Thursday, April 5, 2007

Cheap credit goes the way of government programs

The intemperately strict regulation of Canada's financial and lending institutions may have the effect of making competition a bluff, but it may also spare this country the plague of subprime mortgage delinquencies that has begun to infect the U.S. real estate market — although in a state of absolute government monopoly on the money supply, as in both Canada and the U.S., genuine competition is practically reduced to the dubious and shady corners of lending to begin with, and all that Canada has done is swept out more of the corners as well. But Canadians should not take too much heart in their regulatory regimes. Subprime markets themselves may be a particular feature of the U.S. that is usually disparaged as "predatory" practices by lenders aimed at poor and uneducated borrowers but, as the Wall Street Journal shows, delinquency rates are rising in higher income markets as well. Subprime lending may increase risky borrowing by the poor or uneducated, but wealthier and more educated borrowers have not proven immune to the prospect of deferred debt, short documentation, and low equity-stake loans — conditions that have prevailed in Canada over the past several years as well. In fact, real estate speculation and price inflation have afflicted Canadian markets nearly as much as their American neighbours — subprime defaults are likely only the harbingers of broader defaults in credit markets that have operated with excessive risk tolerance and without effective reserve requirements.

Howard Husock in Cities on a Hill notes that collapses in the housing and real esate bubbles are "not just a problem for the bond markets and homeowners—they’re a special problem for cities."

The maps and tables of Where Subprime Delinquencies are Getting Worse show that subprime defaults are geographically concentrated and that much of that concentration occurs in cities. In Oakland, 12 percent of all subprimes are delinquent for 60 days or more; in Sacramento, 14 percent, Boston, 15 percent, Minneapolis 16.5 percent and Detroit, 24.6 percent. In New York City, more than 9,000 homeowners faced foreclosure in 2006, 50% more than in 2005, and the 2007 numbers are even worse so far.

Any delinquency reflects personal hardship, but such concentration can also mean neighborhood problems. If one’s neighbors are behind on mortgage payments, it’s not likely they will paint or do roof repairs either. Such are the ways neighborhoods—and tax bases—go downhill.

One might call this the “default and delinquency belt” phenomenon. I first saw it several years ago on the near-South Side of Chicago, where a community organizer (not Barack Obama) took me on a tour of the Back of the Yards neighborhood. He’d painstakingly assembled data on mortgage defaults—and could point out which houses on which blocks were in trouble. It wasn’t hard to tell. Some had been abandoned and taken over by drug gangs. Blue collar neighbors understood their life savings, tied up in their homes, to be at risk.

The questions arise, however, as to why such urban delinquency belts, as mapped by Journal, have come to be, and what, if anything can or should be done about them?
The inevitable political solution, as Husock points out, has already been suggested to compound the problem and bail out delinquent borrowers — this would penalize sound borrowing and lending practices, not to mention taxpayers, and merely propagate hazardous practices instead and postpone the crisis until it becomes an even greater one. Although it would be better to leave things alone, indentured homeowners are unfortunately too large a voting bloc for politicians to ignore. There are, of course, only two remedial solutions — cutting government spending and taxes, and disbanding the government's monopoly on currency manufacture and distribution — but these are too radical for politicians habituated to the idea that they solve problems by central command to even consider.

1 Comment:

Anonymous said...

Excellent post. Way to go.

One reason why the bubble is not as great in Canada may be that our ability to create money out of thin air is constrained due to foreigners' lack of willingness to support Canadian profligacy by propping up our dollar. Not only are Canadian business assets not particularly valuable (outside of a small number of lucrative oilfields), but our real estate (outside of Whistler) is not that attractive and our people are not very dynamic and entrepreneurial.