Image: Queen Anne’s Row
James Cheng  /  msnbc.com
Queen Anne’s Row, located in the south side of Poughkeepsie, is a prime example of the city's recent economic development successes. Now, the rising pace of foreclosures and slowing economy put those efforts at risk.
By John W. Schoen Senior producer
msnbc.com
updated 6/25/2008 12:46:22 PM ET 2008-06-25T16:46:22

For Al Russo, a 30-year-old husband and father of two young boys, the trouble started about two years ago, when the shoe repair business he inherited from his parents hit a seasonal slow patch during the winter.

He’d set aside money to carry him over — just as his parents had taught him. But he had to use that money to pay for his mother’s funeral and soon began falling behind on his mortgage payments. To try to head off a foreclosure on the house he and his wife bought in 2005, he filed for bankruptcy this year at the federal court here on Main Street, representing himself. 

But on a recent spring afternoon in a standing-room-only courtroom, Russo's struggle to save his home ended after he missed a hearing in which the lender was allowed to proceed with its foreclosure action.

“There’s like no hope for me at all,” he said. “I’m going to lose everything my parents worked for, and there’s not a damn thing I can do about it.”

This city in the heart of the mid-Hudson Valley, about an hour south of Albany, has until recently largely avoided the housing downturn that has hammered parts of California, Florida, Arizona, Nevada and other regions where the housing boom ratcheted up prices the fastest and the mortgage mess has inflicted the most damage so far.

But now, with house prices falling and foreclosures rising here, both residents and local government officials are having a tougher time making ends meet. And they fear things may get worse before they get better.

Cities like Poughkeepsie, the county seat of surrounding Dutchess County, never boomed in the same way but enjoyed a slower but steadier housing expansion and stable economic growth. Until recently, it looked as though communities like this one might escape the fallout faced by housing markets that overheated at the height of the boom.

No longer.

Memories of FDR
Folks here are quick to remind visitors that President Franklin Roosevelt, who helped repair Depression-era economic damage and ushered in a new era of expanded homeownership, was born and raised in nearby Hyde Park. As the American dream of homeownership faces its greatest test in 75 years, Poughkeepsie’s leaders are working hard to minimize the wider economic damage on their community.

For starters, they’re bracing for a drop in property tax revenues as home values fall from peak levels in 2006, when the city conducted its latest revaluation.

“We are going to have to tighten our belts and look at spending across the board and tighten the way we operate,” said Poughkeepsie Mayor John Tkazyik, a 29-year-old former councilman who was elected to his new job in November, in part on his record of working to improve the region's economic development.

The housing downturn here, as in the rest of the country, represents a hangover fueled by easy lending terms that sent prices surging much faster than incomes. Though median household income in surrounding Dutchess County rose by 15 percent from 2001 to 2006, home prices surged by 82 percent, with the average selling price peaking at $409,000 in 2006. 

That average price has fallen back to $371,000. The pace of sales has also fallen; in May, home sales were 31 percent behind year-ago levels.

“Our market has had a significant correction,” said Sandy Tambone, who tracks local housing statistics at the Dutchess County Multiple Listing Service.

Now, as the spring selling season comes to a close, there’s little sign of improvement in what is typically the busiest time the year, according to Norm MacKay, a local real estate agent for 20 years.

“It’s very slow,” he said. “People are coming in with extremely low bids because everything they read and hear says ‘bad market.’”

As home prices have fallen, layoffs have risen. When the housing market began to soften in 2006, the job market here held up better than many parts of the country. But by early 2007, it had started to weaken and job losses rose through the year.

“What once was broad-based job growth — just about all the industry sectors were adding jobs — now it’s being replaced by job losses throughout most industry sectors,” said John Nelson, a labor market analyst with the New York Department of Labor.

Some job sectors are holding up relatively well, including commercial construction and professional services, a category that includes relatively high-paid professionals like accountants, lawyers and engineers. But the financial services industry in the Poughkeepsie area — including banking, real estate and insurance — are getting hit with job losses that threaten to ripple through the local economy. Several subprime mortgage lenders in the area, for example, began laying off workers as far back as March 2007, said Nelson.

“If people are losing their jobs, some of those people that live in our area - they’re going to cut back their spending,” he said. “A family that used to go out to dinner four to five times a week may cut down to just two, so you’ll see leisure and hospitality industries affected.”

This city and the surrounding county have been through tough times before.

For decades, the economy of the mid-Hudson Valley was heavily reliant on IBM as its biggest employer. So Poughkeepsie and surrounding towns suffered a major blow in 1993 when the company cut 10,000 jobs at a nearby manufacturing plant and the country lost another 10,000 from related industries, according to William Steinhaus, the current county executive, who first took office in 1992.

“To say we had a lot of houses you could have bought at that time would be an understatement,” he said.

As the national economy recovered from a housing-led recession at the start of the 1990s, Poughkeepsie’s recovery was slower. By 1998, the city had “grown accustomed to violent crime, drugs (and) prostitution,” according to a report that year in the New York Times.

Since that low point, the state, county and local governments have succeeded in rebuilding and diversifying the local economy, developing an active arts community. Today, the city is home to a half dozen art galleries. On Market Street, in the heart of downtown, the Bardavon Opera House, which opened in 1869, hosts a busy calendar of performing arts.

In 2004, Inc. magazine ranked Dutchess County as eighth-best small metro area in the nation for business. By 2005, more than $220 million in commercial and residential development had been approved or begun — more than double the combined development over the prior 10 years, according to then-mayor Nancy Cozean's 2005 State of the City Address.

But today, that revival is at risk as the national slump in home sales and the rise in home foreclosures spills over to cities like Poughkeepsie.

Local officials say that, so far, they haven’t had to make significant cuts in services.

“We put a hiring freeze in and we’ve restricted spending in other areas,” said Steinhaus. “We still have a mission: We’re still going to plow snow when we have to and send public public health nurses to senior citizens’ homes to care for them, and we’re still going to answer the phone at the 911 center.”

Unlike the federal government, which canborrow money to make ends meet in tight times, county and city budgets have to balance every year. If sales and property taxes continue to fall, local government leaders here will face tougher choices. Until the pace of foreclosures begins to slow, the recession gripping the housing market will continue to weigh on the local economy.

“I don’t think we’ve hit bottom yet,” said Albert Desalvo, community reinvestment officer at M&T Bank, a community bank with three offices in the city. “One of the reasons it’s going to be hard to figure out the true amount of foreclosure for awhile is because it takes inordinately long in the state of New York to be completed — longer than most states. So I don’t think we’ve seen the worst of it.”

One big unknown is the fate of homeowners who are holding adjustable-rate mortgages scheduled to set to higher levels after a low, initial fixed rate. Those resets are a major factor behind the rise in foreclosure rates in Poughkeepsie and across the country. Higher monthly mortgage payments are kicking in just as as consumers face rapidly rising costs throughout their household budgets — from food to gasoline to health care.

Around the corner from Poughkeepsie's City Hall, Hudson River Housing runs a variety of housing and community development programs and has been working to minimize the damage from the rise in foreclosures. The non-profit community group helps homeowners in trouble work with lenders to negotiate a more affordable payment plan. The group also works with new home buyers to avoid the pitfalls that could get them into future trouble.

These days, traffic at the office is brisk. Last year, the office handled three or four cases a week. Today, they’re getting as many as six a day, according to Mary Linge, who heads the office. They’ve recently hired another housing counselor and have applied for additional funds from the state to meet the growth in demand.

“We’ve actually looked to some group sessions, which is unprecedented because it’s such a private matter,” she said. “But it’s the only way we're going to be able to handle everyone.”

Traffic is also brisk at U.S. Bankruptcy Court on Main Street, where some strapped homeowners are trying to stop the clock on foreclosure and work out a more manageable payment plan with creditors. As the economy weakens, the pace of filings will likely continue to grow, according to Mel Spivak, a bankruptcy attorney based in Poughkeepsie.

“We haven’t seen the crest of it yet,” he said. “Within the next six months or a year, hopefully it will peak out and maybe get better. But between gasoline prices, heating oil prices and adjustable rate mortgages, people are stretched to the bone."

On a recent afternoon, Judge Cecelia Morris heard more than 60 bankruptcy cases in a matter of hours. The circumstances that brought each debtor to court varied widely; so did their financial circumstances.

“Bad luck, dire straits and lack of planning do not discriminate — anyone can become a debtor,” Morris wrote in a recent e-mail.

Some of those who appeared before Judge Morris had worked out payment plans with lenders that were then approved by the court; others learned that their efforts to get a fresh start had failed. Morris carefully explained the reasons for each outcome, and congratulated those who had succeeded.

Since her appointment to the bench eight years ago, Morris said the change in debtors’ fortunes seems to be happening more rapidly.

“I am seeing debtors whose economic condition has deteriorated quickly — variable interest rates, all-time-high credit card interest rates and increased fees for late charges and minimum payments have driven them to seek bankruptcy protection,” Morris wrote. “The cycle from prosperity to bankruptcy seems to be much more rapid in today’s environment than when I was first appointed to the bench.”

After learning that his foreclosure would proceed, Al Russo and his wife made plans to move to Florida, where he hopes to get a fresh start working for a well-drilling company. Though he said he still has equity in his home, he doubts he’ll be able to sell it before the foreclosure process is completed.

And while he’s resigned to the prospect of starting over, he’s wary about the future.

“This is not going to get better — and not just for me,” he said. “This is going to get worse for everybody else.”   

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