CRL Looks at Spillover from Foreclosures


The Center for Responsible
Lending (CRL) estimates that between 2007 and 2012 some 12.5 million homes in
America have been put into the process of foreclosure.   Beyond the harm this has done to the
families who have lost or face the loss of their homes there is a spillover
on the neighborhood and the larger community.  In an update to a report issued in 2012, CRL
has just published a brief on the economic impact on the larger community when
a home in the area is foreclosed. 

CRL based its analysis on mortgage data collected by the government under
the Home Mortgage Disclosure Act and by Lender Processing Services.  It estimated the number of foreclosures in
each community, the number of affected neighboring properties, and the loss in
to those properties applying a the 2008 estimate derived by Harding,
Rosenblatt, and Yao of a 0.744 percent house price depreciation to every home
within 1/8 mile of a foreclosure.  The
depreciation amount was then aggregated at various geographic levels to arrive
at the total of spillover losses.

The Center estimates that about 95 million homeowners have lost equity when
a nearby home has gone into foreclosure. 
The aggregate property value lost by these homeowners is estimated at a
staggering $2.2 trillion.   The average
loss for families
, both already suffered as well as estimated future losses,
average $23,150 in household wealth or 8.8 percent of their home’s value. 

The brief, one of five that CRL has published updating a
study published in 2012, found that over half of the spillover losses have been
felt in communities of color.  About $1.1
trillion in property values has occurred in minority neighborhoods, reflecting
the higher concentrations of foreclosures in those communities.  In communities of color the average current
and future losses (based on homes that have entered but not completed
foreclosure) is estimated at $40,297 or 16 percent of the homes’ value.

CRL based these estimates only on the losses suffered by
those in close proximity to homes in foreclosure.  They did not include the estimated total of
$7 trillion in home equity that resulted from the housing crisis, the negative
impact from loss tax receipts and increased costs of managing vacant and
abandoned property that has fallen on local governments, or the non-financial
spillover costs such as increased crime, and neighborhood blight.

CRL said that research suggests that the
spillover impact increases during the year leading up to the foreclosure sale,
after which the negative effect stabilizes. 
Given that there is a variation depending on the stage of foreclosure
the property is in, CLR said it recognizes that the full spillover
impact of all of
foreclosure starts
may not have materialized yet. 

Finally, spillover
loss, like any loss
in home
equity, may be
temporary and there
is some
evidence that property
values may eventually rebound months or
years after foreclosed properties are purchased
by new owners.  Despite this
eventual rebound
, CRL said
they believe it is
important to capture the aggregate
loss in wealth incurred by nearby homeowners throughout the
crisis, even if some
of that equity may have
been restored.

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