Valuing Foreclosure Prevention

Calculating a reliable figure for the losses suffered by all the affected public and private parties from the ongoing foreclosure crisis is
very problematic. So many losses, more or less related and causally intertwined, suffered by so many stakeholders, who stand
more or less remote from the foreclosures themselves. However, teasing out limited portions of the economic damage is simpler,
more conservative, and can be done using basic mathematics in a very straightforward, back-of-the-envelope manner.
If we limit the damage calculation to only include losses directly associated with foreclosed houses prosecuted through to
sheriff sale, we can focus on a more concrete measure of wealth destruction from the crisis. If we accept that limitation, effectively
sealing off the forfeited house from the rippling, downstream effects of the foreclosure taint, we can apply county-level research on
median value losses to published median home prices for 2007-2010.
The resulting damage estimates represent the destroyed real estate value directly tied to the countys median foreclosed home.
When investors lose money on a mortgage because the house did not fetch a price sufficient to cover the unpaid loan balance, the
loss has balance sheet consequences for the investors. We argue here that when a homes foreclosure liquidation is
completed, a parallel loss occurs for the community. Like the investors, the communitys balance sheet takes a hit to one of its
precious assets --- its housing stock.
It is vitally important to emphasize the economic losses this simplified approach does not capture. It does not include:
the public sector costs for additional safety services, maintaining and/or tearing down abandoned houses
value declines suffered by homes adjacent to the foreclosure;
the many social costs from splitting up families to find shelter or doubling up, childrens interrupted schooling, unpaid bills
throughout the rest of the local economy, and the increased demand for social services for the thousands of displaced families;
lost time at work coping with the household disruption from foreclosure and home loss, reducing the familys income along with
workplace productivity;
career and transaction options forfeited by negative mortgage equity and being tied to the land;
legacy costs from the multiplying toxic titles generated by lender write-offs, walk-aways and securitzation short cuts; and
finally
the continuing losses to the countys tax duplicate---the increased tax burden shifted to remaining homeowners, and the
reduced revenue for public services formerly supported by higher tax collections.
Details for this simplified loss measure for Cuyahoga County appear in the following table.
Sources: Cleveland.com, NEO CANDO, CSU CCFPP Evaluations
In the first column are median home values in the county by year. Using County Auditor data, the Cleveland Plain Dealer calculated
the values in Cuyahoga County for 2007, 2008, 2009 and 2010. The second column states the percentage of a homes value lost
upon completion of the foreclosure process. The 2007, 2008 and 2009 loss percentages were taken from a paper by local
researchers included in a Federal Reserve Bank of Cleveland publication in 2010. The percentage used for 2010 was estimated by
looking at the county trend in the loss percentages for 2007 through 2009. Multiplying the first and second columns for each year,
produces the median dollar value lost on a single residential foreclosure in Cuyahoga County (third column).
The fourth column is the number of residential sheriff sales conducted in the county by year. Multiplying the number of sheriff sales
times the median value lost on a foreclosed home produces the fifth column, the Countys Aggregate Losses from Foreclosed
Houses for each of the four years. Adding those numbers together, the losses for the four years totals to over $2B.
The last two columns calculate how much of the countys housing wealth was saved when foreclosure prevention counseling
succeeded in keeping a borrower in their home. We only have the agencies client numbers for three years 2008, 2009 and 2010.
The sixth column is the number of cases the Cuyahoga County Foreclosure Prevention Program (CCFPP) partner agencies handled
where the homeowner was able to stay in their home through a modification, forbearance or other loan workout. Multiplying those
Median
Home
Price
Cuyahoga
County
Percent
Decrease
In Median
Home
Value
Decrease in
Median
Home Value
from
Foreclosure
Residential
Sheriff
Sales
County's
Aggregate Losses
from Foreclosed
Houses
Counseling
Successful
Outcomes
County's
Aggregate
Retained Value
from
Foreclosure
Avoidance
2007 $114,000 78% $88,920 10,020 $890,978,400
2008 $80,000 75% $60,000 7,921 $475,260,000 573 $34,380,000
2009 $84,000 71% $59,640 5,753 $343,108,920 732 $43,656,480
2010 $92,050 67% $61,674 6,035 $372,199,573 932 $57,479,702
TOTALS $2,081,546,893 2,237 $135,516,182
successful case totals by the third column produces the final column, the Countys Aggregate Retained Value from Foreclosure
Avoidance, over $135M for three years.
Economic Return on Foreclosure Prevention Counseling
Focusing on the three year total for the Aggregate Retained Value --- $135,516,182 --- it is possible to calculate the return on
investment from local funding support allocated to the Cuyahoga County foreclosure prevention efforts. (CCFPP raises funds and
coordinates foreclosure prevention agencies in the county.) Combining private charitable contributions for the three years
(approximately $750,000, rounded up) and the various county government allocations for the same period (approximately
$2,250,000, rounded up) totals to $3,000,000. If we estimate (high side) that the five CCFPP partner counseling agencies
individually raised another $1,000,000 locally for their foreclosure prevention programs, the grand total of local support for the
prevention counseling work comes to approximately $4,000,000 over 2008, 2009 and 2010.
Dividing the aggregate retained value from foreclosure avoidance ($135,516,182) by local support ($4,000,000) yields the return on
investment --- $33.88. For every local dollar invested in foreclosure prevention in the last three years, just under $34 of housing
value was diverted from the obliterating wealth bonfire of home foreclosures.
Foreclosure prevention is a smart investment that pays tremendous dividends to the whole community. If we look at this
preservation mathematics in reverse, that is, if we were to propose creating $34 in local wealth for every dollar invested, the
benefits would be manifest, even to a casual observer. But the economic consequences of preserving wealth are indistinguishable
from the economic consequences of creating wealth.
Or, to reduce the economic rationale of foreclosure prevention to a folksy bromide: $135,000,000 saved is $135,000,000 earned.
Definitions and Sources
Median Home Price Cuyahoga County Median home prices in 2010 remained below 2007 levels across Cuyahoga County,
Rich Exner, February 7, 2011, Cleveland Plain Dealer,
http://www.cleveland.com/datacentral/index.ssf/2011/02/median_home_prices_in_2010_rem.html
Percent Decrease In Median Home Value REO and Beyond: The Aftermath of the Foreclosure Crisis in Cuyahoga County,
Ohio, Claudia Colton, Michael Schramm, & April Hirsh, CWRU, published in REO & Vacant Properties: Strategies for Neighborhood
Stabilization, Joint publication of the Feral Reserve Banks of Boston and Cleveland and the Federal Reserve, 2010. The table below
includes a value for 2010 that is a projected estimate, based upon the slowly improving trend for 2008 and 2009.
http://www.clevelandfed.org/Community_Development/publications/REO/47_Coulton_Schramm_Hirsch.pdf.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
City of Cleveland 85% 77% 76% 74% 71% 54% 31% 13% 15% 20%
Cuyahoga County 84% 79% 77% 78% 76% 62% 42% 22% 25% 29% 33%
Suburbs of Cleveland 84% 81% 79% 86% 81% 74% 56% 37% 37% 37%
East Side of Cleveland 83% 73% 70% 68% 64% 47% 26% 10% 11% 13%
West Side of Cleveland 94% 85% 84% 85% 81% 65% 51% 28% 27% 30%
Decrease in Median Home Value from Foreclosure -- Product of:
Median Home Price Cuyahoga County x Percent Decrease In Median Home Value
Residential Sheriff Sales -- NEO CANDO (http://neocando.case.edu)
County's Aggregate Losses from Foreclosed Houses -- Product of:
Decrease in Median Home Value from Foreclosure x Residential Sheriff Sales
Counseling Successful Outcomes -- Foreclosure prevention data from five counseling agencies (CHN, CHS, ESOP, NHS and
HRRC, 2010 only) compiled by the Center for Community Planning at the Maxine Goodman Levin College of Urban Affairs. A
Successful Outcome means that the homeowner was able to stay in their home as a result of the counseling and getting a workout
with the lender. This data was systematically complied by the counseling agencies beginning in 2008 The table below on the left
breaks out the Successful Outcomes (owner stays in their home) by each CCFPP partner agency for the three-year period. The
collaborating CCFPP agencies acronyms are identified in the adjacent text box.
2008 2009 2010 Totals
CHS 60 249 310 619
CHN 105 112 161 378
ESOP 247 215 220 682
NHS 161 156 206 523
HRRC 35 35
Totals 573 732 932 2,237
County's Aggregate Retained Value from Foreclosure Avoidance Product of:
Decrease in Median Home Value from Foreclosure x Counseling Successful Outcomes
CHS -- Community Housing Solutions
CHN Cleveland Housing Network
ESOP Empowering & Strengthening Ohios People
NHS Neighborhood Housing Solutions of Greater
Cleveland
HRRC Home Repair Resource Center