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REO neglect in minority communities faces wider probe

The National Fair Housing Alliance said Wednesday the Department of Housing and Urban Development and Fannie Mae will fund its investigation into banks that it alleges have disproportionately mismanaged REO in communities of color.

The NFHA found in its year-long investigation of more than 1,000 properties in nine major cities that REO in predominately African-American or Latino neighborhoods lacked routine maintenance and more rigorous advertising efforts when compared to white areas.

The group plans to file complaints with HUD or in court against the banks as a wider investigation begins this year.

Property preservationists counter the issue is more complicated than a blanket REO mismanagement claim.

There were roughly 18.3 million vacant homes on the U.S. housing market at the end of 2011, down from 18.5 million at the end of last year, according to Census Bureau data. Laurie Goodman, senior analyst at Amherst Securities, estimates conservatively another 7.4 million are at risk of default based on negative equity and other factors.

"The banks violate the Fair Housing Act by failing or delaying maintenance or repairs of REO in these communities," said Peter Romer-Friedman, of the class-action law firm Cohen, Milstein Sellers & Toll. "They've clearly violated the law when a bank maintains an REO in an inferior manner."

Some of the nation's major mortgage servicers declined to comment.

Roughly 54% of neighbors in white neighborhoods reported routine and consistent REO maintenance, compared to just 30% in minority communities, according to the findings. Also, 40% of those in white neighborhoods witnessed home improvement contractors, compared to 20% in predominately African-American or Latino areas.

Investigators graded each home based on what shape it was in. According to this graph from Metro Fair Housing Services in Atlanta, homes in minority neighborhoods showed far more blight when compared to communities north of the city. (Click to expand.)

Jim McCarthy, CEO of Miami Valley Fair Housing in Dayton, Ohio, said 84% of REO in African-American neighborhoods had no "For Sale" sign whatsoever.

"How would people driving through these neighborhoods even know these homes are for sale?" he asked.

"Advertising must be done on an equal basis," Romer-Friedman said. "Banks can't use different advertising, and can't selectively advertise in white communities while not doing the same amount in communities of color."

Shanna Smith, CEO of NFHA, said 23% of homes that received the lowest grades in white areas were sold to owner-occupants, compared to 12% in minority regions.

"The blight these neighborhoods suffer from are all the responsibility of the banks that own and have an obligation to market and maintain these properties," Smith said.

One nationwide property preservation firm said that it did not experience a variation in the way REOs are treated based on the racial makeup of the communities, when dealing with either big bank or HUD repossessions.

A top executive of the firm, who asked to be kept anonymous considering the nature of the discussion, said it is more difficult to keep properties up to code in areas with higher levels of theft and vandalism.

"You can put an A/C unit in one day and it will be gone the next," he said. "So the approach is more of a function of the community crime rate, which tends to be higher in more urbanized neighborhoods. I'm not saying it happens in all cases, but it does happen."

In 2011, roughly 60% of Fannie Mae REO sales went to owner-occupants, making these stats an important metric for the GSE as it looks to occupy homes quickly and with a lower cost to taxpayers.

"We work with nonprofits to support foreclosure prevention and neighborhood stabilization efforts. In the case of the National Fair Housing Alliance, we've provided support to facilitate the maintenance, marketing and sale of REO properties in predominantly minority communities, including training real estate agents and examining practices of financial institutions," according to a statement from the GSE. "Our support for NFHA and other nonprofits is focused on developing innovative ways to address the housing crisis and help communities recover."

jprior@housingwire.com

@JonAPrior

Jacob Gaffney contributed to this report.

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