New Ohio Mortgage Lending Rules will Create Glut of Unsold Homes

You might think the evaporation of high-interest home loans is good news for a region where thousands of people have lost their homes to foreclosure.

But the timing could not be worse, Cuyahoga County Treasurer Jim Rokakis says.

High-interest mortgages are often the only option for people who are rebuilding their credit. If the supply disappears when many homes in the Northeast Ohio housing market are vacant and begging for owners, it might cause a glut and depress values for years.

“Look out below,” he said. “It’s going to get ugly.”

Tighter credit will further weaken the housing market, said Brian Mikelbank, director of the Center for Housing Policy and Research at Cleveland State University. So will new housing. And the faster handling of foreclosures in Cuyahoga County Common Pleas Court will dump even more houses on the market.

The court has reduced its foreclosure backlog by 16 percent - from 13,155 cases to 11,066 - in under 10 months, records show. Older suburbs demanded swifter action because many owners were abandoning their homes in the face of lawsuits.

But Mikelbank said pain in the near future will eventually give way to gain.

“I think the longer-term impact of the collapse is that lenders are going to have to be much more careful in their lending practices,” he wrote in an e-mail. “That will likely mean fewer households getting mortgages (or households qualifying for smaller [home mortgages]), but hopefully that translates to fewer having to give up their homes down the line.”

Home buyers with good credit would be likely to have the means to maintain the homes, but doing so is out of reach for people strapped by high-interest loan payments.

Critics, including Rokakis, say subprime lenders have fed Northeast Ohio’s foreclosure epidemic by locking people into deals they don’t need or can’t afford.

A new study of foreclosures in Shaker Heights found that high-interest loans, largely for home mortgage refinancing, fueled foreclosures in lower-income neighborhoods.

Now that cities are mired in this high-interest mortgage mess, they have no easy way out. Whether the supply of high-interest credit rises or falls, the result is likely to be an increase in the number of vacant and deteriorated houses.

In many cases, cities will be faced with a choice: fix them up or tear them down.

Some suburbs have already stepped in to fix the houses. Shaker Heights plans to borrow $500,000 this year to repair 40 exteriors. The money must be repaid before the property is sold.

SOURCE: The Cleveland Plan Dealer