Using Community and Economic Development to Promote Growth
The recent financial crisis is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It was caused by the housing bubble that disguised risk and had other various enabling conditions that resulted from bank deregulation. From these circumstances, many cities like Detroit saw a sharp increase in foreclosures and abandoned housing which then resulted in a decrease in quality of life. There are numerous development strategies that cities can employ as they seek to recover from the impact of the collapse of the real estate market upon neighborhoods and local economies. This paper aims to explain the rise and collapse of the housing bubble and provide possible development strategies for cities to enact in order to recover.
The housing bubble and sub-prime mortgage crisis sent shock waves through the economy, particularly in metro areas like Detroit. Simply defined, a subprime mortgage is just a loan made to someone with a weak or troubled credit history. By 2005, the list of subprime-lending specialists had grown to 210 lenders, from 141 in 1996 yet their combined loan volume grew tenfold during the same period. The subprime crisis hit Detroit particularly hard as residents went from struggling to get loans from banks to having loan brokers, who required no licenses, knock on their doors offering subprime refinance deals – with interest rates that are higher than those on conventional loans. In fact, 70 percent of the loans made in the Detroit neighborhood carried a high interest rate. Furthermore, the bigger the loan, the more those loan brokers make in commission so they encourage consumers to take out larger loans than they can afford or they really need. Furthermore, once the broker made his money, he longer has interest in whether the loan works out. In 2005, borrowers who got high-rate mortgages to buy one- to four-family homes were loaned 2.1 times their reported annual income. Ultimately, there was an aggressive home-mortgage industry pushing to get people into homes they couldn’t afford at a time when home prices were very high.
Deregulation from the Great Depression specifically the repeal of the Glass-Steagall Act in 1999 and the deregulation and privatization of the mortgage market and its ties to broader global capital caused looser lending practices- which gave rise to the shadow banking system that allowed for consumers with weak or troubled credit history to take out mortgages. By 2006 eighty percent of lending was done by loosely or unregulated banks. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls as traditional banks. This system incentivized unusual behavior in which consumers got into home that were too larger for their income and couldn’t stay above water with the payments. These loose lending practices then led to...