One Industry s Risk is Another Community s Loss: The Impact of Clustered Mortgage Foreclosures on Neighborhood Property Values in Philadelphia Presentation before the Federal Reserve Bank of Philadelphia s Reinventing Older Communities: People, Places, Markets April, 2006
Between 1965 and 2005, 36 million new households become owners Homeownership Rate; 1965-2005 70 69 68 67 66 Rate 65 64 63 62 61 60 1965 1970 1975 1980 1985 1990 1995 2000 2005 Year (4th Quarter)
Pennsylvania s homeownership rate exceeds the national average and has risen steadily since 1960 Homeownership Rate; Pennsylvania, 1960-2003 73 72 71 Homeownership Rate 70 69 68 67 66 1960 1970 1980 1990 2000 2003 Year
Homeownership in Philadelphia is particularly high among higher income households, but has generally declined since 1980 Homeownership Rates by Income and Year; Philadelphia, 1980-2003 100.0% 90.0% 80.0% 70.0% Homeownership Rate 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% < $24.9 $25-$49.9 $50-$74.9 $75-$99.9 > $100+ Income Level ($000) 1980 1990 2000 2003
For most households, except those with the highest incomes, their home is their only asset Estimated Presence of Wealth for Households in Philadelphia by Household Income Level; 1999 100% 90% 80% 70% Percent of Households 60% 50% 40% 30% 20% 10% 0% Under $36211 $36211-$54314 $54315-$90524 $90525-$135786 Over $135786 Household Income No Asset - No Home No Asset - Home Asset - No Home Asset - Home
2.10 1.80 1.50 1.20 0.90 0.60 0.30 0.00 Pennsylvania mortgage delinquencies exceed the national average and have been on the rise since 2000 Figure 2: US and Pennsylvania 90-Day Delinquency Rates; 1979-2005 Q4 1982 Q3 1983 Q2 1984 Q1 1985 Q4 1985 Q3 1986 Q2 1987 Q1 1988 Q4 1988 Q3 1989 Q2 1990 Q1 1991 Q4 1991 Q3 1992 Q2 1993 Q1 1994 Q4 1994 Q3 1995 Q2 1996 Q1 1997 Q4 1997 Q3 1998 Q2 1999 Q1 2000 Q4 2000 Q3 2001 Q2 2002 Q1 2003 Q4 2003 Q3 2004 Q2 2005 Quarter / Year US Pennsylvania Q2 1981 Q1 1982 Q3 1980 Q1 1979 Q4 1979 Rate
3.00 2.50 2.00 1.50 1.00 0.50 0.00 The Pennsylvania foreclosure rate exceeds the national average; both have declined since 2002 Figure 3: US and Pennsylvania Foreclosure Rates; 1979-2005 Q1 1979 Q1 1980 Q1 1981 Q1 1982 Q1 1983 Q1 1984 Q1 1985 Q1 1986 Q1 1987 Q1 1988 Q1 1989 Q1 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Quarter / Year US Pennsylvania Rate
Between 2000 and 2004, both the number of foreclosure filings and the rate of filings peaked in 2002 and then declined Foreclosure Filings and Rate Per 1,000 Estimed Owner Occupied Housing Units; 2000-2004 10000.00 18.00 Filings 9000.00 8000.00 7000.00 6000.00 5000.00 4000.00 3000.00 2000.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Rate 1000.00 2.00 0.00 2000 2001 2002 2003 2004 Filings 5112 5977 6361 6292 5441 Rate 13.03 15.19 16.14 15.94 13.74 Year 0.00 Filings Rate
How does a foreclosure impact the borrower? Monetary - Direct Net loss on downpayment and principal paid Penalties and fees charged by mortgage servicers during the period of delinquency Legal fees Monetary Indirect Future cost of borrowing as a result of damaged credit Moving expenses Nonmonetary Emotional distress Physical distress Psychological distress Adverse family impacts Minnesota Family Fund (1998) estimates the cost per household to be approximately $7,200 per foreclosure
How does a foreclosure impact a lender/investor? Foreclosures do cost lenders and investors, but Foreclosure loss to the investor. Pricing (interest and fees/points) of loan compensates for risk Foreclosures are not always consummated In the case of subprime loans, although priced as subprime, a substantial portion of borrowers are prime borrowers Part of the debt is typically paid by the time of foreclosure White (2004) cites evidence that subprime losses tend to be in the range of 1% per year of outstanding loan pool balances
Specifying Investor Loss Example: EQCC Asset Backed Certificate Series 2001-2 Original Pool Amount $10,368,314,000 As of Jan, 2006, pool amount is $1,393,672,000 (i.e., 13.4% remaining) 11.5% Foreclosure 13.4% Bankruptcy 2.9% REO (5.1% Cumulative net loss => approximately 1% / year)
How does a foreclosure impact a municipality? Costs associated with: Increased policing Increased fire protection Increased demand for social services Demolition Inspection Legal Actions Tax Revenues Managing the foreclosure process Reputation Apgar (IL) estimates municipal costs to be $34,000; Family Housing Fund (MN) estimates municipal cost to be $27,000 (Apgar, 2005; Family Housing Fund, 1998)
How does a foreclosure impact a community? Foreclosures can facilitate racial transition (Baxter and Lauria, 2000; Lauria and Baxter, 1999) Foreclosure are associated with violent crime (Immergluck, 2005) Foreclosure can adversely impact property value (Immergluck and Smith, 2005; Cagan, 2005; Pennington-Cross, 2004) Estimates of cost include: Chicago (Apgar) $17,000 to neighborhing properties; Chicago (Immergluck & Smith)» 1%.
Residential Sale Prices; 2000
Residential Sale Prices; 2001
Residential Sale Prices; 2002
Residential Sale Prices; 2003
Counting Foreclosures Around Sales Map of sales
Foreclosure Filings, 2000
Foreclosure Filings, 2001
Foreclosure Filings, 2002
Foreclosure Filings, 2003
Owner Occupancy and Foreclosure Density; 2000 Median Percent Owner Occupied of Census Block Groups by Frequency of Foreclosure Filings; 2000 80 70 60 Median Percent Owner Occupied 50 40 30 20 10 0 0-2 3-5 6-10 11-15 16+ Number of Foreclosure Filings
Financial Distress and Foreclosure Density; 2000 Median Percent of Ower Occupied Households (with a mortgage) Spending More Than 50% of Income on Housing of Census Block Groups by Frequency of Foreclosure Filings; 2000 25 20 Median Percent Spending 50%+ Income 15 10 5 0 0-2 3-5 6-10 11-15 16+ Number of Foreclosure Filings
Percent Black and Foreclosure Density; 2000 Median Percent Black of Census Block Groups by Frequency of Foreclosure Filings; 2000 70 60 50 Median Percent Black 40 30 20 10 0 0-2 3-5 6-10 11-15 16+ Number of Foreclosure Filings
Percent Hispanic and Foreclosure Density; 2000 Median Percent Hispanic of Census Block Groups by Frequency of Foreclosure Filings; 2000 7 6 5 Median Percent Hispanic 4 3 2 1 0 0-2 3-5 6-10 11-15 16+ Number of Foreclosure Filings
Number of Mortgage Foreclosures Within 1/8th of a Mile and 1 Year of Sales; 2001-2003 12,000 10,000 8,000 Number of Sales 6,000 4,000 The average sale in 2001-2003 had approximately 4 foreclosure filings within 1/8 th of a mile and one year prior to the sale date. 2,000 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Number of Foreclosures
Summary Method Description Number of foreclosures around the sale is transformed into a natural logarithm Fixed-effects multiple regression model using characteristics of the sale property as well as census tract location to predict sale price Tested various distances (e.g., 1/8 th, 1/4, 3/8 th and 1/2 mile) and time periods (quarterly dating back three years) for foreclosure filings Estimated sale price
In general, each foreclosure within 1/8 th of a mile and 1 year prior to a sale reduces the sale price by 1% DISTANCE, YEAR 2001 2002 2003 2001-2 2002-3 2001-3 1/8 mile, yr1-0.00752 * -0.01179 * -0.0079 * -0.01067 * -0.0093 * -0.009847* 0.001469 0.001374 0.00129 0.000982 0.000922 0.0007682 Adjusted R2 0.6075 0.6201 0.6273 0.6114 0.6242 0.6186 Observations 24,796 25,196 27,622 49,992 52,818 77,614 * = statistically significant Adjusted R2 is a measure of how strong the explanatory model of price is and it ranges from 0 to 1, where 1 reflects the strongest statistical explanation. The adjustment statistically corrects for inter-correlation among variables used to predict price.
Linear: Increasing numbers of foreclosure filings have an independent, and significant negative impact on price Cumulative Impact of Foreclosures on Price (Analysis limited to no more than 38 foreclosures in the measured impact area) Cumulative Impact--Unrestricted, Truncated at 38 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37-0.1-0.2 Percent -0.3-0.4-0.5-0.6 Foreclosures
Quadratic: Increasing numbers of foreclosure filings have an independent, and significant negative impact on price Cumulative (Quadratic) Impact of Foreclosures on Price 0.05 (Analysis limited to no more than 27 foreclosures in the measured impact area) Cumulative Impacts--Unrestricted Truncated at 27, Quadratic Fit 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26-0.05 Percent -0.1-0.15-0.2 Inflection Point -0.25 Foreclosures
Areas where prices are highly impacted by foreclosures in 2001
Areas where prices are highly impacted by foreclosures in 2002
Areas where prices are highly impacted by foreclosures in 2003
Conclusions Lenders and investors should require enhanced servicing practices that reach borrowers early in default and thus have the greatest likelihood of halting the transition from delinquency to default and foreclosure Consider a suitability standard for the provision of loan products to borrowers; Reconsider when new hybrid loan products designed to make homeownership seem more affordable to low- and moderateincome families present greater community risk than can be justified by the potential return to the individual Create procedures so that all foreclosures within a county/state are centrally recorded and publicly available; Include data on the parties to the foreclosure, including the address of the collateral property and identification of the mortgage (e.g., mortgage book/page, originating lender, date of origination, mortgage type and terms)
Conclusions In Pennsylvania, where there is an existing legislative framework and a nationally recognized emergency mortgage assistance program (Homeowners Emergency Mortgage Assistance Program - HEMAP), require lenders to provide the Commonwealth all Act 91 notices issued [Recommended by PA Department of Banking in 2005] Map the location of homes subject to those notices Affirmatively deploy approved counselors into particularly hard-hit communities Investigate lenders with disproportionate numbers of foreclosure filings, unusually brief period between origination and Act 91 notice, and/or spatial clustering of foreclosure actions Strengthen state and federal enforcement efforts designed to limit asset-based lending Enhanced financial education opportunities in the middle and high school years