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Trading  | July 23, 2017

Contrary to popular perception, not all of the money approved as part of the federal government’s emergency effort to save the American financial system in the fall of 2008 went to the big banks. Some of it – nearly $10 billion, all told – went to support the government’s “hardest hit” program, meant to help forestall foreclosures in 18 states.

And unsurprisingly, nearly a decade after the program was signed into law, government investigators are finding that much of this money was squandered by state governments. Money initially earmarked to help troubled homeowners struggling with underwater mortgages was instead spent on demolitions meant to boost prices of surrounding homes and help ward off crime in city neighborhoods. Except the money was often squandered by state governments, disproportionately robbing poor citizens in cities like Detroit of a program meant to save them from homelessness.

As the Detroit Metro Times reports, Detroit’s decade-long wave of tax and mortgage foreclosures has wiped out large swaths of the city’s neighborhoods as Wayne County continues to seize thousands of occupied homes a year. The city’s neediest homeowners were supposed to receive federal assistance to save their homes as part of the Treasury Department’s seven-year-old Hardest Hit Fund. But the State of Michigan squandered its money by adopting unnecessarily stringent requirements — according to a scathing audit issued in January by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).

In 2010, Michigan originally received nearly $500 million to provide loans to eligible homeowners who were facing tax or mortgage foreclosure. But the program, called Step Forward Michigan, rejected funding for about 5,000 Detroiters, while assisting more than 2,000 homeowners who earned at least $70,000 a year. That number eventually swelled to $761 million, and of that amount, half was committed to demolitions.

As a result, more than 80 percent of Detroiters making $30,000 or less a year were denied assistance to save their homes from tax or mortgage foreclosure. By contrast, the other 17 states with Hardest Hit Funds rejected 53 percent of homeowners making less than $30,000.

“Michigan and Ohio are among the states that have the most TARP dollars set aside, but also have some of the highest percentage of people turned down for the Hardest Hit Fund,” the audit reads.”

SIGTARP said Michigan’s high rejection rate “raises questions about whether these programs are as effective and efficient as they can be to reach those people who are the hardest hit.” But perhaps even more galling than the state government’s decision to turn away needy homeowners, is how Michigan instead became the first state in 2013 to demolish homes using money intended to save them.

As the paper explains, the idea was that demolitions would revitalize neighborhoods by increasing the property values of surrounding houses, attracting new homeowners, and reducing crime rates.

The plan was only marginally successful: A report commissioned by the Skillman Foundation and Rock Ventures found that each demolition in Detroit increased the value of adjacent homes by only 4.2 percent. Since 2013, Detroit has razed more than 10,000 blighted and abandoned houses using the federal funds. But in its criticism of Michigan’s program, the Treasury Department investigators didn’t focus on its effectiveness, or the unconscionable notion that Michigan decided to destroy homes instead of saving homeowners from being put out on the street.

Instead, Michigan and several other states’ decision to use the money for demolitions has come under fire because the federal government created no rules or controls to prevent fraud, waste, and abuse, according to a 2016 SIGTARP investigation.

Their negligence allowed the program to be riddled with waste and fraud, as contractors started raising their bids, and the bidding process for demolitions has become rife with bid-rigging and other tactics for fraud and abuse that were once famously associated with the American mafia. Soaring demolition costs in the state caught the attention of federal investigators, and now the Detroit Land Bank’s handling of the demolitions has become the subject of an ongoing federal grand jury investigation.

“The investigation found that demolition programs are ‘vulnerable to the risk of unfair competitive practices such as bid rigging, contract steering, and other closed door contracting processes’ because the “Treasury conducts no oversight” and therefore cannot determine whether the cost of demolition is ‘necessary and reasonable.’

The SIGTARP report added that “the vulnerability of the Hardest Hit Fund to fraud, waste, and abuse significantly increased with blight elimination, which Treasury could have mitigated, but did not.


In a report to Congress in April, a federal inspector slammed the state of Michigan for “skyrocketing demolition costs,” indicating that the average price to raze a house had increased 90 percent, from $9,266 to $17,643 by the second quarter of 2016.


The Detroit Land Bank’s handling of the demolitions has become the subject of an ongoing federal grand jury investigation. The Land Bank declined to comment for this story.”

Foreclosure experts question why Michigan, one of the states hardest hit by the Great Recession, would prioritize demolition over foreclosure prevention. Over the past decade, more than one in three homes in Detroit, a total of about 140,000, have been foreclosed because of unpaid taxes or mortgage defaults. Yet, requirements for the TARP relief program, a program that most homeowners probably aren’t even aware of, have been incredibly strict.

“Many of the houses now being demolished could have been saved if there wasn’t a lack of preventing foreclosures,” says Jerry Paffendorf, co-founder and CEO of Loveland Technologies, a Detroit-based property and mapping company. “If you don’t prevent foreclosures, you’re going to have more houses to demolish.”

Michigan’s eligibility requirements were unusually strict, according to the report. For example, the state declines assistance to homeowners whose income was not cut by at least 20 percent, unlike other states that don’t require a specific pay reduction to be eligible. Michigan also denies funding to homeowners whose unemployment benefits ran out more than a year ago.

“The Michigan requirement does not reward a responsible worker whose paycheck was cut more than one year ago and has exhausted unemployment benefits, savings, family help, or low-paying part-time work to pay their mortgage,” SIGTARP wrote in January 2017.

And while the Metro Times doesn’t bother asking why Michigan would favor contractors over poor urban homeowners, for anyone familiar with how statewide political campaigns are financed, the answer should be obvious. State contractors are often major donors to politicians. So, is it any surprise that politicians would favor their benefactors over a handful of voters?

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