Robo-signers. Moratoriums. Botched documents. In the midst of a complicated and crooked mess, New Deal 2.0 asked leading thinkers and activists to help navigate the maze of the foreclosure crisis. Our "Foreclosure 411" series focuses on the values inherent in explaining why we should care and what the crisis means to all of us. In the second part, Dean Baker warns that foreclosures have a corrosive effect on communities and consumers.
There are two obvious reasons that foreclosures should be viewed as a problem even by those who are not worried about being thrown out on the streets. The first is that depressions are a blight on neighborhoods. Banks often neglect properties following a foreclosure. This means both not doing appropriate cosmetic care and neglecting maintenance of the house. The result is that foreclosed properties can be eyesores that depress property values throughout the neighborhood. They can also be physically dangerous -- for example, if they contain exposed wiring or become a drug house. Either way, a neighborhood with a large number of foreclosures will be facing problems.
The other issue related to foreclosure is that families often struggle to meet their mortgage payments, pulling money away from other types of consumption. This means that instead of spending money in restaurants or other types of demand-generating consumption, families struggle to send enough money to the bank to hang onto their house.
This situation could be rectified either with a mortgage modification that lowers mortgage payments, or alternatively by allowing the homeowners to stay in their home as a renter paying the market rent. In most of the markets that were formerly bubble-inflated, rents can be half as much as the monthly mortgage payment from a home purchased near the peak. By allowing either a modification or for people to remain in their home as renters, tens of billions of dollars can be freed up to support increased consumption.
Dean Baker is the co-director of the Center for Economic and Policy Research.