Fed Governor: Foreclosure Stabilization Requires Tailored Strategy

Federal Reserve GovernorrnElizabeth A Duke, speaking at the NeighborWorks Training Institute in National Harbor, Maryland on Wednesday, told attendees that “there is nornone-size-fits-all strategy for community stabilization.”

Governor Duke said she had learned many lessons from her travels representingrnthe Federal Reserve on the NeighborWorks America's board of directors and asrnchairperson of the Fed's Committee on Consumer and Community Affairs.  The Federal Reserve is partnering withrnNeighborworks to reduce the impact of foreclosures in low-and moderate-incomerncommunities.

The first lesson she had learned,rnGovernor Duke said, was that the downturn in housing had affected communitiesrnin many ways, but the effects were largely related to the underlying economiesrnof each.  Therefore, a stabilizationrnstrategy that might work in an industrial area with high unemployment might notrnwork in a suburban area where employment is relatively stable.

In communities with weakrnunderlying economies the downturn and the increased rate of foreclosures hasrnhastened the cycle of increasing vacancies and decreasing property values.  This then leads to declines in property taxrnand sales tax revenues, further deteriorating the communities.

Problems experienced by communityrnorganizations and homeowners are worst in the weak communities.  “In the most devastatedrnneighborhoods, some lenders do not even complete the foreclosure process orrnrecord the outcome of foreclosure sales because the cost of foreclosing exceedsrnthe value of the property.”  There arernindications, she said, that there are significant numbers of properties in suchrnlegal limbo.

Some communities have responded thisrnabandonment by demolishing vacant properties and creating land banks.  These “right sizing” strategies align housingrnsupply with demand and create open spaces and parkland that increase communityrnhealth and sustainability.  She citedrnDetroit where community organizations have joined together in an urban farmingrninitiative to reclaim abandoned properties and turn them into gardens to growrnfood.   The resulting program createdrn169 community gardens utilized by 40 schools and 359 families to grow tons ofrnfood.

Communities withrnhistorically strong economies have also faced destabilization as foreclosuresrnhave increased.  She said that citiesrnsuch as Los Angeles, parts of Atlanta, and a number of cities in Florida whichrnwere until recently economically vibrant are now in distress because of highrnforeclosure rates which have ranged as high as 10 percent.

Vacant propertiesrnin some more prosperous markets are attracting investors who offer cash tornbanks to purchase foreclosed properties in bulk.  This has crowded first-time homebuyers andrncommunity organizations out of the market and further destabilizedrnneighborhoods.

Foreclosure scamsrnare also taking root, particularly in stronger areas where people are morerninclined to want to keep their homes. rnThe Governor said that one housing counselor in Los Angeles told her thatrn80 percent of her clients had been victims of these scams.

Foreclosurernmitigation, Governor Duke said, by necessity focuses on individual houses andrnmortgages, but it is clear that the key to stabilization is a more holisticrnapproach to the problem.  She stressedrnthat housing alone is not sufficient to make a community economicallyrnresilient.  The most successful programsrnare those that factor in the many elements that make a neighborhood a desirablernplace to live.

She cited several examplesrnof programs in communities that have adopted a multi-faceted approach torncommunity development, coupling several elements such as housing, schools, healthrncare, job training, assistance to small businesses, leadership development accessrnto reasonably priced food, transportation, childcare, or literacy training.

The mostrnsuccessful programs, she said, do not severe the connection to people once arnjob is found or other immediate needs are met. rnThe programs are committed and connected to the community they serve andrnintend to continue to meet the needs of the neighborhood.  

Ms. Duke pointedrnout that the one characteristic shared by the communities that have coped mostrnsuccessfully in the economic downturn is organizational capacity. In some casesrnthis capacity has grown out of many years experience in the community, but manyrncommunities are facing the issues of vacancy, abandonment, and decay for thernfirst time, and these communities need help to grow the human and financialrncapital required to address neighborhood decline.  She said that the people attending thernTraining Institute demonstrate that there is a “strong appetite among communityrnorganizations for information, training, and leadership development.”  

Governor Duke saidrnthat the partnership between the Federal Reserve and NeighborWorks is just onernaspect of the Federal Reserve's effort to stabilize neighborhoods.   She said the Fed is committed to continuingrnto identify ways in which its strengths as a research institution and itsrnnetwork of Community Affairs outreach workers can be leveraged to helprncommunities recover from high numbers of foreclosures and related economicrnimpacts.

Her travels hadrntaught her, Duke said, that a vibrant community is made up of more than houses.rnNeighborhoods need the right blend of housing, retail, and community servicesrnin order to remain desirable and resilient to economic cycles. 

“The bottom line is that housing alone is notrnsufficient to create sustainable and economically resilient communities.”

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