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Foreclosure Effects Extend Beyond Homeowner's Woes

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By Tiffany Brewington - Editor
Record Information Services
October 2007

It’s easy to think of foreclosure as a stressful situation between the homeowner and their lender, but foreclosures have many more consequences that affect the entire economy. Let’s examine a few affects that foreclosures have on the homeowner, the community, and you.
The Homeowner in Foreclosure
Having a home listed in foreclosure is an embarrassing financial burden for the owner to carry. In addition to losing any equity they have paid on the home, it can cause the homeowner to be in the constant spotlight of investors promising to take over payments, or encouraging them to sell at prices lower than the market value. Many times working with the investor prior to the home going to auction is the homeowner’s best option. A foreclosure auction is one of the most damaging notes that can ever appear on a credit report. The resulting low credit score can raise interest rates on future purchases that the homeowner makes for up to 7 years.
Neighbors of the Foreclosed Property
Homes in foreclosure are quite often abandoned by the property owner. The fallout from these homes spills over to the neighborhoods in which they are located. Overgrown lawns, broken windows, and newspapers piling up are all nuisances to neighboring homeowners. More importantly than these eyesores – a foreclosure can decrease the property value of surrounding homes by up to .09%. If the foreclosed property is sold at a huge reduction of its market value, it can make neighboring homes appear overpriced, and can force those owners to lower their asking price if they move.
Affects of Foreclosures on Renters
When commercial properties such as apartment complexes are in foreclosure, renters who pay their rent faithfully can still be evicted due to the landlord not paying their taxes or mortgage. Renters could also see a raise in their rents due to the landlords trying to salvage what they can to keep the property.
Foreclosures also affect the demand for rental property. The U.S. subprime crisis that caused so many homeowners into foreclosure has forced lenders to tighten their standards on new loans. Therefore many people who are in the market for a new home won’t qualify for loans that they may have been able to get a year ago. These potential homeowners may choose to rent instead, allowing landlords to charge much higher rent than they would have otherwise.
Foreclosure Affects on the Community
Property values in communities are tied to income, expected growth, taxes, and new investment by businesses. Homeowners in foreclosure are difficult to contact by the city government who are owed debts by the individuals, forcing those unpaid bills to be spread out through taxes on other paying homeowners. Disinvestment in the community by new businesses can make jobs sparser and allow companies to pay less for the jobs that are there. Plus, the new tighter standards on lending and resulting smaller pool of buyers has forced many listed homes to sit on the market – and with so many homes for sale - there is less need for the construction companies and contractors that help feed the community income and taxes to prosper.
Foreclosures have consequences far past the homeowner’s wallet and also affect interest rates, the stock market, overseas investors and lenders, and the GDP. It is in everyone’s best interest to help property owners avoid foreclosure, and if you are facing foreclosure – pick up the phone and contact your lender right away to explore payment arrangements; it’s much easier than ignoring the mail, ruining your credit, and fearing eviction in the coming months…
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