Fair Housing Group Goes After Banks Failing to Maintain REO
The National Fair Housing Alliance is accelerating efforts to force mortgage lenders, servicers and trustees to do a better job of maintaining foreclosed properties in minority neighborhoods.
The nonprofit group claims too many African-American and Hispanic communities have been hurt by mass foreclosures and are deteriorating because of neglect by the banks and their servicers.
As a result, it has begun filing fair housing complaints against institutions it feels need to improve their practices. Its most recent complaint came Feb. 25 against Deutsche Bank, but more are in the offing. The group is due to file six complaints against lenders and servicers over the next six months, according to Shanna Smith, its president and chief executive.
The alliance issued a report in 2011 warning the mortgage industry that maintenance of foreclosed homes would become a big issue, but so far it has seen few changes.
“Freddie Mac was the only one that stepped up and changed their business model,” Smith said in an interview. “Wherever we go, we still check out Freddie properties and they are the nicest properties in the neighborhood. If Freddie Mac can do that, there is no reason the other banks can’t do it.”
By filing an administrative complaint with the Department of Housing and Urban Development, the group hopes banks will have an incentive to agree to a settlement to address the issue. If the bank and the group do not come to an agreement, HUD has the power to take an administrative action, file a lawsuit or dismiss the complaint.
The practice has come under fire from critics, who charge that NFHA and HUD are working together to squeeze banks with little to no evidence of actual wrongdoing.
Industry attorneys say the problem is due to vacant properties that are left in limbo and can’t be sold because the foreclosure process takes so long. States where the foreclosure process takes the most time have the biggest issues, particularly in urban areas where the impact on communities can be very negative.
Smith stressed that NFHA is not focused on rundown neighborhoods.
“We are concentrating on middle-class, working-class neighborhoods where people take care of their homes” and the vacant property next door is an eye sore, she said.
The alliance currently has three fair housing complaints pending at HUD involving Bank of America, U.S. Bancorp and Deutsche Bank. The three complaints are the result of investigations into many of the same neighborhoods.
“You have three banks with hundreds of REO that they are not maintaining and they are just pulling down property values in those neighborhoods,” Smith said. “In these black and Latino neighborhoods they just aren’t doing the quality control to make sure the lawns are mowed, the trash is removed and the house is secure.”
The NFHA, along with fair housing groups in Chicago, Memphis and Washington, claim Deutsche Bank maintains REO in majority white neighborhoods in a “strikingly better manner” than in minority neighborhoods.
However, an industry source who did not want to be identified disputed that claim, arguing that the group lacks evidence to support it.
Yet the institutions involved may be likely to seek a settlement rather than risk the reputational damage of being drawn into a lawsuit involving alleged discriminatory practices.
Last June, Wells Fargo entered into a $30 million settlement with the National Fair Housing Alliance over property maintenance in 19 cities. Most the funds ($27 million) are going towards grants to help stabilize neighborhoods that were harmed by foreclosures. The grants are being used to fund downpayment assistance to help homebuyers, rehab foreclosed properties and subsidize rents so the people are not displaced from their neighborhoods, according to NFHA.
Robert Davis, an executive vice president at the American Bankers Association, noted that these complaints are the result of the continued overhang of foreclosed properties.
“There are challenges to maintaining REO that are outside the control of servicers, such as vandalism and theft,” he said.
HUD will have to sort through the issues and determine which complaints have merit and should be pursued, he said.
“HUD’s staff is aware of which allegations are substantive and that will influence the organization if it is flooded with allegations that are misdirected,” Davis said.
In the Deutsche Bank complaint, the NFHA contends the mortgage securities trustee has failed to maintain foreclosed properties, which brings down property values and reduces tax revenues for schools and city services. In addition, “homeowners have lost the opportunity to refinance at historic low levels because of the damage to property values.”
Deutsche Bank claims a trustee cannot be held responsible for the condition of the properties. “Deutsche Bank as trustee does not engage in any of the activities alleged in the complaint. Loan servicing companies, and not Deutsche Bank as trustee, are solely responsible for the maintenance, marketing and resale of foreclosed properties,” Deutsche Bank spokesperson Renee Calabro said.
The NFHA’s Smith argues that the Fair Housing Act specifically says trustees can be respondents in fair housing complaints. HUD also accepts fair housing complaints filed against trustees.
Deutsche Bank entered into $10 million settlement with City of Los Angeles last summer for failing to maintain REO in minority neighborhoods. But the bank says it did not pay a cent, signaling that it likely got the money from servicers.