NYC's Unique Housing Market

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New York City’s subprime crisis may well be different from that facing the rest of the country – thus various fixes fit differently here, too.

In most of the U.S., plummeting home prices have meant that many homeowners now owe more to their banks than their houses are worth. If they sold out today, they still wouldn’t be able to pay off their loans.

But New York City home values are still high, a fact that is both a burden and an opportunity for people with subprime mortgages. “It’s a good news and bad news story,” said Ismene Speliotis, executive director of New York ACORN Housing Company, which develops buildings and counsels homeowners. In the good scenario, Speliotis continued, “if a company wants to work it out,” the relatively stable home values allow for a workout plan that can get people into fixed-rate loans. “But the bad news is, that there’s also a huge incentive to foreclose and resell.”

The White House has entered the sub-prime fray by proposing a voluntary five-year freeze on interest rates. This might help George Christian – the threatened homeowner in the Bronx – avoid losing his home, but only temporarily, unless some refinancing mechanism is put in place in the interim. And it would not help people who are already in default, so Hector Morera Jr. – whose mortgage is skyrocketing in East New York – would still be teetering towards foreclosure. Even backers of the Bush proposal acknowledge it would help only a small fraction of those in need.

“Where’s my president?” Morera asks. “Why isn’t he giving me a helping hand? Why isn’t he helping people who are losing their homes?”

Morera could potentially apply to a program called FHA Secure, in which a bank working with the government-backed Federal Housing Administration would buy out his mortgage and transform it into a long-term fixed-rate loan. But there’s a problem here, too. The FHA limits the size of mortgages it can take on. In New York City, the maximum mortgage the FHA would consider would be $464,449 on a two-family home. Morera already has a subprime loan of $446,250, plus $50,000 he borrowed from his boss, putting him beyond the FHA limit. Several proposals that have been floated to raise the federal mortgage limits, but there has been no action yet.

For folks in the rust belt, where many homes have lost value and are now worth less than the amount of the debt on them, the Center for American Progress has floated an interesting idea. The Center, a think tank in Washington, D.C., proposes that the government create a short-term agency called the Family Foreclosure Rescue Corporation, which would buy non-performing loans and convert them into affordable fixed-rate loans. Though this would require as much as $135 billion in capital and would cost perhaps $200 million to administer, it would ultimately (over 30 years) recover all the money lent and add $7 billion additional dollars to the national treasury. The group argues the government could raise the money by selling bonds that pay 4.75 percent, while charging homeowners 7.25 percent on their new mortgages.

But, of course, this is only a proposal—and so far it’s gotten no political traction.

At the state level, Assemblyman Jim Brennan, a Brooklyn Democrat, and state Senator Frank Padavan, a Queens Republican, have introduced two proposals that would undoubtedly slow down the foreclosure crisis. The first would delay all foreclosures by one year, as was done in the aftermath of the Depression. The second would empower the State of New York Mortgage Agency (known as SONYMA) to issue $3 billion in bonds and use the proceeds to buy up subprime loans and convert them to secure conventional mortgages.

Time will soon tell whether these proposals have enough backing to become law.

– Robert Neuwirth

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