Loan Rangers

While the dramatic failures of financial powerhouses like Lehman Brothers and AIG in September, 2008 are often considered the beginning of the current global financial crisis, for New Haven residents, the downturn began three years earlier with a sharp dip in the housing market. Between 2007 and 2008 alone, Elm City home sales dropped by 26.2 percent, well above the 16 percent national average. As the value of New Haveners’ homes fell and the interest rates on their mortgages rose, the result was a record number of foreclosures:165 in 2007 and 360 in 2008, following an already shocking 130 percent hike in foreclosure rates between 2005 and 2007.

In response, Mayor John DeStefano gathered housing advocates from city non-profits, community groups, and Yale Law School clinics to develop a coordinated response to the city’s housing crisis. He unveiled this team, called the Real Options Overcoming Foreclosure (ROOF) Project, at a press conference in City Hall at the beginning of May. “The foreclosure crisis is affecting communities nationwide,” DeStefano said at the gathering. “But in New Haven, we’re working together to minimize the impact, help families before they reach the point of foreclosure and educate our residents about creating wealth, understanding what they can afford, and making trusted counseling services available to families in trouble.” The ultimate goal, DeStefano made clear, was to “protect
the vitality of our neighborhoods.”

The city is fighting an uphill battle. While Connecticut has suffered comparatively less than states like Nevada and Arizona, urban areas such as New Haven and Bridgeport, which have relatively weak job markets and high proportions of low-income housing, have been hit far harder than the rest of the state. In January alone, according to the online foreclosure database, there were 560 newly foreclosed homes in New Haven. Hartford County came in a distant second with 387. By the end of 2008, over 1,000 lis pendens filings—the first legal step in foreclosure proceedings—had been issued in New Haven, at nearly triple the rate of the previous year.

“The effect has been huge,” says James Paley, executive director of Neighborhood Housing Services of New Haven, a local non-profit that acquires and rehabilitates distressed properties in the city and resells them at affordable rates. “Each month is a record number of foreclosures over the month before.”

For Paley, the culprit in this crisis is clear: adjustable-rate sub-prime mortgage loans, or mortgages in which borrowers with poor credit ratings initially pay a low, fixed-rate interest on their loan, which then rises substantially after a set period of time. “One of the things people would be told,” Paley recalls, “is, ‘Yes, this is an adjustable rate mortgage and it will go up after two years, but the value of your property will keep going up and you’ll be able to refinance to a fixed rate mortgage.’ Well, when the housing market is strong that’s fine, but when it drops people can’t refinance and they’re stuck in the adjustable rate mortgage owing more than their house is worth.”

New Haven, as an urban center with a high incidence of poverty and low-income housing, became a locus for sub-prime mortgage agreements. “Connecticut is a fairly wealthy state,” explains Eva Heintzelman of the Greater New Haven Community Loan Fund, a New Haven based non-profit that provides low-interest loans to low-income prospective homeowners, “but there is a lot of inequality. Bridgeport, New Haven, Waterbury—we do have some weak markets where we have relatively high rates of sub-prime arrogation,” she says, referring to banks’ seizure of houses that have defaulted on their sub-prime mortgages.

By the end of 2007, nearly 20 percent of all mortgages in New Haven—or roughly 4,000 loans—were sub-prime, and, unsurprisingly, they were focused in the city’s lowest-income areas. In fact, over 60 percent of all foreclosures in New Haven take place in only six neighborhoods: The Hill, Newhallville, Fair Haven, Quinnipiac Meadows, Beaver Hills, and the Annex.

SINCE MID-2008, the ROOF Project has led city efforts to stem the foreclosure tide. While, in theory, the organization is sponsored by City Hall and the Office of the Mayor, in practice, it is comprised mainly of representatives of local non-profits. Heintzelman and Paley both serve on the steering committee, along with DeStefano (ex-officio), two aldermen, and representatives from Yale Law School, United Way, and New Haven’s religious community. The directors are responsible for determining how to distribute funding allocated for housing recovery—including a recent $3.2 million grant from the federal government’s Department of Housing and Urban Development (HUD), awarded in early February. Most of the funds end up in the hands of the neighborhood-level non-profits under the ROOF Project’s
umbrella, as well in those of a few for-profit developers. “Money spent on professional non-profits that are in the trenches day in and day out is money well-spent,” Paley says.

Sameera Fazili, a clinical professor and Ludwig Community Development Fellow at Yale Law School and a member of the ROOF Project’s steering committee, is pleased with the mayor’s efforts. “The city has been a partner with us all the way,” she says, but she still believes that community organizations and private developers are often best-positioned to help recover hard-hit neighborhoods. “I think that the best way to respond to the situation is with a combination of non-profits and the private sector,” she says. “Private sector developers are wonderful as long as they are monitored to make sure that they are doing quality work on the houses they are restoring. As for neighborhood-level recovery, the local non-profits know the neighborhoods best, and they’re the ones who are best positioned to help rehabilitate them.”

Much like the organizations that comprise it, the ROOF Project uses many different tactics to confront foreclosure. “We suggest a three-pronged approach,” says Fazili—first, community outreach, “to let people know that there is help out there for them if they get involved early enough,” followed by much-needed assistance and counseling in dealing with mortgage debt, including consulting with HUD-certified counselors and state-sponsored mediation between bank lenders and at-risk borrowers. And then, to prevent foreclosures from spreading, the Project focuses on neighborhood stabilization.

This final tactic is meant to forestall the destructive effect a small number of foreclosures can have on entire residential areas. Heintzelman describes this dynamic as a “tipping point,” when one or two vacant houses lead to a rapid decline in a neighborhood’s property values and an accompanying rise in its rates of foreclosure.

“Neighbors who are paying their mortgages are seeing the value of their property decline,” Fazili explains. “We are going to see a lot more boarded-up houses. You are going to see an increase in crime and a real decline in the city’s tax base if we don’t address this on a neighborhood level.”

If this task sounds daunting, it is. In the short term, with foreclosure rates rising and whole neighborhoods at risk of reaching the “tipping point,” the ROOF Project will be confronted with record numbers of homeowners in need of guidance. One step of the process that is particularly crucial for residents to understand went into effect in July of 2008. Connecticut Public Act No. 08-176, “An Act Concerning Responsible Lending and Economic Security,” grants homeowners who have received
a foreclosure notification the right to request a meeting with their lenders to try to negotiate a settlement. It also instructs lenders not to begin foreclosure proceedings until they have made a “good faith effort” to determine the borrower’s ability to pay. If a homeowner requests a meeting, loan originators are now legally required to sit down with him or her and a state-appointed judicial mediator who will attempt to strike a compromise and restructure the loan so that the borrower can pay it off over time, while remaining in his or her home.

The law was heralded as a major boon to at-risk homeowners, but in practice, it has proved useless unless homeowners are atypically well-informed. Many are unaware of their right to mediation, and they lose that right if they fail to request a meeting within 15 days of receiving a foreclosure notice. Moreover, while the bill requires that banks and lenders meet with homeowners and agree on new terms if a borrower can prove his or her ability to pay, states are not allowed to enforce such terms. Bankruptcy judges, for example, do not have the power to unilaterally rewrite the conditions of loans if they feel a lender is being unreasonable.

So while most advocates feel that the on-the-ground rehabilitation work is best done by community-based organizations, they also want to see the state and federal government work more actively to enforce banks’ cooperation. “The best role the state and federal government can play, in my opinion,” says Fazili, “is to put pressure on banks and financial institutions to modify loans to keep homeowners in their homes, then helping non-profits to buy foreclosed properties, rehabilitate them, and sell them at a reasonable price.”

Nobody is more emphatic on this point than Robert Solomon. A member of the ROOF Project, supervisor of the Yale Law School’s Clinical Studies Program, and former director of the New Haven Housing Authority, Solomon is a man who minces no words. “I teach a clinic on housing and community development and I teach a clinic on domestic violence,” he says, “and I have found that it is easier to deal with a domestic abuser than it is to deal with a bank or an attorney for a bank.”

For the veteran Solomon, as for Paley, the villains in the housing collapse are indisputably banks. After years of predatory lending, mortgage discrimination, and irresponsible securitization of mortgage loans, he says, banks bear much of the blame for creating the current economic crisis but have yet to be held responsible for their actions. “Banks have been wrong-doers throughout this entire process,” he says. “They have been wrongdoers and they are trying to reap the benefit of their wrongdoing.”

As the director of a housing clinic at the Law School, Solomon has had a first-hand look at many of the mediations resulting from Public Act 08-176. “It’s not adequate—totally inadequate,” he insists. “Banks do not do real mediation.” Instead, he says, many loan originators send unprepared attorneys to meetings and do not authorize them to make alterations to loans. “It’s a disgrace.”

Some, like Heintzelman, claim that, though more governmental regulation would be helpful, mediations can garner results. She explains that the Greater New Haven Community Loan Fund has been “quite successful” in modifying a number of its clients’ loans. But Solomon believes that without explicit powers of enforcement, the right to mediation is meaningless. “The judges in foreclosure courts need specific litigation allowing them to rewrite mortgages and to force banks to comply with mediation,” he argues. “Otherwise the legislation does nothing.”

State Senator Bob Duff, Democrat of Norwalk and Darien and co-chair of the Senate Banking Committee, which wrote Public Act 08-176, acknowledges that there may be room for improvement in the legislation but insists that critics like Solomon undersell it. “Can it be better?” Duff says. “Possibly. But we’re only six months old and we have already helped thousands of people stay in their homes through the mediation process. Connecticut is currently the only state in the nation that has a banking mediation program, and I think it’s been very successful.” As for Solomon’s enforcement concerns, Duff is skeptical that giving foreclosure judges the power to rewrite loan terms if they feel loan originators are acting unreasonably is possible, or, for that matter, desirable. “Frankly, I am not so sure judges want that power,” he says. “Granting judges that kind of power is something we would need to study very closely. For right now, though, I think we’re doing very well.”

And the legislation, which has appointed twelve judicial mediators across the state—two of whom are based in New Haven— has seen some success. As of December 31, mediators had successfully kept 57 percent of all mediation applicants, or 681 homeowners, in their homes, usually through mediated loan modifications. But the numbers only tell half the story: While mediation does have a relatively high success rate, not everyone obtains it. In New Haven, according to statistics provided by the Senate Judiciary Committee, 358 people applied for mediation between July 1, 2008, when the bill entered into law, and December 31, but another 969 who were eligible did not apply. “One of the biggest problems we face,” Heintzelman says, “is that people get something from the court and they freak out and do nothing, and then soon it’s too late.”

While much of the Roof Project’s task in the coming years will be to close this gap, some of its constituent organizations have more wide-ranging and long-term plans. Many members place paramount importance on education and outreach, especially in low-income neighborhoods. “Homeowners need continuing guidance on how to manage their mortgages and finances,” says Fazili. In the long term, this would entail not only homeowner education programs, but also government-sponsored shared-equity programs, in which a state or local government would provide financial assistance to first-time, low-income home buyers in exchange for a share in the value of their property. Such guidance might also include Individual Development Accounts (IDA), organizations in which donations from a number of sources are used to match the savings of low-income home buyers in order to encourage homeownership without relying on risky loans, and other public and private incentive programs to provide homebuyers with alternatives to high-interest mortgages. Such programs, according to Fazili, have the double benefit of stabilizing housing markets and educating first-time home buyers.

Paley agrees that, in order to recover from the housing crisis, advocates must encourage long-term financial responsibility as well as guide people through the foreclosure process. “Our whole work for the past thirty years,” he says of Neighborhood Housing Services, which has been providing counseling and homeownership education since its founding in 1979, “has been to encourage responsible borrowing.” NHS currently offers a number of classes in homeownership and financial management, including courses on credit counseling, foreclosure intervention, and budget and financial management. “The whole object of our Home Ownership Center is to encourage homeownership eventually,” Paley explains. “But everyone that goes through our program goes through an extreme homeownership education.”

Another primary long-term goal of the ROOF Project, and one that NHS and the Greater New Haven Community Loan Fund have been working on for years, is to preserve neighborhoods’ market values and improve their community fabrics in the face of expanding blight. Since its founding thirty years ago, NHS has developed 385 units of affordable housing, helped 475 first-time homebuyers purchase
homes, and enrolled 811 applicants in IDA programs. Since 1988, the Greater New Haven Community Loan Fund has originated over $44 million in low-interest loans for affordable housing. Much of the funding for such organizations, however, comes from state and federal grants, banks, and charitable contributions, all of which have been pummeled by the recession. And while NHS, for example, is able to restore about twenty units of housing per year, and the Greater New Haven Community Loan Fund is able to originate about $2 million worth of loans a year, the City recently estimated that New Haven contains 800 abandoned houses and a rising number of evicted homeowners. Ultimately, the crisis may force the city to reconsider its homeownership-prioritizing mentality. “I think that the major ramification of this crisis will be that we rethink the way we push home ownership on low-income communities,” says Fazili.

Asked about his hopes for New Haven’s recovery, Jim Paley remains guarded but not entirely pessimistic. “It really depends on whether the economy can get back on its feet,” he says. “If unemployment remains where it is, people won’t have money and won’t be able to remain in their houses. It’s so critical we have an economic stimulus that works in order to get people working again, and in order to get the consumer confidence index up so people start buying again.”

Ultimately, for Paley and the other representatives of New Haven’s governmental and community-based organizations scrambling to deal with the housing market’s collapse, working “in the trenches” can only accomplish so much. Without effective governmental regulation and enforcement, the foreclosure epidemic could continue indefinitely. “Can we emerge from this without a total crisis?” Paley muses about New Haven’s future. “Yes, but it’s going to take some real leadership.”

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