Five Questions for G. Thomas Kingsley
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The fallout from subprime mortgages is spreading through neighborhoods, cities, and states. These high-risk loans have jeopardized not only the individual families facing foreclosure, but whole communities. The Urban Institute is highlighting this critical and urgent topic at the first of three 40th anniversary roundtable events. G. Thomas Kingsley answers questions about the subprime mortgage crisis and the Institute’s research on broader consequences July 10, 2008 1. How is the subprime mortgage crisis affecting neighborhoods? Subprime loans tend to be geographically concentrated, often in low-poverty, minority neighborhoods rather than in the poorest and most distressed areas. These are places where African-Americans and Hispanics were becoming homeowners, establishing strong, healthy neighborhoods, and beginning to accumulate real wealth. We’re seeing large clusters of subprime loans in central-city neighborhoods and close-in, minority suburbs. But we’re also seeing them in far-out suburban neighborhoods where young families decided to put up with long commutes to get the biggest house they could afford. In clusters like these, the ripple effects that start when homes begin to foreclose can be devastating. Foreclosures and distressed sales drag down property values in the surrounding area. Whole neighborhoods can experience a downturn. When properties are left vacant by foreclosures, that can have a larger blighting effect on the neighborhood, inviting crime and vandalism. We’re beginning to see research on clusters of crime in neighborhoods with a lot of foreclosures. Just as we’re finally beginning to address disparities in minority homeownership and wealth accumulation, the ripple effect of foreclosures in minority neighborhoods puts this progress at risk. Efforts to open up homeownership more broadly have really been set back and potentially undermined by what were, in many respects, abusive and deceptive lending practices. 2. Who else besides the subprime-mortgage-holders has been caught up in this ripple effect? Many elderly people who have paid off their mortgages count on their home equity to finance their retirement. If house values in their neighborhoods start to fall precipitously, their retirement nest egg may be substantially eroded. Others may have refinanced using subprime loans. It was not unusual for elderly minority homeowners to be actively sought out by subprime lenders. Some may not have understood that in return for some upfront cash they were taking on an unaffordable payment plan that jeopardized their main source of wealth and security. There’s another very underappreciated dimension of this issue that we’re just beginning to recognize. Many of the properties that face foreclosure are rentals. We are just beginning to understand where those investment properties are, what’s happening to them, and what’s happening to the renters who were living in them. Policymakers have been talking about how to rescue property owners and help them renegotiate the terms of their mortgage, but almost all that attention has been focused on owner-occupants, not investor-owners. We really don’t know what’s going to happen to renters. 3. What cities and states were hit hardest? How the rate of subprime lending and the rate of foreclosure vary from one metropolitan area to another depends on housing market conditions—both the pre-crisis situation and the depth of the downturn. The weaker market metros, many in the Midwest, showed problems first. In cities like Cleveland and Detroit, where prices have generally been dropping, mortgage balances began to exceed home values for many families early in this decade. From 2002 through 2006, though, most subprime lending was concentrated in the hottest markets, particularly in California and Florida. There, most people who discovered they couldn’t afford their mortgages could still refinance since home values were going up. But now that those markets have also gone sour, foreclosure problems are overwhelming. Cities in California’s central valley—like Fresno, Modesto, and Stockton—may be hardest hit. But other cities where subprime mortgages were most popular are in dire straits too, including Miami, Las Vegas, Orlando, San Diego, Los Angeles, and Phoenix. In our region, the District of Columbia has not been terribly hard hit, but Prince George’s County has, and so have some of the outlying suburban counties to the west. 4. How is this foreclosure crisis different from a more general downturn in the housing market? This crisis will have more serious ripple effects than you’d see in a generalized slowdown or downturn. These high-priced, unaffordable loans are geographically clustered. That means foreclosures will be concentrated in vulnerable neighborhoods, not evenly scattered across the landscape. Also, in a general downturn, homeowners may lose some wealth and they may have to delay selling their home, but most aren’t saddled with loans they can’t afford. Unless job losses are heavy in a downturn, most homeowners can still afford their mortgages even if their home’s value has gone down. With subprime mortgages, too many homebuyers ended up with loan terms that they couldn’t afford. Some homebuyers didn’t understand the complicated loan product they were sold. Some were deceived by mortgage lenders. And some just figured that house prices would keep rising so they’d be able to sell or refinance before their interest rates jumped. But when a downturn in the market and an epidemic of unaffordable mortgages converge, the number of people who can’t repay their loans and can’t sell their houses for as much as they owe on their mortgages goes up. 5. Why was this roundtable topic chosen as one of three to highlight during Urban Institute’s 40th anniversary year? This is a huge, urgent problem that has arisen quite abruptly but will last for a long time. The housing market, housing finance, neighborhoods, and cities are all going feel the pain for a long time. So, in short, it’s very important. And it’s a problem that the Urban Institute is unusually well positioned to understand, explore, and address. We have a history of studying urban housing markets and the disparate conditions in city and suburban neighborhoods. We also coordinate a network of local organizations in 30 cities that has built a track record of success in assembling neighborhood-level administrative data and using the data to address policy issues. This network—the National Neighborhood Indicators Partnership—is on the ground in neighborhoods and can inform policymakers where problems are occurring, what form they’re taking, and what we need to do about them. With this information, combining national and local data, we’re in a strong position to track the foreclosure crisis and its ripple effects. Finally, this issue draws on expertise across the Urban Institute. Researchers from the Center on Metropolitan Housing and Communities know housing markets and neighborhoods, the Tax Policy Center knows local government finance, and experts from the Center on Labor, Human Services, and Population study how families and children are affected by socioeconomic changes. By melding these different perspectives, we think we can see the whole problem and propose solutions that stand a better chance of working than narrower-gauge proposals. Beyond the roundtable, we’re building a research program that spans several centers. We’re looking at what’s happening to neighborhoods but also evaluating the effectiveness of counseling to help families who face foreclosure. And we’re also grappling with the questions Ned Gramlich raised about how the mortgage lending industry should be regulated so that in the future, loans will be available on a variety of terms people can afford, but low- and moderate-income people don’t again fall victim to scams and unacceptable risks. |
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