One of the bloodiest battles was fought in Cleveland, in the Slavic Village neighborhood. Today the streets of Slavic Village show the scars of the battle -- destroyed homes, destroyed lives and vacant lots. From 2003 to 2007 houses were bought and sold at an alarming rate in this working class neighborhood. Houses were bought cheap and almost immediately sold at multiples of their true worth -- this is commonly called flipping. Most new owners ended up with with sub-prime mortgages that put them on the fast track to foreclosure. A local real estate gang had emerged, and was partnering with mortgage pushers (bankers) in California. They had the home sales process covered -- seller, broker, appraiser, banker, buyer -- all lined up to feed Wall Street a never ending supply of suspect sub-prime mortgages.
Anthony Brancatelli was the local Cleveland city councilman in Slavic Village. He could not believe what was going on in his neighborhood. He started tracking real estate activity in his neighborhood via a spreadsheet -- the same names and the same companies kept popping up. With the help of public records, soon Brancatelli and colleagues had the details on hundreds of real estate transactions which were compiled in a report by The Slavic Village Vacant and Abandoned Property Task Force.
Brancatelli's spreadsheet looks like this...
The network of sales transactions revealed in the spreadsheet are mapped below. A green line with an arrow shows "who sold to whom": seller --> buyer. The nodes/buyers hi-lited in pink ended up in foreclosure. As you can see, most buyers in these transactions ended up in foreclosure. Nodes in black are organizations, other nodes are individuals. For publication, we hid the actual names on the network maps below. The local Prosecutor's office got all names, all connections, all patterns, and all details.
Digging deeper into the spreadsheet and into public records, it was revealed who had business ties with whom. The network map below shows a grey link between two nodes if they show a business tie -- working together, owning property together, appear on LLC documents together, etc. The nodes hi-lited in blue where indicted in the first wave in the autumn of 2008. The nodes hi-lited in green were just indicted in 2009. All of the blue and green hi-lited nodes in this network map were big sellers of real estate in the first map [they had many outgoing arrows].
It is easy to see who will be swept up in the next wave of indictments, or who will be on the witness list in the upcoming trials.
Sadly, every major city probably has maps likes this waiting to be revealed. The mortgage meltdown did not just happen on Wall Street. It was a alliance between Wall Street and real estate speculators on Main Street. Cleveland has started rounding up these crooks thanks to efforts of local neighborhood residents and elected officials like Anthony Brancatelli.
Valdis, your research has many useful applications but right now I'm thinking of how it devastates the meme that the "mortgage crisis" is all about some irresponsible poor people who signed for loans they couldn't afford.
ReplyDeleteAt the most, they were bit players. But you may find that the bulk of the problem revolved around shadow buyers and non-arms-length transactions that had nothing to do with the common notions of causation.
Valdis, in 2004 we looked at a similar trend in events around metro Atlanta, then home to one of the highest default rates in the US. Similar to the circumstances in Cleveland, we quickly surfaced evidence of collusion between a small group of investors, a willing brokerage firm, and straw buyers willing to circulate the same properties through multiple purchasing cycles. The quick turnover escalated local pricing to an unsustainable level, at which point the fraudsters simply abondoned the impacted housing communities. Honest buyers were left with mortgages that had dropped hundreds of percentage points in value.
ReplyDeleteThis instance was a precursor to the broader implosion that could be traced to well-positioned, influential, and often unregulated executives. We found examples in New Jersey, elsewhere in Georgia; frankly, anywhere the housing downturn was quick to take root. Identifying these linkages helps to illuminate a potential catalyst to the broader real estate meltdown.
Good stuff, Valdis.
ReplyDeleteThere were similar reports in the Chicago Tribune over the last couple of years. *sigh*
ReplyDeleteWhy isn't it easier to catch these bums in advance, instead of AFTER they've done their damage.
Thanks a lot for providing so usefull information here. I have shared with my coleagues in Brazil and other places. Best. Cida Medeiros São Paulo, Brazil. http://med.blog.uol.com.br
ReplyDeleteThis is wonderful stuff. It shows up the argument that this was caused by poor people buying houses, to be sure. But it also shows up the argument that the blame goes wholly to a limited sector, specifically. One thing about the network that created the crisis is that it involved a lot of players, widely dispersed through the county, from a variety of backgrounds. Michael Lewis's article in Portfolio showed how compartmentalized the participants in these networks were. (http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true). Gillian Tett's research on the people who created the credit instruments is equally compelling, http://www.npr.org/templates/story/story.php?storyId=104130944&sc=emaf&sc=emaf&sc=emaf. What's most fascinating to me is how these networks are so deeply integrated into everyday life and makes me want to think about the mechanisms of incentive and oversight that might help attenuate their (invetitable?) development.
ReplyDeleteDuring my time (1993 to 1999) as President of {the now defunct} South East Clevelanders Together I worked to promote community organizing in Ward 12 {Slavic Village} to address quality of life issues {such as crime watch} in an aggressive and systematic manner. During that time, Ward 12 was represented by current City of Cleveland Director of Building and Housing Edward W. Rybka and the former Broadway Area Housing Coalition nka Slavic Village Development headed then by current Ward 12 Councilman Anthony Brancatelli. Needless to say, it did not take long for our organization to clash with the former Councilman's housing group. Their primary objective was to build and rehabilitate housing without any real regard for the other issues affecting the residents and business owners. They too took the worst houses and put people in them who had no ability {or desire} to pay. In fact, once they completed their first rehabilitation on any given street that house soon became a haven for various social malcontents. Once the "single apple spoiled the barrel" the remaining law-abiding residents moved thus adding further to the catastrophe. Now the Cleveland City Council wants to extend the boundaries of Ward 12 beyond the current boundaries of Ward 15 which {as luck would have it} would include my residence. Councilman Brian Cummins has been a fine representative for Ward 15 but as for Ward 12 Councilman Anthony Brancatelli; he will do for Ward 15 {Old Brooklyn} was he has and will continue to do for Ward 12 {Slavic Village}.
ReplyDeleteJoe Bialek
Cleveland, OH