Inland Empire ‘Red Team' Anticipates 350,000 Potential Foreclosures

In August of 2008, Riverside County Supervisor John Tavaglione and city of Riverside Mayor Ron Loveridge convened a time-sensitive "Red Team," comprised of representatives from the private and public sectors to identify and to address the housing issues in the sub-region. What motivated the creation of such a team, and what did local officials hope would come from the effort?

Riverside County's economy is strongly linked with housing, and growth projections suggest that this will be a continuing trend, specifically in western Riverside County, far into the future. The recent surge in home foreclosures in the Inland Empire has resulted in a related significant decline in new home construction. There are probably thousands construction-related jobs that have been lost or are in jeopardy of being lost as long as foreclosed homes flood the market in this region. Through the Red Team effort, local government leaders are partnering with business leaders to get an understanding of the severity of these issues and to determine if there are strategies at the local levels to improve the economic standing of the subregion, in addition to what may or may not be occurring at the state or federal levels.

Dr. John Husing stated at the first Red Team meeting that " the Inland Empire is in a deep recession, and we need to take a hard look at the issues so that we can rebuild our economic competitiveness." Could you elaborate on Dr. Husing's findings?

We asked Dr. Husing to do two things. First, we asked him to help us gain an understanding of the magnitude of the economic slowdown as it relates to the number and pace of foreclosures in the Inland Empire. Second, we asked him to suggest strategies that might be considered for local action. Regarding the first assignment, Dr. Husing's findings were astounding. For example, there were approximately 360,000 homes traded during 2004 through 2007; virtually all of these properties are now "upside down," meaning that they are now worth less than what is owed on them. This represents about one-third of all the homes in Riverside and San Bernardino counties. Of these 360,000 homes, approximately 126,000 have received notices of default; and the remaining 254,000 could be in that queue once their mortgage rates, which are most likely tied sub-prime and adjustable loans, adjust in the next year or two. Recognizing that a host of code enforcement and safety issues arise from abandoned homes, the impacts from this quantity of homes going into foreclosure creates numerous issues related to maintaining the quality of local neighborhoods.

Husing's report warns us that, based on similar but less drastic circumstances in the early 1990s, many of these foreclosed homes were purchased by investors, not owners, who converted these homes to rentals, which further impacted local neighborhoods and schools and prolonged economic recovery.

After providing this information as context, the report suggests a number of strategies that local governments could consider that include, but are not limited to, the improved identification of abandoned properties; increased attention to maintenance and code enforcement; local acquisition and disposition of foreclosed properties to keep homes in owner-rather than investor/speculator-hands; and significant temporary local, regional, and school mitigation fee reductions to reinvigorate the new home construction market.

Husing's identification of 350,000 homes potentially at risk of foreclosure was a real eye-opener. The first thing that came to mind was the question of whether local jurisdictions are prepared to address this potential surge in abandoned homes. As these homes in our subregion become vacant or abandoned, they rapidly begin to deteriorate. Abandoned homes can become magnets for crime and bring down the value of the remaining occupied homes in neighborhoods.

Dr. Husing's report stressed the need for jurisdictions to have sophisticated methods for the early identification of troubled properties and to develop ordinances and code enforcement mechanisms that work to maintain them so they don't further deteriorate local neighborhoods. Working with WRCOG's jurisdictions, we will get an idea of how these matters are being handled at the local levels and identify common and "best practices" that can be used by our members.

A more complicated strategy, and one that would need to be implemented over a substantial period of time, involves the identification of significant funding sources that can be packaged so that local jurisdictions can discuss with lenders the prospect of purchasing foreclosed homes en masse. These homes would be repaired as needed and then sold on a priority basis to home-buyers rather than speculators. There are some funds provided locally to the counties and entitlement cities that can be used for this purpose, but they are not in amounts sufficient enough to make a significant impact for this strategy to succeed regionally.

The need to provide financial counseling assistance to homeowners verging on losing their homes was also emphasized. Red Team banking participants estimate that 25 percent or more of these loans can be reconfigured to keep owners afloat on their mortgages. But right now there is a real need to bolster agencies that exist to provide such assistance but are woefully underfunded and understaffed.

What assistance would Inland Empire leadership like to have from Washington?

Like everyone else, local government leaders are anxious to see how, when, and in what amounts any federal "bailout" funds will be allocated. But it seems that many, if not most, people do not have a clear understanding of the nature or mechanics of how the current federal bailout of $700 billion is going to work. There's no telling what our place in line for distribution of these funds would be. Clearly, we need to engage and work closely with our Congressional representatives and elected delegates to create a message for Washington that imparts information about the critical economic importance of addressing foreclosure issues in the Inland Empire.

Foreclosures portend a very serious financial deficit for local government. How seriously is this prospect being taken?

It's just one of many fiscal issues that are impacting local finances. Because negative fiscal news is being presented at so many different levels, this is probably not being addressed or thought about to the extent it could be. There is a surge of requests for revaluing properties by residents who want to see their property tax bills reassessed to reflect recent declines in home prices. I don't know if the actual fiscal impacts of this on local governments are yet known, but we will look forward to receiving a report from the Riverside County Assessor at the February 2009 meeting of the WRCOG Executive Committee in this regard. Foreclosures and related losses of revenues are among the many financial blows that cities, particularly those in rapidly developing subregions like WRCOG, will need to address, adjust to, and endure.

Elaborate on the composition of the Red Team, what role its members will play going forward, and how much public participation there has been in the process.

The composition of the Red Team is pretty diverse. It was intended to be fairly small in number but inclusive of the range public and private sector interests that are interested in and could potentially have a role in implementing identified approaches and helping the region climb out of this economic crisis. It includes representatives from universities, the public sector, builders, chambers of commerce, individual business owners, and banks. The Red Team's recommendations will be communicated through the WRCOG committee process, which will include review by the sub-region's city managers, county executives and regional water district general managers. That group will forward its recommendations to the WRCOG Executive Committee, which includes elected officials representing all of WRCOG's members. Depending on what the nature of the Executive Committee's actions are on the recommendations, I would expect that the Red Team could be expanded and tasked with providing technical assistance as individual strategies are implemented.

TPR featured an interview of Mayor Loveridge in May of 2006 with the headline, "Riverside Emerges as the Inland Empires Economic Powerhouse," The interview focused on infrastructure deficits brought by rapid population growth. Is infrastructure still an issue today?

Absolutely. Western Riverside County has been the fastest growing area in California for the last several years, and even with the economic slow down it will remain the state's nadir for growth for the next two decades. These growth-related economic issues, both the good and the bad, are magnified in areas like ours. Notwithstanding this current situation, if you stay focused on the long-term, our region's growth-related challenges and opportunities remain the same. The economic situation in our sub-region, particularly given the heightened sensitivity to the ebb and flow of housing, serves notice to us that our sub-region still lacks diversity in the economy that would perhaps have helped us to better withstand this crisis. As we strive to address the housing issues that currently confront us we must also be mindful of the need to increase efforts to identify and develop additional economic niches and industries for Riverside County's future.

One recommendation made by the Red Team report that has proven contentious is development and school fee reductions. How does that discussion frame the issue and work itself out?

Dr. Husing suggested that local jurisdictions consider significant temporary reductions in local and regional development impact fees (up to 80 percent reductions) and school fees (40 percent reductions). Husing suggests that such reductions could serve to jumpstart or reinvigorate the new home construction market, and it has been one of the recommendations that has triggered the most response and reaction. Some see it as something that local elected officials can control and implement on a temporary basis to help bring construction costs down to levels where new homes can again become competitively priced. Others suggest that significant reductions in fees could create legal issues given the fact that such fees are levied as a means to mitigate the impacts of new development on infrastructure. Many view it as a "non-issue" until the tens of thousands of foreclosed homes are transacted off the market. In other words, the new home building market will stay depressed until the foreclosures are moved. It's a real contentious issue, and there are no easy answers.

We do this interview the day before the Governors' Climate Change Summit and a few months before the Verdexchange's Green Marketmakers Conference in Downtown Los Angeles. Has the drop in oil prices and real estate market values chilled conversation about climate change?

It probably has, and that is unfortunate. Historically, our nation's foremost environmental advances come at times when the economy is strong. When we start to see a faltering and weakening economy like is currently the case, environmental issues and related regulations tend to take a back seat. For the most part, we continue to view economy and environment as being mutually exclusive, and as such we make decisions that may be only in the short-term interests of the economy rather than considering the long-term interests of both. It's shortsighted, but is nothing we haven't seen before.

With respect to AB 32, jurisdictions, COGs, and transportation commissions are probably paying the most attention to the portion of CARB's Scoping Plan that addresses the transportation and land use component. CARB is currently calling for a 5 million metric ton greenhouse gas emission reduction via measures that involve connections among transportation and land use. SB 375 is the vehicle intended to achieve these emissions reductions, and currently jurisdictions and agencies are trying to gain an understanding of the mechanics of how this bill will be implemented.