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Monday, August 6, 2007

Foreclosure Crisis Will Get Worse Before It Gets Better

American Home Mortgage Investment Corp. has filed for bankruptcy protection, becoming the second-biggest residential lender in the U.S. to close down this year. New Century Financial Corp., which filed in April, was the biggest.

These companies got rich by assembling sub-prime home loans into packages that could become investments on Wall Street. The pressure to generate more such investments led to massive changes in lending practices, resulting in far too many loans (many with abusive credit terms) going out to people who couldn't really afford them. Now there are a record number of people losing their homes through foreclosure and a record number of houses standing vacant. Property values are down because of the vacancies, county revenues are down because of the reduction in property taxes and the expense of dealing with the vacant structures, the stock market is sagging because of the collapse of the lenders, and the house building industry is stalled because builders constructed too many houses to meet demand during the lending boom.

Amid all the chaos and gloom of the crisis, State Treasurer Rich Cordray (D-Grove City) and Cuyahoga County Treasurer Jim Rokakis (D-Cleveland) deserve a lot of credit for putting together a statewide task force to address the situation, and for advocating for changes like one reported in the Cleveland Plain Dealer last week. I'm not clear whether it was a piece of legislation or a rule change that accomplished this, but the State of Ohio authorized Cuyahoga County to take $3 million from a fund that it had been required to set aside for collections and instead use it to combat the foreclosure crisis. Half of the money will be devoted to emergency loans for struggling homeowners, the rest will go toward demolition of or repairs to empty houses. It will take a lot more than that to make a real dent in the crisis, but it's a positive development that should be roundly applauded.

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