Separate But Equal Sub-Prime Crises

“Jump up–hold on tight / Can’t trust the promise or a guarantee
‘Cause the man ’round the curve says that he’s never heard / Of you or me”
–Elvis Costello

The issue of sub-prime loans has been around for years. It never entered the pubic consciousness when groups like SUN framed the issue as one of financial justice–a new form of redlining. Looking at Home Mortgage Disclosure Act data supplied annually by the banks, the pattern was obvious in Central N.Y.: good loans for suburbanites, sub-primes for the inner city. It worked out well for everyone, supposedly. Despite the wide gap in home values between city and suburb, sub-prime loans were profitable.

Now we know that many of the sub-prime loans were profitable because of the people lined up at the banks’ back doors–the folks buying up these loans on the secondary market. With an alchemist’s wave of the hand these loans were turned into financial products that were further sliced and diced on Wall Street. Billions of dollars sloshed through our national and international monetary system, all based on a fleeting promise by a family to pay back their original mortgage loan.

SUN has dealt with the impact sub-prime lending has had on our neighborhoods for many years, convincing the city to create a successful mortgage foreclosure counseling program and working with a national coalition of neighborhood groups to negotiate loan repair programs with several large sub-prime lenders: Citifinancial, Ocwen, Chase. SUN has helped hundreds of families keep their homes.

But this is a tale of two sub-prime loan crises. The crisis SUN’s neighborhoods have faced and the one playing itself out in the international monetary system and the media. The local version is called predatory lending. Target families with a valuable asset, but are cash poor. Hook them up with a mortgage refinance loan that gives them a moderate amount of cash to deal with a pressing emergency like a loss of job, medical catrastrophe. The terms are onerous, larded with fees and charges that accrue to the lender immediately. Eventually, the loan will result in default and the the lender can then seize and liquidate the asset: foreclosure. Often the borrower would go through a couple of refinances with the same lender, enough to shake a little more cash from the target until they are bled dry.

The national version of the sub-prime crisis is a lot more sophisticated than our neighborhoods’ fight against loan sharking schemes. There are many more actors involved, all with different agendas. The home is often not a consideration, at least not for the lender. They just want to make more loans, once you buy they are on to the next score. Companies like Countrywide, New Century and Ameriquest had their marching orders. Sell the loans and the money would pour in from the insatiable secondary market. The lenders are like the lab mice in a famous scientific experiment. Trained to press levers that release food and narcotics, in a short time the mice are constantly pressing the drug lever, neglecting even basic nourishment.

So, given all the handwringing in the media and the real crunch to financial markets, how many people are being threatened by foreclosure? There has been a 75% increase in foreclosures between 2006 and 2007. But that number is just a shade over 1% of all mortgage holders in the U.S. 99% of all mortgages are being paid. The tumult is a result of the spectacular ruin to one of America’s newest innovations: the exurb.

Tim Egan writes about the American west on his NY Times blog, and his post The Pools Of Riverside County points out the hard times: “if you want to find some of the highest foreclosure rates in the country, you go the places where exurban America is pushing into farm fields and forests.” George W. Bush carried almost all of the 100 fastest growing counties in America in the 2004 election. The exurb was the distilled essence of the new America: deracinated, auto-dependent sprawl, few public services. A bunch of McMansions plopped down in the middle of old farms or deep in the desert. Now, these boomtowns are home to thousands of vacant houses and undrained pools turning green with algae, breeding mosquitos.

The states with the highest rates of foreclosures are Nevada, California, Michigan and Florida. While Micigan is being hammered by the loss of manufacturing, the other states have been hammered by investors bidding up home prices to astronomic levels–all looking for a killing. 3.4% of the properties in Nevada are in foreclosure–three times the national average.

People seem to be desensitized to pictures of urban decline. SUN neighborhoods on the south and near west sides of Syracuse have borne the brunt of this decline for years. Our neighborhoods lost 25% of its population between the 1990 and 2000 census. SUN neighborhoods make up 15% of the city’s households, yet harbor 45% of the city’s vacant houses. For over a decade, 5% of the properties in our neighborhoods have been vacant and abandoned. But this media-friendly crisis is happening in middle class neighborhoods, neighborhoods with pools for god’s sake!

The national crisis will eventually abate, house prices will come down from their investor-inflated levels. But will we have learned anything? The superficial take on this mess seems to absolve the lenders and their Wall Street enablers, focusing on the personal ethical shortcomings of borrowers–how dare they borrow more than they can afford? But what if the game was rigged to turn out exactly this way? Bust follows boom follows bust ad nauseam. Such is the nature of modern capitalism. The current wave is unusual because the financial sector and its increasingly complex structure bumped up against the current governmental concensus against strict oversight and regulation.

That concensus is rapidly disappearing. The recent turnover in Congress has put Rep. Barney Frank at the head of House Financial Services Committee. His recent editorial in the Boston Globe recognized the crisis as a tale of two cities:
“one aspect of the subprime mortgage crisis that deserves special attention is that it was in large part a natural experiment on the role of regulation. And the results are clear: Reasonable regulation of mortgages by the bank and credit union regulators allowed the market to function in an efficient and constructive way, while mortgages made and sold in the unregulated sector led to the crisis.”

However, once the sub-prime lenders searching for a killing through the secondary market are shaken out of the system by increased regulation, who will take on the predatory lenders of the Rust Belt? They are are still operating below the radar and they never needed the more exotic loan products like interest-only and adjustable rates to fleece poor homeowners struggling with declining wages and the increasing costs of basic needs like energy and health care. The mainstream credit markets have not worked for people in the inner cities, creating the niche now dominated by predatory lending. When the picture on the cover of Newsweek goes back to one of an inner-city duplex, rather than an exurb McMansion with a green pool, will anyone still care?

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2 thoughts on “Separate But Equal Sub-Prime Crises

  1. My wife and I were lucky enough to be able to purchase a house in December. If we had purchased a year before, however, we might be in the same boat with everyone else in the Sub-Prime mess. I can’t believe how ignorant the American public are about the reality of the crisis and what it is doing to the middle class.

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