Over-indebtedness, the subprime mortgage crisis, and the effect on U.S. cities.

 
Introduction 
 
I.    The Increased Availability of Consumer Debt 
      A. Deregulation 
         1. Housing Purchases: Then 
         2. Housing Purchases: Now 
      B. Responses to the Unaffordability Problem 
      C. Technology 
      D. U.S. Labor Markets 
      E. Changed Norms 
         1. Thrift 
         2. The Myth of Homeownership 
 
II.   Consumer Debt and the Financial Crisis 
      A. Overall Debt Levels 
      B. The Housing Crisis 
         1. Harm to Cash-Strapped Borrowers 
         2. Other Homeowners 
         3. Other Negative Externalities 
         4. Other Non-Homeowner Borrowers 
         5. Urban Areas 
      C. Responses to Current Debt Levels 
 
III.  Potential Responses by Urban Communities 
 
Conclusion 

INTRODUCTION

Too many people in the United States are overwhelmed by debt. While we were once a country of thrift, consumer indebtedness has become a ubiquitous phenomenon that affects people in both urban and rural areas and from all socio-economic groups. Because so many people are over-indebted, (1) the United States is in the midst of a severe economic meltdown and the magnitude of the federal government's intervention in the financial markets is surpassed only by the bailout efforts to end the Great Depression. (2)

The economic crisis was caused by the record number of defaults on subprime mortgage loans and the foreclosures that followed those defaults. For the last two years, U.S. homeowners--like consumers in the rest of the world--have felt the financial pain associated with rising fuel and food prices. The increase in the prices of those commodities, however, was not the reason homeowners started defaulting on their subprime mortgages. Instead, the U.S. subprime mortgage crisis was triggered by (and then morphed into a global financial crisis) the over-consumption of consumer credit generally and our gluttonous consumption of mortgage debt.

This Article discusses the rise in consumer debt generally, the harm that the current credit crisis has caused to the U.S. economy and global capital markets, and the specific threats that the current financial crisis pose to U.S. cities. Part I discusses the increased availability of consumer debt and how deregulated consumer credit markets, along with technological, demographic, and labor market changes, caused lending standards to become so relaxed that people were able to buy homes they clearly could not afford. Part I also notes how shifts in societal views toward thrift and borrowing have caused too many people to borrow too much in a desperate attempt to participate in the "American Dream" of homeownership.

Part II focuses on the current financial crisis. This Part presents current overall consumer debt levels and then discusses the harmful effects of the financial crisis on homeowners, the financial sector, and even groups that are unrelated to the housing industry (such as college students). Part II then briefly describes the initial responses to the financial crisis and the various, but ultimately failed, attempts to prevent the subprime credit crisis from spreading.

Part III suggests that, rather than wait for federal bailouts, localities take proactive steps (including purchasing foreclosed homes) to prevent this financial crisis from decimating their cities. The Article ends by stressing that the metastasizing mortgage crisis threatens to leave urban areas with a glut of abandoned homes and that an increase in distressed neighborhoods may reverse years of urban renewal projects.