The Fire This Time
Today, in Chapter 2 of Find-yourself-a-nice-hole Theater, we look at the credit and mortgage crisis, and how some of the new exurbs could rapidly start resembling the 1970s-era South Bronx.
We lead off with a quiz: When a mortgage lender forecloses on a house that is in default on its loan, and evicts the defaulters, are they then obligated to take control of that property?
The answer, somewhat counter-intuitively, is no.
And there are good reasons for this to be the case: imagine if the owners were running an illegal chemical dump in the backyard; there is no reason why the lender should be saddled with the liability for the expensive environmental cleanup, because the lender didn't do anything wrong.
But now imagine the following situation: a bank, during the height of the housing bubble, made a risky loan to a family of modest means, to allow them to buy their dream home (marble bathtubs, granite countertops, the works) on an acre spread in a booming corner of the far reaches of the suburbs. When the adjustable rate kicks in, the family cannot meet its obligations and defaults. In the meantime, the boomtown, to deal with the influx of new building and the sudden strain on the schools, utilities, and municipal services, has raised property taxes to fund major expansions and overhauls of these basic systems. And now the new arrivals are undergoing epidemic foreclosure. Not everyone, but a significant fraction.
Now the bank has a problem. They are not going to be able to sell this house anytime soon; if they try, they will have to drastically reduce the price, which will in turn further depress the property values of nearby houses (which the bank may already have foreclosed on earlier in the crunch). In the meantime, while the house is vacant, it will still require lots of expensive upkeep (have to keep the grass mowed!) and the property taxes still have to be paid. And it's kind of far from anywhere, which will discourage buyers as gas prices rise. The bank, in fact, doesn't think it will get enough money from the sale of the house to cover the present cost of paying the taxes and upkeep until such time as they can sell.
And here we see how neighborhoods get unmade. Because the bank will now refuse to retake title to the property, since it's strictly worthless to the bank. And now, instead of the bank having a problem, the town has a problem, because the status of this house has just fallen into limbo. Failure, they say, is an orphan, and that is especially true now; because now, with nobody claiming title, and the property vacant and abandoned, the lovely phenomena that get lumped in under the deceptively euphemistic term of "blight" set in; while the lender and the former occupants (and, sometimes, the town itself) slug it out in court over who is responsible for the property, the upkeep is not done, the taxes aren't paid, the house becomes a neighborhood eyesore through deterioration and vandalism, and finally, squatters can break in and occupy the building, possibly bringing serious crime in their wake.
And this creates a chain reaction through the neighborhood, as the effects of this toxic property spread. Not just crime, though it doesn't help the neighbors if the house around the corner is now a drug den. Property values in the neighborhood start tanking as suburban idyll becomes unsightly mess, and this can lead to further abandonments, by residents or by foreclosing banks. The town probably does not have the legal powers necessary to take over the properties outright, and on the slim chance it does, it might not occur to the town to exercise those powers, since it would mean giving up on ever regaining tax revenue from the property, plus assuming costs that (remember the gutted tax base?) it might not be able to afford, either. How much pain are the neighbors in for? It's a function of distance, but that is the first time the large lot sizes actually help anyone in the whole sorry mess. How much value disappears in what radius depends on local circumstances, but when Temple looked at this question in Philadelphia in 2001, every other property on a block with an abandoned house on it was worth $6,720 less.[1]
One will note that the neighbors get scrod even if they were perfectly responsible in the financing of their houses.
This scenario is starting to play out in bubble-fueled exurbs across America. We cannot even trust that it will remain contained there; in today's NYT, there is an article detailing the real estate crash in the mansions of Greenwich, CT.
It is, in a sickening way, exactly parallel to what happened in many urban neighborhoods when they slid over from 'struggling' to 'failed' in the 1960s and 1970s, at the height of the era of government-funded efforts to kill off cities by leveling neighborhoods and replacing them with highways and housing projects. The salient difference was that then, instead of the crisis being precipitated by lending to purchasers, the trigger was a renter's crisis, as rent controls that did not rise with rampant inflation rendered swathes of lower-income housing worthless to their absentee landlords, or worth less than the insurance on the buildings. Landlords merely abandoning property would have been more merciful than what happened too often: "Ladies and Gentlemen, the Bronx is burning."
Those cities that resurrected themselves, did because they contained many people who had a stake in their survival, who organized themselves to the hard tasks of recovery and restoration. That process is not complete; ask anyone in Bushwick, or Strawberry Mansion, or New Haven. But the fact remains that urban core was still a necessity for most wealth-creation, even for those who no longer lived there, so the urban cores were not permitted to die out completely. The exurbs have no such constituency. Indeed, they are increasingly seen as an albatross in an age of expensive energy. That's an attitude I mostly support, except that it unacceptably abandons innocent exurban residents who will bear a disproportionate amount of the pain from mistakes not wholly theirs. The framework to pull back from the worst of the exurban development mistakes in an orderly fashion does not yet exist.
Very bad things are about to happen to a large number of people, most of whom are unprepared for it and many of whom are completely undeserving of their misfortune. May Ghod help them, because we shall almost certainly not.
[1] Temple University Center for Public Policy, Blight Free Philadelphia (8MB PDF), 2001
Further Reading: The Atlantic, Chicago Tribune, BusinessWeek
We lead off with a quiz: When a mortgage lender forecloses on a house that is in default on its loan, and evicts the defaulters, are they then obligated to take control of that property?
The answer, somewhat counter-intuitively, is no.
And there are good reasons for this to be the case: imagine if the owners were running an illegal chemical dump in the backyard; there is no reason why the lender should be saddled with the liability for the expensive environmental cleanup, because the lender didn't do anything wrong.
But now imagine the following situation: a bank, during the height of the housing bubble, made a risky loan to a family of modest means, to allow them to buy their dream home (marble bathtubs, granite countertops, the works) on an acre spread in a booming corner of the far reaches of the suburbs. When the adjustable rate kicks in, the family cannot meet its obligations and defaults. In the meantime, the boomtown, to deal with the influx of new building and the sudden strain on the schools, utilities, and municipal services, has raised property taxes to fund major expansions and overhauls of these basic systems. And now the new arrivals are undergoing epidemic foreclosure. Not everyone, but a significant fraction.
Now the bank has a problem. They are not going to be able to sell this house anytime soon; if they try, they will have to drastically reduce the price, which will in turn further depress the property values of nearby houses (which the bank may already have foreclosed on earlier in the crunch). In the meantime, while the house is vacant, it will still require lots of expensive upkeep (have to keep the grass mowed!) and the property taxes still have to be paid. And it's kind of far from anywhere, which will discourage buyers as gas prices rise. The bank, in fact, doesn't think it will get enough money from the sale of the house to cover the present cost of paying the taxes and upkeep until such time as they can sell.
And here we see how neighborhoods get unmade. Because the bank will now refuse to retake title to the property, since it's strictly worthless to the bank. And now, instead of the bank having a problem, the town has a problem, because the status of this house has just fallen into limbo. Failure, they say, is an orphan, and that is especially true now; because now, with nobody claiming title, and the property vacant and abandoned, the lovely phenomena that get lumped in under the deceptively euphemistic term of "blight" set in; while the lender and the former occupants (and, sometimes, the town itself) slug it out in court over who is responsible for the property, the upkeep is not done, the taxes aren't paid, the house becomes a neighborhood eyesore through deterioration and vandalism, and finally, squatters can break in and occupy the building, possibly bringing serious crime in their wake.
And this creates a chain reaction through the neighborhood, as the effects of this toxic property spread. Not just crime, though it doesn't help the neighbors if the house around the corner is now a drug den. Property values in the neighborhood start tanking as suburban idyll becomes unsightly mess, and this can lead to further abandonments, by residents or by foreclosing banks. The town probably does not have the legal powers necessary to take over the properties outright, and on the slim chance it does, it might not occur to the town to exercise those powers, since it would mean giving up on ever regaining tax revenue from the property, plus assuming costs that (remember the gutted tax base?) it might not be able to afford, either. How much pain are the neighbors in for? It's a function of distance, but that is the first time the large lot sizes actually help anyone in the whole sorry mess. How much value disappears in what radius depends on local circumstances, but when Temple looked at this question in Philadelphia in 2001, every other property on a block with an abandoned house on it was worth $6,720 less.[1]
One will note that the neighbors get scrod even if they were perfectly responsible in the financing of their houses.
This scenario is starting to play out in bubble-fueled exurbs across America. We cannot even trust that it will remain contained there; in today's NYT, there is an article detailing the real estate crash in the mansions of Greenwich, CT.
It is, in a sickening way, exactly parallel to what happened in many urban neighborhoods when they slid over from 'struggling' to 'failed' in the 1960s and 1970s, at the height of the era of government-funded efforts to kill off cities by leveling neighborhoods and replacing them with highways and housing projects. The salient difference was that then, instead of the crisis being precipitated by lending to purchasers, the trigger was a renter's crisis, as rent controls that did not rise with rampant inflation rendered swathes of lower-income housing worthless to their absentee landlords, or worth less than the insurance on the buildings. Landlords merely abandoning property would have been more merciful than what happened too often: "Ladies and Gentlemen, the Bronx is burning."
Those cities that resurrected themselves, did because they contained many people who had a stake in their survival, who organized themselves to the hard tasks of recovery and restoration. That process is not complete; ask anyone in Bushwick, or Strawberry Mansion, or New Haven. But the fact remains that urban core was still a necessity for most wealth-creation, even for those who no longer lived there, so the urban cores were not permitted to die out completely. The exurbs have no such constituency. Indeed, they are increasingly seen as an albatross in an age of expensive energy. That's an attitude I mostly support, except that it unacceptably abandons innocent exurban residents who will bear a disproportionate amount of the pain from mistakes not wholly theirs. The framework to pull back from the worst of the exurban development mistakes in an orderly fashion does not yet exist.
Very bad things are about to happen to a large number of people, most of whom are unprepared for it and many of whom are completely undeserving of their misfortune. May Ghod help them, because we shall almost certainly not.
[1] Temple University Center for Public Policy, Blight Free Philadelphia (8MB PDF), 2001
Further Reading: The Atlantic, Chicago Tribune, BusinessWeek