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

foreclosed-home-ohio204x195.jpg
A boarded-up home stands in the Mount Pleasant neighborhood of Cleveland, Ohio, U.S., on Wednesday, Nov. 10, 2010. The Ohio city of about 431,000 plans to tear down hundreds of homes left empty after being foreclosed on. Cleveland has lost more than half its population since 1950 as the decline of steel, automotive and manufacturing jobs forced residents to leave for parts of the U.S. where employment was growing. Photographer: David Levitt/Bloomberg

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."

For reprint and licensing requests for this article, click here.
Servicing
MORE FROM NATIONAL MORTGAGE NEWS