Study indicates ripple effect on cities from home foreclosures

Mon Jun 13, 7:53 PM ET

MINNEAPOLIS -- City governments inevitably endure some of the costs associated with home foreclosures, but exactly how much has been anyone's guess, until now.

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).

"Foreclosures are on the rise across the country -- especially foreclosures of higher-risk nonprime mortgages," observed 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 Chicago alone, the total number of nonprime foreclosures has increased from less than 500 in 1996 to nearly 3,000 in 2003.

"Left unchecked, the nationwide municipal cost of foreclosures could easily top the $1 billion mark," concluded Apgar, "Money that is annually being diverted from meeting other pressing urban needs."

The study focused on the costs of foreclosures to 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," noted 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 said.

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 13 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 added.

"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 effect of foreclosure further extends to other neighborhood-based entities such as houses of worship, parks and recreation community centers," he said.

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), a partnership between the city of Chicago, Neighborhood Housing Services of Chicago, the Federal Reserve Bank of Chicago and mortgage industry leaders.

In 2003, Chicago Mayor Richard M. Daley addressed the U.S. Conference of Mayors to focus national attention on 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," said 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 nonprofits."

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