When Sam Robertson took out a second mortgage on his home in suburban Cleveland three years ago, he couldn't believe how easy it was. The interest rate seemed low, the approval process was quick and soon he had a $61,000 (U.S.) loan, backed by a house worth about $100,000.
Then Mr. Robertson, 55, lost his job at a plastic-bag company. He found temporary work, but he got behind on payments just as the interest on his loan automatically reset at a higher rate. This week, a letter came. The house his family has lived in for 27 years is in foreclosure.
"It's very embarrassing and very demeaning to me. I was going for the quick fix . . . I wish that I had never fallen for that."
Versions of Mr. Robertson's plight are being played out across Cleveland, which has become the epicentre for the problems plaguing the U.S. housing sector. For months, many economists hoped that the troubles would be contained to that market, but it is now clear that the pain is spreading throughout the U.S. economy . . . and across the border.
"We will feel the sting in Canada," says Michael Gregory, a senior economist at the Bank of Montreal's BMO Capital Markets.
Foreclosures in Cleveland have soared from less than 200 in 2003 to 7,583 in 2007, one of the highest rates in the United States. On average, 20 Cleveland homeowners faced foreclosure every day last year.
The defaults have depressed property values, cut local tax revenue and left many streets lined with vacant buildings. Most have been stripped of windows, doors, siding and even copper wiring and pipes. Some vacant homes carry signs saying, "No Copper. All PVC Piping," in an attempt to stave off looters.
"I don't think you can go down a street in the city of Cleveland without seeing at least one vacant house," says Mark Seifert, who runs a non-profit group called East Side Organizing Project (ESOP). Across the country, an estimated two million homes went into foreclosure last year, about double the 2006 level.
Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.
"It's like you are on a train heading for a bridge, but the bridge is out and you have no way of stopping the train," says Colin Kilgour, of Conner Clark & Lunn, a Toronto-based investment firm. "You can see it coming."
Mortgage woes and falling house prices have prompted consumers to cut their spending to a five-year low. Banks and other financial institutions, which pumped out more than $2.5-trillion worth of subprime loans between 2000 and 2007, have taken massive losses. This week, two of the biggest, Merrill Lynch and Citigroup, reported a combined $20-billion loss for the fourth quarter. In total, banks in the U.S. and Canada have piled up more than $100-billion in housing-market losses.
Throw in high energy costs, weak employment and lower stock prices and it's no wonder that many economists have said the U.S. could fall into recession this year. And that means a slowdown for Canada as well.
Mr. Gregory of BMO points out that consumer spending accounts for 70 per cent of economic activity in the U.S., the main market for Canadian exports. When homeowners are paying off high debts, they have little left over. "No matter how you slice this, there is not a lot of confidence in spending."
So how did it get this bad? How could a bunch of loans in a place like Cleveland end up slowing down the entire North American economy?
