The Manhattan Institute’s
Center for Rethinking Development
Ideas that shape the city’s planning, housing, and development
A Monthly Newsletter by Julia Vitullo-Martin, MI Senior Fellow

Thinking about the City Council's Barriers to Building

Julia Vitullo-Martin, February 2004

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.

The withdrawal of both insurance and mortgage financing in declining urban neighborhoods during the 1960s and 1970s nearly killed off American cities. No city was spared the resulting blight. Yet few elected officials understood at the time what was happening. New York neighborhoods like Harlem, Bedford Stuyvesant, and the South Bronx--with handsome but deteriorating housing stock--were redlined by both banks and insurance companies, mirroring restrictions in federal mortgage programs, such as FHA. Denied insurance and credit while buffeted by neighborhood economic changes, the housing stock sank into disrepair and abandonment. A Center for Civic Innovation report by Jerry Salama, Michael Schill, and Richard Roberts points out that New York City lost over 700,000 people during the devastation of the 1970s. Over 300,000 housing units were burned by arsonists or simply abandoned by their owners. The city’s housing agency took title to 100,000 units in tax foreclosure proceedings. It has cost the city over $5 billion, not including foregone tax revenues, to rescue these properties and their neighborhoods.

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.

Late last month, on Jan. 27, a State Supreme Court ruling invalidated the City Council's predatory lending law--which councilmembers have vowed to re-write and push through. Passed in November 2002 over the mayor's veto, the law sought to protect unsophisticated homeowners from unscrupulous lenders by outlawing concealed fees in loans. It prohibited city government from doing business with any entity defined as a predatory lender--those charging an "unreasonable" rate of interest on loans. Financial institutions with city contracts had to certify that neither they nor their affiliates engaged in predatory lending.

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.

With the Feb. 2 passage of its Childhood Lead Poisoning Prevention Act--over the mayor's veto--the City Council is imperiling further investment in the rehabilitation of occupied housing in struggling neighborhoods. The law makes landlords solely responsible for the existence of lead-based paint, setting excessively high legal standards of liability. If a child's blood is found to have elevated lead levels, the law presumes that the child's residence has lead--until refuted by the owner in a contested proceeding. The law gives tenants and tort lawyers a clear path to sue property owners, including those who are not at fault. Such liability may well choke off insurance, which is already very hard to come by in many neighborhoods, say nonprofit housing developers.

City Council leaders are unconcerned, saying they will monitor the law to see if it proves as onerous as developers contend.

The City Council says it will rework the predatory lending legislation, though it has not announced a schedule. One crucial task will be to distinguish predatory lenders from merely high-cost subprime lenders.

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.

February 2004
Financing relief for city seniors & disabled homeowners
Mortgage Bankers Association’s Predatory Lending Resource Center
HUD on predatory lending
Freddie Mac’s guide
Department of Housing Preservation & Development
Department of Health & Mental Hygiene’s Lead Poisoning Prevention Program
City Planning executive director urges “Embracing Growth, Preserving Neighborhoods”
City Council speaker Gifford Miller proposes 3-point tax cut plan in State of the City Address
On Feb. 4 City Council overrides mayor’s veto of Childhood Lead Poisoning Act by vote of 44 to 5 with 1 abstention
Struggles of shipping industry continue on Brooklyn waterfront
Director of Independent Budget Office wonders if West Side stadium will pay for self
“The City Council’s ordinance presents very serious issues for legitimate lenders and does little to deter unscrupulous lenders from engaging in predatory behavior. We have made it clear we will not make any ‘high-cost’ loans as defined in the ordinance.”
Charlotte Gilbert-Biro, J. P. Morgan Chase & Co.
“The lead bill is an invitation to expand tort litigation that will waste precious resources for affordable housing to no good effect. Universally we have heard from insurers that there will be a number of properties that will not be insurable.”
Ronay Menschel, Phipps Houses