This article first appeared in the St. Louis Beacon, July 13, 2009 - The Beacon had an extraordinary three-part series last year called "Anatomy of a Foreclosure," that told the story of Maureen McKenzie, who lost her family home in Kirkwood to foreclosure.
The articles explained how financial pressure and a mortgage broker persuaded McKenzie to purchase an adjustable-rate loan with a teaser rate that more than doubled her monthly payments in less than two years. Unable to make the payments, McKenzie lost her home.
McKenzie's story is typical but her willingness to talk to the media is not. Most homeowners facing foreclosure are too embarrassed and ashamed to go public. Close to tears, McKenzie felt the same way, "I was afraid to tell everyone about the foreclosure. I thought, 'They're going to think I am a deadbeat'." But she decided that she had to speak up, even appearing on KETC-Channel 9's innovative "Facing the Mortgage Crisis" program.
The prevailing guilt and shame of people in St. Louis facing foreclosure goes a long way toward explaining why St. Louis has done relatively little to prevent foreclosures. A deadly virus is sweeping through the region, yet few people are talking about it and the powers-that-be feel little pressure to act.
Relatively Weak Effort in St. Louis
I co-authored a study funded by the MacArthur Foundation on local responses to foreclosures in six metropolitan areas. (The full report can be accessed at: http://brr.berkeley.edu/ -- click on Resources/Working Papers.) I was responsible for two "weak market" areas, St. Louis and Cleveland, which did not have the huge housing bubbles that plagued California and Florida. I gathered data, read news accounts and interviewed dozens of officials in the two metro areas.
The foreclosure rate in Cleveland has been higher than the foreclosure rate in St. Louis, but what struck me most is that Cleveland has done much more than St. Louis to prevent foreclosures. Pressured by a coalition of inner-ring suburbs, Cuyahoga County, which includes the city of Cleveland, took action to ramp up foreclosure prevention.
Over a two-year period, the county committed almost $2.5 million to a foreclosure prevention initiative while private foundations and banks committed another half a million. A grassroots group, Empowering and Strengthening Ohio's People (ESOP) carried out campaigns against predatory lenders resulting in agreements covering 20 lenders that facilitated much higher rates of loan modification. In a two-year period the Cuyahoga County initiative prevented 1,497 foreclosures.
The only comparable effort in St. Louis has been the St. Louis Alliance for Homeownership Preservation, an alliance of five nonprofits that operates in the city of St. Louis. The city contributed $500,000 to a rescue fund that has helped to keep hundreds of people in their homes. The average expenditure is about a thousand dollars per client. With the help of federal funds, nonprofits -- like Beyond Housing and Catholic Charities -- have implemented badly needed housing counseling programs.
But there is no rescue fund for St. Louis County, which has more foreclosures than the city of St. Louis. Chris Krehmeyer of Beyond Housing asked area foundations for $2 million to $3 million for a rescue fund but was turned down. Unlike Cuyahoga County, St. Louis County government has done little to prevent foreclosures.
100 Percent Responsibility
A main reason public and private actors in St. Louis have made little effort to prevent foreclosures is the attitude that people should take responsibility for their own actions. This attitude was illustrated by a quote in the Beacon series by the vice president of the company that brokered Maureen McKenzie's loan: "You have to sign the documents. You have to read the documents. You have to understand what you're doing. I mean, I take 100 percent responsibility if I make a bad financial decision in my life."
The argument that irresponsible borrowers got themselves into trouble has a grain of truth. But if the source of the problem is greedy homeowners then why did homeowners suddenly become greedy only in the past 5-10 years? The reason is that mortgage brokers, freed from federal regulation, devised a dizzying array of deceptive mortgage products (exploding ARMs, teaser rates, piggyback loans, balloon payments, etc.) that were designed to deceive borrowers. Under yield spread premiums, brokers had an incentive to entice homeowners into more expensive products that they often knew were unsustainable. The key to every scam is playing upon greed - and the mortgage industry knew just how to do this.
The great hypocrisy of the foreclosure crisis is that Wall Street investors, who bought up billions of dollars in bad mortgages, were bailed out with huge infusions of taxpayer money, while homeowners have only belatedly gotten relatively minor funds from the Obama administration. Who was in a better position to make rational investment decisions and be held responsible for their actions - Maureen McKenzie or Morgan Stanley?
'That's Not My Problem'
Even if you believe that homeowners made bad decisions, you would still want to do something to prevent foreclosures if you thought that they had significant spillover effects on society. My guess is that most people in the St. Louis area think that foreclosures will not affect them.
Foreclosures have spread from the central city to the suburbs. But note that large swaths of St. Louis County have less than five foreclosures per square mile (the white areas). Residents of the central corridor and the outer-ring suburbs don't see the direct effects of foreclosures. But the indirect effects of foreclosures, what economists call "negative externalities," impact everyone in the region:
- Research by Will Winter and Will Rogers at the University of Missouri-St. Louis demonstrates that homes in St. Louis City and County within one-eighth of a mile of a foreclosure suffer declines in property values.
- Property tax rates for homeowners whose property values did not decline will have to go up to make up for the declining property values of those impacted by foreclosures.
- At the same time that revenues are declining municipalities face increased costs for maintaining foreclosed homes - everywhere from a few hundred dollars up to about $35,000 for homes that are abandoned, vandalized, and have to be demolished.
- Research shows that foreclosures increase crime.
- By forcibly pulling students out of school, foreclosures make it more difficult for schools to do their job.
The Time to Act is Now
Foreclosures in St. Louis County are down from 2008, but they are still at historically high levels. There is time to take action.
Not all homeowners can be saved. Those who have been laid off from their jobs cannot be saved by loan modifications. But the evidence suggests that about 30 percent of those facing foreclosure can be kept in their homes by expert counseling and appropriate loan modifications. Area foundations, private banks, and local governments should take action to ramp up foreclosure counseling and provide money for a rescue fund for St. Louis County.
The state also needs to take action. Missouri is currently tied for the fifth fastest foreclosure process in the nation, with as few as 38 days from first referral to a sheriff's sale. The Missouri Legislature should lengthen this process to somewhere near the national average of 120 days so that homeowners have more time to negotiate loan modifications.
Preventing foreclosures is the right thing to do. It is also the smart thing to do. Where are the leaders we need to take action on this issue?
Todd Swanstrom is the Des Lee Professor of Community Collaboration and Public Policy Administration at the University of Missouri-St. Louis.