Cities Destroyed (Again) For Cash: Forum on the U.S. Foreclosure Crisis

Abstract

In 2008, there will be at least 2.5 million new foreclosures in the United States. Record levels of mortgage delinquency, default, and foreclosure are causing widespread hardship in cities and suburbs across America, and causing repeated destabilization of global credit and investment markets. In this Forum, six housing specialists unravel the complex connections between urban geography, subprime lending, and foreclosure. Although a wide variety of view-points are represented, three common threads are evident. First, foreclosures are tightly linked to the lax underwriting standards and aggressive business practices of the subprime mortgage market. Second, the subprime-foreclosure linkage is a reflection of the steady deregulation of U.S. financial markets and the promotion of homeownership as the cornerstone of national housing policy. Third, deregulated mortgage market segmentation has created uneven new geographies of debt, risk, and default—superimposed atop existing landscapes of old-fashioned exclusionary discrimination. Low-income and racially marginalized neighborhoods, once redlined and excluded from mainstream credit markets, were at the center of the profitable wave of subprime abuse and equity extraction during the long housing boom, and are now at the center of the long, slowly unfolding catastrophe of the U.S. foreclosure crisis.

Full text

745
Urban Geography, 2008, 29, 8, pp. 745–784. DOI: 10.2747/0272-3638.29.8.745
Copyright © 2008 by Bellwether Publishing, Ltd. All rights reserved.
CITIES DESTROYED (AGAIN) FOR CASH:
FORUM ON THE U.S. FORECLOSURE CRISIS
Jeff Crump
Housing Studies Program
University of Minnesota
Kathe Newman
Bloustein School of Planning and Public Policy
Rutgers University
Eric S. Belsky
Joint Center for Housing Studies
Harvard University
Phil Ashton
College of Urban Planning & Public Affairs
University of Illinois–Chicago
David H. Kaplan
Department of Geography
Kent State University
Daniel J. Hammel
Department of Geography and Planning
University of Toledo
Elvin Wyly
Department of Geography
University of British Columbia
Vancouver, BC, Canada
Abstract: In 2008, there will be at least 2.5 million new foreclosures in the United States.
Record levels of mortgage delinquency, default, and foreclosure are causing widespread hard-
ship in cities and suburbs across America, and causing repeated destabilization of global credit
and investment markets. In this Forum, six housing specialists unravel the complex connections
between urban geography, subprime lending, and foreclosure. Although a wide variety of view-
points are represented, three common threads are evident. First, foreclosures are tightly linked to
the lax underwriting standards and aggressive business practices of the subprime mortgage mar-
ket. Second, the subprime-foreclosure linkage is a reflection of the steady deregulation of U.S.
financial markets and the promotion of homeownership as the cornerstone of national housing
policy. Third, deregulated mortgage market segmentation has created uneven new geographies
of debt, risk, and default—superimposed atop existing landscapes of old-fashioned exclusionary
discrimination. Low-income and racially marginalized neighborhoods, once redlined and
excluded from mainstream credit markets, were at the center of the profitable wave of subprime
abuse and equity extraction during the long housing boom, and are now at the center of the long,
slowly unfolding catastrophe of the U.S. foreclosure crisis. [Key words: foreclosure, subprime
lending, urban policy, housing.]

746 CRUMP ET AL.
INTRODUCTION (ELVIN WYLY
1
AND JEFF CRUMP)
“Many policy makers and bankers said this credit mess was contained. Boy,
were they wrong.”
—Vikas Bajaj (2008), in The New York Times
[T]he disaster … was not caused by ignorance or unsophistication. Instead, it was a
deliberate program of urban ruin for profit, under the cover of government housing law
and with an endless flow of federal money. The destruction of the cities can be understood
if put in old-fashioned cops-and-robbers terms—there were a bunch of bad guys who
stuck up the cities and rode away with the gold.
—Boyer (1973, p. 4)
From the moment it was first glimpsed by stock-market analysts in the unprecedented
profit warnings issued by the global banking giant HSBC in February 2007, the current
worldwide crisis associated with U.S. subprime mortgages has been a curious blend of
speed and scale. On the one hand, financial market information has spread rapidly around
the globe, as brokers and traders who had once made so much money in the rising market
for mortgage-backed securities tried to reposition themselves to make money short-selling
into a collapsing market. On the other hand, the pace of underlying, truly meaningful
information has slowed down dramatically, as financial institutions scramble to hide the
losses buried in their balance sheets, to renege on promises made to other institutions, and
to assign accounting values to assets whose meaning is defined by the long, slow, and
uncertain struggles of millions of cash-strapped borrowers trying to make each month’s
payment. Quicksilver billions on global stock markets slide back and forth as investors
react to the amortized capitalization of countless local experiences—homeowners facing
default on loans for houses with plummeting values, municipal officials dealing with a
flood of foreclosures, abandoned homes, and collapsing property tax rolls (e.g., Fig. 1),
and speculative suburban builders left with instant ghost-town subdivisions.
With the cascade of disclosures about the full scope and severity of fraudulent and
abusive practices used to make so many high-cost subprime loans during the boom, the
credit crisis spread to financial institutions and public budgets in France, Germany,
Norway, Australia, and elsewhere. Moreover, the crisis soon gave Chinese trade negotia-
tors an opportunity to lecture the U.S. Treasury Secretary on the dangers of unregulated
capital markets, amidst a round of talks punctuated by what the Minister of the People’s
Bank of China described as “something we have never experienced before”—an American
admission of “the inadequacy of regulations” on subprime mortgages and other complex
financial instruments (Weisman, 2008b, p. C4). A parade of institutions began writing off
mortgage-related assets—now $400 billion and counting—and desperately courting
1
Correspondence concerning this section should be addressed to Elvin Wyly, Department of Geography,
University of British Columbia, 1984 West Mall, Vancouver, BC V6T 1Z2, Canada; telephone: 778-899-7906;
fax: 604-822-6150; e-mail: ewyly@geog.ubc.ca

FORUM ON THE U.S. FORECLOSURE CRISIS 747
investors for fresh infusions of capital. Much of this new capital has come from sovereign
wealth funds—US$12.5 billion from Singapore and $7.5 billion from Abu Dhabi into
Citigroup, $6.6 billion from Kuwait into Merrill Lynch, $5.5 billion from China into
Morgan Stanley, and many other deals—driving a significant transnational nationaliza-
tion of parts of the U.S. banking sector.
And yet still the news got worse. By December 2007, the U.S. Federal Reserve Bank
(henceforth “the Fed”) began offering $20 billion in short-term loans to banks and depos-
itory institutions, accepting as collateral the mortgage-backed securities that had uncer-
tain value, few buyers, and thus no real market price; the Fed upped the ante to $60 billion
per month in January and to $100 billion in March, and then added another $100 billion
infusion through its ongoing open-market operations. On March 12, the Fed announced
another effort, a $200 billion offer of Treasury securities available to investment banks,
Fig. 1. At the end of the line: delinquency, default, foreclosure, abandonment, arson. Near North Minneapolis,
June 2008. Source: Photograph by Jeff Crump.

748 CRUMP ET AL.
which, like the depositories before them, were allowed to pledge dubious mortgage-
backed securities as collateral. The Dow Jones average dutifully jumped 3.6%. Yet within
days, the Fed had to shift from playing Wall Street’s pawn shop to its matchmaker, trying
to contain a classic bank run fueled by fear, panic, and gossip; Fed and Treasury officials
were patched in by conference call as bank executives “held the equivalent of a speed-
dating auction over the weekend” to find a suitor before the Asian markets opened on
Monday and reacted to the total collapse of an 85-year old Wall Street institution (Sorkin,
2008, p. A16). But this was Bear Stearns, the most cut-throat nonbank investment bank,
which had lost more than 80% of its available cash in a single day according to rumors
that soon became true.
The Sunday-night deal—a shotgun marriage of Bear Stearns to J.P. Morgan Chase for
a cut-rate share price—came with $30 billion of Federal Reserve backstop guarantees on
Bear’s questionable subprime assets, the first opening of the Fed’s discount window facil-
ities for nonbank institutions since the Great Depression, and a revision to the $200 bil-
lion program that made it a limitless, full-faith-and-credit commitment to the investment
houses. The gambit seemed to work, reassuring anxious investors once again. But if the
concerns of investors kept Fed and Treasury officials working late on weekend evenings,
progress was much slower for homeowners facing foreclosure: for months, the White
House, the House of Representatives, and the Senate slowly hashed out the terms of
legislation to provide limited help to (some) homeowners—within the constraints of the
economic-policy mantra that any public intervention in market adjustment would consti-
tute a “bailout” of “irresponsible” borrowers that will exacerbate moral hazards as well as
motivate future reckless behavior.
Bailouts and moral hazard, it turned out, were to be reserved for investors. By July, the
worsening housing-market indicators had infected even the safest prime-mortgage–
backed securities, rapidly eroding investor confidence in Fannie Mae and Freddie Mac,
the quasi-public private companies (known in regulatory parlance as “Government Spon-
sored Enterprises” [GSEs]) who together own or insure some $5 trillion in residential
mortgages. As investors became skeptical about the prospects for a small Monday-
morning debt offering, both Fannie and Freddie lost half their stock value on Friday, July
11, prompting another long weekend of negotiations and late-night policy formulation
among top officials at the Fed and Treasury. The rescue package, announced on Sunday
before Asian markets opened, gave the GSEs full access to the Fed’s discount window,
and came with twin proposals asking Congress to (1) give the Treasury authority to inject
hundreds of billions of dollars directly into the GSEs through investments and loans, and
(2) raise the national debt limit. Treasury Secretary Paulson told skeptical legislators that
the most important part of the plan was its unlimited expenditure authority, which would
reassure investors and thus obviate the need for expenditures:
If you’ve got a squirt gun in your pocket you may have to take it out.... If you’ve
got a bazooka, and people know you have it, then you may not have to take it out.
By making it unspecified, it will greatly expand the likelihood it will not have to be
used. (Labaton and Herszenhorn, 2008, p. A1)
Thus, literally overnight, one of Washington’s central housing-policy axioms had been
reversed. For a generation, investors assumed that Fannie and Freddie had an implicit,

FORUM ON THE U.S. FORECLOSURE CRISIS 749
“too big to fail” guarantee from the government. This implicit backing allowed the com-
panies to raise debt at a significant discount from innumerable individual and institutional
investors around the world. For a generation, top officials in Washington repeatedly
denied that there was any kind of guarantee: investors would win or lose based on the
wisdom of the risks they accepted, according to free-market fundamentals. But faced with
a collapse in confidence that threatened to undermine the value of GSE securities held by
thousands of banks, pension funds, and public investment funds throughout the entire
global financial system, Washington offered a new message to investors around the
world—not only is there a guarantee, it is stronger than you ever imagined. Trust us.
Please. President Bush urged Americans to “take a deep breath,” because the nation’s
financial system “is basically sound” (Weisman, 2008a).
This was a crisis foretold. Quite a few years ago, analysts, activists, and attorneys
began to see and respond to a pronounced shift in the contours of credit in American
cities: alongside an older regime of exclusionary redlining that had barred racially mar-
ginalized people and places from access to credit, there was a new wave of stratified,
unequal greenlining that made credit widely available—but on vastly different terms,
with wildly divergent risks for individual borrowers (e.g., Squires, 1992b, 2003; Engel
and McCoy, 2002; Immergluck, 2004). It became clear that the distorted incentives for
fraud and abuse that had undermined the mortgage insurance programs of the Federal
Housing Administration (FHA) in the late 1960s and early 1970s were being privatized
and securitized into the broad, unregulated territory of collateralized debt obligations,
hedge funds, and credit default swaps (compare Boyer, 1973, and Wachter, 1980, with
Engel and McCoy, 2002). The bad guys who stuck up the cities were not using federal
mortgage insurance to “FHA” entire neighborhoods with vacant foreclosed homes like
they did a generation ago; this time, they used what seemed like an endless flow of money
from Wall Street investment banks, who liked the risk-adjusted yields of financial instru-
ments that just happened to be backed by high-cost, abusive, and often fraudulent trans-
actions designed to trap homeowners and homebuyers into usurious obligations. So long
as the national housing boom kept home prices rising, quick-flip refinancing and eventual
distress default sales helped lenders and brokers escape the costs of even the most abusive
predatory loans, so that everyone from brokers to lenders to investment banks to MBS
investors kept making money from the increasingly risky instruments—low-doc, no-doc,
interest-only, option-ARM, hybrid ARM (quickly dubbed HARM), 2/28 and 3/27 “teaser”
rates, and so on—held up as models of financial innovation.
Analysts documented these processes, and their links with transnational investment
circuits, with an impressive, interdisciplinary literature at the crossroads of legal scholar-
ship, housing studies, and the social sciences. Most studies centered on an analysis of a
particular new process by which old-fashioned discriminatory exclusion was being inter-
woven with new innovations of predatory subprime inclusion, and concluded by analyz-
ing the catastrophic implications for individuals, institutions, neighborhoods, and cities.
Yet so long as low-income and racially marginalized individuals and communities bore
the main brunt of the abuse, even the highest-quality studies of the most egregious prac-
tices could be ignored or dismissed as the exceptional problems of basket-case cities, the
result of a few bad-apple lenders, or the result of selective, anecdotal evidence that did not
properly represent the entire market. Millions were victimized by the subprime boom
long before the costs of the crisis eventually reached Wall Street, worldwide press coverage

750 CRUMP ET AL.
put subprime into prime-time, and the American Dialect Society voted “Subprime” the
2007 Word of the Year (American Dialect Society, 2008).
Many analysts issued prescient, critical warnings of the dangers of the subprime
boom, and offered a wide range of recommendations for regulatory reform, legislative
changes, public-interest litigation, community organizing, and strategic, targeted
research. Among those who have led these efforts in recent years are Kathe Newman,
Eric Belsky, Phil Ashton, David Kaplan, Jeff Crump, and Daniel Hammel. Boy, were they
right.
THE PERFECT STORM: CONTEXTUALIZING
THE FORECLOSURE CRISIS (KATHE NEWMAN
2
)
In the summer of 2007, rating agencies issued downgrades and warnings for billions
of dollars of mortgage-backed securities because of rising foreclosures. Moody’s down-
graded $5 billion worth of subprime securities in July on one day alone (Fender and
Hordahl, 2007). In the wake of the foreclosure crisis that has brought down lenders, a
financial investment bank, borrowers, and at least one small town in Norway, there are
many efforts to untangle the confluence of factors that produced the crisis. Accounts vary
but generally include some combination of an increase in subprime originations, bor-
rower and lender exuberance, poor underwriting, securitization, aggressive marketing,
unscrupulous mortgage brokers, fraud, naïve borrowers, a declining housing market,
tightened credit, servicer accounting errors, and a lack of regulation (Cagan, 2006; Gerardi
et al., 2008; Morgenson, 2008). These are all elements of a perfect storm, but they fall
short of illuminating the broader context in which these things were possible. Financial-
ization, which Krippner (2005, p. 174) defines as “a pattern of accumulation in which
profits accrue primarily through financial channels rather than through trade and com-
modity production,” set the stage for the foreclosure crisis (Krippner, 2005; Epstein,
2005). Financialization has meant a fundamental restructuring of the economy with the
state and market producing new institutional arrangements and rules to facilitate capital
accumulation (French and Leyshon, 2004; Wyly, Atia, and Hammel, 2004; Wyly,
Hammel, and Atia, 2004; Epstein, 2005; Fox Gotham, 2006; Wyly et al., 2006; Newman,
2008b, 2008c). Whereas the nation-state has played a pivotal role in expanding the new
economy, it has done little to ensure that it is regulated.
Financialization
There are many aspects to financialization (Krippner, 2005). Here I explore it through
the lens of housing finance, which has played a prominent role in economic restructuring.
In the 1970s and 1980s, the state created the framework for financialization by chang-
ing rules and creating markets to facilitate the growth of the financial services industry
(Epstein, 2005). At the time, the state was viewed as “neoliberal,” as withdrawing itself
2
Correspondence concerning this section should be addressed to Kathe Newman, Edward J. Bloustein School
of Planning and Public Policy, Rutgers University, 33 Livingston Avenue, New Brunswick, New Jersey 08901;
telephone: 732-932-3822, ext. 556; fax: 732-932-2253; e-mail: knewman@rci.rutgers.edu

FORUM ON THE U.S. FORECLOSURE CRISIS 751
to allow markets to work more efficiently. Looking back nearly 40 years later, the state is
still viewed as “neoliberal” but the definition has changed as the role of the state is seen
more clearly. Instead of removing itself to allow markets to function more efficiently, the
state has engaged with markets to enhance opportunities for growth (Peck and Tickell,
2002). In short, it was an integral partner in facilitating the growth of the postindustrial
economy and financialization in particular. In the United States, the activist state is visible
in its efforts to create the secondary mortgage market and in a suite of federal legislation
that removed barriers to financial institution expansion and ensured liquidity. Collec-
tively, the 1980 Depository Institutions Deregulation and Monetary Control Act, the 1982
Alternative Mortgage Transaction Parity Act, the 1984 Secondary Mortgage Market
Enhancement Act, the 1989 Financial Institutions Reform, Recovery, and Enforcement
Act, and the Tax Reform Act of 1986 transformed the context for mortgage lending and
real estate investment by facilitating the expansion of the secondary mortgage market,
securitization, and the use of flexible multiclass securities and derivatives. It preempted
state rules on securities and interest rates, changed tax law, and permitted new mortgage
products (Mansfield, 2000; Neighborhood Housing Services of Chicago, 2004; Apgar
and Herbert, 2006; Chomsisengphet and Pennington-Cross, 2006; Fox Gotham, 2006;
Howell, 2006; Apgar et al., 2007; McCoy and Renuart, 2008).
Securitization
Securitization—the process of pooling loans and selling securities in the secondary
mortgage market—changed the calculus for mortgage lending. Securitization provided
liquidity, a necessary ingredient to growth, and legal protections, which distanced the
originator and protected the investor. Securitization enabled nondepository institutions to
originate loans and facilitated the growth of the nonbank lending industry and mortgage
brokers but provided minimal oversight (Follain and Zorn, 1990). Securitization enables
security issuers to more finely assess risk by dividing the assets of loan pools to meet the
needs of risk-averse pension funds and high-risk investors alike. In the past few years,
securitization has evolved into a complex affair with securities and derivatives, made
possible in part by elaborate layers of credit enhancement. Although many have blamed
borrowers or lenders for the foreclosure crisis, some have blamed securitization and the
demand from investors. But we might consider that the finance industry itself played a
prominent role in generating demand for these products. Enhanced liquidity, automated
underwriting, and risk assessment and credit enhancement fueled loan origination volume
but also fueled the growth of the financial industry. Each securitized pool of loans pro-
vides narrowly defined jobs including securities issuer, trustee, loan servicer, master loan
servicer, debt swap provider, securities administrator, custodian, interest-rate swap coun-
terparty, and credit issuer, among others, providing highly specialized jobs for a wide
range of financial firms. The rating agency plays a crucial function since ratings greatly
influence the value of the security. Without a triple-A rating, the securities will not be
accessible to many institutional investors or to that small town in Norway. The rating
agencies receive much of their income from those seeking ratings and suggests
one of many conflicts of interest woven into the securitization process (Ashcraft and
Schuermann, 2008).

752 CRUMP ET AL.
In the early 2000s, low interest rates produced a high loan origination volume. As
interest rates climbed, the industry aggressively created new mortgage products to tap
new markets such as borrowers with less than prime credit, investors, borrowers seeking
second homes, those who saw refinancing as a way to access much needed cash, and
those priced out of low- and even higher-income housing markets. Complemented by a
political culture and policy regime that greatly favored homeownership over renting and
a cadre of homeowners who had built equity through homeownership, many borrowers
took the plunge. Subprime lending figured prominently as it has captured massive market
share in this decade.
Subprime Lending
Most observers cite the rapid expansion of subprime lending as the primary reason for
the foreclosure crisis (Edmiston and Zalneraitis, 2007; Gerardi et al., 2008; McCoy and
Renuart, 2008). Subprime loans have higher fees and interest rates to account for the
additional risk of lending to borrowers with less than perfect credit and are expected to
go into foreclosure at higher rates than prime loans. Securitization, complemented by
technological changes, primarily automated underwriting software, allowed subprime
lenders to dramatically increase loan originations while decreasing staff (Browning,
2007; Ashcraft and Schuermann, 2008). Simultaneously, subprime lenders expanded
their mortgage product, offering to include more ARMs and “exotic” interest-only loans
(borrowers pay interest or a percentage of the interest for a set period of time such as 5 or
10 years) and payment option loans (borrowers can choose their monthly payment),
which previously were only available in select markets. Ashcraft and Schuermann (2008,
p. 17) describe ARMs and exotic loans in a pool of loans originated by New Century as
“rather complex financial instruments with payout features often found in interest rate
derivatives.” They add that borrowers, who are ill-equipped to do so, take most of the
interest-rate risk in this type of lending. Naïve or ambitious/hopeful borrowers, declining
house values, and interest-rate resets have been blamed for subprime foreclosures, but
this overlooks loan structure, aggressive marketing, complex lending processes, informa-
tional asymmetries, fraud, poor underwriting, and high combined loan-to-value ratios
(Baker, 2007; Fellowes and Mabanta, 2007; Ashcraft and Schuermann, 2008; McCoy and
Renuart, 2008; State Foreclosure Prevention Working Group, 2008; TRF, 2005). For
example, adjustable subprime loans have been cited as a primary reason for foreclosure
because borrowers qualified for the loan based on the initial payment rather than the pay-
ment after the interest-rate reset. These resets are certainly a concern, but to date many
subprime loans have entered the foreclosure process prior to the loan reset date, suggest-
ing that foreclosures thus far have not primarily been due to rate resets (State Foreclosure
Prevention Working Group, 2008). Since many of the loans originated in recent years
have entered foreclosure so swiftly, sometimes before borrowers have even made a single
payment, some have called underwriting standards into question. Securitization includes
many points at which there should be checks on the underwriting of individual loans
as well as the securities. Ashcraft and Schuermann (2008) argue that “informational
frictions” limit the effectiveness of these checks because each actor in the securitization
process from issuer to asset manager to rating agency has a limitation that keeps her/him
from aggressively checking the quality of the underlying loans. During a period of

FORUM ON THE U.S. FORECLOSURE CRISIS 753
enhanced optimism and capital accumulation marked by the phrase “everything works in
an up-market,” apparently few were interested in assessing the underlying assets of these
deals, with devastating consequences.
The State
Whereas the state featured prominently in the financialization of the economy through
legislative and regulatory changes, the state did little to regulate this crucial component
of the new economy. Regulation was left to a highly fragmented system that was ill-
equipped to assess the implications of the rapidly changing mortgage finance sector
(Immergluck, 2004; Apgar et al., 2007). McCoy and Renuart (2008) argue that the lack of
regulation was responsible for the subprime crisis. They cite federal preemption of state
interest-rate caps and legislative authority for lenders to make riskier loan products with
adjustable interest rates, balloons, and negative amortization, which made subprime lend-
ing possible (Mansfield, 2000). Many state governments sought to eliminate what they
saw as increasingly risky lending behavior with antipredatory–lending legislation, but the
Federal Office of Thrift Supervision and the Office of the Comptroller of the Currency
preempted state regulations for many financial institutions (McCoy and Renuart, 2008).
The effect was to create two different regulatory structures. Apgar et al. (2007) call this
“channel specialization” where prime credit flows through one set of regulatory struc-
tures, while subprime credit flows through a different set of less well regulated structures.
The racial implications are critical as “44.2 percent of all Blacks (vs. 30.1% of Whites)
obtain a loan from less heavily regulated independent mortgage companies” (Apgar et al.,
2007, p. iv).
Conclusion
This perfect storm could be seen as the confluence of subprime loan originations,
fraud, inexperienced borrowers, and exuberant lending institutions. But looking beyond
these factors to the economic and political context that made them possible suggests a
different way of interpreting the problem. The state facilitated the expansion of the new
economy and financialization plays a prominent role. Even though this growth has bene-
fitted many, it has also left devastation in its wake, and the people and communities
facing the hardest challenges are also those least equipped to address them. Subprime
borrowers, urban communities, inner-ring suburbs, and even states are in no position to
assist borrowers, navigate the intricacies of securitization to help borrowers negotiate
loan workouts, challenge foreclosure, or purchase houses in foreclosure or once foreclo-
sure is complete. As tax revenues decline, students shift schools and districts, displaced
borrowers and renters share housing with friends and families or use the few emergency
services available, localities struggle to understand the problem and intervene (Newman,
2008a). But this should not be a local problem and a local response is not sufficient to
mediate it. The subprime crisis was not caused by naïve borrowers. It was produced as a
byproduct of the fundamental transformation of the economy. Local governments and
nonprofit organizations are devoting scarce resources to address the crisis. The federal
government has ensured that major financial institutions are stable, but that alone is not a
sufficient federal response. Again, to cite Krippner (2005, p. 198), “The result of shifting

754 CRUMP ET AL.
our ‘lens’ in this way is that financialization—rather than the rise of the service economy
or postindustrialism—emerges as the most important ‘fact’ about the economy.” The state
has played a critical role in expanding the economy and it is up to the national state to
craft a response.
THE CAUSES AND CONSEQUENCES OF THE
SUBPRIME MORTGAGE MELTDOWN (ERIC S. BELSKY
3
)
With remarkable speed, the subprime mortgage market collapsed in the second half of
2007. Few predicted that the loans originated in 2004–2007 would turn in a performance
far worse than public ratings agencies had anticipated. Even fewer expected that prob-
lems emanating in mortgage markets would threaten to shutter commercial banks, invest-
ment banks, and entire segments of credit markets. Yet this is precisely what happened.
Now that the system has unraveled, it is time to take stock of what went so badly wrong,
how it will affect communities, and what challenges policymakers face in trying to pick
up the pieces.
The Roots of the Crisis
In the coming years, there will doubtless be volumes written about what precipitated
the subprime mortgage market collapse. At the risk of oversimplification, the precondi-
tions of the crisis likely stem from the remarkable glut of global capital that accumulated
during the 1990s. Interest rates in the United States were driven to very low levels by a
run-up of domestic wealth and massive inflows of foreign investment from several major
nations climbing the steep part of the economic growth curve toward fuller industrializa-
tion (Adrian and Shin, 2008). The Federal Reserve aided and abetted the drop in interest
rates, easing monetary policy in 2001 and holding the federal funds rate at a mere 1% by
2003.
Unusually low interest rates enabled U.S. homebuyers to chase home prices higher
around 2002 and 2003, at a time when housing markets were historically tight in their
months’ supply of new homes for sale. This led to record rates of house-price apprecia-
tion between 2002 and 2005. At the same time, investors in search of returns beyond what
they could get from stocks and bonds developed a larger appetite for riskier instruments.
But even the yields on these riskier instruments were below their hurdle rates of return.
To boost returns on their equity, many investors resorted to borrowing short-term money
to buy mortgage-based securities. These factors combined to create overheated housing
markets and overleveraged investments.
In the midst of these conditions, credit providers and investors in mortgage-backed
securities had to decide how much risk they were willing to assume. As it turns out, they
were only too willing to put the considerable capital they had on their balance sheets—or
could get access to by selling loans in the secondary market—to use. Lulled by what
3
Correspondence concerning this section should be addressed to Eric Belsky, Joint Center for Housing Studies,
John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge,
Massachusetts 02138; telephone: 617-496-4991; fax: 617-496-9957; e-mail: eric_belsky@harvard.edu

FORUM ON THE U.S. FORECLOSURE CRISIS 755
appeared to be powerful predictive risk pricing tools used by ratings agencies, remote
investors gobbled up mortgage-backed securities. Eager to meet the strong investor
demand for these securities, lenders started to relax underwriting standards in ways that
had never been seen before. This created whole new groups of homebuyers who had
previously been denied access to credit, including subprime borrowers, self-employed
borrowers with uncertain and irregular incomes, and investor/speculators looking to
borrow with very little money down. Risk was layered on top of risk in the middle of a
booming housing market with unprecedented house-price appreciation in many (but by
no means all) areas.
In hindsight, it seems improbable that the risks of these new mortgage products could
reliably be assessed and priced. After all, there was no historical precedent to see how
these loans would perform in a down market. In 2006, when the Center for Responsible
Lending (Schloemer et al., 2006) released predictions of how ugly things could get
nationally—drawn from inferences based on the loan performance in states like Ohio that
were under far greater economic stress than the rest of the nation—they were roundly
criticized by many as alarmist. Now, however, it looks as though their estimates were
conservative.
When the housing market finally crested under the weight of rising interest rates and
affordability concerns, prices stagnated and eventually declined. As prices fell, home-
owners with unmanageable mortgages lost the capacity to get out of trouble by refinanc-
ing or selling their homes to fully repay their mortgages. Loan performance eroded
swiftly, especially on subprime adjustable-rate mortgages that had been originated at
deep initial discounts with minimal or no documentation of income and assets.
The reckless lending practices of the preceding three years that had helped the market
to overheat were now contributing to its crash. As the housing market tumbled, other ills
that had been lurking in the Pandora’s Box of lax lending practices were unleashed. To
begin with, the dependence of mortgage companies on short-term debt to buy and sell
loans collided with their own lax lending practices. When an unprecedented share of
loans defaulted within just a few months of issue, mortgage companies had to buy back
these failing loans. But with little net worth of their own and with banks unwilling to
rollover their debt, many of these mortgage companies could not raise enough money to
buy back the failed mortgage loans. Several went bankrupt.
Meanwhile, many investors borrowed short-term money to buy long-term mortgage
securities. When these investors were suddenly unable to sell the securities at anywhere
near par value, their lenders would not renew their loans, causing several investment
funds to fail. In addition, it was unclear how much exposure financial institutions had to
subprime mortgages because mortgage cash flows had been sliced and diced so many
different ways and because there was so little detailed public reporting by individual insti-
tutions on their mortgage-backed security holdings. Thus, even some of the biggest
institutions could not raise short-term funds. Eventually, Bear Stearns faced a liquidity
crisis and was rescued from collapse by a Federal Reserve–engineered bank buyout.
Around the same time, large banks with hefty exposure to subprime mortgages had to
take huge write-offs when they marked their mortgage portfolios to market values. As a
result, major bank after major bank turned to foreign sovereign funds and other overseas
investors for equity infusions. With banks and investors hoarding cash, corporate and
mortgage debt was harder to obtain and spreads to risk-free Treasuries ballooned.

756 CRUMP ET AL.
Spatial and Individual Consequences
Lending without the safety nets of prudent underwriting and the ability to accurately
price risk—especially when done at the top of a market fueled in large measure by these
practices in the first place—is a truly risky business. The consequences were swift and
devastating. According to the Mortgage Bankers Association, fully 3.6% of all loans
were seriously delinquent (more than 90 days) or in foreclosure in the fourth quarter of
2007, and 0.9% were entering foreclosure. Two years earlier, the comparable figures were
2.1% and 0.4%. The only published estimate of the share of loans in foreclosure emanat-
ing from loans to housing investors (made by the Mortgage Bankers Association for the
third quarter of 2007) placed the figure at 1 in 5. The rest were a mix of homeowners in
economic trouble and homebuyers who ventured into expensive markets with risky prod-
ucts at the wrong time.
These consequences had very clear spatial dimensions. It is now well known that sub-
prime lending shares of all loans are sharply higher in low-income and minority areas,
with the highest concentration in places that stand at the intersection of the two. The high-
cost loan origination share in 2006, as reported by the Home Mortgage Disclosure Act
(not a perfect but a reasonable proxy for the amorphously defined subprime market),
ranged from a low of 15% to a high of 45%. Not surprisingly, default rates are also
sharply higher in minority low-income communities. But defaults are up nationwide, and
some middle-class and White neighborhoods in the suburbs of metropolitan areas previ-
ously barely touched by mortgage woes were feeling the pinch by 2008. The worst perfor-
mance was turned in by loans in the economically distressed Midwest, followed closely
by areas with high investor loan shares and now fast-deflating prices like California,
Arizona, Nevada, and Florida.
People losing their homes face uncertain prospects. Now that lenders have tightened
their underwriting standards, failed homeowners cannot get loans and may even have a
hard time finding rentals because of their now ruined credit scores. Even homeowners
who have been making their payments are feeling the effects, as fire sales of foreclosed
properties in their neighborhoods reduce the value of their homes. Some neighborhoods
face a glut of vacant foreclosed properties that place these communities at risk of a pro-
longed price decline. These include older low-income and minority communities where
subprime loans were concentrated, as well as some new subdivisions where speculators
tried to take advantage of the long lag times between putting down a deposit and actually
having to take delivery. And in a real sense, everyone is paying in the form of less access
to credit and an economy near or in recession.
What Next?
Many are now asking how the mortgage finance system, broader credit markets, and
capital markets could have run amok in this way (Gramlich, 2007; Baily et al., 2008).
After all, the federal government has long demonstrated a compelling interest in prevent-
ing systemic risk from overwhelming the financial system. Deposit insurance and heavy
regulation of deposit-taking institutions have been hallmarks of the system since the
Great Depression. But over time, funding of mortgages shifted increasingly to institu-
tional investors, such as pension funds and life insurance companies, as well as privately

FORUM ON THE U.S. FORECLOSURE CRISIS 757
held investment funds (hedge funds), that are less closely regulated. In fact, regulation is
less stringent in the entire asset-backed securities market, from the brokers and state-
chartered mortgage companies that originate most of these loans to the larger companies
that pool them to the investment banks that engineer securities and trade them to the
rating agencies that rate them. On top of this, federal regulation and Supreme Court deci-
sions have created a system in which lenders have far freer reign in the interest rates they
can charge and the mortgage products they can offer than if state laws had not been
preempted by federal law in the 1980s (McCoy and Renuart, 2008).
There is no lack of recrimination these days. Regulators and lawmakers have been
faulted, and legitimate questions have been raised about how stronger regulations might
have prevented or at least blunted the crisis. Mortgage investors have been faulted for
relying too heavily on ratings by private agencies and for leveraging their investments to
try to boost returns. The financial intermediaries standing between the investor and the
borrower have been faulted for paying too little attention to the risk that the other finan-
cial intermediaries they relied on might act in ways contrary to their interests. This
includes insufficient audits and checks on the behavior, conduct, and performance of
brokers, insufficient verification of underwriting standards and information, and undue
reliance on credit ratings. Homebuyers have been faulted for paying too little attention to
understanding the risks associated with their mortgages and taking too many chances.
The more important question is: What next? None of the possible remedies is without
its own set of concerns and potential for unintended consequences. Not surprisingly, the
least disagreement surrounds calls for greater financial literacy (Lusardi, 2008). This is
like apple-pie and motherhood, though it begs the question of how much it would cost,
who would set and enforce standards, and who would pay. It also does not address the
question of whether financial literacy is likely to succeed in the face of known decision-
making biases, and the complexity and uncertainties of making tenure and mortgage
choices that are future-regarding (Laibson and Zeckhauser, 1998; Glaeser, 2004; Essene
and Apgar, 2007; Belsky and Essene, 2008).
Strengthened consumer disclosures—aimed at the same notion of inoculating consum-
ers by arming them with information—are arguably the second least controversial
measure under consideration (McCoy, 2007). But even here, many are doubtful that
consumers with better information will make better choices. Furthermore, which new
disclosure rules ought to be imposed is hotly contested and many are seen as adding cost
without clarity (Durkin and Elliehausen, 2008).
From there, the intended fixes get more controversial. Some call for imposing assignee
liability on holders in due course (investors and others who touch loans after they have
been originated), under the premise that, if they are liable for the misdeeds of actors
farther down the supply chain (who do not have deep pockets), it will motivate the larger
fish to better police the system (Engel and McCoy, 2002). This has the appeal of leaving
it up to the market on how to better police itself, although many believe it would add
greatly to the cost and restrict the availability of credit. The same complaints are leveled
against solutions that call for prohibitions on certain practices, rates, and fees. Solutions
that involve establishing a vague suitability standard for lending are viewed as having the
advantage of allowing more flexibility, but feared because of the possibility that additional
litigation will add to credit costs as consumers challenge how individual lenders choose
to meet the standards. Other remedies under consideration include national licensing

758 CRUMP ET AL.
standards for brokers, changes in the federal regulatory structure so that there are fewer
and more powerful regulators, and expansion of the reach of federal regulators (Belsky
and Essene, 2008; U.S. Department of the Treasury, 2008). Additional bold steps that have
been proposed include using default rules to steer borrowers to better products and de-bias
consumers (Jolls and Sunstein, 2005; Barr et al., 2008), and creating a Financial Product
Safety Commission modeled along the lines of the Consumer Product Safety Commission
(Warren, 2007).
Then there is the question of what to do with the mess already at hand. Despite the
enormous weight that foreclosures are placing on certain communities and the economy
as a whole, many feel that bailing out borrowers and/or lenders is unfair and would be a
mistake. It would, they say, let irresponsible borrowers and lenders off the hook in whole
or in part, adding to the moral hazard that they would be even more reckless in the future.
There are no easy answers. In the end, what is done or not will be decided by the
political process. There are many points of view and interests at stake. What is certain is
that the ability of homeownership to deliver on its asset-building potential has been
shaken to the core. Although this time price declines and defaults may be the worst in
more than a generation, it is certainly not the first time these events have occurred. As
recently as the late 1980s and early 1990s, homeowners in many areas defaulted or lost
money when they sold their homes (Belsky and Duda, 2002). Though the rate of homes
entering foreclosure had never before topped 1% per annum since record-keeping began
in the late 1970s, defaults over the years have left millions of homeowners with a bitter
taste in their mouths.
Memories are short, however, and far more households have benefitted from home-
ownership than not. Still, one hopes that renting will now be taken more seriously as an
option and that the knee-jerk assumption that homeownership is best for everyone at all
times and at all costs will be questioned. The MacArthur Foundation, among others, has
committed significant resources to underscore the importance of low-cost rental housing
and to preserve the dwindling supply of affordable rentals. Let us hope the federal gov-
ernment takes notice and follows suit.
SUBPRIME LENDING, WEAK-MARKET NEIGHBORHOODS,
AND THE MULTIPLE DIMENSIONS OF THE MORTGAGE CRISIS
(PHILIP ASHTON
4
)
As the mortgage market crisis has unfolded since early 2007, a critical focus of public
discussion and policy formulation has been the sources and broader implications of the
growing wave of mortgage defaults and foreclosures. Upon closer examination, it is more
appropriate to speak of multiple mortgage crises than of a singular crisis, with this multi-
plicity having at least two sources.
4
Correspondence concerning this section should be addressed to Philip Ashton, Department of Urban Planning
and Policy, College of Urban Planning and Public Affairs, University of Illinois–Chicago, 412 S. Peoria, 231
CUPPA Hall (MC 348), Chicago, Illinois 60607; telephone: 312-413-7599; fax: 312-413-2314; e-mail:
pashton@uic.edu

FORUM ON THE U.S. FORECLOSURE CRISIS 759
First, the evolution of the subprime mortgage market since the late 1990s has involved
the development of a new market structure capable of exposing a much wider and
diverse set of borrowers to the downside risks of overspeculation. Whereas subprime
lending—auto or home loans to borrowers with poor credit histories or other blemishes
that impaired their access to mainstream credit—has been a feature of the U.S. financial
system for several decades, its scale has always been relatively small. As subprime mort-
gage lending expanded rapidly during the early 1990s, it brought with it higher rates of
default and foreclosures. This was not seen as a crisis but characteristic of the higher
likelihood of defaults inuring borrowers with poor credit histories (Avery et al., 1996).
Indeed, higher interest rates and fees charged to borrowers as a risk premium were key
to drawing in investment capital at a significant scale to expand the market after 1994
(Ashton, 2008b).
The expansion of the subprime market has seen these problems widen. A first sub-
prime mortgage crisis unfolded in 1997–1998 as defaults, delinquencies, and prepay-
ments were higher than expected (Temkin et al., 2002). Here again, the scope of the
subprime market was limited enough that these problems did not represent a true crisis
either for public policy or for the broader mortgage market. Rather, losses and bankrupt-
cies presented arbitrage opportunities for larger companies to buy out smaller regional
lenders and finance companies that had formed the basis for the market’s expansion
through the 1990s (Temkin et al., 2002). After 1998, a new market structure for subprime
lending emerged, marked by significant consolidation of the sector into some of the larg-
est bank holding companies in the country, along with the centralization of financing
through major Wall Street investment banks (Ashton, 2008b). In a market environment
where low yields elsewhere in the financial system made the returns to subprime lending
very attractive, this new market structure attracted investors and pumped liquidity into
the mortgage market at an unprecedented rate, causing the overall position of the mort-
gage market to jump from 46.22% of GDP in 1998 to 69.35% by 2005—a 50% increase
in seven years (Angell and Rowley, 2006).
As the expansion of the market proceeded after 2001, lenders targeted new borrower
segments and new geographies (Chomsisengphet and Pennington-Cross, 2006). In order
to maintain high yields, originators and secondary market conduits competed to develop
new loan products that allowed borrowers to overcome income and down-payment con-
straints, overleveraging themselves and their properties in the process and giving shape to
the speculative housing bubble (Angell and Rowley, 2006). This competitive process
shaped the transformation of the subprime market into the broader nonprime market, with
different channels or segments targeting variously high-interest (“rate spread”) loans to
riskier borrowers (Apgar et al., 2007; Wyly et al., 2008), or nontraditional loans to bor-
rowers seeking to compete for homes (or to tap more of their home equity) in highly
speculative or appreciating markets (Chiu, 2006).
This highlights what can be referred to as the “front end” of the mortgage crisis—that
is, the evolution of a market structure within mortgage lending that exposed a broad set
of homebuyers and homeowners to the risks of default, foreclosure, and property value
depreciation as the speculative housing bubble burst. The diversity of foreclosure experi-
ences has a common source in a market structure that evolved after 2001 to allow lenders
to stretch for profits by making even riskier loans to a larger segment of the population
(Angell and Rowley, 2006). However, multiple channeling or segmentation in the mortgage

760 CRUMP ET AL.
market have created more than one foreclosure crisis, as inner-city neighborhoods,
smaller Rustbelt cities, and urban or suburban submarkets exhibiting different degrees of
speculative activity find themselves affected by different forces driving owners to forfeit
their homes.
Second, the multiplicity of mortgage crises is also rooted in the overall scale of fore-
closure activity, which has produced spillover effects with varying degrees of intensity as
it has evolved in different local circumstances. In many cases, these spillover effects
transform the otherwise cyclical nature of the housing downturn into an expanding set of
problems for localities, including: declining home values; a growing credit crunch as
lenders retreat from risk, further reducing effective demand for housing; increased crime
or other social costs associated with a growing stock of vacant, foreclosed properties;
pressures on both the supply of and the demand for rental housing; and a diminished tax
base that threatens local fiscal stability. Also of note are localized job losses that have
reverberated through sectors of the economy tied directly or indirectly to the housing
market, notably including finance and construction (Kochhar, 2008). These spillovers
form what can be best thought of as the “back end” to the foreclosure crisis—an expand-
ing set of effects that continue to draw in households, neighborhoods, and localities not-
withstanding their actual exposure to the subprime mortgage market. As the dimensions
of this back end become clear, localities are having to redirect resources and design new
policy interventions to manage the cumulative effects of mortgage market instability on
their local economies.
However, while popular and media accounts have democratized these multiple crises—
emphasizing shared pain across the socioeconomic spectrum—the longer-term impli-
cations of the mortgage crisis have a spatial dimension that maps onto earlier patterns
of investment and disinvestment, and that exposes select markets to much greater down-
side risk. Metropolitan Chicago is a good example. Although foreclosure activity has
spread across the region, drawing in greenfield suburban and affluent urban submarkets
alike, the problems in those submarkets are often the more conventional ones of excess
speculation and overbuilding. By contrast, the problems look much different for the
cohort of low- and moderate-income, owner-occupied neighborhoods within the central
city (officially labeled Community Areas) that have borne the brunt of the foreclosure
wave. One dimension of this can be seen in the extent of the crisis: just 16 out of Chicago’s
77 community areas accounted for 42% of all foreclosure filings citywide between 2000
and 2007 (Ashton and Doyle, 2008). Foreclosure rates in these “weak-market” neigh-
borhoods are three to four times as high as in other neighborhoods, with a cumulative
foreclosure prevalence between 2000 and 2007 ranging from 175 to 350 foreclosure
filings per 1,000 mortgageable housing units—equivalent to as many as one in three
properties entering the foreclosure process.
A closer examination of the characteristics of these neighborhoods, concentrated on the
southern and western sides of the city, reveals the role played by earlier waves of housing
and mortgage market segmentation in generating a landscape of disadvantage relative to
the current instability. Even though many weak-market neighborhoods maintained stable
owner-occupancy conditions through the 1970s and 1980s, they did so by creating a
cohort of owners through government-insured loan programs (FHA and VA) or with the
assistance of small community banks (Harvey, 1977; Stuart, 2003). By the 1990s, the
basis for their stability was beginning to erode. They began to lose owner-occupants as the

FORUM ON THE U.S. FORECLOSURE CRISIS 761
aging cohort of owners (those who had lived in the neighborhood for 20 years or more)
began passing on or moving into assisted living. As the housing-market boom took shape
in the late 1990s, home-purchase demand passed over weak-market neighborhoods, con-
centrating instead on speculative markets surrounding the CBD. This translated into flat
or declining real home values and a declining stream of replacement buyers from the early
1990s onward (Ashton and Doyle, 2008).
These patterns of market segmentation and weakness established the basis for the par-
ticularly fierce foreclosure effects currently being seen in weak-market neighborhoods.
First, housing-market instability was among the factors that contributed to the dominance
of subprime lenders within those neighborhoods. The stable cohort of long-term owners
represented a significant stock of equity to be targeted by refinance and home improve-
ment lenders (Newman and Wyly, 2004). The tenuous connection to the labor market for
many owners translated into a heightened risk profile within the emerging regime of
credit scoring, contributing to their segmentation into a corner of the mortgage market
where they were exposed to higher prices and more onerous loan terms. Stagnant or
declining owner-occupancy rates meant low profit growth for mainstream lenders, caus-
ing them to forsake those markets as they searched for the kinds of profit and market-
share growth increasingly demanded of publicly traded banking organizations. The lack
of effective competition from mainstream lenders, in turn, facilitated the kinds of rent-
seeking behavior associated with high-cost mortgage lending (Ashton, 2008a; Wyly et
al., 2008). These market trends made weak-market neighborhoods the core of the sub-
prime mortgage market within the city of Chicago. Citywide, 27% of all high-cost home-
purchase loans and 32% of high-cost refinance loans between 2004 and 2006 were made
in these 16 community areas. High-cost loans were much more prevalent here than else-
where: 61% of home purchases in weak-market neighborhoods closed with a high-cost
loan between 2004 and 2006, a rate almost double that of other neighborhoods (Ashton
and Doyle, 2008).
Moreover, the attractive returns to high-cost lending drew in lenders and buyers at
unprecedented rates, and after decades of flat or declining home-purchase demand,
the number of home-purchase mortgage originations in weak-market neighborhoods
exploded after 2000, doubling by 2004 (Ashton and Doyle, 2008). By 2005, Austin—
a community on the City’s West Side, long a poster child for persistent poverty and
disinvestment—was the largest single mortgage market within the city of Chicago by
application volume. The explosion of mortgage liquidity had a significant effect on sales
prices as more buyers and relaxed credit terms increased bidding: in even the slowest
neighborhoods median sales prices grew by 12% to 15% between 2001 and 2005, while
in hotter weak-market neighborhoods prices grew anywhere from 30% to 60% (Ashton
and Doyle, 2008). This created incentives to refinance and drew all homeowners into a
pattern of speculative market development.
Whereas the common experience of increasing foreclosure activity ties together a vari-
ety of neighborhoods and localities, the intensity of the crisis in weak-market neighbor-
hoods suggests new processes of dispossession and urban structuration at work. In all
cases, these processes extend and intensify the risks for select households, neighbor-
hoods, and localities. At the front end of the developing mortgage crisis, select neigh-
borhoods were exposed to the hazards associated with high-cost mortgage lending at a
much greater scale, translating into a stream of owners stripped of their assets and pushed

762 CRUMP ET AL.
deeper into the ranks of risky borrowers. At the back end of the crisis, the depth of
housing-market deflation, triggered by so large a scale of foreclosure activity, maps onto
a history of housing-market weakness to further the likelihood that these neighborhoods
will be seen as ever more risky—a fact confirmed by Fannie Mae’s tightened standards
for mortgage purchases in “declining markets” (Razzi, 2008). As it becomes clear that
neighborhoods will be abandoned to the forces of market recovery to determine the paths
that they follow out of the foreclosure crisis, these effects portend a much longer and
deeper urban crisis.
FORECLOSURES, PREDATORY LENDING, AND REVERSE REDLINING
(DAVID H. KAPLAN
5
)
The issue of foreclosures and their relationship to predatory lending was first brought
to my attention in early 1999. An attorney in a Washington, DC, law firm wanted to know
if I had heard anything about a practice that he called “reverse redlining.” I had not. The
research with which I was familiar examined the causes and consequences of de facto
redlining: the absence of mortgage opportunities in particular neighborhoods, primarily
minority neighborhoods, and on the much greater tendency of minority applicants to be
denied a loan when compared to White applicants (Myers et al., 1993; Buist et al., 1994;
Leven and Sykuta, 1994). Much of this research had been conducted from the 1970s
through the 1990s, spearheaded by economists, sociologists, and a few geographers
(Harvey and Chatterjee, 1974; Dingemans, 1979; Listokin and Casey, 1980; Guy et al.,
1982; Kantor and Nystuen, 1982; Squires and Velez, 1987; Shlay, 1988, 1989; Bradbury
et al., 1989). In regard to policy applications, the continued practice of mortgage discrim-
ination had spurred such well-known tools as the Home Mortgage Disclosure Act and the
Community Reinvestment Act (Canner, 1991; Squires, 1992a; Avery et al., 2005).
Like many other social ills afflicting American cities, the practice of redlining was
bound up with problems of racial and class segregation. The persistent separation of
neighborhoods and the concentration of poor Black households in the inner city produced
a variety of specifically geographical inequities. A pernicious poverty—measured not
only in income but also in access to job, educational, and credit opportunities—had
emerged, in part, from where people lived (Massey, 1990). This was especially apparent
in the absence of mortgage credit. Social science research had an obligation to uncover
where, why, and how such redlining occurred.
As the name suggested, reverse redlining was something like a mirror image of tradi-
tional redlining. What was happening in Washington was that a large number of properties—
private residential homes as well as churches—had gone into foreclosure. These loans
were all tied to a mortgage lender with a history of making unsavory loans, and he had
made a number of refinancing loans used to consolidate debt. The problem was that such
loans were set with terms that we have now come to identify as hallmarks of predatory
lending. These loans were misrepresented. Borrowers were charged interest rates 24% or
higher—more in line with a bad credit card rate than with prevailing mortgage rates.
5
Correspondence concerning this section should be addressed to David H. Kaplan, Department of Geography, Kent
State University, Kent, Ohio 44242; telephone: 330-672-3221; fax: 330-672-4304; e-mail: dkaplan@kent.edu

FORUM ON THE U.S. FORECLOSURE CRISIS 763
There were additional fees and charges assessed that had nothing to do with the servicing
of the loan. The loans contained balloon payments that were set as high as the original
principal. When the loans failed—and many of them did—the lender would begin fore-
closure proceedings and, once a property foreclosed, he would resell it. The foreclosed
properties cut a swath through neighborhoods that were more than 50% Black; three out
of five such loans were issued on blocks that were almost exclusively Black. It was clear
from this particular case that predatory lending and foreclosures were linked together
geographically, in precisely those sorts of places that had historically suffered a deficit of
mortgage lending, areas that had been redlined.
Since 1999, the relationship between foreclosures and predatory loans has gained
tremendous notoriety (Van Order and Zorn, 2000; Bunce et al., 2001; U.S. Department of
Housing and Urban Development, 2001; Pyle, 2003). In Ohio, which has been particu-
larly plagued by the foreclosure crisis, the number of foreclosures quintupled between
1995 and 2007. This has paralleled an astonishing increase in what are termed subprime
loans—loans issued to people with less than stellar credit history. Are these two trends
related? As discussed elsewhere in this forum, the burgeoning of subprime credit is a
consequence of the uncoupling of mortgage loans from traditional banks, whose mort-
gage officers carefully assessed the creditworthiness of applicants as well as securitized
loans that minimized the risks of loans to the lenders.
The relationship between subprime loans and predatory loans is murky. By itself, sub-
prime lending is not necessarily a bad thing. It involves the extension of credit to individ-
uals and households with a compromised credit rating, often determined by one of the
three major credit bureaus. In return, borrowers are asked to pay higher interest rates or
additional fees. This practice exploded in the 1990s and 2000s, increasing from a $35
billion to a $600 billion industry between 1994 and 2005 (Avery et al., 2006). Because it
provided credit to previously ineligible households, subprime lending may have helped
nudge the rate of U.S. homeownership to an all time high of 69% by 2004 (U.S. Bureau
of the Census, 2005). Predatory loans go well beyond what would be considered a reason-
able fee or rate to compensate for the additional risk involved in a subprime loan. Many
of them involve prepayment penalties that make it all but impossible for mortgage
borrowers to escape their existing loan and move on to a loan with better terms. And they
often are loaded with other features designed to extract extraordinary profits from
borrowers, many of whom would struggle just to meet the payments of a legitimate loan.
Studies have determined that subprime lending can lead to foreclosures (Immergluck
and Smith, 2005; Carr, 2007). One reason might be that the expansion of the subprime
lending market has opened up mortgage credit to people who are less financially stable
and therefore more likely to go under. The clearly positive aspects of this practice, how-
ever, also contained a negative: should some of these new homeowners have remained as
renters? Complicating matters is that many of these subprime loans originate from less
than reputable mortgage lenders, such as the lender in Washington mentioned above.
These lenders do not just make subprime loans. They make predatory loans with terms
that mercilessly exploit borrowers. There is also a strong spatial dimension. Subprime
loans, predatory loans, and foreclosures tend to be concentrated in particular neighbor-
hoods, mirroring the type of discriminatory racial geography evidenced in redlining. The
very fact that particular neighborhoods appear to be targeted by subprime lenders, well
beyond what might be predicted in econometric models, indicate that “whether we call it

764 CRUMP ET AL.
subprime or predatory, it is clear that the profits extracted by these lenders are based on
systematic inequalities in access to information, capital, industry resources and power”
(Wyly et al., 2006, p. 123). Research conducted in Summit County, Ohio, showed that
subprime lending and foreclosure rates were strongly related at the neighborhood level
and that both occurred in tandem in lower-income, minority neighborhoods—with the
minority composition of the neighborhood emerging as a significant independent variable.
Three sets of conclusions can be drawn from these recent trends and the research that
has been conducted thus far. First, public policy has been guided, beneficially, by the
analysis of housing finance and provision. Prior research helped expose many of the
problems with de facto redlining, and current research has enabled us to get to the bottom
of the relationship between predatory lending and foreclosures. However, the analysis has
only been as good as the data that are available. The dissemination of foreclosure infor-
mation, while improving, is fairly uneven between counties. Credit scores are difficult to
obtain, and are only available through some proprietary vendors (like Transunion) and are
not geographically precise enough to see how particular neighborhoods are affected.
The attempt to determine which loans may be predatory has always proven difficult
because the nature of predatory lending is such that it cannot be singularly identified. The
U.S. Department of Housing and Urban Development (2001) releases a list of subprime
lenders, but this only means that the majority of loans made by these lenders are sub-
prime. Prime lenders may also make several high-interest loans but do not get classified
in the HUD database. My analysis of the Summit County, Ohio, data showed that many
of its foreclosed properties exhibited loans at incredibly high interest rates from prime
lenders. One sign of progress has been the additional disclosure requirements mandated
by the Home Mortgage Disclosure Act. Since 2004, it has been required to report higher-
priced loans, generally defined as in excess of 3% between the loan APR and Treasury
securities of comparable maturity. According to an analysis by the Federal Reserve, 98%
of subprime loans fall into the higher-cost category (Avery et al., 2005). Nonetheless,
HMDA does not cover about 20% of the mortgage market (Avery et al., 2006).
Second, while foreclosures are still mainly concentrated in inner-city neighborhoods,
they have increasingly been migrating to the outer city as the current housing crisis deep-
ened and expanded. In 2007, Cuyahoga County had the largest number of foreclosure
filings in Ohio and the highest rate of foreclosures per 1000 population (Table 1). More
than half of all foreclosures within Cuyahoga County are concentrated within the city of
Cleveland, particularly in the neighborhoods just east of downtown, but the fastest growth
now is within the inner and outer suburban rings (Fig. 2). Some inner-ring suburbs, such
as the middle class Black community of Bedford Heights, have suffered acutely and
foreclosures here may be related to the same processes afflicting inner-city Cleveland
neighborhoods. But foreclosures in such outer-ring suburbs as Solon, Strongsville, and
Westlake are probably the result of different factors. I suspect that, for many borrowers,
their desire to stretch themselves financially was fueled by dreams of ever-increasing
housing values, and realized by questionable loans issued by questionable lenders. When
housing values stopped rising, many borrowers found themselves “underwater,” owing
more than their property was worth. This underscores that foreclosures are a geographi-
cally contingent phenomenon and care must be taken to examine where they occur.
Third, we need to better understand how individuals may slide into foreclosure
and how this may relate to predatory lending. Qualitative research is rare in the study of

FORUM ON THE U.S. FORECLOSURE CRISIS 765
foreclosures, but there are two good recent examples (Community Development Studio,
2006; Fields et al., 2007). The questions that can be addressed with this kind of research
include the extent to which individuals are targeted by particular types of mortgage lend-
ers, a more complete understanding of the loan terms taken by borrowers, how well the
TABLE 1. FORECLOSURES IN 2007: TOP 10 COUNTIES IN OHIO
County Population
Foreclosure
filings
Filings per
1,000 population
Cuyahoga 1,295,958 14,946 11.53
Montgomery 538,104 5,119 9.51
Summit 543,487 4,920 9.05
Lucas 441,910 3,796 8.59
Preble 41,739 348 8.34
Franklin 1,118,107 9,145 8.18
Lorain 302,260 2,401 7.94
Highland 42,653 334 7.83
Mahoning 240,420 1,880 7.82
Butler 357,888 2,783 7.78
Source: Ohio Supreme Court; U.S. Census Bureau; Policy Matters review of filings in U.S. District Courts.
(Schiller et al., 2008)
Fig. 2. Foreclosures in Cuyahoga County, 2007. Only selected municipalities are labeled. Each dot repre-
sents one foreclosure. Data source: Cuyahoga County Court of Common Pleas; State of Ohio Department of
Commerce, Division of Financial Institutions. Source: Map courtesy of The Housing Research and Advocacy
Center, Cleveland, Ohio (2008).

766 CRUMP ET AL.
type of loan matches up to an applicant’s credit history, financial means, and property, and
the process by which a borrower goes from missing a few payments to suffering the hard-
ship and indignity of foreclosure.
I have recently had the opportunity to supervise the interviewing of some foreclosure
victims in northeastern Ohio. Thus far, the findings are quite suggestive. What emerges is
a picture wherein most of the interviewed seek lenders through informal channels, often
learning about a specific lender from a friend or acquaintance. Most borrowers inter-
viewed were quite naïve and had little experience navigating the world of mortgages.
Given the complexity of lending documents, this could refer to any borrower who to a
great extent must take on faith that she/he is being given a fair shake, but for financially
inexperienced borrowers this trust can be misplaced and devastating. These characteris-
tics surface in neighborhoods where there is a general lack of access to conventional
banks and financial institutions and where little opportunity exists to shop around for the
best loan terms.
Once a borrower gets into trouble with payments, what is the next step? Gone are the
days when a borrower could count on a single point of contact. With loans being sold and
resold, and the entire industry given over to hyperspecialization, borrowers were never
able to communicate with the same person. Instead they were shuffled from agent to
agent, with no opportunity to continue the story or to have any follow through. Without
some sort of centralized contact, or ombudsman, missed payments more readily slipped
into foreclosures. Some of these foreclosures could probably have been prevented.
Foreclosures are a deeply personal tragedy. But they are also part and parcel of the
geographically segmented society in which we live. High-cost lending, subprime or pred-
atory, has been concentrated in the same neighborhoods in which mortgage credit was
long absent. Foreclosures too, although increasing in the White suburbs, have also
ravaged these minority neighborhoods in focused and disastrous ways.
THE FORECLOSURE CRISIS IN MINNESOTA:
STATE LEGISLATIVE RESPONSES (JEFF CRUMP
6
)
In Minneapolis, Minnesota, foreclosures have reached record levels. In 2007, there
were a total of 2,895 foreclosures in the city, an 80% increase over the 2006 total of 1,607
(HousingLink, 2007). As if to underline the destructiveness of the foreclosure crisis, on
the evening of March 26, 2008, a natural gas explosion leveled a vacant house in the
predominantly African American neighborhood of North Minneapolis (Collins, 2008).
Later investigation revealed that the gas leak was likely the result of an ill-fated attempt
to strip copper pipe from the vacant house. The explosion, which left a debris-filled hole
in the ground, is emblematic of the destructive wave of devaluation that is sweeping
through the Minneapolis–St. Paul metropolitan region.
6
Correspondence concerning this section should be addressed to Jeff Crump, Housing Studies Program,
University of Minnesota, 350 McNeal Hall, St. Paul, Minnesota 55108; telephone: 612-624-2281; e-mail:
jrcrump@umn.edu

FORUM ON THE U.S. FORECLOSURE CRISIS 767
Subprime Lending and Foreclosure in the Twin Cities, 2002–2007
In 2003, I initiated a research project focused on analyzing patterns of subprime lend-
ing and foreclosure in the Twin Cities. I began by using Home Mortgage Disclosure Act
(HMDA) data to map the spatial distribution of subprime loans in the Twin Cities. In
addition, I collected and mapped the foreclosures in Hennepin and Ramsey Counties (the
core counties of the Twin Cities metropolis) for 2002.
The research findings left little doubt that subprime lending was disproportionately
concentrated in minority neighborhoods (Crump, 2005). When the 2002 foreclosures
were geocoded and mapped, it was evident that these neighborhoods were also the focus
for an alarming number of foreclosures (Fig. 3). These findings were hardly surprising,
however, given the similar results reported in other studies on subprime lending and fore-
closure (Newman and Wyly, 2004; Immergluck and Smith, 2005).
The visual evidence provided by the maps was supplemented by logistic regression
analysis that used the origination of a subprime loan as the dependent variable and vectors
of individual as well as neighborhood characteristics as explanatory variables (Crump,
2007). These equations yielded the finding that, irrespective of income or neighborhood
characteristics, African Americans were 64% more likely to receive a subprime loan as
compared to Whites. Similar findings were observed for Asians and Hispanics as well
(Crump, 2007).
Although the brunt of the social and economic costs of foreclosure is borne by the
minority neighborhoods of Minneapolis and St. Paul, it is now apparent that foreclosure
has spread to the suburbs. For example, Dakota County (located on the southeastern
fringes of the Minneapolis–St. Paul metropolitan region) experienced an 93% increase in
foreclosures (from 880 to 1,610) between 2006 and 2007.
Foreclosure: Investor Speculation
In low-income minority neighborhoods such as North Minneapolis, many foreclosures
are the result of the speculative activities of investors. According to staff at local CDCs,
approximately 70% of the foreclosures in North Minneapolis are investor owned.
Although tracking the prevalence of investor-owned foreclosures is difficult, an analysis
using the Minnesota homestead exemption as an indicator of owner occupancy does pro-
vide empirical verification of the prevalence of investor-owned foreclosures. In the heav-
ily impacted North Minneapolis neighborhoods of Jordan and Hawthorne, 62% of the
2007 foreclosures are not homesteaded, indicating that these foreclosures are related to
investors.
The large number of investor-owned foreclosures has resulted in significant repercus-
sions for renters. Many unsuspecting tenants have been evicted from rental properties
when foreclosure proceedings began and some were left in the dark when utilities were
cut off. Furthermore, some tenants who were evicted due to an investor foreclosure,
ended up with a damaged rental record that made it difficult to find another rental unit.
These speculative investments in rental property are very profitable. Typically, inves-
tors purchase rentals with a subprime loan and subsequently refinance the property
several times to extract the equity. Concomitantly, investors continue to collect rent as

768 CRUMP ET AL.
Fig. 3. Subprime share of all loan originations (2006, top), and foreclosure sales (2007, bottom), Twin
Cities metropolitan area.

FORUM ON THE U.S. FORECLOSURE CRISIS 769
well as security deposits from tenants. At the end of the process, investors simply walk
away from the property, leaving tenants without a place to live and leaving the neighbors
(and city officials) to deal with neglected and abandoned structures.
Fraud
Another aspect to the foreclosure crisis in the Twin Cities, especially (but not limited
to) North Minneapolis, is large-scale fraud. For many years, the Northside has been
plagued by fraudulent real estate transactions such as property flipping. Fraud reached a
new peak, however, in the subprime-fueled real estate boom of 2005–2007. A recent
example involved the firm of TJ Waconia (Brandt, 2008). The Waconia scheme involved
the purchase of rental properties and their subsequent resale to straw buyers who were
given $2,500 and provided with funds to pay the mortgage for two years. Most of these
properties were purchased sight unseen and when Waconia ultimately collapsed these
“investors” were left holding the mortgage. Subsequently, a total of 162 properties with
$32 million in mortgages were foreclosed upon (Brandt, 2008). According to the
Minneapolis Star Tribune, “Most of these properties were in North Minneapolis where …
the men and their firm laid waste to three neighborhoods, leaving blocks dotted with
vacant, deteriorating housing” (Brandt, 2008).
Legislative Responses
Although federal responses to the foreclosure crisis are slow in coming, at the state
level, advocates and legislators have been extremely active. At last count, 36 states
have some form of regulation over the subprime lending industry (Li and Ernst, 2007).
Minnesota is no exception and, in the last two legislative sessions, several significant bills
regulating subprime lending and foreclosure have been passed.
During the 2007 legislative session, two bills limiting predatory lending were passed.
The Minnesota antipredatory lending laws are among the most stringent in the nation.
Stipulations of Minnesota’s Anti-Predatory Lending Law include: (1) lenders must verify
borrower’s ability to repay a loan; (2) “loan churning” (i.e., refinancing) is prohibited
unless there is a “reasonable and tangible” benefit to borrower; (3) loans that result in
negative amortization are prohibited; (4) a duty of agency for mortgage brokers is estab-
lished; (5) lenders are prohibited from making misleading or false statements; (6) selling
a borrower a subprime loan is prohibited if that borrower qualifies for a prime mortgage;
(7) prepayment penalties are outlawed; (8) a right to private action is provided; and (9)
mortgage fraud is defined and prohibited.
Nearly a year after its implementation, the Minnesota antipredatory lending law is
considered a success. In particular, the more stringent requirements placed on mortgage
brokers have caused many to give up their licenses, and the number of active mortgage
brokers dropped from over 4,000 in 2007 to 1,319 at present (Buchta, 2008). Although
the Minnesota laws are strict, it is important to note that the legislation does not apply to
federally regulated banks and lenders (e.g., Wells Fargo, Countrywide) that are exempt
from these (and other) state regulations.
In fall of 2007, five bipartisan working groups were convened to address the foreclo-
sure crisis. Significant legislative proposals came out of the foreclosure data committee

770 CRUMP ET AL.
(which I chaired)—the renter working group and the remedies working group. Subse-
quently, in the 2008 Minnesota State Legislative session, 11 bills dealing with some
aspect of the foreclosure crisis were passed and signed into law.
In terms of foreclosure data, the new Foreclosure Data Practices Act adds the address,
property tax identification, and lender’s information to preexisting public foreclosure
documents. These data will provide more readily available locational and lender informa-
tion. The legislation also established a working group charged with developing and plan-
ning a statewide electronic foreclosure data system that will facilitate improved access to
foreclosure data.
Several important bills addressing foreclosure and rental properties were also passed
in the 2008 session. Most noteworthy are new requirements to notify current and prospec-
tive tenants of landlord foreclosure, facilitating the ability of tenants to pay utility bills,
and another bill that provides for the mandatory removal of foreclosure-related evictions
from the tenant’s rental record in cases of landlord foreclosure.
Moreover, important steps were taken to facilitate early intervention by foreclosure
prevention agencies. Here, Minnesota’s foreclosure law was amended to require lenders
to provide borrowers who are in default on their mortgages (default usually occurs when
borrowers are 30 to 90 days behind on their payments) but not yet in foreclosure, with
information pertaining to foreclosure prevention counseling. The new law also requires
that lenders provide authorized foreclosure prevention agencies with the mortgagor’s
name, address, and telephone number. Subsequently, foreclosure prevention counselors
will contact the borrower with information pertaining to actions that can be taken to pre-
vent a foreclosure.
The preforeclosure notification requirement provides the opportunity for foreclosure
counselors to intervene earlier in the process, and it is hoped that this will facilitate more
effective intervention. The effectiveness of foreclosure counseling, however, hinges on
the willingness of lenders to renegotiate loan terms or to provide payment plans that pro-
vide the homeowner with a realistic opportunity to repay the loan. The record of lenders
in this regard is not encouraging (California Reinvestment Coalition, 2008).
In the 2008 session of the Minnesota legislature, the most noteworthy and controver-
sial bill relating to mortgage foreclosure was the Minnesota Subprime Borrower Relief
Act. The bill provides for a one-year foreclosure deferment for borrowers who currently
hold a subprime loan or who have a negatively amortized loan. During the deferment
period, borrowers would still have to make payments to the lender and would also have
to participate in mortgage foreclosure prevention counseling. However, the foreclosure
process would be halted for a year. Supporters estimated that over 15,000 subprime bor-
rowers would be eligible for a foreclosure deferment (Cox, 2008).
Although the Minnesota Subprime Relief bill was narrowly passed by the Minnesota
House and Senate; it was subsequently vetoed by Governor Tim Pawlenty. In vetoing the
bill, Pawlenty argued that it would create additional risk for mortgage lenders and thereby,
raise the cost of mortgages in the state (Merrick, 2008). As Pawlenty stated, “While the
bill is well-intentioned, it could have a negative impact on the credit market for the 98%
of Minnesotans who are not in foreclosure” (Merrick, 2008, p. A3). The governor also
argued that such a moratorium constituted a change to the mortgage contract signed by
the borrower and that he had significant philosophical and constitutional concerns over
the stipulations of the bill. Pawlenty’s veto was supported by the Minnesota Bankers

FORUM ON THE U.S. FORECLOSURE CRISIS 771
Association and was praised by Kieran P. Quinn, Chairman of the Mortgage Bankers
Association, who stated, “we applaud Governor Pawlenty for his leadership in promoting
solutions to aid troubled borrowers and correctly deciding to veto this bill” (Mortgage
Bankers Association, 2008).
Supporters of the Minnesota Subprime Relief Act countered these arguments by point-
ing out that the mortgages covered by the bill were outlawed by the 2007 Anti-Predatory
Lending bill and were no longer legal in Minnesota. Since these loans are not even avail-
able in Minnesota, supporters claimed the cost of credit would not be affected by its
passage and implementation. Advocates also pointed out that preventing additional fore-
closures was essential to preventing a further erosion of home values due to the large
number of foreclosed homes that are currently flooding the housing market .
The Pawlenty veto also brings out the salience of the foreclosure crisis in the national
race for the Presidency. Pawlenty was an early supporter of Republican nominee John
McCain and was often mentioned as a likely vice presidential candidate on the McCain
ticket. His veto of a bill that would directly help homeowners in foreclosure might,
according to the Wall Street Journal, be seen as “insensitive to homeowners” (Merrick,
2008).
In response to Governor Pawlenty’s veto of the Subprime Borrowers Relief Act, the
author of the bill, Professor Prentiss Cox, stated:
This notion that lenders will refuse to make financially sensible mortgage loans …
based on Minnesota helping subprime borrowers now can accurately be described
as a threat of class warfare. It may make good, if divisive politics—inciting fear in
the affluent against homeowners in need … but it doesn’t make sense from a market
perspective. (Priesmeyer, 2008)
The Crisis Is Just Beginning
As foreclosures become common in suburban and exurban locations, it is evident that
the foreclosure crisis, caused by the reckless, speculative activities of subprime lenders
and investors, continues to grow in intensity and scope. As the foreclosure crisis evolves,
I think that one can discern two distinct phases in the evolution of the housing crisis.
First, there was an early phase during which subprime lenders successfully targeted
minority neighborhoods. These early-stage subprime loans subsequently resulted in a
foreclosure spike in minority neighborhoods that was largely ignored. The exploitation of
inner-city minority neighborhoods was classic mortgage industry behavior and can be
termed the reverse redlining phase. This was followed by a second, “money chasing bor-
rower” phase. Beginning around 2005, securitization boomed on Wall Street. To meet the
financial sector’s insatiable demand for mortgages to package and sell on the securities
market, subprime lenders lowered their standards and the Alt-A loan sector (marked by
no document or interest-only loans) boomed. The “money chasing borrowers” phase
lasted until the mortgage market meltdown of late 2007. In spatial terms, it is character-
ized by the spread of subprime lending to heretofore untouched suburban markets. By
early 2008, it was evident that those loans were going into foreclosure at a rapid rate.
What we are witnessing now is the spreading of foreclosures to both suburban and
exurban locations. Ill advised (and poorly underwritten) mortgages, problems in the

772 CRUMP ET AL.
broader economy, and an unexpected surge in energy costs have fueled a rapid rise in
foreclosures in formerly secure outlying metropolitan locations. The spread of the fore-
closure crisis is reflected in recent data that indicate that one out of every eleven mort-
gages in the United States is either in arrears or foreclosure (Bajaj and Grynbaum, 2008).
This is a frightening statistic and points to the need for immediate and significant action
to stem the still expanding foreclosure explosion.
Although many states are attempting to grapple with the difficulties presented by the
foreclosure crisis, the federal government has offered little if any relief for homeowners.
Meanwhile, up to two million households may lose their homes to foreclosure between
mid-2008 and mid-2009, with entire neighborhoods being depopulated in both the inner
city and suburbs. The foreclosure crisis calls for significant federal intervention to keep
families in their homes and prevent further deterioration in the housing market. If steps
are not taken toward mitigation, what we are seeing today is simply a prelude to a deeper
and more serious economic and social crisis.
THE FORECLOSURE CRISIS: IDEOLOGICAL STRUGGLES
AND RESEARCH CHALLENGES
7
(DANIEL J. HAMMEL
8
)
For the past several years I have required my introductory human geography students
to read “Prisoners of Geography” by Ricardo Hausmann (2001), who was at that time a
professor at Harvard’s John F. Kennedy School of Government. In his attempt to explain
persistent poverty in Africa, Hausmann raised some legitimate and thought provoking
issues about latitudinal biases in research and development spending in a wide range of
fields from agronomy to epidemiology. He then extended his argument about the impor-
tance of geography well beyond where most academic geographers would be comfort-
able, moving toward explanations derived from long discredited theories that formed the
core of environmental determinism. He also launched into a spirited defense of Ellsworth
Huntington. Perhaps most disturbing though, was Hausmann’s ability to ignore Africa’s
colonial history: in a 10-page essay he did not even use the term colonialism. Many of the
introductory students noticed the omission even before I called their attention to it.
I mention this essay because of a recent speech by Federal Reserve Board Chair Ben
Bernanke in which he sought to explain mortgage foreclosures by resorting to geographic
analysis or at least a rudimentary form of it (Bernanke, 2008). Bernanke presented a
series of county-level “heat maps” of the United States showing foreclosure activity and
a range of economic and housing-market variables that might account for it.
9
His analyt-
ical technique might best be described as “eyeballing it,” somewhat disappointing given
the apparent richness of his data. Yet, like Hausmann, Bernanke presents us with a similar
7
This material is based on work completed while serving at the National Science Foundation. Any opinions,
findings, and conclusions or recommendations expressed in this material are those of the author and do not
necessarily reflect the views of the National Science Foundation.
8
Correspondence concerning this section should be addressed to Daniel Hammel, Department of Geography
and Planning, The University of Toledo, Toledo, Ohio 43606; telephone: 419-530-4709; fax: 419-530-7919;
e-mail: dhammel@utnet.utoledo.edu
9
The maps themselves are quite interesting and can be found online at http://www.federalreserve.gov/newsevents/
speech/Bernanke20080505a.htm

FORUM ON THE U.S. FORECLOSURE CRISIS 773
dilemma—a respected economist insisting that geography is an essential component in
resolving a fundamental and serious problem while ignoring elements that many geogra-
phers (and scholars from the social sciences in general) would identify as root causes of
the problem. You see, in a nearly 3,000-word speech, Bernanke mentions subprime lend-
ing only in passing.
To be generous, I should note that the choice of county-level analysis masked the fine-
grained geographic variation in subprime lending that is driven by the urban geographies
of capital, class, and, most importantly, race (Squires, 2004; Ashton, 2008a; Wyly et al.,
2008). To be less charitable, I would note that the absence of any discussion of subprime
lending reflects Bernanke’s unwillingness to acknowledge the substantial regulatory fail-
ures over the mortgage market created by a decade and a half of neoliberal governance.
The U.S. foreclosure crisis, despite its potential global repercussions, pales in compar-
ison to the issue of global poverty. It is revealing, though, that in Bernanke we have not a
Harvard-based policy wonk like Hausmann, but an individual who exerts as much influ-
ence on the nation’s economy as anyone. The analysis is also revealing in what it tells us
about the foreclosure crisis. For the sake of brevity (and perhaps simplicity), I will focus
on three issues that Bernanke inadvertently highlighted: spin, data, and context.
Spin
This colloquialism is an apt term for the recent discussions of the mortgage crisis
among policymakers and pundits. Ideological debates are commonplace in urban policy
discussions. Even among those who depend on empirical approaches, differences in inter-
pretation based on careful analysis occur with some frequency. Unfortunately, we have
not yet reached this point in the discourse on the foreclosure crisis. This is not to say that
there is not yet good scholarship on foreclosures. There is some (e.g., Bunce et al., 2001;
Quercia et al., 2007), and certainly much of the recent work on subprime lending can
inform the discussion.
10
At this point, however, the volume of work is not to the point that
it seems to be having much effect on policy discussions. This is changing, but in its
absence we are left with spin.
Whereas policymakers and talking heads on all sides of the foreclosure crisis are capa-
ble of spinning, in the absence of any scientific polling data it appears that the right—the
neoliberal right and its associated cult of individual responsibility—is wining the battle.
My claim is based on the admittedly unscientific reading of opinion pieces and letters to
the editor in some of the nation’s most influential newspapers. Conservatives make strong
claims about the efficacy of the free market and its ability to weather the crisis, and even
more progressive writers are quick to note that much of the blame can be placed on low-
income borrowers who are seen to be too greedy for their own good. I do not have space
for a full-scale analysis of popular press coverage, nor do I posses the requisite analytical
skills for such an endeavor, but let me turn to a brief consideration of the very peculiar
term, “predatory borrower.”
10
Unfortunately, much of the earlier work on foreclosures does not apply well to the current situation due to the
massive changes in home-purchase finance over the past decade.

774 CRUMP ET AL.
The origins of this term are not clear, but its popularity may be due to a column
written by the conservative commentator, Michelle Malkin, in the New York Post
(Malkin, 2008). It has been used to describe a specific act of fraud on the part of the
borrower during the loan application process (Cowen, 2008), as well as a more general
term to include all of those borrowers who just should have known better (Malkin,
2008). The first of these meanings refers to the now infamous NoDoc loans whereby
mortgage issuers, departing from over a half-century of business practice, required no
documentation of the prospective borrower’s income or assets before writing a mort-
gage. The existence of these loans provides some insight into the new housing finance.
Discounting a sudden movement toward increased trust in humankind by the financial
sector of the economy, the only logical assumption one can draw from NoDoc loans is
that lenders understood that a borrower’s ability to repay a loan was inconsequential.
Lenders knew that they could profit from a loan even if the borrower defaulted within
several months. To the uninitiated or to those whose understanding of mortgage process
is more than a decade old, this statement may seem bizarre. Yet, thanks to the increas-
ingly complex securitization process, it is true—or at least was true for a time (Engel
and McCoy, 2004, 2007).
11
Today, these same lenders are conducting studies with ques-
tionable findings to suggest that they have been victimized by unscrupulous borrowers,
and that this victimization led to the mortgage crisis.
12
The phrase “predatory borrower” has appeared in New York Post and the New York
Times, and subsequently spread rapidly across the Internet in a viral manner. By mid-
2008, it could be found on the websites of most major conservative think tanks. George
Will stopped just short of using the term in a May 15, 2008, editorial in the Washington
Post (Will, 2008); however, six months earlier Will wondered, “But did ‘predatory’ lend-
ers expect the borrowers upon whom they supposedly preyed to default?” (Will, 2007, p.
B07, emphasis original). Obviously, he thought the answer was no. This suggests that at
least some of those using the phrase may not fully understand how much the mortgage
market has changed over the past decade. Others seem to have a clearer picture.
The issue of spin is not insignificant. In early 2008, the mortgage crisis had become a
major ideological battleground. While liberals may know this, and some proposals for
increased regulation have emerged, conservatives clearly understand what is at stake.
They have mobilized, and are already successfully attacking the victims, although not yet
in an orchestrated or organized fashion. One hopes that the crisis will not continue to
deepen. It has already inflicted significant suffering and financial loss, but the impending
maturation of large numbers of Alt-A loans is certainly cause for renewed concern. If we
do see a continued increase in foreclosures, however, it may provide one of the clearest
11
Many storefront lenders and mortgage brokers have still managed to avoid significant loss of funds on sub-
prime loans that go into foreclosure. It is the investors that hold the securities, the securities firms, and the U.S.
taxpayers who will bail them out that will lose money. Of course, the subprime borrowers are hurt no matter the
condition of the economy.
12
The study was conducted by Base Point Analytics who describe themselves as “a leading provider of predic-
tive analytic fraud and risk management solutions for the mortgage and global banking industries” (http://
www.basepointanalytics.com). Their findings according the New York Times (Cowen, 2008) suggest that as
many as 70% of early-payment defaults on loans in 2005 and 2006 had fraudulent claims on the mortgage
application. They did not report on what percentage of the lenders made fraudulent claims to the borrowers.

FORUM ON THE U.S. FORECLOSURE CRISIS 775
views that the U.S. middle class will have of the repercussions of the neoliberal project.
What action this might engender is still to be seen, but it is a challenge that organizers and
progressive policymakers need to rise to.
Data
Our understanding of the foreclosure crisis suffers from a lack of accurate, consistent
data on foreclosures themselves. Even the feeble analysis offered by the Bernanke is
worth attention, not simply because of his position as Chair of the Federal Reserve Board,
but also because he presented some very interesting data that help fill some gaps in our
current understanding. Yet datasets like Bernanke’s are not enough and the data gap we
are currently experiencing is problematic.
The dearth of data revolves around three aspects of foreclosures that make them some-
what different than other common “transactions” in the housing market. First, the foreclosure
process is inherently local. Legislation governing foreclosures is made at the state level,
which immediately introduces a great deal of variability into the national picture. Second,
the legal filing of a foreclosure typically occurs at the county level. Thus acquiring national-
level foreclosure data would involve contacting each of the roughly 3,143 county (or
county-like) entities. And third, the foreclosure process has several data collection points
from the reporting of a property in default, to the foreclosure filing, and to the subsequent
sheriff’s sale. Not all properties go through each of these stages, and not all jurisdictions
require them.
13
Unlike most other segments of the housing market, there is no federal regulation that
might require a nationwide data-gathering effort. Much of the now substantial literature
on subprime lending and the work on racial and ethnic discrimination in lending that
preceded it relied heavily on the data reported by the Federal Financial Institutions Exam-
ination Council as a requirement of the Home Mortgage Disclosure Act (HMDA). HMDA
has its faults and gaps, but it has provided something of a gold standard for studies of
mortgage lending. It is also worth noting that the most useful aspects of the HMDA data
were a product of forced compromise created during the bailout of U.S. savings and loan
institutions—the last major crisis in the housing and real estate market. At this point, the
only significant efforts to create a nationwide dataset have been made by such private
firms as RealtyTrac. These data are proprietary and thus expensive; their quality is
suspect; and there are no metadata available. Perhaps the lack of data on foreclosures
provides us with yet another glimpse of the future of neoliberal governance.
Given the data issues involved, studies of foreclosures have come in two forms. Quan-
titative work tends to be localized (often countywide) research drawing on privately
collected data over a reasonably short time period, and analyses have ranged from basic
to econometric (e.g., Immergluck and Smith, 2006). Qualitative work has been oriented
toward interviews of a small number of people who lost their homes in foreclosure (Libman
et al., 2007; Saegert et al., 2008). All of these studies have produced valuable information
on foreclosures, their root causes and effects, the foreclosure process, and the effectiveness
13
For example, slightly more than half of the states allow a nonjudicial form of foreclosure termed foreclosure
by power of sale that does not require a formal filing unless challenged.

776 CRUMP ET AL.
of various policy interventions. Some of them have begun to link foreclosures to broader
theories of urban process (Newman, 2008c). They have also highlighted the difficulty of
accessing or collecting good data on foreclosures.
14
Indeed, without a significant amount
of this kind of research on foreclosures, our true understanding of the crisis and it impacts
is limited. But this is not enough.
We need more nationwide econometric analyses of foreclosures at a detailed geo-
graphic scale. I do not claim that this type of research is more rigorous or insightful than
qualitative research, but it is different. It is based on the methods on which policy analysts
rely, and uses the terms that policymakers, when they choose to listen, pay attention to.
15
Foreclosures do pose some thorny but surmountable issues for econometric analysis, in
part due to the time lag between the multitude of causes and the eventual filing. Yet this
type of analysis will not occur, at least not soon, unless we are able to create a repre-
sentative and reliable dataset to support it. We need to move beyond Bernanke’s heat
maps, and some form of comprehensive data gathering needs to be part of any legislation
intended to bail out the financial sector.
Context
Bernanke’s attempt at spatial analysis did at least highlight the importance of geo-
graphic context for understanding the foreclosure crisis. His maps show clear patterns of
concentrations of foreclosures in particular regions. The old industrial core has been hit
hard by the crisis, but so have the areas where the housing bubble burst the most dramat-
ically—the West and parts of the Southeast. As Bernanke pointed out, there is a different
mix of causes for the increase in foreclosures in each of these areas. Some causes prevail
nationwide. The effect of rising interest rates on adjustable-rate mortgages as they mature
and begin to reset have increased monthly mortgage payments beyond an affordable level
for many homeowners. The rising cost of health care and unexpected health-related
expenses have left many struggling to pay off substantial debts.
Other causes vary greatly among different U.S. regions. As I have already noted, dif-
ferences in the process of foreclosure can create state-to-state and even county-to-county
variation in foreclosure rates. More significantly, unemployment rates are much higher in
some regions than others. The strength of the local housing market (even at the submarket
level) plays a crucial role in mitigating or exacerbating foreclosure rates. It has been
evident for several years that foreclosure rates in particularly hot housing markets have
stayed low because homeowners could sell their homes quickly and for a price that
allowed them to stave off default or foreclosure. With stagnant house values and
moribund housing markets, that option has not existed for nearly a decade in cities like
Cleveland and Detroit.
14
Kathe Newman’s work in Essex County, New Jersey has resulted in the largest and highest quality dataset
that I know of. To collect the data she and a small team labored over the course of several years in an effort she
notes may have moved from dedication to obsession.
15
Although a claim such as this could undoubtedly set off serious epistemological debates, I take the more
simple-minded approach that the foreclosure crisis, like many significant social issues, ought to be subjected to
the full range of analytical approaches that urban geography and urban studies can bring to bear. For a much
more sophisticated treatment of this issue, see Plummer and Sheppard (2001).

FORUM ON THE U.S. FORECLOSURE CRISIS 777
Even though all of these factors contribute to the foreclosure crisis, subprime lending
provides the most important contextual issue. It is present all over the country, but in most
major cities clear patterns of lending have emerged that indicate low-income and minority
neighborhoods have been targeted for subprime loans (Calem et al., 2004; Newman and
Wyly, 2004). To many observers, this pattern makes sense because it is the low-income
and minority borrowers that pose the greatest credit risks and therefore are only qualified
for subprime loans. They are the borrowers who, in retrospect, should not have sought
loans. Setting aside for a moment the unevenly applied principles of individual responsi-
bility that drive these arguments, there are two observations that substantially weaken
these assertions. First, many borrowers did not seek loans; the borrowers were sought out
by lenders. Refinance loans are an important component of the subprime and predatory
market, and in 2006 about 28% of all refinance loans were made at interest rates at least
three points higher than the prime rate (FFIEC, 2006). Second, some estimates suggest
that in 2006 as many as 60% of subprime borrowers may have been qualified for prime
loans (Brooks and Simon, 2007).
16
Why did this happen? In part, a borrower’s likelihood
of segmentation into the subprime market is more a function of where the borrower lives
than his or her creditworthiness. Given the level of racial and ethnic segregation in U.S.
cities, it is minority borrowers who suffer the most. This is geographical targeting, and
this is the geographical context that must be included in any analysis of foreclosures.
Conclusion
The foreclosure crisis has deeply affected tens of thousands of people, and if it pro-
vides a trigger for a sustained economic slump, its effect could be magnified enormously.
Short-term policy and legislation is needed to assist the most vulnerable, and a case might
be made that the Wall Street actors behind much of the crisis need assistance as well.
However, the real battle will be over the long term, and involves a move toward a reason-
able, just, welfare state—or a continued move toward an increasingly harsh neoliberal
state. We do not know which path will be chosen, but solid research on foreclosures, their
causes, their effects, and their relationship to larger policy issues needs to be part of the
decision.
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