Subprime Loan Settlements

The Silent Sandy: the Foreclosure Crisis in NYC

The Silent Sandy in progress (New Economy Project)

The Silent Sandy in progress (New Economy Project)

In following up on my previous post about how the foreclosure crisis never really ended nationally, I want to discuss how it has been playing out in New York City, particularly for minority homeowners.

Though the national narrative during the crisis in 2008-2009 focused on the Sun Belt states, certain neighborhoods in NYC (particularly in Queens and Brooklyn) were ravaged at even higher rates.  Disturbingly, the numbers of people affected today have effectively stayed at the numbers from this period.  Much of this blog post pulls information from testimony given in 2015 by Linda Jun, a staff attorney with MFY Legal Services, a non-profit legal aid group, and a 2011 report issued by NY Communities for Change. 

Before discussing the current situation in NYC, it is worth going back over some numbers from the 2008 crash, which help to explain why today is just as bad for minorities. Though traditionally only about 1/3 of New Yorkers own their home, the racial breakdown of ownership is stark: 41% of Whites and Asians, 26.5% of Blacks, 16% of Latinos own homes.  

In 2009, Black and Latino homeowners represented 32% of all NYC homeowners, but 56% of all pre-foreclosure notices, and 53% of all underwater mortgages - making them 175% more likely to be at risk of foreclosure than White homeowners. (Pre-foreclosure notices are triggered when a homeowner has missed 90 days of payments. Underwater mortgages mean the payments on the mortgage are higher than the value of the home itself.)  

State court filings for actual foreclosures totaled 47, 664 for that year.  Given that this was the peak of the crisis, it's not a surprise that that number was a record. Keep that number in mind.

Much of this can be explained by the concentration of subprime loans that disproportionately affected minority homeowners (which has been grossly under-prosecuted despite multiple settlements). Black and Latino homeowners were 5.5 and 4.1 times more likely to receive these types of loans than White homeowners. Subprime loans are now infamous, but it's easy to forget that they were intended to extend loans to people with poor or almost no credit, seemingly a good intention to encourage homeownership.  Also, the assumption was that property values would continue to rise, making any loan viable.

In practice, these loans offered exploding interest rates and hidden charges that were intentionally deceptive and intentionally designed to target minority homeowners (who historically have bad credit because scores are based on out-dated and discriminatory models).  When property values failed to keep climbing as required for the deals to make sense, and these higher rates kicked in, the result was the loss of thousands of minority-owned homes across the city. 

There were alarm bells about the practice even before the bubble burst in the city, including from Senator Schumer's office, but not enough was done to prevent it.  And sadly, not enough is currently being done to fix it or, heaven forbid, prevent another one. 

You can see this lack of action play out over the last 7-8 years.  After some dips in 2010-2011, numbers have started to climb and by 2013 there were 46,696 new filings for foreclosures - almost the same levels of 2009 (though the numbers appeared to have dipped slightly in 2014). You wouldn't know that from the rather rosy images of New York City real estate because the boom continues at the upper end of the market.  Therefore it's easy to miss the extent of the crisis because it's so concentrated in minority-majority neighborhoods.

With thousands of homeowners still at risk of losing their homes, it is depressing how little this is discussed in New York City at the public level. Rightfully, the need for affordable rental housing has been a major issue that has dominated the housing conversation, but 13% of homeowners are underwater in the city.  That represents a huge portion of New Yorkers, not to mention a huge portion of property tax money lost to the city (Ms. Jun estimates $84m.) 

As I discussed in the previous post, there have been national programs put together to assist homeowners in refinancing or permanently reducing payments, but many were difficult to qualify for and were short-term fixes based on the faulty assumptions that wages and property values would eventually return to pre-recession levels.  This has simply not happened and many homeowners have received little or no reduction in principal payments, interest rates, or other fees. More concerning is that only 16% of NYC homeowners that have applied for permanent reductions have received them. Discriminatory practices still lurk in the housing market at every financial turn.

This has left New York City with two housing crises - the well-known rental housing one, and the lesser known mortgage one.  Both have harrowing implications for thousands of New Yorkers right now.  Mayor De Blasio has outlined a detailed, if, in many tenant circles, controversial Housing Plan that at the very least addresses many of the issues in the rental housing crisis, but the city, state, and federal governments must act on the mortgage crisis or a repeat of 2008  or worse isn't out of the question.

The need for principal reduction, advocated for in this blog before, is plain to see. The often sited 'moral hazard' argument doesn't hold up when compared to the bailout or the fact that many lenders settled with the federal government for billions of dollars for unlawful lending practices.  Fixing said lending practices (including how credit scores are calculated) to create manageable and transparent payment plans would help those interested in homeownership.  Finally, finding new housing systems and ownership structures to diversify the housing options for people would remove the binary "Sophie's Choice" of getting a mortgage you can't afford or getting priced out of a rental.

What can be so frustrating about surveying this landscape is how many solutions are actually out there, waiting to be tested.  We have two housing crises in this city because choices were made that could have easily not been made and can in fact be unmade. We can address these issues if we choose to.