The Big Squeeze

More than 1,600 houses are in foreclosure in Rhode Island, threatening to send our economy into a swoon. How is the state going to fix this mortgage mess?

Whitehall Street is a hodgepodge of triple-deckers and bungalows, hard by the highway, before Union Avenue climbs the hill to the grander old homes of Silver Lake. Here on the bottom rungs of the housing market, the house-proud, who set their borders with freshly painted wrought iron fences, share the street with owners of a looser grip. Number
116 Whitehall is a tall multifamily of vague architecture, with dead leaves clotting its chain-link fence and mail overflowing the boxes by the door. It is one of five foreclosed properties in a four-block stretch, making Whitehall Street ground zero in the state’s sub-prime mortgage crisis—a distinction it shares with Bowdoin Street in Olneyville.

On a city foreclosure map, the dots are clustered in the West Side and South Side neighborhoods of Providence. By October, 750—nearly half of the state’s 1,648 foreclosed properties—were located within the city limits. As the Dow bucked and reared this fall, many were watching the dots to see if they would connect to something big enough to swamp the entire economy.

“There are some signs that are making us a little leery,” says Nicholas Retsinas of Harvard University’s Joint Center for Housing Studies. One is a historical study of ten housing downturns over the last fifty years that the center has just completed.

It shows that eight triggered recessions.

“But every time is different,” he cautions. “What is different this time is our economy is very much affected by what happens in the rest of the world; we are now in a global economy. A recession is still a possibility. The rest of the world is now important, and it might prop up the broader economy.”       

Not everyone is so hopeful. There are other signs, large and small, that the sub-prime mortgage crisis will usher in a recession—RV sales are slumping, a past harbinger of a general economic slump. Credit is tightening. Major lenders, such as Merrill Lynch, Citigroup and Bank of America have written off billions in assets. The National Retail Federation reported the slowest sales growth in five years on this year’s Black Friday, the day after Thanksgiving, when retail balance sheets historically change from red to black.     

In November, Edward M. Mazze, a University of Rhode Island business administration professor and regional forecaster for the New England Economic Partnership, an independent nonprofit, revised his estimate of Rhode Island home price trends. He now forecasts a 5 percent drop this year, and another five in each of the next two. Mazze estimates job growth in Rhode Island is expected to reach 1 percent in 2008 and 1.4 percent in 2009—several percentage points shy of the local economy’s break-even point. Those calculations can lead to a loss of business and consumer confidence. When the former stops investing and the latter stops spending, the 10 percent of the economy directly tied to housing, carpenters, mortgage brokers and interior decorators takes a hit.

In the last few of his thirteen years buying and selling mid-priced pieces of Victoriana, Aaron Boudreau, an antiques wholesaler from Dighton, Massachusetts, has seen the market evaporate along with his profit margin on staples of his inventory.

“I’ll give you an example,” he says. “A Larkin desk. Larkin was a company that sold soap at the turn of the century. When you bought soap, you got certificates you could redeem to get a piece of furniture. A Larkin desk, with a mirror and two candleholders was always worth $200, $225. I had one I bought for $75. I auctioned it off seven states away and lost twenty-five bucks on it. This is something I used to buy like snapping sticks. It was a no-brainer. The upper middle class and wealthy, they still have the money. But the working class and the middle class aren’t buying.” 

And the renting class is, in many cases, being booted unceremoniously from foreclosed homes, causing an immediate  squeeze on the state’s resources. Ray Neirinckx, the state Housing Resources Commission’s coordinator for the office of homeownership, says that many social agencies are getting hit with Emergency Housing Assistance requests from renters who lost their security deposits to a foreclosure along with their apartments.

“There’s no reason for these evictions,” he adds. “In many cases the mortgage has a rider on it for renters—meaning if the property is foreclosed, the rents can be
assigned directly to the banks. In some cases, the rents would pay the mortgage.

I don’t understand why the banks aren’t making use of the riders.” 

The city of Providence has mounted an aggressive response to the crisis, says Mayor David Cicilline. It is weighing the legislative options for strengthening the rights of tenants in foreclosures and offering city services to foreclosed homeowners. City housing inspectors and police are keeping a close watch on vacant properties to prevent them from blighting surrounding homes, while working with the banks to quickly turn over properties to new owners instead of bundling them to sell off to another financial entity.  

“I see this crisis has the potential to slow the progress and revival of several of our neighborhoods, but properly managed we will weather it and prosper,” Cicilline says.
But Mazze doubts the state has braced itself for the impact, and he says that it could be sizeable given Rhode Island’s weak financials.

“When it comes to economic crises, the government divides into three parts, and each part has difficulty working with the other part and nothing gets done,” he says. “There’s a high probability that the sub-prime crisis will increase the deficit and have an impact on the funding of schools and other public activities. Rhode Island has two types of economics. One type looks at data and makes a decision. The other type is political economics. You make a decision, then you collect data. If it doesn’t fit, you pick a different starting date, so you can’t compare the state numbers with data from any other source. And the political economics is always right, and the regular economics is always wrong.”

Rhode Island has one factor in its favor, says Retsinas. It was not overbuilt to the same extent as some of the Sunbelt communities.

“There’s some likelihood we may turn the corner before a Phoenix or a Las Vegas,” he says.

And every downturn has its upside. At Rhode Island Housing, the state’s quasi-public agency that provides low-rate mortgages for low- to moderate-income, first-time home buyers, business is booming. Richard Godfrey, the agency’s executive director, sees in the slide of home prices a much needed correction.

“We are moving to a neutral market,” he says. “Home prices soared too quickly—far faster than people’s ability to pay, so this could be healthy in the long run. The
decline in home values is nothing compared to the run-up in prices. And Rhode Island has had such a housing shortage for the past ten years. There’s been a lot of pent-up demand. It’s a good market to buy a home.”

Sharon and Shawn Prime found in the sub-prime mortgage crash a foothold. Sharon, a brokerage accounts represen-tative, and her husband, a certified nurse’s assistant, had abandoned their house search last year after looking at ranch houses selling for around $300,000. But after following the financial news, the Primes decided to resume in August. By October, they closed on a $230,000 ranch in Pascoag.

“We wanted something that we could make into a home and not just a place to live,” Sharon says. “We looked at which way things were going and decided that it was probably going to be the best time to start looking again. We wound up buying the first home we looked at. It was very quick, very easy. We were so lucky.”