Collateral Damage: Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom

The recent rise in foreclosures has opened a new and costly chapter in the troubled history of America’s distressed urban neighborhoods. One key aspect of the story emerging from this trend is the fact that foreclosures impose significant costs not only on borrowers and lenders, but also on municipal governments, neighboring homeowners, and others with a financial stake in nearby properties. This is particularly true of nonprime mortgage foreclosures because of their spatial concentration.

Using the City of Chicago as an example, this report documents for the first time the municipal costs of foreclosure, including both direct municipal expenditures for foreclosure related services and indirect costs linked to the blighting effect that foreclosures have on urban neighborhoods. After detailing the negative effects that foreclosures have on communities, the paper discusses steps that Chicago and other municipalities are taking to reduce the impact of foreclosures, both by engineering them out of the system and by limiting the negative spillovers that arise from foreclosures that are not preventable.

The report was prepared by William Apgar and Mark Duda. Mr. 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 PhD in Economics from Harvard University. Mr. 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 PhD in Urban Geography from Clark University.

Summary

As the City of Chicago’s example demonstrates, the high costs of foreclosures make it imperative that municipal, mortgage industry, and community leaders join the effort to stop the problem where it starts—poorly underwritten and/or fraudulent high-risk loans. Because even legitimate nonprime loans are more failure-prone, however, these groups must also support foreclosure avoidance programs that educate distressed borrowers about loan restructuring options.

Municipalities themselves have numerous opportunities to make delivery of foreclosure-related services more efficient and to reevaluate laws and regulations that may unintentionally add to the overall social cost of foreclosures. Recognizing that they will inevitably bear some of the costs, however, municipalities must be prepared to use their own community development resources to advance foreclosure avoidance efforts, both to reduce their own exposure and to help families in distress.

In addition, municipalities should carefully review the costs of providing foreclosure-related services and, when appropriate, ask the mortgage industry to share the burden of paying these costs. Municipalities can work with mortgage industry leaders to ensure that they recover a greater share of outlays from user fees or proceeds from the foreclosure sale. In combination, all of these initiatives will limit the disproportionate burden municipalities now carry for the rising rate of foreclosures, while also helping to preserve the homeownership gains achieved by extending credit to higher-risk borrowers.

William C. Apgar and Mark Duda

May 11, 2005

A report prepared for the

Homeownership Preservation Foundation

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Minneapolis, Minnesota 55437

(952) 857-891

http://www.hpfonline.org

and endorsed by

The Financial Services Roundtable

Housing Policy Council

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