Foreclosures—Let's Talk about the Solution: Neighborhood Action Matters
It's been said that the first line of defense is a good offense. Thinking around a curve can be a bit of a challenge, but the ability becomes more important for a neighborhood considering how to preserve the progress it has made when foreclosed and problem properties start showing up.
To meet the challenge, residents need to reach a consensus about the existence of problem properties and how it affects them. Neighborhood-based improvement, business, housing, faith-based and other organizations often lead efforts to identify issues and build consensus around them. These groups serve as the primary means to communicate the concerns of the neighborhood to city, regional and state leaders.
To begin building a good offensive strategy may require talking about reasons why foreclosure and problem property intervention and prevention efforts are important. Three basic answers are offered here to help answer the question, "Why does this issue matter?"
Reason No. 1: The homeowner and the wider neighborhood are not independent of one another.
Problems presented by residential foreclosures and other types of property issues go beyond the household and spread to the neighborhood. This spillover effect is known in economics as a neighborhood externality. It means that the behavior of an individual homeowner and the wider neighborhood are interdependent. Positive externalities offer a benefit while negative externalities present a cost to the wider neighborhood.
Reason No. 2: The stakes are high.
Decades of work and investment by dozens of stakeholders in a neighborhood could be in question, particularly in those areas with concentrations of at-risk properties. Studies reveal that local foreclosures and other serious housing problems like vacancy and abandonment can be related to other issues, including criminal activity, demographic changes, business closures, declining tax revenue, falling home prices and property values, higher municipal costs, and a rise in predatory lending, like foreclosure rescue scams and mortgage fraud. Foreclosures alone mean not only costs for borrowers and lenders but also for neighborhoods, communities and local governments and have been estimated to be about $78,000 per foreclosure. (See Table.)
Reason No. 3: Local action can mitigate negative externalities.
Neighborhood-based organizations helped break down barriers to lending. Now they play an important role in addressing other issues in the neighborhood, including foreclosure and property problems. They represent the interests of the residents, organize support and develop the capacity to raise capital.
These organizations can be even more effective when they work together. The St. Louis Foreclosure Prevention Task Force is one example. It is a coalition of organizations interested in property asset protection and preservation. The task force will work in 2008 to explore neighborhood actions.
Action at the neighborhood level is necessary because housing markets are local and some neighborhoods are affected more than others by property issues. For instance, home price appreciation has stabilized or declined in some areas and this could translate to an increase in loan-to-value ratios for the homeowners in a neighborhood.
Data and automated information systems help neighborhoods to stay on top of conditions and develop answers to questions like, "What's next?" This is critical because, in dealing with foreclosed and problem properties, the goal for the neighborhood is to intervene as soon as possible and recycle properties in a timely manner.
Tools and Techniques: A Checklist for Local Action
- The neighborhood is served by social, housing and community development organizations.
- Community-based housing corporations have the capacity to reclaim, rehabilitate and recycle foreclosed and problem property.
- Housing rehabilitation and repair programs are in place and are adequately funded.
- Neighborhood real estate watch programs use information and data management computer systems to track properties and other neighborhood conditions.
- Resident-driven nuisance, problem and code enforcement systems are in place to protect against larger problems.
- Vacant and abandoned properties initiatives are in place and legal issues are addressed through a municipal housing court or other remedy.
- Community partnerships support neighborhoods as a stakeholder in the property disposition process to ensure that the property will not cause disinvestment in the area. Banks and other financial institutions that have a Real Estate Owned (REO) department that is charged with selling foreclosed property are working with neighborhood-based organizations.
- There is a marketing plan for foreclosed and problem properties to bring them to market quickly by partnering with real estate agents.
- Programs are in place at the neighborhood level to promote responsible property ownership for home-owners and landlords.