EDITORIAL

Editorial: Detroit foreclosure crisis was a team effort

The Detroit News

Detroit has been ravaged by reckless and often unscrupulous mortgage lending. The resulting foreclosure crisis is a leading cause of the city's blight, and a major impediment to its comeback.

An investigative report by The Detroit News found that one-in-three homes have been foreclosed in the last decade. Half of the foreclosed homes are now blighted, at a cost to taxpayers of $500 million.

The practice of subprime lending, driven in part by federal policies and in part by the irresponsibility of lenders, had the greatest negative impact on the nicest neighborhoods in Detroit, contributing to the ongoing decline in middle class residents.

Nearly every major lender in the country is complicit, including Detroit's own Quicken Loans. Ironically, Quicken's owner, Dan Gilbert, is also a leading force in attacking Detroit's blight.

Gilbert. who blames high taxes not lending practices for Detroit's abandonment, is at least trying to remedy the damage with major investments in the city. Other lenders have taken their profits and ignored the damage they've left behind.

Those companies should feel an obligation to help clean-up the mess. The News' series found that many were exploitive in their practices, focused entirely on issuing loans and unconcerned with whether the borrowers could repay the debt. The News also found evidence of deceptive or misleading claims made to home buyers who lacked the knowledge to protect themselves.

Loans on homes that are still occupied and viable should be restructured so that the owners can afford the payments and stay in their homes. Given the market in Detroit and the glut of available homes, the mortgage holders will likely be better off as well, since a foreclosed home has such a high likelihood of ending up blighted and worthless.

The city has a role as well. Gilbert may be dismissing the culpability of lenders, but he has a point that high taxes contribute mightily to Detroit's foreclosure crisis. Many homeowners can not keep up with high interest mortgages and tax bills that are completely out of line with the true value of the home. Mayor Mike Duggan is working to bring assessments to market reality, but it is a slow process.

It's important to accelerate the process to allow more Detroiters to afford to stay put.

The federal government can't be let off the hook. Its policies helped fuel the surge in subprime lending that greatly contributed to the financial melt-down of 2008 and was the main driver of Detroit's housing collapse.

Subprime loans are offered at a higher rate to borrowers who are a poor credit risk. The loans often contain provisions that prevent refinancing when rates drop of the risk of the borrower lessens, and some have large balloon maturities that require a huge final payment. All those provisions make it more challenging for a struggling borrower to keep up.

Many banks and mortgage companies turned to subprime loans to comply with the federal Community Reinvestment Act, which incentivizes lending to low income borrowers. Those loans by their nature have a higher failure rate. In communities with a diverse housing market, the foreclosures can be absorbed.

That's been tougher in Detroit, where such a high percentage of the lending has been to riskier borrowers. The CRA should be revisited to assure it is not contributing to the devastation of the communities it was designed to assist.

Pulling out of this crisis will require banks, the city and the feds to recognize that the damage done to Detroit by their practices and policies will require extraordinary measures to undo.