Foreclosure King: Best Thing for Distressed Neighborhoods Is Homeowners

Nov. 18, 2008— -- When "Nightline" first met Odell Barnes, the man known to some as the Foreclosure King, he was on his cell phone constantly, buying foreclosed homes by the dozens from his front porch in South Carolina.

A year later, he's still answering the phone, but he's off his porch and in Detroit.

"It's too big for me," he said of the current housing crisis. "One thousand houses a week? It outgrows you."

Sitting on another front porch -- this time at a burned-out house in Detroit -- Barnes has plunged face first into the nation's housing crisis. He's always bought houses in bulk from banks, but what's changed is that, in the last year, mortgage insurer Fannie Mae has begun dumping foreclosed houses on him. The original owners are gone and Fannie Mae and the banks can't sell any other way.

What's also changed is the volume and locations of the houses he sees all across the country .

"I've always had Detroits, the inner-city houses, but not the Wisconsins, not the Maines," he said. "I'm buying in Maine, I'm buying in Delaware." He also mentions California and Nevada, states where he says he'd never had houses.

"I don't think there is a state I don't buy in anymore," he said.

Detroit has been particularly hard hit. Barnes said that if he buys a package of 100 houses, 10 percent of them may be tear-downs or have serious problems, like fire damage. There are also many livable homes, just waiting for a little TLC.

But in this part of the country, where dying industries have exacerbated the foreclosure problem, there were so many foreclosures being dumped that Barnes couldn't handle all the sales from his front porch. He's opened an office here and brought in partners, like local entrepreneur Abner McWhorter.

"The last thing I think we want with these homes is that they get in the hands of landlords who try to, if nothing else, rent them or mothball 'em, [and] if the market turns around, to cash out," McWhorter said. "We really don't need that as a community right now. I'm glad that we teamed up and we're doing pretty good."

With hundreds of houses sitting empty, in danger of falling apart or being stripped of anything salable, Michigan and Detroit have become ground zero in the nation's housing crisis. But now it's not just the inner cities -- houses in middle-class suburbs are being hit.

"Two years ago, you bought 100, 200 houses a month, now you buy 2,000 to 3,000 houses a month and it's going to be more," Barnes said. "They don't know what to do with them, the mortgage companies, and they're just dumping them."

The problem is that nice houses can easily be turned into bad ones. And one vacant, neglected house can quickly destroy a block, that block can bring down the neighborhood, and so on.

To Barnes, the solution is simple -- get people into houses. Barnes does that by buying packages of houses from lenders, then selling in smaller packages to investors. Either he or his investors then find out the going rate for rent in the neighborhood and offer to sell the house for slightly less than that.

The day "Nightline" stopped by Barnes' and McWhorter's shared office in Detroit, Edward Moody was closing on his second house, on the same block as his first. He fixed up the house he's living in now and plans major repairs on the one he just picked up.

"This is bringing back up the neighborhood. It's making the houses better and easier for people to get 'em before they tear 'em up," Moody said. "I want somebody to get them before they strip 'em all out. It's much easier."

Moody said this will provide housing for his family and his in-laws.

"This way is better. Just like I can go in and fix the house any way I want," Moody said. "The other house, I made the whole house into one. Took out the kitchen and converted it. I put my kids upstairs and me and my wife had downstairs. I took out one room. You do what you want to do at the price that you're getting it for. To me, it's winning."

To Barnes, winning is simple changes that can keep houses from falling into disrepair. He wonders why Fannie Mae and the banks aren't -- or can't -- do what he's doing.

"There should be some in-between ground on giving the house away, or renegotiating with the people," he said. "I don't know if Fannie Mae can do that."

Fannie Mae says it can't.

"Our business model is really financial. We are not a real estate investor," said Stacey Stewart, senior vice president of Fannie Mae. "It often makes more sense to sell them in a bulk sales process, to an investor or to a state or to a nonprofit that can really take on those properties, bring them back up to a place ... that is appropriate for sale or rent to a new family or homeowners."

Stewart said that by selling houses to people like Barnes, Fannie Mae is working to keep the houses occupied. But is it better to work to keep the original owners in their houses in the first place? Fannie Mae has recently ramped up efforts to do that.

"We have a number of different things we're doing to help many families stay in their homes," Stewart said. "From restructuring their mortgages so that their payments over time can be more affordable, and families can afford to pay them over time, to reviewing any properties that are going to foreclosure."

To Detroit resident Nadine Miller, these arguments are all academic. She pays about $300 a month for a house she bought from the Barnes/McWhorter partnership. And because of Barnes' and McWhorter's incentive program -- refer a friend and get a month free -- she won't have a mortgage payment for a year.

McWhorter said he wants more people like Miller; a homeowner is always the solution.

"You're more involved in the neighborhood if you own the house versus a renter," he said. "A renter is typically in the mindset of just passing through. I had an opportunity where we sold a house that we were renting; a homeowner bought the house and put a new roof on it. Suddenly they care."

Barnes admits this business has been very good to him, but he's worried because there's such an alarming avalanche of business now. And, he said, human nature being what it is, as soon as the United States is out of this crisis, people will go right back to their old ways.

"We're a society of indulging," he said. "Unless somebody says you can't, we'll do it. If you give somebody a credit card, we're going to max it. You tell us we're going to get an equity line on our house for a million -- give us a little time, we'll have it maxed. That's the way we are. I don't know what to do about it. I really don't. But this will happen again 20 years from now."