|The Manhattan Institutes|
Center for Rethinking Development
Ideas that shape the citys planning, housing, and development
|A Monthly Newsletter by Julia Vitullo-Martin, MI Senior Fellow|
Even as the Bloomberg administration works to dismantle old barriers to building--proposing to rezone large swathes of waterfront land for residential use, for example--the City Council has been working hard for the last two years erecting new ones. But these new ones aren't what you might expect--they are not barriers to the development of luxury housing, the target of such efforts in the past. On the contrary, the new barriers are being erected against precisely the kind of housing you might think the councilmembers would support--the rehabilitation of low- to moderate-income housing in the city's distressed neighborhoods.
While the barriers have been devised in response to genuine problems, they are likely to have destructive consequences far beyond what the City Council has anticipated.
The resurgence of New York's neighborhoods will continue only if mortgage financing and insurance remain available to a wide range of owners seeking to improve their property. Both industries were jeopardized by recent legislation. The City Council will soon turn to highly regulatory legislation on other development issues, including code enforcement and rent restrictions for tax abatement programs, that threaten to make older housing less attractive to lenders and insurers.
FORGETTING THE PAST
Ignoring the past and legislating in the name of the public good, the New York City Council is now deliberately setting up the conditions that could encourage another gradual withdrawal of both insurance and mortgages from fragile neighborhoods.
The overturned law, which had not yet taken effect, required loans to have points and fees of no more than 4 percent. Interest rates could be no more than 6 percent above the prevailing Treasury bill.
Justice Michael Stallman said the City Council had illegitimately preempted state and federal banking laws which already protect homeowners against predatory practices. New York State, which is one of only four states with a strict law against predatory lending, regards interest rates that are 8 points higher than the Treasury rate and fees that total more than 5% of the loan as predatory. Thus the City Council imposed far more stringent standards than the state.
Predatory lending is an ugly, difficult, and very real issue. Such lenders often solicit door-to-door in minority and immigrant neighborhoods. They advertise on radio and television, promising homeowners instant cash in exchange for mortgage refinancing. The terms, which look reasonable, typically involve exorbitant fees, escalating interest rates, and worthless insurance. The City Council specifically denounced such practices as repeated refinancing of a loan without tangible benefit to the borrower, charging excessive prepayment penalties, financing single premium credit insurance, encouraging a borrower to default on other debts, failing to comply with federal disclosure requirements, making a loan for more than the borrower can repay, requiring advance payments, charging fees to modify a loan or defer payments, permitting acceleration of a loan at lender's discretion, and increasing the interest rate on default.
These tactics, argues the City Council, can lock borrowers into high-rate loans even when they qualify for lower rates, strip equity from borrowers' homes, lead to impoverishment as borrowers pay thousands extra in excessive costs, and lead to increased foreclosure with profoundly damaging consequences for both families and neighborhoods.
But complicating the issue of predatory lending is the existence of a parallel and legitimate set of lenders who are a productive part of the economy. Such high-cost lenders, called "subprime" lenders in the banking industry, perform an important market function by providing loans to borrowers with weak or poor credit histories who cannot get more conventional loans. They charge higher rates and fees to offset the risk, which is perfectly fair. But high-cost lenders are not always easily distinguished from predatory lenders.
The business, which has grown tenfold nationally since 1993, is concentrated in poorer neighborhoods--where borrowers with troubled or unknown credit history tend also to be concentrated. A 2000 study by the Neighborhood Economic Development Advocacy Project found that high-cost lenders made 36% of refinancing loans in New York City. In Brooklyn's Bedford-Stuyvesant, high-cost lenders made 65% of loans, and in Jamaica, Queens, they made 56%.
The City Council's vague but far-reaching law has been overturned, but another law is on its way. Councilmembers are right to be worried about genuine predatory lending, which can destroy neighborhoods as homeowners find themselves crushed by heavy payments they can't meet. Waves of foreclosures have badly damaged neighborhoods in the past, and no one wants to see them recur. At the same time, many homeowners need subprime loans in order to maintain and rehabilitate their property--meaning they need these lenders to stay in business.
City Council leaders are unconcerned, saying they will monitor the law to see if it proves as onerous as developers contend.
City officials have until August to work out regulations and procedures for implementing the lead abatement bill, which contains an unusual number of potential problems. Because the law mandates the removal of lead paint on all rubbing surfaces when a young child is present as well as on turnover of the apartment, all doors and windows will have to be replaced in older apartments. But how will this work in landmarked districts, where windows must be replaced building-wide or not at all?
Nor has the law been thought through in terms of routine tenant-landlord disagreements. Even though the bill has been promoted as pro-tenant, it mandates that landlords conduct a complete and detailed yearly inspection of any apartment housing a child under age 7. How will tenants feel when landlord representatives show up with city marshals to enforce these inspections? Not to mention how tenants will feel as landlords begin passing along in rent increases the $15,000-20,000 per apartment costs of abatement.
In sum, the City Council is unnecessarily raising the costs of maintaining and rehabilitating older housing, which constitutes the bulk of the city's affordable housing stock.