Report: Federal Government Should Address Secondary Impacts of Foreclosure Crisis

The Brookings Institution has published a report calling for a four-pronged approach to dealing with the mortgage foreclosure crisis and its secondary effects on neighborhood vitality. The report finds that the foreclosure crisis has greatly destabilized neighborhoods, towns, and cities in a vicious cycle in which high neighborhood foreclosure rates diminish area property values, which lead to more foreclosures and vacant lots. The study concludes that the federal government must address the neighborhood effects of the foreclosure crisis, as it is the only level of government able to deliver the resources commensurate with the scale of the problem.

The report notes that the current foreclosure crisis originated in the subprime market but has spread to include other types of loans. The foreclosure problem varies widely across the country but is mainly concentrated in metropolitan areas, with the Sunbelt being especially hard hit. Furthermore, the increased foreclosure rates have exacerbated vacancy and abandonment problems in many cities.

To date, the federal government has responded to the neighborhood aspects of the foreclosure crisis with the creation of the Neighborhood Stabilization Program (NSP), which provides communities with funds to buy and redevelop foreclosed properties, but the report argues the available NSP funds do not match the scope of the problem. The report finds that the secondary effects of the crisis such as the economic and social impacts on properties and communities are not taken into account with NSP funds. Without funding to stem foreclosures, these properties diminish the value of surrounding areas and destabilize neighborhoods further reducing local and state revenues.

The report suggests the federal government take the following four-pronged approach to speed neighborhood housing market recovery and mitigate foreclosure effects on families and communities:

  • First, the federal government should redesign a multi-year neighborhood stabilization program that includes a competitive grant program to support collaborative, high-leverage projects.
  • Second, finance the acquisition of distressed properties via a new federal program, the Land Banking Entity, in order to mitigate the effects of the foreclosure crisis.
  • Third, enact a targeted tax credit to assist individuals buying homes in distressed neighborhoods.
  • Finally, develop a national mortgage and foreclosure database.

The report, Stabilizing Communities: A Federal Response to the Secondary Impacts of the Foreclosure Crisis, can be found here: http://www.brookings.edu/~/media/Files/rc/reports/2009/02foreclosurecrisismallach/02foreclosurecrisismallachreport.pdf.