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The Implications for Municipalities

What were the implications for municipalities and their housing stock of the decline in housing prices and the high rates of mortgage defaults? When mortgage defaults are few, banks simply foreclose (regardless of whether they hold the mortgage or merely service it for its holder), the property is resold, and the entire foreclosure event is of little or no concern to the municipality. When housing prices are falling and defaults are frequent, as became the case in so many municipalities in 2008 and 2009, and thereafter, the situation becomes a matter of great common concern.

Abandoned properties, especially if there are many of them, lose value very rapidly. They are often prey to vandalism. In many cases scavengers will come in and strip the property of plumbing fixtures, pipes, electrical wiring—anything that can be resold—and often do a great deal of damage in extracting what they want. There can be problems with squatters and drug users. Arson or accidental fires can also be a problem. If the original owners feel angry or victimized about having to move, they may damage the property through neglect or vandalism. Abandoned and neglected properties drag down the market value of nearby properties, which puts more property owners underwater and makes them more pessimistic that the situation will ever improve. That, of course, will push some of them into abandonment, and the situation feeds on itself. To say that abandoned houses can by their presence cause more abandonment is just a variation on the old real estate cliche that the three most important characteristics of a property are location, location, and location.

Not only does neighborhood quality become a problem for local governments, but defaults can be a serious financial problem for local governments and school districts, for whom property taxes are a very important revenue source. Abandoned properties don't pay property taxes.

Just how hard municipalities were hit by the foreclosure crisis varied greatly. In general, places that had experienced the greatest run-up in prices in the preceding years were most vulnerable. Places where a large part of the housing stock was very new also tended to be hard-hit because many homeowners and speculators had little equity and quickly found themselves underwater (negative equity) when prices slumped. California and parts of the Southeast and Southwest were especially vulnerable for these reasons. So too were places that resembled the "boomburgs" noted in Chapter 2 for the same reasons. But other types of areas were also hit hard. For example, the Cleveland and Detroit areas were hit very hard in part because job losses meant that many people were unable to make their mortgage payments.

 
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