September 08, 2007

By Jay Bookman

Home foreclosures in July rose 93 percent over the same month a year earlier, according to RealtyTrac, continuing a trend that is forcing tens of thousands of American families out of their homes.

If you happened to be the unlucky owner of one of those homes, the impact was probably devastating. Your credit rating was destroyed, you probably lost whatever equity you had built, and you and your family have been forced to find a new place to live.

Nonetheless, some government officials continue to argue against an aggressive government response to the crisis, and they have a point. The market has to be allowed to do its job by punishing lenders who gave money to bad credit risks and borrowers who got greedy and bought more house than they could afford. As President Bush noted recently, “A federal bailout of lenders would only encourage a recurrence of the problem.”

However, blame for this problem extends beyond irresponsible lenders and borrowers to include the Bush administration, Congress, the Federal Reserve and other government agencies.

Through lax regulation of lenders and easy credit policies, they helped drive a housing boom that for a while gave a record percentage of Americans ownership of their own homes, with minority home ownership exceeding 50 percent for the first time in history. In his 2004 speech accepting the GOP nomination for president, Bush claimed credit for that accomplishment, telling delegates that “thanks to our policies, home ownership in America is at an all-time high.”

Now, the same policies that drove the boom in home ownership are being blamed by experts for the current meltdown, with home ownership rates falling among minorities and the larger population as well. If left unaddressed, foreclosures on such a large scale will do serious harm not just to the irresponsible, but to millions of innocent people as well.

“I’ve spent five-plus years trying to make the argument that it’s not just about individual borrowers and lenders,” says Dan Immergluck, an associate professor of city and regional planning at Georgia Tech. “It’s also about neighborhoods and communities.”

Together with co-author Geoff Smith, Immergluck has conducted research on the social and economic impact of foreclosures, based on a database of more than 9,600 property transactions in Chicago. That research found that as foreclosures increase in a neighborhood, violent crime jumps significantly. An annual increase of 2.8 foreclosures per 100 homes “corresponds to an increase in neighborhood violent crime of approximately 6.7 percent,” their study found.

“It’s probably something related to the stigma of boarded-up buildings — the ‘broken windows’ theory of crime and the psychological impact of all that on the community,” Immergluck says.

Another study by Immergluck and Smith, using that same database, documented the impact of foreclosures on property values, a phenomenon already visible in many communities across the country. According to what they call a conservative estimate, a single foreclosure devalues every home within an eighth of a mile by an average of almost 1 percent.

Immergluck, like many other experts, warns that the foreclosure crisis hasn’t come close to peaking.

“I think that what happens in the next few months will make everything else pale in comparison,” he says. “It will probably become the first housing problem to become a big issue in the federal presidential campaign.”

Data on adjustable rate mortgages compiled by Credit Suisse support that prediction. The company found that in the next four months, roughly $190 billion in adjustable-rate mortgages will be reset to much higher, permanent interest rates, meaning higher mortgage payments for people already struggling to make ends meet.

Government can’t — and probably shouldn’t — try to block that wave from cresting. Its challenge is to contain the damage to the larger economy, and to reform policies that encouraged such a large-scale mess in the first place.