Effects of Foreclosures on a Neighborhood - Research Paper Example

 Effects of Foreclosures on a Neighborhood Introduction Due to the recent recession of the American economy that started in 2007, both mortgage lenders and people have experienced great losses. Homeowners, who lost their jobs due to the economic crunch, were unable to pay their mortgage and creditors, such as banks, started taking legal actions against those homeowners resulting in foreclosures (The truth about mortgage.com, 2007). Although, it was initially considered a problem mainly associated with the Federal Housing Administration’s loan programs, recent research has shown that foreclosures have been on the continuous increase for the past few years. The sudden increase in foreclosures that started in the 1990s was largely driven by the growth of high risk, conventional subprime lending, irregular mortgage interest rates, increasing labor and material cost for new construction and uncertainty about the mortgage banking industry in general, combined to depress the new housing market (Dizikes, 2010). Reasons behind foreclosures The downsizing of a number of organizations was a main reason for the decreasing jobs in the early nineties. The downsizing resulted in individuals losing their jobs and the loss of income made it hard to keep up with their mortgage payments and other bills. Furthermore, the downturn in economy resulted in decreased property values. Lower property values caused the failure of the numerous homeowners to refinance, or borrow against their home equity to strengthen their debt load. Thus, the loss of a huge section of the homeowners’ income due to economic recession and the reduced property values, resulted in many cases, is the loss of their home due to foreclosure (Schuetz, Been, & Ellen, 2008). The problem of high foreclosure amounts in recent years has been associated with growing activity of subprime mortgage lenders that concentrate in lending to borrowers with unsatisfactory credit. The subprime mortgage started with the explosion of the housing bubble that had driven prices high in the previous decade due to the increased default rates on subprime and other adjustable mortgages offered to individuals with imperfect credit histories and lower capacities to fulfill their loans. This resulted in the trickle up effect on the larger financial sectors as banks and financial institutions. These institutions went through liquidity problems due to increased defaulting mortgages and reduced consumer spending resulting in severe harmful effect on the economy. Due to the consumers’ incapacity to pay off increasing mortgage cost and the fluctuating interest rates, lending institutions had no option but to foreclose on defaulting properties causing the already-shaky homeowners to be forced out of their homes. This resulted in a huge amount of foreclosures of properties causing an excess of homes in the market compounded by falling demand thus, starting a major housing crisis (Schuetz, Been, & Ellen, 2008). The sudden increase of foreclosures is related to predatory lending practices of brokers and lending institutions. The reason behind this is that the subprime lending sector provided loans to the segment of those borrowers who did not meet the criteria for a prime loan. The subprime lenders participated in lending activities that took away borrowers’ home equity and positioned them at a greater risk of foreclosures. Among these activities that distinguish predatory lending are unnecessary interest rates and fees and obligation of single-premium credit life insurance and forestallment of penalties that offered no countervailing benefits to the buyers. Thus, the subprime mortgage along with predatory lending increased the amounts of foreclosures during the economic recession (Miller, Rauterkus, & Sklarz, n.d). Effects of foreclosures Foreclosures entail significant costs and suffering for those most directly involved in the process because they not only lose the accumulated home equity and the costs associated with acquiring the home, but also access to secure, decent housing (Schuetz, Been, & Ellen, 2008). The financial implications of foreclosures on both the society and individuals have been discussed quite thoroughly in previous researches. But there are other important, personal and social costs of foreclosures as well. The first and the foremost, effect of foreclosures is that the individual whose property has been foreclosed upon becomes homeless. Even though, there are some people who rely on family during this time or are able afford to move into an apartment but there are a number of individuals who find themselves homeless. Similarly, foreclosure is perpetually accompanied by anxiety and stress which can ultimately lead to depression. There is a feeling of being lost and hopelessness marked by low self-esteem which results from feeling of embarrassment and disgrace. The credit rating is another effect of foreclosures because individuals with bad credit ratings are unable to obtain loans at better rates of interest. Moreover, such individuals are not able to secure jobs as most of the employers require a good credit rating to get hired. The trickle down effect can also have a serious effect on the neighborhood of the foreclosed upon property because property values decrease near foreclosed property (Miller, Rauterkus, & Sklarz, n.d). Effects of foreclosures on a neighborhood Foreclosures can have great influence on the areas nearby and even for the larger communities. The amount of foreclosures in numerous middle-and upper-earning neighborhoods is not high due to the strong need of housing property (Marilyn, 2010). In such neighborhoods, homebuyers and lenders have confidence about worth of the properties and the ability of these properties to be resold at a higher price (Marilyn, 2010). Thus, the negative impacts of foreclosures on a neighborhood are not likely very high. On the other hand, in low-and moderate-earning neighborhoods, or neighborhoods in which people are struggling with different types of economic pressures, foreclosures might result in significant negative externalities (Immergluck & Smith, 2005). Foreclosures not only wound individuals who are giving up their homes to foreclosure, but also damage neighbors by dropping the value of their houses (Dizikes, 2010). This means that existence of a foreclosed house in a neighborhood decreases the value of the homes around it and multiple foreclosures taking place within one neighborhood in a short period of time can have a crippling value drop (Dizikes, 2010). A number of real estate professionals indicate that for every foreclosure that takes place within a neighborhood, the worth of the homes around it drop by about 1.5 percent (Dizikes, 2010). Similarly, an additional foreclosure inside 250 feet of a sale harmfully effects selling price by about $1,666 (Leonard & Murdoch, 2009). Another significant impact of foreclosures is the increase in the level of crime that takes place in the neighborhood where a foreclosure of a property has taken place. If a homeowner undergoes a crisis of some kind and cannot pay his/her mortgage, his/her home might be foreclosed upon and the house might become empty and then maybe boarded up and ultimately abandoned. Empty houses might be used as places where drugs are traded and used, or used by criminals who might attack people in the neighborhood. Finally, such homes might be vandalized; people might steal wiring or other building parts. However, crimes from empty houses are less likely to be reported as compared to houses that are occupied. In some way, the existence of boarded-up and abandoned buildings might result in a lack of collective concern by neighborhood inhabitants with neighborhood crime (Immergluck & Smith, 2006). Literature Review Immergluck and Smith (2006) tried to determine the effects of foreclosures of houses in Chicago and revealed that each additional foreclosure within one-eighth of a mile is linked with approximately a one-percent decline in property value. In particular, foreclosures are expected to be more frequent in neighborhoods where property values are lower. Leonard and Murdoch (2007) determine the effects of foreclosures on single family houses sales in Dallas County in 2006. The results of the study indicated that each added foreclosure inside 250 feet of a sale is linked with about 1% decline in sales price. Lin, Rosenblatt and Yao (2008) investigated the spillover effect of foreclosures on neighboring property values through the evaluation method; assuming that foreclosed properties sell at a discount, and that the discounted sales prices are used as comparables, foreclosures will result in reduced assessed values of houses in the vicinity. They validate this in 2003 and 2006, including determinants of the level of foreclosures in 425 different instances and distance from the sale. The results of the study suggest that foreclosures have a noteworthy harmful effect up to 0.9 kilometers away from the sale, and till five years after the foreclosure. Skogan (1990) emphasized that deserted buildings can negatively effect a neighborhood by an increase in criminal activity in these areas. On the other hand, such robberies are not generally reported as the properties are empty. Methodology Data collection method The present study identifies effects of foreclosures on the neighborhood. The related literature was used as the data for the content analysis concerning the effects of foreclosure on the neighborhood. The sources consisted of academic journals, articles and internet websites. Data analysis Data was analyzed using content analysis which is a research instrument used to find out the existence of certain words or theories within writings or sets of writings. Researchers compute and study the existence, significance, and associations of such words and concepts, then make deductions about the messages within the texts. The use of content analysis for exploratory study is extensively supported in the literature, particularly for qualitative research (Miles & Huberman 1994). Limitations of the research The primary limitation of the present research is that it made use of existing literature as a source of data and conducted no primary research which limited its scope. Analysis The costs associated with foreclosures include costs to the individual unable to pay his/her debts and the institution in possession of the failed mortgage. The analysis of the existing literature regarding the effects of foreclosures on the price value of the neighborhood houses is divided into twp arts; the distance of the neighborhood properties from the foreclosed property and the devaluation of the price. The analysis indicates that each regular foreclosure within an eighth of a mile of a house causes a decrease of 0.9 percent in value (Immergluck & Smith, 2006). The value of foreclosed property increases less as compared to average appreciation rate (Pennington-Cross, 2006). According to the Center for Responsible lending (2008) 20.6 million neighboring homes will go through depreciation due to the subprime foreclosures that take place in nearby areas. The approximate value for this depreciation is $202 billion or $5,000 on average. Furthermore, foreclosures negatively effect local housing worth by as much as 5.7% (Dubin, 2008) and nearby troubled properties have significant negative contagion effects over and above the overall trend in house prices of approximately 1% to 1.5% per foreclosure (Harding, Rosenblatt, Yao, 2008). According to Leonard and Murdoch (2008) the direct effect of an increase in foreclosures is between $1.320 and $2,020 and the spatial reach of this impact is 250 feet. Lin, Rosenblatt and Yao (2008) further suggested that the spreading effect of foreclosure results in around 9.7% decrease in home prices when the foreclosed house is inside 100 yards. On the other hand, the analysis of the effect of foreclosures on neighborhood crimes indicates that foreclosures have been considered a serious risk to the stability of the neighborhood and health of a community. It suggests that foreclosures particularly in low-income neighborhoods can result it empty and abandoned properties. This can ultimately result in increased criminal activity put off social capital formation, and further disinvestment. Thus, foreclosures resulting in such harmful effects would lead to lower property values in the nearby areas, especially in the case residential property (Immergluck & Smith, 2005). The analysis further indicates that higher neighborhood foreclosure result in higher levels of violent neighborhood crime at significant levels. While the effect on neighborhood crime is not found to be statistically significant, the relationship is positive. This effect might be because more neighborhood crimes are not reported when they occur in empty. Conclusion The analysis in the present report illustrates that foreclosures have a significant impact on property values. The research further suggests that the spillover effect of foreclosure on the value of the houses in the neighborhood relies on two aspects; the distance of the neighborhood properties from the foreclosed property and the devaluation of the price. The results of the study reveal that there is a significant impact on the value of the property with a certain distance and a time period. It was found out that foreclosures within 250 feet of a sale depreciate selling price while the effects of the foreclosure remained in the neighborhood for five years. Furthermore, the findings of the study reveal that foreclosures have considerable social and economic impacts on neighborhoods. An increase in violent crime is an important social impact of foreclosures. Suggestions and Recommendations These results offer a number of useful suggestions for policymakers trying to deal with the increasing amounts of foreclosures. First, the results provide evidence that the effects of foreclosures spread to neighboring property owners along with the troubled borrowers themselves, which might offer a stronger reason for government intervention. If policy makers are to make effective decisions about whether and how much to control high-risk mortgage lending, they must consider the significant costs of high-risk lending that are being borne by communities - many of them lower-income and working class neighborhoods - who have no direct part in the mortgage lending process. This study shows that irresponsible lending has real implications for communities - implications that can be measured, at least partially, in lost wealth and decreased property taxes. Furthermore, it also indicates that neighborhood crimes due to increased foreclosures must be incorporated into policy making concerning real estate and mortgage lending policies and regulation. The research also suggests that both money lenders and homeowners should avoid being involved in high-risk lending/borrowing due to the high risks attached to it. Thus, through a thorough analysis of the previous literature on the effects of foreclosures on the neighborhood, it can be suggested that foreclosure in a neighborhood negatively impact other properties in the vicinity. This impact is not only through the devaluation of the property but also results in increase in the neighborhood crimes. Thus, the study offers recommendations for the policy-makers that encourage reasonably priced and long-lasting homeownership for individuals and communities. Works Cited Center for Responsible Lending. (2008). Subprime Spillover: Foreclosures Cost Neighbors $202 Billion; 40.6 Million Home Loses $5,000 on Average. Dizikes, P. (2010). How foreclosures hurt everyone's home values. MIT media relations. Retrieved on October 19th, 2010 from http://web.mit.edu/press/2010/housing-prices.html Dubin, R. (2008). Foreclosures in Cleveland. Unpublished working paper. Immergluck, D. (2009). Foreclosed: high-risk lending, deregulation, and the undermining of America’s mortgage market. Cornell University Press. Retrieved on October 19th, 2010 from http://books.google.co.in/books?id=aBMBQm5mevQC&pg=PA149&dq= foreclosures +affect+a+neighborhood&hl=en&ei=lf2TPPcII3QcdGOwYQO&sa=X&oi= book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q&f=false Immergluck, D. and Smith, G. (2006). The impact of single-family mortgage foreclosures on neighborhood crimes. Housing Studies, 21(6): 851-866. Retrieved on October 22nd, 2010 from http://www.prism.gatech.edu/~di17/HousingStudies.pdf Immergluck, D. and Smith, G. (2005). There goes the neighborhood: the effect of single-family mortgage foreclosures on property values. Woodstock Institute. Retrieved on October 22nd, 2010 from http://www.nw.org/network/neighborworksprogs/foreclosuresolutions/ reports/documents/TGTN_Report.pdf Leonard, T. and Murdoch, J. C. (2009). The neighborhood effects of foreclosures. Journal of Geographical Systems, 11(4): 317-332. Retrieved on October 22nd, 2010 from http://www.springerlink.com/content/q554x0wq16475688/ Lin, Z, Rosenblatt, E and Yao, V. W. (2009). Spillover Effects of Foreclosures on Neighborhood Property Values. Journal of Real Estate Finance and Economics. 38 (4): 1-35. Retrieved on October 19th, 2010 from http://ssrn.com/abstract=1033437 Marilyn, K. (2010). Foreclosures’ effect on upscale neighborhood? Retrieved on October 19th, 2010 from http://huntingtonhomes.ocregister.com/2010/03/21/how-foreclosure-affects-pricey-home-sales/89585/ Miller, N. G., Rauterkus, S. Y. and Sklarz, M. A. (n.d). The neighborhood impact of subprime lending, predatory lending and foreclosure. Retrieved on October 22nd, 2010 from http://www.hoyt.org/subprime/neighborhoodimpact.pdf Pennington-Cross, A. (2996). The value of foreclosed property. Journal of Real Estate Research, 28 (2): 193-214. Schuetz, J., Been, V. and Ellen, I. G. (2008). Neighborhood effects of concentrated mortgage foreclosures. Accepted for publication in Journal of Housing Economics. Retrieved on October 22nd, 2010 from http://furmancenter.org/files/publications/ foreclosures08-03.pdf Skogan, W. (1990) Disorder and decline: crime and the spiral of decay in American neighborhoods. University of California Press). The truth about mortgage.com. (2007). How Do Foreclosures Affect Your Neighborhood? Retrieved on October 19th, 2010 from http://www.thetruthaboutmortgage.com/how-do-foreclosures-affect-your-neighborhood/ Read More