Stabilizing Communities: A Federal Response to the Secondary Impacts of the Foreclosure Crisis

Alan Mallach
Alan Mallach Former Brookings Expert

February 3, 2009

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The wave of home mortgage foreclosures that began in 2006 continues to surge, greatly destabilizing neighborhoods, towns, and cities across the United States. Without robust, carefully-targeted federal policies to mitigate the community-level impacts of foreclosure, local and state efforts will invariably fall far short of what is needed. For that reason, the federal government should adopt a four-part strategy that provides state and local leaders with the tools to stabilize affected neighborhoods and promote market recovery in the wake of the mortgage crisis.

America’s Challenge
Over 1.2 million residential properties went into foreclosure in 2008, and analysts project that perhaps 8 million more will be in foreclosure over the 2009 to 2012 period. Problems began among subprime mortgages but are rapidly spreading into broader segments of the market. Homes in foreclosure or REO (real-estate owned) status concentrate in major metropolitan areas; those in over-built markets like the interior West and South Florida, and in economically distressed regions like Ohio and Michigan, exhibit the most severe challenges. Rising foreclosures in all types of markets threaten to create or exacerbate underlying problems of vacancy and abandonment, thereby diminishing area property values, destabilizing neighborhood economic and social conditions, and eroding state and local fiscal capacity to address these problems.

Limitations of Existing Federal Policy
Since the mortgage crisis erupted in 2006, the federal government has played only a limited role in attempting to mitigate its effects on families and communities. The 2008 Neighborhood Stabilization Program (NSP) provided $3.92 billion to state and local governments to acquire and rehabilitate foreclosed or vacant properties, but is too small to have systemic impact. Only the federal government can deliver resources commensurate with the scale of the problem, while helping to address state and local variations in planning and stabilization capacity, market conditions, and legal conditions establishing the ground rules for foreclosures and the means to address them.

A New Federal Approach
The federal government should provide essential leadership to facilitate neighborhood stabilization and recovery in the face of the mortgage foreclosure crisis. Four actions deserve particular consideration:

  • Creating a redesigned and multi-year neighborhood stabilization program that includes competitive grant awards to support strategic, high-leverage, collaborative projects, while fixing the Neighborhood Stabilization Program enacted in 2008.
  • Financing the acquisition of distressed properties via a new federal Land Banking Entity, and using it to encourage state reforms that mitigate the impact of foreclosures on families and communities
  • Enacting a targeted tax credit that assists individual home buying for occupancy in areas destabilized by foreclosures to speed neighborhood housing market recovery
  • Developing a national mortgage and foreclosure database to aid neighborhood stabilization efforts.

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