Evaluating the Neighborhood Stabilization Program in Milwaukee

The Public Policy Forum’s recently released 2011 City of Milwaukee budget brief notes that Milwaukee’s budget includes significant allocations to curb the effects of foreclosures in city neighborhoods. Many of the city’s new and enhanced initiatives are funded with grant dollars from the federal Neighborhood Stabilization Program (NSP), which has helped foreclosure strategies throughout the state. The initial NSP allocation in Wisconsin totaled $38.8 million, of which Milwaukee received $9.2 million. In early 2010, the second round of NSP awarded Milwaukee $25 million to return approximately 1,000 foreclosed homes back to productive use.
These allocations are being used, primarily, to prevent homes from sitting vacant and deteriorating neighborhoods. In theory, higher vacancy rates lead to lower home values. Academic literature also identifies this strong inverse relationship between vacancy rates and home prices.

But how can we be sure that NSP allocations are effective? Should the proper test for evaluating NSP’s effectiveness be broad-based, observable increases in home values? On the one hand, yes. If vacancy rates decrease as NSP ultimately returns properties to productive uses, then home values increase. But on the other hand, perhaps not. Theoretically, the bottoming out of the housing market induces some investors, speculators, or unaffected consumers to purchase up properties at a low price. Eventually, demand for properties increases and causes an increase in prices. In other words, at some point property values are bound to increase even without policy action. The issue becomes the speed with which home values increase.

What policy analysts must determine, therefore, is whether the NSP, and similar programs, raise property values more quickly than they otherwise would have rebounded. To do so, analysts will have to account for the other contributing factors that help determine property values, such as unemployment rates, mortgage interest rates, and the availability of credit, among others.

Useful strategies but no easy answers in ending homelessness

A new study from the U.S. Housing and Urban Development Department (HUD) examines the costs of serving homeless individuals and families and explores cost-saving possibilities in differentiating services according to individual characteristics.

HUD finds that different types of first-time homeless individuals and families use system resources differently, so some opportunities exist to improve outcomes by developing tailored strategies to meet the needs of each type of individual and family. For example, the report describes how African American families are often homeless primarily due to poverty rather than mental illness or substance abuse, and therefore need permanent housing but not substantial supportive services. Similarly, childless single women have different needs than families.

Despite HUD’s support for tailored services, its cost analysis revealed that there are no loopholes or easy answers when it comes to cost savings. The study found that significant cost reductions are only achievable when targeting the few individuals and families with high levels of involvement in mainstream systems prior to homelessness. Accordingly, while narrowly targeted initiatives aimed at this group will yield the greatest savings-per-person, such initiatives would only be appropriate for a small number of people.

HUD's study was released as Milwaukee is considering its new ten-year plan to end homelessness. The County Board has already endorsed the plan, and so has a Common Council committee. If fully adopted, Milwaukee will join more than 800 cities and counties that have partnered in implementing at least 355 ten-year plans to end homelessness.

Milwaukee’s plan was developed by the Continuum of Care (a conglomeration of social service agencies that address issues facing the homeless) as well as other local participants. Among other things, it calls for both earmarked state funds and reapportioned federal and local expenditures to fund services for the homeless. It targets a number of key issues raised in the HUD study, including prevention, employment, behavioral health, and permanent housing. The plan also calls for revamping methods of discharge planning for those transitioning out of foster care, hospitals, mental health care and jails.

Milwaukee’s plan appears to meet the National Alliance to End Homelessness recommendations for successful planning by possessing four elements: identifying a person or body responsible for implementation; setting numeric outcomes; identifying a funding source; and setting a clear implementation timeline.

According to the U.S. Interagency Council on Homelessness, taking a 10-year plan from “good to great” requires extensive engagement of public officials and community champions, as well as the ability to sustain momentum for implementation through changes in political leadership and priorities. With changes in political leadership likely on the horizon here in Milwaukee, it would appear that momentum-building will need to be a top priority for plan supporters.

PPF Pearls: What may Milwaukee have in common with Baltimore?

The City of Baltimore has filed a federal lawsuit against Wells Fargo bank, alleging that the bank pushed high-interest subprime mortgages on homebuyers, and deliberately did so more often to African-American borrowers than to whites.

Baltimore is seeking damages from Wells Fargo because more than half of the Baltimore homes on which Wells Fargo has foreclosed since 2005 are now vacant, with 71% in predominantly African-American neighborhoods. The city argues that the resulting hit to property values in those neighborhoods has affected the city's bottom line, both by decreasing property tax revenues and increasing demand for services.

Other cities around the country are watching Baltimore's suit quite closely, including, perhaps, Milwaukee. The Public Policy Forum's 2002 study of affordable housing in the Milwaukee region found a pattern of higher subprime loans to African-Americans than to whites. We found that in 1999, 41% of all mortgage loans to African-American homebuyers in the Milwaukee region were subprime, compared to just 8% of all loans to white homebuyers. This put us way ahead of the rest of the nation--the national subprime lending rate to African-American homebuyers that year was 19% (the white rate was 4%).

If Baltimore is successful in recovering damages from Wells Fargo, more cities will likely file more suits against this and other banks. What's the likelihood of Milwaukee being one of them?

If history is any guide, remember that Milwaukee was just the second government to seek damages from paint manufacturers due to the negative health impacts of lead paint on city children. On the other hand, while Rhode Island won that first suit against the paint manufacturers, Milwaukee ended up losing (after appealing all the way up to the state supreme court). The city might be reluctant to attempt another novel law suit.

Affordable housing efforts hampered by fragmented approach

The housing bubble burst and subsequent foreclosure crisis have brought the need for affordable rental housing into sharp and immediate focus for many affected families locally. However, even before home prices crashed, the rental housing market in Milwaukee did not meet the needs of many households at low income levels.


In the Public Policy Forum’s latest report, commissioned by the Local Initiatives Support Corporation, we explore the affordable rental housing landscape in Milwaukee County; what it will take to create a sound and sustainable infrastructure to support the development of affordable housing in the county; and how existing publicly funded affordable housing programs might be coordinated more effectively. Our report, entitled Give Me Shelter: Responding to Milwaukee County’s Affordable Housing Challenges, can be downloaded here. Among our key findings:

• Milwaukee’s affordability crisis is driven by low household incomes, not high rents. When compared to other large counties in the United States, Milwaukee is not an expensive rental market. Its average household income, however, was 103rd lowest out of the country’s 112 most populous counties at the time of the last Census.


• Milwaukee’s housing affordability crisis is most severe among extremely low income households—those households making less than 30% of the Area Median Income.


• The vast majority of Milwaukee County’s low-income renters do not receive public rental subsidies. In fact, public subsidy programs help less than one out of every three extremely low income and very low income renter households in Milwaukee County.


• The health of Milwaukee’s current private rental stock is failing. More than 40% of renters in Milwaukee County are living in housing that is inadequate either because it is too expensive, too crowded, or, in fewer instances, does not have adequate plumbing and kitchen facilities.


• Public efforts to address the housing needs of low-income residents in Milwaukee County are fragmented, and the multiplicity of public programs is confusing for both housing developers and investors, as well as for low-income renters. This suggests the need for more unified governance in select programmatic areas to help increase service quality and impact.

Addressing Milwaukee’s affordable rental housing needs will require greater public sector coordination, greater private sector participation, and recognition of the need for an integrated strategy that addresses both the supply side of the equation (i.e. building or rehabilitating low-income units) and the demand side (providing additional rental assistance). Hopefully, the data collected and analyzed in this report, and its conclusions and policy options, will encourage policymakers to tackle affordable housing needs with increased urgency and a greater sense of collaboration and innovation.

The housing crash and your property tax bill

Milwaukee seems to be weathering the housing crisis relatively well. Foreclosure rates in 2007 in metro Milwaukee were lower than in most other metro areas and housing prices in metro Milwaukee, alone among the largest 25 cities in the country, rose between Oct. 2007 and Oct. 2008. Other more current indicators, however, are more troubling to local homeowners.

The Milwaukee Rising blog of former Journal Sentinel reporter Gretchen Schuldt has analysis of the weekly home sales reports in the Sunday Milwaukee Journal Sentinel, comparing the sales price to the assessed value of each property. The most recent week analyzed has sales prices in the City of Milwaukee averaging 35% less than assessed value. The prior week averaged 43% less than assessed value. What makes these numbers especially troubling is that Milwaukee's assessments are as current as possible; the City reassesses property values annually as of Jan. 1.

While these low prices are a bargain hunter's dream, they are a mayor's nightmare--declining market values will drive down assessed values. For most of the past eight years, increases in assessed values have allowed the City to enjoy growth in the tax levy without raising tax rates. If home sales are routinely below assessed value in 2009, then assessments will be reduced, causing the city to either slash costs to accommodate a smaller levy or raise tax rates to maintain or grow the levy.

Increased tax rates would seem likely, but cuts in services will be considered as well. Milwaukee homeowners may soon feel the triple whammy of lost value, higher taxes, and fewer services.

Windfall federal housing funds headed to Milwaukee

What happens when a large pot of one-time federal funding becomes available to local governments? In the case of Milwaukee County and emergency flood aid, it was the unfortunate incident outside the Coggs Human Services Center. In the case of New Orleans and federal disaster assistance, it was a slow rebuilding effort which is only now beginning to improve.

Now, the City of Milwaukee enters the fray. In the coming weeks, the City will find out just how much of the $3.97 billion allocation it stands to receive from the recent passage of H.R. 3221 - The Housing and Economic Recovery Act of 2008. The funds are to be used for the redevelopment of abandoned and foreclosed homes.

Although the allocation formula has not yet been set by the U.S. Department of Housing and Urban Development (HUD), the Enterprise Community Partners estimates that Wisconsin stands to gain $57.2 million under this provision. The City of Milwaukee can expect to receive a significant portion of that allocation.

One key stipulation on the expenditure of these funds is that "Community Development Block Grant (CDBG) regulations will govern the administration of the funds." Of course, CDBG regulations are notoriously flexible. In an ideal situation, this would be just fine because localities would be given the flexibility to craft an appropriate response to local housing conditions. However, this one-time allocation brings up a host of questions as the City of Milwaukee decides how it is going to spend its allocation:

• Capacity - The legislation stipulates that state and local governments must use the funds within 18 months after receipt of the allocation from HUD. This begs the question: can the city come up with an effective and accountable housing program in just a few months time? If not, there is a risk of the funds not being spent or being susceptible to misuse.
• Parochialism - Will the planning process for these funds resemble the "battle" that surrounds annual CDBG appropriations in municipalities and counties throughout the state? Or, will community-based organizations join forces with the city to jointly craft a policy that is both focused and accountable? Will outside technical assistance be needed to craft an effective policy?
• Equity - How will this money get to the right people? How can one tell who is suffering from the crisis and who is just suffering - is there a difference? Should the program focus on rehabilitation or demolition? Should the program focus on the renovation of abandoned properties for rental or homeownership? Can policy be crafted that will not be perceived as a bailout for the banks which own many of the foreclosed properties?
  
• Accountability - What will be the metrics for success? This may have to be a local requirement because CDBG regulations require minimal accountability.
• Leveraging - Can these one-time program funds be leveraged with other public and private dollars to maximize impact? Can the funds be used to capitalize a revolving loan pool to fund the redevelopment of foreclosed homes? Can the funds be matched with dollars from area banks (after all, banks will partially benefit from this infusion of resources)?
  

Public policy often works best when it is implemented to prevent fires, not to put them out. The intent of this piece of legislation is laudable, but the implementation of the Title III funds will be challenging, to say the least. A collaborative and depoliticized process to plan for the expenditure of the tens of millions of CDBG dollars will be a critical factor in crafting a sound policy to deal with the fallout from the foreclosure crisis.

How can state and local policies blunt the impact of the mortgage crisis? Part II of II

The home foreclosure crisis obviously affects individual homeowners and the entire credit market, but it is also a crisis for local governments.

The Pew Center on the States estimates that the nation’s lost property tax base due to foreclosures amounts to $356 billion so far; and projects Wisconsin’s lost tax base will total $1.9 billion by 2009. These figures do not include the amount of property tax revenue lost due to the lower tax base.

While a municipal or county government cannot change the momentum of the crashing housing market, it is in a local government’s best interest to prevent foreclosures from accumulating and further decimating the tax base. In addition, vacant homes can result in cost increases for a local government, due to the greater need for policing empty neighborhoods, fighting fires, and reinforcing the safety net for the newly displaced and homeless.

Some local governments have become pro-active. Chicago, for example, just passed a new vacant properties ordinance strengthening the requirements for owners of vacant properties to maintain the dwelling. To enforce the ordinance, building inspectors will conduct interior and exterior examinations every six months.

The City of Boston has a three-pronged attack:
1. Prevention—The city has long run a Home Center to provide counseling and education for first-time home buyers.
2. Intervention—A foreclosure prevention hotline gives advice to homeowners in default. In addition, the city has begun to reach out directly to anyone receiving a foreclosure petition to offer intervention counseling. In 2007, 192 foreclosures were prevented (which was three times more than the number of actual foreclosures in 2005).
3. Reclamation—The city has an intensive program aimed at stabilizing neighborhoods experiencing a rash of foreclosures with more intensive policing and street repairs and maintenance. The city also sponsors a trolley tour of potential home buyers, showing them all the foreclosed homes that are now listed with brokers, and offers classes and technical assistance to buyers of foreclosed properties.

But the most important thing Boston is doing is surveying all bank-owned homes on a monthly basis to document their condition, putting the most deteriorated vacant homes into receivership, and streamlining the process for turning these homes over to developers for rehab and resale. The city is also doing “bulk” purchasing of the entire portfolio of a lender, as they have found this to be an easier way of dealing with banks and other loan servicers, who are often not motivated or equipped to sell individual properties promptly.

Protecting property values is of vital importance for local governments during this time of tight budgets and reluctance to raise tax rates. Mayor Barrett recognizes this and his administration is working with the Metropolitan Milwaukee Fair Housing Council and the Legal Aid Society to counsel homeowners. In addition, Milwaukee's Common Council president, Willie Hines, has recently proposed a housing and foreclosure policy advisor position be created in the upcoming budget. But even more action may be needed. It is imperative for Milwaukee to remain vigilant and be ready to move similarly to Chicago or Boston to keep vacant properties from causing wholesale value decline.

(Read part I of this post here.)

Home foreclosure crisis causes, Part I of II

What do Ed McMahon and Eric Rosengren, president of the Federal Reserve Bank of Boston, have in common? They've both faced foreclosure on their homes. It’s an interesting tale as told by Paul Willen, senior economist at the Boston Fed, who presumably had his boss’ permission when he recounted his story during the Governmental Research Association’s annual conference.

Mr. Willen’s story illustrates the results of his research into the causes of the mortgage crisis. A dataset of all mortgage loans in Massachusetts revealed some interesting findings.

Finding 1: Most of the defaulted subprime loans are not the purchase loan, but a refinance or a piggyback loan. The crisis isn’t solely the result of new homebuyers going after a house they can’t afford with an unwise purchase loan, as is often contended.

Finding 2: The rate adjustments after the initial lower-interest period, called resets, aren’t the sole problem either. The definition of a subprime loan is one in which the initial interest rate is already above the market rate; the reset didn’t push the rate too much higher. Resets on subprime loans are not like the interest rate resets on those cheap credit cards you can sign up for at Summerfest.

Finding 3: Housing prices are a contributing problem. In Massachusetts less than 0.1% of all homebuyers in 2002 went into default on their mortgage within 24 months; but 0.4% of all 2005 buyers went into default during that timeframe. Mr. Willen applied the home price appreciation experienced by the homebuyers of 2002 to those of 2005 and found the 24-month default rate would have gone down to 0.1% had 2005 buyers seen their home values go up as the 2002 buyers did.

It may be that the Federal Reserve Bank’s monetary policies, particularly the low interest rates of the early 00’s and the decision not to cut rates in 2007, had an impact on housing demand and thus housing prices. Even so, the bank's finding that declining home values are a source of the crisis is significant. It means the crisis is not acute—it will not be a sharp spike of defaults that will soon pass through the system, but a continuing problem until home values eventually start to recover.

For Southeastern Wisconsin, this may mean we’ll be insulated from the worst of the crisis, as the housing bubble here was never as expansive as in other metro areas. By never reaching the peak of the bubble, we may have been saved from experiencing the depths of the crisis.

And Mr. McMahon's and Mr. Rosengren's story? While they’ve both faced foreclosure on their homes, the outcomes were very different. When Mr. Rosengren became “upside down” on his home loan in the 90’s, he did not default, but tightened his belt and stayed in the home, waiting for home prices to increase.

Mr. McMahon, in default in 2008, entered foreclosure—for him, and thousands of others, the market turnaround is too far off. Luckily for Mr. McMahon, Donald Trump came to the rescue, buying the house and leasing it back to him. That’s a rather unlikely scenario for any other homeowner facing foreclosure.

(Part II, tomorrow: How can state and local policies blunt the impact of the crisis?)

Milwaukee's mortgages compare favorably

Sometimes a picture is worth...well, you know. The New York Times recently had a graphic mapping the subprime mortgage foreclosure crisis nationally, using data from major metropolitan areas. The map indicates Milwaukee isn't experiencing the crisis to the extent of many of our neighbors.

What it shows (in less than a thousand words) is that in metro Minneapolis/St. Paul, between 9% and 12% of all mortgages are subprime mortgages, and of those, 17.1% are in foreclosure. It's worse in metro Detroit, where over 15% of all mortgages are subprime and 20.6% of the subprime mortgages are in foreclosure.

The map indicates that in Wisconsin, metro Green Bay has been hit the hardest, with 12.8% of subprime mortgages in foreclosure, although less than 9% of the total mortgage market in Green Bay is subprime.

Reasons southeastern Wisconsin may weather the subprime crisis: The two accompanying maps show we were below the national average in new housing construction from 2004 to 2007 and had a lower unemployment rate than the national average during the same period.

Housing price roller coaster--really!

Someone has turned the graph of inflation-adjusted US housing prices since 1890 into a roller coaster ride.

Let's just say that this isn't a ride you'd want to stand in line for.

Hat tip: 13th Floor