Thousands of New Yorkers will lose their homes this year because lenders are foreclosing on their mortgages. Thousands more will wind up in court, fighting to keep lenders from kicking them to the curb. Most of them are victims of predatory lending schemes that trapped them in mortgages they couldn't afford. Ironically, many of them would have qualified for traditional mortgages, which carry less risk but can be harder to find these days amid the barrage of sub-prime loan advertising.
A city program aimed at helping the foreclosed, and warning borrowers about the pitfalls of subprime lending before they land in similar situations, is on the brink of expanding from NYC's hardest-hit neighborhoods to the city at large. The program, Preserve Assets and Community Equity, or PACE, is coming to the end of its two-year pilot period, but since it's proved its worth city officials are working to expand it. Between Sept. 2005 and March 2007, more than 1,000 homeowners were helped through PACE, says the Department of Housing Preservation and Development (HPD), which manages the program. More than 400 of them were referred to legal counsel and about 100 were able to refinance their mortgages and keep their homes.
In 2005, New York City housing courts handled 6,873 foreclosure actions. In 2006 that number climbed to 9,089, and projections indicate that there will be more than 14,000 foreclosure proceedings initiated by lenders against borrowers in 2007, according to the Neighborhood Economic Development Advocacy Project (NEDAP), a Manhattan-based advocate on economic issues.
Numbers like those are motivating HPD and its funding partners – a group of financial institutions including Astoria Bank, Bank of America, Fannie Mae and Freddie Mac – to come up with more than the $1.2 million it took to fund the first two years, which ended last month. HPD Assistant Commissioner William Carbine says the pilot showed such promise that the city was able to secure private funding to extend the program through the end of 2007. In 2008, PACE will include all five boroughs, which Carbine says will mean an expansion of the legal services provided to homeowners and a renewed emphasis on education that should help borrowers avoid unaffordable loans in the first place.
Up to this point, PACE has been focused on neighborhoods where predatory lending practices and foreclosures are the most widespread. The pilot program was limited to homeowners in Bushwick and Bedford-Stuyvesant in Brooklyn, parts of southeastern Queens and sections of the north Bronx. But the need goes beyond that, officials say.
Going forward, the various players in the PACE program will be more coordinated, and the expansion will require that oversight of the program be more centralized. Those familiar with the planning process say that procedures for intake and evaluation will be more standardized and counseling and legal services will be more specifically tailored to meet the needs of individual homeowners when the program goes citywide – a lesson learned from the pilot program.
“The key to our approach to this in New York has been that we are not providing cookie-cutter services,” said Sarah Ludwig, executive director of NEDAP, which has been heavily involved in planning the expansion of PACE. “We want to make sure that people are getting the services they need instead of canned services that might not help them.”
Experts say that much of the foreclosure crisis in New York City is directly linked to sub-prime lending – loans offered to those with poor credit at higher rates of interest than traditional mortgages – and “exotic” loans in which the borrower only pays part of the interest with each payment; the remaining interest is tacked onto the principle. Both types of loans typically include large upfront fees and penalties for repaying too much too soon.
Nationwide, one out of five sub-prime mortgages is expected to end in foreclosure, Ludwig says. As the sub-prime market crashes down around the ears of Americans across the country, New Yorkers – particularly those in low-income, minority neighborhoods – are among the hardest hit.
“We thought we were in crisis two years ago,” she said. “The number of foreclosures has doubled since then, so we’re beyond a crisis level event at this point.”
Sub-prime loans do have a legitimate role to play in the market. They're best-suited for borrowers expecting a large increase in income in a short period of time – the Wall Street trader who will get a six-figure bonus at the end of the year, or the medical student whose income will skyrocket after becoming a doctor. But many of the sub-prime loans made in New York recently have been to seniors living on a fixed income or first-time homebuyers who won’t be seeing a boost in income anytime soon.
“New York City’s neighborhoods of color are blanketed with destabilizing credit,” said Ludwig. “So, if the foreclosure rate is exceedingly high, as it is now, then those are the neighborhoods at the greatest risk.”
In the past year alone, foreclosures in Brooklyn and Queens have doubled, says Jessica Davis, president of Profiles Publications Inc., which tracks foreclosure records in the city. Most of the sub-prime mortgages made in the last half of 2006 and the early part of 2007 were made in neighborhoods like Bushwick and Bedford-Stuyvesant, Davis said. Those are the same neighborhoods that were initially targeted by the PACE program, and Davis says that is where many borrowers are defaulting on their loans. “The last market to get hot is usually the first market to go bust,” she said.
“There is always predatory lending and some of this crisis comes from that. The banks are greedy and the mortgage companies are greedy, there is no question about that,” Davis added. “But also there are people who want a mortgage so badly that they get into something that they can’t afford because they don’t know any better.”
Those are the problems PACE has been addressing over the past two years, says Carbine. His agency has been putting at-risk borrowers in touch with non-profit groups that provide financial education and advice and often referring them to legal counsel.
“Originally we were worried about lenders who were purposefully defrauding people who didn’t have a lot of knowledge or experience with mortgages, and there were all sorts of nasty tricks that lenders were playing to get people’s property away from them,” Carbine said. “In the mean time, the sub-prime market expanded exponentially, so now we are dealing with people who were not defrauded, but are still at risk of losing their homes.”
In addition to connecting borrowers with counseling and legal services, Carbine says HPD also works with nonprofits and financial institutions to get lenders and borrowers to work out a deal whereby the homeowners can make up for their missed payments, get back on track and keep their homes.
“The goal here is very straightforward,” Carbine said. “We want to keep people in their homes if there is anyway to do that reasonably. Generally speaking it is in the interest of the lenders to work out a deal with the borrower, but at the end of the day they want their money, so sometimes they work out a deal and sometimes they don’t.”
Ludwig says policy changes at the state level could prevent the crisis from getting any worse. This year New Yorkers for Responsible Lending, a statewide coalition of advocacy groups that supports fair and affordable financial services, drafted the Responsible Lending Act to promote just that sort of policy shift. The Act, which was introduced in the Assembly shortly before the end of its last session, would give mortgage brokers and lenders a legal obligation to represent the interests of borrowers. Further, the Act would force full disclosure of all loan costs – including insurance and taxes – to the borrower. It would also require lenders to ensure that a mortgage is affordable for the life of the loan, and impose financial penalties on brokers and lenders who don’t follow the rules.