In his first best-selling book, Downsize This!, Michael Moore made a good (if terribly oversimplified) point by comparing pictures of Flint after GM moved out with Oklahoma City after the bomb went off. Of course, the image of rubble where buildings once stood was essentially the same.
Apparently some urban areas in the U.S. feel the same way about big mortgage lenders, raising some interesting questions about responsibility for one's actions and what it means to be a menace to our society.
Cleveland, one of the most beyond-devastated inner cities in the land, is suing 21 large mortgage lenders for intentionally making loans that they knew could not be repaid. On the surface most readers' reaction would be to cry "Bullshit!" a la someone suing McDonald's over hot coffee. But the city has legitimate points. Waves of foreclosures significantly reduce Cleveland's already-pitiful property tax earnings while increasing the drain on city services (police, fire, and maintenance costs increase around abandoned homes). The glut of foreclosed homes in turn depresses the prices of housing in the surrounding areas.
For a city already on the edge, these changes can be crippling. Their schools, already among the worst and most underfunded in America, can scarcely afford to lose additional property tax revenue.
Baltimore is also joining in the fun by suing one lender (Wells Fargo) for predatory lending in poor (read: black) neighborhoods. Rates in those areas were nearly double the rates Wells Fargo peddled in other (read: not black) neighborhoods. A racial disparity in interest rates or lending practices would constitute a federal crime, of course. Again, the city's lawsuit notes the dramatic increase in the cost of caring for abandoned neighborhoods.
Unfortunately I think this is just the first step in A) an ugly economic downturn and B) a reckoning for 30 years of attempting to maintain the "American dream" of home ownership in the face of falling real wages and disappearing middle-class jobs.
Remember when Carter gave his infamous "We must lower our standard of living" speech and was practically drawn and quartered? Well, 30 years later "we" don't have to do anything – it has been done for us. When real wages don't increase and when good jobs are replaced by Wal-Mart style employment ($7/hr, no benefits, no pension) the only way to keep the dirty common folk from….well, getting pissed….is to create the illusion of wealth through credit. Sure, your wages are shrinking, but here's a couple of credit cards! That'll make up the difference. We know you'll charge more than you can pay back, but it's alright. Just make minimum payments for 30 years.
At 20%.
So too goes it with home ownership. This whole "subprime lending" fiasco was perfume attempting to cover the stench of a simple fact: most Americans can no longer expect to be able to afford a home. But in order to create the illusion that they can, it has become necessary to abandon all common sense in lending standards. The only way someone making peanuts is going to get a home is at usurious rates.
People know when their standard of living falls. What they could once afford is no longer attainable. The past decade or two have been nothing but an extended exercise in distraction. John Doe can't afford his lifestyle anymore, but banks (with complicity from the political system) are more than happy to let him charge it. Banks lend money that can't be repaid knowing that they will make even more if people keep chipping away with minimum payments. Unfortunately, as the subprime fiasco is proving on a daily basis, the house of cards collapses when even those minimum payments exceed the capacity of a nation's stagnant or falling wages to pay.