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By Christian E. WellerRISMEDIA, May 14, 2007-The subprime mortgage crisis has so far been nothing more than a boogeyman in your friend Joey’s closet–an easy worry to forget on the way to the sandbox. Yet this easily forgotten scare is now coming back to haunt the white collar workers and upper-income real estate investors who have so far escaped the housing market slowdown unscathed.

Rising foreclosures and mortgage lender bankruptcies have disproportionately affected borrowers with weaker credit histories, lower incomes, and fewer assets to support their loans. Yet the housing market that last year seemed a boon to small business owners, real estate investors, and higher-class workers may come back to pinch wallets as the fallout from the housing market slowdown begins to heat up.

The end of the housing boom has been a long time coming. A decade of sharp price gains led many families to incur record amounts of debt, and the housing market began to bottom out in late 2005 with prices rising much more slowly in 2006. Home price appreciation dropped to 5.9 percent in 2006 from 13.2 percent in 2005-a startling 55 percent decline.

Slower price increases and large amounts of debt meant that a growing number of homeowners could not sell their homes at a high enough price to cover their mortgages. And by the end of 2006, the share of mortgages that went into foreclosure rose to 0.5 percent, the highest since 1979, when mortgage bankers started collecting these data.

Lower-income and minority communities have so far born the brunt of the market fallout. Hybrid adjustable rate mortgages that offered easy lending terms in exchange for the possibility of hefty rate increases down the line have for many families taken a turn for the worse. The interest rates on hybrid mortgages are quickly increasing from their initial low introductory rates, and weak economic and employment growth has left them unable to handle the mounting payments.

Yet the end of the housing boom hasn’t brought hard times for everyone. It has created a buyer’s market for many families not directly affected by the surge in foreclosures. Prices are no longer increasing at a runaway pace, the supply of homes on the market has grown sharply, and homes for sale linger for weeks and months-a phenomenon unheard of during the hyper-charged market prior to 2005.

But not all is well. Lenders worried about rising foreclosures and mounting losses have started to tighten their credit standards, which particularly affects small businesses. Mortgages and other bank loans make up two-thirds of all small business loans, but loan standards tighten in these markets. The share of senior loan officers reporting stricter mortgage standards, for example, is the highest since 1991. The Federal Reserve also reports that banks are tightening access to loans for small businesses. This can limit the ability of small business owners to grow their business by investing or hiring more, which drags on an already slowing economy.

It’s in the slowing economy that the next problem lurks. New home sales have already dropped by 17 percent over the course of 2006, which begins to show that mortgage market problems are leading to larger economic worries-particularly for more educated workers.

Employment for college-educated workers still had not recovered by March 2007 from losses during the last recession in 2001. Workers with less than a high school degree, however, had already recovered their losses by the middle of 2004.

With the economy floundering and profit growth decreasing, companies target white-collar, college-educated workers to cut costs. Healthy companies such as Verizon, Sprint, and Hewlett-Packard have recently eliminated pensions for non-unionized white-collar workers. Circuit City’s recent announcement to lay off 3,400 workers similarly affected higher paid, white collar employees; and Citigroup’s announcement to cut 17,000 jobs targeted middle income white-collar workers as well.

The days when only blue-collar high school graduates paid a price for lower sales and profits clearly seem to be over. Should the subprime market troubles translate into even more economic problems, white-collar college-educated workers may be the ones paying the price.

But that’s not all. Many middle- and upper-income families took advantage of the housing boom and borrowed against the equity in their own homes to invest in other real estate. A report by the Center for American Progress estimated that about one-fifth of the increase in house values between 2001 and 2004 was due to families buying investment properties.

States with a large number of second homes have recently found themselves with comparatively large numbers of foreclosures. Florida, Nevada, and Arizona were all in the top 25 percent of states with the highest foreclosure rates in 2006. And Las Vegas, Fort Lauderdale, and Miami all ranked among the 10 metropolitan areas with the largest foreclosure rates last year as well. Investors in those areas may see the value of their properties slip precipitously.

The slowing economy and over-investment by eager buyers in the wake of the housing market collapse may mean that current problems won’t remain isolated to low-income and minority families for very long. We may have been too quick to think that that the boogeyman wouldn’t come knocking at our closet doors, too.

Christian E. Weller is a Senior Fellow at the Center for American Progress.

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