Thursday, January 31, 2008

An “impact fee” for foreclosures?

Housestreet   Communities across the nation are wincing at the boom in foreclosures.  In my state of Florida, about two percent of all households encountered some form of foreclosure last year.  The problem hits hardest in low-income areas, of course, where many buyers took on high-interest, high-principal loans that they have been unable to pay back.  In some neighborhoods, there appears to a house in foreclosure on almost every block.  Vandalism and other “spillover” effects may then plague the neighborhood.  A recent study by three Fannie Mae economists in The Journal of Real Estate Finance and Economics (here’s an abstract and links) used data to create a theoretical model that shows negative spillover effects on housing prices up to 10 block away, and as high as 8.7 percent.

    While some cities are trying to recoup losses with lawsuits (Cleveland has sued banks, alleging a public nuisance – see my post for Jan. 17), a prospective, long-term approach to the problem might be to compel future lenders to pay an “impact fee” for each loan that goes into foreclosure, to compensate for losses to the community.    

  Such a fee might encourage lenders to pay closer attention to avoiding making risky loans.  It could also mean fewer loans to the low-income citizens for whom it has always been American policy to try to encourage and foster homeownership. 

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