11.29.2011 | This afternoon, the Center for Housing Policy is hosting a webinar on “resilience in the face of foreclosures,” which draws on the work of BRR member Todd Swanstrom and others. We encourage you to check it out. In the meantime, in this post, Swanstrom calculates the losses from foreclosures in one of the case study sites, St. Louis (not featured in today’s webinar), and makes the case for mediation. * * *
by Todd Swanstrom
Firefighters don’t ask if the homeowner was smoking in bed before putting out the fire. Similarly, we don’t need to ask who is to blame for the foreclosure wild fires that are destroying communities across the region. We should act now to protect the public because the costs of foreclosure affect us all.
Consider St. Louis. In 2010, foreclosures cost property owners in St. Louis County close to a billion dollars. William Rogers, head of the Real Estate Research Service of the Public Policy Research Center at the University of Missouri, St. Louis, estimates direct losses of about $975 million. I calculate another $12 million in lost tax revenue.
Williams used thousands of actual sales and accounted for unique characteristics of each property to isolate the costs of foreclosures and the loss in value for all homes located within one-eighth of a mile (660 feet) of a foreclosure. The losses to foreclosed homes totaled $116.1 million, and to neighboring homes, $859.6 million.
I’d add to that the costs to local governments — and the broader metro area. Lost property tax revenue alone from foreclosures in St. Louis County was $970,000 in 2010. Other tax funds were equally hard-hit. Community colleges in the county lost $404,000 in funding, the zoo/museum district lost $475,000. The special school district, which funds special services for handicapped and other students throughout the county, lost nearly $2 million in forgone tax revenue. Because school districts rely more on property tax revenue, they have been even bigger losers. Using the average property tax rate across the 23 school districts in St. Louis County, I estimate that schools lost $8.2 million due to foreclosures in 2010. In sum, last year foreclosures cost local governments and school districts in St. Louis County almost $12 million in lost revenue.
Local governments cannot continue to suffer these losses. Lenders, governments, and homeowners all know that everybody loses when a foreclosure happens. One option to stem the losses is foreclosure mediation. In mediation programs, homeowners on the brink of foreclosure are notified that they have a right to participate in a mediation conference. The homeowner (hopefully represented by a trained housing counselor) and the lender then appear before a neutral mediator to agree on a way to avoid foreclosure. If the parties cannot agree on a solution and if the mediator determines that the lender has negotiated in good faith, the foreclosure can proceed. Lenders who do not negotiate in good faith must pay a fine before proceeding with the foreclosure.
Some argue that homeowners who have “overborrowed” and can no longer afford their homes should bear the brunt of the responsibility and honor their moral promise to pay their mortgage. Let the chips fall where they may, in other words. No mediation, no changing the terms of the original deal. But this assumes that the original mortgage was transparent and fair. In many cases, borrowers were pushed into predatory mortgages they did not understand. Moreover, according to the logic of “let the chips fall,” doctors would withhold care from heart attack victims who were overweight and out of shape, just as firefighters would let a house burn if the owner had fallen asleep while smoking. In the case of foreclosures, the harm extends beyond the individual to the community at large, and the costs of not mediating the foreclosure are likely greater than the losses the banks will assume in a mediation.
In fact, loan modifications could be a win-win for homeowners and investors. Research in St. Louis shows that each house that goes through a foreclosure loses about 28 percent of its value. From 2006 to 2010, foreclosed properties fell approximately $1 billion in price – a direct loss to those taking possession of these properties following foreclosures. Lenders could offer to cut the principal owed by $500 million and, if this prevented the foreclosures, the drop in housing values from foreclosures would be averted and investors could still end up ahead. Obviously, this is a simplified scenario, but at its core, some savings are better than nothing. And community college students, elementary and middle school students, the zoo, the police force, the roads and bridges, would all benefit.
Mediation is not a radical idea. At least 20 jurisdictions and most major banks and lenders across the country are participating in some form of mediation. Under a 2011 mediation program in Nevada, 15 percent of homeowners facing foreclosure opted for mediation, and 78 percent of those who went through mediation were able to avoid foreclosure. Last year, there were 4,749 distressed sales in St. Louis County, almost all of them associated with a foreclosure. If a mediation program like Nevada’s had been in place, I estimate that 558 foreclosures could have been prevented, increasing property values by $114.6 million and giving local governments an additional $1.4 million in tax revenues.
Why more jurisdictions don’t join Nevada’s example is a puzzle. In many cases, it’s clear that servicers, by rigidly refusing to modify loans, are not acting in the best interest of investors. Perhaps it’s also a case of “loss aversion” that behavioral economists have so well documented. We humans hate losses and make amazingly irrational decisions to avoid a loss. In the stock market, for example, we tend to hang on far too long to sliding stocks. Could bankers be doing the same thing and holding on to a loss for too long?
The burden of foreclosures rests heavily on the local government, the jurisdiction that polices our communities, cuts grass on vacant lots, and pays the price for neighborhood destabilization and decline as a result of foreclosures. The cost to the taxpayers of a countywide foreclosure mediation program is minimal and the benefits are substantial. And the savings are not only monetary. Mediation can also reduce the enormous social costs of foreclosures, including rising crime rates, stress on families, and falling school performance from students being suddenly pulled out of school. Foreclosure mediation is not only the smart thing to do; it is the right thing to do.
Todd Swanstrom is the Des Lee Professor of Community Collaboration and Public Policy Administration at the UMSL. He has published extensively on local and regional responses to the foreclosure crisis.