The American Mortgage System: Crisis and Reform

6. A Profile of the Mortgage Crisis in a Low- and Moderate-Income Community

C h a p t e r 6 A Profile of the Mortgage Crisis in a Low- and Moderate-Income Community Lynn Fisher, Lauren Lambie-Hanson, and Paul S. Willen It is an accepted fact in the current policy debate that the U.S. housing crisis has damaged communities. A search for newspaper articles with the words “foreclosure” and “community” coupled with such words as “ravaged,” “destroyed,” and “damaged” turns up thousands of entries. In this chapter, we attempt to measure the effects of the crisis in a systematic way. We focus on Chelsea, Massachusetts, a city adjacent to and just north of Boston. We chose Chelsea partly because we have an exceptionally good dataset but also because Chelsea was particularly hard hit in the housing crisis. As we will show, from the market’s peak in 2005 to 2009, house prices fell by almost half and lenders foreclosed on or agreed to “short sales” on almost 8 percent of the condominiums and one- to three-family properties in the city. Chelsea is typical of poorer communities in New England: 90 percent of its 34,356 residents live in census tracts identified by the Federal Financial Institutions Examination Council (FFIEC) as low- to moderate-income. Over 56 percent of its residents are Hispanic or Latino. As Calem, Gillen, and Wachter (2004) explain, communities such as Chelsea, with high concentrations of low-income and minority residents as well as borrowers with 138 Lynn Fisher, Lauren Lambie-Hanson, and Paul S. Willen limited credit records, such as immigrants, became magnets for high-cost lending in the recent housing boom. Chelsea’s land mass is small, about two square miles, making it one of the fifty most densely populated municipalities in the country. According to 2008 census data, there are 12,798 housing units in Chelsea . Its housing stock is old, almost two thirds (8,158 units) having been built before 1940. Only 4,609 of those units are occupied by their owners. Chelsea’s typical housing structure is the small multi-family building; more than half, or 6,579, of the units are in two- to four-unit buildings. What do we find in our study? There is good news and bad news to report. As was mentioned previously, the bad news surrounds house prices and foreclosures. According to our repeat-sales indices, by 2009, house prices had fallen by nearly 48 percent from their peak in 2005. These price estimates are not driven by foreclosures, as we exclude both foreclosure auctions and the sales of bank-owned properties from our sample. Excluding so-called short sales, in which a lender agrees to take less than the outstanding balance, reduces the city’s estimated price decline to about 40 percent from the 2005 peak. Such dramatic price falls, remarkably, are not unprecedented in Chelsea; in fact, through 2009, the descent in this current housing cycle has been significantly short of the drop that occurred during the last cycle: Between 1987 and 1993, Chelsea house prices fell by 57 percent. Collapsing house prices in the current cycle have led to an explosion in foreclosure activity. Between 1998 and 2005, annual foreclosure numbers in Chelsea were in the single digits every year, and two years—2003 and 2004—registered no foreclosures at all. In 2005, foreclosures started to rise, and in 2008, there were 125 foreclosures—more than five times more than the twenty-four total foreclosures that occurred in the 8-year period between 1998 and 2005. If we include short sales, the numbers are much higher. By our count, between 2006 and 2009, 357 homeowners left their homes through either a foreclosure or a short sale. According to the tax records, there are about 4,500 condominiums and one- to three-family properties in Chelsea, meaning that roughly 8 percent of the city’s homeowners have lost their homes since the mortgage crisis began.1 Maps of the city show that foreclosures were widespread, with at least one foreclosure on virtually every residential block in the city. Even for homeowners who are not directly affected by foreclosure, falling prices have a deleterious effect. Depending on which price index we use, A Profile of the Mortgage Crisis in a Low- and Moderate-Income Community 139 anyone who bought after 2000 owns a home today that is worth less than they paid. Taking inflation into account makes the situation even worse. Measured...