Effect of a foreclosure on the values of neighboring houses is small | Bedford NY Real Estate

A report by Federal Reserve Bank of Boston researchers disputes a long-held belief that foreclosures don’t just affect people who lose their homes, but also significantly drag down the values of nearby properties.

According to the report, a home foreclosure only depresses neighborhood property prices by about 1 percent. It also argues that prolonging the seizure process can do more damage than good.

Senior Federal Reserve economist Paul S. Willen — who coauthored the study with Kristopher S. Gerardi, Eric Rosenblatt, and Vincent W. Yao. — said the findings show that if a foreclosure is necessary, it should be expedited. Delinquent borrowers frequently let their properties fall into disrepair, he said, which can have a larger impact on the prices of adjacent homes.

“First thing is to try to prevent the foreclosure. That can happen quickly,” Willen said. “If you go to foreclosure, then you want to get that done quickly, too.”

The report comes as foreclosures in Massachusetts continue to mount. More than 4,450 homeowners lost their properties during the first six months of the year, 18 percent more than during the same period last year, according to Warren Group, a Boston company that tracks local real estate.

At the same time, government officials have been working to help homeowners stave off foreclosure through loan modifications and other assistance. In 2010, Governor Deval Patrick passed a law extending the time troubled borrowers have to save their homes from 90 to 150 days.

But the report says that policies intended to slow the “transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices,” while doing little to help homeowners who can’t pay their mortgages.

Based on their study of 158,000 home sales across the United States in 2009, the researchers concluded that properties lost 1.2 percent of their value if they were within 0.1 mile of a home whose mortgage was seriously delinquent. That dropped to 0.9 percent of the value if the nearby home was seized by a bank and 0.6 percent if the foreclosed home was sold.

The study results were questioned by some housing advocates who are fighting against foreclosures around the country.

Lewis Finfer, director of the Massachusetts Communities Action Network, based in Boston, said it fails to take into account the human elements of the nation’s foreclosure crisis. The problem has been exacerbated by mismanaged government programs and lenders’ procedures that delayed or denied help for borrowers, he said.

If mortgage-assistance programs were better run, Finfer said, borrowers would receive quicker decisions on requests for help.

“You have to balance economic efficiency with the fact this is someone’s home,” he added, “someone’s American dream that should not be kicked aside.”

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