A new study by a Federal Reserve Bank researcher suggests banks may be their own worst enemy when it comes to landlording.
The study used a combination of data on loans and homes sales — the latter provided by The Warren Group, publisher of Banker & Tradesman — along with complaints to a neighborhood hotline for the city of Boston to pinpoint where along the road to foreclosure properties begin to show signs of abandonment and neglect.
The paper’s author, Lauren Lambie-Hanson, formerly a researcher at the Federal Reserve Bank of Boston and now an analyst at the Philadelphia Fed, found that the likelihood of a property receiving a neglect-related complaint mounted higher and higher the longer the property was in distress, with seriously delinquent borrowers 35 percent more likely to be the subject of a complaint and borrowers in foreclosure 80 percent more likely to be the subject of a complaint.
Prior studies have examined the impact of foreclosures on nearby properties, with several finding that having a foreclosure next door can lower selling prices about 1 percent. But Lambie-Hanson’s work suggests that even when foreclosures aren’t dragging down the prices of homes around them, they do have an impact on the neighborhood.
“[T]he most severe effects from foreclosure are for single-family properties, which are more than 10 times as likely to receive a complaint while bank owned as while owned by a borrower who is current on his mortgage,” she wrote.
Bank-owned properties and single family properties in particular are more likely to be neglected because they’re vacant, Lambie-Hanson suggested in an interview with Banker & Tradesman.
“If a property’s completely vacant, there’s nobody there to handle routine maintenance, and it also may be more clear to the neighbors [that the property is distressed]. There’s no one to talk to, and that may tip them over into calling [the city],” she said.
Lambie-Hanson work also suggests that an inability to pay for routine maintenance may be a bigger driver of neglect than the fact that distressed homeowners stop caring as it becomes more likely that they’ll lose the house. Homeowners who retained greater equity in their homes were equally likely to receive complaints as underwater distressed homeowners, and homes which were marketed as short sales — which owners would have a greater incentive to maintain — also received a similar number of complaints as foreclosed properties.
Banks may have other incentives to push borrowers toward shorts, however. While this particular paper didn’t look at how neglect affects the final sale price of the distressed property itself, the research did find that foreclosed properties spent a full year longer in “ownership limbo” than short sales, which tended to exacerbate their level of neglect.
“It’s a tricky statistical problem, because you don’t know if the properties that sell as foreclosures are doing worse because they’re the ones you couldn’t get people to buy as short sales,” said Lambie-Hanson. “[But] it does seem like the properties are becoming distressed early in the process, well before they become REO. So definitely the faster you can make the sale happen, the less degradation overall.”
Email: csullivan@thewarrengroup.com
