Smith Speaks From Albany
Smith Speaks From
Repairing A House of Cards: New York's Subprime Crisis
Commentary From The Desk Of Senator Malcolm Smith
Minority Leader New York State Senate
Homeownership may well be the American Dream. But for thousands of New Yorkers, that dream is quickly turning into a nightmare.
Predatory lenders are mostly to blame. They target low-income borrowers who do not otherwise qualify for financing, hike interest rates, charge a swarm of fees or hide contractual terms to hedge their bet on high-risk loans.
Some lenders even offer tempting interest rates up front to ease new borrowers into their obligation, only to raise the rate a few payments later, before it is possible to refinance with another lender.
Like a house of cards, these are scenarios stacked for failure. In their hunger for more customers, companies are ignoring the reality that borrowers simply cannot afford high-cost loans. And so, interest rates spike, bills go unpaid, fees mount, the bank forecloses on the property - and a family loses its dream.
Since 2005, traps like these have blindsided would-be homeowners at an alarming rate in New York, hitting hardworking 9-to-5 families with the greatest force. This is especially so in the subprime lending market, where customers are charged a higher interest rate - as opposed to a "prime" rate - due to their low credit score, inadequate finances or a history of loan defaults. Subprime loans, in fact, account for over 60 percent of foreclosures. Not all subprime lenders are predatory. However, since subprime borrowers are more likely to be at an economic disadvantage, they are also most prone to exploitation.
Studies project that home loan foreclosures will plague a mind-boggling 20.9 percent of all subprime mortgages - or about 28,000 homes - initiated in New York in 2005. Last year alone, more than 9,000 New York City homeowners faced foreclosure.
At one time, the subprime market promised to open doors of homeownership for low-income applicants and other would-be borrowers traditionally overlooked by the prime-rate market. Soon enough, though, the market tanked as predatory lending practices got more aggressive, and government regulations dramatically less so. The house of cards tumbled.
The collapse has been particularly harmful to minority populations. Statistics show that African-Americans and Latinos are nearly four times more likely to pay higher-cost loans than whites. Minorities are also routinely urged to take out high-cost subprime loans even when they qualify for lower-priced prime-rate mortgages.
Senate Democrats have recently launched a new campaign to rebuild this house of cards using more structurally sound materials - and, in the process, bring much-needed relief for victims of predatory lending. We call it the Predatory Lending Mitigation Program.
To start, we have scheduled a series of public hearings statewide to hear testimony from fair housing advocates, victims of predatory lending practices and other experts as we draft a policy plan for solving the crisis of loan foreclosure in New York. We are also asking banks to pledge a voluntary six-month moratorium on all subprime foreclosures while this process unfolds. I also recently introduced a bill in the Senate to prohibit state agencies from contracting with financial institutions that engage in predatory lending practices. Simply put: companies wanting to conduct business with New York State should not be exploiting the dreams of New Yorkers who simply want a stake in the American dream of homeownership, and a stake in their families' future.
Senator John Sampson (D-Brooklyn) has also introduced a measure to provide training and assistance to borrowers seeking a loan.
These measures fulfill our 9-to-5 Democratic Senate agenda to help New York families create a better life for themselves and their children. We recognize the thousands of New Yorkers who work hard, play by the rules and, yet, are struggling to make ends meet.
Clearly there have been no winners in the foreclosure meltdown. As borrowers went bankrupt, so too have a number of lending companies. Gambling on risky mortgages to turn a quick buck, investors at all levels lost big.
We've all been affected by the foreclosure fallout, but none more so than the thousands of hardworking New Yorkers who dared to believe that by scrimping and saving, they could take hold of the American Dream - and that it would not be stolen from them.
Smith is State Senate Democratic Leader. He represents the 14th District of Queens.