Mortgage Meltdown: Towns File Bankruptcy: Vallejo

Housing Crisis Bankrupts Vallejo

The crisis caused by dramatic changes in the home lending markets has claimed a new victim.  This time it is not a bank or mortgage lender, it is instead a working class suburb of San Francisco that has filed for bankruptcy protection.

A recent post by Adam Levitin on the Credit Slips blog site calls attention to the city of Vallejo, California, that on May 23, 2008, become the first city to have filed for Chapter 9 bankruptcy as a result of the plummeting home prices.  Although Vallejo stands out as a community particularly hard hit by the housing crisis – as one where the housing bubble was disproportionately bloated, and where city government used unrealistic revenue projections to live beyond its means – it is hardly unique.  The City of Vallejo website has a special set of pages containing the documents filed in the Chapter 9 case and a copy of the court docket for the pending case.

The experience in financial markets of the last year ought to teach us that one default, caused by what John Quigly, professor of Economics at University of California, Berkeley called in a Times interview “a low level of infection everywhere”, is a harbinger of many more as the problems work their way down the queue from the most egregious to the garden-variety.

I’m not an expert on macroeconomics, but it does not look to me as if HR 5818, The Neighborhood Stabilization  Act of 2008, is a viable solution to the problems facing Vallejo or any other community in a similar position.  A key provision of this bill, which just passed the House of Representatives, has the Federal Government extending loans, through states, to communities that would in turn loan the money to individuals to buy up and rehabilitate foreclosed properties.  Presumably a city that had already declared bankruptcy wouldn’t qualify.  For one a little less embroiled in a similar morass to borrow large sums of money, albeit under attractive terms, in order to allow individuals whose incomes may well drop in the next few years to incur debt for houses whose value, most probably, is still above a sustainable level, simply postpones the day of reckoning and ensures that the final bottom will be even more painful.

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