Study: Prices hurt property values

The CWRU study found that foreclosed homes are being sold at one-third their
previous value.

CLEVELAND (AP) — Banks have been selling foreclosed homes in Cleveland at less than one-third of their previous value, harming property values in an area that has been an epicenter for the nation’s mortgage crisis, a new study said Monday.

The study by Case Western Reserve University, which tracked thousands of houses sold at sheriff’s auctions from January 2000 through last September, found that prices declined every year and fell dramatically in 2006 and 2007.

Foreclosure sales have more than quadrupled in Cleveland and Cuyahoga County since 2000.

Nearly 24,000 residential properties were involved in foreclosure sales in the county in the past seven years, representing 8.8 percent of residential properties in the city and 3 percent in its suburbs.

Spreading foreclosures can harm neighborhoods, the study said. “They will have spillover effects, such as becoming nuisances or undermining the desirability and value of the surrounding area,” the report said.

Last week, the city sued 21 mortgage bankers, claiming their subprime lending practices have created a public nuisance that has hurt property values and city tax collections.

Case professor Claudia Coulton, who wrote the report, said a draft had circulated among members of a civic committee working on foreclosure issues. She predicted the study’s conclusions might help the city in its lawsuit.

In a second city legal challenge last week, Baltimore sued Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites in violation of federal law. The bank said it doesn’t lend on the basis of race.

A report commissioned last November by the U.S. Conference of Mayors projected that 361 metropolitan areas would take an economic hit of $166 billion in 2008 because of the foreclosure crisis.

To calculate the property values of foreclosed homes, Case Western divided the sales price by the county auditor’s assessed market value before foreclosure, Coulton said.

“In 2006, the picture was looking rosy and it’s possible that the market values were overestimated,” she said. “Some of these subprime lending activities involved inflated prices.”

The report, noting the rising number of foreclosed homes, predicted that the number of home buyers would not keep up with the foreclosure pace, leaving some foreclosed homes vacant.

The numbers of foreclosures and declining property values make the cycle “a losing proposition not only for the individuals in default but for lenders, investors and communities,” the report said.

Deutsche and Wells Fargo were listed among the banks buying the most foreclosed homes at auction in 2006-07 in Cuyahoga County — 1,365 or 11.8 percent for Deutsche and 906 or 7.9 percent for Wells Fargo.

Deutsche Bank spokesman John Gallagher said that DB National Trust Co. acts as trustee for securitization trusts and is not responsible for foreclosures or selling foreclosed property and that those decisions are made by servicing companies.

Banks buying homes at foreclosure auctions aren’t necessarily the mortgage lenders and instead might represent investors or be serving as a trustee, the study noted.