Housing Crisis Needs Localized Approach, Not "One Size Fits All" Solution

EricrnRosengren, president of the Federal Reserve Bank of Boston, told attendeesrnat a Federal Reserve sponsored conference on REO and VacantrnProperty Strategies for Neighborhood Stabilization lastrnThursday that there may not be a single solution for the housing market as the effects of financial crisis depend on the characteristics of each individual community.  </p

Framing the problem affects the solutions you propose,rnhe said.  </p

If we assume we are trying solve a problem ofrnforeclosures and REO rooted in the housing bubble, the solutions will tend tornemphasize mitigating foreclosures, accelerating the disposition of REO, orrnadvocating for reconsideration of the legal systems approach to personalrnbankruptcy and foreclosure.  </p

If the problem is viewed asrnbeing primarily about housing demand, then the focus might be on solutions thatrnresult in sustainable home ownership such as establishing a minimum down paymentrnor new financing approaches or financial education. The availability ofrnaffordable rental housing might also be a focus.  </p

If the problem is seenrnthrough the lens of community, however, foreclosure may be viewed as a symptomrnof broader problems affecting neighborhoods – such as high concentrations ofrnunemployment, elevated crime rates, and poor code enforcement.  “Letrnme be clear, Rosengren said, “I am not saying that ‘the community is thernproblem,’ but rather that, in this view, different communities will experiencernproblems differently because of their different characteristics, and oftenrnrequiring different solutions.  Thernpublic policy solution for this problem may be to have more general revenuesrnavailable for non-profits and local governments to address the problem in arnmore holistic fashion.”</p

He said that clearly therncurrent crisis has all three elements but the solutions will be differentrndepending on how the problem is framed. rn”So, we should ask, do we have the right balance as we think aboutrnthe best way to address a serious – and I would argue multifaceted – publicrnpolicy problem?  My own view is that too little focus has been onrncommunity problems because the focus has been more targeted to housing andrnforeclosures.”</p

Focusing on his home regionrnof New England, Rosengren asked whether the current foreclosure and housing problemrnaffects all communities similarly or if it is better understood as a crisisrnthat is reflected differently in each community.</p

On a map of the threernstates in the Fed’s New England Region, Rosengren showed the REO per squarernmile by zip code and compared that with changes in the median housing pricernfrom 2005 to 2008.  There was littlerncorrelation between REO and changes in price at the lower levels of REO, but asrnthe concentration rose, there was a much stronger correlation with price drops.rnRosenberg admitted that not all questions of causality had been answered inrnthis relationship and that more work is being down to control for factors suchrnas population density. </p

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But, where concentrationsrnof REO were high – four or more houses per square mile, there were also higherrnconcentrations of property crimes, higher rates of low birth-weight babies,rnhigher unemployment, and weaker activity among small businesses. Information for these charts actually predatesrnthe foreclosure crisis so these communities were already challenged.</p

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Hernsaid that it is easy to ignore children in the current crisis but many studies showrnthat school difficulties are strongly correlated with moving and “foreclosuresrnmean moving; to a shelter, to a relative’s home, to the back seat of a car”rnand we can see that children in these communities were being impacted evenrnbefore the dramatic increase in foreclosures. rnThose communities with four or more REO per square had higher highrnschool drop-out rates and higher failures in statewide math tests.  Since foreclosure is also often related tornunemployment, martial stress or physical ailments, a foreclosure can make itrndifficult for even the most determined student to excel.</p

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The chart also illustratesrnthe large gap in these communities between their municipal service needs andrntheir ability to raise revenues to pay for those needs (the “fiscalrngap”).  </p

The patterns in these datarnimply a need for more holistic approaches to the problem.  This is not arnone-size-fits-all foreclosure or housing problem; these are community problems.  He stressed that he was using examples fromrnNew England and the Fed needs to examine how similar or dissimilar the patternsrnare in other regions.  </p

It seems, in sum, Rosengrenrnsaid, that communities with some of these challenging attributes are likely tornexperience higher rates of foreclosure and REO.  And the same communitiesrnexperience greater hardships when those foreclosures and REO begin to rise. Thus,rnrather than treating the symptom, high REO, “we need to better understandrnhow to resolve the more general problems in communities that lead to higherrnconcentrations of REOs and exacerbate the effects of high REOs.  However,rnthe challenge of finding holistic solutions is significant, andrnlongstanding.”</p

Rosengren said that whilernmore research needs to be done on the communities, and on which solutions work,rnwe should also reflect on how we are spending our public policy dollars. rnAre they appropriately balanced to address the problems of housing deman, foreclosure, and individual communities? </p

As an example, hernpointed to a recent Boston Fed finding that non-school revenue sharing inrnMassachusetts is not well aligned with communities’ fiscal gaps and changes inrnrevenue sharing are critical to helping those communities address theirrnproblems.  He suggested that potentially,rna federal revenue sharing program at the national level that focuses on theserncommunities could help.  These funds could be provided in a flexible wayrnso they could target those areas of most importance – since local governmentsrnmay be in a better position to determine if the funds should be directed to morernteachers, more code enforcement, more police, or more assistance to non-profitrnorganizations that are making a difference in their communities.</p

If a more holistic approach is needed, statesrnand the federal government may need to examine the most effective and efficientrnway to address the broader problems in these communities, including potentiallyrnlooking at revenue sharing that provides a flexible way to address the fiscalrngap faced by many of our hard-pressed communities. </p

HERE is the full text of his prepared remarks and presentation slides

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