“Having more services is good,” said Andra Horgan, a housing organizer with Changer, a 3-year-old citywide organizing effort against predatory lending. “But if there’s not structural change, all you’re going to have is people going to counselors and all the counselors have a choice to do is hold someone’s hand as they go through the foreclosure process.”
Supporters of the city initiative – whose creation was announced by Mayor Bloomberg Dec. 5, but was actually the result of months of independent meetings between advocacy groups, public agencies, philanthropies, and even some of the banks involved in lending for subprime mortgages – acknowledge that the effort is limited because they do not have the power or deep pockets to restructure the troublesome debts. But they say they’re encouraged that more homeowners will have legal and professional assistance.
“I don’t even think it pretends to be a solution,” said Mark Winston Griffith, co-director of the Neighborhood Economic Development Advocacy Project. “This is just trying to get more people doing the day-to-day work helping people in distress.” Foreclosure counseling efforts are hamstrung by lack of staff and support, said Griffith (a member of the board of City Futures, City Limits’ parent nonprofit), and are forced to turn away eight of every 10 homeowners who call them.
“We need to get people counseling so they don’t go right back to the people who got them into trouble at the get-go” for a problematic refinancing package, said City Councilman Lewis Fidler, a Brooklyn Democrat who was instrumental in getting Council to attack the problem two years ago. “But we still need to find a way to overlook the damage that’s been done to their credit score” so they can qualify for refinancing. To Fidler, the Center shows the city is doing its part. The federal and state governments, he said, now have to step forward.
Contrary to what the name may seem to imply, subprime mortgages are high interest loans (sub-prime means that the borrowers are risky candidates for loans), often with rates that start out reasonable but jump—sometimes by as much as five or six percentage points—after two years. They were designed for homebuyers who could not qualify for ordinary loans, but some buyers – including a disproportionate number of minorities – who could have qualified for standard mortgages were steered into taking subprime loans which seemed, at least up front, to be more affordable. According to the Mortgage Bankers Association, close to 3 million American families have these subprime adjustable rate mortgages and another 2.7 million families have subprime fixed rate mortgages.
These mortgages were then packaged by big banks and sold as part of massive, mortgage-backed securities or collateralized debt obligations—financial vehicles that allow individual investors to buy into the returns from the mortgages without buying into any individual home. In themselves, these devices are not new: federally chartered agencies like the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have long supported themselves by packaging their mortgages this way. But many subprime loans were written with little or no documentation of a homeowner’s income and ability to pay.
As the interest rates vaulted, hundreds of thousands of new homeowners found themselves in arrears. At the end of September, the most recent date for which reliable data exists, 17,843, or 17.6 percent, of the 101,439 New York state families with subprime adjustable rate mortgages were either three months behind in payments or already facing foreclosure, according to the Mortgage Bankers Association. Nationally, more than 450,000 families with adjustable rate subprime loans – 15.6 percent of the total – were either seriously delinquent or in foreclosure.
Hundreds of thousands more homeowners fear that this may be their future, too. Take George Christian. The house on E. 216th Street in the Bronx that he bought in 2003 was his entry into the American dream of homeownership after almost a decade living as a renter in New York. But, by this time next year, he may become another statistic: one of thousands of homeowners around the nation facing foreclosure. That’s because the interest on his mortgage will likely jump from 7.75 percent to 10.75 percent. That may not sound like a huge increment, but it could boost the Antiguan immigrant’s monthly costs by almost $1,000 a month—an amount he admits will be very difficult to handle.
“No, I can’t pay that,” says Christian. “If I can’t pay the mortgage, most likely it would go into foreclosure. That’s what these mortgage companies do.”
Christian bought his $239,000 home with just $1,900 down, and got a mortgage for $237,100 from Lend America, a company he recalls finding on either a flyer handed out on the street or an advertisement on the Internet.
Since then, he’s refinanced twice—first in early 2006, with Ameriquest, which had purchased his mortgage from Lend America. The Ameriquest mortage was worth $298,000. Later that same year, Christian refinanced again, with Option One, for $375,000. Although Christian said he needed the additional money for home improvements, advocates say that refinancing at a higher value in order to stave off the day of reckoning on past debts is a common strategy pushed on subprime borrowers by mortgage brokers eager to make additional commissions. (The higher-value loans can boast lower initial rates and may allow homeowners to get out from under higher interest credit card debt.)
Christian’s new mortgage is an adjustable rate loan. He’s got one more year paying 7.75 percent interest. After that, his mortgage payments could jump above 10 percent and be reset every six months thereafter, ultimately up to 13.75 percent. Already, Option One, the sixth-largest subprime lender in the nation, has raised his monthly payment from $2,981 to $3,095, claiming that property taxes on his home have gone up (an allocation for property taxes is often included in the mortgage payments.) Christian, who says his taxes have not risen, has been disputing this, to no avail.
Meanwhile H & R Block, the giant tax preparer that owns Option One, announced in early December that it was shutting the bank and would give no more mortgages, though it would continue to collect on existing loans, including Christian’s. The company announced more than $1 billion in losses on Option One’s loan portfolio. Over the past few weeks, a number of major U.S. and foreign banks have acknowledged that tens of billions of dollars of these loans will likely never be paid back. The banks have essentially declared these loans to be bad debt, taking huge losses on their balance sheets.
But there’s no relief for homeowners, even as the banks are acknowledging that they never expect to be paid – and therein lies the problem. While Wall Street’s banking houses will survive intact, it’s doubtful that low-income homebuyers who fell for suspect mortgages with payments that have ballooned, or will soon, will be able to hold onto their homes without some government intervention. And individual negotiation with the banks may be too time-consuming and costly to salvage the situation.
For instance, though 1.3 million American families are either seriously behind on their mortgage payments or in foreclosure, a national nonprofit called Neighborhood Assistance Corporation of America was able to help 450 families restructure their mortgages or refinance their homes during the month of November. While probably a meaningful assist to those families, it doesn’t come close to matching the scope of need.
Mike Shea, head of ACORN Housing, a national credit and mortgage counseling agency and low-income housing developer that is affiliated with the community group ACORN, says he no longer believes that working out mortgages on a case-by-case basis with the banks will succeed. “I believed that three to six months ago,” Shea said. “I now believe that we’re going to need a public policy approach.”
The big picture
Elected officials have put forward a number of just such public policy approaches (see related story). One proposal that experts suggest would almost immediately prevent massive numbers of evictions hearkens back to almost three-quarters of a century ago, when the nation was coming out of the meltdown from the Great Depression. At the time, Congress modified bankruptcy law to allow debt-ridden people to protect themselves from eviction.
“That would be such a win,” Shea said. “You hate to see people go into bankruptcy, but that would keep many people in their homes.” Indeed, an analyst for the Center for Responsible Lending, a Washington-based nonprofit, suggested that modifying the bankruptcy law could save more than 500,000 people from losing their homes.
There’s currently a bill, introduced in October by U.S. Sen. Richard Durbin, an Illinois Democrat, that would take up the Depression-era approach: it would allow bankruptcy judges to reset the terms of mortgages on people’s primary residences, thus preventing them from losing their homes when they declare personal bankruptcy. In a statement early this month on the floor of the Senate, Durbin said his proposal could help one-quarter of the people who will face foreclosure in the coming years.
Durbin introduced the proposal on behalf of himself and New York Sen. Charles Schumer—and it quickly attracted support from most of the major candidates seeking the Democratic nomination for president. Sen. Joseph Biden of Delaware, Sen. Christopher Dodd of Connecticut, Durbin’s fellow Illinoisian Sen. Barack Obama, former Sen. John Edwards of North Carolina, and New Mexico Gov. Bill Richardson all support the measure.
But there’s one prominent presidential candidate who hasn’t spoken about it: New York’s other senator, Hillary Rodham Clinton.
In a press statement issued last month in Iowa, Clinton said, “I have proposed to dramatically expand federal support for state and community groups that help families manage their day-to-day expenses and avoid foreclosure. I have also called on the President to immediately convene a ‘crisis conference’ that brings together housing stakeholders—mortgage lenders, mortgage servicers, representatives of homeowners, regulators, and others—to end the foreclosure crisis.”
Clinton has also called for a three-month moratorium on foreclosures—a stand ACORN’s Shea found encouraging. But she has not taken a stand on Durbin’s proposal, and neither her Senate press office nor her campaign press office returned requests for comment.
So, when it comes to the bankruptcy law revision, Clinton has something in common with some on the other side of the aisle who regularly disagree with her: none of the Republican candidates for president have taken a stand on the bankruptcy proposal either.
Locally, it’s not clear what the counselors from the Center for NYC Neighborhoods could do for Hector Morera, Jr. that’s not already being done.
Morera, whose two sons are in military service in Iraq and Afghanistan, and whose 4-year-old daughter is blind and deaf, bought a newly built home in East New York in 2005 for $525,000. The real estate agent—who represented both Morera and the developer who sold the house—recommended a mortgage company called Whitman Mortgagee.
This is a common tactic that helped rope people into high-interest loans. “Mortgage brokers are very frequently represented by real estate brokers,” said Councilman Fidler. “There’s even a commonality of ownership. Lawyers get involved in that incestuous relationship as well.” Fidler thinks these relationships should be banned.
Morera was so excited to buy the house that he signed the papers almost without reading them. “I’m a master plumber,” he said. “I can tell what’s wrong with a boiler right away. But don’t ask me to understand a mortgage.”
His mortgage started at a reasonable-sounding 6.65 percent interest—giving him monthly payments of approximately $2,800 a month. Nine months after he got the mortgage, Whitman Mortgagee sold the loan to Option One. And this past March, the interest rate jumped. It’s been rising ever since. “The payment went to $3,000, then $3,200, then $3,800. Now it’s almost $4,100 a month,” said Morera. Even with a decent job coordinating construction for a real estate firm in the East Village, he’s fallen three months behind on his payments.
“When we’re children, our parents always wanted to get the American Dream. Now it turns out to be the American nightmare,” Morera says. His new dream is more modest: refinancing. “That would be the happiest moment of my life,” he said.
“The banks write these loans off, so why is the family paying the same amount of money on the loan?” asks Lionel Ouellette, executive director of Changer, the group that organizes against predatory lending. To him the major ingredient in a real fix is clear. “There need to be very serious write-downs that penetrate to the homeowner.”