We have all seen the ads: "No money? No Credit? No problem!" It is this type of irresponsible misinformation to consumers that has contributed to the sub-prime mortgage crisis facing New York, and gripping the country. Impacts of the sub-prime mortgage crisis are reverberating throughout the entire economy. As we saw with the savings and loan crisis of the late 1980s, irresponsible and overly risky behavior on the part of financial institutions has the potential to undermine major sectors of the economy, affecting everyone. And as with the savings and loan crisis, much of the focus has been placed on bailing out the companies who made unwise investments. It is critical to remember that the victims in this sad situation are not the financial institutions, or even the broader community of investors in these companies, but the homeowners who were literally manipulated into taking loans they could not afford, many of whom have already lost their homes. The impact of foreclosures goes beyond the individual, destabilizing entire communities.

The truth is, we are talking about people who wanted the "American dream." They wanted to buy a house—to have a stable home for themselves and their families, and improve their communities. But there have been too many disingenuous, predatory lenders out there who have not been following the rules of the game, and who have been manipulating information in order to get people to sign on the dotted line for mortgages they can't afford.

This crisis is, in large part, due to a number of unscrupulous practices. The first is intentional misrepresentation, and unclear explanations of loan terms to borrowers, who often do not fully understand the incredibly complex characteristics of their sub-prime loans, including variable interest rates with exploding APR’s and balloon payments that can drastically increase the monthly payments on the loan. Many sub-prime loans (56% for 2006) are actually refinancing deals, where consumers were convinced to refinance on the promise of lower payments and ready cash, without being fully informed about the full costs of the refinancing. Another major contributing factor to the current crisis has been the granting of loans to people without regard to their ability to pay. Lenders know better. People are easily convinced to take money when it is offered to them, but the rest of us are left reeling from the consequences of banks giving loans to people that they know will never be able to afford to actually make repayments.

As the housing market has cooled, the risks of foreclosure become even greater as it makes refinancing more difficult for many homeowners who are stuck with unfavorable credit terms.

Foreclosures are soaring throughout the country, as well as here in the New York City area. For July 2006 to July 2007, there have been 14,559 foreclosures in New York City, and, according to credit monitoring groups, the foreclosure rates for 2007 are expected to be 60 percent higher than for 2006. Furthermore, because predatory loans often are targeted at minority communities, it is these neighborhoods that end up suffering from the highest foreclosure rates, and consequent dislocation. In New York, African Americans are 5.1 times more likely than whites to receive sub-prime loans than whites; Latino borrowers are 3.8 times more likely.

So what can we do to deal with this problem in a way that helps those at-risk of foreclosure and preserves our communities, instead of only looking to protect the lenders who got us into this mess? The first requirement is to provide reasonable refinancing alternatives for homeowners with sub-prime loans. There is already some funding for refinancing available through the State of New York Mortgage Agency’s (SONYMA) “Keep the Dream” Program, created by Governor Spitzer earlier this year, which offers at-risk homeowners the ability to refinance current mortgages with 30- to 40-year fixed-rate mortgages with competitive interest rates. This program is great because it stabilizes communities, without costing taxpayers anything—the mortgages must be repaid. Information on the Keep the Dream Program is available online at www.nyhomes.org/home or by calling 1-800-382-HOME. I expect that given the dramatic increase in foreclosures we are currently facing, this program will need to be significantly expanded to bring an end to the foreclosure crisis.

We must also move beyond the current crisis to ensure that homebuyers and homeowners are better informed before they borrow money, and to require that lenders act more responsibly. Current funding for homeownership counseling and foreclosure prevention programs are extremely limited, and it is critical that New York act to ensure adequate funding for these programs in the next budget cycle. An educated consumer will be in a much better position to avoid the pitfalls that have caused so many borrowers to lose their homes. People also need to have the tools to evaluate whether they can really afford a home – homeownership is not the best choice for everyone, despite the seductive advertisements many predatory lenders use to convince them otherwise.

Key to all of this is that we need to pass State legislation that prohibits the worst kinds of practices that predatory lenders are known to engage in. There are a number of bills that address these issues currently under consideration, including:

1.) Requiring all lenders to demonstrate the borrower’s ability to repay the loan;
2.) Prohibiting lenders from steering borrowers towards home loans that are less favorable than a home loan for which the borrower is qualified;
3.) Requiring mortgage brokers to have fiduciary responsibility to the borrower, so that they cannot profit by directing people into higher cost loans than they need;
4.) Prohibiting balloon payments, negative amortization, prepayment penalties and other deleterious provisions for all sub-prime and nontraditional loans;
5.) Requiring disclosure of availability of mortgage counseling and rate comparisons with all sub-prime and non-traditional loans.

These steps would go a long way towards limiting the damage done by the current crisis, and preventing future foreclosure crises. This is clearly a case where the market has failed to provide adequate protections for the moderate- and low-income people who have found themselves caught up in this crisis—or for that matter, from the irresponsible lenders now facing bankruptcy and a taxpayer subsidized bailout. As those same lenders use their political power to fight for federal and state bailouts, we cannot forget those who face the most dramatic impact of this crisis – the loss of their homes. The dream of owning a home should not have to become the nightmare of eviction and potential homelessness.

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