Chances are you have received a few, if not many, calls from banks, mortage companies, brokers, butchers, bakers, candlestick makers... trying to get you to refinance your mortgage. Many included such enticing offers such as 'no money down', a outrageously low interest rate (make that introductory rate...), no closing costs, etc. Most of these fall into what has become known as 'sub-prime loans', or risky loans to people that either can't afford the loan, or those that would get swamped when the interest rates adjusted. While this may be described as just part of the global economic picture, it has an extremely laser-like effect on the local economy.

This story was taken from a September 2, 2007 article in the New York Times. It was written by Nelson D. Schwartz (click link above to see complete article). It highlights the ramifications of the longer-term, often not considered, circle-of-life in the local community. The mortgage is just the starting point of the circle. This article takes a look at the other points of the circle, as the homeowners adjust to the changes as they move along this circle.

Can the Mortgage Crisis Swallow a Town?

Charles and Tammi Eggleston, with their daughters, Shelby and Sydney, have been trying to sell their home in Maple Heights, Ohio, since May 2006. Nearby houses sit vacant.

Paying Attention To The Details

This story starts out where, perhaps, many of us are familiar... We agree to a mortgage that looks fantastic, at least the monthly rate. Unfortunately we don't pay too much attention to the interest rate, or other conditions associated with the loan. In this story, the homeowners recognize after the fact that they really did not pay much attention to the loan details.

“I do blame myself a little bit,” Mrs. Sweet acknowledges. “I feel dumb.” She explains that she was focused on the monthly payment when she borrowed from Countrywide, not the interest rate or taxes due. “Once we got the loan documents at the closing, I just came home and stuck them in a drawer.”

In most cases, this would not seem to be an issue. We assume that our jobs, which provide finances to pay the mortgage, will stay the same, and probably grow in wages, making it easier to make the payments over time.

Unfortunately, the assumptions made at the beginning of the loan process have not come to fruition for those that bought subprime mortgages. Either the rates have jumped considerably, or changes in the local taxes have changed the monthly payment, or perhaps, the job situation has taken a disasterous turn, and you can't make the monthly payments.

The typical external marker of this event occurring is the number of houses for sale in the neighborhood. Either the homeowners need to sell the house to get out of the mortgage, or the bank has taken ownership in foreclosure. With a glut of houses for sale, the asking price for your home becomes less with each passing day. It may get to the point where you can't make enough on the sale of the home to pay-off your mortgage. Or, you may get to the point where you have to decide what bills get paid, and which ones don't. In many cases, that includes utilities and local taxes.

Despite what the homeowners may believe, the local town or city can not function without the tax revenues. In Maple Heights, Mayor Michael Ciaravino was quoted as saying:

Mayor Ciaravino has already had to shut his town’s two swimming pools, cut the ranks of police officers and firefighters and eliminate services like free plowing for senior citizens with snow-covered driveways.

In fact, when the town made its annual assessment on homes for garbage collection last month, receipts came in 15 percent below projections, forcing a 50 percent rate increase.

“There is truly a cascading effect,” says Mr. Ciaravino, 43, who grew up in Maple Heights and was a local prosecutor before being elected mayor four years ago. Sitting in his 1950s-style wood-paneled office in City Hall, he says that “the folks living next to these empty homes get discouraged, and middle-class people are leaving.”

Next Page (2/2)