Monday, February 1, 2010

The Cost of a Foreclosure

Originally posted on Rortybomb:

Short answer: To taxpayers, anywhere between $5,000 and $34,000 for an unsecured foreclosure. Here’s the longer answer:

Let’s take one more swing at at this wave of foreclosures chart:

Notice how the number of foreclosures closed is actually going down, though the number of delinquencies are skyrocketing. The best scenario, without government action or a change of norms, is that we have a long, slow, steady stream of foreclosures, with millions of Americans homeowners stuck in properties that are both underwater and will be foreclosed on, unable to move to pursue jobs, build savings through renting cheaper properties, unwilling to invest in proper maintenance, etc.

I want to talk a little bit about the cost of any one of these foreclosures to me, as a taxpayer. I’m going to go with this Urban Institute study from May, 2009, The Impacts of Foreclosures on Families and Communities: A Primer. Here’s their summary of a cost of a foreclosure:

And their description:

First, there is a typical $7,200 cost to the homeowner, a figure not including any imputed values for the effects of stress on the family. Second, as noted earlier, are the high legal and administrative costs born by the lender/servicer: as much as $50,000. Next are the costs to local government: $19,229 under scenario D from Apgar and Duda’s analysis explained above. Finally, there is a $3,016 drop in property value for the adjacent homes (calculated based on information from the Immergluck and Smith study). The estimated total cost is $79,443.

$20,000 to taxpayers! Not to mention a total cost of $80,000. Where is that taxpayer cost coming from? They break that down by a variety of costs and by a variety of scenarios:

And here is their description:

Why do foreclosures cause local governments to spend more? In a study of the City of Chicago, William Apgar and Mark Duda enumerated the reasons.44 They estimate the costs (as of 2005) of actions that the city must take under five different scenarios (summarized in figure 2). In scenario A, the property is vacant but secured by its owner. Only a few administrative processing tasks are required ($430). Where the current owner has not secured the property, the city has to step in and take action itself. If the decision is to secure and conserve the property (scenario B) the costs of required processing jump up to $5,400, but if the decision is to demolish (scenario C), they go up even higher to over $13,000. If the owner abandons the property (scenario D) the city’s financial exposure is even steeper because of unpaid property and utility taxes, and new outlays to continue water service and provide lawn mowing and trash removal (almost $20,000). The city’s exposure is highest by far if a fire occurs (scenario E). In this case, there are the costs of fire suppression, the eventual costs of demolition and site clearance, and the costs of keeping the building from being a threat to safety in between (more than $34,000).

So an owner abandoned property can easily approach $20,000 in costs to a municipality. That’s a more extreme scenario, but even a best case estimate of a foreclosure on an unsecured property costs taxpayers $5,000. And that’s a best case. Amazing. A few additional points:

- To paraphrase Toby Keith, “negative freedom isn’t free.” Even having the night watchman walking around making sure property rights in land are well maintained can be a very costly proposition, especially when we get to the problem of highly leveraged property run through the magic of financial engineering, property that everyone really wishes would just go away, property likely to become a home for squatters, crime, or fires. $5,000-$20,000 is a huge chunk of money per foreclosure, especially for an already struggling municipality budget, and the night watchman might want to take some actions to clean this mess up.

- That a house that is sold in foreclosure loses 30% of its value, and neighboring houses lose about 1% of their value, is very well documented from a variety of sources. John Y. Campbell has a paper to this effect, and he’s one of the best with statistics and finance.

- From the paper, referencing a big study carried out in Chicago, “A 1 percentage point increase in the foreclosure rate…is expected to increase the number of violent crimes in a tract by 2.33 percent, all other things being equal. A full standard deviation increase in the foreclosure rate is expected to increase the violent crime rate by 6.68 percent.”

- Obviously the ability of neighborhoods to force representatives and officials to get banks to not de facto abandoned their properties depends on how much clout they have with officials. Middle and upper-middle class neighborhoods can probably handle this. Poor neighborhoods, who are often lacking for community organizers, will have more difficulty.

- This is a great moment to remind you of the excellent Alex Kotlowitz article All Boarded Up, about Cleveland’s efforts with mass foreclosures. Hearing from officials on the ground gives you a sense on how these costs pile up so quickly.

- There’s a lot of talk about the administration’s proposals to help invest in energy-efficient home improvements. That’s a good idea, but it’s also worthwhile to step back and just imagine the sheer amount of deterioration going on with the housing stock in these scenarios. Nobody has an incentive to keep these not-yet-foreclosed-on homes well-maintained.

- Also from the paper, 53% of the officials a National League of Cities (NLC) survey “said that needs for temporary assistance had increased some or a lot over the past year.” How’s something like Right to Rent as an easy solution to this new wave of homeless people coming from foreclosures?

The government needs to get involved, and not in a wink-wink subsidy to the banks’ balance sheets like the predatory HAMP program. At this rate how can we afford not to?

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