Outlook: Speculation Kills
Tuesday, October 2, 2007; 1:30 PM
"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.... 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."
Cuyahoga County Treasurer Jim Rokakis was online Tuesday, Oct. 2 at 1 p.m. ET to explain the extreme impact real estate speculation and the subprime lending collapse have had on one community.
The transcript follows.
Maryland: I grew up in a now-aging suburb of Cleveland (South Euclid) and moved to the Washington area after college 25 years ago (then, as now, the employment picture here is much brighter). I sold the house I grew up in 10 years ago, after my parents died. It sold very quickly. But five years later or so it was abadonned, and stayed that way for several years. I even wrote to the mayor of South Euclid asking what could be done, but received no answer. It's now occupied again. It's so sad to see the home where you have so many happy memories become neglected and a blight on the neighborhood.
Could you talk about the foreclosure issue in Cleveland's suburbs? I'm sure it's not as bad as in Slavic Village, but my sense is that it's big issue, one the many municipalities (unlike the Washington area, where most government is countywide, the Cleveland suburbs each have their own government) are unprepared to handle. What is the county's role in this?
Jim Rokakis: Predatory lending is not a Cleveland-only problem. Of the 13,500 foreclosures in Cuyahoga County in 2006, 7,000 were in the city and 6,500 in the suburbs. The same loose lending standards being used by the "flippers" in Cleveland moved to the suburbs about four years ago. In fact, the highest forclosure rate in Cuyahoga County so far in 2007 is in the suburb of Maple Heights. My statutory role in combating these practices is limited; however, I have used and will continue to use this office as a bully pulpit to advocate for change in Columbus and Washinton.
Southern Maryland: How many towns, cities, and counties do you think will be impacted, nationwide? How much is this topic on the radar screen for elected officials and what are their thoughts? Is there anyway to stop the bleeding? Do you think this will magnify and send the economy into a recession? Thank you!
Jim Rokakis: I have no way of knowing how many towns will be affected by this nationally, but I do know that more than $880 billion dollars worth of subprime adjustable-rate mortgages have begun to reset (since June of this year) and will continue to reset at the rate of $40 billion to $50 billion dollars per month until October 1998. So, it is hard to believe that the impact will not be felt nationally.
Some states have been agressive in stopping these predatory lending practices; others have been quite lax. My purpose in publishing Sunday's article was to get the attention of decision makers in Washington. Can we stop the bleeding? Only if Congress continues to pressure Wall Street into working out loan modifications with borrowers on the two million loans that I think will go bad in the next 18 months. Recession? I would have to leave that answer to the professionals, but my opinion is that is where we are headed.
Vienna, Va.: A very brave article indeed, Mr. Rokakis -- A politician overseeing a dysfunctional "community" rife with crime, incivility, violence and a lack of economic dynamism steps back to consider where to point the finger, and finds a way to blame the moneylenders! In all of history, no politician has ever thought of that before...
Jim Rokakis: I did not have enough room to fully discuss the issue of who is to blame in this article. Of course borrowers also share the blame. So do the appraisers who lied in their appraisals. So do the mortage brokers, who knowingly put buyers into high priced loans so they could collect a yield spread premium. So do the mortage banks, 161 of which have gone out of business or stopped making loans since this real estate bubble burst. So do the rating agencies, which foolishly slapped a "AAA" rating on all those mortage backed securities. So does Wall Street issuers now losing billions of dollars for securitizing and selling these risky mortages.
How about the Fed, which kept rates low for historically long periods of time? I wrote about the Ohio legislature in my piece, but the Congress abdicated its responsibility as well, and finally is paying attention -- too late. When blood flowed on the streets in places like Cleveland, nobody cared. Now that it's flowing on Wall Street, well, everybody is listening. So if you want to talk about politicians and historic trends, Vienna, Va., make sure you throw in the following historic events -- The Savings & Loan Crisis, the Junk Bond crisis of the late 1980's, Enron, Adelphia, Global Crossing, WorldCom, etc. You get the drift?
Rockville, Md.: That was an interesting article about predatory lenders. I happened to be in Cleveland this summer and noticed an article in the paper about how the city's population had dropped so much in the past 10 years or so that the city council needed to shrink -- so, while predatory lending may have made a bad situation worse, it clearly was not the only problem going on. What is the city's leadership, not just the government, doing to encourage positive economic activity and job growth (while knowing that raising taxes usually doesn't attract new businesses).
Jim Rokakis: Gee, that is an answer that will take more time than I have to offer. The city, the county and the state are engaged in a variety of initiatives involving economic incetives and other "sweetners" designed to bring businesses back to North East Ohio, but an economy that was this heavily dependent on manufacturing will be slow to turn around. The one thing that I know for sure is that we cannot depend on the real estate industry to create the false sense of prosperity that we have relied on these past several years.
Washington: So far, it seems that all local/state efforts at controlling foreclosures, including Ohio's, have failed. Lyndon LaRouche has issued a call for a federal moratorium on foreclosures, for an indefinite period, in an effort to protect homeowners and local banking institutions. Resolutions of support for the Homeowner and Bank Protection Act now have been introduced in four state legislatures across the country. Would you endorse such a measure?
Jim Rokakis: We are looking closely at the possibility of a 60- to 90-day moratorium on foreclosure activity to give us the opportunity to continue to counsel the many induviduals facing foreclosure who have asked for help. There are so many, however, seeking help, that we are losing them before we can counsel them, which is why we are considering a moratorium. We are also supportive of a national call for a moratorium on ARM resets, which we also think can slow this foreclosure locomotive down.
Lake Ridge, Va.: Hello my old classmate and neighbor. Although this is a nationwide problem, it is more likely to occur in a neighborhood like Slavic Village. Many of the loans that have been offered to these people were predicated on the assumbtion that the non-stop appreciation in property values would continue. Granted, most of the predatory loans that have been mentioned were made to desperate people who had few other options. Although I agree that these brokers and lenders were preying on these people, the truth was in the disclosures, meaning that either these borrowere were in such a bad state that they had to close these loans, or that they just never read the disclosures -- because if they (loan terms) were not properly disclosed, the borrowers would have a strong case in a court of law. Regardless, this is just the tip of the iceberg. It is far from peaking, and you may see another situation similar to or worse than we experienced in the days of the Oil Patch loan crisis. I hope you are well, and maybe we can see each other at the LW class reunion in October.
Jim Rokakis: One point I was not able to address in my article was that we are not talking strictly about innocent homeowners when we discuss this crisis. Approximately half of the buyers in Cuyahoga County were not homeowners -- they were flippers, speculators and scammers. They knew exactly what they were doing. They knew there was a system in place where they could buy properties with no money down, no credit checks and, amazingly, get cash back at the closing! Are you surprised at what happened? I am not. I don't condone it, but I understand it. Is it criminal? Yes, but those who would write to me, as some have, "arrest them, throw them in jail" aren't being realistic -- there are not enough jails to put all these characters away. This was an industry that demanded close scrutiny and regulation, but people in positions of authority were looking the other way. Great to hear from you, but I went to Rhodes High School!
Washington: Mr. Rokakis, can you say with a straight face that you, in the 19 years you were on the Cleveland City Council, and then the 10 years you've been Cuyahoga County Treasurer, never have been (before the current crunch) a party to efforts to force or "encourage" lenders to "equalize" mortgage approval rates? I've seen so many rust-belt localities' politicos like you argue for decades that if minority mortgage applicants were not approved at the exact same rate as white applicants, then racism was the only possible cause -- and it had to be fought tooth and nail with all of local (and state) government's tools, from lawsuits to regulation to pressure. Your arguments would be far more persuasive if you admitted that you (even "you" as collectively representing urban political establishments) have contributed immensely to the problem this way, even if you had never taken a dime in campaign contributions from lenders' PACs.
Jim Rokakis: Let's start with your PAC argument. Common Cause reported that more than $200 million dollars has been spent on lobbying the federal government by real estate interests between 2000 and 2006. I would imagine a similar amount was spent at the local government level. If you really believe that I, as a member of Cleveland City Council, had the ability to rein in this industry, then I respectfully would submit to you that I have a bridge I would like to sell you as well.
Have I fought against redlining? Yes. Do I support CRA? Yes. But if what you are telling me is that supporting those two measures means that we have to accept the abuses of an industry that might experience $1 trillion in losses as a result of these abuses -- well, you have got to be kidding me. How about this: Want to own a home? You need a down payment. How about this: Want a loan? Verify your income. Did you know that in the past year, 70 percent of all home mortage loans had little or no documentation of income? And one final comment -- not everybody is prepared to own a home.
Ogden, Utah: I really wonder how much in the grip of industry this nation is. Obviously you could see the danger of what Alan Greenspan dismissed as "froth" in the housing market, and I as a simple journalist could see no good coming from what was obviously a speculative bubble in housing prices driven by a mad rush to sell mortgages to everyone who could hold a pen. But why were your legislators so blind? Do real estate and banking lobbyists have so much power? Silly me, obviously they do.
Jim Rokakis: The power of the lobbyists -- as I said in my early comments -- is beyond belief, but what's new? I hate to be flip, but the only way these abuses will end is by reining in the power of all lobbyists. Oops, I guess I'm sounding like a politician.
Silver Spring, Md.: Dear Mr. Rokakis, thank you for this magnificent, heartbreaking piece. Alas, this Ohio native is not surprised. How can we save these small-scale middle-class neighborhoods? Couldn't some of the military/homeland security/industrial jobs from the D.C. area be sent to these areas that have been stripped of good blue-collar jobs? Those Ohio folks could be retrained so they could work in their home state instead of trying to come here. Our small Maryland neighborhoods are threatened by developers, who want to bulldoze them for "smart growth" luxury high rises, allegedly to acommmodate population growth.
Jim Rokakis: We certainly could use those jobs. As a lifelong resident of Ohio, it has been especially painful as one manufacturing concern after another closes down, and I watch people in their 50s and 60s struggle to seek new employment. Things did not break down overnight in the industrial states of Ohio and Michigan, nor are they going to be repaired overnight either.
Washington: I'm not sure why you cast blame on only the mortgage lenders. Surely the people who weilded the weapons are more to blame for the deaths. Surely the buyers themselves, who failed to read the fine print and budget properly, are partially to blame for getting their houses foreclosed. The mortgage lenders share part of the blame for make available loans to people who are likely to default, but casting sole blame on them ignores the concept of personal responsibility.
Jim Rokakis: Look at my earlier answer. As I said, there is plenty of blame to go around. Do you support the practice of charging yield spread premiums? For those of you reading this who don't know what a yield spread premium is, it is an incentive paid to mortage brokers at closing for talking a home buyer into a higher-priced mortage than the one they deserve. Did you know that one of every three African American subprime borrowers deserved a prime rate loan but was talked into a subprime loan? I think yield spread premiums should be outlawed. Speaking of personal responsibility, the anti-predatory lending law passed in Cleveland in 2002 required mandatory counseling for high priced loans so that borrowers could understand the consequences of their mortage -- but as I said in my piece, that law was struck down.
Washington: Let he who is without sin cast the first stone. You have never cited the Community Reinvestment Act to pressure lenders to lend to people they might not lend to otherwise?
Jim Rokakis: I am waiting for one definitive article by somebody in the banking industry that can argue -- backed by the facts -- that CRA laws have forced banks into bad loans. I have not seen that article yet. Maybe you can make it available to me. Until that time, I don't think we have much to talk about.
Housing Mess: I think the real tragedy here is those of us who are left behind, honestly trying to make a living a wanting security of owning a home. The speculators and bad lenders have destroyed my faith in the system. I tried twice to sell my home, but the offers made and the process were so insulting I refused to sell. People are making the mistake of believing everyone is having financial troubles and needs to sell, versus just wanting to sell to move. I have worked too hard and put too much in to have someone rob me of my investment. The flippers are the true thieves of this market, and the lenders who lent to people they knew would not fulfill the obligation!
Jim Rokakis: You are right, and I pointed out in my piece, the real victims in this crisis are people who played by the rules, and who are having their most valuable possession, their home, pulled out from underneath them.
Fort Washington, Md.: Given the fiscal dilemma your city is facing from the costs associated with the demolition of communities that have been abandoned because of record number foreclosures, why not sue the real estate agents, mortgage brokers and lenders, who through their powerful lobbyists, descended upon Cleveland and crippled legislation that would have regulated "predatory lending" practices? I am sure the members from these private sector industries are secure in their homes and will not face the negative fallout that millions are faced with.
Jim Rokakis: Their pockets are simply not deep enough to recover the cost of this crisis. Mortgage banks simply will go out of business -- 161 have gone out of business since the beginning of this crisis. Real estate agents, mortgage brokers -- no money there either, nothing substantial anyway. There will be litigation, and lots of it. My fear is that by the time all the litigation dust has settled, there won't be nearly enough to compensate cities like Cleveland for the incalculable harm that has been done.
Washington: How much of this tragedy is directly attributable to governmental deregulation that began under President Reagan?
Jim Rokakis: I am not smart enough to answer that one, but this belief that government is bad and needs to get off the back of businesses probably picked up steam under Reagan. If you want to know the consequences of a completely unregulated industry -- the real estate industry -- come to Ohio and look around. You'll see the effects all around you in the tens of thousands of vacant properties.
Boston: What do Cleveland urban planners recommend doing with the land after buildings have been demolished? Open space?
Jim Rokakis: Open space might be our best bet in the short term. This was a city of more than 900,000 people at one time. The cities' population is probably around 425,000. I expect it will bottom out at about 350,000, which means there will be a lot of vacant land. I like the idea of green belts throughout this community until such time as there is demand for this property again.
Wheaton, Md.: So, what is being done about the increased crime? Is law enforement being encouraged to step up, or are people just sitting around whining and blaming subprime mortgage lenders?
Jim Rokakis: Look, Cleveland relies heavily on income taxes and to a lesser extent property taxes to fund its budget. If people aren't working, there is no income tax. If properties are being abandoned, the owners stop paying taxes. So there is less revenue to hire police. Logical isn't it? Does Cleveland need more police? Of course. Are there any big cities like Cleveland that don't need more police? None that I know of. The one point that I made in my article is that the federal government needs to reinstitue the LEAA program that used to provide federal funding to hire police in urban areas. We are spending $12 billion a month in Iraq. Do you think there might be any money to provide security for the people of Cleveland, Detroit and Buffalo at all?
Knesington, Md.: Aren't you being carried along by the fact that as the rest of the country moves forward economically, Cleveland does not? Cleveland and Pittsburgh would make textbook case studies on the wrong vs. right way to deal with economic change. I have heard many, many opinions about the missteps Cleveland has made over the years. I think the issues you raise are drops in the ocean of Cleveland's problems.
Jim Rokakis: There is no question that Cleveland and other cities in the industrial heartland have failed to adapt quickly enough so what is your point? That the practices of the predatory lending are what we deserve for not being quicker to adapt to changing economic conditions? If anything, we needed protection to prevent these abuses from pushing us over the edge, which they have done for many neighborhoods.
Vienna, Va.: Mr. Rokakis, the lenders have been in a damned-if-they-do-damned-if-they-don't position for years. If they hadn't bent over backwards to make "the American Dream of Home Ownership" more affordable for people with dodgy credit scores, you and other politicians like you would be screaming about racism and red-lining -- probably from the same pulpit that The Post gave you -- and subjecting them to court action and city council pressure.
Let's be frank -- urban politicians of your political party have been the primary advocates for the watering-down of lending rules, to benefit your constituencies. It is hypocritical for someone from that group of urban politicians -- who had key roles in setting up the conditions that led to financial disasters for individual home buyers, and for those who lent to them -- to now cry "exploitation" when the interest and conditions charged to high-risk borrowers reflects that risk.
Jim Rokakis: What can I say? You are right. Politicians are to blame for this entire crisis? What stuns me about comments like yours is just how simplistic you are in your views. Again, let me see if I have your argument right; you wanted credit -- we gave you credit. Do you really believe the practices that are unraveling today in this country -- which will end up costing us hundreds of billions of dollars -- are the fault of urban politicians, and not Wall Street? You gotta be kidding. I have recieved more than 300 e-mails about this piece, and the majority of comments like yours have come from people in the real estate industry. How does that saying go? "If you throw a rock into a pack of wild dogs, the ones that yelp is the ones that git hit." I am an urban kid, but I learned that from my best friend, who grew up in Tennessee.
Washington: Re: CRA responsibility -- a U.S. Senate Banking Committee staffer told me about 10 years ago that at least $100 billion in such loans had been made in the first 20 years of the Act. It since has gotten worse. You want an article? I will try to send you a recent New York Times piece about a man named Bruce Marks who became quite notorious during the past decade for pressuring banks to earmark literally billions of dollars to his organization, the "Neighborhood Assistance Corporation of America." He boasted to the Times that he had "won" loan commitments totaling $3.8 billion from Bank of America, First Union Corporation and the Fleet Financial Group. And that is just one "community group" operating in one city -- Boston.
washingtonpost.com: Can These Mortgages Be Saved? (New York Times, Sept. 30)
Jim Rokakis: Thanks for the citation -- I will read it as soon as this chat ends at 2:30 p.m.
Alexandria, Va.: Thanks for considering a moratorium on foreclosures. It makes those of us who bust our backsides to make our payments and play by the rules so happy to know that the government will bail out those who don't. I mean, really, why not just seize all of Slavic Village by eminent domain and then just dole out the place by parcels to your voters? Kelo has opened the way for you.
Jim Rokakis: We never talked about a permanent moratorium -- read my comments.
Seattle: After recently visiting the Washington-Baltimore area -- Baltimore in particular -- are there any known case studies of Baltimore to use for recovery? I have never seen urban decay such as in Baltimore, where neighborhoods have been decimated and literally abandoned. Baltimore has historically ethnic neighborhoods as well.
Jim Rokakis: There are numerous models but I am not in a position in the remaining 15 minutes or so to respond with specifics. If you want to reach me at my e-mail address feel free to do so. I will refer you to neighborhood revitalization experts that can help you.
Woodbridge, Va.: I don't know anything, but I do know one thing -- your comment that our economy is built on real estate is spot-on, in my opinion. God knows we don't produce anything anymore, so let's create this fake economy. Sickening.
Jim Rokakis: You are right. We live in a new Gilded Age. In the old Gilded Age, the industrial barons produced steel, built automobiles and manufactured hundreds of thousands of products. In this new Gilded Age, we have become expert at manufacturing debt traps.
Lake Ridge, Va.: It serves no one to make bad loans -- why was this done?
Jim Rokakis: Because they could make these loans, take their profits, and pass them on to Wall Street who sold them as Mortgage Backed Securities to unsuspecting investors. Or as I often say, they did it because they could do it.
Bethesda, Md.: Thank you for a moving and cogent op-ed piece. How should mortgage lending practices be changed to better protect consumers, especially those with limited incomes?
Jim Rokakis: There are measures in Congress that propose a variety of reforms that make good common sense. They include a "suitability standard" which would prohibit loans that borrowers cannot afford at a fully indexed rate. They would also require that borrowers fully document their income i.e. ban no document loans. They would require the escrowing of taxes and insurance for high priced loans. Some would ban the practice of yield spread premiums that I spoke about earlier. There are many other reforms under consideration, but these are a good place to start.
Mountain Home, Ark.: This looks to me like another great deal for President Bush and Congress. Maybe they can sell Cleveland to China or Iraq. They want to sell or give away everything else in America.
Jim Rokakis: Thanks for your comment -- what a great way to end this discussion. Amen.
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