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Banks turn to demolition of foreclosed properties to ease housing-market pressures

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Cleveland — The sight of excavators tearing down vacant buildings has become common in this foreclosure-ravaged city, where the housing crisis hit early and hard. But the story behind the recent wave of demolitions is novel — and cities around the country are taking notice.

A handful of the nation’s largest banks have begun giving away scores of properties that are abandoned or otherwise at risk of languishing indefinitely and further dragging down already depressed neighborhoods.

The banks have even been footing the bill for the demolitions — as much as $7,500 a pop. Four years into the housing crisis, the ongoing expense of upkeep and taxes, along with costly code violations and the price of marketing the properties, has saddled banks with a heavy burden. It often has become cheaper to knock down decaying homes no one wants.

The demolitions in some cases have paved the way for community gardens, church additions and parking lots. Even when the result is an empty lot, it can be one less pockmark. While some widespread demolitions could risk hollowing out the urban core of struggling cities such as Cleveland, advocates say that the homes being targeted are already unsalvageable and that the bulldozers are merely “burying the dead.”

T he task of plowing under the homes rests with the Cuyahoga County Land Reutilization Corp., which grew out of a 2009 state law aimed at creating “land banks” with the power and money to acquire unwanted properties and put them to better use — or at least put them out of their misery.

The efforts have led other states to pursue similar laws to deal with their own foreclosure epidemics. New York passed a comparable measure this summer. Similar legislation is in the works in Georgia, Philadelphia and elsewhere.

Cleveland has found progress in the sliver of common ground between the land bank’s mission and the interest of financial firms, including some that helped fuel the housing crisis through risky loans and later botched paperwork in carrying out foreclosures across the country.

This collaboration was uncomfortable at first, said Gus Frangos, the Cuyahoga land bank’s president and one of the people behind the state law.

“Two years ago, when we started . . . it was difficult,” he said. “Everybody was guarded.”

After countless meetings, however, land bank officials and banking representatives shed their initial wariness of one another. Frangos made a simple pitch: We’re not here to point fingers. We’ll take your worst properties, the ones not worth keeping. Pony up for the demolition, and you’ll still come out ahead. Just don’t walk away from them.

Bank of America and Wells Fargo announced plans this summer to donate more than 100 properties to the land bank. J.P. Morgan Chase also has made regular donations, and several other banks have given sporadically. Fannie Mae, the massive mortgage finance company seized by the federal government three years ago, began donating properties early on and now hands over about 30 properties a month, Frangos said.

For those companies, the arrangement equals good public relations. But it also makes economic sense.

“It feels great that we’re able to help nonprofits, help neighborhoods, help families,” said Tyler Smith, an assistant vice president at Wells Fargo, which donated 300 properties nationwide last year and is on track for about 1,000 this year. “But we certainly have to have the piece that shows it makes business sense.”

The bank, which often services mortgages on behalf of other investors, knows what it costs daily to hold each foreclosure — the upkeep, the taxes, the broker’s commission, the potential for costly code violations.

“We can make the financial case to the investor that, ‘It’s in your best interest to donate this,’ ” Smith said.

Thanks in part to the steady stream of donations, Cuyahoga land bank officials expect to complete roughly 700 demolitions by the end of the year.

On a recent Tuesday, the excavators roared to life. On tap: Four empty homes and one decaying apartment building, some on foreclosure-riddled streets, others in leafy neighborhoods with tidy lawns.

“It’s been a long time comin’,” Ronice Dunn, 58, said as the rotting home two doors down from her on Agnes Court — and donated by Fannie Mae — finally surrendered to the heavy machinery. “I’m not sad to see it go.”

In East Cleveland, not far from the mansion where John D. Rockefeller once lived, workers were turning an abandoned apartment building on Hartshorn Road into rubble.

“It’s about . . . time,” said George Jester, 73, who has lived on the block for more than two decades. What had become a magnet for rodents, vandals and vagrants was now an empty lot, full of potential. “It’ll be for the better.”

‘The discarded litter’

Land banks have existed for decades, but only in recent years have their numbers surged. Their objective, said Emory University professor and land bank expert Frank S. Alexander, is to deal with “the discarded litter of a consumption society” — the homes nobody wants. Traditionally, they have been small and passive organizations, acquiring properties through tax foreclosures and able to handle only a few at a time.

The aim of land banks has been to take these properties — which would otherwise be a drain on public services, magnets for crime and a drag on housing prices — and renovate them or clear the land for potential redevelopment.

With the foreclosure crisis ravaging Cleveland neighborhoods, officials there envisioned a more nimble and autonomous version. The Ohio law allowed Cuyahoga’s land bank, a nonprofit corporation, to receive millions of dollars a year from interest and penalties on collected delinquent real estate taxes and to spend that money as it sees fit, within its mandated mission.

Working with other nonprofits and benefiting from Cleveland’s assertive housing court, which has a reputation for smacking huge fines on banks and servicers responsible for crumbling properties, the land bank started gobbling up dozens of vacant and abandoned properties. Today, it has an inventory of about 1,000, with more than 100 flowing in every month from various sources.

“They have quickly gone from zero to being one of the most productive land banks in the country,” Alexander said.

The challenge remains to put those parcels to good use as quickly as possible. Some have been sold for pennies to churches or hospitals, such as the renowned Cleveland Clinic, that want to expand. Others are being redeveloped into rental properties or rehabbed for future sales or turned into community gardens. Even when there’s no immediate productive use, the razed lots are one less eyesore on the landscape. Frangos said eliminating run-down and abandoned buildings helps improve the value of neighboring properties.

Land banks and other local authorities aim to be strategic about where the demolitions take place, often trying to cluster them in “target areas” as part of larger efforts to stabilize neighborhoods.

In the Washington region, only Maryland has passed a law authorizing the creation of land banks. The measure was designed partly to help Baltimore deal with its glut of vacant and abandoned homes, but the land bank has yet to become reality.

A balance of interests

The donations keep coming, and not just in Cleveland.

At the end of August, the nation’s banks, along with Fannie Mae and Freddie Mac, had an inventory of more than 816,000 foreclosed properties on their books waiting for a buyer, according to RealtyTrac. An additional 800,000 are working their way through the foreclosure process.

At Wells Fargo, Smith said, about a dozen asset managers “scrub these portfolios weekly” in cities such as Chicago and Milwaukee, looking for possible donations.

Rebecca Mairone, national mortgage outreach executive for Bank of America, said the company is expanding its donation programs to nearly a dozen cities, including Detroit and Chicago.

“It does balance the bank’s best interest with the community’s best interest,” she said.

In previous decades, Detroit, perhaps more than any other American city, saw such a vast swath of buildings torn down as the result of blight that some activists now urge that this land be returned to agriculture.

In Cleveland, much has changed since the first awkward meetings with the banks.

“My conversations [with banks] now are totally different than two years ago,” Frangos said. “We’re very comfortable with them, though there are still a lot of hard feelings in the community with big banks.”

Streets throughout Cleveland remain scarred by the crisis. Once-­elegant homes sit empty and rotting, like ghosts of better times. A map in Frangos’s office marks the location of each foreclosure filing in recent years. No neighborhood has escaped untouched. With as many as 15,000 vacant and abandoned structures remaining and more on the way, the job at the current pace could take longer than a decade and cost $250 million for demolition and other expenses.

Frangos said he expects progress, not miracles.

“It is the root canal of community development that we’re doing,” he said, “and it’s not a quick fix.”

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