Where housing bust hits hard

In many metro areas, far-flung suburbs and exurbs face sharp declines in home prices.

from the May 21, 2008 edition

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Another geographic story is unfolding along boundary lines based on income. Some of the neighborhoods most affected by foreclosures are poorer ones, where access to credit was scarce in the past.

"You're looking at three to four houses on a block going into foreclosure," says Michael van Zalingen of Neighborhood Housing Services, a nonprofit group in Chicago.

What prompted the influx of money before? It was a shift that happened far from the affected neighborhoods.

Bankers on Wall Street found growing global demand for investments built on the income stream from mortgages. The products were structured in such a way that, for a long time, the risk of borrower default seemed small.

The result: a big incentive for mortgage brokers to write more loans. And the biggest opportunity to do that, many found, was in places where lenders had traditionally been wary.

"ZIP Codes where the income growth was relatively negative were actually having much higher house price appreciation and much higher mortgage originations," says Amir Sufi, a finance expert at the University of Chicago's Graduate School of Business.

Very often, those ZIP Codes are ones with many low-income or minority residents, says Mr. Sufi, who recently published an analysis of the credit surge with university colleague Atif Mian.

The housing bust's uneven geographic distribution has important implications. It means that, even though an economic slowdown is under way nationally, some neighborhoods feel it more than others.

Several foreclosures on a block or cul-de-sac diminish the value of surrounding properties – a factor that can then contribute to still more loan defaults. Neighborhood quality goes down, and crime generally goes up.

As Washington considers policy responses, geography isn't the central issue. But it is a piece of the puzzle.

The main responses have a nationwide focus – such as how to encourage lenders to write down the balance on troubled loans. Geography may come into play in smaller but significant ways:

•Congress is considering channeling money to the local level, so that state or city governments can implement programs to buy foreclosed properties in some of the most distressed areas. The result might be fewer vacant homes and new affordable-housing units.

•Boston is one example of how some cities are moving on their own to buy and redevelop vacant homes. The move by Mayor Thomas Menino came after the Boston Herald featured a story about one foreclosure-blighted street.

•Communities with higher loan defaults may need more funding for community-based nonprofit groups – which can help borrowers and lenders find the best options. This issue is also on Congress's radar.

At the Home Ownership Resource Center in Fort Myers, Fla., director Eddie Felton says he'd like to hire more trained counselors as he tries to reach out to the city's many at-risk borrowers.

"We don't believe in two things here – foreclosure and bankruptcy," he says. "We feel that we can work it out."

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