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Notes from the Field

The Face of a Policy Issue

Policy issues are often complex and intertwined.

As community developers, we grapple with policy issues that are multifaceted and complex. Often, several distinct problems intertwine with one another under the umbrella of a larger, more broadly defined policy concern. As my colleague, Tom Fitzpatrick, and I were putting together the agenda for a recent public program, “Getting Back in Gear: Better Ways to Move Stalled and Vacant Foreclosures Forward,” we were careful to include multiple perspectives in order to address the array of interrelated problems associated with our subject and give our attendees a beneficial learning opportunity. However, the program also proved a learning opportunity for me.

Following the mortgage servicing panel discussion, a local building inspector asked the panel what he should do to address a problem condo after the related lien had been charged off but for which the owner could not be found. This relatively pragmatic question went to the heart of the abandoned foreclosures issue, and seemed to encapsulate the reasons why abandoned foreclosures deserve policymakers’ attention.

As the audience learned, because the lien holder for the property in question does not wish to take possession of the property, the property is stuck in foreclosure "limbo" and has become, by default, a problem local government is now forced to address. At considerable expense, the city secured the property and remediated it of mold posing health concerns to proximate homeowners. The question posed by our attendee—what to do next with a property that nobody, including the lien holder, wants—puts a real face on policy issues that, from a practical standpoint, leave many sometimes underfunded and generally ill-equipped municipalities and other stakeholders scrambling to identify solutions. How can we prevent properties from falling into non-productive status? And are there ways to more easily move these properties forward to productive reuse?

On the national stage, abandoned foreclosures, especially as they relate to local governments and community developers, is a seldom-discussed policy issue. This lack of dialogue may be due, in part, to the fact that abandoned foreclosures are the exception, not the norm (the GAO estimated abandoned foreclosures represented less than 1% of vacant homes between January 2008 and March 2010). However, this small number belies the disproportionately larger negative impact of these properties on local governments, community developers, and surrounding neighborhoods, which is forcing many policymakers to give abandoned property issues a second look.

One of the most significant concerns is that, even if abandoned foreclosures are relatively rare and thus represent only a fraction of the distressed housing market, these properties have an outsized impact on their surrounding communities and, compounding the problem, are often concentrated in already distressed communities that are less well equipped to effectively manage them. When a servicer opts to not foreclose on a property (generally because its market value does not justify the expense associated with completing the foreclosure, coupled with the potential liability associated with holding title), the result can be a higher instance of properties in disrepair and tangled title issues that make these properties far more difficult and expensive to reclaim.

In essence, an abandoned foreclosure often dooms a property—and sometimes, the surrounding homes and neighborhood—to blight. This is particularly true, and especially troublesome to community developers, in low- and moderate-income communities that may have higher concentrations of vacant and abandoned property already.

Throughout our event, each of the panelists shed some light on how foreclosures become stalled or abandoned and discussed possible solutions. Clearly, stakeholders approach this issue in very different ways and from a variety of perspectives—including how they define stalled and vacant foreclosures!

Some early steps taken to alleviate the impacts of abandoned foreclosures include the Federal Reserve issuing guidance in 2012 to covered financial institutions on how to deal with the decision to abandon a foreclosure. But many believe more can be done.

Hopefully, this post has provided you with enough of a teaser that you will check out the archived program. You can check out the agenda, review presentations, and watch video of any or all of the panels on YouTube. The program includes lots of great information that provides an excellent primer on a topic that is gaining attention.

The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.