Friday, July 9, 2010

When the Charter Bubble Bursts

We know we are in the midst of an economic crisis, and real estate has been hit especially hard. And there's one group out there losing their homes at an alarming rate. In fact, one in seven of these people are now delinquent on their mortgages. You might guess that it's the middle class, or lower income individuals who were talked into sub-prime loans. But you'd be wrong.

It's the wealthy.

Yes, according to the New York Times, one in seven homeowners with a mortgage of over one million dollars is now seriously delinquent in their payments and in danger of immediate foreclosure. Don't cry them a river or demand a bailout, however; many of these people are simply choosing not to pay. Like so many others, the rich have seen the values of their homes decline and many properties are underwater (more is owed than the home is worth). Unlike many other people, the rich appear much more likely to just walk away from their mortgages and stick the taxpayers with the bill. Sam Khater of CoreLogic, a senior economist with a flair for understatement, was quoted as saying, "The rich are different. They are more ruthless."

Ruthless is right. Remember, most of these wealthy homeowners aren't in terrible financial straits--they just see their homes as a bad investement and walk away. Never mind what happens to the neighborhood. And who cares if the taxpayers are left holding the bag?

So I have to ask: What happens when the charter school boom goes bust? When the hedge funds finally eliminate charter caps and charters become ubiquitous, what will happen in the next finanacial downturn? Let's face it--it is the rich who own and operate charters. Will they walk away from their schools with as little care as they abandon their properties? Will they show concern for the neighborhoods they ruin?

Make no mistake: it can happen. Charters are the darlings of hedge funds right now because they are the reform de jour and politicians are looking to throw money at them. But that won't last forever. The very reason Bloomberg wants charters is that he can run them on the cheap by eliminating pesky unions that demand fair wages, pensions, and reasonable working conditions.

With a charter on every corner, they'll lose their special status. When the economic downturn happens, which it does in cycles, charters will be cut to the bone just like public schools are now. If there isn't enough profit, will the wealthy charter school operator keep the school going for the sake of the community, or will he just cut and run?

Let's put it this way: If the rich are walking away from their in-ground pools and marble staircases, why would they worry about a local school?


NYC Educator said...

I'm not certain it'll happen quite like that. Just today they got another 40 million or so, so the Governor could ensure funds weren't restored to public schools. I think they'd like to lure the best kids away from public schools and once they're debased enough, they'll walk away from charters, just as you say, and potentially middle class kids will be left to wander the streets like the kids in Salaam Bombay.

Just my two cents.

james boutin said...

Interesting post and possibly an apt comparison. Do you really think all charters would go down like that, though? Surely some people who invest in charters do so with the intent of improving education rather than their bank accounts.

Also, can you please provide evidence that hedge funds are investing heavily in charters. It's not that I don't believe you. I've read it on many blogs, but I haven't yet found that evidence for myself yet.


reality-based educator said...

Fox News nuts and much of Wall Street likes to blame the near collapse of the financial system and the mortgage crisis on subprime and Alt A mortgage holders. In fact, they named the problem THE SUBPRIME CRISIS on CNBC and gave it its own music. Also Fannie and Freddie get lots of blame, as does The Community Reinvestment Act for "forcing" banks to lend money to poor people and people of color for houses.

But of course this was all jive. It is true that many subprime mortgages went belly up, but so did many near prime and prime mortgages. Foreclosure problems showed up in subprime first because those borrowers had little room for error. But the foreclosures quickly moved up the income chain and as we can see, 1 out of 7 wealthy mortgage holders are walking away now (and according to the article, with less guilt then people down the income chain.)

As usual, the hedge fundies like to scapegoat people for a problem that they themselves caused by pushing de-regulation and innovation that allowed people to make loans without checking income/ability to pay, then package those mortgages to investors, thus dumping the toxic crap off their own balance sheets onto someone else'.

I guess it is just a Goldman Sachs world and we mere mortals can just live in it.

See Invictus at The Big Picture for more on this:

reality-based educator said...

Oops, meant to put these links up for the above commenter asking about the charter/hedge fundie connection: