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Subprime geography

Steve Tripoli Apr 5, 2007

Subprime geography

Steve Tripoli Apr 5, 2007

Is the subprime crisis affecting you directly — either at work, in the wallet, or at home? Click here to tell us about it.

KAI RYSSDAL: Yahoo unveiled a new website today. It’s a shopping site, of sorts. Kinda depressing, though — it’ll let you search for foreclosed properties.

It’ll probably be pretty successful. There’s been a rise in foreclosures since the subprime mortgage market hit the skids.

But expensive lending like subprimes extends beyond just mortgages. Credit cards, auto loans and fast cash places are all the same category. Marketplace’s Steve Tripoli looks at a the wider consequences of high-priced credit.

STEVE TRIPOLI: Of all the places where you might learn about subprime lending, maybe one of the last you’d think of is a school’s geography department.

But professor Steve Graves at Cal State Northridge has taken to mapping three types of subprime lending. He says mapping lenders’ locations tells him a lot more than their addresses.

STEVE GRAVES: It lays bare the business model for this industry.

Graves says that model targets poor neighborhoods, including places you might not think of — like the streets around military bases.

PHOTO: A map displays payday lenders congregating around a military base in Oceanside, Calif. (Prof. Steve Graves, Cal State Northridge)

But here’s where the subprime story departs from the expected. This time, poor people aren’t the only ones deeply involved.

What other groups might be hard-hit?

ADA FOCER: I have suspect categories.

Ada Focer is a former Massachusetts banking commissioner who’s written extensively about lending. She hasn’t fully researched this yet, but says she’s picking up a set of wealthier communities that may also be subprime misery zones.

FOCER: I would be looking to communities that have concentrations of software, computer programmer people, where their negotiating power in the marketplace has gone down. I’d be looking for communities that have young families.

In other words, folks caught in the “middle-class squeeze” of stagnant wages and rising costs for housing, health care and education. Subprime lenders say they exist for these people and lower-income folks.

Jamie Fulmer of Advance America, a 2,800-store payday lender, describes his firm’s fast-cash loans much as other subprime lenders describe their products.

JAMIE FULMER: We think that this is a product that consumers value, this is a product that consumers like and this is a product that they have overwhelmingly demonstrated that they use responsibly.

Fulmer says most borrowers don’t have better options — a claim that’s hotly contested — and that most are smart enough to go elsewhere if there are less-expensive deals.

Subprime lenders say they’re “democratizing credit,” giving folks who would never have gotten a loan under old standards a chance at a better life.

Those arguments drive opponents like Kathleen Keest crazy.

KATHLEEN KEEST: I think it’s more like an anvil around people’s neck than a helping hand up.

Keest works for the nonpartisan Center for Responsible Lending. She and others point to numerous studies saying many subprime borrowers can do better but don’t know it — in part because they’re misled by loan marketers.

These critics say millions become hopelessly mired in subprime debt before they realize what’s hit them.

Their arguments have new support. The Federal Comptroller of the Currency’s office now says abusive lending and fraud is feeding subprime mortgage defaults.

So, what might come next?

The streets of Boston’s working-class Dorchester neighborhood have seen this story before. Cycles of high-cost lending in communities like this one have been tremendous wealth-destroyers.

Ada Focer, the former state banking commissioner, lived here for 30 years. When the downward cycle starts and people start losing their homes, she says no one in these communities gets away unscathed.

FOCER: Everybody who lives there — everybody who lives there, even the people who are not being foreclosed on — lose wealth.

Empty homes sink real estate values. People flee. Even many who survive their loans see precious years of equity-building wiped out.

Half a continent away, legal services lawyer Diane Thompson also sees this around East St. Louis, Ill.

DIANE THOMPSON: We are looking at hundreds of thousands of dollars being sucked out of a community that could desperately use that money to build wealth. To fix the roads, to send the kids to better schools. And instead, that money is just disappearing in exorbitant credit rates.

PHOTO: Payday lenders across the U.S. (Prof. Steve Graves, Cal State Northridge)

In the past month, news reports have detailed major stress and mortgage foreclosures in suburbs of Cleveland, Atlanta and Chicago. Pockets near Sacramento are staggering. Boston’s far suburbs make up half of the nation’s top 10 spots for subprime mortgage delinquencies.

The way things reached this point is also different this time. Subprime lenders and those who package their financing for investors often make their money up front now.

Researcher Alan White says that’s a big change from the days when lenders held their own loans and absorbed all the damage if things went bad.

ALAN WHITE: There’s no feedback cycle. The harm and the pain caused by foreclosures and bankruptcies is not necessarily going to make its way back to the lending markets.

No one knows how bad this will get. But we already know one thing for sure and one that’s likely. We know there will be many pockets of concentrated painnot all of them poor.

And what’s likely is that the argument over how this happened, and what if anything needs to be done about subprime lending, is about to get hotter.

I’m Steve Tripoli for Marketplace.

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