According to a new study entitled "Collateral Damage: The Municipal Impact of Today's Mortgage Foreclosure Boom" the foreclosure of a single-family home, especially one that leaves the home vacant and unsecured, may, in some cases, generate direct municipal costs on cash-strapped public agencies in excess of $30,000 per property. In addition, area homeowners, business owners, and landlords stand to lose if a rash of foreclosures brings down property prices, accelerating the decline of an entire neighborhood.
The report was conducted by William Apgar, Senior Scholar and Mark Duda, Research Fellow at the Joint Center for Housing Studies at Harvard University, and it was funded by Minneapolis-based Homeownership Preservation Foundation (www.hpfonline.org), which is dedicating $7 million over the next three years to assist homeowners nationwide in overcoming obstacles that could threaten their ability to retain ownership of their homes. Homeowners who are facing foreclosure can receive free foreclosure prevention counseling offered through the Foundation via a nationwide, toll-free hotline, 1-888-995-HOPE. The report also was endorsed by NeighborWorks America (www.nw.org), and the Financial Services Roundtable's Housing Policy Council (www.fsround.org).
"Foreclosures are on the rise across the country - especially foreclosures of higher-risk nonprime mortgages," observes Apgar. "Although non-prime lending has enabled millions to become homeowners, higher-risk lending has also sparked substantial increases in foreclosures."
For example, the report notes that serious delinquencies and foreclosures for nonprime loans can easily be ten times higher than for prime loans. In the City of Chicago alone, the total number of nonprime foreclosures has increased from less than 500 in 1996 to nearly 3,000 foreclosures in 2003.
"Left unchecked, the nationwide municipal cost of foreclosures could easily top the one billion dollar mark," concludes Apgar, "Money that is annually being diverted from meeting other pressing urban needs."
The study focused on the costs of foreclosures to the City of Chicago, which is in the second year of a major campaign to prevent and reduce home foreclosures. Costs associated with a typical foreclosure will vary from case to case, depending on the severity of the foreclosure scenario. Typical costs include: loss of tax revenue, increased policing, increased fire department activity (due to arson and/or vandalism), demolition costs, building inspections, legal expenses, costs associated with managing the foreclosure process, and increased demand for social services programs.
"Foreclosures impose costs not only on borrowers and lenders," notes Apgar, "but the foreclosure process and city efforts to minimize the blighting influence of foreclosures on vulnerable neighborhoods may involve more than a dozen municipal agencies and twice as many specific municipal activities."
"The foreclosure of a home also can have a dramatic affect on a neighborhood," Duda says. For example, the study presents estimates of the adverse impact of a foreclosure on the residents of a block in the Auburn/Gresham neighborhood, located southwest of downtown Chicago. After a foreclosed home was demolished, the study estimated some thirteen homeowners, whose properties were located within 150 feet of the newly vacant lot, collectively lost some $220,000 in property values as a result of that failed loan.
"Nor is the blight of a foreclosure limited just to property owners," Apgar adds. "Vacant and boarded-up homes reduce the willingness of customers to shop at nearby stores and limits the ability of nearby employers to attract qualified employees. The affect of foreclosure further extends to other neighborhood-based entities such as houses of worship, parks and recreation community centers."
The study concludes municipalities must take decisive, proactive steps to help reduce foreclosures, as they and their citizens are forced to bear a substantial portion of the costs. The study urges that government, mortgage industry and community leaders work together to:
-- Support grassroots efforts to help homeowners facing foreclosure;
-- Reduce the incidence of poorly underwritten and/or fraudulent loans made in distressed neighborhoods; and
-- Encourage industry participants to pay their fair share of the foreclosure-related costs.
The study was funded by the Homeownership Preservation Foundation, which assists homeowners nationwide in overcoming obstacles that could threaten their ability to retain ownership of their homes. The study is the latest research that has emerged from Chicago's Homeownership Preservation Initiative (HOPI), an innovative partnership between the City of Chicago, Neighborhood Housing Services of Chicago, the Federal Reserve Bank of Chicago and mortgage industry leaders.
Launched 22 months ago, HOPI has become a national model for helping homeowners avoid foreclosure and reclaiming vacant properties that result from foreclosure. The program features a city-wide public information campaign to draw awareness to the problem of home foreclosures and the availability of free counseling to help homeowners facing financial challenges. This campaign has included free workshops to homeowners located in high foreclosure areas as well as a significant faith-based initiative to reach homeowners through churches and other religious communities. To date, the campaign has provided several thousand free counseling sessions and has helped more than 750 residents avoid foreclosure.
In 2003, Chicago Mayor Richard M. Daley addressed the U.S. Conference of Mayors to focus national attention or foreclosures and the devastating effects they have on families, communities, and cities. Since then, Chicago has become a national model for helping homeowners at risk of foreclosure.
"Foreclosures weaken neighborhood markets and negatively impact homeowners, lenders, neighbors, and municipalities," says Chicago Mayor Richard M. Daley. "This new study reiterates the high costs that foreclosures impose on cities. We must focus our efforts on foreclosure prevention through partnerships with lenders and non-profits."
Based on the success of the Chicago HOPI program, the Homeownership Preservation Foundation, is expanding the availability of its counseling services, through its nationwide hotline, 1-888-995-HOPE. In Chicago, families can call the city's non-emergency number, 311, and be immediately connected to foreclosure prevention counseling. In addition to continuing to offer foreclosure prevention counseling through Chicago HOPI, the Foundation also is a key partner in other city-focused foreclosure prevention efforts in Detroit and Dallas.
"Municipalities collaborating with nonprofit groups and responsible lenders can more effectively address the issue of foreclosure," says Apgar. "There are more solutions available when these groups work together than if they tried to combat foreclosure on their own."
About the Authors of the Study
William Apgar is a Senior Scholar at the Joint Center for Housing Studies of Harvard University, and a Lecturer in Public Policy at Harvard's John F. Kennedy School of Government. He previously served as the Assistant Secretary for Housing/Federal Housing Commissioner at the U.S. Department of Housing and Urban Development, and also Chaired the Federal Housing Finance Board. Mr. Apgar holds a Ph.D. in Economics from Harvard University.
Mark Duda is a Research Fellow at the Joint Center for Housing Studies. He consults and has written widely on issues relating to single family mortgage finance in both the U.S. and China. Mr. Duda holds a Ph.D. in Urban Geography from Clark University.
© 2005 Business Wire
