OLR Research Report


February 16, 2010

 

2010-R-0019

EFFECTS OF FORECLOSURE CRISIS IN CONNECTICUT

 

By: Soncia Coleman, Associate Legislative Attorney

James Orlando, Legislative Analyst

John Rappa, Principal Analyst

Veronica Rose, Principal Analyst

Emilee Mooney Scott, Legislative Fellow

Kristin Sullivan, Principal Analyst

You asked how the foreclosure crisis has affected Connecticut in general and its urban areas specifically.

SUMMARY

Like most of the country, Connecticut has recently experienced a rising number of foreclosures. Lis pendens filings—which typically constitute pre-foreclosure activity—nearly doubled from 2006 to 2009. According to data supplied by the Warren Group to the Connecticut Housing Finance Authority, there were 9,470 lis pendens filings in Connecticut in 2006, 13,258 in 2007, and 14,629 in 2008. As of September 30, 2009, there were 18,415 filings, and one in every 14 residential mortgages in Connecticut was either 90 days or more past due or in some stage of foreclosure proceedings (Gosselin, 2009).

This magnitude of foreclosures destabilizes the housing market; reduces property values; threatens municipal finances and services; jeopardizes individuals' financial, physical, and emotional health; and increases crime rates.

The foreclosure crisis has led to instability in the housing market, as rising foreclosures increased supply and lowered home values. It also affected the rental market due to increased demand for rental housing by people displaced from their houses by foreclosures. The percentage of households with severe housing cost burdens increased from 2005 to 2008. Connecticut households with moderate to low incomes faced particular challenges finding affordable rental housing. But during the second half of 2009 some housing indicators, in Connecticut as well as nationally, began to show improvement.

Banks often sell foreclosed homes quickly at steep discounts due to several factors, including the properties' increased physical deterioration due to neglected maintenance. The presence of foreclosed homes also may lower values of nearby properties due to increased supply, decreased selling price, and vandalism or neglect of abandoned homes.

The foreclosure crisis has affected municipalities in various ways, including eroding their property tax base, increasing administrative and property maintenance costs, and increasing the demand for services by the individuals and families displaced by foreclosures. Municipalities may be forced to cut services, raise taxes, or both, and either response could lead families and businesses to relocate, thus further shrinking the tax base. The combination of these factors could lower municipalities' credit ratings, which could lead to higher rates on their municipal bonds.

The fiscal impact on municipalities may be most severe when a high number of foreclosures are concentrated in a neighborhood or community. The extent of the impact will also depend upon preexisting neighborhood economic stability. Low-income, minority families and communities have been especially vulnerable to foreclosure and its negative effects due to the disproportionate share of subprime loans made in these communities.

Foreclosure affects individuals and families in various ways. It displaces both owners and renters. Foreclosure often has other direct economic costs for families such as moving expenses, lowered credit scores, and the loss of renters' security deposits. Beyond these financial challenges, foreclosure often leads to other difficulties, including physical and emotional health issues, especially for children and elderly people. The latter may be especially vulnerable to both the economic and health impacts of foreclosure. Children in families facing foreclosure may be more likely to struggle in school and display delinquent behavior.

National data indicates that foreclosures have a significant impact on crime. Homes vacated or abandoned due to foreclosures become targets for vandalism and other crimes. But we were unable to find any studies on the effect of the foreclosure crisis on crime rates in Connecticut.

HOUSING MARKET TRENDS

The foreclosure crisis caused a domino effect in the housing market. Foreclosures led to an oversupply of homes for sale. Oversupply resulted in housing market weakness, which contributed to a full-blown economic recession. The recession and accompanying job losses made it even more difficult for people to remain in their homes. So foreclosures increased, leading to even more supply. As the number of displaced families grew, the demand for affordable housing, especially low-cost rental units did too. And increased demand for rental units often caused those prices to rise. During the latter half of 2009, however, some housing market indicators began to show improvement, both nationally and in Connecticut.

Housing Supply

Single Family. The foreclosure crisis caused an oversupply of single family housing. The National Association of Home Builders (NAHB) reports that “months' supply time,” which is the amount of time it will take to sell current inventory based on the month's sales rate, peaked between the latter half of 2008 and the beginning of 2009. For existing family homes, month's supply time reached an all-time high of 11.0 months in June 2008. For new construction, it climbed to a high of 12.4 months in January 2009.

But recent data shows this trend reversing. According to NAHB, in 2009 the inventory of existing single-family homes for sale fell to 3.0 million in October from 3.1 million in September and 3.3 million in August. By the end of October 2009, the number of new homes for sale fell to 239,000, the lowest it has been since May 1971. Similarly, months' supply time for existing homes fell to 6.8 months in October, down from 7.6 months in September. For new construction, it fell to 6.7 months from 7.4 months in September, down considerably from the January 2009 historic high of 12.4 months.

Rentals. Foreclosure's impact on the rental market is less clear than its impact on the ownership market. However, it is clear that in most parts of the country, the crisis contributed to an increase in (1) the number of renters and (2) rental costs.

Since rental properties often house multiple families, renters made up an estimated 40% of households displaced by foreclosures. At the same time, homeowners forced into foreclosure turned to rentals for their housing needs. Between the fourth quarter of 2006 and the same quarter in 2008, the number of renter households grew by 2.2 million. Increased demand for rental properties generally drove up rents. According to the National Low Income Coalition, rents increased or stayed the same in 2008 in 13 of the country's 14 largest metropolitan areas. Thus, increased demand and increasing rents have apparently made it more difficult for most renters, including those in Connecticut, to find affordable housing.

Connecticut ranks as one of the most expensive and least affordable states in the country. The Department of Housing and Urban Development (HUD) estimates area Fair Market Rents (FMR), which are gross rent estimates that include shelter rent and utility costs, except telephone. A 2009 National Low Income Coalition report found that the average FMR for a two-bedroom apartment in Connecticut was $1,123. For this rent to qualify as “affordable” (i.e., no more than 30% of household income), a household must earn $3,745 monthly or $44,938 annually. Assuming a 40-hour work week, 52 weeks per year, this means a household must earn an hourly housing wage of $21.60; the 2009 estimated average wage for all Connecticut renters was $17.58.

Extremely Low Income (ELI) renters in Connecticut likely have an even more difficult time than other renters finding affordable housing. HUD defines an ELI household as one that earns 30% or less of the area median income (AMI). Connecticut's 2009 AMI was $87,678 and 30% of that was $26,303. To qualify as affordable, monthly rent for the average ELI renter could not exceed $658.

Costs

Despite the depreciation in property values associated with the foreclosure crisis, housing affordability worsened slightly between 2005 and 2008. The Center for Housing Policy analyzed affordability comparing American Community Survey data from 2008 to 2005 data. Of the 113.1 million U.S. households in 2008, about 15% (11% of owners and 23% of renters) had a severe housing cost burden, spending more than half their monthly income on housing costs, including utilities. About 19% had a moderate housing cost burden, spending between 31% and 50% of their income on housing. These numbers were up from 14% and 18% in 2005, respectively. The rise is attributable mostly to

increasing costs for homeowners, not renters. From 2005 to 2008, household incomes for both owners and renters increased 12%, but median housing costs rose 16% for owners and 14% for renters.

The trend in Connecticut mirrors the national picture, particularly with respect to working households (i.e., those working 20 or more hours per week with incomes of 120% or less of the AMI). In 2008, the share of Connecticut's working households with a severe housing cost burden surpassed the national average of 21%. Of the 574,233 working households, 22% spent more than half their income on housing, up 4% from 2005. The metropolitan statistical area comprised of Hartford, West Hartford, and East Hartford experienced an even greater increase. In 2008, the portion of working households with a severe housing cost burden rose to 21% from 14% in 2005.

Connecticut's Forecast

According to Prudential Connecticut Realty, which conducts a year-end review of Connecticut's housing and rental market, the state experienced a significant increase in home sales during the latter half of 2009. It reports that in the first quarter of 2009, single family home sales were down by 25% and condo sales by almost 40% from the previous year. By year-end, single family home sales were down only about 1% and condo sales by 9%. In fact, six counties (Hartford, Middlesex, New Haven, Tolland, New London and Windham) showed slight increases in single family sales.

The 2009 review also examines inventory supply time as an indicator of market health. Comparing the first quarter of 2009 to the last, inventory supply times for single-family and condominium sales decreased in each county and statewide 53% and 50%, respectively. Table 1 shows these times.

Table 1: Sales Supply Times in Months

County

Single-family Homes

Condominiums

March 2009

Dec. 2009

Decrease

March 2009

Dec. 2009

Decrease

Fairfield

24

10

58%

25

13

48%

Hartford

11

5

55%

15

7

53%

Litchfield

26

15

42%

37

15

59%

Middlesex

20

10

50%

16

9

44%

New Haven

15

8

47%

20

10

50%

New London

18

11

39%

26

13

50%

Tolland

13

7

44%

13

8

38%

Windham

16

10

37%

40

11

72%

Statewide Average

17

8

53%

20

10

50%

Source: Prudential Connecticut Realty

Prudential attributes the positive changes to three factors: (1) the extension of first-time homebuyer federal tax credits; (2) low mortgage interest rates; and (3) buyers' reaction to a decreasing housing supply within specific price ranges and towns. But it notes that residential construction does not show signs of improvement.

Construction. Based on responses from 128 Connecticut municipalities, residential construction permits for both owner-occupied and rental units decreased from 10,334 in 2004 to 4,910 in 2008. Projections for 2009 were 3,150. The decrease, which seems to mirror the national picture, could be positive if it helps shrink excess market supply. But Prudential Connecticut cautions that an improving economy and market could increase buyer demand and lead to a shortage in new homes and condominiums.

PROPERTY VALUES

Foreclosure affects property values in two ways. First, it affects the value of the foreclosed home. Second, the presence of foreclosed homes affects the value of other homes in the neighborhood.

Discount of Foreclosure Home Sales

We could not find data on the average resale price for foreclosed properties in Connecticut or on the average declines in property values in the state. However, most studies on this topic show that properties sold following foreclosure typically sell at a large discount, often of 20% or more. For example, a recent study of Massachusetts home sales from 1987 to March 2008 found a 28% discount among foreclosure sale prices (Pathak et al., 2009).

While part of this discount is due to the foreclosure status itself (and the stigma associated with foreclosure), much of the discount may be due to variables often associated with foreclosed homes. For example, many homeowners facing foreclosure neglect upkeep of the property. Therefore, the property's physical condition deteriorates, leading to a reduction in price when the home is sold following foreclosure. Deteriorating neighborhood conditions, as well as the threat of vandalism and other crime, may also affect the value of foreclosed homes.

Foreclosed properties may also be more likely than other properties to be vacant, and research has shown that vacant properties typically sell for less than occupied properties. Many foreclosed properties are purchased as investments through a cash transaction, and properties sold in cash transactions often sell for slightly less than properties whose purchase is financed.

In addition, banks and lenders often have incentives to sell foreclosed properties quickly, even if below market price. For example, they may be willing to sell below market value to avoid maintenance costs as well as the costs needed to deter vandalism. They may also wish to sell a foreclosed home quickly to get a bad loan off of their balance sheet.

Contagion/ Spillover Effect

Foreclosures also depress prices of nearby homes. This spillover effect has been observed in several studies. While most studies have found that a foreclosure depresses values of nearby homes by about 1% to 2%, some studies have shown considerably larger impacts, as high as 10%. Generally, the studies show that (1) the spillover effect is greatest for homes that are a very short distance from the foreclosure (500 feet or less), and (2) the overall effect increases when there are multiple foreclosures in a neighborhood, although the marginal impact of each additional foreclosure likely diminishes as the number of foreclosures increases. Some studies have shown that the spillover effect is larger in neighborhoods with relatively low property values. They also show that the spillover effect diminishes with time.

There are several possible reasons for this spillover effect. One common method of property valuation is comparing the recent selling price of nearby homes with similar characteristics. Thus, a homeowner seeking to sell a home in a neighborhood with recent nearby foreclosure sales may receive lower offers due to the discounted sale prices on these foreclosures. Even if the foreclosed homes do not sell at depressed prices, the presence of a large number of foreclosed homes in an area also can drive down nearby prices by increasing the supply of available homes.

Due to the many variables at play, it is difficult to estimate the aggregate cost of foreclosures on nearby property values in Connecticut. Drawing upon data from other sources, a May 2009 report by the Center for Responsible Lending estimated that in 2009, over 736,000 homes in Connecticut would experience a property devaluation due to the spillover impact of nearby foreclosures, with an average decline in value of over $2,800 (Center for Responsible Lending, 2009).

FISCAL IMPACT OF MORTGAGE FORECLOSURES

Chain Reaction

Local Level. Mortgage foreclosures could increase municipal costs and erode property tax bases, especially in communities already struggling with vacant and abandoned property, unpaid property taxes, persistent joblessness, and declining population. Municipalities incur administrative and service costs by helping families avoid foreclosure, recording foreclosure documents (which may be recouped through recording fees), and preventing foreclosed property from deteriorating. These expenses represent foreclosures' immediate primary effects.

But foreclosures may also have delayed, far-reaching secondary effects. It may be harder to sell foreclosed properties in distressed neighborhoods than it is to sell such properties in affluent ones. Consequently, the former are more likely to lose their value or come off the tax roll. Either outcome would shrink the municipality's tax base and shift more of the tax burden onto the remaining properties, especially if no new properties are added to the tax roll or the value of neighboring properties depreciates.

Given the smaller tax base, the municipality might have to choose between cutting services (to ease the tax burden) and increasing taxes (to maintain current services). Either option presents potentially difficult consequences. If the municipality cuts taxes, it may also have to cut services. But the residents and businesses that depend on those services might react by selling their properties and relocating to another municipality. If they sell their properties at a loss, the municipality's tax base could shrink even more, which once again increases the tax burden on the remaining taxpayers.

The other option—increasing the tax rate to maintain or increase service levels—could also trigger an exodus. A tax increase would squeeze more taxes from fewer and possibly less valuable properties. It could also, like cutting municipality services, induce residents and businesses to sell, relocate, and thus trigger a new round of hard choices.

Regardless of whether a municipality cuts services or maintains them, it may find itself paying higher interest rates on the bonds they issue to cover short-term cash flow deficits and finance new public infrastructure.

This could occur if the bond market questions the municipality's ability to repay the bonds given a declining tax base. Increased bond rates could discourage the municipality from making necessary, long-term capital improvements.

State Level. Foreclosure shock waves can also affect state finances. Families facing foreclosure often cut spending to meet mortgage payments. Consequently, state (and in some states, local) sales tax revenues could fall. These revenues could drop even more if the foreclosed property becomes vacant and dilapidated, and thus discourages nearby residents and businesses from spending to maintain or improve their properties.

The drop in state revenues could impose the same hard choices on the state that the drop in municipal revenue imposes on municipalities. But state spending cuts could affect the education and other funds it gives to municipalities, an option that could compound the latter's budget woes.

Impact. The extent to which foreclosures trigger the chain reaction described above and consequently drain municipal and state resources depends on three interrelated factors:

1. the number of properties undergoing foreclosure,

2. the extent to which they are geographically concentrated, and

3. the time it takes to reoccupy or demolish them.

Municipal costs are likely to increase as the number of foreclosures increases. But research suggests that a municipality can expect more severe fiscal aftershocks when foreclosed properties comprise a significant share of a neighborhood's housing stock. It is this density “that generally heightens . . . the negative spillover effects like declines in property values and increasing crime rates” (Kingsley et al., 2009).

Close-Up on Foreclosures' Shockwaves

Analytical Framework. Foreclosures trigger a chain reaction that could send fiscal shockwaves throughout a neighborhood and the surrounding city. As discussed above, the magnitude of the waves depends on the number of foreclosures occurring at the same time and their location. The magnitude also depends on preexisting conditions,

such as high unemployment, concentrations of vacant and abandoned properties, and persistent criminal activity. Foreclosures, combined with these preexisting conditions, can simultaneously drive up municipal costs while eroding the tax base needed to cover those costs.

Given the forces at play, it is difficult to quantify the cost of services a municipality could direct to foreclosures and their spillover effects. But a 2005 Chicago study attempted to document those costs. It focused on 14 foreclosures that occurred during the 1990s in a single block with 37 properties. The study estimated that each foreclosure cost Chicago and Cook County about $34,000 and reduced property values in the aggregate by about $220,000 (Apgar et al., 2005).

The study provides a way to identify and analyze foreclosure's effects based on the different outcomes in a property foreclosure and the time to complete them. The study identified 10 possible outcomes and the associated costs, such as building inspections and police calls (i.e., direct effects). It also discussed how foreclosures affect surrounding properties (i.e., indirect effects).

We modified this framework to provide a more generic way to identify foreclosures' fiscal effects. We consolidated the scenarios into seven and added another indirect effect, namely how declining property values affect the interest rate a municipality must pay on its bonds. Table 2 identifies how each scenario affects municipal expenses (first wave), property values and property taxes (second wave), and bonding costs (third wave). As Table 2 shows, the magnitude of the effects increases with each scenario.

Table 2: Potential Outcomes of Foreclosure

Scenario

Shock Waves

1st Wave: Immediate Cost Impacts

2nd Wave: Impact on Property Values and Property Tax Revenues

3rd Wave: Impact on Bonding Costs

Foreclosed, sold at auction, and reoccupied

Minimal recording costs (all or a portion of which may be recovered by recording fees); additional cost if counseling provided to property owners and occupants.

Impact depends on the number of foreclosed properties, their resale values, and the resell time. Immediate sales stabilize property values, minimize shifts in the tax burden, and encourage property maintenance and improvements.

Borrowing costs reflect the municipality's capacity to repay bonds. Immediate resale prevents tax base erosion and mitigates bonding costs.

Foreclosed, sold at auction, and vacant and secured (i.e., closed, no entry)

The above costs plus those incurred for inspecting, securing, and maintaining the property.

Same as above plus the length of time the property remains vacant and the extent to which the municipality can keep it from deteriorating.

Immediately securing the property keeps it and the neighborhood from deteriorating and consequently preserves the tax base, which helps municipalities secure credit on favorable terms.

Foreclosed, sold at auction, vacant and unsecured

Municipality must legally compel the owner or note holder to secure the property or do so itself. Municipality incurs more costs if it wants these parties to reimburse it for securing the property.

The longer it takes the municipality to secure the property, the more likely property value will drop. Unsecured property is more likely to attract squatters and vandals, deteriorate more rapidly, and discourage neighboring residents from maintaining or improving their property.

Vacant and unsecured property makes the neighborhood less desirable and discourages residents and business owners from improving their properties. The subsequent drop in property values affects the tax base and municipal bonding costs.

Foreclosed, sold at auction, vacant, unsecured and attracts criminal activity

Municipality incurs the same costs as above plus the cost of responding to relative minor criminal activity, such as squatting, vandalism, and drug use (as opposed to drug dealing).

Vandalized structures and criminal activity may encourage residents to relocate to other neighborhoods or municipalities. They may also discourage customers from shopping at neighborhood stores and make it harder for employers to attract or retain workers.

Municipality's bonding costs may increase if vacant and unsecured properties become eyesores and the value of occupied property decreases.

Table 2: Continued

Scenario

Shock Waves

1st Wave: Immediate Cost Impacts

2nd Wave: Impact on Property Values and Property Tax Revenues

3rd Wave: Impact on Bonding Costs

Foreclosed, sold at auction, vacant, unsecured, attracts criminal activity, demolished

Municipality incurs demolition costs, which may include administrative and legal expenses. While the municipality waits to demolish property, criminal activity continues.

Demolition reduces the tax roll, which shifts the tax burden to other owners while reducing property values. Blighted structures and lots also drive away business customers, which could depress business property values and drive businesses to relocate.

Removing property from the tax rolls further reduces the tax base and consequently drives up bonding costs.

No foreclosure (i.e., “walkaway”), property remains vacant and unsecured, attracts criminal activity, and subsequently demolished

Because the owner or note holder walks away from the property, the municipality must directly maintain and secure it until it demolishes the property or forecloses on the tax lien, a legal process that could take years. Meanwhile, property attracts serious crime.

The municipality could foreclose on the tax lien and recoup some of the back taxes and maintenance costs. But this takes time, and the property can deteriorate and, consequently reduce the value of neighboring properties. The neighborhood could destabilize if the remaining owners sell their properties.

Walkaways could severely affect bonding costs, given their potential impact on the tax base.

No foreclosure, property remains vacant and unsecured, and catches fire

The longer the property sits vacant and unsecured, the more likely it will deteriorate, attract crime, and catch fire.

Crime and fire induces residents, investors, and businesses to abandon the neighborhood, which furthers deterioration and depresses property values.

If blight spreads through out the area, the tax base will significantly erode, which could drive bonding costs even higher.

Hoping for the Best in a Bad Situation

The first two scenarios pose the fewest problems, mainly because the foreclosed property is quickly secured. The municipality (or, in Chicago's case, the county) registers the foreclosure and records the subsequent sale. It may recoup these costs through document registration and recording fees.

Vacant Property: Going from Bad to Worse

But the costs begin to mount in the second scenario because the property remains vacant after the sale and consequently must be secured. Neighbors' complaints may trigger building and housing code inspections, which usually require notifying the owner about code violations and the need to secure the property. In the second scenario, the owner boards up the structure and maintains the grounds, thus preventing blight, crime, and their attendant municipal costs. These steps prevent blight and crime and preserve property values.

Costs escalate in each of the remaining scenarios because the property could remain vacant and unsecured for a long time. To secure the structure and maintain the grounds, the municipality must find the owner and compel him or her to reimburse it for the costs. Squatting and vandalism give way to drug selling and arson, activities that significantly increase municipal costs.

Meanwhile, the property's condition and the problems it attracts begin to change how people and businesses perceive the neighborhood and the market value of their properties. Some may decide to leave the neighborhood and sell their properties at a write-down. Those who stay may forgo basic maintenance and repairs, a choice that could also affect the values of the surrounding properties. Business owners may face similar choices, especially if they lose customers or find it hard to attract or keep employees.

Blight and crime, or the perception of them, lower property values and tax revenue while driving up municipal costs. Vacant lots appear throughout the neighborhood, attracting litter, debris, and vermin. The neighborhood becomes even less desirable, further reducing property values and eroding the tax base.

Municipalities immediately feel the impact of the demolished properties because they are removed from the tax rolls. But it may take time before they feel the impact of the drop in the values of the remaining property. A property owner does not realize the effect of the reduced value on his or her taxes until the municipality revalues property, which in Connecticut occurs at least once every five years. In the meantime, the owner pays taxes on a higher, inaccurate value.

In the last scenarios, the impact on the tax revenues is immediate because the foreclosed properties are demolished and removed from the tax rolls.

Aftershocks

Now, foreclosures' shock waves reach city hall where the municipality's credit rating could drop, consequently raising bonding costs. The municipality must now choose between deferring necessary capital improvements and possibly diverting more tax revenue toward servicing new debt.

A shrinking tax base is not the only factor affecting the municipality's access to credit. Before the subprime mortgage crisis affected financial markets, readily available bond insurance allowed municipalities to obtain credit on favorable terms and conditions. This happened because bond rating agencies—the organizations that gauge and assign risk—based a bond's risk on the bond insurer's credit, not the underlying credit of the municipality issuing the bond. Consequently, municipalities with poor credit avoided paying higher interest rates when issuing insured bonds.

But this mechanism for securing low-cost credit became too popular for its own good. As the demand for bond insurance went up, the cost of insurance went down. Consequently, insurers sought to boost profit margins by investing in mortgage-back securities, which included subprime mortgages, a decision they subsequently regretted:

When the real estate market nosedived, leading to soaring default and foreclosures rates, these securities proved to be far riskier than anyone had believed, and the bond insurers suddenly faced huge unanticipated liabilities. As losses mounted among insurers, the credit rating agencies lowered the insurers' ratings which, in turn, lowered the ratings—and raised the interest rate—on the municipal bonds they insured (Weinstein, 2009).

Beginning in 2008, banks, money market funds, and other institutional investors curtailed their purchase of municipal bonds and the volume of new municipal bonds that were issued nationally between September 2007 and 2008 dropped 40%, the New York State comptroller reported (Office of the New York State Comptroller, 2008). If this trend continues, “a local government could be shut out of the market altogether. Those that have market access will likely pay higher interest rates—increasing repayment costs for taxpayers and squeezing already tight budgets.”

FORECLOSURE EFFECT ON PEOPLE AND FAMILIES

A 2009 Urban Institute report appears to be the most comprehensive study of the impact of the mortgage and foreclosure crises on individuals and families. The report, however, first acknowledges the lack of research on the topic due to the (1) recent nature of the crises, and (2) difficulty associated with identifying and tracking all of the families impacted by them. Therefore, its findings are based on interviews with service providers who deal with the affected population and studies about families who had to move due to other negative events occurring in their lives.

The report explores the issues of housing instability and financial security. It acknowledges that there is no reliable data in how families in foreclosure are rehoused or how their new neighborhoods compare to their old ones. However, for homeowners, it points to a lowered credit rating and loss of savings during the foreclosure process as obstacles to stabilizing their housing and financial situations. Renters face similar issues, possibly losing their security deposits and having an eviction on file. There are also costs associated with moving (application fees, etc.) and renters especially may have to make hasty decisions based on when they are notified about the foreclosure. The report concludes that there is an expectation that a significant number of households in foreclosure would experience financial hardship, but it acknowledges that in light of the larger economic crisis it is difficult to attribute increases in the number of individuals seeking financial assistance just to foreclosure.

The report also discusses physical and emotional health issues, noting that stress exacerbates “negative behaviors” and negatively affects physical health. It stresses that families dealing with foreclosure may already be vulnerable to health issues as healthcare costs are a major factor in mortgage defaults. However, again, it finds no research specifically addressing the issue and notes it is difficult to tie increases in people seeking health services specifically to the foreclosure crisis.

Special Populations

The Urban Institute pays special attention to the elderly and children. Based on AARP data, the report concludes that the problem is potentially significant in the elderly community, with 28% of all mortgage delinquencies and foreclosures in the last half of 2007 affecting a household headed by someone age 50 and over. For the elderly, it notes that moving can trigger emotional and physical setbacks. Additionally, their limited incomes make it harder to recover from the crisis.

The Urban Institute report also found significant health and education effects for children affected by the crises. These are explored in more detail in a 2008 First Focus report. The report estimates that 1.95 million children were affected by the mortgage crisis, based on Center for Responsible Lending projections on subprime loans, Home Mortgage Disclosure Act data on subprime loans by ethnicities, and census data. It acknowledges that this number might be low because it does not include children in families that are evicted and families in foreclosure on traditional loans.

The report cites research, including National Assessment of Education Progress data, to conclude that children who experience excessive mobility suffer in school, including performing poorly in reading and math and a higher likelihood of being held back and dropping out. The report also highlights research that shows that excessive mobility is associated with delinquent behavior. Like the Urban Institute report, the First Focus report notes the possible increase in health issues.

Many reports note the disproportionate number of subprime loans in predominately minority communities. While the Urban Institute acknowledges this trend, it finds that the highest subprime densities are in those minority communities with higher-income residents. This is because, while subprime loans represent a higher proportion of loans in low-income neighborhoods, the volume of lending in those neighborhoods is low. Commentators point out that low-income minority communities are especially vulnerable to all of the effects discussed above due to the conditions that lead to high number of subprime loans in the first place.

CRIME

As far as we were able to determine, the actual effect of subprime mortgage lending on crime in New England has not been examined. But research has shown that subprime mortgage lending leads to much higher foreclosure rates than prime lending. And the growth and concentration of foreclosures in lower-income and especially minority neighborhoods have been linked to the growth and concentration of subprime mortgages in these areas.

Foreclosures have been shown to have a significant impact on crime. Especially in lower-income neighborhoods, a substantial percentage of foreclosures is likely to lead to buildings being vacated or abandoned. Properties abandoned or left vacant for extended periods become targets for vandalism and a magnet for all kinds of crime, including theft, arson, and drug trafficking.

A frequently cited 2005 study in Chicago examined the impact of single-family mortgage foreclosures, many linked to subprime mortgage lending, on neighborhood crime. The study found that higher foreclosure rates lead to much higher levels of violent crime. When the foreclosure rate increases by one percentage point, neighborhood violent crime rises by 2.3 (Immergluck and Smith, Housing Studies, 2006). The authors found the trend rate for property crimes was not statistically significant.

BIBLIOGRAPHY

Apgar, W. C., M. Duda and R. N. Gorey. 2005. The Municipal Cost of Foreclosures: A Chicago Case Study. Homeownership Preservation Foundation.

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Center for Responsible Lending. May 2009. Soaring Spillover: Accelerating Foreclosures to Cost Neighbors $502 Billion in 2009 Alone; 69.5 Million Homes Lose $7,200 on Average.

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