FOCUS: SUBPRIME HOME LOANS
Mortgage crisis here may be worse than reported
Group says many risky mortgages in Erie County may not undergo traditional oversight
Dorothy Gary never lost her home, but the senior citizen’s oversized 24 percent mortgage rate brought her awfully, awfully close.
Gary got help, but only after learning that seven years of uninterrupted monthly payments had barely made a dent in her loan’s principal.
Even worse, her home — a modest but well-maintained bungalow in the Broadway-Jefferson neighborhood — was now worth less than what she owed the bank.
“At some point, I would have had to walk away,” she said of her home. “I wouldn’t have had a choice.”
Gary is just one face in a subprime lending crisis that new studies suggest has hit Buffalo and its suburbs harder than first reported.
One of those studies also identifies, for the first time, an unusually large number of Erie County mortgages that are not subject to traditional government oversight.
The study found that 44 percent of the mortgages made here from 2001 through 2006 involved lenders who do not face the same level of federal regulation as banks and other mortgage lenders.
And the people taking out those loans are not just low-income, inner- city families. They also include middle-class homeowners in Amherst, Hamburg, Evans and every other suburban community.
“There’s a big unknown out there,” said Kathleen Lynch of the Western New York Law Center, the group overseeing the mortgage foreclosure study. “And that’s troubling because we don’t know anything about these loans.”
One of the suspicions is that within that large pool of less-regulated mortgages are a significant number of subprime loans, many of them in foreclosure.
Until now, Western New York’s foreclosure woes have been measured by information supplied by lenders to the federal government. The result has been a determination that, yes, the region has problems, but nothing compared with other parts of the country.
That’s true when you compare Erie County with Arizona, Florida or California, which are hotbeds of foreclosures, but not when you compare it with other Northeast communities.
“Our rate of foreclosure, given our population, is high,” said Lynch, coordinator of the Law Center’s foreclosure prevention initiative. “It’s also a mistake to think it’s only low-income individuals who are taking out these loans.”
One of the Law Center’s earlier studies identified 2,800 foreclosure filings in Erie County last year. By comparison, New York City, with eight times the population, had 14,000 foreclosure filings.
The numbers also back up the Law Center’s long-standing claim that RealtyTrac, a popular source for tracking foreclosure trends across the nation, has underestimated the problem here.
The worry, of course, is that the region could be shortchanged on government foreclosure aid because of the undercounting by RealtyTrac and the government.
The presence of less-regulated lenders in large urban areas is hardly a news flash, but in Erie County the number of loans they generate seems unusually high.
“It just blows my mind,” said Josh Silver of the National Community Reinvestment Coalition, a national group tracking less-regulated lenders. “It does seem like Buffalo has a disproportionate number of these loans.” He said the general rule is that the Home Mortgage Disclosure Act, the federal law that requires lenders to report their mortgages to the government, covers about 80 percent of a community’s home lending activity.
The Law Center found the percentage of reports in Erie County to be much lower — between 50 percent and 60 percent each year.
Silver is not sure why, but there’s a fear that the large number of less-regulated loans suggests the presence of riskier subprime mortgages. A recent national study found a strong link between the least-regulated lenders and the riskiest mortgages.
In Erie County, the impact of those riskier mortgages seems to have hit hardest those homeowners — most notably senior citizens — who used their high-interest loans to pay off credit card debt.
“It’s the biggest trap for the elderly,” said David Derrico, a lawyer at the Western New York Law Center. “I would strongly encourage homeowners to be wary about paying off their credit cards with a home equity loan.”
The pitfalls become obvious when you look closely at some of the more burdensome subprime loan products offered here.
One of them is the 228 ARM, an adjustable-rate mortgage that begins with a low “teaser” interest rate, which is frozen for two years but then increases twice a year for the next 28 years.
Unlike conventional ARMs, which fluctuate with interest rates, the rate on a 228 never drops.
“Yes,” Lynch said, “we had those loans in our market.”
Lynch said the Law Center also discovered a lot of the same subprime lenders encountered in other cities.
Those lenders were the subject of a study in March by the Empire Justice Center. That study found about 5,400 subprime loans originated in Erie County in 2006.
Of those, 27 percent were in jeopardy — either in foreclosure or more than 30 days late — the second-highest rate among upstate counties.
Locally, the area hardest hit by those troubled loans is the 14215 ZIP code, an area that includes the city’s University District and one of Buffalo’s strongest African-American communities.
“They were sitting ducks,” said Michael Hanley, a lawyer with the Empire Justice Center in Rochester.
Hanley said the University District was vulnerable because its population consists largely of first-time home buyers.
To understand the subprime market’s impact on Buffalo’s neighborhoods, the center isolated a single street, Stockbridge Avenue. The four-block residential street was home to 16 foreclosure filings.
“If we can stop those foreclosures,” Lynch said, “we can save that street.”
One living, breathing example of that effort to keep low-income people in their homes is Gary.
Thanks to the Law Center, which provides legal counseling to homeowners facing foreclosure, she stopped just short of becoming yet another subprime statistic.
For seven years, Gary made her monthly payments, never fully aware that her $664 payments were barely eating into the principal.
“I could never get ahead,” Gary said. “My interest rate was so high, I would make a $600 payment, and all of it would go for interest.”
She kept her home in the Broadway-Jefferson neighborhood by getting her lender to agree to a new, interest-free loan with $260 monthly payments, less than half what she was paying before.
Unfortunately, local foreclosure data suggests that Gary’s success story is the exception, not the rule. Homeowners facing foreclosure can receive legal and counseling assistance from the Law Center at 855-0203 or Homefront, another local agency, at 856-2952.
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