Shadowed by the Shadow Inventory: A Newark, New Jersey Case Study of Stalled Foreclosures & Their Consequences
4 U.C. Irvine L. Rev. 1265 (2014)
30 Pages Posted: 28 Jun 2013 Last revised: 23 Mar 2015
Date Written: June 24, 2013
Foreclosure activity has declined recently in some areas, but a number of states, such as Florida, New Jersey, and Illinois, showed increases in 2012. The national inventory of homes in foreclosure or owned by banks climbed nine percent to 1.5 million homes. Although investors are now buying foreclosed properties in certain markets, driving down inventory and contributing to an upswing in housing prices, lower-income neighborhoods generally have not enjoyed these effects. These include many of the African-American and Latino neighborhoods that bore the brunt of predatory and subprime lending. There, lenders have failed to complete foreclosures or maintain and market their REO (real-estate owned) properties, contributing to the shadow inventory that continues to depress local housing markets.
This empirical project tests the extent to which bank stalling has contributed to foreclosure delays and property vacancies in Newark, New Jersey. Previous studies conducted by the U.S. General Accounting Office, as well as by researchers at the Federal Reserve, and in Cleveland and Chicago, uncovered considerable evidence of stalled or abandoned foreclosures. Several of the studies found that abandoned foreclosures correlated positively with property vacancies. This is the first study to trace the disposition of each property in the sample through both public and private sources, allowing highly accurate conclusions to be drawn. I reach a similar conclusion to the previous studies with respect to stalling: without legal excuse or ongoing workout efforts, banks frequently cease prosecuting foreclosures. The stalled foreclosures in my study, however, do not strongly correlate with property vacancies, but a high percentage of REO properties are vacant. This study is small in scale, involving a random sample of 100 foreclosures filed between 2007 and the first half of 2009 in a single neighborhood, but the results can be extrapolated to the City of Newark, and, to some extent, similar lower-income urban neighborhoods in Northeastern states with judicial foreclosure regimes. The national banks that securitized mortgages during the housing boom followed standard practices of targeting communities of color for the worst subprime loans. They also followed national servicing and foreclosure practices adapted to each state’s laws.
Keywords: foreclosure, mortgages, shadow inventory, banks, REO, vacant properties, subprime lending, predatory lending
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