Record numbers of Americans are facing the threat of losing their homes because they cannot afford steeply rising payments on their mortgages. The crisis is mainly among people who are defaulting on high-interest, adjustable rate home loans. Many of those mortgages began with a low interest "sub-prime" rate that rose higher over time, and more will reset in the months and years to come. New York City announced recently that it will expand programs that give legal and financial advice to homeowners threatened with foreclosure, but some experts warn a coming wave of defaults could overwhelm public resources. Carolyn Weaver reports.
High cost subprime mortgages were sold mainly to people who could not qualify for better mortgages, either because they were poor or had flawed credit records. Analysts say that in New York, as in the rest of the country, subprime loans were often marketed to racial minorities and women: to people like Michele McIntosh, a single mother of three.
McIntosh bought her apartment in 2002 with $6,000 in savings. A mortgage company loaned her the rest, at the sky-high interest rate of 10.5 percent. Two years later, she refinanced the loan with an "adjustable" rate that began at 7.5 percent, and would rise over time.
"How it was presented to me was that the market right now was pretty good,” she recalled in an interview, “and the long term outlook for the market would be looking rather good, so I didn't have to worry, is how the dealer I was working with kind of broached it to me. So I was like, okay. And he said, even in two years, if you find that the rate is getting a little high, then you could do another refinance."
Within a couple of years, the interest rate was at 11.5 percent and climbing. McIntosh was out of work for several months and fell behind in her payments. She says there is no way now she can catch up. "Depending on what happens in court on Wednesday, I could possibly lose my apartment, lose it because the courts could determine to give the lender a sale date,” she said.
"My constituents are losing their shirts,” says James Sanders, a member of New York’s City Council who represents McIntosh's neighborhood in the Queens district, where many of those facing foreclosure live. Sanders says it boils down to predatory business dealings: high-cost loans aimed especially at lower-income and minority homebuyers.
"All of the banks are involved, especially the largest banks,” Sanders told a reporter as he toured a Far Rockaway neighborhood where many homes, both old and new, are up for sale. “Now their claim is, 'we don't do that, we don't go out and meet people.' No, they don't do that," he says. "But they buy the loans from these mortgage companies, thereby giving these mortgage companies money so that they can continue this horrible practice."
New York State is investigating possible abuses by both private and public housing lenders. Governor Eliot Spitzer says the state is committed to helping large groups of people threatened with foreclosure. "Not doing it one-by-one, on a one-off basis with the individuals who come in on the cusp of foreclosure,” he told reporters recently, “but doing it across the board with entire classes of borrowers [for] whom you can get mass relief."
But Frank Bruno, chief economist for the New York City comptroller's office, says that helping everyone would require vast private help, too. "The amount of money we're talking about is so large,” Bruno said. “Over $100 billion in mortgages were taken out in the city between 2000 and 2005. So, the ability of government to deal with such huge numbers is very limited."
Some observers say that the blame should rest mainly on those who are defaulting on their home loans. Councilman Sanders strongly disagrees. "If there's an argument that people need to pay for being irresponsible, then the banks, who were the most irresponsible, need to pay the most,” he says.
The banks that bought the seemingly profitable loans from mortgage companies then bundled and sold them as "securities" to other institutions around the world, which sold them to still others. Now even financial experts are not quite sure where on the globe all these now worthless securities are held. But banking experts say the crisis is far from over, as the adjustable mortgage rates continue to rise, threatening fresh waves of defaults.
