Repost - "Our Least Resilient Neighborhoods"

I've got another interview coming up this weekend, God willing. In preparation for that interview, I thought it would be good to mention “Our Least Resilient Neighborhoods”, a post I wrote several months ago. That post talks about the challenges facing neighborhoods in the United States in this time of economic collapse, challenges made worse in many cases by institutional policies of economic persecution directed against minority communities. It is a good preparation for this next interview which will explore of some of these policies further, as well as general financial issues confronting urban neighborhoods. It's a bit late in the day to be talking about some of these issues – I don't know how much can be done at this stage of the game. Nevertheless, it can't hurt to talk about these things.

A Sign Called Desperation

The Abandoned House Syndrome

Recently, the following houses caught my eye:

House #1, Lake Oswego, OR. This house has been abandoned for several months.

House #2, Lake Oswego, OR. This house has been abandoned for a year. The bank that owns it attempted an auction, but it failed.

House #3, East Portland. See the lockbox on the front door, as well as the trash and weeds in the front yard.

House #4, East Portland, OR. Note the broken rear window. It looks like someone kicked it in.

House #5, East Portland, OR. This house has been abandoned for a year. The City had recently put a ticket on the house for weeds and "public nuisance." When I took the picture, however, someone from a property management company was mowing the lawn. This house was the subject of another failed auction.

Four of these houses are in various stages of tracing out the same trajectory of history. They were all offered for sale by homeowners who found themselves in trouble of one kind or another and who could no longer pay their mortgages. None of the owners was able to sell at the desired asking price. All these homes fell into foreclosure and became bank-owned. All are now abandoned.

House #3 does indeed have a lockbox on the front door, indicating that it may have been purchased by a new owner who simply hasn't arrived yet. But in that case, where is the realtor's sign with a big “SOLD” sticker on it? Also, notice the signs of abandonment here as well – the trash in the unkempt front yard, for instance.

I didn't go intentionally searching for houses like these; rather, I noticed them as I was going about my daily business. However, I am sure that searchers could find many houses like these by now, not only in Portland and Lake Oswego, but in many other cities.

These houses illustrate a few interesting trends. First, at the very beginning of the present economic collapse, there were some writers on the subject of collapse and preparation who suggested that it might be possible for homeowners in trouble to negotiate more lenient loan payment terms with their lenders, because it was assumed that banks really don't want to own homes. But while it may or may not be true that banks don't look forward to owning homes, it has definitely proven to be true that banks are quite willing to take homes away from people who are unable to pay their home loans under terms originally negotiated.

Why are banks taking houses? Because the assets counted on the balance sheets of most banks consist of interest-bearing loans made to supposedly credit-worthy borrowers. When those loans became worthless due to the default of the debtors, the only other assets banks could carry on their balance sheets were the items of collateral used to secure the original loans. Such collateral included the houses of people who could no longer make their house payments.

Why are the banks holding these houses for such a long time? Because a huge gulf has arisen between the prices that banks and other holders of real estate would like to charge for their assets versus the actual price that most people can afford. Yet these houses and other real estate are still being carried on the banks' books at the price that they would have commanded near the height of the recent real estate bubble, when prices were high. For banks to sell foreclosed and repossessed properties at a price that would actually work in our present market, the banks would have to admit that their so-called assets had lost a huge percentage of their notional value. This would shrink the balance sheets of banks to such an extent that many more of them would fail.

The recent government bailouts of the banking system should have allowed more banks to remain solvent even as these banks either negotiated more merciful loan payment plans with homeowners or as the banks sold repossessed homes for a more reasonable price. Yet the bailout money was not used by the banks to enable mercy and fair play. Rather, it was used to increase shareholder dividends and CEO bonuses. Now, therefore, the banks hold “auctions” in which they try to sell foreclosed properties for inflated prices. When no one is willing to submit a satisfactory bid, these houses are taken off the market in the hope that one day, market conditions will magically improve, at which point another auction or sale will be attempted. Some banks, desperate to raise homebuyer demand by limiting supply, are now paying demolition crews to bulldoze abandoned homes, including recently built or nearly built McMansions. (Sources: http://www.cnbc.com/id/30580830; http://blog.mlive.com/flint-city-beat/2009/07/kildee_a_smaller_flint_equals.html; and this - http://www.jsonline.com/watchdog/watchdogreports/50548282.html for a slightly different twist.)

Meanwhile, the weeds and moss grow, the trash piles up, the paint peels, the banks must pay a property management company to look in on their properties and clean up the places, and the occasional window gets kicked in...

The Return of the NINJA (or at least his cousin)

Beware – the NINJA is back! Or at least, his cousin. No, I'm not talking about some Oriental warrior dressed in dark, baggy clothes, some disciple of ancient methods of killing people barehanded, taught by some “college of violent knowledge.” Nor am I talking about the return of some indie, Asian-themed horror movie.

But I'm sure you will all remember the NINJA as I begin to describe him. He is the No Income, No Job, No Assets adjustable-rate, subprime loan foisted off on many working-class families by predatory lenders in the troubled years before our present economic collapse. He was seemingly run out of town in 2008 through the reluctant posturing of Federal lawmakers pushed by a wave of public outrage. But he now seems to be sneaking back upon us, albeit in a somewhat mangled form. Or maybe that's his one-armed cousin I see.

Observe the letter below:

I recently got this letter in the mail. I am sure it was sent to everyone in my neighborhood. (By the way, I live in a working-class neighborhood.)

At the top, you can see a statement in bold capital letters: “FHA BENEFITS UPDATE STIMULUS 2009.” Below are the words, “Passed by Congress and signed into law by the President.” The purpose of these words is to fool their readers into thinking that this letter is part of some Federal program. Next come the words, “HUD-approved Flagship Financial Group has been directed to:

1. Get FHA homeowners instant relief yadda yadda...

2. Yadda yadda...

This is a continuation of their opening ploy. “Flagship Financial Group has been directed...” By whom? By themselves and their own lust for your dollars? Certainly not by the Government!

Their “program” is available to anyone who has an FHA loan, with “No Appraisal, No Income Verification, No Credit Score Qualification, and No Out-Of-Pocket Costs,” according to the letter. This is not quite a NINJA loan, since it is meant for people with FHA loans who presumably are living in “starter” homes. Maybe we could call this a “NINJ” loan. The letter further advertises “4.375% Fixed Rates!” Although I don't owe any money on my house, I called their 1-800 number to ask about this 4.375% rate – just as a “private detective” exercise. When I asked whether this was a 30-year rate, the agent replied that due to present market conditions, they couldn't offer 30-year loans with this rate. However, they were willing to offer “hybrid” loans with this 4.375% rate for the first five years, then an adjustable rate afterward.

The agent's use of the word “hybrid” was quite creative (almost as creative as the use I heard this past week for the term “locally owned,” as I described in this post: "Localism" And Truthfulness). To me this sounds the same as the dishonest adjustable-rate mortgages with tempting introductory “teaser rates” pushed onto working-class families in the earlier part of this decade.

What all of this tells me is that in our present time of manifest economic distress, there are scam artists out there who are continuing to fleece ordinary people by playing on the crisis and on the coping strategies employed by these ordinary people. It is important to remember the basic coping strategies for these times, the strategies of frugality, which consist of paying down debts, becoming self-sufficient and living within one's means. Remember also that if something looks too good to be true, it usually is – and trying out things that are too good to be true may cost you everything you own.

One other thing this letter shows is how effective our lawmakers have been in reining in the excesses of the financial “industry” – which is to say, that they haven't done anything at all.

Breaking Neighborhoods For Fun And Profit

(Warning: this post is long.) The masters of the official economy are threatened by self-sufficient, resilient neighborhoods and communities, as these communities don't make a good “growth market” for the products produced by the official economy. People who own their own land and homes outright, who don't have to pay a mortgage, who grow their own food, who provide for their own needs, who live frugally – such people threaten the profit motive of the big growth capitalists. These growth capitalists cannot easily take advantage of people as long as people are self-reliant.

In order therefore to insure “growth,” corporatists must break self-sufficient, resilient neighborhoods and communities. It is only when such social units are broken and the means of self-reliance are taken away that corporatists can make a prey out of the people who comprise such neighborhoods and communities. It is only when fully-paid houses and profitable locally-owned business are wiped out that large developers and big-box stores can continue their expansion. By breaking perfectly good things these corporatists can sell more newly-manufactured things to replace the things that were broken, and they sell the new things at greatly inflated prices.

One of the tools of this breakage is the abuse of eminent domain. “Eminent domain” is defined in Wikipedia as “...the inherent power of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent.” This power has always existed in the United States, being part of the common law inherited from England. However, the U.S. Constitution's Fifth Amendment restricts the Federal government's taking of land to that which is taken for expressly public use.

While the Federal government has always been limited in the purposes for which it could seize or restrict land use, the states were under no such limitation until the ratification of the Fourteenth Amendment. In 1896, the Supreme Court held that the eminent domain provisions of the Fifth Amendment were incorporated into the Due Process Clause of the Fourteenth Amendment, and were now binding on the states. That meant that the states were prohibited from seizing anyone's property unless that seizure was for a clearly public use, such as a public road or dock or harbor.

That is the concept of eminent domain that most Americans have in their minds today, and it was taught to us from grade-school civics classes and onward. Yet most Americans don't know that this definition is seriously out of date, and has been since before many of us were born. As early as 1954, as cities across the nation struggled to “reduce blight” within their environs, the Supreme Court ruled that the District of Columbia could seize “blighted” properties within designated “slum” areas and transfer these properties to private developers for the purpose of “urban renewal.” This set a precedent for other cities, which engaged in wholesale condemnation and seizure of properties within areas of designated urban blight. These areas were inhabited disproportionately by poor and minority residents, who were displaced and severely disrupted by the seizure of their homes, and who were unable to afford the new dwellings and amenities constructed in these zones as part of “urban renewal.”

This Supreme Court decision allowed cities to redefine taking private property for public use as “taking private property for the public good.” This became the justification for cities seizing homes and other real estate and transferring these properties to other private parties because of some perceived “public benefit” arising from the transfer. This decision kicked off a wave of such seizures, most of which occurred in poor, minority communities targeted for “gentrification” and “urban renewal” by city planners. Homes were seized and razed to make way for expensive condos and upscale shops, among other things. In the state of Kansas, 150 homes were condemned to make way for a racetrack. In Michigan in 1981, the state Supreme Court allowed the demolition of over 1000 homes and 600 businesses in the city of Poletown to make room for a new General Motors plant, in order to serve the “public purpose” of providing jobs and economic growth. The property rights group Institute for Justice found 10,000 cases from 1998 to 2002 of local governments in 41 states using or threatening to use eminent domain to transfer homes and properties from one private owner to another.

One key thing that happened from 1954 onward was that as poor and minority neighborhoods were broken up and redeveloped, cities and powerful business franchises began to seize ever more mainstream houses and neighborhoods – including homes that were increasingly owned by non-minority, educated middle class residents. Many of these people had the financial means to fight the seizure of their property or the declaration of their property or neighborhoods as “blighted.” And fight they did. One notable fight (which unfortunately was lost) was Kelo versus City Of New London, a case between a group of neighborhood residents (including resident Suzanne Kelo, after whom the case was named) and the City of New London, Connecticut, which used eminent domain to seize the homes of these residents in order to transfer the underlying land to a developer for a dollar a year. The Connecticut Supreme Court ruled that if an economic project creates new jobs, increases tax and other city revenues, and revitalizes a “depressed” (even if not blighted) urban area, then it qualifies as a public use. When the Kelo neighborhood residents appealed to the U.S. Supreme Court, it ruled 5-4 against them. (Interestingly, this decision was supported by all four of the justices appointed by President Clinton, who supposedly “felt our pain” and was supposed to be for the little guy.)

The Kelo ruling caused quite a backlash and outcry in the U.S., and several states passed laws or ratified changes in their constitution to forbid the use of eminent domain to transfer property from one private party to another. However, eminent domain abuse is still alive and is doing quite well even today. A particular case that comes to mind is the City of Fullerton, California.

In the early part of this decade, the neighborhoods near the Fullerton train station were mainly comprised of small older homes typically inhabited by renters. Most of the residents were Hispanic and working-class. But around 2003, that area was targeted for redevelopment as part of the City Council's plan to turn the downtown area into an entertainment/upscale living magnet. Most of the old homes were torn down and replaced by very expensive “townhomes” and loft condo's. Many of the older downtown antique and specialty businesses were replaced by bars and nightclubs. (In fact, I believe the City managed to cram over 40 bars into the space of a few city blocks! Talk about taking a hit to the Solari index!)

I saw the transition as it took place, because there was a time when I had to catch the Metrolink train in Fullerton to get to work. I read of the toll the transition was taking on the non-alcohol-serving downtown businesses and nearby neighborhoods who had to endure the antics of drunken visitors on weekends. I saw increasing numbers of homeless people “from every kindred, tongue and tribe” hanging out at the Starbucks on Harbor Boulevard in hopes of receiving some help from charitable passers-by. I must admit with shame that at the time, I never connected the dots between Fullerton's “redevelopment” and some of the things I was seeing, nor did I question how the City had managed to get hold of the redeveloped land.

Now it seems that this bit of redevelopment was not enough for the City. According to the Fullerton Observer, the City Council was scheduled to vote on the 5^th of May on whether to expand the City's redevelopment area by 1,165 acres, thus placing nearly 25 percent of the entire city under its redevelopment agency and its expanded powers to use eminent domain, divert property taxes and subsidize development. (I wonder how the vote went.) Included in this area are properties which do not meet strict definitions of “blight,” as well as several well-known and highly successful niche small businesses like Bob Marriott's Fly Fishing Store. (I almost stopped in there several times when I was living in So. Cal.) By the way, it seems that the City's redevelopment agency is now coming up with some creative definitions of “blight.”

Eminent domain and the threat of redevelopment are used to displace people whose homes are paid for, whose homes are older and thus not subject to high property taxes, and who are in some cases accused of “overcrowding,” as stated by Fullerton Mayor Don Bankhead. Eminent domain and the threat of redevelopment are some of the methods of choice for cities which seek to grow their tax revenues. It is not surprising that the incidence of eminent domain abuse rose with the recent real estate and construction bubbles in the American economy.

But the abuse of eminent domain is a direct threat to the building of households, neighborhoods and communities that are resilient in the face of the social shocks now arising from Peak Oil, climate change and economic collapse. For the building of such resilience and of alternative safety nets depends on having a stable and guaranteed place to live. The threat of foreclosure and the worry of indebtedness are already enough of a destabilizing force without the threat of some municipality taking property from its citizens in order to increase its tax revenues or satisfy some big business. The problem of eminent domain abuse must therefore be forcefully addressed by residents of neighborhoods and communities that seek to become resilient. Otherwise, why create a permaculture garden in your backyard or form a neighborhood barter network if you and your neighbors are at constant risk of being thrown out of your homes? Why take in displaced relatives if doing so will expose your home to seizure on account of “overcrowding”?

One last note: Some members of the “libertarian” camp have jumped on the “Down With Eminent Domain!” bandwagon. But they have a devious agenda: they seek to define “eminent domain abuse” as the placing of any restriction on land use by any government agency. According to this definition, restrictions on land use arising from environmental protection concerns would be classed as “eminent domain abuse.” I thoroughly disagree with such a definition. In my opinion, it is bogus and childish. I firmly believe that to the extent that people legitimately own property at all, they must realize that they “own” it only as a trust and stewardship, and that their use of their land affects others even when those others don't live on the same land. Therefore I thought Oregon's Measure 37 was a huge mistake, as it allowed a bunch of greedy landowners and developers an opportunity to try to turn Oregon into another Southern California – strip malls, freeways and housing tracts from one end to the other. I was glad when Measure 49 passed. (In fact, I voted for it.) I also support environmentally responsible restrictions on land use.

Sources:

• “Public Power, Private Gain: The Abuse Of Eminent Domain,” Dana Berliner, Capitalism Magazine, 14 February 2005, http://www.capmag.com/article.asp?ID=4420

• “My Turn | Fight Property Abuse,” David T. Beito, Tuscaloosa News, 26 April 2009, http://www.tuscaloosanews.com/article/20090426/NEWS/904259948

• “Report: Eminent-Domain Abuse Widespread,” Jon Dougherty, WorldNetDaily, 22 April 2003, http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=32172

• “NOW – Politics and Economy: Eminent Domain,” PBS, 24 June 2005, http://www.pbs.org/now/politics/domain.html

• “Eminent Domain Being Abused?”, 60 Minutes, 4 July 2004, http://www.cbsnews.com/stories/2003/09/26/60minutes/main575343.shtml

• “Kelo V. City Of New London,” Wikipedia, http://en.wikipedia.org/wiki/Kelo_v._City_of_New_London#History

• “Victimizing The Vulnerable – The Demographics of Eminent Domain Abuse,” Dick M. Carpenter II, Ph.D and John K. Ross, Institute for Justice, June 2007, http://www.ij.org/index.php?option=com_content&task=view&id=1621&Itemid=249

• “Opening The Floodgates: Eminent Domain Abuse in a Post-Kelo World,” Dana Berliner, June 2006, http://www.castlecoalition.org/index.php?option=com_content&task=view&id=189&Itemid=113

• “Myths and Realities of Eminent Domain Abuse,” Castle Coalition, June 2006, www.castlecoalition.org/pdf/publications/CC_Myths_Reality%20Final.pdf

• “Blight Or Corporate Welfare In Redevelopment Area Expansion?”, Fullerton Observer, Mid-April 2009, http://www.fullertonobserver.com/

• 1 Kings 21:1-24, World English Bible (a public domain translation), http://ebible.org/web/

Conversation With A Bank-Owned Property Salesman

This afternoon as I was coming home from the store, I noticed that the foreclosed house at the corner of my block was open. Outside were large signs advertising the auction of this “bank-owned” property. I had never been inside the house before and was curious to see who the selling agent was, so I stopped by.

The agent is a nice, personable guy who specializes in selling repossessed properties for banks and other creditors. He let me poke around the place, a rather small Korean War-vintage house with three small bedrooms, one bathroom and a garage that had been converted into a bonus room. While the front yard is decently sized, the backyard is vestigial at best.

I asked him what the price range of the auction would be. He told me that the seller would probably set a floor price of around $140,000, and that he expected it to sell for around $160,000. When I asked him what would happen if all the offers came in below the floor price, he said that the seller would simply pull the house off the market and wait a bit longer before advertising it again. But my question had aroused his curiosity, so he asked me what I thought the house would sell for (a dangerous question, if he wanted to get a good night's sleep tonight). I told him that I thought the seller would probably not get even $100,000. His eyes widened perceptibly at that answer, as he protested that he thought the economy might just pick up and that things might get better. But then he added a caveat about how no one really knew how things would turn out (although he was interested in hearing what I thought).

I told him, “I believe I know.”

“Really?” he said in a voice both curious and unsettled, his full attention focused on me. I proceeded to tell him about how an expanding economy requires an expanding resource base, and that when that resource base begins to contract, so must the economy it supplies. I told him about how the production of one key resource – oil – had peaked in 2005, declining afterward and causing spikes in prices for food and energy. I told him also about how these price spikes destroyed the ability of many Americans to maintain their large debts, and how this contributed to the present worldwide economic collapse.

This news, though distrubing, was partly familiar to him. He began telling me that yes, he had heard about the role of bad loans in causing the present economic crisis. But he asserted that the downturn had not affected Oregon to the extent that many other parts of the country had been affected. Oregon, he claimed, was more “resilient” because of its diversified manufacturing base and because its houses had maintained their value to a much greater extent than houses in places like Phoenix, Las Vegas, Florida and Michigan. He called Detroit in particular a “black hole” as far as house prices and resale value.

I told him that I thought Detroit had hidden potential. “Really?” he asked, startled again. I explained that economically depressed areas of the country have potential, not as places for “investment” properties, but as places to live for people who want to decouple themselves from the faltering “official” global economy. These places are ideal because since ownership is cheap in such places, those who choose to live there don't have to take on a large debt. Therefore they don't have to enslave themselves to the official economy, and they have time and resources for learning how to live frugally and sustainably.

I could tell by the look on his face that he still didn't quite get what I was talking about. So I said, “The term that best sums up what I'm describing is 'urban ecovillage.'”

“Whoa, you're talking about a social revolution!” he replied. “Are you sure that most Americans are even ready for that?” I told him that the times now upon us would force Americans to make new arrangements, and that we were nowhere near the bottom yet as far as economic collapse. I casually dropped the names of a few authors, such as Dmitri Orlov and James Howard Kunstler, and mentioned that he might be interested in reading what these authors have to say.

In an attempt to change the subject, he asked me what I did for a living. When I told him that I am an engineer, he began to praise the value of the house we were in, and its potential as a rental property. I laughed a little and told him that I live just down the street, and am not interested in buying another house or going into debt. I explained my fear of indebtness in view of our present economic troubles.

He said again that he thought the local economy was relatively robust. I told him about the slowdowns and layoffs at my company's local office, and mentioned that the official unemployment rate in Oregon is over ten percent. This was news to him. “If all the things you tell me are true, I'm really worried about my children,” he said. I can sympathize with such a worry.

“Well, listen,” he said, trying to end on a less worrisome note. “Let's get together in a couple of years and see who's guesses were right about the future.” “Sounds great,” I replied, “although I don't think we'll have to wait more than a few months.”

By the way, for those who want a broader picture of how our state is doing, here are two recent news articles: www.nytimes.com/2009/03/27/business/economy/27portland.html?pagewanted=1&_r=3&ref=business, and www.washingtonpost.com/wp-dyn/content/article/2009/03/27/AR2009032700979.html. The New York Times article is interesting because it mentions the fall-off in shipping traffic at the Port of Portland. I often ride my bike over the Steel Bridge on the way to work. While I still see bulkers loading or unloading at the dock next to the bridge, I think they may not be coming as frequently as usual.