Preserving Homeownership: Community-Development Implications of the New Mortgage Market

Mar 25, 2004 | by
  • Description

The recent rise in subprime mortgage foreclosures threatens to undermine the historic homeownership gains made by low-income and minority households during the 1990s. Particularly problematic is the fact that the wave of foreclosures sweeping the country is concentrated in low-income communities. Foreclosures have devastating financial and psychological impacts on borrowers, damaging their credit reputations and ability to secure credit in the future. Yet the negative impact of foreclosures extends beyond individual borrowers, lenders, and investors. Foreclosed properties often represent an eyesore, a site for illicit activity, and a drag on local house prices in vulnerable neighborhoods, and contribute to negative perceptions of these places. These factors can, in turn, generate a vicious cycle in which the presence of several foreclosed properties in a concentrated geographic area increases the likelihood that loans on neighboring properties will be defaulted on as well. Obviously, a run-up in foreclosures can impose unanticipated costs on mortgage industry participants. For investors and insurers of securities issues, foreclosures represent a direct reduction in cash flows and can reduce the market value of their securities. Foreclosure is also damaging to servicers, who incur significant expense pursuing and attempting to rectify problem loans. In addition, a servicer's bottom line deteriorates as the value of servicing rights must be written down as loans drop out of the pools backing securities issues. Funded by the Neighborhood Reinvestment Corporation and building on the work of Neighborhood Housing Services (NHS) of Chicago, this report seeks to chart new ways that community-based organizations -- working cooperatively with private industry and federal, state, and local governments -- can develop new national-scale foreclosure prevention initiatives. Through its Home Ownership Preservation Initiative (HOPI), the NHS of Chicago has forged a new partnership with the city of Chicago and key lending, investment and servicing institutions doing business in the city. The partnership seeks to preserve homeownership whenever possible and keep families in their homes through pre- and postpurchase counseling, prudent application of loan workouts, and in some cases by providing opportunities to refinance into more affordable NHS loans. When foreclosure is unavoidable, the partners seek to preserve the vacant properties as neighborhood assets.