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March 21, 2012

The fallout

New report looks at lingering consequences of foreclosure

It’s a warm, spring morning in the California neighborhood. Other than chattering birds, all is quiet. Mary McGuire, with Louisville Metro’s Department of Codes and Regulations, points out unfortunate truths behind the silence: boarded up windows, notices on doors, at least four homes on one block appear unlived in.

“(California) has been hit really hard,” McGuire says, talking about foreclosures. Over the last several years, many in west Louisville have lost their homes due to the predatory practice of refinancing lower-income families at high interest rates. More recently, job instability is a factor.

A new report conducted by the nonprofits Metropolitan Housing Coalition and Network Center for Community Change (NC3) illustrate the pervasive, detrimental effects of foreclosures. Specifically, the report reveals what’s become of 1,699 properties that had a foreclosure filed against them in the first half of 2007.

Of the 1,699 properties, only about half ended with a foreclosure sale, the worst possible outcome. The rest were dismissed. But the Jefferson County Circuit Court does not require a recorded reason for dismissal, so the fate of those properties remains unclear.

The report, titled “Louisville’s Foreclosure Recovery: Understanding and Responding to the Impact of Foreclosure Sales,” is a follow-up to a 2008 study examining the factors behind record-high foreclosure rates. (From 2008 to 2010, there were 12,945 foreclosure filings in Jefferson County and 21,536 in the Metro Louisville region. The highest concentration of foreclosures is in southwest Louisville, but downtown and east Louisville have experienced significant spikes as well.)

One finding, about vacant and abandoned properties, hits McGuire’s department hard. At least 112 of the 1,699 properties in the sample have been reported to Codes and Regulations as nuisances. (It’s likely more from that sample sit empty but have not been reported.)

Abandoned homes have risen as a primary concern in California. Last fall, the Department of Codes and Regulations organized a cleanup, mowing grass that had reached more than 4 feet tall, clearing land used as dumpsites. The cleanup still doesn’t solve plunging property values.

According to the report, in 2007, the median assessed value of a property in foreclosure in California was $56,760. If that home went through a court ordered foreclosure sale, the value plummeted 59 percent.

The report analyzes the value of foreclosed homes in two other neighborhoods — Highview and Shively. They, too, experienced dips, but none nearly as dramatic as in California. All this negatively impacts surrounding homes. The report states:

“As a result, property owners in only the three focus neighborhoods (most of whom are paying their mortgages on time) have lost $4.5 million in property value due to the spillover effects of foreclosures filed in just six months of 2007.”

Adding to the daisy chain, all that lost property value means less revenue for Metro government.

“We need to start looking at foreclosure not as individual failures, and start looking at it as a community problem affecting the value of our real estate in our community, our tax base in our community,” says Cathy Hinko, executive director of the Metropolitan Housing Coalition. “And that response needs to be community wide.”

One solution, according to Hinko and other advocates, would be throwing out Kentucky’s law allowing for the “privatization” of tax liens. As it stands, when a homeowner owes money on property taxes, utility bills or holds some other form of debt, a lien is placed on that home by the county clerks office. That office then sells the lien to an out-of-state third party.

These private companies can charge interest and attorney’s fees. When debt balloons and homeowners can’t pay, companies initiate a foreclosure. It’s not uncommon for overwhelmed debtors to flee, and then the city is left with an empty house and no way to collect on the debt.

Adam Hall, president of the Mortgage Bankers Association of Kentucky, says the current system makes it difficult for developers seeking to fix up an abandoned home.

“You may have a property that’s worth $10,000 that has $30,000 to $40,000 worth of liens against it,” he says.

Advocates hope next year the Kentucky legislature will make it so municipalities have control of tax liens. They’d also like to see a streamlined land bank system that would take vacant properties and wipe the titles clean, setting them up for redevelopment.

With the report complete, NC3 plans to share the data with affected communities, like California. The hope is that neighbors will organize for change, preventing those teetering on the edge of foreclosure

from falling.