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					Foreclosures in Austin: spatial and demographic trends from
                        2006 – 2008
                        Chad Ballentine
                        In Young Jang
                           Meng Qi




                   Affordable Housing Policy
                         Final Project
                          5/18/2009
INTRODUCTION                                                                                                            3

INTRODUCTION                                                                                                            3

Housing Context for Foreclosures in Austin ...........................................................3

Research Plan ...........................................................................................................5
        Main Research Questions ...............................................................................5

DATA COMPILATION AND METHODOLOGY                                                                                        7

Data Compilation .....................................................................................................7

Mapping Methodology.............................................................................................8

MAJOR FORECLOSURE TRENDS                                                                                              10

Spatial Trends ........................................................................................................10

Building Type Trends ............................................................................................12

Demographic Trends ..............................................................................................14

Loan Characteristic Trends ....................................................................................15

STUDY AREAS                                                                                                           18

POLICY IMPLICATIONS                                                                                                   25

Impact of Foreclosures on Cities ...........................................................................25

Policy Recommendations.......................................................................................27
        Foreclosure prevention..................................................................................27
        Targeted Mitigation ......................................................................................33

BIBLIOGRAPHY                                                                                                          42

VISUAL TOUR OF FORECLOSURES                                                                                           44




                                                                       2
                                         Introduction

Housing Context for Foreclosures in Austin

       Since the 1990’s, the share of U.S. households that own their homes has risen to an

extraordinarily high level. Although homeownership has been encouraged through U.S. housing

policy since the 1950’s, what makes the current situation unique is that home ownership for low-

income families has become more common. By 2004, homeownership rates were at 69%, and in

particular, mortgages to low and moderate-income families increased by 38% between 1993 and

1997 (Stegman et al. 2007). This growth in mortgages to low and moderate income families was

supported by the introduction of and federal support for “affordable” mortgages, which included

low (or sometimes zero) down payments, higher debt ratios, reduced cash reserves, and

nontraditional means of verifying credit or household income (Quercia et al. 2002). There was

also an increase in the number of Adjustable Rate Mortgages, which offered borrowers a loan

that appeared affordable initially, due to a low starting interest rate and minimal down payment,

but that became dramatically less affordable after a few years, when the interest rate would

rocket to a much higher rate. While the housing market was very strong, the market was able to

sustain these “flexible” mortgages, as homeowners were able to sell their house for an

appreciated value if they found themselves unable to afford their mortgage payments. As the

economy and the housing market have declined in the last few years, the U.S. has seen alarming

growth in the number of foreclosures. The weak market and increased job losses have

undermined the ability of many families to meet their mortgage obligations.

       The city of Austin, Texas has been, to a certain extent, mirroring this national trend of

increased low-income home ownership. While the use of exotic mortgages has not been as

rampant in Texas as other states in the nation, subprime mortgages have been increasing sharply
                                                  3
since 2003, which has subsequently led to an increased number in foreclosures. In Austin, the

number of foreclosure postings has risen 31% in the past year, while in Travis County as a

whole, postings have risen 44% (Mueller 2009). Studies conducted by the state have already

found that most of the foreclosures that occurred between 2000 and 2006 were

disproportionately located in low income minority neighborhoods, and many were in the

outlying areas of Travis County where developers have sold new homes that require no down

payment. However, there has been little study on how the recent economic decline and the job

losses that have come with it have affected spatial and demographic characteristics of

foreclosures in Austin. It is possible that these recent new factors will lead to a different spatial

concentration of foreclosures in the city, and foreclosure prevention agencies may have to

change their focus areas for service outreach.

       These target areas are especially important to identify because the City of Austin plans to

apply for a portion of the four billion dollars from the federal Neighborhood Stabilization

Program that was recently allocated by HUD (Housing and Urban Development). The Austin

metropolitan area (encompassing the city of Austin and surrounding areas in Travis County) has

already been allocated a little over two million dollars from the fund, with the City expected to

receive around $1.1 million and the county $800,000 of these funds. These funds are to be

distributed to jurisdictions according to their percentage of foreclosures, subprime mortgages,

and mortgage delinquencies. Once the City of Austin receives their allocation of these funds,

they will be able to use them to offer foreclosure relief in target areas, either by buying up

foreclosed properties, rehabilitating aging homes, or acquiring vacant land for redevelopment.




                                                  4
Research Plan

       Our research project utilized foreclosure data for Travis County from the last three years

(2006, 2007, and 2008) to investigate the nature of the recent foreclosure problem in Austin. We

used GIS maps in combination with academic literature to identify how geographic location,

demographic characteristics, and loan characteristics have affected foreclosure rates in Austin

over the last three years. Following this, we used what we learned from our GIS maps to identify

some general county-wide trends and make some policy recommendations for possible

foreclosure prevention strategies. The data used for the spatial investigation portion of our

project was purchased from the Foreclosure Listing Service, Inc.

       As part of our project, we are partnering with Frameworks CDC to assist them to more

effectively target their foreclosure prevention assistance to specific groups in Austin.

Frameworks CDC provides free foreclosure prevention counseling to families at risk of

foreclosure. All counselors have been fully trained and certified, and work especially to

intervene with banks to help families strategize new payment options to avoid foreclosure. In

addition, Frameworks also helps families attain affordable housing and, for those purchasing

homes, affordable and sustainable loan products. They provide first time homebuyer classes, as

well as one-on-one financial counseling to make sure low-income families understand and plan

for the costs of owning a home. To date, Frameworks has helped many families avoid

foreclosure, and they hope to expand their services even more in 2009. By providing them

spatial data showing areas of concentrated foreclosures in Austin, we will help Frameworks more

effectively target their outreach and publicity (Frameworks CDC 2009).


Main Research Questions

The main research questions addressed in our study are:
                                               5
1. Which areas in Austin are experiencing high rates of foreclosure, and how do these rates

compare to the rate for the city overall as well as national rates?

2. What factors are most strongly associated with foreclosures in Austin? Do they have to do

with individual loan characteristics or characteristics of the places where they are most

concentrated?

3. Within affected areas in Austin, can we determine the types of loans that homeowners have as

well as how old those loans are?

4. How do the demographic characteristics of households in foreclosure differ from the City of

Austin as a whole?

5. What are the policy implications of our findings?

In order to answer these questions, we used a combination of GIS mapping, data analysis, on-site

observations of focus study areas, consultations with Rory O’Malley and Donald Degollado (of

Frameworks), and review of academic literature on the current foreclosure crisis.




                                                  6
                           Data Compilation and Methodology



Data Compilation

       Because the data that we received from the Foreclosure Listing Service was not formatted

for the computer mapping program we used (ArcGIS), we had to clean and prepare the dataset to

make it compatible. We also wanted to organize our database of foreclosure postings for the last

three years to create a file that could be easily navigated and searched.

       First of all, upon examining the data we received from the Foreclosure Listing Service,

Inc., we found that there were quite a few instances in which the same house was reposted many

times for foreclosure in the last three years. This could have happened if a household defaulted

on their mortgage, went into the foreclosure process, but was able to repay enough of their

mortgage to stall the foreclosure process. However, after a period of time, the household again

defaulted on their loan, and again went into foreclosure. Because we did not want to risk over-

reporting foreclosures in Austin by double counting these households, we deleted the entries that

had the same address, loan origination year, loan type, and mortgagee name as one we already

counted before. However, if a address came up twice in our database, but we saw it had a

different mortgagee name, we kept it because this could more likely mean that another family

has defaulted on the same house, and thus, represented a separate foreclosure posting. We also

decided to keep postings that had the same address, the same mortgagee name, but different loan

type and loan expiration dates because we wanted to take into account loans that were refinanced

but went into foreclosure posting again after the refinancing process.

       Also, it must be noted that the data we obtained from the Foreclosure Listing Service did

not necessarily have complete information for every foreclosed address that was posted. There
                                               7
was some missing information from our original data usually in the form of specific loan

characteristic data or legal lot descriptions. There were also some entries that, after cleaning up

our original data, did not make sense. For instance, in some cases, the Construction Year for a

given address would be a year in the future, or a year in the very distant past. In these cases, we

substituted N/A for these entries, and they were not taken into account in our data analysis in the

charts and tables. However, we did include these in our GIS maps because the address was still

applicable.


Mapping Methodology

       Our mapping was fairly straightforward. We plotted all the foreclosure addresses we

wanted to include in our study by geocoding them, which allowed us to translate each address

into a longitude – latitude coordinate that ArcGIS could use. We could then sort through our

data to plot individual loan characteristics that we wanted to investigate further. We also used

data from the Home Mortgage Disclosure Act (HMDA) database, which allowed us to obtain

more up-to-date demographic information for Austin based on the Census’ American

Community Survey. This data is projected from Census 2000 data to create an estimated 2008

number.

       One important thing to note for our GIS methodology was that we decided to only focus

on building types that were likely to only be occupied by homeowner households in our study.

Although the database we obtained from the Foreclosure Listing Service, Inc. included other

building types such as multifamily apartment complexes and vacant lots, we decided to

investigate more thoroughly single family occupied building types. This was mostly because our

community partner, Frameworks CDC, informed us they were primarily interested in these

building types, since that is where they target their foreclosure prevention services. So, for all
                                                  8
the foreclosure maps that we made, we only included foreclosures on Single Family Detached

homes, Mobile homes, Condos, Duplexes, and Townhouses.




                                              9
                                 Major Foreclosure Trends



Spatial Trends

       Overall, we found that Travis County has not faced the same high levels of foreclosures

that the rest of the country or even the rest of Texas has been facing. Despite these relatively low

numbers particularly areas within Travis County are experiencing high rates of foreclosure.




       The foreclosures in Travis County in the last three years tended to be more concentrated

as we looked further out from the city center. They tended to align in a north – south pattern,

which was unsurprising since this has been the general development pattern in the City of Austin

to date (see Percent of Foreclosure Postings in Each Census Tract map). The percentage of

foreclosures out of total housing units per census tract was also higher on the east side of IH-35.

There were some tight clusters of foreclosures in isolated spots to the far east and far south of
                                                 10
Austin that caught our attention. Eventually, we chose a few of these as our focus study areas,

and these will be discussed in more detail below. For the most part, the general pattern of

foreclosures was similar between our three study years, but there were a few differences.

       In 2006, there were a total of 2,465 foreclosures in the city. The number of foreclosures

increased as we looked further north or south from the city center (see Travis County

Foreclosure Postings in 2006 map). This made sense to us, since property values tend to be

lower as they get towards the outskirts of a city. As mentioned before, there were about five

tight clusters of foreclosures towards the east side of Austin, which we found were isolated

developments that had been built away from the main developed part of the city. We were also

surprised to find that there was a small concentration of foreclosures towards the west side of

Austin, near Lake Travis. This surprised us because this area has fairly high property values,

which led us to hypothesize that these were speculative investor properties or vacation homes

that had been purchased when the real estate market was stronger.

       In 2007, the pattern of foreclosure concentrations actually becomes slightly less

pronounced, although the total number of foreclosures (2,469) is almost the same as those in

2006 (see Travis County Foreclosure Postings in 2007 map). In general, the percentage of

foreclosures in each individual census tract is either the same, or even slightly less, than those in

the 2006 map. This actually suggests that though the number of foreclosures in Austin stayed

about the same, the development of total housing units in the city increased, causing the

percentages of foreclosures to actually decline throughout the city in general.

       In 2008, the number of foreclosures (2,713) was the highest of all three years. This is

reflected in the map, as we see more foreclosures throughout all areas of the city. Again, we see

the same basic pattern of foreclosure concentrations, but the clusters become more pronounced

                                                 11
(see Travis County Foreclosure Postings in 2008 map). We hypothesize that this is partly due to

the effect of earlier foreclosures on property values, which has caused home values of an entire

neighborhood to drop, and subsequently, has made it even more difficult for neighboring

                                                            families to sell their homes. As
  Table 1. Owner-occupied Foreclosures by Housing Type
     Type           2006           2007          2008       expected, the percentage of foreclosures
  SF detached           2,113         2,106         2,196
 Condominium              143           167           290   (out of total housing units) in census
    Duplex                 89            79           117
 Mobile Home              116            94            83   tracts increased in 2008 in Austin as
  Townhome                  4            23            27
     Total              2,465         2,469         2,713   whole (see Percentage of Foreclosure

Postings in Each Census Tract map).


Building Type Trends

       Out of all possible single family occupied housing, Single Family Detached homes made

up the majority of all foreclosures (see Table 1). This was true for all three years in our study.

The Single Family Detached homes in Travis County are the dominant housing type, so it is no

surprise that they accounted for the highest number of foreclosures. It would have been very

informative for us to find out the percentage of foreclosures for each housing type in our study

out of the total of the housing types in Travis County, but we were unable to locate this data. We

expect that we would have found that although the total raw number of a certain housing type

foreclosures was not large, there was an inordinately high percentage of a certain single family

occupied housing type that was undergoing high rates of foreclosures.




                                                  12
       In terms of construction year of foreclosed properties, an overwhelming majority of the

units were constructed after 1970. More interestingly, more than a third of the foreclosed homes

were constructed after the year 2000 (see Table 2 and Graph 1). This is interesting because it

indicates that new construction, and new developments should perhaps be a target for foreclosure

prevention services. This is consistent with the spatial pattern of foreclosures described above,

since new developments tend to be further out from the central core of the city. This was further

corroborated through our maps, which showed that the construction of foreclosed homes was

newer and newer as they got further from the city core (see Based on Construction Year map). It

is interesting to note that almost all the developments with clustered foreclosures on the far east

side of Austin were constructed after 1990 or 2000. It is also interesting that most of the

foreclosed homes by Lake Travis on the west side of Austin were also built after 1990 or 2000.




         Construction Year                   # of Properties
            Before 1950s                                193
             1950-1959                                  221
             1960-1969                                  407
             1970-1979                                1,021
             1980-1989                                1,503
             1990-1999                                1,216
             After 2000                               2,947
                N/A                                     139
                Total                                 7,647
Table 2. Foreclosed Single Family Homes, By Construction Year




                                                  13
Graph 1. Foreclosed Single Family Detached Homes, By Construction Year




Demographic Trends

       Several basic demographic trends were apparent when Census data for Travis County

was plotted onto the GIS maps. We then overlaid foreclosure data on the maps to determine if

any foreclosure clusters were associated with specific demographic patterns.

       The map entitled Median Age by Tract shows a general trend, with the youngest

households located in the Southeast corner of the county and also in the downtown core tracts of

the city. Older households are located in the rural Western portion of the county. When the

foreclosure listings were plotted on this map we could see that the majority of the Travis County

foreclosures were located in tracts with a below average median age.

       The map entitled Household Size shows that smaller households tend to live in the urban

core of the city. Larger households were more common in the Southeast part of the county as

well as a pocket of north Travis County, where Pflugerville is located. When the foreclosure data

is overlaid onto these maps there is a clear relation between household size and foreclosures.

Tracts with larger average household sizes are much more likely to have a high concentration of
                                               14
foreclosures. This indicates that the foreclosure problem in Travis County is disproportionately

affecting families.

       The map entitled Percent of Households with Incomes Below Poverty shows high

poverty rates in central Austin and on the east side of town. Poverty trends are more difficult to

interpret due to the likely inclusion of many of the large student population from the University

of Texas. Students typically do not have high incomes but usually have alternative resources to

draw from such as student loans and parents. Yet we were not able to separate out students from

those who face long term endemic poverty. Perhaps for this reason, when we overlaid

foreclosures on the Poverty map there were no clear trends that indicate a correlation between

census-identified poverty and the foreclosure problem.

       The final demographic map is entitled Minority Population. This map shows a clear

spatial pattern, with minority populations concentrated on the east and southeast sides of town.

When foreclosure listings were overlaid onto this map it became clear that minority populations

were affected by the foreclosures disproportionately.

       Overall, we can identify a demographic profile for Austin neighborhoods with high

numbers of foreclosure postings. Census tracts that have high rates of foreclosure are commonly

found to have large households, high shares of minority residents, and a relatively young

population. This unfortunately means that Travis County foreclosures are impacting
neighborhoods where young minority families are concentrated the most.



Loan Characteristic Trends

       The two aspects of loan characteristics that we analyzed were the loan origination date,

and the loan type. We chose these two aspects because we felt they would reveal the most about

whether certain loan characteristics were the reason for recent foreclosures in Austin, or if they

were the reason for certain foreclosures in specific locations around the city. For these trends,

                                                15
we used the combined 2006 to 2008 data for all of our analyses, because we did not see any

striking differences between each of the individual years in our study when we mapped them

separately. It would have been helpful to also investigate the effect of interest rates and other

loan terms on foreclosures, but unfortunately these data were not available to us.

       In terms of the loan origination date, we found that the overwhelming majority of the

loans that foreclosed in the last three years were originated after the year 2000 (see Table 3 and

Graph 2). The origination time period that had the highest number of foreclosures was between

2000 and 2004. This is interesting because it is in the last decade or so that “flexible” mortgages

have become particularly popular. Although we cannot be sure that this is definitely the reason

behind the sharp increase in foreclosures after the year 2000, it is certainly highly suggestive.

Spatially, there is a somewhat even and random distribution of foreclosures across Austin based

on loan origination year (see Loan Originated Year maps). Clearly, there is a significant increase

of foreclosures on the maps of loans originated in or after the year 2000, but the increase seems

to be fairly evenly distributed across areas that were already experiencing foreclosures.

          Loan Year                    # of Properties
         Before 1980s                              17
          1980-1984                                19
          1985-1989                                89
          1990-1994                               140
          1995-1999                               686
          2000-2004                             3,536
          After 2005                            2,958
             N/A                                  202
            Total                               7,647

Table 3. Foreclosed Single Family Homes, By Loan Origination Year




                                                  16
Graph 2. Foreclosed Single Family Homes, By Loan Year




       The loan types that were the most prominent among foreclosures were FHA loans and

Fannie Mae/Freddie Mac loans (see Table 4). Among these two, Fannie Mae/Freddie Mac loans

consistently outnumbered FHA loans that foreclosed for each of our study years. This was

somewhat surprising to us because we had expected these loans to include stricter standards than

other loans, and therefore, be less likely to foreclose. However, from a conversation with

Donald Degollado at Frameworks CDC, we learned that the standards for FHA and Fannie

Mae/Freddie Mac loans have been getting looser in recent years. The percent of down payment

required has often been flexible, as well as the interest rates and income requirements. Spatially,

we do not see a geographic pattern for any of the loan types except for FHA loans (see the Loan

Type map). While foreclosures from all other loan types are fairly evenly distributed throughout



                                                17
the city, FHA loans tend to be more specific to the developments outside the city center, where

property values tend to be lower (see Loan Type: FHA Loans map).

 Loan Type                                   2006       2007       2008
 Conventional Fannie Mae and Freddie Mac       1,073      1,242      1,575
 Federal Housing Administration                  713        640        562
 Conventional Loan                               282        231        264
 Home Equity Loan                                216        190        149
 Veterans’ Administration                         92         74         52
 Home Owner’s Association                         53         61         90
 TAX                                              21         23         14
 Mechanic’s Lien                                   8          3          1
 N/A                                               7          5          6
                  TOTAL                        2,465      2,469      2,713

Table 4. Foreclosed Single Family Homes, By Loan Type


                                           Study Areas
       During the process of mapping foreclosures in Travis County it became clear that there

are some spatial patterns. We see a tendency for some of the foreclosure properties to be

clustered within certain neighborhood developments. Three areas in particular were hardest hit,

as indicated in the maps below, showing the location of our three case study areas. Case Study

area #1 is located east of the newly built SH130 toll road on FM 969. Case Study #2 is also east

but farther south in an area known as Del Valley, just east of Austin Bergstrom Airport. Study

area #3 is in south Austin, just east of IH-35 and south of Ben White Blvd. All three of these

study areas are comprised of single-family detached home neighborhoods.




                                                 18
       Once the areas were identified on the map we began to look more closely at these areas to

determine what made these areas unique or different from other neighborhoods in Travis County.

Immediately it was clear that these areas were comprised of large developments with only one

builder each. There was no diversity of housing types in any of these developments, only a single

builder mass producing the same house over and over again. This can be clearly seen in the

visual tour of foreclosures at the end of this paper.

       The complication that exists with drawing conclusions regarding the relationship between

neighborhood demographic characteristics and these concentrations is that they are newer

developments and the demographic data from the most recent 2000 census does not provide an

accurate picture of current census tract demographics. Changes that have resulted from the

development of these neighborhoods have not yet been captured at the census tract level and

therefore must be pulled together from the American Community Survey estimates as well as

through direct observation. From the available data we were able to determine that these areas

were mostly made up of young minority households with 3 or more people. These are primarily

working class people who make less than the median family income for the Austin area that are

trying to raise children in homes that they can afford.

       A recent report named the “Comprehensive Housing Market Study” was created for the

City of Austin and released in March of 2009. This report compiled a significant amount of data

related to the current situation of Austin’s Housing Market. In the short summary of Austin’s

foreclosure situation the report simply highlights that the problem is most severe in the East.

These Eastern census tracts are mostly rural except for these developments we have highlighted

                                                  19
in our findings. By displaying the findings only by census tract the foreclosure problem seems to

be a widespread problem in a large area, but the reality is that these tracts are outsized due to the

small number of residents they contained in 2000, when tract boundaries were drawn.




       The distance of these developments from the core of the city, from public transit, from

retail opportunities, and their distance from major employers are 4 observations that must be

highlighted. These locations are therefore some of the least desirable areas for city residents to

live within the greater Austin area if one were to make that decision based on neighborhood

convenience and amenities. They are also very limited in the diversity of housing types being

offered. The one common positive feature that these neighborhoods do have is an affordable

housing price for the size of the home being offered. These are the lowest priced new homes

being offered within the greater Austin Metropolitan area. These neighborhoods are mostly 10

years old or newer and are strictly single family detached.

                                                 20
                                                                    These developments are

                                                             successful as a result of a lack of

                                                             affordable housing closer to Austin

                                                             large enough to house households

                                                             with 3 or more people. The recent

                                                             “Comprehensive Housing Market

                                                             Study” created for the City of

                                                             Austin maps out the affordable

                                                             single family detached housing

                                                             available to “low income” people

                                                             between 51% and 80% MFI. The

                                                             value of the homes they identify as

                                                             “low income” homes range from

around $111,000 to $178,000. These areas are charted on the map shown here. The areas with

the highest concentration of houses affordable to these people are generally located on the

outskirts of the city.

        The study areas we are looking at for this project are developments where the home

prices ranged from $90,000 to $120,000. These price ranges serve more of the 35% to 55% MFI

range, where households earning between $30,000 and $40,000 per year would be able to afford

to pay the mortgage without spending more than 30 percent of their gross monthly income. At

this income level a household would have few affordable options for purchasing a basic 2-bed, 2-

bath single family detached home. To help visualize the problem, we performed a home search

                                                21
on a popular real estate website Ziprealty.com for homes in Austin selling for $100,000 or

below and a search for homes selling for between $100,000 and $120,00 that fit the criteria of 2-

bed 2-bath.




       The results clearly show a bias to the east side of town with only 8 of the nearly 180

homes for sale in that price range on the West side of the highway. This search clearly

demonstrates the limited options that exist for households wishing to buy a home between 35%

and 55% MFI. The Comprehensive Housing Market Study reinforces the problem of limited

single-family detached home availability when it comes to households in this income range in

the graph shown on this page.




                                                      Source: BBC Research & Consulting, 2009




                                               22
       The production of affordable housing is important for the success of any urbanized area

but in these three cases is Austin ignoring a potentially toxic form of affordable housing

development? It is true that without these developments the city would have a much smaller

stock of housing affordable to its workforce but what are the true human costs of allowing these

types of cheap “affordable” leapfrog developments?

       1) The concentrated foreclosures in these neighborhoods represent financially ruin for the

lower income Austin households that they disproportionately affect.

       2) A wave of low-income households losing their homes to foreclosure will enter an

already constricted rental housing market with poor credit and no rental references.

       3) Households that are not facing foreclosure but are remaining in these neighborhoods

are facing declining home values. The decline in home values often results in households where

more is owed on the house than the house is worth. This gives the homeowner the option to stay

and hope for a future increase in home value or take a path of financial ruin in order to get out of

the house.

       4) Homeowners in these neighborhoods continue to remain geographically secluded

because these developments were built far from the city where land was the cheapest. During a

time of economic recession this seclusion can sometimes exacerbate a bad situation due to a

difficulty accessing employment opportunities, social services, employment, childcare,

affordable groceries, and other services.

       5) Remaining homeowners are heavily automobile dependent and are heavily impacted

by the rising costs of fuel because these developments were built far from public transportation

systems.




                                                 23
The unfortunate outcome here is that many of the residents in these focus areas are seeing their

American dream turn into a financial prison while the developers of these communities have

made their profits and have moved on. Part of the solution is to create better, more centrally

located low-income housing so that working class families don’t have to sacrifice everything for

a chance at the American dream.




                                                24
                                       Policy Implications

Impact of Foreclosures on Cities

        To grasp the significance of our findings, as well as the necessity of creating effective

foreclosure prevention strategies for the future, it is important to understand the impacts that

foreclosures have on cities in terms of increased service demands and costs. As the number of

foreclosures around the country has increased, there have been various studies investigating and

documenting the secondary effects that foreclosures have had on municipalities, through the

decline in property values and rising crime rates they can induce. These secondary effects result

in costs for the city as a whole that are felt in the form of higher tax burdens for all residents.

Raising awareness of this chain of effects could help engender greater public support for publicly

funded foreclosure prevention services.

        Increased foreclosures have been shown to have an impact on crime rates in

neighborhoods. A study conducted by Dan Immergluck and Geoff Smith at the Georgia Institute

of Technology on neighborhoods throughout Chicago showed that just a one percentage point

increase in foreclosures is enough to increase the violent crime rate in a neighborhood by 2.33

percent, controlling for other factors (Immergluck and Smith 2006b). This is due to a variety of

factors that result from increased foreclosures, including increased abandonment of foreclosed

homes and general decline of the neighborhood. Abandoned homes have often been theorized to

lead to increased crime, partly due to less surveillance by neighborhood inhabitants, the

possibility of vacant homes being overtaken by squatters, and the general “broken windows”

theory (Immergluck and Smith 2006b). Clearly, if foreclosures do stimulate an increase in



                                                  25
neighborhood crime, this places a social and economic burden on the neighborhood and the city

as a whole.

       Another issue is the impact that foreclosures have on the value of nearby properties. This

issue has been much more heavily researched, possibly because it interests many more

stakeholders in diverse groups in a city. Another study by Dan Immergluck and Geoff Smith

estimated that each foreclosure within an eighth of a mile of a single family detached home

reduces its property value by 0.9 percent. This means that in the entire city of Chicago, the

foreclosures that occurred in 1997 and 1998 were estimated to have caused more than a $598

million reduction in aggregate property values (Immergluck and Smith 2006a). Another study in

New York City found that the foreclosures between 2000 and 2005 also resulted in decreased

property values of neighboring homes, but the relationship they found was not a linear one.

They also found that a relatively small number of foreclosures (1-2 in a 250-500 foot ring) did

not result in any significant property value decrease, while three of more foreclosures within the

same geographic distance did (Schuetz, Been, and Ellen 2008). A third study conducted in the

Chicago PMSA found an even more complicated relationship between property value decline

and foreclosures. This study found that there was a significant decrease in property values of

homes within 0.9 km and within 5 years of its liquidation. However, these effects on

neighboring homes were reduced by half when the real estate market was booming in Chicago

(Lin, Rosenblatt, and Yao 2009). Clearly, more research needs to be conducted in the future for

a clearer view of the effect of foreclosures on neighboring property values. Effects are also

likely to be context specific, so it would be important to conduct specific research in Austin to

investigate local dynamics of this issue.




                                                26
Policy Recommendations

Our recommendations can be grouped into two broad categories: foreclosure prevention and

targeted mitigation. Foreclosure prevention recommendations are aimed at using local tools to

prevent future homebuyers, as well as those currently owning their homes, from losing their

homes to foreclosure. Targeted mitigation recommendations are aimed to using local resources

to mitigate the effects of foreclosures on neighbors, particularly in areas of the city were

foreclosures are concentrated.


Foreclosure prevention

Homebuyer Education and Counseling

       Even before current housing market crisis, the importance of homebuyer education and

counseling programs was widely recognized as a key strategy for helping homebuyers better

understand the process of purchasing a home. However, requiring education and counseling for

homebuyers was rare nationally before current housing crisis. Currently, there are eleven Home

Buying Education Service providers as well as several online education service providers in

Austin (Texas Department of Housing and Community Affair, 2009). Although the services they

provide vary, most of the issues that are covered in the homebuyer education are similar: 1)

Preparing for home ownership, 2) Budgeting and Credit, 3) Financing a Home, 4) Selecting

Home and 5) Maintaining a Home and Finances. After on-line homebuyer education,

participants can easily get a certificate if they pass the test. Compared to online education, the

eight hours of on-site education provided in classes give prospective owners more opportunity to

get one-on-one counseling service. In this case, the homebuyers can better understand whether




                                                 27
they are ready for homeownership or how they can sustainably maintain ownership of their

home.

        In the last two years, Fannie Mae and Freddie MAC have heightened their requirement

for the education and counseling for all borrowers. In particular, Fannie Mae requires first-time

homebuyers and those using unconventional sources of credit to qualify to complete prepurchase

homebuyer education and counseling. Such programs must provide information about the home

buying process and mortgage financing, and also assist homeowners in establishing key contacts

that can be relied upon to provide additional support should they encounter difficulties meeting

their mortgage obligations in the future (Fannie MAE, 2008). Prepurchase homebuyer education

has also been mandatory since January 1, 2009. When homebuyers borrow money from

MyCommunityMortgage®, they must also consent to post-purchase early delinquency

counseling (Fannie MAE, 2008).

        While the city cannot mandate the use of homebuyer education and counseling, it can

(and does) ensure that prospective homeowners taking advantage of city programs receive

adequate counseling. Currently, there are several types of government sponsored programs in

Travis County and the City of Austin available to assist first time home buyers within the area.

Those programs are 1) Down payment/Closing Cost Assistance (DCC), 2) Below Market Interest

Rate Mortgage Loans without Down Payment Assistance (BMM w/o DPA), 3) Below Market

Interest Rate Mortgage Loans with Down Payment Assistance (BMM with DPA), and 4)

Mortgage Credit Certificate Programs (MCC). Even if the type of program is the same,

requirements differ by agency. DCC programs operated by the Travis County Housing Finance

Corporation and Austin Housing Finance Corporation require homebuyer. The City of Austin

has developed its own homebuyer education course, Housing Smarts. The programs offered by

                                                28
state agencies (the BMM with DPA program offered by the Texas y of Housing and Community

Affairs and the MCC available from both TDHCA and the Texas State Affordable Housing

Corporation) don’t require the completion of Homebuyer Education. We believe that for

affordable homeownership to be meaningful, it must be structured to be financially sustainable.

To ensure that low income homeowners are buying homes that they can afford for the long term,

homeownership assistance programs should require the Homebuyer Education and Counseling.

       Lastly, the different education and service providers should make sure that the contents of

their educational programs are updated frequently, to be consistent with National Industry

Standards for Homeownership Education and Counseling. Moreover, Post-Purchase Standard

Homeownership Education Content should be also included to keep the sustainable

homeownership.


Mortgage Refinancing and Foreclosure Timeline

       Households that fall behind on their mortgage payments or who have a hard time paying

their mortgage need assistance in order to avoid losing their homes to foreclosure. Several

alternatives such as loan refinancing or loan modification have been already adopted as solutions

to reduce monthly mortgage payments. When a mortgage loan is refinanced, it goes through the

previous mortgage loan closing process. Once the loan is refinanced, the interest rate is fixed to a

lower rate or the term of the loan is extended. In this process, there are several types of fees that

are usually charged to households, such as: 1) Loan Origination Fee, 2) Interest Points, 3)

Appraisal Fee, 4) Credit Report Fee, 5) Extra Interest Payments, 6) Escrow Account, 7)

Increased Property Taxes, 8) Transfer Taxes and Recording Fees 9) Homeowners Insurance 10)

Flood or Quake Insurance, 11) Private Mortgage Insurance, and 12) Title Insurance. Depending

on the lender, some or all of these fees might not be charged. But, in many cases, those
                                                  29
uncharged fees are reflected in the borrower’s other payments. In addition, if the Loan to Value

(L/V) ratio exceeds 80%, it is not easy for the households to actually obtain a lower interest rate,

and they run the risk of having to pay private mortgage insurance (PMI). Since most of the

housing values are decreasing in this current housing market depression, many borrowers have

been having a hard time keeping their L/V ratio under 80%. Therefore, refinancing isn’t always

the best model for households facing foreclosure, as it might become only another burden to

some of them.

       Since President Obama approved the Homeowner Affordability and Stability Plan on

February 18, 2009, many households now have more options for their mortgage refinance and

loan modification. Under the Homeowner Affordability and Stability Plan, homeowners who are

at risk of foreclosure but have made a best effort to pay their mortgage payment can get better

conditions for their loan modification. Or, households who are current on their mortgage but

have been unable to refinance because their house has decreased in value, now have the

opportunity to refinance into a 30 year, fixed rate loan (The White House, 2009). In both cases,

they can get free counseling services from HUD-approved organizations and there are no fees for

the entire refinance or loan modification process. Within Travis County, there are several service

providers for this plan including Frameworks and the Consumer Credit Counseling Service.

There are also nation-wide counseling services for this plan as well. More proactive outreach

action is necessary to inform low-income households that these counseling services and other

types of help are available for them.

       To be eligible for the loan modification, households must meet the following criteria: 1)

the house should be the primary residence, 2) the loan must be owned or securitized by Fannie

Mae and Freddie Mac, 2) the amount of the first mortgage must be equal to or less than

                                                 30
$729,750, 3) the mortgage was originated before January 1, 2009, and 4) the monthly mortgage

payments including principal, interest, taxes, insurance and homeowner’s association dues are

more than 31% of current gross income of each household (U.S. Department of Tresury, 2009).

For refinancing, the criteria is a little different: 1) their house size should be a one- to four-unit

home 2) their loan should be owned or guaranteed by Fannie Mae or Freddie Mac, 3) they must

not have been more than 30-days late on their mortgage payment in the last 12 months, and 4)

their first mortgage must not exceed 105% of the current market value of their home (U.S.

Department of Tresury, 2009).

        As we mentioned in our data analysis, the most frequent loan type for single family

occupied homes posted for foreclosure in Travis County is the Conventional Fannie Mae or

Freddie Mac loan. That means lots of the households in Travis County already meet at least one

of the criteria of the Homeowner Affordability and Stability Plan. However, they still need to

meet other criteria to benefit from this plan. Now, Travis County and the City of Austin should

take more action for those who couldn’t afford the refinancing or loan modification personally or

those who are not eligible for the Homeowner Affordability and Stability Plan.

        First of all, the city can support those households whose L/V ratio is over 80% by

financing the extra value above 80% so that the households can get a better interest rate while

not having to pay their PMI when they refinance their mortgage loan. In this case, the financed

money should be paid back when the loan payments of the households are stable and their L/V

ratio decreases to a manageable level (usually below 80%). One possible theory is that the

house keeps its value or increases its appraised value. However, this seems unlikely in the

current housing market. However, if the county and city provides better services to keep up

community amenities or prevent vandalism or squatting in vacant properties in those

                                                   31
neighborhoods experiencing high foreclosure rates, it may increase the chances of those homes

maintaining or increasing their value when the economy begins to strengthen.

       Second, the county and city might provide subsidized legal services or counseling

services for those who can’t afford legal fees to refinance their mortgage loans. Since there are

already several non-profit organizations that provide similar services, the county and city can

work more cooperatively with them to provide more services. By doing do, the household can

take action before they get their foreclosure notice.

       Most importantly, the timeframe is very important to support households more effectively

since the current foreclosure process happens very quickly in Texas. Foreclosure procedures in

Texas are so fast that it is hard for the households find what the best solution is for them

immediately. Since Senate Bill 472 was passed last April, many Texas homeowners have been

able to extend the period to cure their pending foreclosure from 20 to 45 days (Texas Legislature

Online, 2009). This bill also requires “a mortgage lender to serve a debtor with the written

notice of sale by regular and certified mail, authorizes the attorney general to create a model

form for that notice, and requires a debtor to notify any tenants of a pending foreclosure within

seven days after the debtor receives a notice of sale” (Texas Legislature Online, 2009).

However, this bill will not be effective until September 1, 2009. Furthermore, though the

extension to 45 days will undoubtedly be helpful, it may still not be enough for troubled

homeowners to explore all their options to cure their foreclosure. As described above, the

process for refinancing or loan restructuring is a lengthy one, and may ultimately end up not

being the best option for homeowners. In those cases, homeowners may need more than 45 days

to look for other options. In other states, such as Oregon, the time between a foreclosure posting

and the actual sale is 120 days (Oregon Foreclosure Law). Furthermore, two city council

                                                 32
members in Baltimore, Maryland are lobbying to extend the time between foreclosures to

eviction from 14 to 365 days (Kay 2009) to give homeowners more time to find solutions to their

mortgage delinquency. Given the short time period between foreclosure posting and final

foreclosure in Texas, reaching out to families likely to in trouble becomes extremely important.

The city should support local agencies that do this work, helping them identify areas of high

need that come to the city’s attention and also alerting them to families in city programs that

need assistance.


Targeted Mitigation

Modifications of the city’s SMART Housing program

        The city’s S.M.A.R.T. housing program is described by the AHFC on its website

www.ci.austin.tx.us/ahfc/smart.htm as “a policy initiative designed to stimulate the production

of affordable housing for low and moderate income residents of Austin”. The program is

designed to encourage this type of development not through financing but rather through

development fee waivers, expedited plan review, and providing advocacy to developers

throughout the process. The S.M.A.R.T. acronym stands for the various policy goals of the

initiative, e.g., to provide housing that is safe, mixed income, accessible, reasonably-priced and

transit oriented.

        Providing incentives that aim to create homes that are affordable sounds like a good

approach yet, through our analysis of Austin’s foreclosure patterns, some issues arose that appear

inconsistent with the program’s stated goals and may be contributing to the vulnerability of

SMART Housing neighborhoods to foreclosure. In this section, we discuss specific SMART

Housing neighborhoods where we discovered concentrations of foreclosures.


                                                33
       An analysis of smart housing was done for this project to determine if homes built under

the S.M.A.R.T. Housing program faced a higher rate of foreclosure than traditional

developments. When S.M.A.R.T. Housing developments were overlaid on a map of foreclosures

it was noticed that the following S.M.A.R.T. Housing developments contained a significant

number of foreclosures:

       Meadow Lake Subdivision PH 1 & 2

       Crossing at Onion Creek Sections 3, 4, & 5

       Dittmar Crossing

       Springfield Phase B Sections 4, 5, & 6



Case #1: Meadow Lake Subdivision Phases 1 & 2




       The Meadow Lake Subdivision is located 8 miles from downtown in south Austin just

East of IH-35. The subdivision is outlined in red on this map. Phases 1 & 2 are considered

S.M.A.R.T. Housing developments and are highlighted in green. Phases 3 & 4 are not

S.M.A.R.T. housing and are not shaded. The stars represent foreclosed properties, and one can

                                                34
clearly see that this neighborhood has been hurt by the foreclosure problem. Phases 3 & 4 are

too new to gather any significant information on trends, but Phases 1 & 2 already show a

significant drop in value from their original levels. The chart on this page shows that on an

average these homes lost a total value of over $9,000 each from 2005 to 2008. Any average

lower-income resident that may have purchased in this S.M.A.R.T. housing development when it

was built would most likely owe more on their house than it is worth today.     This neighborhood

has left its residents in a worse financial situation then before they purchased homes here. The

City of Austin’s S.M.A.R.T. housing program in this case is associated with a loss of wealth

amongst the segment of the population who are in the most precarious financial situation.




Case #2: Crossing at Onion Creek Sections 3, 4, & 5




                                                35
         The Crossing at Onion Creek Subdivision Phases one through five are located a little

more than 9 miles south of downtown Austin on the East side of IH-35. Sections 3, 4, & 5 are all

part of the S.M.A.R.T. housing program whereas sections 1 and 2 are not. The foreclosures in

this subdivision are spread throughout the development evenly without any major clusters. Home

values are where some of the differences can be seen. Sections 1 & 2 have maintained enough of

an increase in home values since they were built in 2005 to still be worth more than they were

originally sold for. Sections 3 & 4 were built under the S.M.A.R.T. housing program and have

not fared as well. Homes in these sections are on average worth around $4,400 less than when

they were originally built. This means that residents are losing equity through the loss of home

value. Section 5 is the newest section built in 2007. This section is in the S.M.A.R.T. program as

well but still has a positive increase in value from the original price. The increase in value that

Section 5 had from 2007 to 2008 was only 0.32%, from $138,888 to $139,329 (House Almanac

2009).
                                                 36
37
Case #3: Dittmar Crossing




       The Dittmar Crossing subdivision is a S.M.A.R.T housing development located 8 miles

south of downtown Austin just East of Manchaca between William Cannon Dr and Slaughter

Lane. This subdivision has done well in maintaining a positive home value for its homeowners,

but the number of foreclosures in this neighborhood is higher than the surrounding areas.




                                               38
Case #4: Springfield Phase B Sections 1, 2, 3, 4, & 5




       The Springfield Phase B development used the S.M.A.R.T. housing program to develop

sections 4, 5, & 6 of this multi phased project. The Springfield Phase B is located almost 10

miles south of downtown and 3 miles east of IH-35. As part of the S.M.A.R.T. housing program

there is supposed to be a transit-oriented element to the projects. In this particular development

there is transit available but it takes over an hour to get downtown with two buses. A round trip

transit commute of two hours a day to a downtown job should not qualify as transit-oriented.

The foreclosures in this neighborhood are evenly spread out and do not seem to be concentrated

in any one section more than another. The sharp contrast between the sections become clear

when an analysis of the home values are considered. Overall the development has seen a steady

rise in home values in all sections except for two of the three S.M.A.R.T. housing sections.


                                                 39
Section 5 homes have lost an average value of nearly $16,000 since they were built in 2006, and

perhaps even more staggering is the loss of value in Section 6 is over $23,000 since 2007.




       Loss of neighborhood value and a concentration of foreclosures in these S.M.A.R.T.

housing developments is a serious concern that was revealed in this analysis. A re-evaluation of

the S.M.A.R.T. housing program should be done with a special focus on the underwriting

standards used in these developments and what happens to these developments once the

developer is gone. Affordable and moderate priced housing is needed in Austin and while the

intention of the S.M.A.R.T. housing program aims at addressing that need it could be creating a

range of new problems.

       As noted earlier, there is a severe lack of housing affordable to low income owners closer

to the center of Austin. Despite the inclusion of “transit-oriented” as a criterion for participation

in the SMART Housing program, it appears that many of these developments are also far from

                                                  40
the city center. In these and other neighborhoods recently built on the outskirts of the city, the

concentration of homes at similar price points, far from jobs and amenities, appears to compound

the impact of foreclosures on these neighborhoods. Similar families, buying homes at similar

prices often under terms set by the same builder/lender team, appear to be similar in their

likelihood of facing challenges that may lead to foreclosure. During an economic downturn, the

high costs of commuting to jobs, schools, and services and lack of access to amenities such as

affordable groceries, child care and other services places an additional burden on low income

households. This raises questions about facilitating or encouraging the development of such

neighborhoods through city programs. Current discussions suggest that the city is moving toward

emphasizing greater dispersal of affordable housing throughout the city. To the extent that this

breaks the trend of homogeneous neighborhoods where residents are similarly at risk, this is a

positive trend.

       For neighborhoods where concentrations of foreclosures are currently present, it is

especially important that the city make use of the funds currently available to stop the decline of

these areas. Households that are not facing foreclosure but are remaining in these neighborhoods

are at increasing risk of foreclosure themselves, as their homes decline in value, often leaving

them owing more than their house is worth. Ensuring maintenance of public spaces and services

in the area, as well as working with stakeholders (from the financial institutions that now own

the properties to community organizations or churches in the area) to make sure that properties

are maintained and re-occupied quickly will be especially important. Part of the longer term

solution is to create better, more centrally located low-income housing so that working class

families don’t have to sacrifice everything for a chance at the American dream.




                                                 41
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                                              43
     Visual Tour of Foreclosures
Pictures by Chad Ballentine, In Young Jang, Meng Qi




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