Neighborhood blight affects more than property values.

We all know that a foreclosure (or ten) in the neighborhood is bad news for home values and for homeowners hoping to sell. However, a new study from the Federal Reserve Bank of Boston indicates that foreclosures also negatively affect the quality of life for neighbors who have no intention of selling. In fact, the likelihood of a neighbor complaining about a home in foreclosure – regardless of that neighbor’s desire to sell his or her own home – doubles when the property actually enters the foreclosure process and increases nine-fold once the property is owned by the bank[1]. The problem is simple: neglect. No one likes to see it whether they want to sell their own homes or not.

Lauren Lambie-Hanson, the researcher who headed up the study, observed that the real issue when it comes to the effects of foreclosure homes on the neighbors hinges on property upkeep. As a result, properties in “limbo” that may have entered the foreclosure process but never actually been repossessed by the bank and actually resold are the biggest threat to neighborhood morale. Short sales, on the other hand, keep owners motivated to keep the property in good condition and minimize or eliminate the period of time during which the lender is responsible for upkeep, making this transaction far better for neighbors both when it comes to their own property values and their level of satisfaction with surrounding properties.

Interestingly, Lambie-Hanson found that complaints about homes in distress, foreclosure, and being held as REO properties can come from all sources, including local renters as well as local homeowners[2]. Furthermore, underwater homes occupied by homeowners are less likely to elicit complaints, and homes that have relatively small amounts of equity do not attract more negative attention than homes with relatively larger amounts of equity. Ultimately, “distressed properties are most problematic when held by banks, both before and during lenders’ attempts to sell the properties,” she explained. Lambie-Hanson recommended greater bank accountability as a crucial part of any solution.

Do these findings surprise you? Do you think that there is any possibility that banks will take on more accountability for their REO properties in the near future?

by Carole VanSickle