Nothin' but Blue Skies

by Edward McClelland

  “They took the fifty thousand dollars and split it to line their pockets with gold,” Zajac said. “Three years ago, Aunt Mary and her son were sued by the lender, Deutsche Bank. They falsify the income of the purchaser and they fly. They leave the house once they got the money.”

  Then there were flippers. They paid old women $40,000 for their houses, then turned around and sold them for $60,000 to suckers whose greed was inflamed by “Get Rich Quick in Real Estate!” infomercials, and by the inflated real estate market of the late 1990s, when properties were doubling and tripling in value. Hapless bargain hunters purchased houses on the Internet, only to find them boarded up and stripped of every metal fixture. A California artist looking for a cheap home/studio bought a Slavic Village house that turned out to be condemned. (After many trips to housing court, he brought it back up to code.)

  The lenders were so aggressive they went door-to-door on the East Side of Cleveland, pointing out loose shingles, collapsing chimneys, or sagging porches. Money from a second mortgage could repair any of those defects, the door-to-door brokers told the homeowners. They never mentioned the adjustable rate.

  Anita Gardner’s sons fell for that scam. Gardner, who worked thirty-one years as a heavy-duty machinist and welder at TRW Automotive, bought a two-story house on the East Side for $21,000 back in the early 1970s. It was almost paid off when she was diagnosed with Chiari malformation, a brain disorder that left her too ill to work or even walk up the stairs to her bedroom. So she bought a one-story home, a converted liquor store, and signed the old house—“My Buckingham Palace, a place where I could cover the walls with my paintings and close off the world”—over to her two thirtysomething sons. When Gardner had moved in, every house was owned by an autoworker or a steelworker with a wife, four or five children, and a new car. Then J & L Steel, the neighborhood’s largest employer, closed in 1999. The blue-collar workers moved out, and the mortgage brokers began moving in, attracted by the remaining residents’ financial desperation. Having lost their paychecks, these dispossessed factory rats were told they still had a source of income, in the houses they’d bought cheap and paid off with union wages and frugality.

  “This couldn’t have happened if people had good jobs,” Gardner said. “Or why would they change their mortgage? They were desperate for money. It was targeted. It was definitely targeted. Mortgage agents were going door-to-door, calling on the phone. It was in the air: ‘You don’t have to have credit. You can have nice things.’”

  Gardner’s sons fell for the pitch. Neither had ever been able to afford nice things. The elder brother had served eleven years on a drug charge. When he got out of prison, the only job he could find was delivering furniture for Sears. The younger brother worked as a restaurant supply salesman. When an agent from Countrywide Financial offered them a $70,000 mortgage on their mom’s almost-paid-off house, they signed. Gardner suspects the agent falsely inflated the home’s value in order to write a bigger mortgage. Agents received bigger commissions for adjustable-rate mortgages. The boys used the second mortgage for a shopping spree. A black Hyundai Tiburon sports car. A new couch. A big-screen TV. A refrigerator in the garage, full of beer.

  The monthly payments began at $436 a month, but as the boys missed payments, it more than doubled to $950, far more than they could pay on their small-time jobs. When the past-due amount reached $4,000, Gardner’s sons appealed to Mom for a bailout.

  Gardner paid the arrears, plus an $800 transaction fee, plus a series of six $1,000 “good-faith payments” to return the note to its original payment plan. A Realtor friend negotiated with Countrywide to buy the house back for $25,000—which Gardner raised by borrowing on her new house. The mortgage lending crisis ate up her life savings.

  “I’m out of money,” she said. “This is all my retirement money. I have enough to live on, but all the money I had stuffed under the mattress, it’s gone. Meanwhile, my mortgage on the new house jumps from six hundred dollars to nine hundred dollars.”

  Gardner evicted her sons—“they don’t deserve this, they don’t understand what the palace is”—but two months after buying back her house from Countrywide, she was informed that the employee with whom she’d negotiated had no authority to cut a deal.

  “Why should we take twenty-five thousand dollars when we can get seventy thousand dollars?” a Countrywide agent told Gardner. “We will get the money from your son. We will prosecute him.”

  Countrywide sued Gardner’s sons and began foreclosure proceedings on the house. Desperate, she appealed to an organization called ESOP—Empowering and Strengthening Ohio’s People. As a social service agency in the nation’s foreclosure capital, ESOP was devoting a large part of its resources to mortgage counseling. Having lived a middle-class life, Gardner was a little put off by ESOP’s office. A room in the back of a church, with two or three people working on mismatched furniture, it reminded her of a sweatshop or a numbers runner’s den. But Gardner joined ESOP’s campaign against Countrywide, which had been writing shady mortgages all over northeastern Ohio. Wearing a shark’s head, Gardner joined a picket of Countrywide’s headquarters, where ESOP members passed out the personal cell phone number of CEO Angelo Mozilo. Busloads of protesters picketed Mozilo’s country club. (They were followed, needless to say, by vanloads of TV cameras.) ESOP blew up the company’s fax machine with photographs of foreclosed homes. Finally, Countrywide settled with Gardner for another $6,000. Buckingham Palace was hers again, but the rest of her street was a cemetery.

  “There was seventy-six houses on the street, and now only eleven are occupied,” she said.

  This raises a question. Which is the greater social ill: allowing people who can no longer afford their mortgages to stay in their houses, thus undermining the credit system by letting people skip out on their payments, or evicting people from houses for which there is no buyer, thus undermining the property itself and the surrounding neighborhood? Ted Michols and Anita Gardner would say let the poor folks stay and look after their houses. Vacant houses attract criminals. Michols called the cops on a stripper trying to tear the aluminum drainpipe off a house at eleven o’clock in the morning. In a 150-foot radius around a vacant house, property values go down at least $7,000. A vacant house reduces its own value even more, since it’s usually denuded of plumbing fixtures, boilers, carpeting, sinks, toilets, heating pipes, and any architectural sconces that can be peddled in a secondhand shop. Yellow foreclosure stickers and plywood windows are not warnings, they’re invitations. After homeowners exhaust the equity, inner-city scavengers salvage the last pennies of value out of a house, until the mortgage lender ends up paying the city for demolition.

  Jim Rokakis, who had been a twenty-two-year-old city councilman when Dennis Kucinich was mayor, was elected Cuyahoga County treasurer in 1996. Holding that job, at that time, made him the first politician in America to see the foreclosure crisis coming. Normally, 2 to 3 percent of the county’s homes were in foreclosure. But by the end of Rokakis’s first term, that proportion had doubled. Cuyahoga County had the highest foreclosure rate in the nation.

  As a freshman treasurer, Rokakis was ignorant of the mortgage industry’s scams. But once he learned that fly-by-night brokers were writing inflated mortgages to buyers with no income, he convened a conference, “Predatory Lending in Ohio,” at the Cleveland branch of the Federal Reserve. Rokakis hoped that Federal Reserve Board chairman Alan Greenspan might crack down on sleazy lenders like Countrywide. Greenspan did nothing, not even after receiving a warning letter from a Federal Reserve governor who attended the conference. So Rokakis persuaded three Ohio cities—Cleveland, Dayton, and Toledo—to adopt anti-predatory-lending ordinances. The ordinances were quickly invalidated by the state legislature in Columbus, which passed a law specifying that only the state could regulate banking. This, of course, lured even more lenders to Cleveland. In 2004, Ameriquest Mortgage Company, the nation’s largest subprime lender, established an office of its Argent Mortgage subsidiary in Cleve
land. Ameriquest had invented the “stated income loan”: if a customer told Ameriquest he earned one hundred grand a year, Ameriquest would take his word for it. Why let the facts mess up a bad loan?

  “The amazing statistic about Argent is their first year of operation, ’04, they led Cuyahoga County in two categories—loans issued and foreclosures,” Rokakis said. “So the day they opened up, they were in trouble. They were making these wild loans and they were making loans that could not be repaid.”

  By the time the crisis peaked, in 2006, Cuyahoga County had thirteen thousand foreclosure filings—four times its pre-2000 level. Unable to get the attention of Greenspan or Ohio governor Bob Taft, Rokakis wrote an op-ed for the Washington Post. By then, it was too late for the nation to gain from Cleveland’s pain. From its cradle in Slavic Village, the subprime lending industry had spread throughout the entire nation and was a year away from capsizing the entire American economy. Wrote Rokakis:

  Let me tell you about a place called Slavic Village and the death of a girl called Cookie Thomas. You’ve never heard this story before—talk of housing markets and hedge funds, interest rates and the Federal Reserve has drowned it out.

  Twenty years ago, the Slavic Village neighborhood of Cleveland was a tightly knit community of first- and second-generation Polish and Czech immigrants. Today, it’s in danger of becoming a ghost town, largely because a swarm of speculators, real estate agents, mortgage brokers and lenders saw an opportunity to make a buck there.

  You could say it was because of them that 12-year-old Asteve “Cookie” Thomas lost her life on Sept. 1, shot in Slavic Village when she stumbled into the crossfire of suspected drug dealers. The neighborhood wasn’t always a haven for criminals—not until hundreds of foreclosures destabilized the community. Houses (800 at last count) and then entire streets were abandoned. Crime increased as vacant properties offered shelter for people who had a reason to hide.

  Cookie Thomas … haunt[s] me because [she] didn’t have to die. In a sense, [her death] was foreshadowed in the late 1990s, when the dark side of the real estate industry—the predatory lenders—came to Ohio, including Cleveland’s Cuyahoga County, where I serve as treasurer. They knew that the state’s lax regulatory structure would give them virtually free rein. This is when we first heard terms such as “securitization,” “mortgage-backed securities,” “3-28s,” and “risk modeling.” These are code words for Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible—the strategies that have sucked the life out of my city.

  By 2006, the year the crisis peaked in Cleveland, 903 of Slavic Village’s 2,944 properties were in foreclosure. Rokakis did secure passage of a county ordinance that sped up foreclosure of vacant, tax-delinquent properties. The empty houses went into the city’s land bank, which often sold them to next-door neighbors, so they could expand their yards. (“If the vacant lot is next to you and you can beautify it by putting grass and cutting it and keep it nice, it adds to your property value,” Rokakis said.) Others went to community development organizations. On a street as gapped and rotten as an old tramp’s mouth, a group called Slavic Village Development built vinyl-sided ranch houses to replace the worn-out workingman’s cottages.

  Slavic Village offers an opportunity for an entrepreneurial developer. Broadway, the neighborhood’s high street, is served by five-and-ten-dollar businesses: Walgreens, Wendy’s, soft ice cream stands, and grimy diners serving city chicken. (The Cleveland dish of city chicken is actually cubed pork on a skewer. It was invented as a poultry substitute by Slavic housewives too poor to afford actual chicken and is still served as a white ethnic comfort food.) What Slavic Village needs is a strip mall gathering every ghetto business under a single roof. It would include a cell phone store, a discount dollar store, a rent-to-own center, a Laundromat, a liquor store specializing in White Owl cigars and Night Train wine, a Chinese takeout with three wobbly tables and a hand-lettered “NO MSG” sign in the window, a chicken-and-fish grill where the food is served on a rotisserie that rotates through a bulletproof window, an instant-tax-refund center where a man dressed as the Statue of Liberty hands out flyers every winter, and a currency exchange charging a 3 percent fee to cash checks for people trying to avoid having their bank accounts garnished for child support and/or back taxes and/or legal fees. The mall could also support a sneaker boutique selling counterfeit Nikes (look for the backward swoosh) and three-for-five packages of cotton socks, as well as a day labor center that takes a 33 percent fee out of your wages but doesn’t ask, “Have you ever been convicted of a felony?” on the application. A pawnshop is also a possibility, although pawnbrokers have been thriving since the recession began, so they might be able to afford their own building.

  The wonderful thing about this mall is that it could be prefabricated and franchised out to every inner-city neighborhood and small town in the United States. Just as toothpaste and soap manufacturers are trying to profit from the economic stratification of America by developing discount products for the formerly middle class, a single poverty-pimpin’ conglomerate—we’ll call it PoorMart—could develop thousands of these little malls, from Bridgeport, Connecticut, to Phenix City, Alabama, to Stockton, California. After buying the properties in foreclosure sales, PoorMart would hire nonunion contractors to build the stores and recruit low-wage employees from Pakistan, India, Nigeria, and Iraq, arranging for work visas which would be voided at the first sign of insubordination. PoorMart would fill a niche too small and specialized for Walmart to occupy. As the Walton family earns billions of dollars by selling shoddy goods to people who lack the money or the transportation options to shop in department stores, PoorMart’s owners would earn billions off people too poor to shop at Walmart. They’d make billions more in interest and convenience fees from people too broke to save up for a living room set or wait six weeks for their tax refunds. With its combination of retail stores and financial services, PoorMart would transmute the masses’ poverty into investors’ wealth.

  As the birthplace of the new underclass, Slavic Village is the perfect test market for PoorMart. Unlike most urban neighborhoods—even most neighborhoods in Cleveland, where the Cuyahoga River separates East Side blacks and West Side whites—Slavic Village is racially mixed. A cross was burned when blacks began to infiltrate in the 1990s, but Catholic parishes—like Ted Michols’s Immaculate Heart of Mary—and Polish immigrants prevented unanimous white flight. Slavic Village’s demographics have settled at 55 percent African-American and 41 percent Caucasian. The white population has actually been growing, due to young urban pioneers seeking cheap housing and “authentic urban experiences” (e.g., Polish bakeries) they can’t find in the suburbs. When Slavic Village Development built middle-income houses and town houses on the site of a closed-down state mental institution, it managed to attract black and white buyers in equal numbers, by marketing to both races. Councilman Brancatelli marketed his Fourth of July fireworks show the same way: he hires a country singer and a funk band, thus drawing a salt-and-pepper crowd of blacks, elderly Poles, and tattooed white families. While waiting in line for free ice cream and hot dogs before the fireworks, I met a man who identified himself as “Bohemian, Hungarian, Polish, Czech, and Slovenian,” which used to pass for diversity in Slavic Village. He believed his neighborhood’s worst years were over, now that the city was demolishing the legacies of the foreclosures.

  “It’s cleaned up a lot of property,” he said. “There’s a lot of vacant land. The crime went up, because there was drug dealers in all the houses, but they’ve been torn down. It’s turning the corner. Plus, once you’re a drug dealer, you have to have money to buy drugs. All the scrap is gone. The drug dealers are moving out to the suburbs.”

  THE HOUSING CRISIS that began in Slavic Village eventually bankrupted several Wall Street houses that had overinvested in subprime-mortgage-backed securities. What was bad for Wall Street was even worse for Detroit. The American automakers were already struggling in 200
8. Their solvency depended on SUV sales. Only big vehicles could generate the profits necessary to pay health care premiums and pensions for millions of retirees. But once gasoline prices crested at $4 a gallon that May, even Americans stopped buying SUVs. In the spring quarter of 2008, General Motors lost $15.5 billion. GM cut off medical benefits to retired salesmen, engineers, and executives, but it couldn’t cut off UAW members, whose contracts guaranteed health care for life.

  Then, in September, Lehman Brothers filed for bankruptcy. The stock market lost 30 percent of its value. Automobile sales dropped by the same amount, to their lowest levels since the Iranian crisis of the late 1970s. GM stock crashed to $3.36 a share—less than a third of its value just three months before, and its most meager price since 1946. Drivers weren’t buying cars. Bankers weren’t making loans. The auto companies had only one place to turn for money: the federal government.

  In Pinckney, Michigan, an automotive engineer named Tom Lavey watched the entire congressional auto bailout hearings on CNN. Lavey had plenty of time to sit in front of his television, because he’d just been laid off for the second time that year. During the spring, he’d ended a contract job with International Automotive Components, designing carpets for Ford cars. In the fall, Lavey caught on as a contractor with Ford, where he had worked early in his career. It paid a third less than he’d been making at IAC, but in 2008, the Big Three weren’t handing out engineering jobs the way they had been when Lavey graduated from Eastern Michigan University in the 1980s.

  There’s a legend that when a boy is born in southeastern Michigan, his parents declare, “What a cute baby. He’ll make a great addition to the auto industry.” Lavey decided that himself. From the time he was seven years old, he wanted to make cars. His path was confirmed in college, where he saw a flyer listing the salaries of various careers. “Manufacturing and Auto Industry: $30,000 a year” it read. That was good money. It was security, too. How could manufacturing ever go away? People would always need stuff. The auto industry had supported his grandfather, who’d spent his entire career at Ford, and it would support him, too. Right out of college, Lavey got a contract job at Ford and saved enough money for a three-month trip to Europe.