The Fight for Consumer Protections Comes to a Check Casher Near You (Updated)

(Update: Please note the corrections on the actual vote below.)
Opinion by Gregory Lobo Jost

I have to admit it is downright depressing that Republicans in Congress are doing whatever they can to block the newly formed Consumer Financial Protection Bureau (CFPB) from fully getting off the ground.  The bureau came about as a response to the failure of the various protection agencies to do their job on subprime and predatory products in the decade leading up the collapse.  Many of these agencies had arguably been bought off by the industries they were supposed to protect us from.  These same industries are now working the politicians in Washington to keep the CFPB from having any teeth.

What may actually be even more depressing is that New York State is now considering a bill that will relax some of our own strong consumer protections – mainly the state’s longstanding civil and criminal usury laws, which cap interest rates on small loans at 25%.  The Senate Committee on Banks voted yesterday in favor of a bill that would exempt check cashers from this usury cap and allow them to make triple-digit interest rate short term loans.

New Yorkers for Responsible Lending, a statewide coalition of 151 groups (including University Neighborhood Housing Program where I work) called on the committee to withdraw this piece of legislation (S.3841 / A.7047) known as the "short-term financial services loan act", as it would likely open the door to predatory payday lending, which thankfully our state has long prohibited. Despite this strong public opposition from NYRL groups and others around the state, the Committee approved the bill yesterday morning, sending it to the Finance Committee for review.

(Updated/Corrected:) Both Bronx Senators Ruben Diaz, Sr. and Gustavo Rivera are on this committee, but according to footage of the meeting on YouTube (skip ahead to minute 30 for this bill) were not present for the actual vote.  They both submitted their votes, however, with Diaz voting in favor and Rivera against. Senator Rivera was in another meeting with the Department of Corrections (he is also on the Crime Committee) about the potential closing of downstate prisons, and his staff has made it clear that he is strongly opposed to this short term loan bill as it stands. Senator Liz Krueger of Manhattan was the lone Senator to raise questions about the bill at the actual meeting, and the final vote was 14-5 in favor, with Malcolm Smith, Neil Breslin and Carl Kruger joining Senators Rivera and Krueger in dissent.  Meanwhile, Bronx Assemblyman Carl Heastie is sponsoring identical legislation in the Assembly. 

Bronx Housing Roundup: the mess of foreclosures

It’s been another active week in the world of housing news, in the Bronx and nationally. The one common theme shouldn’t be too surprising: foreclosures.

Let’s start locally with a couple of stories that exemplify larger trends in Bronx multifamily housing.

NYU Report Documents Credit Crunch's arrival in 2007

On Monday, the Furman Center at NYU released a report, Declining Credit & Growing Disparities: Key Findings from HMDA 2007. The report uses recently released Home Mortgage Disclosure Act (HMDA) data to analyze trends in home purchase and refinance lending activity between 2006 and 2007. The report highlights changes in the high cost (sub-prime) and prime markets, and demonstrates these effects on different racial groups. Here's a summary of the report findings from the authors:

Much of the media’s focus has been on signs of tightening credit over the past few months, but our report illustrates that the flow of credit has been slowing for the housing markets for well over a year. In New York City, we saw dramatic declines in home purchase and refinance activity from 2006 to 2007 (14% and 31% respectively)... Moreover, we see troubling signs that New York City's black and Hispanic borrowers are bearing the brunt of this decline in credit, and it is not simply evidence of the subprime market drying up. The number of prime loans awarded to black and Hispanic borrowers fell by 23% and 15% respectively between 2006 and 2007. By contrast, the number of prime loans issued to white borrowers rose by 4% while the number issued to Asians increased by 18%. If these trends continue, and black and Hispanic borrowers are disproportionately affected by the tightening credit market, it may mean less investment in communities of color, an undoing of recent progress in bringing homeownership opportunities to black and Hispanic New Yorkers, and a reshaping of who is buying homes in New York.

Based on the report, the Bronx had the largest drop in home purchase loan originations (-24.9%) of all five boroughs, including the largest drop in prime home purchase loans (-5.4%). It also tied Brooklyn for the largest drop in refinance loan originations (-33.2). In addition to these signs of credit drying up, the data on loans actually being issued isn't good either: for 2007, the Bronx had the highest percent of home purchase loans that would be considered high cost (17.4%), and when you think high-cost, think bad sub-prime products. Here's that chart from the report:

Keep in mind that this data is for 2007 and the changes from 2006. You could make an argument that 2006 was the peak bubble year, or at least late 2006 to early 2007. I suspect the drop-offs on lending in 2008 will be much more dramatic.

On a somewhat related note, the Local Initiatives Support Corporation (LISC) has completed a study showing the rate at which mortgage borrowers find themselves in default is not primarily related to whether they are poor or prosperous but rather is tied to the type of mortgage products they were sold.

More on CRA and ACORN

West Bronx resident and freelance journalist Eileen Markey goes in depth with ACORN on their relationship with CRA and subprime lending over the last decade in a piece in City Limits Weekly. Read about how they were one of many community groups fighting predatory lending and pushing for quality lending, not the toxic stuff that ended up blanketing low and moderate income communities of color.

But ACORN and other proponents of the Community Reinvestment Act – the 1977 law requiring banks to lend in all communities from which they receive deposits – did promote a fairly nuanced message. They lobbied for more quality lending in low-income and minority communities while also calling for more stringent regulation of the kind of non-bank lenders like Countrywide that fueled the mortgage crisis. Campaigns by ACORN and like-minded groups including the Chicago-based Neighborhood Training and Information Center sought to shrink the risky-mortgage business by pressuring investment banks not to buy the debt, and also pushed for changes in the way banks measured creditworthiness so that people with lower credit scores could be eligible for decent mortgages from real banks.

"A lot of this did not have to happen, and there were groups out there including ACORN that were sounding the alarm," said Ismene Speliotis, executive director of NY ACORN Housing, in an interview last week. But many investment banks, busy making oodles by investing in the sub-prime mortgages, didn't heed the warning.

In Defense of CRA

Opinion by Gregory Lobo Jost
It's getting a little ridiculous, to tell you the truth. According to the New York Times, an Iowa Representative has introduced legislation to repeal the 1977 watershed legislation that helped save neighborhoods across the country, including the those in the Bronx. Maybe it should come as no surprise that certain deregulation-minded conservatives who have been battling the Community Reinvestment Act for years (following the lead of former Senator Phil Gramm) would take the opportunity of a financial meltdown to once again go on the attack against CRA.

Fortunately, the Times editorial board has taken a stand today in support of CRA:

The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there’s the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending.

In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans.

The Times also cites a report by the Center for Community Capital at UNC Chapel Hill that shows much lower default rates in CRA loans than in subprime. A separate January 2008 study showed that banks who were subject to CRA, "were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio." In other words, they had better lending practices.

The real problem was from lenders not regulated by CRA (thanks in part to Phil Gramm) who went wild with their products. Often they didn't care if the loans were affordable because they were going to sell them off to be packaged into securities and sold to investors around the world, who were in turn duped by the ratings agencies. Plenty of people made a lot of money along the way without any real accountability. Since CRA-regulated banks are more likely to keep their loans on their own books, they actually lent with the intention of being repaid.

The lack of accountability inherent to the mortgage securitization process is what fueled the housing bubble and has brought us to this disastrous economic moment. The weakening of CRA in 1999 might be a better place to look to place a good chunk of the blame. The timing suggests it warrants a closer look.

Consumer Protection in Financial Services: The Bronx is Heard on Capitol Hill

Guest Opinion from Blogger Gregory Lobo Jost:

Yesterday I had the opportunity to tesify in front of the House Appropriations Subcommittee on Financials Services and General Goverment. Congressman Jose Serrano is the Chair of this Subcommittee and had this to say about the hearing in his newsletter:

"All consumers are at risk of being victimized by financial predators...Each year countless working class parents who are struggling to achieve the American dream tragically have their hopes of upward mobility crushed by the practices of dishonest businesses. While their plight often goes unrecognized, the enduring housing crisis has opened the eyes of many Americans to their struggles, and made us all aware of the devastating effects such exploitation can have on the strength of our economy."

My testimony focused primarily on expanding absence of conventional banks in places like the Bronx (a legacy of redlining), and how this has opened the door to fringe financial institutions. In addition to speaking highly of Senator Dodd's bill (S.2452) to add protections for homebuyers and homeowners, I focused on Refund Anticipation Loans offered by tax preparers throughout low income areas. Here are some excerpts:

Without a doubt there is need for stronger consumer protections in financial services, especially in low- and moderate-income communities of color that in the past were victims of redlining. The Bronx is entirely too familiar with redlining, as this practice led to the borough’s notorious incendiary reputation. While the Community Reinvestment Act has helped immensely to turn around the fortunes of places like the Bronx, the residual effects of redlining have led to abusive lending practices, often referred to as “reverse-redlining.” Traditional banks continue to have a relatively small branch presence in our neighborhoods, opening up the door to fringe financial institutions such as payday lenders and check cashers who often double as mortgage brokers pushing subprime products. ...It is three times as hard to find a bank branch in the Bronx as it is nationally...In fact, our borough’s many Puerto Rican-born residents are much more likely to find a bank branch back on the island than they are in the Bronx.

...this residual effect of redlining has created a vacuum for predatory and irresponsible lending to come into our neighborhoods and make a fortune off the meager incomes of our residents through the guise of rent-to-own stores, tax preparers that offer refund anticipation loans (RALs), and one-stop-shop mortgage agencies pushing their subprime dope.

At UNHP, we have performed outreach, intake and referrals to many struggling Bronx homeowners over the past eight years. In the past two-and-a-half years, many of those calls have come from new homeowners who by no means could afford their homes. Others, many senior citizens, have owned their homes for a long time but can no longer afford their current mortgage thanks to the unsavory terms of a recent refinancing. Our own research has shown that the majority of Bronx homeowners going into foreclosure during the first three quarters of 2007 were not the victims of 2/28 or 3/27 ARMs; almost 65% of the loans going into foreclosure during this period were less than two years old! This exemplifies the extent of atrocious underwriting in recent years, where huge numbers of loans were made without regards to the borrower's ability to repay. The proliferation of the securitized secondary market has made this all possible through its blatant lack of accountability.

Outside of mortgages, one of the main areas that our neighborhoods could use more consumer protection is with tax preparation, specifically with protection against the exorbitant interest rates and fees that come with Refund Anticipation Loans (RALs). Once again, it is the same neighborhoods like the South and West Bronx that are targeted by tax preparation services offering RALS. The financial effects are devastating as tens of millions of dollars meant for low- and moderate-income families struggling to literally pay the rent are being siphoned off through RALs.

To make matters worse, it is one of our nation’s largest anti-poverty programs that is being preyed upon by RALs. It is indeed the very same low-income neighborhoods where households receive and depend upon the Earned Income Tax Credit (EITC) that RALs are targeted and flourish. In effect, the federal government is subsidizing tax preparation companies and their national lender partners by allowing them to take advantage of folks living on the edge who are desperate for cash. Congress can easily change all of this by requiring the IRS to ban RALs on Earned Income Tax Credit dollars.

Congress can also act by ending Federal preemption of state laws that would in effect do away with predatory loan products like RALs. It is no wonder that (at least in New York) only national banks make these loans; State laws and banking regulations prohibit such high interest rates so only banks not subject to these rules can offer such predatory products. This is a loophole that needs to be closed.

While this subcommittee deals specifically with appropriations (funding the federal government's agencies), the hearing will hopefully lead to more protections for consumers from Washington which will in the end benefit places like the Bronx.

Bailouts Come Easy for Wall Street, Not Homeowners

Opinion from Guest Blogger Gregory Lobo Jost
How comforting to know that our government can act quickly to cut interest rates when things get bad. As markets tanked across the globe on Monday and Wall Street was spared thanks to the King Holiday, the Fed slashed the federal funds rate by 75 basis points or 3/4 of a percent this morning -- talk about fast action! And is anyone complaining about a bailout?

If such action could be taken on the hundreds of thousands of homeowners in danger of foreclosure (or already there), many Americans would be up in arms complaining about a bailout for their neighbors (even though it would help their own property values).

If you aren't convinced about how much better Wall Street bankers fare in hard times than our regular citizens, consider the huge bonuses given out this year. Despite huge losses for most of the corporations involved in the subprime lending debacle, bonuses are down only 4.7% from last year. This editorial on MarketWatch offers some interesting suggestions on what the bankers should do with their bonuses -- if they won't give them back, make them invest in the mortgage backed securities that are tanking! (Also, check out the section at the end of the article on the related protests against private equity firms.)

The Times' Vikas Bajaj has an interesting article today that gets to the root of the subprime fiasco. "Homeowners are suing mortgage lenders. Mortgage lenders are suing Wall Street banks. Wall Street banks are suing loan specialists. And investors are suing everyone." Why did lenders ever make loans that they knew borrowers couldn't repay? Because they were passing the responsibility and accountability on to others. The article doesn't mention the ratings agencies, however, who often rated securities much better than should have, partly because they were being paid by the banks issuing the securities. The New York Sun gives these ratings agencies a subpar rating.

Bringing things back closer to home, the Daily News has an article on how prevalent property flipping has been (and continues to be), and how it fed off subprime lending to inflate property values and push families into foreclosure.

On an unrelated note, the Daily News also reports that the Bronx had much fewer bedbug complaints to 311 than all the other boroughs (except Staten Island). While at first it felt great to think the Bronx finally ranks near the bottom in something bad, the numbers aren't quite as rosy for Bronxites once adjusted for population. In the 4 boroughs cited in the article, Queens had the lowest rate of complaints (1 per every 1,408 residents) and the Bronx came next at 1 per every 1,219 residents -- not too shabby, but not a first place finish like article mentions. Brooklyn (1 per 1,053) comes in slightly better than the most bed-buggy borough, Manhattan (1 per every 932 residents). The downside of looking at the absolute number of complaints instead of the rate of complaints is that none of the upcoming educational seminars on how to prevent bedbugs will be held in the Bronx.

Note: Population numbers come from the 2007 Population Estimates from the U.S. Census Bureau

A Few Housing Updates for September

On the multifamily/rental front, a City Limits article this week exposed how Public Money Helps Fund an Expensive Housing Flip. A report by Tenants and Neighbors and UHAB showed that both the city employees’ retirement account and the New York State and Local Employees’ Retirement System are investing tens of millions in real estate funds that provide capital to the Putnam Holding Company to purchase five expiring Mitchell-Lama properties for almost $1 billion this past May.

With a purchase price that high, there's little doubt rents in these properties will rise dramatically in the coming years. One Assembly Democrat criticized "the investment of retirement funds for city and state employees in 'private equity groups that purchase former Mitchell-Lama developments and make them unaffordable to those same workers.'"

On the homeownership side, Andrew Beveridge in the Gotham Gazette documents the housing bust in New York City, and low income communities of color like the west Bronx will get the hardest. In New York City in 2006, a quarter of Hispanic/Latino homeowning households paid an astounding 81% of their incomes on homeownership costs (mortgage, taxes, utilities). Half of African American homeowners in the City paid more than 44% of their income on homeownership costs.

"Those most at risk of losing their homes because of high housing costs are more than proportionally minority, less educated, either very young or very old, and most especially with much lower incomes than those living in affordable situations. The median income of those paying less than 30 percent of their income on housing is $120,900. For those paying between 30 and 50 percent of their income, though, the median is $74,390, and for those paying over 50 percent the median income is $39,900."

In other words, the less money you make, the more of it goes towards housing. As a result, neighborhoods like the west Bronx will have a higher proportion of homeowners paying a big chunk of their paychecks towards their mortgages, taxes, insurance, fuel, water & sewer, and other costs paid by homeowners.

Finally, the New York Law Journal last month reported on lawsuits by eight black first-time homebuyers in Brooklyn against the real estate company United Homes. The lawsuits all claim that United Homes "oversaw a conspiracy to defraud minorities" looking to become homeowners.

"The plaintiffs' allegations share numerous common elements. After responding to ads on the subway or local newspapers promising 'We Make Dreams Come True,' the plaintiffs were rushed through a streamlined process in which the various defendants conspired to sell them overpriced, defective houses at unfair mortgage rates based on a succession of misrepresentations, according to the complaints."

According to Eastern District of New York Chief Judge Raymond J. Dearie, the plaintiffs claim that United Homes was behind a "fraudulent property-flipping scheme," and that they "bought damaged properties at foreclosure auctions or estate sales[,] performed some cosmetic repairs and, shortly thereafter, sold the properties, often at double the purchase price." The lawsuit targets both the company and their affiliated lawyers, appraisers, and lenders who participated in these schemes. A major accusation in the lawsuit is that these practices were targeted racially.

While it's not surprising that these types of practices were going on in Brooklyn in recent years (and most definitely in the Bronx as well), it is surprising that the allegations have stood up in court thus far. A recent motion to dismiss by the defendents was thrown out by the judge, and one of the plaintiff's attorney's reacted by stating,

"The decision is probably the first time a New York federal court has come to grips with this issue -- the intersection of predatory lending and race discrimination -- and Judge Dearie has made a clear statement that will have strong precedential value in this area."

How will the Subprime Fallout effect the West Bronx?

The recent dramatic changes in the real estate market -- ignited by the realization that making loans to folks who could never repay them was (also) bad for investors -- are slowly beginning to have an effect on the west Bronx housing market.

Up until very recently, New York had been mostly immune to the real estate downturn (dare I say bubble collapse?) occurring in the rest of the country. So while foreclosures are dramatically up in the City, the effects of them are mostly invisible (unless you know a victim), as troubled owners have been able to do a pre-foreclosure sale for more than the value of their mortgage (even if it's to a property-flipping 'we pay cash for houses'-type place). The main point here is that houses haven't been going vacant or boarded-up in recent years because there has been an out.
But while the City's economy remains strong, the troubles on Wall Street may be a sign that New York's real estate market may soon join the nationwide dive. Much of the subprime lending and "creative financing" that inflated this housing bubble is now drying up, as the secondary market (mostly Wall Street investors, but also Fannie Mae and Freddie Mac) are no longer interested in packaging or purchasing these riskier loans. That means that fewer potential buyers will have access to the type or amount of credit to pay the asking prices (pop! goes the bubble?).
Another similar issue that is especially relevant to the Bronx is the recent jump in jumbo mortgage rates. Because of concerns in the secondary market (the bank that gives you a mortgage often sells it so it can continue to make new mortgages) interest rates on mortgages above $417,000 have recently spiked. This phenomenon may not last, but if those rates do stay higher, buyers will have a harder time financing the two- and three-family homes for sale in the Bronx. In fact, some of the developers of the new-construction 3 family homes (often posted on craigslist.org) have begun dropping their asking prices lately, and many of these homes still have not sold.
If home prices in the Bronx fall below levels from two or three years ago, many homeowners going into foreclosure won't be able to sell for more than what they owe (most foreclosures are on mortgages made in the last two-five years). The result of this could be more properties actually going to auction, and potentially ending up owned by the bank until they could be resold. This is actually what is going on with distressing frequency across the rest of the country, especially in rust belt cities like Cleveland and Syracuse.
As for the specific foreclosure numbers, last week RealtryTrac reported on the rise in foreclosure rates comparing July 2006 to July 2007. The nation as a whole was up 93%, while NYC was up only 55%. The Bronx was up a measly 54.3%, from 208 filing in 07/2006 to 321 filings in 07/2007. UNHP's tracking of foreclosure data in the Bronx also shows increases in all parts of the borough, including the West Bronx.

On the multifamily side, Crain's is reporting that "financing for almost all large commercial and residential projects in the city has dried up," (subscription required) due to the lack of investor interest on Wall Street (another secondary market issue). However, this is mostly influencing deals outside of the Bronx (office and condo deals in Manhattan and parts of Brooklyn).


The majority of banks and thrifts that finance Bronx apartment buildings keep their mortgages in-house, so they may actually be able to pick up some of the business the secondary market is giving up, Crain's also reports. However, it is possible that many of these lenders will tighten their underwriting guidelines in current mortgage climate.

Overall, things remain fairly stable for owners of Bronx apartment buildings, in terms of their access to credit, but the question remains: What will happen in properties that have recently sold for high prices where the new owners need to raise rents to make their bottom line? Even in this recent strong economy, wages for most working class New Yorkers have stagnated, meaning more and more families pay upwards of half of their income on rent or are forced to double-up. An overall downturn in the economy may spell trouble for everyone, including new building owners who be forced to sell at a loss.