19 Nov Inner Cities are Not to Blame for Sub-Prime Mess
A recent editorial in a Connecticut newspaper blamed the sub-prime mess on the nation’s inner cities and their mayors who clamored for money to finance homes for low-income families. While it is true that lenders largely ignore the deteriorating inner cities, lending is always driven by profit, not social policies. If the two happen to mesh, then it is a happy coincidence. It’s all about profit. Foreclosure rates are up exponentially in Connecticut’s metropolitan areas to the tune of 450% to 500%. However, the looser lending standards were not driven by any political demands, but rather by profit. Borrowers were encouraged to buy homes they could not afford and sellers reaped the rewards of higher sales prices. Then homeowners were encouraged to borrow more money against their homes to finance a higher living standard. Local retailers reaped the rewards of higher sales of more profitable goods. This was as true in the suburbs as it was in the inner cities.The difference is that the incentive to save a home in the inner city is much less than a home near better schools and open space. There is a perception that those homes will be worth more then the current crisis ends. When a homeowner continually refinances their home, the brokers and the lenders make more money from the fees and costs of making a new loan. Following the credit cards’ lead, they don’t care if you ever pay the loan off; in fact, they hope you don’t.Don’t be surprised when the investors discover that there is substantial money to be made from buying inner city foreclosed homes and flipping them. One company in Connecticut already figured this out by financing the purchase of a foreclosed home, buying it back from the bank after a subsequent foreclosure and reselling it to yet another unsuspecting family and then repeating the process. The cycle can only be broken when we address the real problem of ignorance and poverty and make the cities attractive to others as a viable place to live and work.