Creative Destruction

On April 2, housingwire.com released an article entitled Creative Destruction.

Creative Destruction

The average cost for demolishing a dilapidated house ranges between $7,500 and $10,000, but neighbors often pay Douglas Fernbacher and his crews with pizza.

The Chicagoan with a Miami tan has spent 14 years tearing down everything from single-family homes to Kmarts. In years past, when a house came down, a larger one took its place soon after. He brought in dirt from nearby developments to fill the foundation hole his crew excavated.

But today there are no nearby developments. Since the housing crash in 2007, there is no clearer physical representation of the busted housing bubble and the remains of its artificially inflated structure than a demolition site.

Fernbacher’s company GSPS is a contractor for several property preservation firms. All they do is tear down homes. They are the last resort for many communities all over the country overrun with blight.

Starting in 2011, however, cities made the first tentative steps toward clearing away the excess. There were more than 18.7 million vacant homes in the U.S. last year, according to the Census Bureau, down from more than 18.9 million in 2010.

But much more will need to be done to address the problem of blight. Vacant properties increased every year over the last decade from the 13.6 million empty homes counted in 2000. Between 2005 and 2008, as the real estate market began to overheat and record-level foreclosures left many properties abandoned, vacancies jumped from 15.8 million to 18.7 million homes.

In 2011, nearly 76% of these properties were considered vacant year-round.

“I think there’s a collective conscious coming here, and I think that people are starting to realize that we have to get serious about this,” Fernbacher says. “We have to move these houses. And the only way to do this is to remove them.”

One of Fernbacher’s clients is Safeguard Properties, the Ohio-based property preservation firm. Its founder Robert Klein is taking Fernbacher around the country this year from conference to conference on a demolition crusade, to convince cities to pursue the clean slate their hardest hit communities crave.

“Every single city, I don’t care where it’s at, has these blighted communities,” Klein said. “They are a cancer.”

Their first opportunity is a quiet place left even more silent after the housing downturn. In Slavic Village, a community located in Cleveland, Ohio, home prices plummeted from nearly $150,000 during the housing boom to roughly $39,000 today, according to data from Altos Research.

The 29 properties sold there in early March spent an average 550 days on the market, Altos said.

Safeguard and GSPS will start a pilot program this year to demolish 2,200 Slavic Village homes that are considered beyond saving. But it isn’t as simple as that.

TEARING DOWN THE STIGMA
Slavic Village was spotlighted in the Alyssa Katz book “Our Lot” as a prime example of subprime predatory lending practices.

Barbara Anderson was one of the first black homebuyers in Slavic Village. According to her Senate testimony in 2007, a broker approached her with a refinancing proposal and approved her for a loan at 8.5% through the now-defunct Conti Mortgage. Within four years, the rate jumped to 14.5%, pushing her monthly payment higher by nearly 60%. Her loan was sold 15 times over that time. Today, the result is apparent. Slavic Village is a ghost town.

Klein with community leaders and the local city council president in February with their solution.

Safeguard placed all Slavic Village properties into three categories. Owner-occupied homes fall into the first category, homes in need of rehabilitation but vacant are the second category, and the third category consists of ones that need to come down.

Most of the properties sit in either of the first two categories, but any progress waits on tearing down the ones in category three.

“No developer will come in when you have five occupied properties, five vacant properties and one that needs to be demolished. Those five properties are affordable, and can be rehabbed fairly cheaply. But nobody will come in until you’ve demolished that one property,” Klein said. “What we’re doing now is we’re putting together a model to make this thing work in Slavic Village. If it works in Slavic Village, we can do this anywhere in the country.”

THE DEMOLITION
You can tell Fernbacher enjoys what he does more than attending the conferences. His joy for tearing down buildings is like that of a kid playing with Tonka trucks in his backyard. And when he talks about the array of hurdles that keep him from doing what he loves, he sounds like that same kid grudgingly doing his homework before going outside.

When a demolition crew first arrives, it checks for environmental problems. A contractor is hired to assess the property for lead-based paint, asbestos, oil tanks and other problems. Fernbacher says the vast majority of the homes built in the mid-1970s have something potentially toxic about them.

“Back then, a company called Armstrong Flooring thought it would be a good idea to use this wonderful invention called asbestos,” Fernbacher says. “But usually you can get these problems taken care of quickly. If banks or servicers or cities want to get it done, it could take 30 days. It just depends. Actually getting the work done doesn’t take that long. Taking out asbestos flooring can take a few days and you’re done.”

But then demolition contractors have to get the permit from the city. Depending on what city a crew is operating in, the process can be relatively easy or a nightmare. In Chicago, it’s a nightmare.

Tearing down a home in the city costs the servicer an automatic $2,300 charge to disconnect the water and sewer services at the street level. Fernbacher says fees easily exceed $5,000 there, and the permit process can take several months. On top of that, servicers have to pay any outstanding bills owed to the city.

“We had a situation where my client had to pay a $5,000 water bill before we could demolish it. The servicer had to pay that. Yeah, it was a shock to them,” Fernbacher says.

He takes a deep breath though and sits forward. “Then comes the fun part,” he says.

Demolition crews that finally secure a permit put up a security fence first, drop off their fuel tanks and the hydraulic excavator. There’s a barbaric sort of grace to how it’s done. The excavator starts at the top and begins peeling the property away. The crew then separates the debris into piles of brick, stone, metal, pipes, the HVAC and wood. A surprising amount of it can be recycled.

In times past, when nice homes were being torn down for McMansions to take their place, contractors would often salvage things like doors, stained glass, even door knobs. Fernbacher says he would make anywhere from $1,500 to $2,000 salvaging through the piles and another couple of thousand reselling metals. These days, though, the pickings are slim.

He’s sure some of the McMansions built over previous demolition sites have been torn down since as well.

Down to the foundation, the excavator digs out the brick, concrete and stone, which is also separated and recycled.
“You’re basically left with a hole in the ground,” Fernbacher says.

About 12 trucks of dirt come rumbling down the street next. It’s packed in and leveled out.

“Then, you’re essentially ready to lay sod and lay seed and bring the community back,” Fernbacher says. “The neighbors thank us. They say, ‘Thank you for taking care of this blight. Now, I don’t have to worry about people coming out of these properties at 2 in the morning and I have two small children.’ It’s such a good feeling knowing that you’re making a difference in these neighborhoods even if it’s one house at a time. We get pizzas delivered a couple of times. That did happen once or twice, because we took down the ugliest most dilapidated house on the block. Most neighbors with a $300,000 house, they don’t want the $30,000 eyesore. It’s hurting their life savings.”

Gus Frangos is the president and general counsel for the Cuyahoga Land Bank in Cleveland. Since ramping up its operations in 2011, it has knocked down close to 800 homes in the county, most of them in the Cleveland area. It has another 700 planned this year.

“When we go and demolish properties, people come out and, literally, they’re crying they’re so happy,” Frangos says and pauses.

It seems so feeble for these neighbors of his. An overwhelming amount of people are current on their mortgage but have also funded underwhelming government programs, millions in executive bonuses, billions in bailouts to Wall Street firms, billions more to Fannie Mae and Freddie Mac, trillions more in no-interest loans from the Federal Reserve to banks considered more systemically important than the people forking over the money.

And when a city or local government manages the $7,500 to tear down a property that had gone ignored and neglected for years, they weep and throw pizza parties. The stigma of demolition’s finality is lifted, and in its place is a clean slate. Rarely is a larger home put in its place.

Frangos says their challenge is to figure out what to put there. Often it’s a park or community playground, even a church parking lot. Anything, but a house.

“You’re stabilizing property values when you do this,” Frangos says. “Who’s going to buy a house next to some of these homes? You could have gold-plated countertops, but if you live next to that, they’re not going to buy in your neighborhood. Period.”

MORE TO COME
The kind of homes landing in the Cuyahoga County Land Bank is shifting. When it first launched in 2009, the primary pipeline of roughly 100 properties coming in were about 40 from Fannie Mae, another 40 from the Department of Housing and Urban Development and the rest were sent from banks and local cities.

As the robo-signing scandal brought the foreclosure process to a standstill in many states, the tax foreclosure system has been rejuvenated, precisely because of the land banks. When a local government forecloses on a property for delinquent taxes, that money becomes a “phantom receivable,” according to Frangos. No one bids on the property. The state and city lose the tax revenue owed. With budgets already tight, rehabbing the property or tearing it down is simply too expensive and so the blight remains untreated.

“That’s why the process was scaled back,” Frangos says. “The government has to be somewhat careful about how much they’re foreclosing.”

With the development of local land banks, the process rebooted, and in Cuyahoga County there is a big influx of city and state-owned properties that have been donated to the land bank. Meanwhile, Fannie Mae incoming properties dropped to 15 per month because of the robo-signing slow down.

Several state attorneys general have tentative plans in place to use some of the $25 billion foreclosure settlement to help fund expensive demolition projects. Ohio AG Mike DeWine set aside $75 million of the roughly $385 million the state plans to receive.

According to Frangos, the money will likely be distributed on a match basis, according to preliminary meetings he attended. The Cuyahoga County Land Bank and the city of Cleveland assembled a $14 million pool to ask for a match.

“Hopefully, we’ll have $30 million to throw at it,” he says.

More federal money is coming too, with some of that specifically for demolition. HUD allocated $6.8 billion through three rounds of Neighborhood Stabilization Program grantees. Local community groups, nonprofits and governments are using the money to acquire and rehab properties.

But the city of Cleveland felt it wasn’t allowed to spend enough of the NSP 3 money specifically for much-needed demolition. According to its third quarter NSP progress report, the city will spend $18 million on rehab projects, but only 10% of NSP 3 funding could be used for demolition.

“For this reason, Cleveland is requesting a waiver of the 10% cap on NSP 3 funds for demolition, up to 41% of the total NSP 3 allocation for a total demolition allocation of $2.8 million,” according to the report.

George Gonzalez, a spokesman for HUD, says the waiver on the cap was granted, and the city was allowed to spend 41% of its NSP 3 funds on demolition.

“Nationally, including Cleveland, HUD has granted 20 waivers for the demolition cap for use of NSP 3,” Gonzalez says.

Chicago, Atlanta and other cities around the country are installing programs to demolish more homes. The largest may be Detroit, where the mayor pledged to tear down 10,000 vacant homes by the end of 2013. The city assigned 4,074 structures to contractors, and 3,629 of these properties are now gone, according to the latest data.

LATEST EFFORT
Sen. Jack Reed, D-R.I., introduced a bill in March that would provide another $15 billion to states, cities and nonprofits for rehab and demolition projects. Roughly $10 billion would be granted using a model based on the NSP, and $5 billion will be distributed through new competitive grants. It would also provide more support to local land banks.

“This initiative will provide a flexible source of funding to help local communities leverage federal dollars to effectively address vacant and blighted properties in their areas,” Reed says.

Slavic Village could be the launching pad for a national program, where rehab investors, demolition crews, servicers, property preservation companies and the city are partnering to rip down properties and attract private capital to then rejuvenate the house next door.

“It’s still in the implementation stage,” Klein says. “This has never been done. We’re figuring out the concept.”

Rick Sharga, executive vice president of Carrington Mortgage Services, believes there will be more land bank projects this year.

“One of the reasons we haven’t seen much of this activity to date probably comes down to budgetary issues — many cities across the country are running deficits and simply don’t have the funds to pay the demolition costs, even if the property owners were willing to give them the properties,” Sharga says. “The fact that certain Ohio counties have decided to use funds from the AG settlement drew some complaints from consumer groups, but is really a smart way to pay for clearing away properties that are safety hazards, and which are likely dragging down the property values of adjacent homes.”

The key to more enthusiasm for a broader effort is the early success of these pilots, which Sharga said is inevitable.

“There may be a psychological barrier to the demolition strategy as well; bulldozing a home is a permanent action, and indicates that everything else has failed,” Sharga says. “I think once we see positive results in some of the communities that take this action first, you’ll start to see it happen in other areas which were either egregiously overbuilt during the housing boom, or fell into disrepair during the recession.”

Caroline Reaves, CEO of property preservation firm Mortgage Contracting Services, says some servicers are beginning to change their own policies to encourage more demolition. Cities like Chicago are beginning to enforce code violations and force the banks to pay for the demolition.

There were 18,320 vacant Chicago properties as of September 2010, according to the most recent study from the Woodstock Institute. Nearly 70% were tied to foreclosure filings began between 2006 and the first half of 2010.

“Neighborhood blight has been one factor contributing to drastically depreciated home values,” Reaves says. “To prevent its spread, some banks and servicers themselves are re-evaluating certain vacant properties and proactively demolishing abandoned, condemned and/or dilapidated properties to result in nice, manicured lots.”

In early March, Bank of America donated another 75 homes to Kansas City and provided up to $875,000 to rehab or demolish them. Last year, it donated another 100 to the city of Detroit.

Still, with costs so high and timelines so long for taking down a home, forecasting how much of the excess inventory will be torn down is nearly impossible.

“It is challenging to forecast an exact volume of demolition initiatives that will be carried out this year, but we are seeing a high level of collaboration between all the parties involved in this process to ensure a positive solution that helps stabilize our nation’s communities and reduces neighborhood blight,” Reaves says.

Fernbacher, too, believes cost is the largest issue that is keeping more projects on hold. But, he says dollar-for-dollar, demolition could be one of the best solutions for the housing market once carrying costs, insurance, safety and liability costs for homes stalled in a jammed foreclosure process are factored in.

He’s already seeing a growing interest. Based on his models, GSPS business is set to quadruple from last year — in just the first four months of 2012. He has 21 full-time employees and 230 independent subcontractors, many laid-off construction workers who once built nearby homes.

But unlike demolition causes in the past, there will be a lot more green space this time around, he says.

“It’s completely come full circle,” he says. “Where it became about excess before, it’s about becoming a minimalist and reducing the inventory now.”

To view the online article, please click here.

About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, Ohio and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees  and a handful of contractors performing services in the Midwest, to a national company with over 800 employees. Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.

x

CHIEF EXECUTIVE OFFICER

Alan Jaffa

Alan Jaffa is the chief executive officer for Safeguard, steering the company as the mortgage field services industry leader. He also serves on the board of advisors for SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets.

Alan joined Safeguard in 1995, learning the business from the ground up. He was promoted to chief operating officer in 2002, and was named CEO in May 2010. His hands-on experience has given him unique insights as a leader to innovate, improve and strengthen Safeguard’s processes to assure that the company adheres to the highest standards of quality and customer service.

Under Alan’s leadership, Safeguard has grown significantly with strategies that have included new and expanded services, technology investments that deliver higher quality and greater efficiency to clients, and strategic acquisitions. He takes a team approach to process improvement, involving staff at all levels of the organization to address issues, brainstorm solutions, and identify new and better ways to serve clients.

In 2008, Alan was recognized by Crain’s Cleveland Business in its annual “40-Under-40” profile of young leaders. He also was named a NEO Ernst & Young Entrepreneur of the Year® finalist in 2013.

x

Chief Operating Officer

Michael Greenbaum

Michael Greenbaum is the chief operating officer for Safeguard. Mike has been instrumental in aligning operations to become more efficient, effective, and compliant with our ever-changing industry requirements. Mike has a proven track record of excellence, partnership and collaboration at Safeguard. Under Mike’s leadership, all operational departments of Safeguard have reviewed, updated and enhanced their business processes to maximize efficiency and improve quality control.

Mike joined Safeguard in July 2010 as vice president of REO and has continued to take on additional duties and responsibilities within the organization, including the role of vice president of operations in 2013 and then COO in 2015.

Mike built his business career in supply-chain management, operations, finance and marketing. He has held senior management and executive positions with Erico, a manufacturing company in Solon, Ohio; Accel, Inc., a packaging company in Lewis Center, Ohio; and McMaster-Carr, an industrial supply company in Aurora, Ohio.

Before entering the business world, Mike served in the U.S. Army, Ordinance Branch, and specialized in supply chain management. He is a distinguished graduate of West Point (U.S. Military Academy), where he majored in quantitative economics.

x

CHIEF INFORMATION OFFICER

Sean Reddington

Sean Reddington is the new Chief Information Officer for Safeguard Properties LLC. Sean has over 15+ years of experience in Information Services Management with a strong focus on Product and Application Management. Sean is responsible for Safeguard’s technological direction, including planning, implementation and maintaining all operational systems

Sean has a proven record of accomplishment for increasing operational efficiencies, improving customer service levels, and implementing and maintaining IT initiatives to support successful business processes.  He has provided the vision and dedicated leadership for key technologies for Fortune 100 companies, and nationally recognized consulting firms including enterprise system architecture, security, desktop and database management systems. Sean possesses strong functional and system knowledge of information security, systems and software, contracts management, budgeting, human resources and legal and related regulatory compliance.

Sean joined Safeguard Properties LLC from RenPSG Inc. which is a nationally leading Philintropic Software Platform in the Fintech space. He oversaw the organization’s technological direction including planning, implementing and maintaining the best practices that align with all corporate functions. He also provided day-to-day technology operations, enterprise security, information risk and vulnerability management, audit and compliance, security awareness and training.

Prior to RenPSG, Sean worked for DMI Consulting as a Client Success Director where he guided the delivery in a multibillion-dollar Fortune 500 enterprise client account. He was responsible for all project deliveries in terms of quality, budget and timeliness and led the team to coordinate development and definition of project scope and limitations. Sean also worked for KPMG Consulting in their Microsoft Practice and Technicolor’s Ebusiness Division where he had responsibility for application development, maintenance, and support.

Sean is a graduate of Rutgers University with a Bachelor of Arts and received his Masters in International Business from Central Michigan University. He was also a commissioned officer in the United States Air Force prior to his career in the business world.

x

General Counsel and Executive Vice President

Linda Erkkila, Esq.

Linda Erkkila is the general counsel and executive vice president for Safeguard and oversees the legal, human resources, training, and compliance departments. Linda’s responsibilities cover regulatory issues that impact Safeguard’s operations, risk mitigation, enterprise strategic planning, human resources and training initiatives, compliance, litigation and claims management, and mergers, acquisition and joint ventures.

Linda assures that Safeguard’s strategic initiatives align with its resources, leverage opportunities across the company, and contemplate compliance mandates. Her practice spans over 20 years, and Linda’s experience covers regulatory disclosure, corporate governance compliance, risk assessment, executive compensation, litigation management, and merger and acquisition activity. Her experience at a former Fortune 500 financial institution during the subprime crisis helped develop Linda’s pro-active approach to change management during periods of heightened regulatory scrutiny.

Linda previously served as vice president and attorney for National City Corporation, as securities and corporate governance counsel for Agilysys Inc., and as an associate at Thompson Hine LLP. She earned her JD at Cleveland-Marshall College of Law. Linda holds a degree in economics from Miami University and an MBA. In 2017, Linda was named as both a “Woman of Influence” by HousingWire and as a “Leading Lady” by MReport.

x

Chief Financial Officer

Joe Iafigliola

Joe Iafigliola is the Chief Financial Officer for Safeguard. Joe is responsible for the Control, Quality Assurance, Business Development, Accounting & Information Security departments, and is a Managing Director of SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets.

Joe has been in a wide variety of roles in finance, supply chain management, information systems development, and sales and marketing. His career includes senior positions with McMaster-Carr Supply Company, Newell/Rubbermaid, and Procter and Gamble.

Joe has an MBA from The Weatherhead School of Management at Case Western Reserve University, is a Certified Management Accountant (CMA), and holds a bachelor’s degree from The Ohio State University’s Honors Accounting program.

x

AVP, High Risk and Investor Compliance

Steve Meyer

Steve Meyer is the assistant vice president of high risk and investor compliance for Safeguard. In this role, Steve is responsible for managing our clients’ conveyance processes, Safeguard’s investor compliance team and developing our working relationships with cities and municipalities around the country. He also works directly with our clients in our many outreach efforts and he represents Safeguard at a number of industry conferences each year.

Steve joined Safeguard in 1998 as manager over the hazard claims team. He was instrumental in the development and creation of policies, procedures and operating protocol. Under Steve’s leadership, the department became one of the largest within Safeguard. In 2002, he assumed responsibility for the newly-formed high risk department, once again building its success. Steve was promoted to director over these two areas in 2007, and he was promoted to assistant vice president in 2012.

Prior to joining Safeguard, Steve spent 10 years within the insurance industry, holding a number of positions including multi-line property adjuster, branch claims supervisor, and multi-line and subrogation/litigation supervisor. Steve is a graduate of Grove City College.

x

AVP, Operations

Jennifer Jozity

Jennifer Jozity is the assistant vice president of operations, overseeing inspections, REO and property preservation for Safeguard. Jen ensures quality work is performed in the field and internally, to meet and exceed our clients’ expectations. Jen has demonstrated the ability to deliver consistent results in order audit and order management.  She will build upon these strengths in order to deliver this level of excellence in both REO and property preservation operations.

Jen joined Safeguard in 1997 and was promoted to director of inspections operations in 2009 and assistant vice president of inspections operations in 2012.

She graduated from Cleveland State University with a degree in business.

x

AVP, Finance

Jennifer Anspach

Jennifer Anspach is the assistant vice president of finance for Safeguard. She is responsible for the company’s national workforce of approximately 1,000 employees. She manages recruitment strategies, employee relations, training, personnel policies, retention, payroll and benefits programs. Additionally, Jennifer has oversight of the accounts receivable and loss functions formerly within the accounting department.

Jennifer joined the company in April 2009 as a manager of accounting and finance and a year later was promoted to director. She was named AVP of human capital in 2014. Prior to joining Safeguard, she held several management positions at OfficeMax and InkStop in both operations and finance.

Jennifer is a graduate of Youngstown State University. She was named a Crain’s Cleveland Business Archer Award finalist for HR Executive of the Year in 2017.

x

AVP, Application Architecture

Rick Moran

Rick Moran is the assistant vice president of application architecture for Safeguard. Rick is responsible for evolving the Safeguard IT systems. He leads the design of Safeguard’s enterprise application architecture. This includes Safeguard’s real-time integration with other systems, vendors and clients; the future upgrade roadmap for systems; and standards designed to meet availability, security, performance and goals.

Rick has been with Safeguard since 2011. During that time, he has led the system upgrades necessary to support Safeguard’s growth. In addition, Rick’s team has designed and implemented several innovative systems.

Prior to joining Safeguard, Rick was director of enterprise architecture at Revol Wireless, a privately held CDMA Wireless provider in Ohio and Indiana, and operated his own consulting firm providing services to the manufacturing, telecommunications, and energy sectors.

x

AVP, Technology Infrastructure and Cloud Services

Steve Machovina

Steve Machovina is the assistant vice president of technology infrastructure and cloud services for Safeguard. He is responsible for the overall management and design of Safeguard’s hybrid cloud infrastructure. He manages all technology engineering staff who support data centers, telecommunications, network, servers, storage, service monitoring, and disaster recovery.

Steve joined Safeguard in November 2013 as director of information technology operations.

Prior to joining Safeguard, Steve was vice president of information technology at Revol Wireless, a privately held wireless provider in Ohio and Indiana. He also held management positions with Northcoast PCS and Corecomm Communications, and spent nine years as a Coast Guard officer and pilot.

Steve holds a BBA in management information systems from Kent State University in Ohio and an MBA from Wayne State University in Michigan.

x

Assistant Vice president of Application Development

Steve Goberish

Steve Goberish, is the assistant vice president of application development for Safeguard. He is responsible for the maintenance and evolution of Safeguard’s vendor systems ensuring high-availability, security and scalability while advancing the vendor products’ capabilities and enhancing the vendor experience.

Prior to joining Safeguard, Steve was a senior technical architect and development manager at First American Title Insurance, a publicly held title insurance provider based in southern California, in addition to managing and developing applications in multiple sectors from insurance to VOIP.

Steve has a bachelor’s degree from Kent State University in Ohio.