Subprime crisis hits home



 

 Our  Subprime  Crisis

The Westchester housing market was once thought to be invincible, but some county residents are in danger of losing their homes.

 

The American Dream has turned into a nightmare for the Mendez family in Yonkers.

This is not how the American Dream is supposed to end: houses trashed by their departing owners, water faucets running, realtors opening yet another piece of “jingle mail”—the keys to an abandoned home. But for an increasing number of Westchester residents, the dream of home ownership—that classic marker of upward mobility and creator of middle-class wealth—has become a nightmare.

As the subprime mortgage crisis shudders across the country, in 2007, according to the County Clerk’s office, 2,166 Westchester homeowners received notices of foreclosure. 

It starts with a familiar story. A far-away family member falls ill or dies, adding sudden, unplanned travel costs to a burdensome mortgage payment that—thanks to ever-rising interest-rate resets—is already a lot higher than it was at the closing. Or half of a two-income couple loses a job and, with it, the second paycheck necessary to make those monthly numbers. Maybe it’s a medical crisis, with bills and medication and co-pays that unexpectedly consume hundreds of dollars once earmarked for housing.

“It was clear that some of these people could not afford these houses,” says Margot Bennett, a realtor for 32 years in Yonkers, one of the two Westchester towns hardest hit by the crisis. “A lot of us were conscious of this a long time ago.” When Bennett spoke to Westchester Magazine in mid-January, 85 single-family homes listed with MLS faced possible foreclosure, 11 in Mount Vernon and eight in Yonkers. As of February 25, the number had dropped to 56.

While the absolute number of such homes remains small relative to the 3,075 active MLS listings for single-family homes in February in Westchester, and small compared to the number in counties like Suffolk and Nassau on Long Island, which have been much harder hit, the emotional and financial devastation of losing one’s home is very real for the families affected.

“It’s far worse than it should be,” says County Clerk Timothy Idoni, who, in 2007, handled the administration of legal court documents by which 707 families lost their homes. Idoni has seen families with as many as four mortgages, “digging themselves deeper into the hole. People are in a state of denial until foreclosure actually happens.”  Idoni wants change, soon. “Federal lending laws need to be tightened,” he says, “and we need better state laws as well.”

As state and federal politicians scramble to pick up the pieces, realtors, housing advocates, and homeowners are trying to make sense of what happened.

“We are moving into financial waters that we haven’t had to navigate in quite some time—if ever,” wrote business columnist Gretchen Morgenson in January in the New York Times. “Because other housing downturns were not national in scope and did not involve mortgages that had been pooled, sliced up, and sold to investors around the globe, it is almost impossible to predict how long the turmoil will last or how financiers, regulators, municipalities, and homeowners will manage its fallout.”

Josue and Noemi Mendez live with their two children, Josue, 13, and Iris, 10, in a small, 44-year-old house at the top of a steep hill in Yonkers, blessed by a front-yard statue of the Virgin Mary in her grotto. However, financial fear, and the potential loss of their house, has become part of daily life. The refrigerator in their tiny, unrenovated kitchen is full—but only thanks to the generosity of their friends, family, and neighbors. Because Josue, 35, earns $48,000 as a mailman, the family’s income is too high to qualify for food stamps or other social assistance. 

Noemi, a warm, down-to-earth 38-year-old, was diagnosed with ovarian cancer in March 2007 and had to quit her job at a check-cashing store in Getty Square, where she earned $10 an hour. The family lost $800 to $1,200 a month of badly needed income, and their mortgage payment was four months late by the time they got their foreclosure notice, the first of several, in late 2007.

The couple has lived in their house for seven years, moving into it from public housing a few blocks away. They were thrilled to become the first members of either family to own property, for which they paid $163,000.  Today they owe $243,000 and their monthly mortgage payment is $1,808.

Ironically, they bought their home after seeing an ad for its foreclosure. “They showed us three houses, and this is the one that fit us,” recalls Josue proudly. The 1,200-square-foot house sits on a quarter acre, with three-and-a-half bedrooms and one bathroom.

“It’s the American Dream,” Josue says. “I was always renting, and, if I was going to keep renting, I wanted to buy.” But home ownership soon socked them with unexpected costs: $5,000 for roof repairs, $2,000 to shore up the sagging bathroom floor, $800 for a new water heater, and $2,800 for a backyard retaining wall. They had the home inspected only two days before they bought. “I was too excited,” Josue admits. “Everyone in my family was so excited!”

From the start, though—typical of other Westchester homeowners now losing their houses—financial troubles were brewing. The Mendezes bought their house using their tax refund and vacation money for the down payment and closing costs. Soon buried in additional unanticipated bills—the home repairs and several trips home to Puerto Rico to help his parents—Josue refinanced in April 2005, adding his credit-card debt and a car loan at 24 percent to the new mortgage. Now he owed $190,000 at 9 percent, and his payment jumped to $1,700 a month, eventually rising to $2,147.

By September 2007, the Mendezes were two months behind on their mortgage and $900 in arrears on their property taxes. Josue also owes $18,000 on credit cards at 16 percent interest. “I do it just to get by,” he says. “I get into a little jam and I’ll deal with it later.” Desperate and frightened, the couple recently turned to Westchester Residential Opportunities, a local non-profit housing advocacy group that aids low-income families, for help.

Veronica Raphael, a program administrator with WRO, is frank in her assessment of how the subprime mortgage meltdown has played out in Westchester, a largely affluent county: “I would categorize it as a minority-targeted problem.” Many of her clients fell into the same trap as Josue and Noemi—a toxic mix of sloppy property appraisals and predatory lending on the vendors’ side and of excess optimism, insufficient emergency savings, financial naiveté, and plain bad luck on the buyers’ side. Some buyers, already carrying a poor history of handling credit, simply didn’t understand the financial commitment they had made, Raphael says. “I have to tell them, ‘You did breach a contract. You promised to pay.’”

But she sees plenty of blame to go around, including to high-priced real-estate attorneys who too hastily close these dubious deals to collect their fees. “I’ve heard so many horror stories where the attorney didn’t go over the papers at all, but just said, ‘Go ahead and sign.’ Very few people walk away.”

Raphael, who began her career in mortgage banking, traces the current debacle to 1995, when banks realized they could make money with “no doc” loans—asking for little more than proof of employment and even paying the closing costs as part of the deal. Buyers with poor credit and low FICO scores, once shunned by conservative bankers, were now able to buy property, albeit at much higher interest rates, often on interest-only mortgages whose monthly payment would soon double. Buyers were reassured they could simply refinance later to escape ballooning mortgage payments. But for people like the Mendezes, already poor credit risks and hammered by job loss, growing credit-card debt, and illness, refinance rates kept rising as well.

           

The crash has been unevenly distributed, says P. Gilbert Mercurio, head of the 8,000-member Westchester County Board of Realtors. “There’s been a big percentage increase in the number of foreclosures, from thirty-three to fifty percent,” he says, “but I can’t say the numbers are having a serious effect on the Westchester market. Our inventory is decreasing, so these foreclosures are not bulking up our inventory like in Florida or Las Vegas or other markets around the country.

“What I do hear from my members anecdotally,” he adds, “is that transactions are now taking longer to make sure that buyers have the proper credit ratings. It has slowed down the process a little bit.”

Changes are forthcoming, promises State Senator Andrea Stewart-Cousins (D-Yonkers, 35th District). “All the key members of the legislature understand that this is a huge crisis whose fallout will hit every neighborhood. We’re looking at various bills, from prohibiting mortgages without income verification to making sure there is better documentation to ensure borrowers can afford the terms they’re going into and have the opportunity to re-negotiate with their lenders.”

But legislative action won’t happen quickly, she warns. “Everybody’s talking about it, but with so many different people weighing in and so many levels and layers to this problem, there will be a huge amount of discussion. We have to introduce financial literacy, we have to introduce buyer protection, we have to introduce guidelines and accountability to a process that impacts so many families. It’s going to be multi-faceted.”

Widespread financial illiteracy has played a major role, Stewart-Cousins argues. “People have come to the conclusion that they’re supposed to live on credit, that not owning your house or your car or even your toaster is okay. We’ve gotten used to living in debt up to our ears. We have to create the mechanisms that force people to be educated about what they’re getting into. These are basic things many people don’t know and haven’t been taught—and it worked to the advantage of lenders, people who clearly couched themselves as good guys.”

“If you were breathing, you could buy a house,” veteran realtor Margot Bennett agrees. “For some of the Hispanic buyers, language was an issue. They didn’t understand what they were getting into.” By the time low-income buyers face foreclosure, they have few options—their families have no money to lend them, and they don’t have anyone else to ask for help.

“Certain banks were giving money away,” says Darryl Selsey, owner of Four Seasons Real Estate Center in Mount Vernon, a firm with 32 agents. Buyers who didn’t have to save to purchase their home feel little guilt walking away from it, he adds. “They didn’t lose their life savings versus someone who’s saved for fifteen years to buy property. That’s a big difference.”

There is little relief in sight, he adds. “We’re starting to see the effects now. From May through December, 2008, about two million loans nationwide are going to adjust—double the number in 2007. It’s not just the mortgage. It’s utilities, heating oil, annual jumps in property and school taxes, unexpected costs. Even in a brand new house, something is going to go wrong.”

 

Tarrytown journalist and National Magazine Award winner Caitlin Kelly is the author of Blown Away: American Women and Guns (Pocket Books, 2004). A former New York Daily News reporter, she often writes for the New York Times.

 

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