The Shadow of Debt
Let me tell you about a place called Slavic Village and the death of a girl named Cookie Thomas. You've never heard this story before -- talk of housing markets and hedge funds, interest rates and the Federal Reserve has drowned it out.
Twenty years ago, the Slavic Village neighborhood of Cleveland was a tightly knit community of first- and second-generation Polish and Czech immigrants. Today, it's in danger of becoming a ghost town, largely because a swarm of speculators, real estate agents, mortgage brokers and lenders saw an opportunity to make a buck there.
You could say it was because of them that 12-year-old Asteve' "Cookie" Thomas lost her life on Sept. 1, shot in Slavic Village when she stumbled into the crossfire of suspected drug dealers. The neighborhood wasn't always a haven for criminals -- not until hundreds of foreclosures destabilized the community. Houses (800 at last count) and then entire streets were abandoned. Crime increased as vacant properties offered shelter to people who had a reason to hide.
Another victim was Joe Krasucki. On the night of March 15, his 78th birthday, he thought he heard vandals prying the aluminum siding off his house, where he had lived for 40 years. Looters had already ransacked his neighbor's abandoned property -- a fate that awaits the majority of foreclosed houses in cities such as Cleveland. When Joe went outside to investigate, a gang of teenagers beat him so severely that he died a week and a half later.
Cookie Thomas and Joe Krasucki haunt me because they didn't have to die. In a sense, their deaths were foreshadowed in the late 1990s, when the dark side of the real estate industry -- the predatory lenders -- came to Ohio, including Cleveland's Cuyahoga County, where I serve as treasurer. They knew that the state's lax regulatory structure would give them virtually free rein. This is when we first heard terms such as "securitization," "mortgage-backed securities," "3-28s" and "risk modeling." These are code words for Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible -- the strategies that have sucked the life out of my city.
Cleveland isn't alone. In Stockton, Calif., lenders filed for foreclosure on one in 27 households in the first half of 2007, according to RealtyTrac.com, a marketer of foreclosed properties. The Detroit area watched as foreclosure proceedings started on one in 29 households. One in 122 households in the metropolitan area of Bridgeport, Conn., had a foreclosure filing, an increase of 552 percent from 2006.
The national outlook isn't good, either. RealtyTrac.com reports that there could be more than 2 million foreclosures in 2007. Home builders haven't struggled so much since the 1991 recession. Last month, the sale of new homes fell to its lowest rate in more than seven years. And the Federal Reserve's Sept. 18 decision to cut interest rates by half a percentage point tells you that we're all in trouble: homeowners, who stand to lose their biggest investment; lenders, who are going bust at a record rate; citizens, who return home each night to dangerous neighborhoods; and city governments, which simply don't have the resources to solve their communities' problems.
Funny thing, the mortgage business. For years, buyers, sellers and lenders operated under the arcane notion that if you wanted to own a home, you needed a down payment and some semblance of a good credit history. Along with other consumer advocates and community leaders, I once battled the evils of redlining, a practice that denied loans to people -- largely minorities -- who lived in neighborhoods that banks considered too risky for investments. At that time, we fought for fair but sensible lending.
That's why we couldn't comprehend the new rules that predatory lenders brought to town. They offered "creative" loans to people with weak credit and, later, to others with no credit history at all. The practice defied logic. It was as if Wall Street brokers came to places such as Slavic Village and said, "Okay, you want money? We'll give you money. We'll give you more money than you dreamed possible."
They did, and predictably, the loans went bad. Borrowers managed to pay the deceptively low initial payments but fell into foreclosure when the monthly payments ballooned -- a hallmark of the predatory loan. The sad truth is that for many of these buyers, responsible home ownership was simply out of their economic reach.