With the week’s economic news, uncertainly is in the air. Though foreclosure filings are dropping across the country, it’s certainly not because the housing market is any healthier. Some housing experts predict waves of foreclosures that will continue into the future. No one is sure what the coming months and years will bring, but research from the BRR Network can help policymakers and planners in metropolitan regions learn from the recent foreclosure crisis and build their region’s capacity to respond to whatever may be coming next.
In a series of case studies that examined how six different metro regions fared in the recent housing crisis, researchers from the BRR Network led by Todd Swanstrom found that local community resilience was a significant factor in how well a region was able to recover from the collapse of the housing market. As Tip O’Neill famously put it, all politics is local. He might have added that all real estate is hyperlocal. Therefore, building that capacity to respond to the foreclosure crisis, the authors argue, means joining federal, state, and local policymaking with local, on-the-ground understanding of neighborhoods.
Foreclosures are devastating for all involved. Losing a home is one of the most stressful events in anyone’s life. Children are uprooted from schools, parents lose not only their home but also the equity they’ve put into it, and the black mark on personal credit will shadow them for years. Neighborhoods suffer as well from declining property values. Studies have shown that each foreclosure causes homes within about an eighth of a mile to lose from .5 to 2 percent of their value.
Crime also increases when homes sit vacant. As Swanstrom reports, a study in Chicago found that for each 1 percentage point increase in the foreclosure rate, violent crime ticked up by 2% in the area. Local governments lose tax revenue and services suffer as a result, compounding the neighborhood decline. Another study in Chicago found that if a foreclosed property is quickly put back on the market, the average cost to local governments is only about $430. If the home languishes and is abandoned and requires demolition, the cost to the local municipality is $34,199. Even the bankers lose. A study of 900 subprime loans estimated the cost to investors at over 50%. With an average principal balance of $190,000, that means a lost of about $95,000 on each foreclosure. The losses are even greater in weak real estate markets.
And lest anyone think that the foreclosure crisis is confined to “the usual suspects”—low-income, inner-city neighborhoods—think again. Swanstrom and colleagues’ data shows that foreclosures have spread to the outlying suburbs, with their “drive ‘til you qualify” mortgages. Unfortunately, these suburbs have less experience with foreclosures and often lack the ability to respond quickly.
“We were more likely to find networks of robust housing nonprofits in the central city and maybe a few inner-ring suburbs,” Swanstrom told HUD’s Research Works in an interview last year. “The inner city has dealt with foreclosures for decades, trying to avoid abandonment and get houses back on the market. But most outlying areas don’t have that same capacity to respond—they are not used to dealing with this kind of problem.”
Given these costs, stemming the tide of foreclosures is imperative, and focusing on building local capacity to respond is critical. Swanstrom and colleagues find that those cities and counties that were better able to weather the storm were those that shifted organizational routines; collaborated with other sectors of government, foundations and community-based organizations; redirected resources to where they were needed; and passed targeted reform laws.
In “Resilience in the Face of Foreclosure,” (pdf) Swanstrom and James A. Brooks from the National Leagues of Cities outline lessons from local and regional practice that policymakers and planners can use to build their capacity to respond in the future. They include:
1. Create a strategic vision. Housing policy should not be focused only on housing production or even only on affordability, but on building thriving neighborhoods that attract residents and businesses.
2. Move quickly to assess the nature of the problem. Government officials need to understand what causes foreclosures, who’s impacted and where interventions can be most effective.
3. Develop a regional data system. Because foreclosures are a moving target, and are essentially private transactions, public access to accurate data is limited. Metropolitan areas need up-to-date data systems to track the problem in real time. (One well-developed model is the Northeast Ohio Community and Neighborhood Data for Organizing or NEO CANDO. The data is run by the Center on Urban Poverty and Community Development at Case Western Reserve University in Cleveland. You can check it out here.)
4. Build leadership by finding a credible convener who is perceived as neutral and can bring stakeholders to work together at the table. (For example, in St. Louis the Federal Reserve played a key leadership role by helping to pull together the Metro Foreclosure Intervention Task Force.)
5. Cooperate with other governments in the region. Local responses can be more effective by addressing gaps in services.
6. Act quickly to redirect existing funding and find new funding sources.
7. Build capacity, both administrative and capacity to collaborate across departments and sectors.
8. Lobby for state and federal policies that can encourage innovation and flexibility.
In a forthcoming chapter, “Resilience in the Face of Foreclosures: How National Actors Shape Local Responses,” Swanstrom expands on how federal policy can provide more opportunities for municipalities, regional planners and policymakers to take some of the steps outlined above.
He argues that while local government has the neighborhood expertise to more effectively respond to the foreclosure crisis, they need support. He identifies several ways national policy can create opportunities to strengthen the local response and foster more resilient regions, including:
- Stronger laws that require loan lenders and servicers to work with counselors to help families stay in their homes by reducing monthly payments through loan modification programs.
- More targeted federal funding for the Neighborhood Stabilization Program that enables municipalities to buy foreclosed properties, fix them up and put them back on the market. The current method of spreading the funds around in a “peanut butter” approach risks wasting taxpayer’s money when market dynamics overwhelm rehabbed homes. Giving actors the ability to spend money on larger neighborhood stabilization and not just on foreclosed homes is a better option.
- More freedom to pursue a localized market recovery strategy, targeting “transitional” neighborhoods where the funding can really make a difference. Transitional neighborhoods are neighborhoods that have market strengths but that could be tipped into decline by a rash of foreclosures.
- Greater capacity of local governments to take advantage of these federal dollars. Often they do not have the capacity to spend the money in a timely fashion while meeting regulations or to collaborate in the ways that are necessary to tackle the revitalization efforts at the needed regional scale.
- More “strategic collaborative capacity” to not just spend the federal funding but to implement a targeted market recovery strategy. Doing so requires 1) cross-sector collaboration, including real estate agents and lenders, nonprofit organizations, and community development corporations, because local government cannot know what is happening on the ground in a neighborhood as well as these groups can; 2) cross-government collaboration, especially because small suburban governments lack the scale and expertise to manage this problem; and 3) “cross-functional” collaboration because healthy neighborhoods are not just about housing. They need strong schools, transit, police and parks, to name a few.
Swanstrom says the kinds of places that will be most resilient to future crises will be diverse and flexible in terms of housing stock (that can accommodate households at different income ranges and life stages), transportation (car, bike, public transit, pedestrians,) and local community-based organizations who can track trends in real time, collaborate and shift resources easily to where they are needed.
The chapter will be published later this year in Regional Resilience: Urban and Regional Policy and Its Effects, edited by Harold Wolman, Margaret Weir and Howard Wial from the Brookings Institution Press.
Photo by Ted Guamero.