Fast-tracking Foreclosures on Vacant Properties Could Result in Substantial Cost Savings, Say Cleveland Fed Researchers
They estimate savings in Ohio and Pennsylvania of at least $24 million annually
Fast-tracking foreclosures on vacant properties in states that handle foreclosures through the courts could result in substantial cost savings, according to a study by Federal Reserve Bank of Cleveland researchers Kyle Fee and Thomas J. Fitzpatrick IV, who estimate that the savings in two judicial foreclosure states – Ohio and Pennsylvania -- would be at least $24 million annually. The savings would come from shortening the amount of time vacant properties spend in foreclosure and reducing the deadweight losses – costs without corresponding benefits – that lenders and communities suffer.
States that require that foreclosures be conducted through the courts have decided that protecting the rights of property owners is worth the higher cost of judicial foreclosure relative to nonjudicial foreclosure, say Fee and Fitzpatrick. But they note that when a foreclosure 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. There are also additional costs to the community when unoccupied homes create health and safety hazards and cause surrounding homes to lose value. Importantly, when the home is vacant these costs benefit no one.
The researchers say these deadweight losses are what legislatures in some judicial foreclosure states have attempted to address by creating foreclosure fast-tracks. Ohio, for example, created a private mortgage foreclosure fast-track for tax foreclosure in 2006, and the Ohio legislature is considering a pilot foreclosure fast-track for properties abandoned by the homeowner.
The researchers caution that crafting legislation that balances the interests of creditors and homeowners is no simple task and will likely require the input of creditors, attorneys, communities, and the judiciary.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
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