Mortgage Troubles Erode Faith in Ownership

Note: This article appears in the Dorchester Reporter.

The mortgage troubles plaguing multi-family housing in parts of Boston are putting new strain on belief in the benefits of greater access to home ownership.

In a public policy discussion paper on subprime lending and multi-family housing released on the last day of 2008, researchers for the Federal Reserve Bank of Boston argue that two widely-held beliefs in policy may have been overstated. One belief is that increasing owner-occupancy improves the quality of life for buyers and their neighborhoods. The other is in the growth of ownership among people of color—a trend that was also supposed to narrow the racial gap in wealth.

With the disproportionate toll of foreclosures on urban neighborhoods, advocates and public officials have put most of the blame on high-risk lending—especially subprime mortgages. But researchers at the Federal Reserve say the subprime loans and resulting foreclosures might also be viewed as a reflection of the buyers themselves.

“In other words,” say the researchers, “these borrowers are more likely to default because they have a history of delinquency (perhaps providing a signal of their preferences) or lack the financial means to survive an adverse financial shock or life event.”

Those same buyers would also be more vulnerable to a sharp downturn in the market. Adding to the risk would be the dependence on rental income and the need for repairs, especially in older buildings.

“If something goes wrong and you need to fix something, and nobody can live in the unit, you get into trouble very quickly,” said Paul S. Willen, a senior economist and policy advisor for the Federal Reserve Bank of Boston.

“The good thing about the absentee landlord,” said, “is they have a lot of reserves and they have a lot more resources than a small owner.”

The report from the Federal Reserve was confined to homes bought as multi-families. It confirms the number of black and Hispanic households who bought homes in Massachusetts doubled between 1998 and 2006. But the report also found the increase was solely due to subprime loans.

When researchers compared the number of home purchases to the number of home sales or foreclosures, they found the increase in subprime financed purchases between 2003 and 2006 in Massachusetts “was unlikely to have led to a significant increase in homeownership.”

And, according to researchers, as subprime lending increased from 2003 to 2006, there were more transactions in which buyers and sellers were both people of color. “In other words,” say researchers, “one could argue that it enabled a sort of churning of properties.”

A more recent discussion paper from the Federal Reserve also shows that subprime lending practices changed over time. The earlier subprime loans were mainly for refinancing, while the later loans were almost entirely for home purchases. Also increasing over time were loans that combined less documentation of the borrower’s income and assets with higher leverage—or a lower percentage of down payment. It was the increased leverage that researchers say contributed the most to the increase in defaults.

The resulting foreclosures are reminiscent of what happened in the late 1960’s and early 1970’s, when there was an attempt to expand home ownership opportunities for people of color by the Boston Banks Urban Renewal Group (BBURG). Under BBURG, loans were guaranteed by the federal government, so lenders had less reason to worry about risk—or finding a new buyer after a default.

Almost forty years later, lenders were passing on risk by selling their loans to financial markets. And riskier subprime and “Alt-A” loans—with higher interest rates—were also attractive to financial markets because of their higher yields for investors.

But the most recent downturn in Boston’s multi-family housing market brought yet another change in the pattern ownership—the conversion of three-deckers into condominiums on a massive scale. Before the end of the boom, when more desirable three-deckers were selling for $500,000 to $600,000, recorded sales prices on converted units in Dorchester were as high as $439,900 apiece.

Public records indicate many of the unit buyers were not occupant owners. Even some loans given for use of a unit as a primary residence went to buyers who received mortgages containing the same provision within a year on other properties. In other cases, owners of multiple units at different locations had mortgages for “second homes” that also restricted use of the property for income. And most of the lenders were mortgage companies or thrifts, which were less tightly regulated than commercial banks.

On many three-decker conversions, there were also piggyback mortgages. And researchers at the Federal Reserve say the default rates for these loans were abnormally high.

Observers say the risks were also increased in some cases by transactions at inflated prices—which had an effect on the rest of the market: when prices were climbing, other properties became less affordable; when the market fell, some of those properties had less value than what was still owed on the mortgage. According to figures for Boston from the Warren group, the sharpest falls in the median sale price for condos last year were in Mattapan (55%) and Dorchester (18%).

The changes in subprime lending practices took place in years when housing prices in Boston were still rising, or at least before a sharp downturn. And, as researchers for the Federal Reserve note, the change in practices was gradual. “Thus,” they wrote, “rather than plunging into uncharted waters, investors may have felt increasing comfort with each successive round of weaker underwriting standards.”

And Willen says prices during the boom years may have made those standards seem less important. “If house values are rising, it’s not that risky,” he reasoned. “If they’re falling, even a documented loan is going to be pretty risky.”

According to the city’s Dept. of Neighborhood Development, Boston had 1,750 foreclosures in 2006-2008, and more than half were on units owned by investors. As of last November 15, there were 955 properties taken by foreclosure that had yet to be resold.

Because so many of the foreclosed properties were owned by investors, Mayor Thomas Menino’s chief of Housing the director of the Dept. of Neighborhood Development, Evelyn Friedman, argues against putting all the blame on homeowners.

“I don’t think the issue is home ownership opportunities. The issue is the quality of lending,” said Friedman.

“Yes, we do want to have home ownership,” she said. “We want to have sustainable home ownership.”

And Friedman says that includes lending based on sound documentation of the borrower’s ability to pay.

“The lenders have to be made to be responsible for whom they’re lending to,” she said. “That’s the regulatory problem that has to be addressed.”

The executive director of the Mass. Affordable Housing Alliance (MAHA), Thomas Callahan, says the best way to stabilize the city’s multi-family houses is to have, in most cases, entire buildings in the hands of responsible investors and owner-occupants.

“It’s not the right solution to give up on owner-occupants as the bulk of the three-family owners in the city,” said Callahan.

“I think what you see in the market,” he notes, “is investor owners walking away quicker than owner-occupants do.”

Though Willen says some of the borrowers who ended up in foreclosure had taken home-ownership classes, Callahan says MAHA’s delinquency rates for two- and three-family homes were even lower than the rates for condos and single-families.

“I think two- and three-family home ownership in Boston and Massachusetts can be very stable,” he said, “if it’s done right.”

The city is using federal money to acquire 7 foreclosed properties by early next month directly from Countrywide Financial, which has been acquired by Bank of America. The city’s plan is to acquire more properties directly from companies holding the loans, and then to turn them over to private or non-profit developers and owner-occupants.

“I think the group of people we need to attract, and will be attracted to these properties,” said Friedman, “are the young first-time home-buyer who can’t afford Jamaica Plain or the Back Bay.”

A new challenge in the current downturn is that foreclosures in multi-family buildings converted into condos have taken place one unit at a time, and occasionally months or years apart. Friedman says the city will only try to acquire units where it would control the entire building.

And, if past downturns are a predictor, there is no guarantee that other properties sold after foreclosure will be stabilized quickly.

The executive director of Citizens Housing and Planning Association, Aaron Gornstein, predicts that, once the market reaches bottom—possibly after another wave of mortgage defaults caused largely by the economic downturn—recovery could take another five years. In the meantime, he says, the chance to buy cheap might not be enough to attract the kind of homeownership that benefits the neighborhood.

“Unfortunately,” said Gornstein, “it tends to attract investors who don’t have a long-term plan to invest in the neighborhood, who want to flip the property and get out.”

Mattapan, Dorchester Lead Housing Slump

The Warren Group reports single-family home sales were down last year in Boston by almost 15%. The median price decreased by more than 11%. The largest decreases in sales were in Brighton, South Boston and West Roxbury. The largest price drops were in Mattapan, at almost 31%, and East Boston, at more then 26%.

For condos in Boston, the number of sales was down by almost 20%, but the median price was up by more than 4%. The neighborhoods with the largest fall-off in condo sales were Brighton, Mattapan, East Boston and Hyde Park, all more than 30%. The largest price drops were in Mattapan, at almost 55%, and Dorchester, almost 18%. The largest increase in the price of a condo was in Roxbury, at more than 10%.

Besides having the largest price drops for all of 2008, Mattapan—among comparisons of more than a handful of transactions—had the largest price drop in December for condos (70.37%). The decreases in December condo sales were almost as high in West Roxbury (61.54%) and Charlestown (60%), but the decreases in median price were less than 10%. In East Boston’s condo market for December, the number of sales was down 46%, while the median price was down more than 30%.

Neighborhoods where the 2008 median price increased (for single-family homes) were Jamaica Plain, Brighton, Roslindale, and South Boston. There were price increases for condos in Jamaica Plain, West Roxbury, and areas close to downtown Boston, though the numbers of sales in those areas were all lower. The number of condos sold in Dorchester increased in December, compared with the same month in 2007, but the median price declined by 61.44%. The largest increase in condos sales for December was in Roxbury—more than doubling, from 13 to 27—but was price was down slightly, by 1.22%.

Boston 2009: Same City, Different State

It’s hard to recall when the state of the city had changed so much in a single year.

When Mayor Thomas Menino gave his State of the City address in January, 2008, he said the national economic climate was “uncertain,” while the state of the city was “stronger than ever.” As he told the audience at the Strand Theatre in Dorchester, Boston was “bursting with excitement, investment and potential.”

A year later, Boston is one of many cities confronting an economic crisis. Office rents and the number of active mega-projects are on the way down, while the economy shows signs of struggle everywhere from the financial sector and world-class universities to neighborhood businesses on Bowdoin Street.

In 2009, it was the neighborhoods that the mayor said were stronger than ever, if measured by diversity and population growth. If the state of the city was strong, it was, as the mayor put it, because of being in the hands of Boston residents. In other words, the road to recovery would have to include sacrifices, such as the mayor’s proposal for a one-year wage freeze for city workers with union contracts.

The crowd hadn’t even left Faneuil Hall when the wage freeze started taking some hits. As one member of the audience pointed out, there was no wage freeze for some of the elected officials listening to the speech in the front rows. But supporters of the idea can argue a wage freeze looks much more acceptable to people in the private or non-profit sector who might feel lucky if they still have a job.

By the mayor’s estimate, the wage freeze could shrink an expected budget shortfall of $140 million by $55 million. But union leaders could argue that opening up contracts for one revision could lead to more, and also shave money off workers’ pensions.

City Councilor Michael Flaherty, who would later announce his candidacy for mayor, responded by calling for cuts in unspecified wasteful programs, and for getting rid of all consultants.

“Some people will lose their jobs,” Flaherty said in a statement right after the address on January 13, making his own call for Boston to be a “national leader in lean budgeting.”

The more waste cut from the budget, the smaller the shortfall, and the less need there would be for concessions from unions. Over the past several weeks, the mayor’s administration had been sending signals about possible budget cuts in the Police and School Departments. The signals have been mixed and the message is being challenged. But, outside this year's address at Faneuil Hall, the message was reinforced. Instead of police or firefighters demonstrating over contract demands, there was a show of concern over budget cuts from a group of high school students.

The wage freeze proposal got more support from another councilor said to be considering a run for Mayor, Sam Yoon. He favors a freeze for workers making at least $100,000 a year. City Council President Mike Ross called the wage freeze “a good idea worthy of serious consideration,” but less than a complete solution to the city’s budget gap.

Union leaders can also argue the wage problem is really a revenue problem that can be solved with some help from the state. That was the hint when the president of the Boston Teachers Union, Richard Stutman, responded to the mayor’s speech by issuing a statement pledging support for helping the city get powers to collect more revenue from local option taxes, most likely on rooms or meals.

In the last economic downturn, around 2003, the mayor trimmed the city payroll with the aid of early retirement incentives. These made it possible to avoid layoffs in large numbers, and the incentives could, for example, protect the jobs of young, motivated teachers without tenure—at the expense of more experienced teachers, who also might be more inclined to move on.

But, as the president of the Boston Municipal Research Bureau, Sam Tyler points out, the incentives can take a disproportionate toll on certain departments, along with increasing the city’s pension liability. For those reasons, he says the city “should not even consider” the incentives this time around. But Tyler suggested it might be a good idea to encourage an exit by employees already eligible for retirement.

So, if the unions agreed to a wage freeze, and the city had new sources of revenue, would that close the budget gap?

“I don’t say it would prevent any kind of employee reductions,” said Tyler, “but significant cutbacks this year would not be necessary.”

Local option taxes have support from Governor Deval Patrick, but Tyler notes, even if there were to be agreement from the state legislature, and enactment at the local level, little if any of the money would be available before the new fiscal year at the beginning of July. And, based on the real estate market at the beginning of 2009, it’s expected the burden of any increase in property taxes next year would fall more heavily on homeowners.

One other departure from last year’s state of the city address was the lack of any talk about the potential School Dept. savings from a reduction in busing. Last year, the mayor said busing costs would increase 50% in five years—by $20 million, but this year’s speech came after months of declining gasoline prices.

Last year’s speech also mentioned an expansion of ties between schools, libraries and community centers that could mean less reliance on busing for equal access to quality education. The mayor called the strategy “Community Learning,” and he even referred to it as the “next Boston Miracle.” In the 2009 speech, the mayor mentioned several achievements and improvements, along with the promise of a better future, but there was no miracle.

Gun in School Update

A judge in West Roxbury District Court has set bail for Walter West, Jr. at $100,000 and revoked his open bail in connection with another case.

“The defendant had a cocked and loaded 9mm handgun inside a school,” said Suffolk County District Attorney Dan Conley. “With rounds in the chamber and the magazine, it presented an extremely dangerous situation in a building full of innocents.”

Also arraigned in connection with the disturbance yesterday morning at Boston English High School were two juveniles and two other 17 year-olds from Dorchester. The three older defendants will have to wear a global position monitoring system and observe an 8 p.m. curfew.

In a statement issued after the arraignment, Conley also said, “A case like this should be chilling to every parent and every person in the Commonwealth who cares for children’s safety, no matter where those children live or go to school.”

Teen with Gun Arrested at Boston English

A teenager with a firearm was arrested this morning at Boston English High School in Jamaica Plain.

Seventeen year-old Walter West of Dorchester is being charged with unlawful possession of a gun and ammunition, unlawful possession of a gun on school property, resisting arrest and trespassing. Also arrested for trespassing were two other 17 year-olds from Dorchester, Damien Oliver and Tyrone Rutledge, along with two juveniles.

Boston Police say the arrests followed a disturbance at the school that was reported around 9 a.m. Authorities say Oliver was the only one of the teens arrested who is a student at Boston English.

According to police, one of the teens was “focused on and reaching for” a backpack that, as it turned out, contained a loaded firearm.

Prosecutors say it was Oliver who let the other teens into the school through a side door. The chief communications officer for the Boston School Dept., Christopher Horan, says the door can only be opened from the inside, and he says students who come in through the regular entrance are randomly searched for weapons with a metal detecting wand.

Once the intruders were in the building, said Horan, they were quickly recognized as trespassers.

“It certainly is troubling,” he said, “but we were all impressed how quickly and appropriately the school responded.”

Creating New Hotspots for Voter Turnout

The following post was published as an article in the Dorchester Reporter.

There were only two people standing on the traffic island in middle of Blue Hill Avenue with an Obama-Biden sign, but the horns could be heard for several blocks around.

It was election day in Grove Hall.

Propping up the blue sign were the founder of the local radio station, TOUCH FM 106.1, Charles Clemons, and the executive director of the Grove Hall Neighborhood Development Corp., Sister Virginia Morrison. Each of them held the sign with one hand and waved at the traffic with the other. And whenever they waved, someone answered with a triumphant honk.

“It’s a beautiful day in the neighborhood,” Morrison exulted.

One reason to exult was the commanding vote for her candidate. Another was the increase in the Grove Hall vote count. In one of the areas near the same intersection, Ward 14, Precinct 1, the number of votes cast last Tuesday had risen over the figure for the 2000 presidential election—the last to fill a vacancy in the White House—by 66%. Since 1996, the presidential year count had increased by 80%.

What happened last week in Grove Hall was happening in several areas around the city where normal turnouts used to run lower than average. Most of these were areas where voters were predominantly people of color—from Asian-American in Chinatown to Latinos around Jamaica Plain’s Hyde Square, along parts of Roxbury, Mattapan and Dorchester dominated by African Americans and other immigrants, whether from Haiti, Vietnam, or Cape Verde.

“People were engaged in this election,” Mayor Thomas Menino told Neighborhood Network News, “and they wanted to make changes, but also they had a candidate they believed in. That’s why we had such a huge turnout in the City of Boston.”

While votes cast in this year’s election around the country had increased over November, 2004 by no more than 5%, the increase in Boston was slightly short of 15%.

Compared with the election in November, 2000, the number of people voting in Boston last Tuesday had increased by 17.75%--despite an increase in the number of eligible people who didn’t vote. There were more votes cast in almost every ward. But one area traditionally known for high totals—Ward 20 (West Roxbury and Roslindale)—had an increase of less than 6% over the figures for the last two presidential elections.

At the other end of the chart were neighborhoods with very sharp increases, such as Chinatown (Ward 3, Precinct 8), with almost 96% over the total for 2000, and Dorchester’s Ward 15 (Fields Corner/Bowdoin-Geneva/Meetinghouse Hill) at more than 58%. Close behind was Ward 14 (Grove Hall/Four Corners/Franklin Field/Wellington Hill), with an increase over 2000 by more than 57%. Compared with November, 2000, vote totals for Roxbury wards increased anywhere from 41% to as much as 72%.

Less dramatic increases in the same areas had been seen in other recent elections, especially the one in November, 2006, when Deval Patrick became the first person of color to be elected Governor of Massachusetts. Vote totals in the same parts of the city also showed a higher percentage gain in city elections for 2003 and 2005, though not for 2007.

“So we’re seeing an excitement around getting civically engaged that, to a large degree we lost,” the deputy director of MassVOTE, David Ortiz, said in an interview last week on Neighborhood Network News. “We’ve always talked about the possibility of trying to get a holiday to happen on election day, and I have to say that I think everyone would agree that it seemed as though this election was a holiday. People were celebrating like it was the Fourth of July.”

Among the neighborhoods where voters came out early in large numbers was Chinatown.

“People were lined up before 7 a.m. when the polls opened,” said the executive director of the Chinese Progressive Association, Lydia Lowe. “The line was out to the end of the street.” To accommodate elderly voters waiting in line, she added, community activists even provided chairs.

Lowe acknowledges that some of the neighborhood’s increase in voters results from new housing developments, with many newer non-Chinese residents from Chinatown proper and the adjoining Leather District.

But Lowe says the turnout has also been increased by voter workshops that drew “several hundred” residents, mainly Chinese-speaking. Under an agreement with the US Dept. of Justice, those voters could use ballots almost entirely in Chinese, except for the names of candidates. In the workshops, the candidates’ names were transliterated into Chinese characters.

Lowe says what’s gained in translation is that immigrant voters who have become US citizens feel more competent to decide elections.

“It’s a sense of empowerment,” she said. “Since Chinatown’s vote has increased over the past ten years, politicians pay attention to Chinatown.”

Novel grassroots campaigns without explicit connection to candidates were going on in other parts of the city as well. In Jamaica Plain, teens in the Hyde Square Task Force tried to reach voters through phone banks and house calls. The message was that a “No” vote on Question 1 (the proposed abolition of the state income tax) was a vote for their future.

Ortiz says that kind of community networking is a two-way street, channeling the community’s support for potential candidates, and the candidates’ support for needs in the community.

“These community-based organizations can now say they have a base—they have a base of voters—in the sense of a community-based organization,” he said. “They will try to use that base to get them involved in the issues, get them involved in services that they have, or try to get them to become volunteers.”

Between November, 2000 and last Tuesday, the number of people voting in one area around Hyde Square (Ward 10, Precinct 6) increased by almost 62%. Over the same period, the number of registered voters in the precinct had risen by 90%.

And Ortiz sees a parallel between turnout and registration campaigns in Boston and the widespread use of grassroots volunteers in campaign Obama’s campaign around the country.

“I think what candidates have done,” he said, “is they’ve learned from organizations like MassVOTE that, if you try an organic approach, more holistic approach, an approach that’s sort of led from the bottom-up, that folks want to get more involved, that there’s more motivation, and because of that, more participation. And I think that more candidates are starting to see that and starting to mimic that model.”

Among those candidates Ortiz includes two getting off to a head start on campaigns for City Councillor at Large—Felix G. Arroyo and Jean Claude Sanon.

Also taking note of the grassroots factor is Sam Yoon, a City Councillor at Large who’s reportedly raising money for a possible attempt at higher office.

“A lot of these groups penetrated parts of the community that are harder to reach for either (presidential) campaign,” said Yoon.

While there was little doubt who would carry the state for President, Yoon said areas with the largest increase in votes were drawn by the urge to support a candidate—and to participate.

“Obama inspired that,” said Yoon. “His message inspired that kind of participation—that feeling that everyone mattered, no matter what their race, creed, or community.”

And Yoon says that meant getting voters to think, not as isolated individuals acting only on self-interest, but as people connected to other people.

“This is important in a democracy,” he said, “that we feel that connectedness to each other.”

But last year’s election for City Council showed that voter participation can also sharply decrease. Because this was an off-year election, with no race for mayor, a relatively low turnout had been expected. As it happened, there were barely enough at-large candidates to require a preliminary September election throughout the city, and even fewer candidates with competitive campaigns.

When the City Council and Mayor Menino passed a special measure to skip the preliminary election for Council at-large, there was little opposition, even from grassroots organizations. When the single at-large election took place in November, the number of voters plummeted, in some areas below the levels for 1999. The turnout figure was 13.59%.

Yoon was quick to note that one difference between last year and this year was the change in candidates.

“Now that these folks have been engaged,” said Yoon, “it’s up to us to keep them engaged in the political process.”

And Ortiz says there should be a carry-over of newly-engaged voters in years ahead.

“I think what’s left over will come with the face of those that are 18 to 29, because they were the ones that really turned out this year,” said Ortiz. “What we saw was a younger generation of voters that we’ve never seen before, which is completely different from the past, when it was older folk that were actually going out to vote in large numbers.”

*****

After the article was published, Sister Virgina Morrison conveyed some of her thoughts on the election:

Yes, there was an organized effort to get out the vote and then there was the community utilizing every person, place, or thing to inform our community about the power and significance of their vote. There also was a sense of pride. Many saw hope. President-elect Obama and the soon-to-be 1st lady of these United States represent a sense of family and morality that has been lost. Two very educated, bright, and articulate husband and wife from humble beginnings aspiring to be president of what most see as the most powerful country in the world are worth helping to succeed.

Obviously, when the politicians see the potential votership they will pay attention to the needs and wants of a potentially very large constituency, which should translate into more services, etc. for any given community.

I feel, once the people see what their vote can do and has done, they will be married to the political system. They understand how important it is to be well informed, and how important it is for the candidate to be connected to the mainstream and grassroots. They now know what is expected from them and what they should expect from local and national politicians.

Boston Vote Strength Comparison

The following table shows how this year's presidential election vote cast in Boston compares with figures from the three previous presidential elections. For the most part, the figures show more relative gains in areas dominated by people of color--Chinatown, Roxbury, Mattapan, and parts of Dorchester.

Compared with the election of November, 2004, the number of registered voters in Boston had risen by 26.7% to 380,881. Despite the increase in the number of votes cast, there was also an increase in the number of eligible persons who didn’t vote. That’s why this year’s voter turnout (61.57%) was lower than the figure four years ago (68.61%).

For video reports on election day in Boston and reaction in Dudley Square the morning after the election, go to NNNonline.