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Just Thoughts is the blog of the Empire Justice Center, New York’s statewide, multi-issue, multi-strategy public interest law firm focused on changing the “systems” within which poor and low income families live. Here staff and guest authors will share stories, announcements and perspectives on timely issues related to our work.    



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Principal Reductions in Mortgage Workouts are Essential to Reducing the Discriminatory Impact of Foreclosures


“Preserving an affordable home, in a stable neighborhood, for all Americans”—this phrase summarizes three key aspects of housing opportunity and the realization of the American dream.  The foreclosure crisis and the resulting recession, however, have undercut every aspect of this vision. 

Access to an affordable home with sustainable payments is out of reach for many more people today than before the crisis.  Millions of homeowners have already lost their home through foreclosure, are still at risk of foreclosure, or are stuck underwater with unaffordable mortgages as a result of the decline in housing values or lost income.  New York State alone currently has 122,544 mortgages in some stage of foreclosure, and another 197,507 that are seriously delinquent. [1] 

Moreover, due to stricter underwriting guidelines and other changes in the mortgage industry, the lower-income minority borrowers who are the potential purchasers most likely to help stabilize neighborhoods of color now have less access to affordable mortgages.

Our neighborhoods are at risk of instability and blight.  Worse yet, the neighborhoods that have seen the highest concentrations of foreclosures, resulting in higher numbers of vacant properties, are now seeing the steepest declines in housing values, putting many of these neighborhoods into a spiral of increasing instability and blight.

Rust-belt cities, like Rochester, Buffalo and Syracuse, which already had high numbers of vacant properties before the foreclosure crisis, are experiencing sharp declines in their tax bases, and may soon have to adopt triage strategies to stop the spread of blight.

The foreclosure crisis has had a disparate impact on African American and Latino homeowners and communities.   Foreclosures have not affected all homeowners and communities equally.  Since foreclosures are disproportionately concentrated in minority neighborhoods, and since all of homeowners living in those neighborhoods are impacted by foreclosures, African American and Latino homeowners are suffering disproportionately.  That’s because we live today with patterns of segregation that were established decades ago.  Because we live in segregated communities, African American and Latino homeowners are several times more likely than White, non-Latino homeowners to live in the areas most impacted by foreclosures. 

Minority homeowners either in foreclosure, or living in neighborhoods impacted by foreclosures, are suffering disproportionately from declines in housing values and neighborhood instability.

To get neighborhoods of color back on track, so they can share in the economic and housing recovery, we need to keep as many homeowners as possible in their homes.  This is especially true for the homeowners in the neighborhoods most impacted by foreclosures.

Principal reductions based on true value assessments are fair.

Requiring mortgage servicers to do principal reductions – based on the true (i.e., reduced) value of homes in impacted areas – will help us get back on track by keeping more owners in their homes, reducing  foreclosure-associated vacancies, stabilizing impacted neighborhoods, and thus reducing  the disproportionate impact of foreclosures and foreclosure-related vacancies on African American and Latino homeowners and neighborhoods.  Banks and servicers wouldn’t be losing anything, they’d just be recognizing the lost value of their assets that had already occurred.

Principal reductions must factor in the effect that HIGHER CONCENTRATIONS of foreclosures have on property values.  

True value assessments done in conjunction with principal reductions would result in a greater number of successful loan modifications and keep more owners from losing their homes.  But to do true value assessments, the impact of higher concentrations of foreclosures must be taken into account.  Neighborhoods with high concentrations of foreclosures [2] can be readily identified [3] and property valuations can be adjusted fairly.  If we fail or refuse to do principal reductions that take into account the greater drops in home values created by concentrations of foreclosures, it will be African American and Latino homeowners and minority neighborhoods as a whole who suffer. [4]

We can address the problem of concentrated foreclosures by urging federal policy makers to act.  The Federal Housing Finance Agency, the agency that oversees Fannie Mae and Freddie Mac, needs to begin to not only allow, but to require mortgage servicers to do principal reductions.  Congress needs to pass legislation requiring principal reductions and true value assessment.

Let’s make minority homeowners and communities of color equal participants in the nation’s housing recovery.


End Notes:
 [1] Empire Justice Center estimate using data from the CoreLogic, “National Foreclosure Report,” December 2013, as found at http://www.corelogic.com/research/foreclosure-report/national-foreclosure-report-december-2013.pdf.
 [2] Note, however, that zip code foreclosure totals alone are not sufficiently accurate for this purpose. For example, a suburban zip code with 350 foreclosures is not impacted as severely as an urban zip code with the same number of foreclosures, but which is 1/43 the size. (This is an actual example based on zip codes 14619 and 14580 in Monroe County, NY). Instead, the rate of foreclosures and geographic density should be taken into account. That can readily be done at the census tract level.
 [3] Empire Justice Center did this on Long Island. See our report.
 [4] These findings are based upon a data analysis conducted by the Empire Justice Center in New York State which included an evaluation of all foreclosures initiated in Rochester NY since January 1, 2009, mapping the foreclosures and linking the court records for each property to the city’s property information database, as well as census demographics for minority homeowners, in order to evaluate the characteristics of properties in foreclosure including location, concentration, case status, vacancy status and changes in ownership. 



Tags: foreclosure | minority homeowners | African American | Latino | neighborhoods of color | principal reductions | housing opportunity | FHFA





Bravo to AG Schneiderman

Issue Area: Consumer

There has been much discussion about the lawsuit recently filed by New York’s Attorney General, Eric Schneiderman, against JP Morgan for fraudulent activities committed by Bear Stearns before JP Morgan acquired it in March 2008.  For the record, Empire Justice Center is very supportive of these efforts and appreciative of the leadership role Attorney General Schneiderman has taken in pursuing accountability in the face of opposition.  It’s a matter of justice – those that do wrong should be held accountable for the harms they caused to both investors and homeowners.

It is absolutely critical that as a society we ensure that the predatory practices of the last decade are never repeated again.  Today, many of the failed predatory lenders have been acquired by the “Too Big to Fail Banks,” like Bank of America.  The price paid by the acquiring banks factored in the need to provide justice to those harmed by the predatory lenders and the litigation risks involved with the purchase. 

These failed companies were not bought by mom and pop banks.  Acquiring institutions bought them at fire sale prices.  The 52 week high for Bear Stearns’ stock before the crisis occurred was $133 a share.  JP Morgan ultimately purchased Bear Stearns for only $10 a share.  Having paid the fire sale rate, the acquiring banks must live by the rules of the free market.  Armies of well-paid lawyers and investment bankers reviewed the bank mergers.  Therefore, it is completely disingenuous for the banks to complain about being held accountable for the very bad practices that drove down the price they paid for the predatory lenders.  The litigation they now face was entirely predictable and was precisely why the predatory lenders were sold at the dramatically lower prices.  Again, the cost of losing litigation and having to make whole those harmed by the illegal conduct of the predatory lenders was factored into the sale price.

Many of those who now advocate giving the acquiring banks a free pass, have in the past actually opposed the need to provide financial relief to the victims of predatory lending.  They cited the risk of “moral hazard.”  While we don’t see any moral hazard in making the victims of predatory lending whole, we are a bit surprised by the inconsistency of those who fail to see the moral hazard in letting the acquiring backs off the hook.  To the contrary, there is a clear moral hazard in not holding predatory lenders and their acquiring institutions responsible for illegal acts that were wide-spread in the industry.  Litigation such as the NY Attorney General’s against these predatory practices will play an important role in ensuring these practices are not repeated in the future because those in the industry will know that a lender's sins will not be washed away with a sale.

Furthermore, the after effects of the financial crisis these perpetrators caused have directly resulted in hundreds of thousands of New Yorkers facing the loss of their homes.  Millions of families have seen a lifetime of savings wiped out.  Entire neighborhoods have seen price declines of 20- 40%.  Millions of homeowners have had to help bear the cost of the financial meltdown – shouldn't those harmed by illegal conduct be provided with compensation?

Despite the real suffering families are experiencing, our analysis of foreclosure data shows that the worst may still be ahead of us.  Foreclosures are still making their way through the courts.  The full impact of completed foreclosures and the consequences on hundreds of neighborhoods is still to be experienced.  Tens of thousands families who are unable to receive significant loan modifications will start facing eviction and potential homelessness.  Many minority communities will be impacted more than others.

Homeowners and their advocates have long been pushing State and Federal regulators to take legal action against these abusive practices.  We are proud of the New York Attorney General’s long history of protecting the rights of consumers and we applaud our Attorney General Eric Schneiderman for his leadership and for continuing with the tradition.



Tags: foreclosure | predatory lending | Bear Sterns | too big to fail | JP Morgan