Friday, March 23, 2007

The mortgage collapse -- look out, Milwaukee

News of the collapse of the subprime lending industry is everywhere. The very real and very scary possibility is that the meltdown will have devastating consequences for Milwaukee, especially its inner city.

It's been no secret that the housing values in the central city soared over the past few years. That was likely caused in part by investors betting on continued pricing acceleration, but it also was undoubtedly due to lower-income folks getting non-traditional mortgages from subprime lenders willing to take a risk on shaky credit in exchange for mortgage interest rates that start very low, but jump very high a couple of years down the line.

These kind of deals sort of work for a few years. A lot of people who could not afford to buy homes in a traditional market are suddenly homeowners and that is a good thing, right? Property values in struggling areas soar as the market heats up. This makes local officials' jobs of developing property-tax dependent budgets just a little easier because the higher property values generate more property taxes.
It's unfortunate that some of the proud new homeowners can't afford the newly increased property taxes, but that is a small sidebar in the big housing boom story.

The real winners, if they do things right, are the lending companies that originate the loans. They can reduce their risk to the disappearing point by selling the paper on the secondary market. They take the profit and dump the risk. The bad news for Milwaukee is that the loans often are sold to new owners in New York or Los Angeles or Waukesha, or somewhere else the holders do not give a rat's behind about what happens to the central city here.

The subprime industry is now at the breaking point, though. The loans' nasty interest rate increases are kicking in, and the homeowners can't afford them. Foreclosures are jumping. People are losing their homes, which are now on the market for prices they no longer command. Eventually, those prices will drop, and so will the taxes they generate.

That probably means cuts in local government services when city residents need additional assistance. And foreclosed upon houses will sit vacant and boarded up, attracting the kind of bad activity that board-ups attract.

As the impact from the subprime collapse expands and lenders go bankrupt or out of business, there will be no way to enforce building code requirements for some of these places. If the person who took out a mortgage gets foreclosed upon, and the lender who holds the mortgage goes under, who does the city go after? It's stuck with yet another piece of blight. Property values in the area are infected by it and drop a little more.

This is the fix we are in. There are all sorts of variations on the theme. If real estate fraud is involved (and there is likely some of it, given the easy money that could be made in the formerly go-go market) losses could multiply. Lenders that survive the shake-out could look at the mortgages they hold, look at the cost of rehabbing the properties they took through foreclosure, decide the investment is not worth the payoff, and walk away. It happens all the time.

It seems likely now that it will happen now on a scale Milwaukee has not seen before.

1 comment:

Anonymous said...

And aside from all this impact on property . . . these are people here.

And these often are families -- many of whom will be homeless here or have to crowd into other family members' housing, all leading to more stressed parents and children, more sadly lost children. The impact on already-stressed MPS and teachers will be great, too.

We need to be ready to help, somehow. How? Get ready to help at homeless shelters, donate to Second Harvest, fight even harder for MPS schools? What can we do? Because I think that you are right about this. . . .