While the US economy continually adjusts to a housing market yet to hit a firm bottom, billions of dollars are set to flow into communities across the country in an effort to stabilize neighborhoods imperiled by predatory lending, ill-informed borrowing, and subsequent foreclosure. Resources heading into communities -- federal dollars funneled through states in most cases -- will flow under the guise of neighborhood stabilization. But based on the history of local use of federal dollars for housing and community development, there are reasons to pause and think carefully about just how this money will be spent, by whom, towards what ostensible aims, and with what potential set of results. Indeed several questions surface and ought to get a fair hearing before final deployment decisions are made.
Which of the underlying governing variables that helped shape the predicament we're in now remain in place? Which of these inputs are being fundamentally rethought and dismantled before supposedly resuscitative resources hit the street? Whatever the merits of the actions that shaped the growth and then collapse of the housing market, what guiding principles of past behaviors figure into the future? Are the housing policy principles and programs that gave direction to previous public policy being fully reconsidered? The history of housing and neighborhoods in America is more a history of iterative adjustments than well-crafted overhauls. It's important to know whether the billions now intended to deal with subprime disasters and foreclosures are more likely to tinker with things as they have always been, or rethink the total process.
Further, how do we avoid facile answers to the dilemma of a housing and community development challenge far larger than the resources with which we have to respond? It seems especially wise -- since even the large amount of money Congress passed is far less than sufficient -- to be approaching the challenge of neighborhood stabilization knowing we have much less than is truly needed.
It's important to pose these questions because the housing and community development field -- the group of professionals essentially tasked with deciding how to spend billions preempting further decline in many of our nation's housing markets -- is notorious for asking far too few basic questions. Remarkably, we are some of the same practitioners that have partial responsibility for the fix we're in the first place.
How can we explain policies and programs that rarely attempt, much less achieve the aim of deconcentrating poverty? How can we explain continual reliance on housing unit development systems when in many markets it was rarely clear that more units were necessary and never clear that the delivery system crafted the last 25 years made much sense? This is not an indictment of the whole of the community development field. Far from it. Our role in the current morass pales when compared to the bulldozer work done by Countrywide, Citigroup and Washington Mutual and others. But because we do own some share of the current state of affairs, and because it's our field that will determine how to spend scarce resources to try to fix things, at the very least we should think very carefully about the ends we're pursuing and our means of getting there.
Based on my experience in every kind of market -- from Saginaw, Michigan to Oil City, Pennsylvania to Santa Fe, New Mexico to Bridgeport, Connecticut -- there is at least one meta theme that must be acknowledged. Simply said, there are two America's now: one that can repay what it borrowed, and one that can't. Most of the time, the America that can repay on its own is geographically concentrated.
Bad loans have followed speculation of one sort or another -- speculation by developers overbuilding new housing and investors aiming to acquire and flip, and speculation by unqualified borrowers aspiring to own or to move up. Such speculation has wound up mainly hurting low- and moderate-income Americans either directly in the form of an eviction notice or indirectly in the form of being the neighbor to a soon-to-be-vacant house, which will impact values in ways demonstrably negative and viral.
Fortunately, there are numerous ways to attack the viruses of default, foreclosure, vacancy, distress, auctions, more speculation, bottom-feeding acquisition, and questionable remarketing. At the core will be proper re-pricing of loans, but the mechanics of how to re-price the loan is not the point. What matters is which loans to re-price. Let me state again: the mechanics of working out problem loans, or property disposition or loans and houses already in advanced distress is, while not unimportant, substantially less important than the logic used to determine which houses on which streets in which parts of town should receive attention.
With perfect resources, every vacant property once owned by a working family in Bridgeport, CT, or Saginaw, MI who over-borrowed would be the target of our efforts. Each home would be stabilized and, in turn, any further decline on those streets would in part be stemmed. But $4 billion will not do it, while hundreds of billions in mortgages are at risk.
So the unavoidable question is this: if we can't address every property in trouble on every imperiled street in every at-risk neighborhood, then which ones should we address and where?
Mistakes From the Past
Based on past behaviors over 25 years of community development history, the prototype response to such a challenge will have two likely tendencies. One will be to put deep resources into those communities hurting the most. Another will be to put a little bit everywhere.
In the case of the former, we can envision a scenario where a state receives $30 million, and now must determine how much goes to city A, how much to city B, and so on. Most states will adopt the same per capita approach used to drive other formula amounts from the federal government. But then the real work begins.
In my experience, most city neighborhoods can be classified into market "types" ranging from healthy to distressed. All will have some level of foreclosure to tackle. Where to spend the money? Let's say a community winds up with $1million. Should it spend $1 million to fix ten problems in a pretty healthy neighborhood, or $1million fixing 5 problems in a greatly distressed area?
The past tendency in our field was to deploy the $1million across the city thinly, or to concentrate resources where there is greatest need at the bottom.
The first approach is decried as politically driven, scatter shot and very low impact. The second approach designates qualified neighborhoods and has given us public housing towers and tax credit investments skewed to the most at-risk households in neighborhoods where market conditions will hardly ever improve as the result of more subsidies.
How does this happen? For starters the right question isn't commonly enough asked at the local or state level. Housing and neighborhood policy tends to get crafted by asking where is the area of greatest need. Political decisions tend to get made by asking where is the area of greatest support by the community and by officials. Resources usually follow questions, but are the right questions being asked?
The question at the center of the challenge of neighborhood stabilization - now amidst the current fiasco or at any other time - is not where is the area of greatest need, but which area has the greatest chance for success? There are many good reasons community development professionals have been historically loath to ask this question. But I suspect the main reason is that it seems unfair to even contemplate the answer, much less precipitate it.
The parts of a city that are most likely to succeed are the middle market neighborhoods still showing signs of strength, neighborhoods with problems but with counterpoised assets that are marketable with minor improvements. These are the neighborhoods where pocket blight can be wrestled to the ground before it takes root. These are the neighborhoods where social norms provide running room for improvement.
Yet these are not the neighborhoods we have historically chosen to focus our community development efforts in, and they are not the places we are likely to deploy the new stabilization resources in, either. This is most unfortunate, because it is these neighborhoods that have not yet -- but well might -- tip. These are the neighborhoods where there remains some semblance of equity, where loan-to-value ratios still offer some kind of collateral, where such market strengths have not yet been replaced by renewed speculation and added slum landlord practices. Then why invest here? Because these are the neighborhoods that will tip downward without an intervention, and these are the neighborhoods where relatively modest interventions in concentrated doses can redirect market forces, generate value, stem disinvestment, and spur tax base renewal.
In my experience, though, because the residents of these neighborhoods are lower middle income and the working poor, and because these neighborhoods are not yet completely distressed, they are apt to be passed over or receive glancing attention. The argument will be that there are other neighborhoods of greater need, in greater distress. This will be true. But the recovery costs will almost always exceed the resources available and while these neighborhoods are trying to recover, truly savable neighboring submarkets will have turned, and failed.
Finding the Right Questions
To many of us the concept of triage is a grotesque logic model to consider. It assigns to patients probable trajectories of recovery based on a range of interventions. It then subtracts the resources that might save a distressed patient and donates them to one less distressed. But this is also a syllogism, whereby the unfairness of triage is calculated in the fantasy world of enough doctors and enough blood plasma to go around. In truth, a world with too little resources is the world we live in. Too few livers for people who need them. Too few police covering too wide an area. This is a distributional problem.
Traditional community development also compounds this problem by affixing to the work the belief that cleverness in our intervention can so stretch scarce resources that we can in fact save everyone. But we would be wise to examine more closely the kinds of creative efforts we've used in the past, and how in fact, they have turned out.
To get more low-income people housed, rather than fewer, we have historically opted to build on the cheapest land. This has served the purposes of many politicians, activists, and developers quite well with the result being a disastrous concentration of poverty.
To get distressed markets working again, we have hewed to our edifice complex and too often pursued a "Field of Dreams" strategy, building new products in weak neighborhoods convinced that the market will come.
To get families patently unqualified to buy a home, we've completely neglected the ground rules of due diligence, paying little or no attention to collateral, credit, or capacity or the eventual likelihood of disastrous foreclosures.
Depending on the moment, there is little question that each of these approaches made some kind of sense. But what all these and other similar tactics have in common is they are all too clever by half and were forged under pressure caused by seeing community development not as a distributional challenge but as a moral imperative.
We are at a moment where once again we have a distributional challenge. More than two million foreclosures. $4 billion dollars. I doubt very much that $2,000 per house will fix this problem. I doubt that a street of 40 homes with 30 foreclosures can be fixed for $60,000. What we want to be asking is whether to fix the street with 30 of 40 homes in trouble (and in what kind of trouble according to a gradient) for $3 million with little chance of being turned around, or the street with 5 of 40 for less than $1 million and with a high probability for recovery.
I don't have easy answers -- in part because there aren't any; but also because we're charting new territory while covering the same ground. What I do know is this: we should be asking questions like:
My own recommendation for municipalities developing their criteria for intervening in their housing markets is as follows:
Using these criteria will not reach every challenged neighborhood in your city. But the ones you do reach will recover.
Charles Buki is principal of czb, a Virginia-based neighborhood planning firm specializing in deep dive analysis, strategy development, and implementation of revitalization plans.