Foreclosure Crisis in Detroit

Every day, CHN receives calls and e mail asking about housing issues such as fair housing, mortgages, and accessibility. In an effort to answer some of the most frequently asked questions, and to make people aware of housing issues and opportunities for advocacy, I've decided to start a weekly blog on our website.

Each week I'll offer both information and viewpoints about local, state, and federal housing issues. I hope that this information proves useful, and welcome your feedback.

I plan to devote the first few postings to the topic of foreclosure. This important issue has received a great deal of attention lately, and I would like to promote better understanding of the issue in order to address the current crisis and help to avoid recurrence of the problem in the future.

I recently heard a commentator offer the opinion that the current foreclosure crisis is primarily a needed correction to shaky lending practices by greedy lenders. While there is a kernel of truth in this argument, it greatly oversimplifies a complex problem.

Let's first take a look at blaming the foreclosure crisis on mortgage lenders.

It is indeed true that over the last several years, many people were able to buy houses that they could not have otherwise afforded without low introductory interest rates on adjustable rate mortgages (ARM's). It is also true that a relatively small number of mortgage lenders made it too easy to get these mortgages (lowered underwriting standards), and did not inform home buyers that their payments would dramatically increase to unaffordable levels in a year or less (deceptive lending practices). These mortgages are also referred to as "sub prime" loans, meaning that the interest rates and lending criteria were relaxed, and were outside of the conventional range. In these situations, the problem came when the payments increased while the homeowner's income remained the same or went down.

Many of these mortgages loans were then sold to investors. Some of the investors, both in the US and internationally, are now experiencing significant losses due to high default rates on these investments.

While sub prime lending certainly contributed to the national foreclosure crisis, it is not, by any means, the whole story.

In many parts of the country, housing prices had increased rapidly and dramatically. A strong national economy over the last decade was the most significant factor that supported this price growth. As with most things, this could not continue forever. In the Detroit area, the economy has struggled more than the national economy. Job losses and the shift toward lower paying jobs, along with movement of people to other parts of the country in search of employment, have both significantly reduced the demand for housing and increased the supply of homes for sale in our area. This economic condition, and not lenders, has been the primary cause of increased foreclosures in our area.

There are actually two pieces of good news in this situation: First, more flexibility in underwriting has actually been beneficial to many people, particularly people who have historically been shut out of the housing market, who are now successful home owners. Second, reduced prices have benefited a number of firs time home buyers in our community over the last two years.

In next week's installment I'll discuss the "market correction", and offer some viewpoints about what we may see in the future.