Foreclosure Activity in New York City, and the Neighborhood Impacts of Foreclosures

Testimony of Vicki Been Elihu Root Professor of Law Director, Furman Center for Real Estate and Urban Policy New York University

Before New York City Council Committee on Community Development

Albert Vann, Chair January 22, 2009

Chairman Vann and all the members of the Committee, I am honored to be here today to

share with you some of our research on the state of foreclosures in New York City and the effects of mortgage foreclosures on the surrounding community. .My name is Vicki Been, and I am the Elihu Root Professor of Law at New York University School of Law and director of the

Furman Center for Real Estate and Urban Policy. The Furman Center is a joint research center

of NYU’s School of Law and its Robert F. Wagner School of Public Service. Founded in 1995,

the Center brings the talents of our law faculty and our urban economics faculty, along with the

talents and energy of phenomenal students from all parts of New York University, to bear on

urban problems. We are one of the nation’s leading academic research centers devoted to the

public policy aspects of land use, real estate development and housing.

Few urban problems have been more vexing, or more threatening, than the huge numbers

of mortgage foreclosures plaguing our communities. To understand better where foreclosures

are happening and how they are impacting our communities, the Furman Center has undertaken Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 2 several studies to examine the patterns of New York City foreclosures and the external costs they impose. I will describe our research on both these issues in turn.

Foreclosure Activity in New York City:

The Furman Center has data on foreclosure filings in New York City since 1993.

Foreclosure activity was relatively stable (and relatively low) in the first years of the 2000s. But in 2006, as the subprime mortgage crisis was beginning to unfold, we saw a sizable increase in the number of foreclosure filings, and have seen sharp increases year-to-year since then, reaching up to 15,000 foreclosure filings in 2007, and nearly 13,000 in the first three quarters of 2008.

Foreclosures in New York are very concentrated, with the most foreclosure activity taking place in areas that have seen high rates of subprime lending and in largely minority communities.

Among the ten community districts with the highest rates of foreclosure in 2007, seven also were among the ten community districts with the highest rates of subprime lending in 2006. In nine of those neighborhoods, the population is at least 86% non-white.

Queens and Brooklyn have been hit the hardest. In 2007, those two boroughs accounted for 78% of the City’s foreclosure filings. And within those boroughs, certain neighborhoods are being affected much more than others. Take Jamaica, for example; in 2007, Jamaica was home to 31% of the foreclosure filings in Queens, even though it makes up only 9% of the borough’s housing units. Or in Brooklyn, East New York had three and a half times the number of foreclosure filings as the entire borough of Manhattan.

Looking just at the number of foreclosure filings can sometimes be misleading, because each community district features a different composition of housing types. In order to make fairer comparisons across neighborhoods, we also look at the rate of foreclosure filings per 1000

1-4 family properties. These rates reveal similar disparities; in 2007, Bedford Stuyvesant had a Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 3

rate of 65.3 foreclosure filings per 1000 1-4 family properties, more than three times the citywide average of 20.2.1

Unlike many parts of the country, where condo foreclosures are more common, in New

York City the vast majority (about 91%) of foreclosure filings are on one-to-four family

properties. Moreover, 60% of all foreclosure filings are on 2-4 family buildings or 5+ buildings,

resulting in many innocent renter households being affected by the foreclosure crisis. The

Furman Center estimates that in 2007, at least 15,000 renter households were living in buildings

that entered foreclosures.2

The Effects Foreclosures Have on the Value of Neighboring Properties:

Foreclosures obviously harm those who are losing their homes, as well as their creditors.

But if foreclosures also harm third parties such as neighbors, the broader community, and

tenants, the justification for government intervention in the crisis becomes even more

compelling.

To assess the external effects foreclosures have on neighbors and the broader community,

we examined the impact that the filing of a foreclosure notice has on the sales prices of nearby

properties. We evaluated these impacts at different distances and over different periods of time.

We take into account unobserved characteristics of the neighborhood, as well as broader

economic conditions. Our model accordingly does a better job of controlling for the various

neighborhood characteristics that may affect both sales prices and the likelihood that a

foreclosure will occur nearby, which allows us to isolate the impacts foreclosure starts have on

prices from the impacts of other market conditions.

1 Appendix A provides the numbers and rates of foreclosure as well as rankings of the community districts, a map of citywide foreclosure activity, and correlations between foreclosure filings and community district characteristics. 2 This analysis is included in Appendix B.

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 4

Before I share our results, it is useful to review the various hypotheses about why foreclosures may have a negative impact on surrounding housing prices. First, property owners who are in default on their mortgages may be less likely to maintain or upgrade their properties, either because they have less incentive to maintain property they may lose, or because the mortgage default results from financial problems that also constrain the property owners from taking appropriate care of their homes. Properties may start to appear rundown as a result, which may make the surrounding homes less desirable. Second, after completion of foreclosure proceedings and eviction of the delinquent borrower, the property may sit vacant and suffer further physical decline. Vacant properties are likely to depress surrounding property values because they contribute to neighborhood blight, may attract vandalism and crime, and more generally signal that the neighborhood is not stable. Even if the vacant properties are well maintained and do not attract criminal or other undesirable activities, they add to the local supply of available units, and under the law of supply and demand, will thus depress property values.

Third, distressed properties sold either at foreclosure auctions or pre-foreclosure sales may be more likely to be sold to investors and become renter-occupied, which may lead to lower levels of maintenance even after the properties are re-occupied. Finally, properties with distressed loans are likely to sell at a discount – both at pre-foreclosure sales and at foreclosure auctions – thus affecting the price of “comparables” used to estimate neighboring property values.

If foreclosures are clustered by neighborhood, the magnitude of these negative effects is likely to increase. Further, the size of these effects is likely to differ according to the strength of the housing market. Foreclosed properties are more likely to remain vacant for longer periods in stable or declining housing markets than in appreciating markets.

Our research shows that foreclosures have a depressing effect on nearby sales. Properties near recent foreclosure starts on average sell at lower prices than comparable properties in the

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 5

same neighborhoods that are not near foreclosure starts. As expected, the size of the price impact generally increases with the number of nearby foreclosure starts, although the marginal

impact of each additional foreclosure decreases once there is a concentration of foreclosures in a

neighborhood.

Specifically, we find that:

 The sales prices of homes within 250 feet of at least one property for which a lis

pendens had been filed in the prior 18 months were 0.8 percent lower than the

prices of similar properties in the same neighborhood but not within 250 feet of

any recent foreclosure start, all else equal. The depressing effects of foreclosure

starts on property values appear to linger beyond the time period when we might

expect the foreclosure to be resolved; being within 250 feet of foreclosure starts

that occurred more than 18 months before the sale is associated with a 1.4 percent

decrease in sale price.

 Sales prices appear to be sensitive to foreclosure starts that occur at up to 1000

feet away from the property, but the size of the impact decreases with increased

distance, and shows some evidence of a threshold effect. Sales prices of homes

between 250 and 500 feet of three or more properties for which a lis pendens had

been filed in the past 18 months were 1.4 percent lower than the prices of

comparable properties with no foreclosure starts within that distance. However,

being within 250-500 feet of 1-2 recent foreclosure starts was not associated with

a drop in sales prices. Similarly, when looking at the effects of foreclosure starts

between 500 and 1000 feet away, we found that homes proximity to 6 or more

foreclosure starts in the previous 18 months was associated with a 2.8 percent

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 6

decrease in sales price, but found no significant impact of fewer than 6

foreclosure starts.

 One of the most striking and robust findings from our research is that sales prices

are significantly lower in neighborhoods in which foreclosures will occur in the

future, even before foreclosures. This suggests that there are systematic

differences between neighborhoods that are likely to experience foreclosures and

those that will not. Research that fails to control for these initial differences in

neighborhoods is therefore likely to confound the effects of foreclosures with

other neighborhood characteristics that affect both the frequency of foreclosures

and housing prices.

What Do Our Findings Suggest About Policy Responses?

Our results show that foreclosures not only harm the homeowners involved, but also hurt neighboring properties, the community itself, and tenants. These findings offer several useful implications for policymakers.

First of all, we know that vacant properties can damage neighborhood property values and contribute to other problems such as crime. Programs to minimize the number of vacant properties resulting from foreclosures accordingly are critically necessary. In work published several years ago, Furman Center researchers found that properties near to vacant properties sold for significantly less than otherwise comparable properties that were not close to vacant properties. Specifically, properties adjacent to abandoned or vacant buildings typically sold for

28 percent less than comparable properties located further away but still in the same

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 7

neighborhood. The negative associations were significant at distances up to 2,000 feet away from the abandoned property.3

In addition, any effort to target resources to those communities most in need must take

into account not only existing foreclosures, but the probability that the neighborhood will suffer foreclosures in the future. Looking at the prevalence of subprime lending can be useful here, because of the strong relationship between subprime lending and the prevalence of foreclosures.

Other forms of risky lending also are associated with higher than average rates of foreclosure, so data on the proportion of borrowers taking out second liens, or piggyback loans, and on the proportion of borrowers who are refinancing even when increasing interest rates are making

refinancing financially unattractive should be factored in as well.

Our empirical analyses help to illuminate the extent and nature of the problems

foreclosures pose for communities and those who had nothing to do with the underlying

mortgage – neighbors, renters, taxpayers, and children. In addition, we have worked to better

understand how local governments can best support neighborhoods suffering from very high

rates of foreclosure by culling lessons from cities around the country that have implemented

innovative programs to rebuild communities suffering from high rates of foreclosure. Last May,

the Furman Center, with support from the Ford Foundation, convened leading housing

researchers, policymakers, lenders, and nonprofit housing organizations from around the country

to discuss how best to leverage public and private resources to reuse foreclosed properties in a

manner that helps stabilize neighborhoods. The Furman Center has produced a White Paper,

Transforming Foreclosed Properties into Community Assets, that documents the roundtable

conversation, summarizes much of the discussion’s substance, and includes links to resources

that we hope will be useful to practitioners, researchers and policymakers involved in

3 Michael H. Schill, Ingrid Gould Ellen, Amy Ellen Schwartz, and Ioan Voicu, “Revitalizing Inner-City Neighborhoods: New York City’s Ten Year Plan for Housing,” Housing Policy Debate 13(3), 2002: 529-566.

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 8

neighborhood stabilization projects. The white paper is available at www.furmancenter.org4. We urge the Committee to take a look our findings there.

Conclusion:

Our research shows that the foreclosure crisis is affecting not just the homeowners who are unable to pay their mortgages, but also is imposing significant costs upon the communities in which the properties going into foreclosure lie, the neighbors of the properties, and the tenants of the debtor. Our research also shows that foreclosure activity in the City is highly concentrated, and that the communities most likely to experience these negative external impacts are communities of color in the outer boroughs.

We appreciate the Committee’s attention to this tragic threat to the very communities we’ve all worked hard to revitalize over the past few decades. If we can be of any help as the

Committee addresses these issues, please let me know.

4 Links to additional Furman Center research are provided in Appendix C.

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APPENDIX A: Data on Foreclosure Patterns in New York City

Furman Center Analysis of Foreclosure Activity in NYC's 59 Community Districts Number of Number of Foreclosure Rate of Foreclosure Filings Foreclosure FIlings (2008Q1 - CD Rank (2007, 1-4 (2007, All Q3, All (by rate of Family Property Property Homeownership foreclosure) Borough CD # CD Name Buildings) types) types) Rate (2007) 1 Brooklyn 203 Bedford Stuyvesant 65.3 863 618 21.3% 2 Brooklyn 216 Brownsville 61.2 373 274 20.8% 3 Brooklyn 204 Bushwick 60.9 437 344 18.7% 4 Brooklyn 205 East New York/Starrett City 56.8 919 743 23.6% 5 Queens 412 Jamaica/Hollis 51.9 1,872 1,608 50.4% 6 Bronx 106 Belmont/East Tremont 47.5 106 82 6.9% 7 Bronx 103 Morrisania/Crotona 45.7 91 67 6.9% 8 Brooklyn 208 Crown Heights 45.4 263 188 19.5% 9 Bronx 104 Highbridge/Concourse 41.0 61 66 5.2% 10 Queens 414 Rockaway/Broad Channel 39.3 463 391 38.4% 11 Bronx 107 Kingsbridge Hghts/Bedford 34.6 64 52 8.9% 12 Bronx 105 Fordham/University Heights 34.5 59 67 4.7% 13 Brooklyn 217 East Flatbush 33.3 542 441 30.8% 14 Bronx 112 Williamsbridge/Baychester 30.6 537 481 37.7% 15 Queens 409 Kew Gardens/Woodhaven 30.4 546 525 46.9% 16 Bronx 102 Hunts Point/Longwood 29.4 44 40 7.9% 17 Manhattan 312 Washington Heights/Inwood 28.8 36 14 8.3% 18 Bronx 109 Parkchester/Soundview 28.4 310 238 23.2% 19 Queens 403 Jackson Heights 28.1 354 363 41.1% 20 Queens 413 Queens Village 26.0 1,064 956 78.6% S. Ozone Park/Howard 21 Queens 410 Beach 25.4 584 563 68.8% South Crown 22 Brooklyn 209 Heights/Prospect Heights 23.3 196 117 16.9% 23 Bronx 101 Mott Haven/Melrose 22.8 46 29 7.9% Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 10

Number of Number of Foreclosure Rate of Foreclosure Filings Foreclosure FIlings (2008Q1 - CD Rank (2007, 1-4 (2007, All Q3, All (by rate of Family Property Property Homeownership foreclosure) Borough CD # CD Name Buildings) types) types) Rate (2007) 24 Brooklyn 218 Flatlands/Canarsie 22.5 765 663 61.6% 25 Staten Island 501 St. George/Stapleton 17.3 605 679 60.1% 26 Manhattan 310 Central Harlem 15.7 60 65 12.2% 27 Queens 404 Elmhurst/Corona 15.4 151 175 25.2% Fort Greene/Brooklyn 28 Brooklyn 202 Heights 15.3 91 77 33.1% 29 Bronx 111 Morris Park/Bronxdale 15.2 169 165 30.0% Morningside 30 Manhattan 309 Heights/Hamilton 14.3 14 35 15.3% 31 Brooklyn 214 Flatbush/Midwood 12.2 129 104 22.8% 32 Brooklyn 213 Coney Island 12.0 90 57 22.6% 33 Queens 402 Woodside/Sunnyside 10.7 72 73 25.7% 34 Bronx 110 Throgs Neck/Co-Op City 10.4 144 157 53.8% 35 Queens 408 Hillcrest/Fresh Meadows 9.0 173 162 48.1% 36 Manhattan 311 East Harlem 8.8 10 28 7.6% 37 Staten Island 503 Tottenville/Great Kills 8.5 384 385 81.6% 38 Brooklyn 215 Sheepshead Bay 8.3 173 150 41.9% 39 Brooklyn 207 Sunset Park 8.2 84 81 27.4% 40 Staten Island 502 S. Beach/Willowbrook 8.0 273 315 72.7% 41 Bronx 108 Riverdale/Fieldston 7.6 29 35 32.4% 42 Queens 407 Flushing/Whitestone 7.1 233 195 50.5% 43 Queens 401 Astoria 7.1 108 95 23.2% 44 Brooklyn 212 Borough Park 6.8 116 123 32.1% 45 Queens 405 Ridgewood/Maspeth 6.6 180 209 42.5% 46 Brooklyn 206 Park Slope/Carroll Gardens 5.7 73 44 39.6% 47 Brooklyn 211 Bensonhurst 4.8 91 68 37.5% 48 Queens 411 Bayside/Little Neck 4.6 118 126 67.9% 49 Queens 406 Rego Park/Forest Hills 4.4 46 41 45.5% 50 Manhattan 304 Clinton/Chelsea 3.7 24 25 24.9%

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 11

Bronx Total 23.8 1,660 1,479 21.4% Brooklyn Total 23.0 5,310 4,215 30.6% Manhattan Total 7.1 262 279 23.1% Queens Total 21.1 5,964 5,482 46.4% Staten Island Total 11.1 1,262 1,379 71.2%

NYC Total 20.2 14,458 12,834 33.6%

Source: Furman Center calculations of Public Data Corporation and Department of Finance Real Property Assessment Database Data; 2007 American Community Survey.

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 12

Source: Furman Center calculations of data from PDC and HMDA Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 13

LP Rate* & Median Household Income by CD 50 Bedford Stuyvesant Bronx 45 Brownsville Brooklyn 40 Bushwick Manhattan East New York / Starrett City 35 Queens Staten Island 30

15 Avg LP Rate 2005-07 10

0 $10 $30 $50 $70 $90 Median Household Income 2006 (000s) *LP rate = LPs per 1000 owner-occupied housing units Source: Furman Center calculations using data from PDC, census

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 14

LP Rate* & Percent Black or Hispanic by CD 50 Bronx Bedford Stuyvesant 45 Brooklyn Brownsville Bushwick 40 Manhattan East New York / Starrett City 35 Queens Staten Island 30

15 Avg LP 2005-07 Rate 10

0 0 20406080100 Percent Black or Hispanic 2006 *LP rate = LPs per 1000 owner-occupied housing units Source: Furman Center calculations using data from PDC, census

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 15

APPENDIX B: Analysis of Renters Affected by Foreclosures

Furman Center for Real Estate and Urban Policy Testimony for New York City Council’s Committee on Community Development January 22, 2009, Page 16

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APPENDIX C: Additional Resources from the Furman Center

 Trends in New York City Mortgage Lending: http://furmancenter.org/files/soc2007/TrendsinNewYorkCityMortgageLending.pdf

 Furman Center White Paper: Transforming Foreclosed Properties into Community Assets: http://furmancenter.org/files/FurmanCenterWhitePaper_TransformingForeclosedProperti esIntoCommunityAssets.pdf

 Neighborhood Effects of Concentrated Mortgage Foreclosures: http://furmancenter.org/files/foreclosures08-03.pdf

 Declining Credit & Growing Disparities: Key Findings from HMDA 2007: http://furmancenter.org/files/KeyFindingsfromHMDA2007FurmanCenterReport.pdf

 New Housing Data Continue to Show Signs of Danger for New York City’s Homeowners: http://furmancenter.org/files/FurmanCenterHMDAAnalysis_000.pdf