How Cleveland aggravated its foreclosure crisis
By Mark Gillispie, The Plain Dealer
December 13, 2009, 5:05AM
View full sizeRachel Rafail is holding her dog "Flavor" on E. 169th St. in Cleveland. In 2005, Rafail bought a home through Cresthaven Development and the city of Cleveland's Afford-A-Home program , but 38 months later it went into foreclosure. Related content
Tale of a house bought again and again: City loans helped developer to sell 1 house 3 times
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.
What makes that so costly to taxpayers is that the city has virtually no chance of recouping its investment once a property is sold at sheriff's sale.
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.
They also suspended Cresthaven from the loan program, pending an investigation of discrepancies in paperwork related to two sales. "Quite frankly, I'm not happy with the way this program has been managed on a number of fronts," Chris Warren, the city's chief of regional development, said in an interview. "We're not helping people if they don't have the ability to pay. We're hurting them."
The U.S. Department of Housing and Urban Development, which provides the money for Afford-A-Home loans, will launch its own review of Cleveland's program, said agency spokesman Brian Sullivan.
"This administration is committed to making certain that federally funded home-buyer assistance programs support sustainable homeownership," Sullivan said in a statement. "When done well, we know that these programs work."
A national study released last year by HUD shows foreclosure rates on properties sold with similar taxpayer-backed assistance varied between 5.5 percent 2001 and 1.7 percent in 2005. Cleveland's Afford-A-Home program was not included in the study.
Buyer says approval took 20 minutes
In the spring of 2005, Rachel Rafail was desperate to move her family away from a bloody battle over drug turf that had erupted in Cleveland's St. Clair-Superior neighborhood.
Rafail, 38, said she answered a classified ad for rental properties placed by Collinwood-based Cresthaven Development Inc., and recalled being told by a Cresthaven representative that, despite what the ad said, the company doesn't rent houses. It sells them.
Rafail said she gave a saleswoman her Social Security number to run a credit check and got a call back 20 minutes later telling her she had been approved for a mortgage.
"I couldn't get a loan for a new car, but they're going to give me a loan to buy a house?" Rafail said in an interview. "I thought that was a little bizarre."
Rafail ended up buying a home in North Collinwood from Cresthaven in May 2005 for $113,900 with a loan from subprime lender New Century Financial Corp. and a $5,000 second mortgage from the city of Cleveland.
But nothing worked out the way Rafail had hoped.
She struggled to make her mortgage payments from the start. And in July 2008, 38 months after she bought the house, a foreclosure was filed. Rafail promptly filed for bankruptcy protection.
Cresthaven co-founder Juraj Dedic said Rafail's claim that she received loan approval in 20 minutes from a company representative would have been "impossible."
-- Mark Gillispie
Loans to encourage homeownership In the spring of 2005, Rachel Rafail was desperate to move her family away from a bloody battle over drug turf that had erupted in Cleveland's St. Clair-Superior neighborhood.
Rafail, 38, said she answered a classified ad for rental properties placed by Collinwood-based Cresthaven Development Inc., and recalled being told by a Cresthaven representative that, despite what the ad said, the company doesn't rent houses. It sells them.
Rafail said she gave a saleswoman her Social Security number to run a credit check and got a call back 20 minutes later telling her she had been approved for a mortgage.
"I couldn't get a loan for a new car, but they're going to give me a loan to buy a house?" Rafail said in an interview. "I thought that was a little bizarre."
Rafail ended up buying a home in North Collinwood from Cresthaven in May 2005 for $113,900 with a loan from subprime lender New Century Financial Corp. and a $5,000 second mortgage from the city of Cleveland.
But nothing worked out the way Rafail had hoped.
She struggled to make her mortgage payments from the start. And in July 2008, 38 months after she bought the house, a foreclosure was filed. Rafail promptly filed for bankruptcy protection.
Cresthaven co-founder Juraj Dedic said Rafail's claim that she received loan approval in 20 minutes from a company representative would have been "impossible."
-- Mark Gillispie
Afford-A-Home has been around since the mid-1990s and is designed to not only encourage homeownership but also the rehabilitation of the city's many rundown houses.
The loans are second mortgages offered to low- and moderate-income home buyers who, based on family size, earn less than 80 percent of the median income for Greater Cleveland. Loan amounts run as high as $20,000, although most are $10,000.
Loan applicants also must be able to obtain a first mortgage.
The loans become interest-free if buyers remain in the homes for five years and do not have to be paid back until the properties are sold. The loans are forgiven completely after 30 years.
Sellers must make at least $25,000 in repairs to what had been a vacant property. Builders typically do a complete renovation to a property, including new roofs, kitchens, bathrooms and mechanical systems.
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.
After 2004, however, an increasing number of Afford-A-Home buyers received higher-cost, subprime mortgages from lenders that have since gone out of business.
Loan recipients often default
Many of the Afford-A-Home buyers who defaulted on their mortgages bought their homes from Cresthaven Development Inc. or two other entities with ties to the company.
Collinwood-based Cresthaven has sold the most properties with Afford-A-Home loans since 2000. The company has received more than $4 million from the program since 2000 and another $1.6 million from other federally funded building programs administered by the city.
Between 2000 and 2007, nearly half the 305 properties sold by Cresthaven with Afford-A-Home loans have gone into foreclosure. One-third of those properties sold at sheriff's sale or were not taken back by banks.
Woman says records far overstate her stake in purchase of home
Tomika Tate was skeptical about her chances of buying a home in the spring of 2006, when a representative from Cresthaven Development began showing her properties.
Tate, 35, said she had gone through a bankruptcy and foreclosure on a house she had previously owned and her credit was shaky. But she was pregnant at the time and needed to find a bigger place to live.
"I was curious at the very beginning how they could pull it off," she said.
But the deal went through, and Tate bought a house on Clearaire Avenue in Cleveland from Cresthaven in June 2006 for $107,000.
A settlement statement on file with the city of Cleveland shows that Tate received a $10,000 Afford-A-Home loan, provided a $1,000 deposit and made a down payment of $7,499.
But Tate said in an interview that the only money she provided was a $200 deposit, not the $1,000 listed on the settlement statement, and that she did not make a $7,499 down payment.
"I wish I had that kind of cash," she said. "Because if I did, I wouldn't have bought a house off St. Clair."
Tate lost her job not long after she bought the home and Wells Fargo Bank foreclosed on the property in June 2007. The house has since sold at sheriff's sale, meaning taxpayers will never recover the $10,000 Afford-A-Home loan.
Cresthaven President and co-owner Juraj Dedic said in a statement: "To the best of our recollection, the $1,000 deposit included her $200 down payment plus $500 she paid for insurance and $300 for the appraisal."
Tate insisted that she only provided $200.
-- Mark Gillispie
The city's loss on those properties is $1.2 million. Tomika Tate was skeptical about her chances of buying a home in the spring of 2006, when a representative from Cresthaven Development began showing her properties.
Tate, 35, said she had gone through a bankruptcy and foreclosure on a house she had previously owned and her credit was shaky. But she was pregnant at the time and needed to find a bigger place to live.
"I was curious at the very beginning how they could pull it off," she said.
But the deal went through, and Tate bought a house on Clearaire Avenue in Cleveland from Cresthaven in June 2006 for $107,000.
A settlement statement on file with the city of Cleveland shows that Tate received a $10,000 Afford-A-Home loan, provided a $1,000 deposit and made a down payment of $7,499.
But Tate said in an interview that the only money she provided was a $200 deposit, not the $1,000 listed on the settlement statement, and that she did not make a $7,499 down payment.
"I wish I had that kind of cash," she said. "Because if I did, I wouldn't have bought a house off St. Clair."
Tate lost her job not long after she bought the home and Wells Fargo Bank foreclosed on the property in June 2007. The house has since sold at sheriff's sale, meaning taxpayers will never recover the $10,000 Afford-A-Home loan.
Cresthaven President and co-owner Juraj Dedic said in a statement: "To the best of our recollection, the $1,000 deposit included her $200 down payment plus $500 she paid for insurance and $300 for the appraisal."
Tate insisted that she only provided $200.
-- Mark Gillispie
And Cresthaven doesn't just sell the properties it acquires. It also markets properties for Pebblebrook Properties Inc. and the nonprofit Collinwood and Nottingham Villages Development Corp., a city-subsidized community development agency.
Afford-A-Home foreclosure rates for those two entities are higher than Cresthaven's. Rec-
ords show that 58 of the 94 properties Pebblebrook sold with Afford-A-Home loans between 2000 and 2007 have gone into foreclosure. It's nine of 14 for Collinwood and Nottingham.
Pebblebrook owner Larry Kupps and Collinwood and Nottingham Executive Director Yolanda Anderson said they did not know why the foreclosure rates for their Afford-A-Home sales were so high.
Kupps said he doesn't typically meet buyers until he gives them the keys to the homes they have bought from him. Cresthaven, he said, arranges the financing and title work for his buyers.
A Cresthaven spokesman said the company recommends mortgage lenders and title firms to buyers.
Rysar Properties, which does not have a business relationship with Cresthaven, also had foreclosure numbers on Afford-A-Home sales that company President Ken Lurie acknowledged were "astonishing."
Records show that 73 of the 185 homes Rysar sold with city help have had a foreclosure filing, a rate of more than 39 percent.
"It's indicative of the people who are buying from us," Lurie said. "It's not because we did something wrong."
By comparison, the nonprofit Cleveland Housing Network has had a foreclosure rate of 21 percent for the 112 homes it sold between 2000 and 2007 with Afford-A-Home help.
Company defends business practices
Cresthaven was formed in 1994 by lifelong buddies Juraj Dedic and Nikola Sabljic. Dedic had previously worked for another home rehab company, Res-Com Builders, which closed after its owner, Dave Goda, went to federal prison on bank fraud charges.
Goda was hired by Cresthaven after leaving prison. Dedic said Goda is responsible for marketing and property acquisition. Dedic would not allow Goda or any other Cresthaven employee to be interviewed by The Plain Dealer.
Dedic said he was not aware of the foreclosure rate for homes Cresthaven had sold with Afford-A-Home loans, but agreed that the rate is high. He added that the responsibility for approving and issuing loans rests with banks and mortgage lenders, not Cresthaven.
"It's alarming, actually," he said. "We try to promote sustainable homeownership. That's why we participate in Afford-A-Home. It gives them [buyers] help."
Dedic also expressed surprise when told that Ohio law requires real estate agents to be licensed if they are selling properties for someone else.
None of Cresthaven's sales representatives, independent contractors paid on commission, has a real estate license, he said.
Dennis Ginty, a spokesman with the Ohio Department of Commerce, said violations of the law are first-degree misdemeanors, but that the state usually deals with them as a civil matter.
Dedic said last week that Cresthaven sales representatives are "applying for real estate licenses whether or not they need them to conduct the business of the company."
But the issue that resulted in Cleveland suspending Cresthaven from the Afford-A-Home program had nothing to do with foreclosure rates or real estate licenses.
City officials instead acted after The Plain Dealer discovered settlement statements -- the official records of real estate transactions -- that give conflicting accounts of how much money buyers contributed when they bought homes from Cresthaven using Afford-A-Home loans.
Dedic said his company had nothing to do with the conflicting statements. He said the papers were prepared by a title company hired by Cresthaven to serve as an escrow agent and prepared closing documents.
"We've been in the business a long time and we try to do the right thing, and we continue to do so," he said. "You're making us out to be the villain and we really aren't." Dedic said he has asked the city why the company has been suspended from Afford-A-Home program.
"Cresthaven Development has an excellent record," he said. "And, if we have any shortcomings, I would like to correct them."
Complaints raised about Cresthaven
Last year, Cresthaven drew the attention of a local activist group, Empowering and Strengthening Ohio's People, a group that tries to help homeowners who are facing default on their mortgages.
At a meeting with representatives from Cresthaven, ESOP and the city, buyers said that they had been persuaded to buy homes after answering ads for rental properties and that the company had not responded to complaints about workmanship on their homes.
Dedic agreed to be more responsive to customers and to stop marketing homes for sale as rental properties. A copy of the agreement was posted on ESOP's Web site.
But ESOP Executive Director Mark Seifert said in an interview months later that the problems with his Cresthaven clients, most of whom received Afford-A-Home loans, make him question the validity of the city program.
"It sounds like it was easy to peddle loans because no one was looking at it," Seifert said.
City officials vow to make reforms
Cleveland is regarded by many as the epicenter of the nation's foreclosure crisis, a meltdown blamed on a combination of high-risk lending, investors willing to buy billions of dollars of high-risk loans packaged as securities, rampant mortgage fraud and financially unsophisticated buyers.
The crisis has left Cleveland with thousands of houses abandoned and deteriorating and has cost the city millions of dollars, including lost taxes from devalued property and money spent on demolitions and board-ups.
So bad is the city's foreclosure plight that Mayor Frank Jackson last year filed an unsuccessful lawsuit accusing 21 investment banks of irresponsibly buying and selling high-interest home loans. Those loans, the city argued, resulted in widespread defaults and blighted neighborhoods.
But when presented with the newspaper's foreclosure rates for Afford-A-Home loan recipients, city officials acknowledged they are at least partly to blame for their own problems and promised reforms.
As part of tightening controls, the city will now determine whether prospective borrowers can actually afford the homes they are buying.
Warren, the city's regional development chief, said that includes making judgments about a borrower's ability to pay back a loan, the value of the property compared with the amount of a loan and the source of a buyer's down payment.
Those reforms are applauded by Sullivan, the HUD spokesman.
"We're encouraged that Cleveland is taking a more active role in running its program, and appreciates that it's not enough to simply get these families into homes, but that it must make every effort to keep them there."
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