Friday, January 29, 2010

Does Cincinnati VBML amounts to Governmental redlining?

Redlining is the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or are poor. While discriminatory practices existed in the banking and insurance industries well before the 1930s, the New Deal Home Owners' Loan Corporation (HOLC) used a redlining policy by developing color-coded maps of American cities that used racial criteria to categorize lending and insurance risks. New, affluent, racially homogeneous housing areas received green lines while black and poor white neighborhoods were often circumscribed by red lines denoting their undesirability. Banks and insurers soon adopted the HOLC's maps and practices to guide lending and underwriting decisions. Further, the Federal Housing Administration, created in 1934, also used the HOLC's methods to assess locations for federally insured new housing construction.

We all know that Mortgage credit lending has been tightened. We also know that with the huge increase in foreclosure filings that property values trend lower since foreclosures often sell at deep discount. Just one or two foreclosures on a block can result in a drop in overall neighborhood value of 20-30 percent or more.

The larger question is does Cincinnati 'blight abatement' policies such as VBML and condemn orders essentially create Governmental 'redlining" of neighborhoods? In simpler terms, is Cincinnati helping or hurting economically disadvantaged neighborhoods by facilitating banks to simply saying no to loans in those neighborhoods. The evidence appears to support that claim.

The city has long claimed that the VBML program will "save' neighborhoods by forcing property owners to come into compliance with "Minimum Building Standards" and effectively 'mothball' properties until it is economically viable to rehabilitate them. The cities argument was a good one and on the surface seemed like a good idea. By essentially requiring 'slumlord/investors' to actually have to pay a licensing fee to keep their property vacant they would eventually sell to someone who would repair the property and return it to occupancy or would do it themselves.

(Potentially historic eligible properties like this one on Waverly will be Bulldozed soon. The city has no public section 106 review process required by Federal law)

What the city did not count on is that with the Housing bubble burst beginning in 2005. Suddenly there was no incentive to spend monies on property that was rapidly declining in value. Property owners simply walked away.

In fact, the City of Cincinnati Vacant property list as of today shows a total of 2429 properties on the vacant buildings list. Those are properties "ordered vacant' by the city for which VBML (Vacant Building Maintenance Licenses) are required. Many neighborhood leaders have questioned if inspectors are not using the VBML to lighten their caseload as only one inspection per year is required unlike the several that typically must be done when repair orders are written.

Yet only a small fraction of those properties have actually applied for VBML or waivers. Often these properties are in the middle of a foreclosure process, the owner has walked away and the bank has not yet initiated foreclosure proceedings. One of the flaws in the VBML order is that the city does not also notify the lender, meaning often times lenders complete the foreclosure process unaware there is VBML order against it. A VBML only shows up on title search if the city has filed a lien for non payment of a VBML (which they rarely, if ever, do). The property is then sold to an unsuspecting buyer who months after they have bought the property finds out the VBML is out there. Since most foreclosures are typically "cash" transactions (banks do not typically make home loans for less than 30K), the new property owner who is likely self financing repairs to get the house ready to move into or resell is now stuck with an additional cost, and for many of these homeowners who are working on tight margins and dealing with high city building permit fees anyway the VBML is the final straw and they walk away.

If the VBML is found out about prior to purchase where mortgage financing is being done, the VBML is a "dealbreaker' for the new mortgage company as few lenders will lend money on a house that has been ordered 'kept vacant'.

Even the VBML waiver process presents difficulties as obtaining liability or homeowners insurance on a vacant property can run thousands. Often more than what was paid for a foreclosure over a two year period.

Given the failure to get a VBML the property then moves into "blight abatement". The city issues a Condemn order for failure to pay the VBML fee and the property is ordered condemned and an order is issued to the property owner to demolish the property or bring it into compliance. By this stage compliance rarely happens, because the property owner has thrown up his hands in disgust and decided to cut their losses.

(Another potential Historic contributing structure this property went from a broken window complaint to condemn orders in less than 4 months, while the foreclosure process is ongoing, yet has no serious structural issues. This house just need a new owner who will repair it.)

The property winds up before "Nuisance Board" and is ordered demolished by the city with with taxpayer funds. These demolitions reduce the county and city tax base since vacant lots pay considerably less than a lot with a house on it causing a general rise in taxes for the remaining property owners and causing additional pressures among economically strapped homeowners in a bad economy. More and more homeowners lose their homes to tax delinquencies every year.

The city's argument for blight abatement is that it is "improving property values" by bulldozing 'nuisance properties. However current studies indicate that the demolition actually further reduce property values and have little if any effect on crime.

The problem is one of appraisals for lending. Appraisers look at recent sales in an area for determining value. In areas where the City Vacant Building Task Force concentrates, there are already high numbers of foreclosures, which reduce "average completed sales prices' this can depress the appraisal to the point it falls below the 30K mark which is usually the lowest level banks will make home loans at. The only alternative for home buyers is to go for a higher interest rate personal loans which are hard to get for most people today or, if they have the credit to put the purchase on a credit card. With ever tightening credit that is often impossible.

The other factors in appraisals are vacancy rates and 'neighborhood trends' . "Trending' looks at sales to determine if values are going up or down in an area and appraisals are adjusted based on those trends. Vacant lots area negative to an appraiser UNLESS there is significant new infill housing which is likely to raise property values on existing homes in the long term. Since the city has no strategy for redevelopment of these lots, they may remain vacant for decades.

The city is very good at the bulldozing part, they demoed 179 properties last year. However the city is very bad at the Redevelopment part.

One need only look at Over the Rhine to see the devastating effects of long term demolition on a neighborhoods. Combine that with the fact the city has 319 properties on its VBML/Keepvacant condemn list just in OTR and its easy to see why that neighborhood is at a tipping point... as are several other urban neighborhoods in this city.
So what are the solutions? We need to first and foremost scrap VBML (Vacant Building Maintenance Licenses). They are no longer an effective tool to bring property into compliance but with the economy the way it is, VBML has become a "dis-incentive" to investment. We need more effective inspection with better trained inspectors whose priority should be to issue repair orders. We need a paintup/fix up program (funded with CDBG, (Community Development Block Grant funds) for low interest loans or outright grants to low income homeowners to make repairs to properties.

The city and key stakeholders, City Inspections, Local Banks, Neighborhood groups, and Business interests need to come together to create a community reinvestment program where by local banks buy into community reinvestment by establishing targeted area loan pools to create home mortgages/rehab loans on properties priced below 30K. The city needs to couple that with reduced or elimination of Building Permit Fees and reduction of condemn status to repair orders in targeted areas like OTR, Fairmount, Price Hill, Walnut Hills, Sedamsvile, and Avondale to promote reinvestment, especially for buyers of vacant foreclosed property.

The facts are that the housing market has changed dramatically since the VBML program was initially created. We will not rebuild our Urban neighborhood and attract new people to this city with a policy of dis-incentives and demolition. We will bring people in with greater flexibility, good incentives and strong buy-ins by lenders and the business community.


CityKin said...

What if the VBML was modified so that the fees were minimal if the building was kept weather-tight and secure, and the fees/fines only increased if the building was left open and unsecured?

Paul Wilham said...

The problem with VBML is with lending. You know that the first thing that happens in foreclousre the minute a person leaves it , is that the plumbing, and sometimes the furnace is stolen.

That "should be" a repair order and that is something a bank can look at do an appraisal and say yes their is "X' additional monies for rehab. Thats a tangible thing a lender can look at. They know a furnace and plumbing cost say 10 grand and they may be willing to loan on that. A VBML is a 'nebulous' thing that is at best "ambiguos" with its 13 points.

So in an impossible real estate market anyway we are throwing another roadblock?

We have two inspectors covering every neighborhood, one for occupied, one for vacant. That is not a 'steamlined' process in my opinion.

Other cities use repair orders very effectively, why cant we? Well other cities have housing court and land banks, and a receivership avenues for "diversion' of property when the homeowner just gives up.

What we are doing now is not working.

CityKin said...

Orders must be enforced. A vacant shell can never meet code, even if it is secured and weather-tight. The VBML is meant to make mothballing legal, but it also makes mothballing increasingly expensive thus encouraging selling.

Every city has a different situation. Cincinnati has a high number of vacated brick structures that preservationists want to see mothballed for future reuse. Before the creation of the VBML the Building Dept didn't have any legal way to address these other than send an Order to "Fix or Demolish." There was no in-between stage. This aspect of VBML should be kept IMO.

I think this is an important issue, and I appreciate you keeping up the drumbeat, however the Building Dept is under a severe budget crunch and every proposed solution, including more inspectors requires money.

Paul Wilham said...

Citykin, I looked at a "Condemned" building in OTR last weekend, "Condemned", not VBML, it was condemned because the owner wouldn't pay a VBML fee.( It does have an exterior wooden staircase which is their reason for conndemn)The ONLY reason that building is still standing is because it's in a historic district and the city doesn't have enough Cap Improvment funds to demo it. The Owner has been ordered to demo it and he could,if he had the money, pull a demo permit and take it down. You might wan't to look at the link at the properties that have been ordered condemned. If the owner wants to comply with that they can. In fact many properties are owner demoed and we do not have much recourse to stop it. OTR is not as protected as some people may have led you to believe it is.
A building was owner demoed in west end on John Street last summer and is now for sale as a development lot for 80K.

Historic districts ONLY protects a building from being demoed with Fed funds. There is nothing to prevent the city from bulldozing it if they obtain local or state funds.

So VBML does not "save" that building right now, it's the fact the city doesn't have enough local monies to take them down.

"Heaven Help" OTR if the city ever does get the money, but with the 2.4 mill in NSP funds they are getting to demo in Avondale, Price Hill and other neighborhoods, they may have free up enough monies from Cap Improvment funds to demo in OTR.

lll_pl said...

I am an owner of one of these properties and I have to agree with Paul. The VBML process is a joke. My house was put on the list because a concerned neighbor who thought they were doing the right thing by calling the city because a copper thief broke 2 windows to steal all the copper in the basement. My house is not a house that should be on the VBML list, it's one of the nicest on the street and one of the most recognizable in the community. I can not only acquire an insurance policy to meet the VBML process but could not afford it. This process is flawed. I am trying to improve the house and the community. If an owner is showing effort then something else should be done, that being said, I do agree that "something" should be done with an absentee landlord who is letting the property sit. Also, I have a mortgage and I got additional monies to work on the property, but that did not take in account the cities ridiculous requirements. It seems to me that something like this should have been on the title search but there was nothing. What makes it so bad, it cost mee $44.00 to fix the windows but now I have all this extra expenditure for absolutely no good reason. What happens to a poor family who thinks they got a good deal and are working on their dream home and actually have to live ther? What if they are and 6 months later they find out about the orders, will they be thrown out on the street? Most people can not carry a mortgage, pay for repairs and rent another place to live. This is ridiculous, what incentive or help is the City giving to remedy this situation, sounds like they want the properties to stay on the list and therefore end up demoed!