The media have been full of stories in the past couple of weeks about an increase in defaults in mortgages and the apparent collapse of the subprime mortgage market. A couple of days ago, the New York Times ran an article on another aspect of the real estate market’s illness:
Here in Ohio, there are more than 200 vacant houses in Euclid, a suburb of Cleveland north of here. In the last two years more than 600 houses in Euclid have gone through foreclosure or started the process, many of them the homes of elderly people who refinanced with low two-year teaser rates, then saw their payments grow by 50 percent or more.
Euclid has installed alarm systems in some vacant houses to keep out people hoping to steal lights and other fixtures, drug users and squatters. The city has hired three new building inspectors, bringing the total to nine, to deal with troubled properties and is getting a $1 million loan from the county to cover the costs of rehabilitation, demolition and lawn care at the foreclosed houses. (When the properties are sold, such direct maintenance costs will be recovered through tax assessments.)
The Euclid mayor, Bill Cervenik, said the city, with a population of 53,000, was losing $750,000 a year in property taxes from the empty houses.
The article includes the story of an elderly woman, who was talked into an ARM, but wasn’t aware that taxes and insurance weren’t included in the quoted monthly payment…not to mention having been hit with a nasty surprise when the teaser rate wore off.
My inner capitalist is trying to convince my typing hands to simply write, “caveat emptor”, but then I think back to the circus surrounding my wife’s and my first mortgage, where the broker was a bit weaselly when it came to handling of the closing costs, and who kept trying to assure me that the quoted monthly payment included escrow and PMI (it didn’t).
Also a concern is that, to the extent that the increase in foreclosures is predominantly a subprime market phenomenon, there is a risk of certain neighborhoods being more affected than others with multiple foreclosures. The strategy mentioned in the article — local officials taking measures to limit squatting and to maintain vacant houses, then billing the titleholder for their services — doesn’t seem too unreasonable, on the surface at least.
Thursday, I listened to a couple of talking heads on Bloomberg who were discussing the epidemic of subprime mortgage defaults. One of them pointed at the bankruptcy reform legislation of a few years ago as being a contributing factor in the severity of the foreclosure rate. His thesis was that when bankruptcy law permitted easy abandonment of debt, lenders had an economic incentive to not make bad loans, and to exercise creativity to avoid a borrower seeking discharge of liabilities in bankruptcy court.
I’m not enough of an economist to be able to issue an expert opinion on that belief, but it does seem like a reasonable belief.