By Steven K. Beckner

(MNI) – Two Federal Reserve Bank presidents voiced concern about
the impact of foreclosures on local communities in their districts
Thursday.

Boston Fed President Eric Rosengren said the problem is
multifaceted. He said it is not just a foreclosure and REO (real estate
owned) problem rooted in the housing bubble requiring mitigation; not
just a housing affordability problem, and not just a problem caused by
problems in the community such as unemployment, crime and so forth, but
a combination of those.

“Clearly there are elements of all three in the current crisis,”
Rosengren told a Federal Reserve Board conference on “REO and Vacant
Properties: Strategies for Neighborhood Stabilization.”

“This is a foreclosure problem. This is a housing problem. This is
a community problem,” he said. “However, … the solutions may be
somewhat different, depending on how one frames the problem.”

Rosengren took the view that there has been “too little focus has
been on community problems because the focus has been more targeted to
housing and foreclosures.”

He emphasized the adverse consequences of foreclosures.
“Communities that would eventually have four or more REO properties per
square mile had higher high school drop-out rates and higher failures in
statewide math tests. It is hard to imagine that dramatic increases in
foreclosure rates would not exacerbate these problems.”

“A foreclosure is likely to mean not only a loss of home, but also
a disruption in where, or whether, kids are in school,” he said. “Since
foreclosure is often related to unemployment, marital stress, or
physical ailments, the foreclosure is likely to make it difficult for
even the most determined student to excel.”

Cleveland Fed President Sandra Pianalto described Cleveland as “the
epicenter of the foreclosure crisis,” noting that in that city “the
average number of days that properties sit vacant has skyrocketed from
114 days in 2006 to 954 days in 2010.”

She said “the longer properties remain vacant, the more collateral
damage is done to property values nearby, and it doesn’t take long for
neighborhoods to suffer from increased crime, arson, and blight.”

“We are still far from a recovery in the housing markets in our
region,” said Pianalto. “The losses and hardship that our neighborhoods
have experienced is staggering. In many low-income communities, decades
of progress have been wiped away during the past few years.”

Pianalto said “the housing market collapse is the result of a
destructive cycle that feeds on itself. In our region, mortgage
delinquencies led to a high number of foreclosures, which led to an
oversupply of housing, which led to home prices depreciating and
borrowers and financial institutions taking on big losses.”

To break this cycle, Pianalto said “a coordinated set of policies
is needed to target multiple points of the breakdown in the housing
market.”

Pianalto said government-sponsored mortgage loan modifications to
address unfavorable terms of some subprime loans have proven largely
ineffective.

“We found that only a very small percentage of distressed loans had
been modified successfully,” she said. “We found that some of the
failure was due to loan servicers operating under a business model that
was not designed to address the immediate needs of troubled borrowers or
the housing counseling agencies that represent them.”

“In recent months, we have discovered the main reason that most
borrowers cite for needing assistance is loss of income as a result of
the weak economy,” she continued. “So we know that loan modifications
alone won’t be enough to address the housing crisis.”

Pianalto proposed that the Community Reinvestment Act (CRA), which
many have blamed for contributing to the upsurge of unsound mortgage
loans in the first place, be used to deal with the foreclosure problem.

She suggested “giving banks more CRA credit if they would shift
some of the resources they usually devote to CRA activities where they
have branches to REO dispositions in the nation’s weakest housing
markets, whether or not the banks have a physical branch there.”

She also suggested that “banks could claim CRA credit for
acquiring, tearing down, and rehabilitating distressed properties.”

** Market News International Washington Bureau: 202-371-2121 **

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