125,000. Unfortunately, the assessed value of the home is only $83,500, meaning Kpoto is “underwater” on his mortgage. Ironically, Kpoto works in Wells Fargo’s mortgage release department, supervising 60 people to process paperwork for homeowners fortunate enough to pay off their loans.
On living life underwater, Kpoto says, “That’s what’s happening in the whole neighborhood.”

Slideshow: Jordan: Life 'Underwater' 
To see captions, click the 'X' to view in full-screen mode. Then click 'Show Info.' 
You can’t live here

Housing discrimination against blacks was rampant in the turbulent 1950s and ’60s. But whereas the U.S. Congress barred employment and education discrimination in the Civil Rights Act of 1964, housing proved a tougher nut to crack. It took another four years for Congress to pass the Civil Rights Act of 1968, the Fair Housing Act, barring discrimination in the sale, rental and financing of housing based on race, color, religion, sex and national origin.

Social historians Douglas Massey and Nancy Denton call the issue of residential desegregation “the most emotional and resistant to change” of all civil rights battles. The authors of “American Apartheid: Segregation and the Making of the Underclass,” said the law “specifically excluded programs of federal mortgage insurance from coverage … because “many senators and representatives harbored strong sentiments against efforts to dismantle the ghetto.”

Today, it’s the provisions of that act the National Fair Housing Alliance used to bring its complaints against several banks, arguing that failing to care for foreclosed homes or failing to market them to potential buyers along racial lines violates the law.

Shanna Smith, NFHA’s president and CEO, says the group has tracked accusations of discriminatory and predatory lending since the 1980s, and during the financial crises, looked at claims banks had singled out minorities for unconventional and confusing loans that later led them to lose their homes at higher rates than whites.

As the number of foreclosures began to skyrocket, those concerns morphed into concerns about how the banks were caring for homes they came to possess. Smith and her colleagues began to ask: “What are they going to do in the black neighborhoods where they own these properties? Will they take care of them?”

Making a case, door-to-door

To test its assumptions about banks, NFHA sends teams of inspectors door-to-door to examine foreclosures in black and white neighborhoods. It tries to examine neighborhoods similar economically even if they differ racially. Then the group examines all of the foreclosed homes in each ZIP code it visits.

If a city has its own fair housing center, sometimes NFHA will train local staff to do investigations. But if a city has no fair housing advocates, the agency will often send its own staff to sniff out the condition of foreclosed homes.

Although Minneapolis has a reputation for being overwhelmingly white, the city of 383,000 is actually 18.5 percent black and 10.5 percent Latino, as of the 2010 U.S. Census. It also has a sizable Asian population, including many Hmong immigrants from Laos. Although many of the city’s neighborhoods are integrated, much of the city’s black population lives in a cluster of neighborhoods like Jordan in an area of North Minneapolis.

Smith and her team of three investigators arrived in Minneapolis on a Tuesday morning in July. Their plan was to examine 60 properties in two days, taking careful notes on the condition of each home. Smith and another staffer would look at houses in the black North Minneapolis area, while a separate team would look at homes in Crystal and Robbinsdale, two mostly white northwest suburbs. (Because NFHA conducts nationwide fair housing investigations that rely on the anonymity of its testers, names of the other NFHA inspectors are not disclosed.)

Investigators tasked with inspecting majority white neighborhoods cruise through Robbinsdale in a red hatchback. As they tick through the houses on their list, one inspector holds the checklist, while the other takes photos. The images are a reference. This way they can go back and see if they missed anything, or have a co-worker give them a second opinion on the condition of a broken gutter or a dark patch that might be mold. Photos are also used as evidence. The inspectors are fast and efficient, zooming through each home in fewer than 10 minutes.

Soon, they pull up to 3727 Orchard Ave. N, a split-level ranch house county records indicate is owned by Fannie Mae, the publicly traded Federal National Mortgage Association. The red brick and pale yellow house is modest but sturdy. The lawn is neat, front hedges trim. A crisp “For Sale” sign stands out front. The inspectors pass through a gate on the chain-link fence and walk around to the backyard.

“We find very minimal deficiencies on this house,” says one inspector. The house “looks perfectly fine.”

She ticks through her checklist: “We see that the gutter here is misplaced, but it could easily be fixed. There’s a window down here on the lower level where the wood seems to be a little rotten.”

On the other hand, she notes, the grass is cut, there’s no trash and the doors are secured. Her colleague snaps a few more photos and they move on to the next house.

Not every house these inspectors scrutinize is pristine. At 4639 Zane Ave. N in Crystal, they find a disheveled backyard strewn with debris. Linda Cline, who lives in the house across the street, comes out to talk to the investigators.

“Actually it looks better now than when someone was living in it,” Cline tells them. “I don’t know who, but somebody comes every couple weeks and mows the lawn. It’s much easier to look at now. They’ve cleaned up the garbage against the fence and things like that.”

When asked if the state of the home has affected her property value, Cline says: “It’s hard to tell with the way everything nosedived. For the most part, this was the only house that was a problem in the neighborhood.”

Something doesn’t smell right on Ilion Avenue

Just down the block from James Kpoto’s own tidy ranch, 2435 Ilion Ave. N is a modern two-story house with gray vinyl siding and a row of bright orange tiger lilies growing along the front walkway. This home, on the black side of town, is vacant, and has been since the previous owner lost it to foreclosure in March.

On a Friday night in late July, neighbors smelled gas coming from the house. Firefighters who responded to their 911 call smelled gas, too, according to the incident report. They backed off, taped off the house and called for backup.

When technicians from CenterPoint Energy arrived, they discovered the air inside the house was 11 percent natural gas – just the right concentration to spark an explosion. A vacant, foreclosed fourplex just a mile away from Ilion met a similar fate in September 2008, after vandals stole the building’s copper pipes. The force of the explosion could be felt a mile away.

When firefighters were able to enter 2435 an hour and a half later, they traced the gas leak to the basement. Someone had broken a steel pipe that would normally feed into a clothes dryer; appliances were nowhere to be seen.

Before they left, firefighters called the number listed on the “For Sale” sign out front. The call went to voicemail. Unclear on who owned the home, they did not know whom else to call, possibly missing signage listing a number to call for emergencies.

When Smith and a co-inspector arrived at 2435 Ilion Ave. N the following Wednesday, they did not know what had just transpired. But what they found shocked them. Although the house looked relatively pristine from the street, side yards were littered with broken glass. Half the ground floor windows were open, the rest shattered. A rusted garbage disposal lay in a side yard in a patch of orange lilies. Behind the house, the garage door was ajar. Smith pulled it open, revealing a junked out couch. One of the cushions lay outside in a pile of burnt garbage: a shattered floor-length mirror, soggy cardboard boxes, melted CDs.

Later, Kpoto, too, was shocked when he saw the condition of the house. He stared in disbelief at the broken glass, the discarded disposal and the burnt out garbage: “This was a nice house!”

Recalling the previous owner, a quiet man, Kpoto said his neighbor didn’t come to neighborhood block parties but took good care of the house.

“It is really discouraging,” Kpoto said. “This helps bring our property values down.”

Owner vs. trustee

Who owns this house? And who was responsible for its care? The answers are complicated, in dispute, and go to the heart of NFHA’s complaints.

The banks deny any discrimination on their part. Bank of America, for example, says it “applies neutral and uniform practices to the management and marketing of vacant bank-owned properties across the U.S., regardless of their location. Any suggestion to the contrary is simply untrue.”

“NFHA faulted the bank for properties that other entities had the responsibility to maintain and market,” according to Jumana Bauwens, a Bank of America spokeswoman.

Deutsche Bank “does not engage in any of the activities alleged in the complaint,” says Oksana Poltavets, a spokeswoman, in an emailed statement. “Loan servicing companies, and not Deutsche Bank as trustee, are solely responsible for the maintenance, marketing and resale of foreclosed properties.”

Bank officials also point a finger at companies they consider the real culprits: loan servicers contracted to keep up the properties. U.S. Bank acts as a trustee of 2435 Ilion Ave. N according to Hennepin County records. A separate company, Ocwen Loan Servicing LLC, is listed as the property’s servicer. It’s a distinction that matters, according to U.S. Bank officials.

According to an emailed response from Ocwen, whose parent company is based in Atlanta, “Ocwen believes that its vendor, Altisource, followed industry best practices with respect to maintaining this property.”

And so it goes.

“We agree that abandoned and blighted homes need to be addressed quickly and fairly, and we fully support efforts to maintain the integrity of our communities,” says Teri Charest, a U.S. Bank spokeswoman, via email. However, “we have no legal right to service or maintain properties that are held in an investment pool for which we are trustee. The vast majority of the properties identified by NFHA are properties where we are trustee.”

To explain the difference between a trustee and a servicer, and to understand why the banking industry takes the distinction so seriously, it’s helpful to go back to the mortgages that predate the foreclosures. Mortgages are loans backed by assets – the houses. Loan originators dole out the initial mortgages. Then arrangers take those loans and turn them into securities. They pool loans by the thousands, dividing those pools into segments, then sell those segments to investors.

To manage these securities and the cash flow they generate, arrangers create a separate legal entity called a trust, and hire other companies to manage it. Each party plays a different role: servicers collect mortgage and interest payments; trustees divvy those payments out to investors. Servicers take care of the properties; trustees take care of the documents. These roles are spelled out in complicated contracts called Pooling and Servicing Agreements, or PSAs, that are hundreds of pages long.

Bank trustees point to these agreements and say, taking care of the property is the servicers’ job. It’s right there in the contract.

But NFHA pushes back against this distinction. Steve Dane, NFHA counsel, says that it doesn’t matter what promises these companies have made to one another. What matters is their collective obligation.

“It doesn’t matter if the owner is a trustee or a corporation or an individual or your grandmother,” Dane says. “Whoever is on the title owes those obligations to the public and the government.”

Dane points to a section of the Fair Housing Act that includes trusts and trustees in the list of parties responsible for upholding fair housing standards. He also cites federal foreclosure maintenance guidelines issued by the Office of the Comptroller of the Currency in 2013.

“In acquiring title to foreclosed properties, a bank assumes the primary responsibility of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties,” guidelines say.

HUD will pick a side as it processes NFHA’s complaints. For now, a HUD spokeswoman said the agency couldn’t comment on the role of trustee versus servicer because the question goes straight to heart of the debate.

Of course, it’s not employees for Bank of America, or even a company like Ocwen, that drive out to neighborhoods like Jordan to trim trees or board up windows. Field service vendors, property preservation companies or asset managers do this, and sometimes they rely on subcontractors for everything from the initial “trash out” [removing a family’s belongings] to draining backyard swimming pools.

NFHA has its eye on these companies, too. In addition to complaints against banks, the consortium filed against Safeguard Properties LLC, Cyprexx Services LLC and Asset Management Specialists Inc., three national field service vendors that work for mortgage giant Fannie Mae.

Like the banks, the field service vendors deny any wrongdoing.

“Safeguard neither condones nor tolerates acts of racism or business practices that would unfairly target or neglect certain neighborhoods based on location and demographics,” the company says in a statement. “We are outraged by the allegations made by the NFHA, which are based on a very small sampling of properties, and we intend to dispute the claims and prove the accusations to be untrue.”

NFHA has not filed against Fannie Mae, which, coincidentally, has given the group $200,000 in grants to improve data collection methods and expand its investigations to other cities.

Still, Smith says, Fannie Mae knows it has a problem.

In a statement, agency officials say, “We provide our property maintenance vendors with clear guidelines and expectations which apply in all neighborhoods. We work closely with our vendors to ensure that they meet our standards, and will continue to do so.”

Although it denies any wrongdoing, in 2013 Wells Fargo settled with HUD and NFHA for $39 million. The settlement included $27 million funneled to 19 of NFHA’s member groups, which invested it in minority neighborhoods hurt by the foreclosure crisis. That money is now at work in communities in cities such as Milwaukee, Dallas and Elgin, Illinois, rehabbing vacant buildings, subsidizing down payments and even paying for a marketing campaign to combat stereotypes that keep some buyers from picking these places.

The bank also changed the way it runs its foreclosure business. It’s extended to two weeks the time its houses are available only to owner occupants or nonprofits as opposed to investors. Like mortgage giant Freddie Mac, an agency NFHA regularly cites as setting the gold standard for property maintenance, Wells Fargo now pays for independent third-party reviews of maintenance done by its field vendors and posts emergency contact information on its website. And it expects every house to be repaired regardless of location.

“I think the biggest ‘Aha!’ for our team was the effect that their decisions can have on an entire neighborhood, rather than simply looking at an individual property,” says Tyler Smith, Wells Fargo’s vice president of REO and Community Development.

NFHA has not completed its data collection from the Minneapolis investigation, in the meantime, Kpoto and his neighbors want someone to take responsibility for the condition of foreclosed homes in Jordan. They want their neighborhood to be treated the same as any other, regardless of who lives there.

When Kpoto fled Liberia, he left a house and 10 lots in the capital city, Monrovia. Also left behind were 50,000 sand and cement bricks he planned to use to build his dream house one day. This day, he sits in the comfort of his back porch on Ilion Avenue, watching the sunset over a lush garden planted by neighbors. Those bricks, he said, “would fill my whole backyard.”

When Kpoto returned to Monrovia in 2010, he discovered a cousin had sold his land, his house and his bricks. “That’s how they do. They thought I wasn’t coming back,” he said.

Kpoto lost one set of properties, but he is determined to hold on to this house in Jordan and the community he’s helped to sustain. He can measure the enduring worth of his home here in more than dollars.

Caption for top splash image: During their time in Minneapolis, Smith and her team encountered children playing in a vacant house owned by the city. (Robin Amer/MEDILL)