The subprime mortgage foreclosure crisis has exerted significant financial pressures on cities around the country, and the resulting challenges aren’t likely to disappear anytime soon. Higher foreclosure rates have been shown to result in increased crime, as well as other social and safety hazards. At the same time, the sharp impact on property values and tax receipts leads to a downward spiral of reduced revenue, exerting increasing pressure on local finances and prompting budget cuts.

Retention of police and fire personnel could be the low-cost policy choice – at least the one that makes the most sense, according to Chris Mier, Managing Director and Head of Analytic Services Group with Loop Capital Markets in Chicago.

In the interview that follows, Mr. Mier provides a municipal analyst’s perspective on why, despite mounting financial pressures, local governments should think twice before downsizing their police and fire department workforce.

MuniNet: When a home goes into foreclosure, what type of financial impact does it have on the community?

Mier: While states around the country are feeling the financial strain caused by foreclosures, local government units are more significantly affected when it comes to the cost of even a single foreclosure. A recent case study examined the municipal cost of foreclosure in the City of Chicago, and found that one foreclosure can impact 16 departments of government and cost up to $35,000, in the most extreme cases.

MuniNet: Can you provide an example of the types of direct and indirect costs to a municipality as a result of a foreclosure?

Mier: Direct costs can include increased policing, burden on fire departments, demolition, building maintenance (e.g., lawn care, snow removal), legal and record-keeping expenses, and increased demand for social services.

Indirect costs might range from reduced home price appreciation to adverse business location decisions, exodus of stable homeowners, and damage to a community’s reputation as a desirable place to live.

MuniNet: How are cities offsetting these costs? Is this why some communities are considering reductions in their public safety workforce?

Mier: On the surface, it might seem like a headcount reduction would be a logical solution, but because foreclosure can actually cause an increase in crime, that’s not such a good idea.

One recent study showed that a one percentage point (.01) increase in the foreclosure rate is expected to increase the number of violent crimes by 2.33 percent. A vacant building can become an attractive hazard for not only violent crime, but also homelessness, prostitution, drugs, arson, and unintentional fires caused by homeless individuals lighting fires to stay warm. The cost-savings of layoffs in police and fire personnel may be offset by higher foreclosure costs due to these types of social and safety hazards.

MuniNet: Why are local governments facing more significant budget crunches during this recession compared to other periods of economic downturn in the past?

Mier: The subprime share of mortgage-financed home purchases reached 18 percent in 2006, compared to less than six percent in 2001. Because this is the first time a recession has overlapped a subprime foreclosure problem, it presents a new type of challenge for municipalities.

The cost-savings of layoffs in police and fire personnel may be offset by higher foreclosure costs due to these types of social and safety hazards.

MuniNet: Are certain cities are more impacted than others?

Mier: While clusters of subprime loans are geographically dispersed throughout the country, subprime loan clusters are disproportionately held in inner-city and minority community populations. The metro areas with the highest foreclosure rates in 2007 were Detroit, Stockton, Las Vegas, Riverside, and Sacramento. Of the 30 metro areas with the highest foreclosure rates for the year, seven were located in California, seven in Florida, and five in Ohio.

MuniNet: What type of solution would you offer cities struggling with this situation?

Mier: Cities need to get their arms around the direct and indirect costs of the foreclosure wave. Developing programs to keep people in their homes and shortening the foreclosure process are two preliminary strategies that communities can employ in order to reduce the effects of the mortgage crisis.

By reducing the number of governmental departments that are involved in the process, and taking stronger safety precautions, like doing a better job of boarding up abandoned buildings, local governments can position themselves to reduce their financial burden, and better manage the effects of the foreclosure crisis on their communities.

Christopher J. Mier, CFA

Mr. Mier brings over 30 years of experience to his role as the Municipal Strategist for Loop Capital Market’s institutional fixed income sales force. In addition to providing portfolio analytics to its sales, trading and underwriting professionals, he is charged with generating client-specific ideas to enhance secondary market activity and fixed income strategy.

Prior to joining Loop Capital Markets, Mr. Mier was an Institutional Portfolio Manager in the Municipal Bond Department at MFS Investment Management, where he also served on the Duration Committee. In addition, Mr. Mier has served as a Portfolio Manager of numerous municipal funds at Scudder Kemper Investments, prior to which he held several posts at Comerica Bank in Detroit, including credit analyst, portfolio manager and trader in the Funds Management Department.

Over the course of his 30-year career, Mr.Mier has served as a fixed income strategist, portfolio manager, trader, credit analyst, and investment banker. He served on the board of the Chicago Municipal Analysts Society for three years and is a member of the Investment Analysts Society of Chicago.

Mr. Mier holds a M.M. in Finance from Northwestern University’s Kellogg School of Management where he graduated with Dean’s List academic honors and a B.A. in Economics from the University of Michigan. He received his Chartered Financial Analyst designation from the AIMR in 1992. He holds Series 7, 24, 53 and 63 licenses.