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City Limits WEEKLY

Week of: October 20, 2008
Number: 660

WHEN THE ROOF CAVES IN:

FORECLOSURES AND THE CITY
Leaders from the battalions of New York's foreclosure-fighters came together
recently to talk about bad lending, good new laws, and the kind of bailout local folks
would appreciate. > By Jarrett Murphy and Karen Loew
The recent collapse of some of the nation's largest financial institutions is
understood as the crashing of a wave set in motion by years of poor lending
practices, corrupt securities schemes and lax oversight. But for thousands of New
Yorkers, the wave is still crashing – as they confront untenable mortgages, potential
loan defaults, and even the loss of their dwellings. In 2007, there were 15,000
foreclosure filings citywide. And experts say that in New York City, the foreclosure
crisis has not even crested.

One response has been the creation of the independent nonprofit Center for New
York City Neighborhoods to coordinate the many foreclosure prevention and
mitigation programs. On September 25, the director of that organization sat down
with City Limits Investigations Editor Jarrett Murphy and other leaders working to
address the local crisis to discuss where we are and what can be done. What follows
are highlights from that conversation.

The participants:

Oda Friedheim, attorney with Queens Legal Aid who works extensively on
foreclosure issues

Michael Hickey, executive director of the Center for NYC Neighborhoods

Stephanie Lawes, housing director at Margert Community Corp. in Far Rockaway,

Queens, where she counsels homeowners facing foreclosure and first-time
homebuyers

Sarah Ludwig, co-director of NEDAP, the Neighborhood Economic Development

Advocacy Project

Jarrett Murphy: What's been happening on Wall Street seems as if it’s going to be
one of those events that folks later on – like an assassination or start of a war or
something – would ask, where were you when it happened? So where have you
been during this crisis, what part of it do you see, that brings you here today?
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been during this crisis, what part of it do you see, that brings you here today?

Michael Hickey: For me, it started because I worked at Deutsche Bank, and I
actually worked in their Corporate Social Responsibility area, and for a number of
years had been dealing with issues around predatory lending. It’s gotten itself all
caught up with public finance. Within our area, we started developing some
programs specifically around intervening in predatory lending, and that was the entry
point for my very steep learning curve about these issues. As more and more
foreclosures started to occur, the bank would get calls from people, because the
bank was listed as the owner of the title and they would find their way to me. So I’d
be dealing with homeowners around the country who’d be calling up obviously very
upset, trying to understand if there’s any way they could communicate with
Deutsche Bank about their mortgage. And we did have a protocol internally, but it
was really one of those processes that wasn’t very satisfying. There wasn’t much
that the bank would really be able to do.

And at one point my boss said to me, look, you need to kind of understand what all
of this is...figure out exactly how this whole thing works. What is this subprime thing,
what are the securities? I have a masters degree in social work, this isn’t really my
bailiwick, but I went out to try to really dig into these transactions and understand
what they were.

And I ended up kind of coming up with a picture of what does it look like, Joe
homeowner down to a security holder, and what’s the complex chain that kind of
winds that transaction all the way down and splits that mortgage up to a whole
bunch of different pieces that makes it really difficult to resolve how that mortgage
should be treated, and how is that different from what used to happen when banks
held mortgages. We’ve come a long way since then. I did learn a lot, and really
started to find myself drawn to the issue, because I think it’s – as much as it’s
enormously difficult, and can be quite painful to deal with – it’s also fascinating
because of the repercussions that extend from the homeowner in Queens, to the
workers on Wall Street. And the deeper you dig, I mean, you just keep unearthing
these layers of people of various levels of culpability and responsibility. They knew it
the whole time and still played along.

Oda Friedheim: I’ve been representing homeowners in abusive lending cases and
foreclosure prevention for the past some seven years. The way I got into it was
actually in housing court, where I met a number of homeowners that were being
evicted from what used to be their home. We have continued to encounter these
abusive loan practices, particularly focused on Southeast Queens, which is really
largely the neighborhood of people of color, both middle class, moderate income,
low income brackets, and it’s heavily targeted and all the maps bear that out, so we
get lots of phone calls. In the last few years, the kind of scenarios that have come to
us are more egregious than when I started out, the predatory lending practices just
got so out of hand. A real culture was created, everybody bought into it, and
sometimes even relatives that thought they could rip off their other relatives.

But how did it all happen? None of these sleazebags could have performed their
role and ripped off homeowners had it not been up to Wall Street and beyond to
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role and ripped off homeowners had it not been up to Wall Street and beyond to
finance this enterprise. I mean, again, loan after loan, transaction after transaction,
whether it’s another one of those foreclosure rescue scams or a totally abusive
refinancing scam, or a first-time homebuyer scam, each time, you look at the loan
papers, and say how could the lender underwrite this? I took a little detour this
morning [on Wall Street] and just looking at all these buildings thinking, what’s going
to happen? Looking at the hot dog stand: What’s going to happen to all these
people? The ground is rapidly shifting under us.

Stephanie Lawes: I’ve been at Margert for 21 years, and I’ve seen all the different
scams and games that come into play that sort of victimize a lot of consumers who
really had no knowledge of the process whatsoever. For the homeowner now, who
couldn’t really afford it from the very beginning, it’s very difficult now to work out
some sort of resolution to help this person, because they couldn’t initially afford it
from the start. They’re placed in a situation where now they have to look for
affordable housing. And we really have a crisis with tenants trying to find affordable
housing, for someone to be evicted from their home.

What I’m seeing is that they rely on us as advocates to help them afford a house
they couldn’t afford. They get this impression that, you know, someone should bail
us out because we were victimized. And that’s not necessarily the case but it
becomes an educational experience on our part to sort of educate the consumer, as
far as: Now what do I do? And that process is a long process, because they have to
get in the mindset that I have to be relocated somewhere, and where is that
somewhere? And our resources are somewhat limited as far as finding a place for
these people to go. I mean, we’re working with tenants already that are trying to find
affordable housing, and then to have this added responsibility as far as finding them
affordable housing. I mean, we’re just tapped for resources ... we just try to create
the words to explain to these consumers, to these homeowners – you might be one
of those persons who may wind up in the shelter system.

Even my seniors, who basically get into these sort of scams...they’re just looking for
maybe someone to fix their bathroom and they end up with two or three hundred
thousand dollars worth of a mortgage that they clearly can’t afford because they’re
on a fixed income. So we have to deal with the added element of what do we do for
seniors? Because they’ve been in the house for over 30 years and that’s all they
know. And for them to be uprooted and placed in the situation where now we have
to find housing for them as well. We’re dealing with many different aspects and
many different socio-economic issues.

Because this crisis just didn’t start. I mean, I’ve been here 21 years as I said, and it’s
just a cycle to me. To me it’s the same thing. If you start identifying what’s going on
in a community and find a way to ward off some of these things, we would be in a
better position today than we are. But because there was no sort of oversight, and
access to money was so free and no education required, that’s my other stickler. I
mean, I’m not going to say that there should not be a subprime market, but if there is
a subprime market, and a certain clientele is going to that sort of loan, I think it
should be required that everyone get homebuyer education, even with refinancing.
Because a lot of these people got into these, went to refinance, and didn’t
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Because a lot of these people got into these, went to refinance, and didn’t
understand what they were refinancing into. They were told: You get a lower interest
rate, or your payments were going to be lower, and in fact it was the opposite. The
payment was higher, the loan balance was higher, so they got into a situation where
– okay, what do I do next? The cycle starts again, let’s refinance out again, because
I think my payments are going to be lower. That sort of thinking got a lot of the
homeowners in the situation where they are now.

And I don’t even want to talk about the option ARMs (adjustable-rate mortgages)
which I think us as advocates were jumping up and down screaming about, saying
stop, please, somebody, because a lot of these people didn’t understand their
interest rate would jump by several percentage points in less than 30 days.

Sarah Ludwig: I started doing this work, or got involved in this work not by choice,
but by necessity because the organization where I work is a resource center for
community groups in New York, started in 1995, and it’s an advocacy organization
as well, and we sort of saw our role when we first started as helping local
organizations deal with redlining, neighborhoods cut off from access to fair and
affordable services and other forms of credit, and basic services, non-financial, that
are really sort of basic threshold ingredients to neighborhood stabilization, to
neighborhood revitalization, and so forth.

And very early on in doing the work, we started getting a lot of calls from community
groups saying, we don’t understand what is happening in our neighborhood, we are
having one person after the other, renters as well as homeowners, coming to our
office holding foreclosure notices. Where renters are being evicted because they
lived in two- to four-family homes, which in many parts of the city is the prevailing
housing stock, and people are saying, 'what’s happened?'

So we started doing some research in 1995, where we took the 1994 Home
Mortgage Disclosure Act data, and did an analysis of what was going on in New
York and we saw a very different picture. I could see this real trend sort of emerging
and the real switch happening, in which the neighborhoods that we were looking at
suddenly flooded with mortgage applications and actual mortgages, largely in the
refinancing realm, not in the home purchasing area. Where you used to see very
few applications and lots of denials on those applications in the raw data, it became
all these consumer finance companies, particularly for refinancing mortgages, of all
different amounts. And as we started to deal with these groups, that kind of what
seemed like this rise of foreclosures, 1995, 1996, 1997, we started to see that there
was a very direct line to these consumer finance companies. Well where are they
getting this capital? They weren’t banks, they didn’t have deposits coming in that
they could then lend out, they were non-bank consumer finance companies. We
started to learn all about securitization, and just the direct line straight up to Wall
Street and how that was helping fuel these companies. And some of them were
starting to go bankrupt early on. There were some definite weaknesses in this
consumer finance market, but some of them did quite well, and started to build and it
became publicly traded, and were really propped up by the explosion of asset-
backed securities, which is where the subprime mortgages are traded, or sold and
securitized.
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securitized.

So, we work on a lot of issues at the organization where I am, but this is one where it
seemed like we really needed to bring groups together and figure out a strategy to
organize around it, and to document what’s happening. This was what we were
starting to hear from all different parts of the city, and as we looked up, we were
seeing this happening all over the country. Particularly the sort of people who had
their ear to the ground were the legal services people, not just in New York, but
around the country, who were seeing all these foreclosure actions, and realizing that
something had to be done, and the neighborhood groups. So we started bringing
groups together into coalition to go to the different regulators. This was again 1996,
1997. We went to the Federal Reserve Bank of New York. We went to the FDIC
(Federal Deposit Insurance Corporation). We went to the OTS (Office of Thrift
Supervision). We went to the OCC (Office of the Comptroller of the Currency).

So we went to the Fed, FDIC, we went to all the federal banking agencies, all four of
them, and we went to the state banking department, and we said: There’s this wave
of foreclosures that’s sweeping over neighborhoods of color in our city; not just
lower-income neighborhoods, and we’re seeing this really eerie, disturbing profile.
It’s a lot of women, it’s a lot of seniors, and it’s a lot of African-American women who
are seniors. A lot of people who are widows. A lot of people who have lived in their
homes for a long time. A lot of older people suffering from dementia. It’s like, how do
they get these mortgages? What the hell is going on here? It’s just like a layering of
exploitative practices that have culminated in this – this happens to implicate Wall
Street so directly, that it’s got a different dimension to it – but these exploitative
practices are not new and they’ve changed as different mechanisms have been
available. So all of this is to say that the regulators said this is anecdotal. We
brought in maps, we said look, here’s where the foreclosures are in New York City
or where the foreclosure actions are filed. Here’s where these high-cost refinancing
mortgages are. Let’s look at the race compositions in these neighborhoods, plunk
down a transparency on top of them. Wow, that’s really disturbing! But they said can
you really prove anything, what does that show? Well, this data doesn’t prove
anything, well, you know, people are in over their heads, they’re just not educated,
we really need education – and we were hearing that refrain for eight years. The
answer is education. The banks lined up, they put up money for education. Financial
literacy, that was the rage. We kept saying, yeah, of course people need access to
information, it’s vital, people need to know their rights, they need to know how
money works, nobody disagrees with that. But we also need to regulate these
practices, they’re harming people. Their lives are being shattered. They’re being set
up for doomed mortgages. So by the beginning of this decade, you already had
something we were calling a foreclosure crisis in New York. You already had these
really concentrated patterns, where at best, you could say people made bad choices
and their neighborhoods are destabilized. At best you could say the data show us
that people of color in New York and across the country are paying more for
mortgages. At worst, you could say there’s targeting going on, it’s systematic, it’s
structural, and it’s being driven by Wall Street, which had an increasing appetite for
these mortgages.

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So, by the beginning, there were so many foreclosures, all the speculative activity,
and that’s when you start seeing the property flippers coming through, buying these
homes at foreclosure in big number, and then fixing them up cosmetically and
flipping them for some homebuyers. There was a push toward home ownership you
could say, but it came from a lot of different places. So people bought homes that
they thought would give them this opportunity to build assets, but in fact were these
homes that were flipped by one-stop shops.

And then you’ve got these first-time homebuyers drawn in to buy foreclosed-on
property, that are in bad repair, over-appraised fraudulently, and a whole set of new
real estate practices, not just lending practices, that really we’re still dealing with and
reeling from right now.

Then you’ve got another defect that also started around the time of the increased
foreclosures. Real estate values in New York had remained strong, even though
we’ve got some softening people say in the market. And certainly that was the case
until a few years ago. So there’s a lot of equity in these homes, a lot of equity to pull
down through repeated refinancings. A lot of equity to pull down through deed theft,
where you take someone in foreclosure who’s vulnerable and you say to them, I’ll
save you from this foreclosure, just give me the deed and I’ll take care of everything.
So you have all these people who’ve lost their homes to that, or are in peril of losing
their homes.

And then you’ve got what happened in the last four or five years which is the
explosion of these non-traditional exotic mortgages, again, another layering, again
driven by Wall Street, and the refinancing stuff kind of came to a point where it
wasn’t really fueling the engine anymore. They needed new fuel for the engine. And
those option ARMs were prime fuel.
~
The view circa autumn 2008

Jarrett Murphy: Exactly what does this problem look like on the ground now? A lot
of the opining is from 50,000 feet. To the people who are coming to you for help,
who you’re working with – what does this look like to them? Foreclosures have been
going on for a long time. What's different now versus five years ago?

Oda Friedheim: A few years ago when I started practicing in this area, I was more
able to settle cases and work things out. There were cases I could live with, where
the opposing client would call and say: 'Yeah, your pleading is pretty good. Can we
settle this?'

Sarah Ludwig: And they’d write down the loan.

Oda Friedheim: And significantly lower the interest rate. You could work things out.
I would say in the last few years because the abuses have become so egregious,
that it makes it much harder now to work things out. And so we’re trying to think,
what can we actually do? There are cases where we are not able to save the home.
Even if we were able to get an amazing low-interest loan, [they're too overextended
to take advantage of it]. Then you think well, maybe we can sue for damages
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to take advantage of it]. Then you think well, maybe we can sue for damages
because one thing you have to remember is that these homeowners were harmed
significantly, even the first-time homebuyers that don’t have much equity.

But to walk away is still easier said than done. One of the horrendous things that
happens in all of these cases is, as a collateral consequence, their credit score is
significantly lowered. That’s one damage. For a low- to moderate-income person, if
they put down ten or twenty thousand dollars, that is their life savings; that’s all they
have. Gone. How do you now find them housing?

Jarrett Murphy: Stephanie, tell us about the desperation in people who you see.

Stephanie Lawes: I’m going to see many more people who will be homeless, or
doubled- or tripled-up families living in a house that the homeowner can barely
afford. And where do we go? What do we do as advocates? I’m still banging my
head trying to figure out what creative ways – who can we talk to, who do we have
to stand with signs in front of, basically screaming, asking for resources? I hate to
say it, but Bush announced this bailout, and I don’t see how that is going to be
effective. It’s just like, you do a bad deed and you get rewarded, that’s the way I see
it. Because why is this bailout going to the lenders or the loan servicers? Why isn’t
this funding directed toward helping homeowners?

Jarrett Murphy: Michael, comparing what you saw when you were at Deutsche
Bank, versus the folks who are coming to the Center for NYC Neighborhoods now,
is there a difference in who’s coming in and what their problems are – or just a
matter of degree?

Michael Hickey: The Center is not a direct provider. We’re not doing housing
counseling or legal services. We’re an intermediary that was created to help
coordinate these services citywide. What I can say is, you know, what we’ve seen is
changes in what’s happening with the servicers. The first point of contact for
someone when they have a problem with their mortgage is actually just a third party,
they’re called a servicer.

What that servicer has done is purchase the rights to the cash flows of those
mortgage payments. And they receive those payments and then they have an
agreement to skim off this tiny little margin, and they pass the payment through to
the trustee, and then the trustee passes it through the security to the investors. It’s
very complicated, but those servicers were supposed to operate on this margin
business; they would just take a little piece off every payment they received, and
that’s what they would use to run their operations. And that went great when you
had less than 1 percent of your portfolio in default. Well, when that number starts to
become 3 percent, 7 percent, 15 percent, all of a sudden, you don’t have the money
you need to run your operation anymore. What happens? You have fewer people
that are providing support to homeowners, people to pick up the phone and look
though the file and respond to requests for any kind of restructuring modification
program forbearance. Anything. You get a higher stack of clients that you’re
supposed to be dealing with, and the problems are worse and worse and worse,
because people are more and more desperate. They wait longer until they’re in
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because people are more and more desperate. They wait longer until they’re in
really deep trouble; they may lose their home in a very short period of time.

So that whole part of the industry is essentially kind of broken down. And again, this
bailout package, as far as I can tell, does absolutely nothing to address these
incredibly complicated structural problems for individual homeowners and trying to
reach some resolution about the value of their home and their ability to pay on the
mortgage, whether it's been revalued or not.

Sarah Ludwig: From the vantage point of doing community education around this,
and for the longest time, all through the mid and late 90s, even until this decade,
nobody wanted to say they were in foreclosure, it was really, really hard to get
people to step forward to get assistance. Because people were ashamed, they
didn't step forward often until they were already served with papers. For the people
who do the counseling and the legal services, it's really hard if someone comes to
you and their house is being sold tomorrow.

Now, what's happened is you go to forums, and people come out in droves. And
that's what I've noticed is that, it's not that the same sort of stigma doesn't exist, it's
just that people understand that this is a structural problem and this has happened in
their communities, that their neighbors are swept into this, and it's in the news all the
time and everywhere. We just go to forums now and people line up, and they've got
their folders and paperwork, and there's a level of desperation and there's also a
sense that people don't really know what hit them. They're at these forums when you
talk to people at community meetings, and churches. We go to a lot of stuff at
churches where afterward, you start to hear the same story being told to you over
and over again.

There's a popular sentiment out there that people were reckless and borrowers also
took advantage of a lax environment. I'm sure that happened somewhere, I'm sure
that people bought their McMansions and 'used their houses like ATMs' and all that,
but it's incredibly offensive at this level that we're working at because that's not what
we're seeing at all. Do people make mistakes? Yeah. Do they regret putting their
signature down – if it was their signature, because there's also a lot of fraud? But
you see all these people who just don't know what hit them. I think we also see
many more people who are what they call upside-down in their mortgage, where it's
almost like you could write down the mortgage almost completely and they still
couldn't afford it. So that's a strain of the problem that nobody knows what to do
about.

Oda Friedheim: At the same time, you know, when the overall market is going
down, they often have negative equity. And then they try to give the deed back to
the lender or do what we call a short sale, which often in fact the lenders do not
cooperate with, no matter how much they say they do. That's just not happening.

But I think I would also like to get into a little bit what happens with the court system,
because one of the things as we're talking about foreclosures is that obviously in
New York State, that's a judicial process. That's not true for all states; but here it is.
So people get a summons and complaint, and frequently, because of scarcity of
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So people get a summons and complaint, and frequently, because of scarcity of

legal resources, they get this paper and either it's totally scary, or they think they're
dealing with a foreclosure because they're talking to the lender, but oftentimes they
do not answer and default –

Sarah Ludwig: Can you just stop there for one second? Isn't it like 80 percent, or
some huge percentage of foreclosure proceedings that end in default judgments,
just because the person didn't answer?

Oda Friedheim: Right, or if the homeowner does put in an answer, like the most
minimal answer, they’re still not represented. That is beginning to change now,
because of a new law (signed by Gov. David Paterson in August). But until now,
homeowners really had no meaningful access to the court system. They would do
their answer, and you know the lender, always with an attorney, would move to
strike their answer and basically still move forward with the foreclosure and leave
the homeowner out there, unless the homeowner at some point could get an
attorney. That is now changing with the new law which, for the first time, actually
sometimes mandates conference in the court. It opens a big door for us to use the
court system in better ways to help and assist people, whether it’s a better
settlement that they otherwise couldn’t reach or represent them, or educate the
homeowner on how to navigate these settlement conferences. It’s the first time that
really homeowners could actually sit there the way the conferences are actually
supposed to be structured – the lender through their attorney is supposed to send
somebody with authority to settle the case. Again, that never happened before.

Sarah Ludwig: Because they’d say, 'we can’t answer for it,' right?

Oda Friedheim: Right! And because the attorney and the servicer would say, well
the investor doesn’t allow me, I can’t do anything about it. So, for the first time, the
attorney has to come in with authority to consider settlement. How this is going to
work out, we don’t know yet, because we’re totally on the threshold of it. At a recent
training, we already could see kind of different points of view that how these
settlement conferences would be done.

Is that going to solve all the problems? Probably not, but it’s at least –

Sarah Ludwig: A fair shake for borrowers!

Stephanie Lawes: Well, we want to hope that it’s a fair shake. I still have the issue
as far as negotiating with the servicer. The servicer wants that homeowner to be
able to make their current payment, in order to determine whether they’re going to
help them. Well, obviously they’re looking for help because they can’t make their
current payment. But servicers want to see that that homeowner has enough income
to make their current payment. That defeats the purpose as far as assisting some
sort of workout.

Oda Friedheim: The flip side of that is there are also some services that the
homeowner can't get. I’m struggling, I can’t pay this loan, can you help me? Well,
are you in default? No, I’m still struggling to pay my loan. Well, then we can’t help
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are you in default? No, I’m still struggling to pay my loan. Well, then we can’t help
you.

Michael Hickey: New York is the piggybank for the rest of the country. You’re not
going to get mortgage values out of properties in Cleveland, Kalamazoo,
Bloomington. It’s not going to happen. Well, where has the market held up pretty
well? New York! And a few other cities, but because New York’s property values
have not had a really significant drop, servicers are demanding that there not be any
writedown in the principal here. And also, a 5 percent writedown on a $20,000
mortgage in Cleveland is really different from the same percentage writedown on a
two-family red-brick home in Jamaica, Queens. There’s a tremendous difference in
the value of the property. So, you know, that right there really gums up the works,
and puts a particularly painful burden on homeowners who are struggling in New
York City.

The other thing is that there are two crises, right? There’s a mortgage crisis and a
credit crisis. They’re happening at the same time, and they’re directly related to each
other, but they’re very different. The mortgage crisis is a crisis that was built one
transaction at a time – one mortgage at a time. The relationship between the crises
is kind of broken now and that’s part of the problem, that’s why we have a credit
crisis. But until there’s certainty with the mortgage crisis, the credit crisis is not going
to resolve itself. And so far, that’s a big problem with this bailout package, is that it
actually doesn’t seem to address these problems, these core problems in the
mortgage crisis.

Angles on affordability

Jarrett Murphy: There's an argument being made that in the late 90s, HUD
increased the number of low- to moderate-income people that the government
lenders are supposed to support mortgages for.

Sarah Ludwig: It’s not a requirement, a goal was set. Let’s be clear.

Jarrett Murphy: Right. Some say that HUD, through government-sponsored

entities, helped to put fuel on the fire, if not originate the crisis. What do we think
about that argument?

Michael Hickey: I don’t think so at all. That giant sucking sound was not HUD. It
was really a market that was created that was incredibly speculative. That was
voracious for product and that created a race to the bottom. That took advantage of
a deregulated environment and pushed products into new realms of lack of
transparency and unaccountability that fed a market that thrived on risk. Thrived on
passing along risk, until it arrived at the situation where we are today – which is a
giant pool of uncertainty. You know, there’s still risk being passed along, not to the
same degree, that there was just a year ago, but now we're at a place where the
valuation of these securities is totally disconnected from the reality of these
securities. The system is paralyzed and essentially broken and at the same time,
these transactions are so incredibly complex. The only way to begin to unwind them
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these transactions are so incredibly complex. The only way to begin to unwind them
is to figure out how to reassemble them into less-complex securities, essentially.
And from there, work your way down into neighborhoods and communities. It’s going
to be a very, very complicated and painful process.

Jarrett Murphy: Let’s stick with the other part of that argument, which was made
earlier in September; I don’t know if one could make it now. It sort of went like this.
Yeah, things are tough, yes, some people are really going to lose their homes, but
overall, the gain that we’ve seen in home ownership and in people’s accumulation of
assets over the past decade or so will in the end have a net benefit for our society
and for people as a whole. Even prior to AIG and Fannie and Freddie and all of that
happening just in the past couple of weeks, and certainly now, do you think that’s
true? Do you think that there are gains – assuming that things don’t get much, much
worse?

Sarah Ludwig: It’s factually inaccurate. There’s actually been a net loss in home
ownership, because of the foreclosure crisis, of the gains made in home ownership
in the 90s. Just looking at the numbers and the people who’ve borne the brunt of
this – you’d have people of color bearing the brunt of this by far and away. So, you
know, what is the gain there? Again, New York is affected in a particular way, but it’s
not sort of immediately visible the way it would be, I guess, in a Syracuse or a
Buffalo or a Cleveland or a Detroit, because you don’t see the boarded-up houses
here, although I guess there’s starting to be some abandonment.

It’s not the same, it’s not as dramatically visible as in other locales, but that’s not to
say that it isn’t a really serious problem for neighborhoods where it’s just so blatantly
cruelly concentrated in neighborhoods of color. The notion that on net balance it
doesn’t have anything to do with people or communities that are affected by this –
that's coming from somebody who’s sitting in a lofty position opining and is out of
touch.

Oda Friedheim: I think what’s really horrendous is not just the loss of a home, but a
family's wealth. I mean, the home is where you live, of course, but that was also
something they hoped to pass on perhaps to their children, and was really the only
piece of 'wealth' they ever had. You know, they don’t own stocks or bonds or that
stuff. So, when you think about these practices, they’ve really, in the aggregate,
lifted a huge amount of that wealth out and basically transferred it to Wall Street,
metaphorically speaking, more or less, through these abusive practices. The ripple
effect is just tremendous because even those who are able to hold onto their
homes, the value has gone down, so that asset is now worth less, the neighborhood
is destabilized, they lose their neighbors, the fabric of the community is torn apart.

I wanted to return to one point that Stephanie made about the first-time homebuyer
scams. One thing that we see repeatedly, and it really goes to the fundamental
scarcity of affordable housing, is people who go to a broker, they were maybe being
evicted, they would say, I’m looking for another apartment, and the broker would
say, you know what? It’s $2,000, you’re paying for rent, might as well own a home.
Money that you saved for the moving truck you might as well save for the down
payment. And that rhetoric became so persuasive because the former renter and
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payment. And that rhetoric became so persuasive because the former renter and
now purchaser would think, well, this real estate person must know what they’re
talking about.

Sarah Ludwig: Why rent when you can own?

Oda Friedheim: Yes, you put your trust into these fast-talking brokers, and so on.
And then of course you had a lawyer appear at the closing, and well, it must be legal
then. It really goes back to the fundamental shortage of affordable housing. Because
people wouldn’t make these choices if they were looking at a rental market where
they could actually afford to rent.

If the gap is so seemingly close – because what’s often not disclosed is the true cost
of home ownership – but on its face, it is so close, you could still rent apartments for
$1,000, you know, something you could afford on a middle income salary. You know,
maybe you wouldn’t make those choices. Now when people are on the rental
market, they battle with this all the time. Crummy apartments rent for $1,000,
$2,000.
~
What's ahead for NYC

Jarrett Murphy: What is the worst-case scenario for New York? Both the mortgage
problem and the credit problem affect the city. If something isn’t done at the federal,
state, or local level to avert it, the big question is how bad could things get. Like the
70s? Worse than that? Or will our piggybank status will be preserved? Will real
estate values survive here or will they eventually fall as well?

Michael Hickey: I don’t know. You know, it is different here. And there are other
variables that complicate New York’s vitality. One is that you have a very low dollar
right now. And so there’s a real estate market that’s still really driven by people
purchasing real estate with foreign currency, where they’re getting this huge
discount just because of the exchange rate values. And even with all this money
that’s been lost on Wall Street, there’s a lot of money on Wall Street, like 60 percent
of the revenues of this city, it’s still an enormous number. And the private sector is
still really what drives the economy, no matter what the mayor wants to say about
the great diversity of New York City’s economy. There's no question that market
softening is going to continue, and again, the neighborhoods where it’s going to hit
the most are the worst of the neighborhoods that are already struggling the hardest,
they’re already economically vulnerable neighborhoods; there’s just no question
about that.

Jarrett Murphy: Is there any possibility that there will be some sort of silver – or at
least bronze – lining to the problem? That if things settle down a bit, people who
otherwise would have been getting priced out of areas will find they can actually,
legitimately afford to buy their own place? Or is that pie in the sky?

Sarah Ludwig: I don’t want to talk about affordable housing only in the context of
the foreclosure and mortgage crisis in New York. I mean one of the myths is that
New York hasn’t been affected because New York is a city of renters. But one-third
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New York hasn’t been affected because New York is a city of renters. But one-third
are homeowners, and that’s a lot of people. Also, you have a lot of people who live
in two- to four-family homes, so they are owner-occupied homes with rental units.

Michael Hickey: Half the displacement are the renters.

Jarrett Murphy: Going forward, what is the role for subprime and exotic financial
products in helping people fund homes?

Sarah Ludwig: I think we should just get back to basics and have fixed-rate, 30-
year mortgages like we used to.

Oda Friedheim: Exactly.

Sarah Ludwig: Simple. This proliferation of product types that are deliberately
complicated to obfuscate their nature, I mean, these were like these really weird
products that were meant for an investor, a savvy investor.

Oda Friedheim: Yes, exactly!

Sarah Ludwig: And even a savvy investor couldn’t really understand it. I’ve been in
rooms with different people from different sectors, and I was with someone from a
very well-known, very large financial institution, that was one of the primary issuers
of option ARMS. This person had been a regulator, she’s a lawyer, she was a
compliance officer at her financial institution, and she admitted in a small room like
this, that she could not understand, for her life – and she had spent hours poring
over the disclosure documents – what an option ARM was and how it was structured
and how it worked. So imagine what that means for the millions, millions of
homeowners who got these mortgages, where we’re suggesting: You really needed
to take a financial education course, and it’s your fault, because you should have
known better – when these products were not meant for the general public and were
actually structured in a way to look affordable, to mask their true nature and to
confuse.

Oda Friedheim: I mean what was never fully disclosed, is that with some of these
options ARMS, it was negative amortization, and you build up your debt.

Sarah Ludwig: Nobody needs an option ARM. But if I say things like that in certain
venues, they say that’s paternalistic. Consumers should have choices here, and
you’re going to cut off people’s choices? I think we’re past that point, but for years,
that was the answer. The same people who were saying 'don’t regulate us and don’t
tell us what to do' suddenly champion the consumer and the consumer’s interest,
because it’s always industry people saying that and regulators as well.

So I think first of all, we just need to get back to basics, and sound underwriting, and
we need to have a market that is regulated. I think the credit crisis and the mortgage
crisis are part of the entire financial services system. Risky financial devices are sort
of like the push product of high-cost credit, in neighborhoods where there have
historically been credit vacuums, that have become such big business for financial
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historically been credit vacuums, that have become such big business for financial
institutions and investors that they’ve taken on their own life. The mortgages are part
of a spectrum with high-cost credit cards, with payday loans, but they’re smaller
amounts of money, usually, and it’s not usually collateral-based lending. What we
saw with the mortgages fits squarely into that whole landscape.

Oda Friedheim: It’s interrelated, because, people get these abusive credit cards,
you know, and what used to be usurious rates...

Sarah Ludwig: And are now deregulated!

Oda Friedheim: But it’s all because, frequently, what people are pushed into doing,
or persuaded into doing, are tricked into doing is to put their unsecured debt into
their secured debt. Put off your credit cards, put it all in the mortgage.

Sarah Ludwig: And you can’t file for bankruptcy, really.

Oda Friedheim: And refinancing also has it’s origin in the fact that people struggle
so hard to make ends meet. And health insurance is unfortunately such a big factor
in many people’s lives.

Sarah Ludwig: And the inability of people’s wages to support themselves.

Oda Friedheim: I know. So that’s why there’s not one pet answer to all of this.
We’re getting back to the whole system.

Sarah Ludwig: It’s part of the bigger picture.

Stephanie Lawes: I think the regulators need to require education on loans.

Oda Friedheim: Actually, that’s what they used to say: We don’t really want to be
regulated, it’s just a question of more education for everyone.

Digging out

Jarrett Murphy: So let’s turn the page, to some of the measures that were put in
place to try to deal with the situation. Folks have mentioned the bill that Governor
Paterson signed this summer. What will that provide, do you think, along with the
federal bill that passed in July? Which of those is going to be helpful to people you
work with?

Stephanie Lawes: I don’t know. Time will tell. For me it’s all about numbers, and the
fact that we have someone who purchased a house that really is not worth the paper
value. I don’t think any law is going to be able to help them with that situation,
because all they’re going to do is just walk away.

Sarah Ludwig: I have a different take on this. I mean, the state law that was passed
in New York has many different parts to it, but three core pieces, and it’s important
to think about any reforms that are going on right now, I think in these
compartments, which is whether they’re helping people that have been aggrieved –
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compartments, which is whether they’re helping people that have been aggrieved –
who are in foreclosure or at risk of foreclosure. And then there’s dealing
prospectively with people who could be in that situation. So, we have to sort of stop
this practice going forward, and we have to help people who have already been
aggrieved. The legislation in New York State has both pieces to it.

There's a 90-day foreclosure notice required, so you can’t even file in court until
you’ve given the homeowner a 90-day notice, and there are lots of people at this
table and in the city talking about: How do we try to get people in that window before
the foreclosure action is even filed? As long as these notices are going out to try and
get some assistance before the case even goes to court. So that’s people already
aggrieved. And then going forward there's a whole set of basic responsible
lending/sound underwriting provisions in the law, that says if you’re going to make
somebody a loan that’s over a certain price – and it’s a much broader swath of
mortgages than previously have been covered, New York State used the Federal
Reserve definition – you actually have to verify that it’s affordable to the borrower.

Stephanie Lawes: I just think that lenders or brokers navigate as they’ve done
historically.

Sarah Ludwig: Yeah, but the reason this is different, is it’s written differently, so that
they can’t circumvent it. It’s not like the 2002 law, which people were able to drive
around. Now it’s like principles-based, so it’s got a sense that you’ve a legal duty if
you’re a broker to a borrower.

Oda Friedheim: Which is very important in litigation.

Sarah Ludwig: Which didn’t exist before.

Stephanie Lawes: I’m hoping I’ve already seen everything! But the problem is, a lot
of the consumers who are coming to me have lost faith as far as laws are
concerned, because lenders and brokers have historically navigated around these
laws.

Sarah Ludwig: It’s why this one was crafted differently.

Stephanie Lawes: I do have a little skepticism, and I’m trying to reserve it, just to
wait out and see what’s going to happen, but again, I have to able to counsel my
home owner, as far as what do they do now, because this is the now. And I
understand that the law is going to help people in the future, but what about the
people now?

Sarah Ludwig: I totally agree with your skepticism, I think we should have a
fundamental restructuring of the whole financial services system. And until we do,
people are going to get around all this stuff, and we’re going to have problems. But
the federal stuff, isn’t going to help us here in New York. And the New York law
doesn’t apply to nationally-chartered financial institutions or depositories –

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Oda Friedheim: Savings banks, for example, would not be covered.

Jarrett Murphy: On a different note, the federal government is prepared to spend

$700 billion on a rescue package. In terms of New York’s own resources to help
people to deal with the problem, what capacity does it really have to help, and do the
city's actions match its capacity?

Michael Hickey: I think there are two simple reminders here. One is New York City
is a growing city, that you know, we are still going to add another million people in
another 20 years, and the people, the growth of the city driven by that population
expansion has always been one of the hallmarks on how New York reinvents itself,
and also continues to be a really vital place.

The other is that New York is incredibly blessed, with community-based

organizations that think about, know extremely well, and play some role in
shepherding these new populations and existing populations and helping them
preserve and plan for the growth of their neighborhoods and communities. And
those groups are incredibly diverse in their skill sets and are uniquely positioned to
play an important role in intervening in this crisis. That’s why Sarah and I are
involved in the way that we are, it’s that we really believe in those organizations in
that capacity, and I think that with the right level of support and resources, they can
be very meaningful advocates. Stephanie’s a great example of somebody who’s
knowledgeable and committed, and there are a lot of people like her in all parts of
the city. So, there’s more resources and attention being paid to the people providing
the support than ever before. And using that intelligently, using those resources
intelligently is incredibly critical, to making a difference to homeowners on the
ground. And New York is unique in that there’s also a lot, I think, of great innovation
here, and the concept that we’ve come up with using and assisting a decentralized
network, and then coordinating amongst that network so that no matter how
someone enters it, they get the same kind of quality of service and access to
resources is really quite unique. We also have a lot of other tools in our tool chest in
dealing with properties like REO (real estate-owned) properties, or the collaboration
that we have with the Queens court system that are really powerful in terms of
intervening early, or on the back end, trying to at least not let properties go into
further speculation, but you know, recapture them for home ownership.

Sarah Ludwig: I just think it’s an interesting dynamic, and I totally agree with Mike,
that we have this really robust, textured set of community-based organizations and
services out there and organizers and advocates and so forth,. But there’s an
interesting contradiction to community development work that we have, which is
somewhat like the onus is on the local groups that are by definition the least-
resourced to deal with these structural problems. So we also need a structural
solution, to make sure these neighborhood groups, like Stephanie’s which is such an
amazing organization, have serious resources, not just resources around the edges
– so that each six months they’re going to be gasping to keep going – but an
infusion of meaningful resources.

We need groups like hers and new groups that are emerging, we need a level of
response that goes back to the post-Depression, like a WPA-level response of
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response that goes back to the post-Depression, like a WPA-level response of

public accountability and involvement in public works to deal with these
neighborhoods, and to make sure that it’s coming from federal government and state
government. And this bailout, I haven’t heard anyone say anything about the war,
and the amount of money going toward the war, and the colossal mistake of the
war, and I know it’s kind of like 'over' – but it’s not! It’s not! We make choices in our
collective governance, as a polity, and our choices have been horrible. And we’ve
made a choice, collectively, and you could say we’re all implicated if we want to go
that level, not to regulate these institutions, to basically let them do whatever they
want, because they said they wanted to do whatever they want and we said okay,
we took away all sort of important regulations and we didn’t even enforce the laws
that we had. So, on the one hand, we have these great organizations that are
neighborhood-based, but we have to make sure that the onus is not on them to deal
with structural problems that transcend their community, that they didn’t create.
Because otherwise you have a model in which the groups least equipped to deal
with structural problems are the ones looked to by everyone for a solution.

Jarrett Murphy: So looking at all the things that have happened or are happening –
Fannie and Freddie, AIG, and now the $700 billion bailout: What is the one thing, if
you had your druthers, that would be in those deals? In terms of regulation, or relief
for people who are already in foreclosure, or help for the people who have already
lost their homes and whose credit is ruined. If you could wave a magic wand and put
something in, what would it be?

Stephanie Lawes: My philosophy would be to provide, in order to preserve home

ownership, direct subsidies to homeowners. That’s the only way I can see a lot of
these homeowners being saved with the so-called bailout. I think that we need to
bailout the homeowners directly. I mean, I understand the philosophy behind
providing this money to lenders and making them whole, but what about making the
homeowner whole?

Sarah Ludwig: It’s not just about liquidity, it’s not just about making them whole, it’s
like the money has dried up in the market, and if we don’t have it, it’s going to be a
domino effect of tankings. Isn’t that the rationale?

Jarrett Murphy: What would you put in the bill if you were writing it?

Oda Friedheim: I think it’s really unclear as to who is going to actually own these
mortgages once there is this bailout.

Sarah Ludwig: [Treasury Secretary Henry] Paulson’s friends.

Oda Friedheim: I think that the whole thing is that we always need a multifaceted
response. There is not, as Sarah and Stephanie already laid out, there’s not just one
remedy that fits all. I think that always the problem. Now we’re looking at “the
bailout” you know, that’s going to be the one remedy.

Jarrett Murphy: But earlier you raised a good point about people whose credit has
been damaged by this. That’s going to have longstanding consequences, even if
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been damaged by this. That’s going to have longstanding consequences, even if

everything is okay from this moment on. Is there anything that can be done for them?

Oda Friedheim: Yeah, you know, the lenders who made the abusive loan can write
a credit repair letter and write that this was a fraudulent loan in the first place, and
that the credit should be repaired. Yeah, keep on dreaming…

Stephanie Lawes: I think we started that with HUD too. At one point, we asked
HUD to write a credit report, didn't we, on the FHA loan? That didn’t work out. So
like I said, history just keeps repeating itself, and we have to come up with a more
creative way of dealing with this crisis.

- Karen Loew

Research assistance provided by Chris Narducci.

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