New study details impact of foreclosures on communities

Points to the role mortgage servicers, investors play in negative effects

A new paper published in the journal Housing Policy Debate points to the role of mortgage servicers as a critical factor in whether or not a neighborhood or community experiences the negative effects commonly associated with foreclosure sales, such as vacant houses, rising criminal activity and loss of nearby property values.

The study, conducted by Abt Associates’ Senior Analyst Hannah Thomas, focused on two Boston neighborhoods—Jamaica Plain and Dorchester. 

As part of the study, Thomas examined foreclosure sales data, observed foreclosure sales and conducted interviews with real estate agents, real estate lawyers and foreclosure auctioneers between 2009 and 2010.

“Preserving community assets is a critical component in maintaining and improving neighborhood quality of life,” Thomas said. “There are a few simple policy steps we can take to ensure that our housing credit and foreclosure systems work toward building neighborhoods up rather than tearing them apart.”

The study, Thomas says, finds that sales practices established by the mortgage servicers and real estate agents tend to favor investor-buyers, who are better positioned to absorb the risk of a foreclosure sale. 

However, these practices may also lead to lower sales prices and increase the likelihood of property vacancy, which is a key factor in declining property value and increases in criminal activity.

Thomas argues that because of consolidation in the mortgage servicer industry, the majority of outstanding mortgages are handled by a few large organizations. 

According to the study, the sheer volume of the loans these organizations are servicing means that they tend to have a one-size-fits-all approach in dealing with delinquent homeowners and foreclosed properties. The result: foreclosed properties sell for lower prices and have a higher risk of being vacant, leading to crime and other problems for a neighborhood.

Thomas’ paper reviews two policy recommendations, which may help prevent delinquent properties from becoming lender-owned, including:

  • Working with homeowners to help them find affordable mortgages and then allowing them to re-purchase their foreclosed homes at current market value.  The study highlights the nationally recognized Boston-based SUN program as a successful example of this practice in action; and
  • Creating a real estate “network,” connecting homeowners whose houses are “underwater” and who want to sell with buyers who are ready to close immediately. 

Thomas’ study was conducted with funding from the U.S. Department of Housing and Urban Development, The Heller Alumni Association and the Downe House Seniors Association.

To view the full article, click here.

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