It was the classic real estate scam: Buy cheap and resell fast at artificially inflated prices. It was the foundation of the 203(k) scandal, in which speculators conspired with crooked appraisers to scam homebuyers, leading to the abandonment of nearly 600 properties in Harlem and Brooklyn and to the skyrocketing of home foreclosure rates–a stat in which New York City leads the nation.
Now, to try to turn these trends around, the federal Department of Housing and Urban Development has proposed a new set of rules prohibiting federal mortgage subsidies for properties that have fallen victim to “flipping.” Under the rules, a property must remain under the same ownership for at least six months before it can qualify for Federal Housing Administration loans, federal guarantees targeted at middle- and low-income buyers. Before financing a re-sale, lenders would have to check property transfer information from court dockets and county clerks’ records.
Of course, as anyone who has researched public property records in New York City knows, obtaining up-to-date information on building ownership is not so easy. Property buyers often take months or even years to register their purchases with the city, and the borough clerks’ offices also take time to officially enter the deed into the system. How those obstacles will play into the enforcement of the new rules is unclear.
What is evident is the dire need to address home bankruptcies in New York City, given that last year alone, FHA home delinquency rates here jumped by more than 30 percent: According to the National Mortgage Bankers Association, 10 percent of all New York borrowers fell more than three months behind on their FHA mortgages last year. The reasons range from rising family debt levels to a slowing economy, but increasingly everyone, including HUD, is blaming predatory lending, the practice of selling loans to low-income borrowers with added fees, high interest rates and hidden payments, driving up mortgage payments and bankrupting homeowners.
“HUD had to intervene,” says Jonathan Zimmerman, a policy analyst with the National Association of Housing and Redevelopment Officials. Other new HUD rules include strengthening its oversight of mortgage brokers who sell home loans: The agency says it might end its relationship with any broker whose default rate is significantly higher than the local and national averages.
And last Monday, HUD Secretary Mel Martinez called for “full disclosure of all costs associated with obtaining a home loan” as an antidote to predatory lending. Once again, however, enforcement will be tough. “Pending new rules,” said a HUD spokesperson, “the Secretary asked…that the industry adopt new disclosure requirements,” essentially duplicating the lending industry’s claim that it can police itself.
While cautiously pleased with the changes, anti-predatory lending activists say they are skeptical about how well they will be implemented. “Anything the Secretary does to stop foreclosures and predatory practices is good,” said Tracy Van Slyke of the National Training and Information Center, which advocates for investment in low-income communities. “But these are only the first steps–enforcing the rules is the most important thing.”
The “flipping” rule, which received a go-ahead from Congress and the federal Office of the Management and Budget, is open for public comment until November 5.