Can Local Ordinances Prevent Neighborhood Destabilization?

Abstract

This article assesses the ability of local housing ordinances to prevent neighborhood destabilization, specifically that arising as a consequence of the most recent housing crisis. We evaluate the degree to which vacancy registrations and point-of-sale inspection requirements influenced housing market outcomes during the housing crisis. With comprehensive real property data from Cuyahoga County, Ohio, we measure outcomes that characterize housing market distress including foreclosures, sales below the tax-assessed value, bulk sales, flipping, and property tax delinquency. We evaluate outcomes across properties in regulated and unregulated municipalities using matching procedures on linked data containing property, neighborhood, loan, and transaction characteristics. We find evidence that vacancy registrations substantially reduce foreclosures. In contrast, we find little evidence that point-of-sale inspections reduce undesirable transactions. Rather, properties in cities with inspection requirements displayed higher levels of foreclosure and tax delinquency relative to the control group during the study period.

Keywords:

• Housing ordinances
• neighborhood stabilization
• propensity score matching

JEL Classification:

• R52
• R31
• K30

Acknowledgements

Our thanks to the Pew Center on the States for their feedback and to Moira Kearney-Marks for her research assistance. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See Connecticut General Statutes Section 49–31 l, et seq.

2. Massachusetts, Minnesota, Georgia, and Missouri round out the top nine states with local governments that have passed vacancy registrations. Together these nine states contained nearly 80% of all known vacancy registrations in 2012. (Lee et al., 2013).

3. Some municipal foreclosure registries were implemented in our study area after the foreclosure crisis. We only attempt to evaluate ordinances that were enacted precrisis. Equivalent ordinances have never been enacted by the county government itself.

4. The following is an example of a situation in which a point-of-sale inspection requirement could cause a foreclosure. A borrower purchases a home in 2004 for $120,000 with 20% down and a $96,000 mortgage. By 2008, the home has depreciated 10% to $108,000, and the outstanding balance on the loan is $91,000. The borrower needs to sell the house to relocate. She believes she has $17,000 in equity to use toward her next down payment. A buyer offers $108,000, but the point-of-sale inspection reveals that a $20,000 repair is needed. Now the seller is underwater. If she can, she must borrow or take funds out of savings to cover the repair. She may decide that letting the home go into foreclosure is her best or only option.

5. Pollard, A. M. (2012). On failure to recover: The state of housing markets, mortgage servicing practices, and foreclosures. Statement of Alfred M. Pollard, General Council, Federal Housing Finance Agency before the U.S. House of Representatives Committee on Oversight and Government Reform. https://oversight.house.gov/wp-content/uploads/2012/03/Pollard-Testimony.pdf

6. The term “bank walkaways" refers to situations where a mortgage holder abandons the collateral property because it determines that the expected recovery value would not cover the costs of pursuing a foreclosure, carrying the property, and marketing it. Banks can make this decision before the initial foreclosure filing, between the filing and sheriff's sale, or even after the property is in REO. The lender stops paying the property taxes and does not pay a servicing company to board up the property, winterize it, or mow the lawn. If not already evicted, borrowers usually vacate the property because they are expecting to be evicted. Bank walkaways are highly susceptible to theft (especially metal scrapping), vandalism, and blight because no party is securing them or reporting the crimes.

7. A reorganization of county government in 2011 has placed the functions of the Auditor and Recorder under the Cuyahoga County Fiscal Officer. Census tract level variables were extracted from the NEO CANDO database at the Center on Urban Poverty and Community Development at Case Western Reserve University.

8. The Link Plus software is provided free of charge by the National Program of Cancer Registries Division of the Centers for Disease Control and Prevention. It is based on the method developed by Fellegi and Sunter (1969).

9. Tracts are generally neighborhoods within municipalities. Ninety-four percent of tracts in Cuyahoga County have 90% or more of their residents in a single municipality.

10. Ohio Department of Education. Report Card Lists and Rankings. http://education.ohio.gov/lists and rankings. http://reportcard.education.ohio.gov/Pages/Download-Data.aspx.