Sub-prime Suburbs

Last week's New York Times article Foreclosures force suburbs to fight blight (March 23, 2007) describes how housing foreclosures are hitting several Cleveland, Ohio suburbs so hard the local government is spending big bucks (think millions) to forestall neighborhood blight by providing housing maintenance and working to keep home owners in their houses or to help them find apartments when evicted. The cause of the foreclosures is the large number of high-interest loans issued by the sub-prime housing loan market.

The rising federal interest rate has resulted in increased payments on adjustable rate mortgages and oftentimes homeowners cannot afford to make payments because of the lax standards in the predatory sub-prime market. Banks foreclose on properties but do not maintain the properties . Shaker Hills, Ohio, Mayor Judith H. Rawson notes that "managing the damage to our communities will take years."

Nationally, economists are concerned that the high rate of sub-prime loan foreclosures will result in tighter lending standards--thus reducing the market of qualified buyers--at a time when the market is being flooded with foreclosed properties. Locally, neighborhoods are looking for ways to respond to this very real threat that is developing.

In February 2007, Channel 3's Andy Wise reported that home foreclosures are skyrocketing in Shelby County. According to Wise, the Memphis Daily News reported that Cordova posted a 128% increase in foreclosure sales from 2004 to 2006 and Frayser's 926 foreclosure notices in 2006 set the record. As in Ohio, the culprit is predatory lending.

In January 2007, the Frayser Community Development Corporation received a $25,000 grant to inform and educate residents about smart borrowing practices. According to the March 23, 2007 Commercial Appeal, the Southeast Community Development Corporation is facing over 300 active foreclosures in the 38125 zip code--along with a myriad of other issues affecting its neighborhoods. In response, the Southeast CDC is providing credit counseling and looking into creating a nonprofit mortgage brokerage. RISE Foundation and former Orange Mound CDC executive director Roshun Austin (now at Homecoming Financial, LLC) are also working to educate consumers on the dangers of predatory lending and to provide financial counseling to help homeowners stay in their houses.

Unfortunately, responding to foreclosures resulting from predatory lending is taking scarce resources away from nonprofit and community leaders who were already struggling to overcome a host of urban decay issues. This should not be their battle to fight alone. If economists are correct, the housing market is ill-prepared to correct this transgression. While federal and state officials argue over who is to blame, they need to make sure that funding is available to specifically address housing foreclosures.

Note: Check out David Gest's commentary, Physical Effects of the Declining Housing Market over at Planetizen.com, for an excellent summary of this issue at the national level.