Foreclosures' impact on kids and communities weighed

Published By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) -- Children could be prevented from realizing their potential in school and, eventually, the labor force as consequences from the problem of home foreclosures last for years, a Federal Reserve official said Thursday.

"A foreclosure is likely to mean not only a loss of home, but also a disruption in where, or whether, kids are in school," said Eric Rosengren, president of the Federal Reserve Bank of Boston, at a Fed conference in Washington about neighborhood stabilization. "Since foreclosure is often related to unemployment, marital stress, or physical ailments, the foreclosure is likely to make it difficult for even the most determined student to excel."

Rosengren added that he is encouraging staff to look at how children are affected by foreclosures. Read more about the conference.

Foreclosures may be a symptom of "broader problems" having effects on neighborhoods, such as high rates of unemployment and property crime, Rosengren said. He noted that higher foreclosure rates could exacerbate such problems.

"My own view is that too little focus has been on community problems because the focus has been more targeted to housing and foreclosures," Rosengren said.

Areas with high concentrations of real estate owned properties -- properties held on the books of banks typically after failing to sell at foreclosure auctions -- have also been associated with greater incidence of babies with low birth weight, higher high-school dropout rates and more frequent failures on statewide math tests.

States and the federal government may need to examine how to address the broader problems in these communities, Rosengren said, including "potentially looking at revenue sharing that provides a flexible way to address the fiscal gap faced by many of our hard-pressed communities."

Also speaking Thursday at the neighborhood stabilization event, Sandra Pianalto, president of the Cleveland Fed, said "decades of progress" have been wiped away in the past few years in many low-income communities.

'Collateral damage'

"The longer properties remain vacant, the more collateral damage is done to property values nearby, and it doesn't take long for neighborhoods to suffer from increased crime, arson, and blight," Pianalto said. "We are still far from a recovery in the housing markets in our region. The losses and hardship that our neighborhoods have experienced is staggering."

The housing-market collapse resulted from "a destructive cycle that feeds on itself," Pianalto said.

"In our region, mortgage delinquencies led to a high number of foreclosures, which led to an oversupply of housing, which led to home prices depreciating and borrowers and financial institutions taking on big losses," Pianalto said. "To break this cycle, a coordinated set of policies is needed to target multiple points of the breakdown in the housing market."

She said loan modifications alone won't be enough to address the housing crisis, noting that the main reason that most borrowers cite for needing assistance is income loss due to the weak economy.

"We have learned that numerous interventions are required to address the multiple causes and consequences of the foreclosure crisis, and we will continue to focus our outreach and analysis on understanding and contributing to solutions in real time," Pianalto said. "A healthy housing sector is critical both to the overall economy and to a sustainable economic recovery."

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