Meddling in Markets

What happens when the government meddles in markets?

This.

How Cleveland aggravated its foreclosure crisis

The city of Cleveland has aggravated its vexing foreclosure problems and has lost millions in tax dollars by helping people buy homes they could not afford, a Plain Dealer investigation has found.

The city provided mostly low-income buyers with down payment loans of up to $20,000 through the federally funded Afford-A-Home program, but did little to determine whether the people could actually afford to keep their homes.

That lack of oversight persisted for years, even as hundreds of loan recipients defaulted on mortgages, many within two years, the newspaper found by analyzing property and loan records covering the period between 2000 and 2007.

For example, nearly half of 584 homes sold by the top three for-profit companies that tapped into the program over the eight years have gone into foreclosure. More than one-third of those homes have sold at sheriff's sale or sit abandoned because banks did not take them back.

..... The loss in Afford-A-Home dollars from failed purchases from Cresthaven Development Corp., Rysar Properties Inc. and Pebblebrook Properties Inc. thus far totals more than $2.3 million.

Presented with the newspaper's findings, city officials acknowledged problems with the Afford-A-Home program and ordered tighter eligibility standards for buyers and sellers.

..... The program is primarily driven by companies that buy, renovate and resell houses. The companies typically seek city approval to sell properties using Afford-A-Home loans before renovations are completed. They are responsible for sending the buyers' Afford-A-Home applications to the city.

A Plain Dealer review of more than 50 Afford-A-Home files found borrowers who, according to their applications, earned as little as $15,000 a year when the city -- and mortgage lenders -- gave them loans.

One woman, according to a letter in her file, was homeless and living in a car with her children when she got $10,000 from the city. Another couple received food stamps and were jobless when they got an Afford-A-Home loan.

Through 2004, the first-lien mortgages for Afford-A-Home buyers typically came from local banks fulfilling federal requirements to lend money in poorer neighborhoods. The loans carried low interest rates.