Foreclosure crisis has Albany’s attention

Stressing that “This is not a ‘bail-out’ of sub-prime lenders,” State Assembly Speaker Sheldon Silver announced recently that “passing the New York State Responsible Lending Act of 2007 will be one of the first priorities” in dealing with the recent tide of home foreclosures, now that the Legislature is back in session in Albany.
Silver, backed by a phalanx of local Assemblymembers including co-sponsor Rory Lancman, made the pledge during a Manhattan press conference on Friday, January 4, during which he outlined the major features of the bill, which has been in the Assembly banking committee since June.
The bill codifies a commonly held belief by borrowers, which has led many to ruin - brokers be will agents of the borrower and not the lender under the law.
Mortgage brokers must act in the borrower’s best interest, can’t accept or charge any fees unless the borrower knows about them and must see to it that the borrower gets the best deal their situation allows, according to the bill.
All home mortgage lenders will be required to consider a borrower’s ability to pay “principal, interest, real estate taxes, homeowner’s insurance and mortgage premiums,” based on the term of the loan of 40 years or less, meaning all rate adjustments and other details would have to be included when calculating a borrower’s ability to pay.
For sub-prime and unconventional loans, the lender must document the borrower’s ability to repay, using pay stubs or tax returns - virtually eliminating the sub-prime “no income verification” loan in New York.
Loans which have payments so low that the principal actually increases would be banned, as would “prepayment penalties” and “balloon” payments of more than three times the average payment for almost all sub-prime mortgages.
Charges for life or credit insurance, credit reporting, or any other membership or service not directly related to the loan itself would be outlawed.
The bill would forbid anyone from writing a sub-prime or unconventional home loan to pay-off a mortgage “originated, subsidized or guaranteed by or through” State, local or tribal government which had a discount rate when issued, or other benefit to the borrower, unless federally-certified credit counseling is given.
“Flipping,” or writing a sub-prime loan to pay off another loan would be outlawed, unless a “tangible benefit to the borrower” could be demonstrated.
Lenders would no longer be able to jack up the interest rate on a sub-prime loan because of a delinquency, or require more than a two-payment “up front” charge
Moreover, lenders must bundle property tax and required insurance premiums in an escrow account and include the escrow charge with the mortgage payment when informing borrowers what the cost of their loan will be.
The bill also includes hefty fines against rogue lenders, and awards double-damages to borrowers who are victimized. Also, borrowers will be protected from having to settle a dispute with their lender in any forum which is less convenient or has rules differing from “a judicial forum established in this State.”
The most notable proposals by the speaker however, are not included in the language of the bill - creation of a $150 million State fund to pick up half the tab of sub-prime mortgage delinquencies, and a $30 allocation for “borrower education.”
Silver noted that the average delinquency among sub-prime borrowers, which now triggers rate increases and charges which often lead to foreclosure are “under $6,000.”
The proposed state fund would be matched by sub-prime lenders, enabling as many as 50,000 borrowers to avoid losing their homes through foreclosure.
The funds would be available to borrowers who were in good standing prior to adjustment of their loan rate, a common feature of the sub-prime loan, and would be part of a package including debt-counseling.
Silver would not say where the money would come from, suggesting that funding would emerge “from the normal budget process.”
“As you know, Queens County is the hardest hit by the foreclosure crisis,” Silver said. “It’s sort of ‘ground zero’ for the problem.” Silver suggested that the combination of funding and counseling would give distressed homeowners “the resources necessary to dig themselves out” of their credit crisis.
Lancman observed, “This bill would make your relationship with a mortgage broker like that of a stock broker - their behavior is subject to legal requirements making them your agent, not the agent of ‘the company.’ ”
The State Senate, which does not have its own bill addressing the problem, has been holding hearings since mid-December in its Banking Committee.
When asked about Silver’s proposal, Frank Padavan, one of the most senior members of the State Senate observed, “The most obvious question is ‘Where is the money going to come from?’”
The State of New York Mortgage Agency (“Sonny Mae”) Padavan noted, had bond-issuing authority, and could borrow at a lower rate than the state in order create the fund Silver proposed.
Padavan noted a one-year delay in court-ordered foreclosures was included in a bill first introduced in the Senate, “enabling banks and lenders to negotiate a way out of a loan problem, perhaps in a more fair and equitable way.