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Rural New York: Life at Sub Prime

Rural New York:  Life at Sub Prime

By Stuart H. Brody

Originally Posted at http://www.empirepage.com/whataboutupstate  (2008)


The American banking community has come under fire lately.  The term “sub prime mortgage” is now familiar to most Americans, whether they hold a mortgage or not.   The banking establishment, in its wisdom, embarked on a plan to loosen the standards for granting a mortgage, jettisoning time honored conditions such as:  having a source of income, a credit history and some money down.

The security industry, not to be left out of a financial boondoggle, packaged these mortgages and sold them as securities, in a feverish reprise of the junk bond mentality of the 80’s.  As the economy now lunges toward collapse,  Americans watch helplessly from the sidelines wondering whether the free enterprise system that spawned this disease can cure it.

Upstate New Yorkers know that sinking feeling:   distant players who put the region at the mercy of unpredictable economic forces.  Yet, there is a home grown variety of banking excess—right here in rural New York—which subverts the economic well being of the region.  It’s called the doctrine of “external obsolescence.” 

External Obsolescence is a complicated name for an automatic rule applied by Upstate banks to business assets owned by rural New Yorkers.  It works like this.  If an entrepreneur wants to set up a business in rural New York, the building he constructs or buys to conduct the business will be automatically devalued, typically by 25%.  Here’s an actual example from the North Country.  A local entrepreneur decided to begin a furniture manufacturing facility, hiring 25 people, paying them good wages with health care benefits,  precisely the kind of jobs the region needs.  In order to finance the business, he collateralized the building which he built for $1M.     The problem was that the local bank valued it at $750,000 instead of $1M, claiming the rule of “external obsolescence” .  The rule dictates that the rural location of the facility, in and of itself, without reference to any objective factors such as actual value, recent property sales, or cost of materials, demeans its value by 25%.   To make up the difference in his capital requirements, the entrepreneur mortgaged his house and furnishings.  Some businessmen can’t meet this added financial burden and abandon their projects, and the jobs that go with them.

That is not the only banking anomaly in rural New York.  A mortgage won’t be granted unless it can be packaged for the security market, just like the sub prime mortgages.  This practice requires rural homeowners to build wells and install central heat, just to get a mortgage.  And if you’re more than a few miles from a fire station you might not get one either.  A beautiful home whose water needs are served by a reliable spring, rather than a well,  won’t get a mortgage because it can’t be packaged.  The rules of homogenization  always play to the greatest number but the minority has been left out, and upstaters are New York’s ignored minority.

We succumb to homogenization in other ways too.  Take the big box stores.  Retail powerhouses like Wal-Mart hire local politicians to proclaim the virtue of these enterprises as economic anchors.  In reality, these big businesses drive out local stores using their enormous economic leverage to do sweetheart deals with suppliers.  They pay low wages with no benefits, and drain off precious local capital for shipment outside of New York.  Adding insult to injury, these behemoths scar the countryside and impede the ability of rural communities to commoditize their natural beauty and pristine way of life.  

Free marketers, the same happy crew that brought us sub prime mortgages, respond that consumers are free to pay a little more to shop locally if they wish.  Yet, when life is scratched out at the margins, a few cents more looms large.  A striking example of this patronizing mentality was displayed by none other than Al Gore, the guru of climate change.

Appearing recently on Meet the Press, Gore was criticized for building a 10,000 square foot home while espousing energy conservation.  With obvious discomfort, Gore conceded that he isn’t perfect but countered that he paid extra to power the edifice with green energy.   Gore’s ready substitution of personal desire for public integrity was not lost on rural New Yorkers who see it as more of the same facile rhetoric in service of faulty logic. 

Upstaters are a hardy lot.  We don’t expect hand outs or give-aways;  just a little respect will do, starting with some legal and moral scrutiny of some of the practices that beset us:  like external obsolescence, those sweetheart deals that the big boxes make with their suppliers, the public servants paid off to espouse the virtues of corporate predators, and banks who refuse mortgages to homeowners who heat with wood or get their water from a spring.

While the media obsess on the global economic picture, New York’s political leaders would do well to look at the smaller world around them where the little things often hurt the most.

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