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The recent collapse of some of the nation’s largest financial institutions is understood as the crashing of a wave set in motion by years of poor lending practices, corrupt securities schemes and lax oversight. But for thousands of New Yorkers, the wave is still crashing – as they confront untenable mortgages, potential loan defaults, and even the loss of their dwellings. In 2007, there were 15,000 foreclosure filings citywide. And experts say that in New York City, the foreclosure crisis has not even crested.
One response has been the creation of the independent nonprofit Center for New York City Neighborhoods to coordinate the many foreclosure prevention and mitigation programs. On September 25, the director of that organization sat down with City Limits Investigations Editor Jarrett Murphy and other leaders working to address the local crisis to discuss where we are and what can be done. What follows are highlights from that conversation.
The participants:
Oda Friedheim, attorney with Queens Legal Aid who works extensively on foreclosure issues
Michael Hickey, executive director of the Center for NYC Neighborhoods
Stephanie Lawes, housing director at Margert Community Corp. in Far Rockaway, Queens, where she counsels homeowners facing foreclosure and first-time homebuyers
Sarah Ludwig, co-director of NEDAP, the Neighborhood Economic Development Advocacy Project
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Jarrett Murphy: What’s been happening on Wall Street seems as if it’s going to be one of those events that folks later on – like an assassination or start of a war or something – would ask, where were you when it happened? So where have you been during this crisis, what part of it do you see, that brings you here today?
Michael Hickey: For me, it started because I worked at Deutsche Bank, and I actually worked in their Corporate Social Responsibility area, and for a number of years had been dealing with issues around predatory lending. It’s gotten itself all caught up with public finance. Within our area, we started developing some programs specifically around intervening in predatory lending, and that was the entry point for my very steep learning curve about these issues. As more and more foreclosures started to occur, the bank would get calls from people, because the bank was listed as the owner of the title and they would find their way to me. So I’d be dealing with homeowners around the country who’d be calling up obviously very upset, trying to understand if there’s any way they could communicate with Deutsche Bank about their mortgage. And we did have a protocol internally, but it was really one of those processes that wasn’t very satisfying. There wasn’t much that the bank would really be able to do.
And at one point my boss said to me, look, you need to kind of understand what all of this is…figure out exactly how this whole thing works. What is this subprime thing, what are the securities? I have a masters degree in social work, this isn’t really my bailiwick, but I went out to try to really dig into these transactions and understand what they were.
And I ended up kind of coming up with a picture of what does it look like, Joe homeowner down to a security holder, and what’s the complex chain that kind of winds that transaction all the way down and splits that mortgage up to a whole bunch of different pieces that makes it really difficult to resolve how that mortgage should be treated, and how is that different from what used to happen when banks held mortgages. We’ve come a long way since then. I did learn a lot, and really started to find myself drawn to the issue, because I think it’s – as much as it’s enormously difficult, and can be quite painful to deal with – it’s also fascinating because of the repercussions that extend from the homeowner in Queens, to the workers on Wall Street. And the deeper you dig, I mean, you just keep unearthing these layers of people of various levels of culpability and responsibility. They knew it the whole time and still played along.
Oda Friedheim: I’ve been representing homeowners in abusive lending cases and foreclosure prevention for the past some seven years. The way I got into it was actually in housing court, where I met a number of homeowners that were being evicted from what used to be their home. We have continued to encounter these abusive loan practices, particularly focused on Southeast Queens, which is really largely the neighborhood of people of color, both middle class, moderate income, low income brackets, and it’s heavily targeted and all the maps bear that out, so we get lots of phone calls. In the last few years, the kind of scenarios that have come to us are more egregious than when I started out, the predatory lending practices just got so out of hand. A real culture was created, everybody bought into it, and sometimes even relatives that thought they could rip off their other relatives.
But how did it all happen? None of these sleazebags could have performed their role and ripped off homeowners had it not been up to Wall Street and beyond to finance this enterprise. I mean, again, loan after loan, transaction after transaction, whether it’s another one of those foreclosure rescue scams or a totally abusive refinancing scam, or a first-time homebuyer scam, each time, you look at the loan papers, and say how could the lender underwrite this? I took a little detour this morning [on Wall Street] and just looking at all these buildings thinking, what’s going to happen? Looking at the hot dog stand: What’s going to happen to all these people? The ground is rapidly shifting under us.
Stephanie Lawes: I’ve been at Margert for 21 years, and I’ve seen all the different scams and games that come into play that sort of victimize a lot of consumers who really had no knowledge of the process whatsoever. For the homeowner now, who couldn’t really afford it from the very beginning, it’s very difficult now to work out some sort of resolution to help this person, because they couldn’t initially afford it from the start. They’re placed in a situation where now they have to look for affordable housing. And we really have a crisis with tenants trying to find affordable housing, for someone to be evicted from their home.
What I’m seeing is that they rely on us as advocates to help them afford a house they couldn’t afford. They get this impression that, you know, someone should bail us out because we were victimized. And that’s not necessarily the case but it becomes an educational experience on our part to sort of educate the consumer, as far as: Now what do I do? And that process is a long process, because they have to get in the mindset that I have to be relocated somewhere, and where is that somewhere? And our resources are somewhat limited as far as finding a place for these people to go. I mean, we’re working with tenants already that are trying to find affordable housing, and then to have this added responsibility as far as finding them affordable housing. I mean, we’re just tapped for resources … we just try to create the words to explain to these consumers, to these homeowners – you might be one of those persons who may wind up in the shelter system.
Even my seniors, who basically get into these sort of scams…they’re just looking for maybe someone to fix their bathroom and they end up with two or three hundred thousand dollars worth of a mortgage that they clearly can’t afford because they’re on a fixed income. So we have to deal with the added element of what do we do for seniors? Because they’ve been in the house for over 30 years and that’s all they know. And for them to be uprooted and placed in the situation where now we have to find housing for them as well. We’re dealing with many different aspects and many different socio-economic issues.
Because this crisis just didn’t start. I mean, I’ve been here 21 years as I said, and it’s just a cycle to me. To me it’s the same thing. If you start identifying what’s going on in a community and find a way to ward off some of these things, we would be in a better position today than we are. But because there was no sort of oversight, and access to money was so free and no education required, that’s my other stickler. I mean, I’m not going to say that there should not be a subprime market, but if there is a subprime market, and a certain clientele is going to that sort of loan, I think it should be required that everyone get homebuyer education, even with refinancing. Because a lot of these people got into these, went to refinance, and didn’t understand what they were refinancing into. They were told: You get a lower interest rate, or your payments were going to be lower, and in fact it was the opposite. The payment was higher, the loan balance was higher, so they got into a situation where – okay, what do I do next? The cycle starts again, let’s refinance out again, because I think my payments are going to be lower. That sort of thinking got a lot of the homeowners in the situation where they are now.
And I don’t even want to talk about the option ARMs (adjustable-rate mortgages) which I think us as advocates were jumping up and down screaming about, saying stop, please, somebody, because a lot of these people didn’t understand their interest rate would jump by several percentage points in less than 30 days.
Sarah Ludwig: I started doing this work, or got involved in this work not by choice, but by necessity because the organization where I work is a resource center for community groups in New York, started in 1995, and it’s an advocacy organization as well, and we sort of saw our role when we first started as helping local organizations deal with redlining, neighborhoods cut off from access to fair and affordable services and other forms of credit, and basic services, non-financial, that are really sort of basic threshold ingredients to neighborhood stabilization, to neighborhood revitalization, and so forth.
And very early on in doing the work, we started getting a lot of calls from community groups saying, we don’t understand what is happening in our neighborhood, we are having one person after the other, renters as well as homeowners, coming to our office holding foreclosure notices. Where renters are being evicted because they lived in two- to four-family homes, which in many parts of the city is the prevailing housing stock, and people are saying, ‘what’s happened?’
So we started doing some research in 1995, where we took the 1994 Home Mortgage Disclosure Act data, and did an analysis of what was going on in New York and we saw a very different picture. I could see this real trend sort of emerging and the real switch happening, in which the neighborhoods that we were looking at suddenly flooded with mortgage applications and actual mortgages, largely in the refinancing realm, not in the home purchasing area. Where you used to see very few applications and lots of denials on those applications in the raw data, it became all these consumer finance companies, particularly for refinancing mortgages, of all different amounts. And as we started to deal with these groups, that kind of what seemed like this rise of foreclosures, 1995, 1996, 1997, we started to see that there was a very direct line to these consumer finance companies. Well where are they getting this capital? They weren’t banks, they didn’t have deposits coming in that they could then lend out, they were non-bank consumer finance companies. We started to learn all about securitization, and just the direct line straight up to Wall Street and how that was helping fuel these companies. And some of them were starting to go bankrupt early on. There were some definite weaknesses in this consumer finance market, but some of them did quite well, and started to build and it became publicly traded, and were really propped up by the explosion of asset-backed securities, which is where the subprime mortgages are traded, or sold and securitized.
So, we work on a lot of issues at the organization where I am, but this is one where it seemed like we really needed to bring groups together and figure out a strategy to organize around it, and to document what’s happening. This was what we were starting to hear from all different parts of the city, and as we looked up, we were seeing this happening all over the country. Particularly the sort of people who had their ear to the ground were the legal services people, not just in New York, but around the country, who were seeing all these foreclosure actions, and realizing that something had to be done, and the neighborhood groups. So we started bringing groups together into coalition to go to the different regulators. This was again 1996, 1997. We went to the Federal Reserve Bank of New York. We went to the FDIC (Federal Deposit Insurance Corporation). We went to the OTS (Office of Thrift Supervision). We went to the OCC (Office of the Comptroller of the Currency).
So we went to the Fed, FDIC, we went to all the federal banking agencies, all four of them, and we went to the state banking department, and we said: There’s this wave of foreclosures that’s sweeping over neighborhoods of color in our city; not just lower-income neighborhoods, and we’re seeing this really eerie, disturbing profile. It’s a lot of women, it’s a lot of seniors, and it’s a lot of African-American women who are seniors. A lot of people who are widows. A lot of people who have lived in their homes for a long time. A lot of older people suffering from dementia. It’s like, how do they get these mortgages? What the hell is going on here? It’s just like a layering of exploitative practices that have culminated in this – this happens to implicate Wall Street so directly, that it’s got a different dimension to it – but these exploitative practices are not new and they’ve changed as different mechanisms have been available. So all of this is to say that the regulators said this is anecdotal. We brought in maps, we said look, here’s where the foreclosures are in New York City or where the foreclosure actions are filed. Here’s where these high-cost refinancing mortgages are. Let’s look at the race compositions in these neighborhoods, plunk down a transparency on top of them. Wow, that’s really disturbing! But they said can you really prove anything, what does that show? Well, this data doesn’t prove anything, well, you know, people are in over their heads, they’re just not educated, we really need education – and we were hearing that refrain for eight years. The answer is education. The banks lined up, they put up money for education. Financial literacy, that was the rage. We kept saying, yeah, of course people need access to information, it’s vital, people need to know their rights, they need to know how money works, nobody disagrees with that. But we also need to regulate these practices, they’re harming people. Their lives are being shattered. They’re being set up for doomed mortgages. So by the beginning of this decade, you already had something we were calling a foreclosure crisis in New York. You already had these really concentrated patterns, where at best, you could say people made bad choices and their neighborhoods are destabilized. At best you could say the data show us that people of color in New York and across the country are paying more for mortgages. At worst, you could say there’s targeting going on, it’s systematic, it’s structural, and it’s being driven by Wall Street, which had an increasing appetite for these mortgages.
So, by the beginning, there were so many foreclosures, all the speculative activity, and that’s when you start seeing the property flippers coming through, buying these homes at foreclosure in big number, and then fixing them up cosmetically and flipping them for some homebuyers. There was a push toward home ownership you could say, but it came from a lot of different places. So people bought homes that they thought would give them this opportunity to build assets, but in fact were these homes that were flipped by one-stop shops.
And then you’ve got these first-time homebuyers drawn in to buy foreclosed-on property, that are in bad repair, over-appraised fraudulently, and a whole set of new real estate practices, not just lending practices, that really we’re still dealing with and reeling from right now.
Then you’ve got another defect that also started around the time of the increased foreclosures. Real estate values in New York had remained strong, even though we’ve got some softening people say in the market. And certainly that was the case until a few years ago. So there’s a lot of equity in these homes, a lot of equity to pull down through repeated refinancings. A lot of equity to pull down through deed theft, where you take someone in foreclosure who’s vulnerable and you say to them, I’ll save you from this foreclosure, just give me the deed and I’ll take care of everything. So you have all these people who’ve lost their homes to that, or are in peril of losing their homes.
And then you’ve got what happened in the last four or five years which is the explosion of these non-traditional exotic mortgages, again, another layering, again driven by Wall Street, and the refinancing stuff kind of came to a point where it wasn’t really fueling the engine anymore. They needed new fuel for the engine. And those option ARMs were prime fuel.
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The view circa autumn 2008
Jarrett Murphy: Exactly what does this problem look like on the ground now? A lot of the opining is from 50,000 feet. To the people who are coming to you for help, who you’re working with – what does this look like to them? Foreclosures have been going on for a long time. What’s different now versus five years ago?
Oda Friedheim: A few years ago when I started practicing in this area, I was more able to settle cases and work things out. There were cases I could live with, where the opposing client would call and say: ‘Yeah, your pleading is pretty good. Can we settle this?’
Sarah Ludwig: And they’d write down the loan.
Oda Friedheim: And significantly lower the interest rate. You could work things out. I would say in the last few years because the abuses have become so egregious, that it makes it much harder now to work things out. And so we’re trying to think, what can we actually do? There are cases where we are not able to save the home. Even if we were able to get an amazing low-interest loan, [they’re too overextended to take advantage of it]. Then you think well, maybe we can sue for damages because one thing you have to remember is that these homeowners were harmed significantly, even the first-time homebuyers that don’t have much equity.
But to walk away is still easier said than done. One of the horrendous things that happens in all of these cases is, as a collateral consequence, their credit score is significantly lowered. That’s one damage. For a low- to moderate-income person, if they put down ten or twenty thousand dollars, that is their life savings; that’s all they have. Gone. How do you now find them housing?
Jarrett Murphy: Stephanie, tell us about the desperation in people who you see.
Stephanie Lawes: I’m going to see many more people who will be homeless, or doubled- or tripled-up families living in a house that the homeowner can barely afford. And where do we go? What do we do as advocates? I’m still banging my head trying to figure out what creative ways – who can we talk to, who do we have to stand with signs in front of, basically screaming, asking for resources? I hate to say it, but Bush announced this bailout, and I don’t see how that is going to be effective. It’s just like, you do a bad deed and you get rewarded, that’s the way I see it. Because why is this bailout going to the lenders or the loan servicers? Why isn’t this funding directed toward helping homeowners?
Jarrett Murphy: Michael, comparing what you saw when you were at Deutsche Bank, versus the folks who are coming to the Center for NYC Neighborhoods now, is there a difference in who’s coming in and what their problems are – or just a matter of degree?
Michael Hickey: The Center is not a direct provider. We’re not doing housing counseling or legal services. We’re an intermediary that was created to help coordinate these services citywide. What I can say is, you know, what we’ve seen is changes in what’s happening with the servicers. The first point of contact for someone when they have a problem with their mortgage is actually just a third party, they’re called a servicer.
What that servicer has done is purchase the rights to the cash flows of those mortgage payments. And they receive those payments and then they have an agreement to skim off this tiny little margin, and they pass the payment through to the trustee, and then the trustee passes it through the security to the investors. It’s very complicated, but those servicers were supposed to operate on this margin business; they would just take a little piece off every payment they received, and that’s what they would use to run their operations. And that went great when you had less than 1 percent of your portfolio in default. Well, when that number starts to become 3 percent, 7 percent, 15 percent, all of a sudden, you don’t have the money you need to run your operation anymore. What happens? You have fewer people that are providing support to homeowners, people to pick up the phone and look though the file and respond to requests for any kind of restructuring modification program forbearance. Anything. You get a higher stack of clients that you’re supposed to be dealing with, and the problems are worse and worse and worse, because people are more and more desperate. They wait longer until they’re in really deep trouble; they may lose their home in a very short period of time.
So that whole part of the industry is essentially kind of broken down. And again, this bailout package, as far as I can tell, does absolutely nothing to address these incredibly complicated structural problems for individual homeowners and trying to reach some resolution about the value of their home and their ability to pay on the mortgage, whether it’s been revalued or not.
Sarah Ludwig: From the vantage point of doing community education around this, and for the longest time, all through the mid and late 90s, even until this decade, nobody wanted to say they were in foreclosure, it was really, really hard to get people to step forward to get assistance. Because people were ashamed, they didn’t step forward often until they were already served with papers. For the people who do the counseling and the legal services, it’s really hard if someone comes to you and their house is being sold tomorrow.
Now, what’s happened is you go to forums, and people come out in droves. And that’s what I’ve noticed is that, it’s not that the same sort of stigma doesn’t exist, it’s just that people understand that this is a structural problem and this has happened in their communities, that their neighbors are swept into this, and it’s in the news all the time and everywhere. We just go to forums now and people line up, and they’ve got their folders and paperwork, and there’s a level of desperation and there’s also a sense that people don’t really know what hit them. They’re at these forums when you talk to people at community meetings, and churches. We go to a lot of stuff at churches where afterward, you start to hear the same story being told to you over and over again.
There’s a popular sentiment out there that people were reckless and borrowers also took advantage of a lax environment. I’m sure that happened somewhere, I’m sure that people bought their McMansions and ‘used their houses like ATMs’ and all that, but it’s incredibly offensive at this level that we’re working at because that’s not what we’re seeing at all. Do people make mistakes? Yeah. Do they regret putting their signature down – if it was their signature, because there’s also a lot of fraud? But you see all these people who just don’t know what hit them. I think we also see many more people who are what they call upside-down in their mortgage, where it’s almost like you could write down the mortgage almost completely and they still couldn’t afford it. So that’s a strain of the problem that nobody knows what to do about.
Oda Friedheim: At the same time, you know, when the overall market is going down, they often have negative equity. And then they try to give the deed back to the lender or do what we call a short sale, which often in fact the lenders do not cooperate with, no matter how much they say they do. That’s just not happening.
But I think I would also like to get into a little bit what happens with the court system, because one of the things as we’re talking about foreclosures is that obviously in New York State, that’s a judicial process. That’s not true for all states; but here it is. So people get a summons and complaint, and frequently, because of scarcity of legal resources, they get this paper and either it’s totally scary, or they think they’re dealing with a foreclosure because they’re talking to the lender, but oftentimes they do not answer and default –
Sarah Ludwig: Can you just stop there for one second? Isn’t it like 80 percent, or some huge percentage of foreclosure proceedings that end in default judgments, just because the person didn’t answer?
Oda Friedheim: Right, or if the homeowner does put in an answer, like the most minimal answer, they’re still not represented. That is beginning to change now, because of a new law (signed by Gov. David Paterson in August). But until now, homeowners really had no meaningful access to the court system. They would do their answer, and you know the lender, always with an attorney, would move to strike their answer and basically still move forward with the foreclosure and leave the homeowner out there, unless the homeowner at some point could get an attorney. That is now changing with the new law which, for the first time, actually sometimes mandates conference in the court. It opens a big door for us to use the court system in better ways to help and assist people, whether it’s a better settlement that they otherwise couldn’t reach or represent them, or educate the homeowner on how to navigate these settlement conferences. It’s the first time that really homeowners could actually sit there the way the conferences are actually supposed to be structured – the lender through their attorney is supposed to send somebody with authority to settle the case. Again, that never happened before.
Sarah Ludwig: Because they’d say, ‘we can’t answer for it,’ right?
Oda Friedheim: Right! And because the attorney and the servicer would say, well the investor doesn’t allow me, I can’t do anything about it. So, for the first time, the attorney has to come in with authority to consider settlement. How this is going to work out, we don’t know yet, because we’re totally on the threshold of it. At a recent training, we already could see kind of different points of view that how these settlement conferences would be done.
Is that going to solve all the problems? Probably not, but it’s at least –
Sarah Ludwig: A fair shake for borrowers!
Stephanie Lawes: Well, we want to hope that it’s a fair shake. I still have the issue as far as negotiating with the servicer. The servicer wants that homeowner to be able to make their current payment, in order to determine whether they’re going to help them. Well, obviously they’re looking for help because they can’t make their current payment. But servicers want to see that that homeowner has enough income to make their current payment. That defeats the purpose as far as assisting some sort of workout.
Oda Friedheim: The flip side of that is there are also some services that the homeowner can’t get. I’m struggling, I can’t pay this loan, can you help me? Well, are you in default? No, I’m still struggling to pay my loan. Well, then we can’t help you.
Michael Hickey: New York is the piggybank for the rest of the country. You’re not going to get mortgage values out of properties in Cleveland, Kalamazoo, Bloomington. It’s not going to happen. Well, where has the market held up pretty well? New York! And a few other cities, but because New York’s property values have not had a really significant drop, servicers are demanding that there not be any writedown in the principal here. And also, a 5 percent writedown on a $20,000 mortgage in Cleveland is really different from the same percentage writedown on a two-family red-brick home in Jamaica, Queens. There’s a tremendous difference in the value of the property. So, you know, that right there really gums up the works, and puts a particularly painful burden on homeowners who are struggling in New York City.
The other thing is that there are two crises, right? There’s a mortgage crisis and a credit crisis. They’re happening at the same time, and they’re directly related to each other, but they’re very different. The mortgage crisis is a crisis that was built one transaction at a time – one mortgage at a time. The relationship between the crises is kind of broken now and that’s part of the problem, that’s why we have a credit crisis. But until there’s certainty with the mortgage crisis, the credit crisis is not going to resolve itself. And so far, that’s a big problem with this bailout package, is that it actually doesn’t seem to address these problems, these core problems in the mortgage crisis.
Angles on affordability
Jarrett Murphy: There’s an argument being made that in the late 90s, HUD increased the number of low- to moderate-income people that the government lenders are supposed to support mortgages for.
Sarah Ludwig: It’s not a requirement, a goal was set. Let’s be clear.
Jarrett Murphy: Right. Some say that HUD, through government-sponsored entities, helped to put fuel on the fire, if not originate the crisis. What do we think about that argument?
Michael Hickey: I don’t think so at all. That giant sucking sound was not HUD. It was really a market that was created that was incredibly speculative. That was voracious for product and that created a race to the bottom. That took advantage of a deregulated environment and pushed products into new realms of lack of transparency and unaccountability that fed a market that thrived on risk. Thrived on passing along risk, until it arrived at the situation where we are today – which is a giant pool of uncertainty. You know, there’s still risk being passed along, not to the same degree, that there was just a year ago, but now we’re at a place where the valuation of these securities is totally disconnected from the reality of these securities. The system is paralyzed and essentially broken and at the same time, these transactions are so incredibly complex. The only way to begin to unwind them is to figure out how to reassemble them into less-complex securities, essentially. And from there, work your way down into neighborhoods and communities. It’s going to be a very, very complicated and painful process.
Jarrett Murphy: Let’s stick with the other part of that argument, which was made earlier in September; I don’t know if one could make it now. It sort of went like this. Yeah, things are tough, yes, some people are really going to lose their homes, but overall, the gain that we’ve seen in home ownership and