Just How Widespread is the Fallout from the Unfolding Credit Crisis?

The rhetoric coming out of Washington jumped a notch last week.

All of a sudden, there is a bit of panic in the air as those in charge finally start noticing what I and others have been saying for many months: this unfolding credit crisis will inflict an increasing amount of pain on growing numbers of Americans.

Unfortunately, these guys, and the so-called experts on Wall Street and in the media, still refuse to acknowledge the seriousness of the situation or the fact that the "problem" is not limited to those who were directly involved in the bad decision-making.

Rather, the fallout is spreading far and wide, as The New York Times reported in "Can the Mortgage Crisis Swallow a Town?"

Tammi and Charles Eggleston never took out a risky mortgage, never borrowed more than they could afford and never missed a monthly payment on their neat, three-bedroom colonial in the Cleveland suburbs. But that hasn’t prevented them from getting caught in the undertow of the subprime mortgage mess now submerging this town.

Over the last 18 months, the Egglestons have watched one house after another on their street, Gardenview Drive, end up foreclosed and vacant. Although lawns are still tidy and empty homes are not boarded up and stripped as they are in inner-city Cleveland, the Egglestons say Maple Heights no longer feels safe after dark. Nor do they have the confidence they had when they moved in a decade ago that this is the ideal place to raise their 6-year-old twin girls, Sydney and Shelby. So, in May 2006, they put their home on the market in order to move closer to Mrs. Eggleston’s parents in another middle-class Cleveland suburb, Richmond Heights.

They have had no takers. Although they lowered the asking price to $99,000 from $109,000, no one has even come to look at it in more than six weeks. “My heart panics every time I drive down the street and I see another for-sale sign,” says Mrs. Eggleston, pointing past the placards in front of her porch to others that dot surrounding yards like lawn furniture. “Some people on the street couldn’t pay, so they just left. The competition to sell is just ridiculous.”

It is a scene being repeated in cities and towns across America as loans that were made to borrowers with little or no credit history, many of whom could not even afford a down payment, fail in ever-growing numbers. It is also a story of how local economic trends are intersecting with national politics, with local foreclosures drawing the attention of Democratic presidential candidates, including John Edwards and Representative Dennis J. Kucinich of Ohio.

On the Republican side, President Bush announced on Friday several steps aimed at alleviating the impact of the subprime crisis on homeowners. In a Rose Garden appearance, he ruled out a federal bailout, citing both “excesses in the lending industry” and unduly optimistic homeowners who took out “loans larger than they could afford,” as reasons for the mortgage woes.

Indeed, what was once a problem confined mostly to economically struggling areas is quickly becoming a national phenomenon. Last year, there were 1.2 million foreclosure filings in the United States, up 42 percent from 2005, according to RealtyTrac, a firm that analyzes such data. At current rates so far this year, RealtyTrac expects foreclosure filings to hit two million in 2007, or roughly one per 62 American households — a rate approaching heights not seen since the Great Depression.

Analysts also say that the fallout from mortgages gone bad is spreading well beyond borrowers now in default. It has begun to engulf middle-class communities like Maple Heights, where nearly 10 percent of the houses — or 910 properties — have been seized by banks in the last two years. And it foreshadows what could lie in store if mortgage holders default on what the Federal Reserve conservatively estimates to be $100 billion in risky subprime loans. Many of these loans were made in 2005 and early 2006, when standards were at their most lax and cities like this were blanketed with aggressive pitches from mortgage providers.

“I don’t think we’ve hit bottom,” says Michael G. Ciaravino, the mayor of Maple Heights. “My fear is that foreclosure rates could go to double where they are today.”

IN terms of the subprime mortgage meltdown, Ohio has been among the hardest-hit states, according to the Mortgage Bankers Association. In Cuyahoga County, which includes Cleveland and surrounding suburbs, roughly 30 percent of subprime mortgages are either delinquent or in foreclosure, says Jim Rokakis, the county treasurer.

But this leafy community of bungalows and small family homes built after World War II could be described as its epicenter. Already, Maple Heights, with a population of 27,000, ranks No. 1 in Cuyahoga County in foreclosures per capita, according to Policy Matters Ohio, a nonprofit research group. Ranked by ZIP code, the number of foreclosures here puts Maple Heights in the top one-half of 1 percent nationally, RealtyTrac says.

Mayor Ciaravino has already had to shut his town’s two swimming pools, cut the ranks of police officers and firefighters and eliminate services like free plowing for senior citizens with snow-covered driveways.

With so many houses vacant, says Michael H. Slocum, the finance director of Maple Heights, “it puts a big question mark out there; historical collection patterns for taxes are becoming less reliable.”

In fact, when the town made its annual assessment on homes for garbage collection last month, receipts came in 15 percent below projections, forcing a 50 percent rate increase.

“There is truly a cascading effect,” says Mr. Ciaravino, 43, who grew up in Maple Heights and was a local prosecutor before being elected mayor four years ago. Sitting in his 1950s-style wood-paneled office in City Hall, he says that “the folks living next to these empty homes get discouraged, and middle-class people are leaving.”

For a mayor presiding over a town in crisis, Mr. Ciaravino doesn’t seem angry, but beneath an affable exterior is barely concealed frustration that the danger of subprime debt became a national issue only after Wall Street began to wake up to the threat this summer. “We’ve been warning of problems for years,” he says. “I’m just a small-town mayor. Where was the foresight?”

That same question is echoing among politicians with constituencies far larger than Mr. Ciaravino’s. In July, Mr. Edwards came to Cleveland to tour a neighborhood hammered by foreclosures. Two months earlier, Mr. Kucinich took reporters on a walking tour of the neighborhood where he spent part of his childhood, Slavic Village, pointing out boarded homes and criticizing what he called “predatory lenders.”

What’s more, Cleveland is key in a crucial battleground state in the next presidential election, so it is a good bet that more candidates from both parties will be here touring neighborhoods dotted with foreclosed homes, much the way Ronald Reagan went to the South Bronx in 1980 to highlight what he called the failure of Jimmy Carter’s economic policies.

“There’s plenty of blame to go around,” warns Mr. Ciaravino.

Unfortunately, by the time this is all over, it won't just be neighborhoods and towns that are swallowed by the unraveling credit bubble. It will be the entire country.

Comments

[Chad Gray_:]

The article is very correct that those who weren't themselves using subprime debt are seeing negative fallout from the meltdown, but don't forget that they were also benefiting greatly for the past 5 years from the upward price surges created by easy credit. It's a little like someone who saw their shares of Intel or Microsoft go down in 2001 on the backs of the dot com implosion. True, those companies weren't dot coms, but they were trading at astronomical multiples (for them) because the exhuberance had spread beyond just the .com's. Then, just as now, you didn't hear a peep from Cisco shareholders who saw their investment growing well beyond rationality, but lots of hard luck stories when valuations returned to earth.

As my grandma used to say, easy come, easy go.

2007 Sep 04 01:26 PM

[wixeywaxy:]

Being widespread is the best thing about the problem. In most cases it's not going to bankrupt those who have exposure. Additionally the problem is painfull enough to assure more caution in the future. The institutions that fail were the ones that were too highly leveraged using these high yielding assets as collateral. Let's face it, they don't deserve any bailout. The taxpayers are the goats in the end and a bail out only assures more of the same. WW

2007 Sep 04 05:42 PM