3.29.2012 | A new report by the Woodstock Institute in Chicago puts some numbers to what many have been saying all along: African Americans and Latinos are suffering disproportinately from the foreclosure crisis.
Although home values have stopped their slide (for now) and the number of foreclosures that were in process during the fourth quarter of 2011 fell by 4.1% from the previous period, you wouldn’t know it from a stroll through many of the Chicago neighborhoods in the Woodstock report. (Foreclosures declined, according to analysts, mainly because of recent efforts to get banks to stop “dual tracking” (starting the foreclosure process while loan modifications are underway), and recent federal pressure on banks to work harder to keep families in their homes.)
The Woodstock report, Struggling to Stay Afloat: Negative Equity in Communities of Color in the Chicago Six County Region [pdf], tallied the damage in the six-county Chicago metro area, neighborhood by neighborhood. They find that in predominantly African American communities in Chicago, 40.5% of borrowers are underwater on their mortgages (that is, they owe more than the home is worth). Similarly, 40.3% of homeowners are underwater in predominantly Latino communities. These rates are about two and a half times higher than foreclosures in predominantly white communities.
Further exacerbating the inequities, borrowers in communities of color are more than twice as likely as those in white communities to have little to no equity in their homes.
The numbers also serve as a possible harbinger of more distress down the road. Many homeowners are at the tipping point when they just walk away. On average in the Chicago metro region, underwater homeowners owe about 33% more than their home is worth. As the Woodstock report notes, the prospect of walking away from a home loan becomes more real when mortgage debt is more than 10% of the value of the home. And the temptation only rises as values sink. Those whose outstanding mortgage debt is 50% more than the value of the property–which a sizable share of Chicago distressed homeowners are approaching— are 7 times as likely to default as homeowners with some equity in their homes.
“Negative equity” also appears to be correlated with mortgages that contain exotic, less sustainable characteristics, according to Woodstock.
“One study found that 80% of nonprime borrowers with payment-option Adjustable Rate Mortgages (ARMs) and 75% of nonprime borrowers with short-term hybrid ARMs had negative equity in their homes, compared to 39% of nonprime borrowers with fixed-rate mortgages. Many African American and Latino first-time homebuyers were victims of these exotic loans.”
As we’ve reported before (here and here), it’s not just homeowners who are affected. Entire neighborhoods are pulled into the decline. Studies (here and here) have shown that each foreclosure causes homes within about an eighth of a mile to lose from 0.5% to 2% of their value.
Crime also increases when homes sit vacant. A study in Chicago found that for each 1 percentage point increase in the foreclosure rate, violent crime ticked up by about 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.
(A discussion of all of these impacts and how communities can best respond is found in BRR member Todd Swantrom’s chapter in Urban and Regional Policy and Its Effects, published recently by Brookings Institution Press.)
Underwater homeowners also encounter challenges when trying to sell their homes, according to the Woodstock report, “since the sale is often contingent on the loan servicer approving a short sale. Options to refinance underwater loans are often limited as well, though policymakers have recently expanded programs designed to facilitate refinancing of loans with negative equity.”
This problem is not going away any time soon, it appears. As Laurie Moore, an Amherst Securities Group LP analyst who has advocated mortgage forgiveness, calculates, there’s another 4.5 million holders nationwide who have given up paying and are likely to lose their homes down the pike. This is in addition to the 2.5 million homes that have already fallen to foreclosure since the housing bubble burst.
Resilience in the Face of Foreclosure, by Todd Swanstrom and James Brooks (National League of Cities).