The East Side Organizing Project (ESOP) has a creative way of getting a predatory lender’s attention—dumping 2,000 small plastic sharks on the lawn of the lending company’s top executive.

The Cleveland-based neighborhood group, which works with borrowers to document the most egregious cases of subprime lending gone bad, typically requests meetings with area lenders to negotiate settlements and ask the companies to change some of their more predatory practices.

If the lender ignores ESOP’s request, the sharks go marching in. “I hear they play havoc with lawnmowers and they’re a real pain in the ass to get out of gutters,” said Mark Seifert, ESOP’s executive director. “That usually results in us getting a meeting.”

ESOP has thrown a lot of sharks lately, thanks to a rash of foreclosures that have spread like a cancer throughout the city. And the subprime meltdown has yet to reach its boiling point.

Many subprime mortgages made in 2006, when the number of homebuyers taking out such loans peaked, have yet to hit the reset point on interest rates. The number of those adjustable-rate mortgage loans? Nearly two million. In just the first three months of this year, foreclosure filings hit 430,000, the highest total since data provider RealtyTrac began tracking the figures in 2000.

The Center for Responsible Lending projects that between 16 percent and 20 percent of these subprime mortgage borrowers in 40 U.S. states eventually will have their homes foreclosed. That percentage is even higher—21 percent to 24 percent—in Arizona, California, Hawaii, Maryland, Nevada, New York, Vermont, and Virginia. Yet the situation is perhaps most severe in parts of the Midwest where predatory lending combined with massive job loss has left entire neighborhoods looking like ghost towns.

What does the fallout mean for the affordable housing industry? It’s a complex issue, industry watchers say. If people experience foreclosures and their incomes aren’t low enough to qualify for federal subsidies, it will be difficult for them to find decent housing with their scarred credit histories, according to Doug Bibby, president of the National Multi Housing Council.

“I have had many apartment owners tell me they turned down a renter because the renter had a low credit score, and then the renter went out and bought a house,” Bibby said. “It’s very unfortunate, and it’s very hard to make predictions on how bad the fallout is going to be.”

Whole swaths of cities will be affected as more homeowners default on high-cost loans. A majority of those foreclosures are in census tracts with a high concentration of minorities.

“Some neighborhoods are expected to lose 70 percent of their housing stock,” said John Taylor, president of the National Community Reinvestment Coalition (NCRC). “These are mortgage sinkholes. The predatory lending issue may be the thing that pushes us to a recession.”

Those involved in homebuilding and the apartment industry should be concerned, he said, because the subprime fallout likely will halt new home construction and add a lot of rental supply to the market.

A plague of vacant homes

Cleveland has been hit particularly hard—13,610 homes were foreclosed last year in Cuyahoga County alone, more than quadruple the 3,345 foreclosures filed in 1995, and up almost 25 percent from the 9,751 filed in 2004. That’s one foreclosure for every 96 people in the county. The U.S. Department of Housing and Urban Development’s stock of foreclosed homes numbers 28,338 nationally, and of those, 3,117, or about 9 percent, are in Ohio.

“You can’t go down any street in the city of Cleveland and not find at least one or two vacant houses,” said Seifert of ESOP. “There are a lot of streets where there are more vacant houses than occupied.”

Predatory lending practices, a weak local economy, and the cooling housing market have conspired to make Cleveland a poster child for the foreclosure epidemic. It doesn’t help that Ohio is one of two states whose consumer protection laws don’t apply to mortgage lending—and also one of two states where appraisers don’t have to be licensed.

About 1,200 new foreclosure cases are filed monthly in Cuyahoga County, where Cleveland is located, according to County Treasurer James Rokakis. Based on the current rate, he believes that 16,000 more foreclosures are in the cards for the county in 2007. “It could conceivably be higher because this is the year that many of those explosive ARMs, those sub-prime loans that are adjustable rate, are going to be reset,” he said.

Rokakis estimates that 225,000 subprime mortgages will be reset in Ohio in 2007, adding to the state’s woes. “The impact has been devastating,” he said, citing census data that shows the county suffered the sixth-worst population decline in the nation, as it lost about 16,000 people between July 2005 and July 2006. Four of the other five counties with the largest population declines were in Hurricane Katrina’s path.

The creeping cancer

When foreclosures reach a critical mass, every property owner is affected. Multifamily properties, too, are being swept into the whirlpool of the biggest homeownership crisis of the decade.

The communities most affected likely will be those transitional neighborhoods where the future was just starting to look a bit brighter.

“If all the other housing stock is worth less and the neighborhood is less desirable, the owner of a multifamily development is also in a worse position,” said Rokakis. “If we could use this crisis to refocus our energies into the need for quality rental housing, there might be an upside. But it’s going to require stabilizing neighborhoods first, and that’s not going to be easy.”

Cleveland’s neighborhoods quickly are becoming blighted, said Mark Wiseman, director of Cuyahoga County’s Foreclosure Prevention Program. Once a house is vacant, scavengers typically steal all usable materials including siding, wood, and copper pipes. “Once that happens, that’s the point of no return—when it becomes more expensive to fix the house than it is to knock it down and put up another house,” said Wiseman.

The domino effect is apparent. The more vacant houses there are on a street, the lower the property values, which fall exponentially with each new foreclosed home. What’s more, “the foreclosure epidemic has bled profusely into the suburbs as well,” he said. “It just oozes outward.”

Cuyahoga County’s Foreclosure Prevention Program, which began in March 2006, funds and coordinates nine agencies that serve as liaisons between the borrower and the lender in loss mitigation cases.

Fighting the disease

Several lenders have taken steps to help stem the tide. “The lending industry needs to recognize that the cost of implementing two million foreclosures is going to cost a lot more than working with borrowers to restructure the loans,” said NCRC’s Taylor. “I think the No. 1 solution would be trying to keep a family in their home.”

Freddie Mac announced it would buy as much as $20 billion in mortgages to help borrowers with high-priced loans. Fannie Mae is developing new types of loans to help homeowners avoid default. Bank of America said it would work with lending institutions and borrowers.

Another option to avoid blight could be to arrange for foreclosed homes to become community assets, said Kevin Stein, associate director with the California Reinvestment Coalition.

“Foreclosure is going to be a reality for a lot of people,” Stein said. “The owner of the note would have to work with the group so that it could take ownership of the house. It could be turned into affordable housing. And that’s better than a boarded-up house.”

To be viable, such an approach would take a concerted effort on the part of lenders.

“There’s a big appetite for cooperation on the part of lenders,” said Taylor. “I said, ‘appetite.’ How much they want to bite off and chew is another matter. Everybody wants the government to bail folks out. There shouldn’t be a bailout. The lending industry should eat this.”

The lack of affordable housing is a key reason for all the mess, said Bibby of NMHC. Richard F. Syron, CEO of Freddie Mac, has said that policy makers should consider whether land-use policies and zoning restrictions are too strict to allow more affordable housing.

“I warned about this two years ago to the week at a press conference,” Bibby said. “About how all this crazy, reckless lending was going to come home to roost. And now it’s coming home to roost.”

David and Goliath

Community groups are also playing a role in helping to stem the tide of foreclosures.

ESOP serves as a liaison between the lender and the troubled borrower in attempting to stave off foreclosure through loss mitigation negotiations.

“Sometimes all we can do is give the homeowner $5,000 to help with moving expenses,” Seifert said. “But at least we’re getting them out of an unaffordable situation.” ESOP brokered about 450 such workouts last year, and expects to handle between 500 and 600 this year.

The lack of oversight of appraisers has been the cause of of the most common complaints the group has seen—overvalued homes. ESOP just counseled a woman who bought her house for $149,000, and is now trying to sell it for $85,000—with no takers. “I’ve seen cases where the picture of the house on the appraisal document was not even the same house being appraised,” Seifert said.

Mariah Crenshaw has lived in the Mount Pleasant area of Cleveland for 37 years, and is trying to stop her neighborhood from becoming a ghost town. “There are 38 foreclosed homes within a one-block radius of my house,” she said. “They’re doing more damage than the drug dealers did.”

Crenshaw, a victim of predatory lending practices, now helps counsel predatory lending victims through her local Association of Community Organizations for Reform Now (ACORN) organization while awaiting an outcome on her case. ACORN, like ESOP, meets with local lenders to push for changes to predatory lending practices.

When she was first served foreclosure papers, Crenshaw considered packing it all in—after all, how can one person fight the legal resources of a large lending institution once foreclosure papers are served?

“When I first dealt with them, I was so overwhelmed that I went to the store and got boxes and began boxing my things up,” she said. But she decided to stay in her home while her court case gets resolved and fight, a David to the company’s Goliath. “And you remember what happened to Goliath, right?” asked Crenshaw. “All it took was one little pebble to bring him down.”