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Posted Thursday, April 26, 2007
FORECLOSURE CRISIS: Spike in foreclosures raises alarms
By John Rudolf, Chronicle Reporter

When Marie Eduard arrived in Queens from Port-Au-Prince, Haiti, in 1985, she carried with her nothing more than a suitcase and the clothes on her back. Today, after 20 years of hard work as a health care worker and bus driver, she owns her own home, a two-story, three-family house in Laurelton she bought for $500,000 last year.

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Yet Eduard’s story is not about the fulfillment of the American Dream — just the opposite. Like more and more borough residents, she finds herself on the brink of foreclosure, just barely able to make payments on a home loan that she now wonders how she was ever qualified to afford.

Desperate to get out of debt, she put her house on the market four months ago. So far there have been no offers. “I pray to God to sell the house quickly,” Eduard said. “Now I’m scared to go into foreclosure, because my credit will be ruined.”

Foreclosures are rapidly rising in Queens, which has been the hardest hit of New York City’s five boroughs. As of March 19, some 1,223 homeowners lost their properties through foreclosure this year — up 57 percent over last year’s already abnormally high total, and up 91 percent from the last quarter of 2006.

“It’s hugely spiking,” said Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project, a nonprofit group that focuses on economic justice. “What we’re seeing is that the way in which loans were being made wasn’t sustainable.”

Responsible for the lion’s share of the defaulted mortgages are so-called subprime loans, which charge higher interest rates to borrowers with less-than-perfect credit, Ludwig said. While there is nothing fundamentally wrong with subprime loans, she said, what has gone awry are the standards by which lenders judge who is capable of repaying a loan and who is not.

Eduard, for instance, told her broker she was uneasy taking out a loan for $495,000. “I told him I didn’t think I could afford the house because my income was too low. He said, ‘Don’t worry about it,’ that he’d take care of it.”

Eduard believes that her broker inflated her income by $60,000 to qualify her for the loan. Now it takes almost every dollar of her $30,000 salary as a school bus driver to pay her $2,400 monthly mortgage bill. She works part time as a health care aide from six to 10 in the morning on Saturday and Sunday, but she wonders how long she can keep it up. “Sometimes I feel so much stress, I don’t want my daughter to see it,” she said.

Another factor responsible for the burgeoning foreclosure crisis is the explosive growth of nontraditional mortgage products like adjustable-rate mortgages, interest-only loans and so-called “piggy-back” loans, which allow borrowers to buy a property with no money down.

“These loans were created for savvy investors, they were a niche product,” Ludwig said. “Now they have been broadly sold to the public.” In Eduard’s case, she received a $99,000 piggy-back loan at 12 percent interest, with a balloon payment of $90,000 due at the end of 25 years. With such a loan, a borrower will never build equity and will virtually never be able to pay off the loan, Ludwig added.

Questionable lending practices also regularly cross the line into outright fraud, said Peggy Morris, a housing advocate with Jamaica Housing Improvement. Seniors and the financially unsavvy make easy prey for con artists, she said.

On Friday, Betty Green, 55, of Jamaica, is expected to lose her home of over 35 years in a foreclosure sale. The trouble began after her husband died in 2003, and unscrupulous mortgage brokers pressured her into a series of unnecessary refinancings, she said.

Each time Green refinanced, her monthly payments increased. When they had almost doubled, to $2,100 a month, she used her credit card to pay her mortgage, which ultimately led her to foreclosure.

Green lives on 145th Street with her son Ricbet, 35, who is deaf, legally blind and developmentally disabled. When Green told him in sign language that they would have to leave the house, Ricbet — who has lived there all his life — signed back that he did not want to go.

Green said her biggest mistake was believing that the mortgage professionals and banks that she dealt with were trustworthy. “There’s no safeguards in the system,” she added.

In response to the rapidly multiplying incidences of mortgage fraud by brokers, in December 2006 the New York state Legislature passed a law requiring that all mortgage originators be authorized by the state, be fingerprinted and undergo a background check.

With a number of different factors responsible for the rising foreclosure rates, advocates and regulators alike said there is no magic bullet to quickly alleviate the situation. Yet as the list of subprime lenders entering bankruptcy grows, and as national banks and institutional investors also begin to feel the pain of billions in loans gone sour, critics say major changes will have to be enacted to prevent a financial meltdown that could cost the country hundreds of billions of dollars.

Richard Neiman, acting superintendent of the New York State Banking Department, said the scope of the subprime crisis would be dictated by the ability of borrowers with adjustable-rate mortgages to deal with rising payments as their mortgages adjust upward. “The big question will be whether delinquencies and defaults continue to accelerate as further resets are triggered later this year,” he said in a recent speech. Neiman said the problem was extensive, predicting that the subprime meltdown would be his “baptism in fire.”

The new Democratic majority in Congress is also poised to act on the subprime crisis, said Congressman Gregory Meeks (D-St. Albans). “Have we done enough? No. Are we working on the issue? Yes. Do I expect something to happen soon with reference to a piece of legislation? Absolutely,” Meeks said. The federal bill now in the works would prohibit lending to homebuyers without regard to whether they can pay back the loan, while also restricting the fees and points that subprime lenders can charge.

So far, banks have fiercely contested increased regulation. “All of this was foreseeable,” said Ludwig. “The regulators, the industry and Wall Street in particular have known about these problems for years.”

The good news was the recognition that there was a fundamental problem. “At this point, the whole subprime industry is a mess. I don’t think anybody really contests that,” she concluded.

©Queens Chronicle 2007. Reprinted from Queens Chronicle of Thursday, April 26, 2007.

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