Study: Foreclosures Have Widespread Financial Impact

Daily Reporter - July 19, 2005

Daily Reporter

by Melanie McIntyre

Home foreclosures have a significant financial impact on local government, area residents
and retailers, but the problems could be minimized by reducing the incidence of poorly
written and/or fraudulent loans made in distressed neighborhoods, according to a recently
published report written by two Harvard University researchers.

“Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom,”
authored by William Agpar, senior scholar and Mark Duda, research fellow at the Joint
Center for Housing Studies at Harvard University, concluded that the foreclosure of a
single family home – especially one that leaves the home vacant and unsecured can
generate direct municipal costs in excess of $30,000 per property.

Typical expenses include loss of tax revenue, costs associated with managing the
foreclosure process, building inspections, increased policing, increased fire department
activity (due to arson and/or vandalism), demolition costs and increased demand for social
service programs.

“Left unchecked, the nationwide municipal cost of foreclosures could easily top the $1
billion mark – money that is annually being diverted from meeting other pressing urban
needs,” Agpar stated.

Foreclosures in lower income, high crime neighborhoods are more likely to generate such
hefty expenses, said Doug McCloud, president of the Columbus Board of Realtors, but in
undistressed neighborhoods a foreclosure goes relatively unnoticed, negating expenditures
for many of the services Agpar listed.

In stable neighborhoods foreclosure proceedings are preferable to boarded-up homes, he
said. Professional rehabbers often buy homes in foreclosure, bring them up to code and
either resell them or rent them, which provides affordable housing options.

Foreclosures in unfinished subdivisions can have negative and positive consequences,
said Joe Evans owner/agent at Keller Williams Greater Columbus Realty and chairman of
the Columbus Board of Realtors’ Builder/Realtor Alliance Committee.

Potential homebuyers may be reluctant to move into a neighborhood with numerous
foreclosed upon, empty homes, but developers are so anxious to fill the subdivision’s new
homes that asking prices are lowered and people who were not able to afford a house
there can then do so, he stated.

If the neighborhood stabilizes over the next several years, buyers who purchased their
houses at lower prices might be able to sell them for a generous profit.

“Foreclosures are on the rise across the country – especially foreclosures on higher-risk
nonprime mortgages,” Agpar stated. “Although non-prime lending has enabled millions to
become homeowners, higher-risk lending also sparked substantial increases in

Ohio is no exception.

According to Policy Matters Ohio, a Cleveland-based research group, foreclosures
continued to rise in Ohio in 2004.

After analyzing data from the Ohio Supreme Court, which updates previous reports on the
subject, PMO revealed that Ohio’s foreclosure filings rose 3 percent for a second
consecutive year, after years of larger increases, reported Hannah News Service.

Growth in foreclosures has leveled off, but at a high level: in 53 Ohio counties, the number
of foreclosure filings has at least quadrupled over the past decade.

Fifty of the state’s 88 counties saw increases in foreclosure filings in 2004.

Foreclosures in Franklin County totaled 5,862 last year, according to records in The Daily
Reporter’s databases of court proceedings.

Overextending credit to high-risk borrowers leads to perverse market effects, as “a race to
the bottom ensues when lenders lower their underwriting standards to reach ever less
qualified borrowers in ever more vulnerable neighborhoods,” the Harvard researchers

“As a result, lenders willing to underprice their products at origination gain marketshare
while leaving others to pick up a portion of the costs generated when loans go bad,” they

Foreclosure also can prove devastating to retailers, as “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,” Agpar said.

The effects of foreclosure further extend into other neighborhood-based entities, he
continued, such as houses of worship, parks and recreation community centers.

Municipalities must take decisive, proactive steps to reduce foreclosures, the Harvard
researchers said.

Government, the mortgage industry and community leaders should work together to
support grassroots efforts to help homeowners facing foreclosure and reduce the
incidence of poorly written and/or fraudulent loans made in distressed neighborhoods.

Additionally, they noted, industry participants should be encouraged to pay their fair share
of foreclosure-related costs.

The report was funded by the Minneapolis-based Homeownership Preservation
Foundation, which assists homeowners nationwide in overcoming obstacles that threaten
their ability to retain ownership of their homes.

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