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Speeding Up Vacant-Home Foreclosures Could Save Big: Fed Paper

MAR 7, 2014 11:09am ET
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Fast-tracking foreclosures on vacant properties in states that handle foreclosures through the courts "could result in substantial cost savings" for all involved, according to a study by the Federal Reserve Bank of Cleveland.

For example, in the judicial foreclosure states of Ohio and Pennsylvania, researchers estimate savings for various stakeholders could amount to at least $24 million annually.

Kyle Fee and Thomas Fitzpatrick IV, who conducted the Cleveland Fed study, quantified the potential reductions in "deadweight losses," or costs without corresponding benefits, if the amount of time vacant properties stay in foreclosure is reduced.

Regulators decided to protect homeowners in judicial foreclosure states, Fee and Fitzpatrick note in a press release. They decided "it is worth the higher cost" compared to nonjudicial foreclosure states. But when a foreclosed home sits vacant, "there are additional costs to the creditor or taxing authority due to the accelerated depreciation of unoccupied homes, which are less well maintained and more likely to be vandalized." Additional costs are shouldered by the community and owners of the surrounding properties that lose value.

Hence, legislators in some judicial foreclosure states have attempted to address these deadweight losses by creating foreclosure fast-tracking programs. Ohio is one example where legislators created a private mortgage foreclosure fast-track for tax foreclosures in 2006, and are now considering a pilot foreclosure fast-track for properties abandoned by the homeowner.

The researchers warn, however, that it is difficult to draft legislation that balances the interests of creditors and homeowners because it "requires the input of creditors, attorneys, communities and the judiciary."

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