As Long Island's economy and housing market boomed, tens of thousands of area residents saddled themselves with expensive mortgages, borrowing billions of dollars and counting on the equity in their homes to help pay their bills and build their wealth for them.
Now, that foundation of home ownership for many is crumbling - and the Long Island economy could pay the price.
Nearly a third of the 107,000 mortgages given to Long Islanders in 2006 were high-cost loans, which charge higher interest rates, fees and points and are far more likely to go into foreclosure than their conventional counterparts, a Newsday analysis of loan and foreclosure data has shown. This universe of loans includes those that are considered subprime - more expensive mortgages given to borrowers with less than perfect credit. For many of those borrowers, these readily available loans were their only way to own a home. For banks, they were a rich source of fees.
"That desperation to buy a home a couple of years ago translated into taking out what turned out to be literally toxic mortgages that seriously undermined" the borrowers' abilities to repay, said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies.
Already across the region, home foreclosures are sharply on the rise, often doubling in the past two years in communities from Roosevelt to Westbury and Brentwood to Deer Park, Newsday found. In Brentwood, the number of initial foreclosure notices, known as lis pendens, rose to 227 in the first six months of 2007, from 98 in the first half of 2005, while Glen Cove went from 10 to 24 filings in the same period.
In the coming months and years, experts say, foreclosure rates may worsen considerably, as borrowers find themselves unable to make their monthly payments and unable to find a way out. And even when they can make their payments, subprime borrowers are spending thousands of dollars more on interest than their prime rate counterparts - dollars they could have used to pay bills, buy a new car or remodel their homes, all of which help fuel the local economy.
Those factors could damage the Long Island economy, which rode the housing wave up for so long and depends extensively on healthy consumer spending, high home prices and a stable housing market. Experts estimate that as much as a third of the region's economy is tied to housing. On top of that, these experts say that Long Islanders - and homeowners nationally - have used their residences as piggy banks to pay for everything from cars to education.
Struggling to save
a childhood home
"For two years now, the average household has been spending more than it's been making," said Irwin Kellner, the chief economist for North Fork Bank and Marketwatch.com. "Now consumer spending is going to slow because they [area residents] can not use their home as an ATM."
For individual homeowners holding high-cost loans, the situation is daunting. Kari Sessa, 53, refinanced her childhood home in Huntington Station in 2005 and now may lose it.
Kari and her husband, Keith, have owned the cape since 2002, when they bought it from her mother's estate for $301,000. At the time, they had a mortgage payment of $2,100 a month, which they said they could manage.
But after a call from a now-defunct Melville mortgage broker, Global Home Loans and Finance, the Sessas decided to refinance to consolidate their debt. While acknowledging that they made their own mistakes, such as not carefully reading paperwork or bringing an attorney to the closing, they said they thought the mortgage would be one 30-year fixed-rate loan.
But instead, they received two loans. One, for about $374,185, had an annual percentage rate, including all fees, adjustments and the total loan cost, of about 9.64 percent. It's an adjustable loan - starting out at a teaser 6.1 percent rate, but scheduled to adjust in early 2008. The other loan, for $99,000, had a fixed rate of 10.6 percent.
That left them with a new monthly payment of $3,354, about $500 more a month than it would have been with a conventional, 6 percent rate loan. To make the payments, both Kari and Keith began working two jobs - Kari for a defense contractor, Keith as a shipping supervisor and both held part-time retail jobs on the side. Yet, the couple is still paying nearly half their income toward the mortgages. And, come March, their larger mortgage payment will rise sharply - adding another $800 a month.
All told, over the life of their 30-year loans, the Sessas will pay $500,000 more than if they had gotten one 30-year prime, fixed-rate loan.
Twice in the past year, the couple has fallen behind on their payments, only to dip into retirement savings to catch up. Now, they're hoping for a loan modification to save their house.
"We should have left it the way it was," said Kari Sessa, who said the stress of their situation has led to high blood pressure and heart troubles. "We didn't know this was going to happen."
The Sessas and others holding these pricey loans may face the steepest fall. The Center for Responsible Lending, a North Carolina-based advocacy group, estimates that one in five subprime loans originated nationally in 2005 and 2006 will end in foreclosure.
But the repercussions of the crisis nationally and regionally will likely go far beyond that, experts say.
For nearly a decade, Long Island's economy has remained strong, in large part propped up by its housing market and consumers who took out second and third mortgages to feed their spending needs. Now, that foundation to the regional economy is threatened. And what's more, the perceptions of an economic downturn - particularly in housing - can often help feed the downturn itself.
"It's going to ripple through every single discretionary spending area of our economy," said Bob Wieboldt, the executive vice president of the Long Island Builders Institute. "If it creates a depressive mentality, people won't go out and make big purchases."
Others are less worried. "I do not think we have a pending catastrophe," said Robert Campbell, a Hofstra University professor of real estate finance. "But it could be worse on Long Island than it is elsewhere."
feel the pain
Newsday's analysis of federal and local data shows that:
In 2006, nearly a third of all loans originated on the Island were higher cost, or subprime, loans, at a total volume of $8.5 billion. In 8 percent of Long Island's census tracts, in communities such as Hempstead, Lakeview and New Cassel, more than half of 2006 loan originations were high cost, according to the data, which comes from reports banks must issue through the Home Mortgage Disclosure Act, or HMDA. At the top of the list: a section of Roosevelt, where two out of three loans were originated at more expensive interest rates.
The number of lis pendens - the first legal filing in the foreclosure process - doubled from the first six months of 2005 to the first six months of 2007, when 5,576 filings were reported, according to data from Long Island Profiles, a real estate information publisher. Nearly half of the communities on Long Island saw their filings more than double in that two-year span, the data showed. Communities from Bethpage and Bellmore to Deer Park and Centereach saw initial foreclosure filings double in two years. West Islip, for instance, saw its lis pendens filings triple in two years - going from 18 in the first six months of 2005 to 55 in the first six months of 2007.
Communities with larger numbers of foreclosures, such as Brentwood and Hempstead, also had more significant high-cost lending. The 10 places with the most initial foreclosure filings in the first six months of 2007 all had percentages of high-priced lending that exceeded the Island's average. Central Islip, for example, had 153 lis pendens filings in the first six months of this year; in 2006, 54 percent of the community's originated loans were at higher interest rates.
The overall housing market on Long Island isn't easing the strain, with prices down nearly 4 percent in Suffolk County and 1 percent in Nassau County. Also, the amount of inventory on the market and the slow sales pace means that it would take more than a year to sell off all of the local homes currently listed, according to Newsday's analysis of Multiple Listing Service data.
at a high price
To be sure, Long Island's percentage of high-cost loans is in line with the nation as a whole - and the region's foreclosure rates are far lower than other parts of the nation, such as the Midwest and states such as Florida, California and Nevada. But the situation here troubles many experts and homeowners alike.
"Whenever you have a foreclosure in the neighborhood, it's costly for the homeowner, it's costly for the lender and it's costly for the neighborhood," said Pearl Kamer, the chief economist of the Long Island Association. "If you're a buyer and you know there's a foreclosure in a neighborhood, you're going to think twice. And then if you're a seller, you're going to have to lower your price ... It's a question of falling dominos."
That's especially true in certain pockets of the Island, according to Newsday's analysis.
In Roosevelt, where the number of high-cost loans has soared and 95 lis pendens were filed in the first half of 2007 alone, home prices have already fallen 10 percent, compared with 1 percent for the county as a whole, local real estate agents said. Some of the lenders who issued high-cost loans even a year ago are now out of business, area residents said.
"Roosevelt is struggling anyway, but it's been on the rise, and it was getting better," said resident Paulette Woodside, who has owned a small real estate firm in the community for eight years. "But at this point, I'm very concerned as to where this downfall might lead us. Instead of getting better, we might get worse."
She said that every sale is tough to close now because few want to buy in the area.
"Now we're in a situation where people in the community are losing their homes," she said. "And those who aren't losing their homes are ready to leave."
In the past, some banks were accused of not lending in minority and low-income areas like Roosevelt at all - illegally red-lining those neighborhoods until regulators began cracking down. But in the past five years, that trend changed: the neighborhoods were getting loans - but at higher prices.
These higher priced loans, particularly those made in minority communities, brought with them a measure of trouble. Newsday's data showed that Brentwood, Hempstead and Freeport had the highest numbers of lis pendens in the first six months of 2007 of any community on Long Island. In some cases, a single street, such as Suffolk Avenue or Timberline Drive in Brentwood, had four or five filings.
Each of those communities also had census tracts where more than half of the loans made in 2006 were high cost.
In 2006, 48 percent of loans on Long Island originated to minorities were high priced, compared with 20 percent for whites. And even when controlling for income, minority borrowers were far more likely to receive a high-cost loan than white borrowers, according to the HMDA data.
Those statistics don't account for credit scores or loan-to-value ratios - both factors in determining interest rates and loan terms that aren't included in the HMDA data, but could explain some of the disparities between minorities and whites. Nonetheless, the effect, advocates say, is clear.
"Studies had showed that the impact [of home ownership] on neighborhoods was a positive one, because people who were homeowners sink down roots into the community," said Marianne Garvin, who heads the Community Development Corporation of Long Island, an advocacy group. "But now, we're seeing the downside, because when you have a lot of foreclosures in a neighborhood, there's a negative impact, in terms of instability, violent crime and economically."
Some also fear that communities ripe for foreclosures may face future disinterest on the part of home buyers, businesses and investors. "Now you're going to have an area that is maybe a pariah," said Elizabeth Ann Rodriguez, vice president of regional and community affairs for the Federal Reserve Bank of New York. "If it's not attractive, you're not going to get new business or traffic. It's a downward spiral and that's the kind of thing that is so much of a concern."
Beatrice, a programming analyst who asked that only her first name be used, bought her $179,000 Elmont home with a fixed rate mortgage of 7 percent in 1999. She and her husband said they had good credit and stable income - income that now exceeds $100,000 annually. After a couple of car accidents got them into financial trouble, Beatrice decided to refinance to take some money out of her home for other expenses.
is not affordable
By 2003, the second time they refinanced, the couple's credit had worsened. The refinanced $317,000 loan was an adjustable mortgage that started at 8.9 percent - far above conventional levels, which hovered under 6 percent at the time. It amounted to $2,450 a month, compared with the $1,900 a month they would have paid at a prime rate. And that didn't include taxes and insurance, which weren't escrowed.
At the time, Beatrice and her husband, who asked that his name not be used, said they were told by their mortgage lender that if they steadily made the payments, they could refinance again into a fixed product within a few months.
"I thought it was going to be OK," Beatrice said. "My mortgage was a little high, considering how many other bills I had, but I figured this was temporary so I went along with it."
But, she said, six months later, loan officers told her she couldn't refinance after all because she didn't have enough equity in the house and soon, she fell behind again.
Two years ago, she declared bankruptcy to stave off foreclosure. But in September, her interest rate adjusted. Now, her interest rate is 11.5 percent and her monthly payments are up to $3,200 - and she can no longer afford her bankruptcy because it requires payments to both mortgage and trustee.
With $27,000 in late payments and fees, Beatrice faced a foreclosure sale. After discussing her situation with a reporter, however, CitiResidential, which now services her loan, is now trying to modify it.
"It's just nerve-wracking," Beatrice said. "I'm still trying to fight until the bitter end. But I've tapped into just about everything I think I have the option to tap into."
Experts say homeowners in trouble like Beatrice are becoming more common, as foreclosures have continued to climb. In August, Suffolk County had 813 lis pendens, a 70 percent jump from August 2006, Long Island Profiles, the real estate publishing company, said. Nassau saw a 45 percent increase, to 492 filings in the month of August. In terms of actual foreclosure auctions, there were 375 across the Island in August - a 50 percent increase from last year. There are approximately 700,000 owner-occupied homes in both counties.
In addition, Newsday's analysis of the data shows, borrowers are now getting into trouble faster. The time between mortgage origination and a foreclosure filing was three and a half years on average in 2005, according to the Long Island Profiles data. In 2007, it took, on average, two and a half years.
Many of the loans opened in 2006 came from large, national subprime lenders who developed a significant presence here in the past few years. Fremont Investment & Loan, for instance, did the Island's largest amount of high-cost lending in 2006, making nearly 3,000 non-conventional loans, worth $831 million, according to the federal lending data. Meanwhile, the company issued 156 lis pendens in the first six months of 2007, compared with just three in the same period of 2005, according to Long Island Profiles' foreclosure data.
High rates bring
even higher risk
What's more, the high-cost loans themselves have gotten more expensive over the past two years. For high-cost loans originated in 2006, the median spread, or difference, between the prime Treasury rate and the loan's annual percentage rate was 5.86 percentage points, compared with 4.12 for 2004 loans.
Each of those subprime loans is far more likely to default in the future, in part because the homeowner is often a "weaker borrower" to begin with, and therefore potentially unable to handle even the best of mortgages, said Beth Marten, who owns Home Buyers' Resource Center, a buyers brokerage and Mortgage 1,2,3, a mortgage broker, in Baldwin. "A weaker borrower has less wherewithal, weaker credit and less money," Marten added.
In New York State, 12 percent of all subprime loans were past due in the second quarter, compared with 2.6 percent of prime loans, as of the latest Mortgage Bankers Association survey, released in September. Nearly 6 percent of subprime loans in the state were in foreclosure as of June compared to .5 percent of prime mortgages.
"The riskier the loan, the higher the delinquency rate and the foreclosure rate," said Doug Duncan, the association's chief economist, who predicts as much as another year of rising delinquencies, and a peak in foreclosures three to six months beyond that. "So, the bottom line is we have a ways to go yet."
Even the best of borrowers are having trouble - and that, too, will affect the region's economy. Some have made their situations worse with poor spending decisions and high credit card debt.
Take Anita and Jerry Combs. The Hauppauge residents have good credit and a fixed rate mortgage at 6.3 percent interest. They even put money down when they bought the house in 2004. But, still, they're paying $2,300 a month on a household income of $65,000. And that doesn't include the couple's $20,000 in credit card debt.
So, the Combs reduced their spending. They're already asking family for help with the mortgage payments - and worry about the months to come. "I cross my fingers, pray and ask for help," said Anita Combs. "And we've cut back a lot."
On Long Island, America's first suburb, home ownership has always been a laudable goal. Ultimately, however, borrowers and their brokers and bankers took a dangerous turn, experts said.
"Unfortunately, these are the people who never should have obtained these loans in the beginning," said Kisha Wright, a foreclosure prevention counselor with the Long Island Housing Partnership. "Now, when the rates are starting to reset or they encounter some sort of family emergency, they're not able to pay that mortgage payment."
There's plenty of blame to go around, from the brokers who gave them the loans to the bankers who bought those loans without questioning the terms to the regulators who didn't put on the brakes. And then there's the borrowers themselves, who often admit that they should have known better.
Finding a way out
of subprime maze
But now that the subprime lending market has all but collapsed, it could be far more difficult for some of those in trouble to get out of their high-cost loans.
To start, it could be harder to refinance, especially if they never documented their incomes, have poor credit or shouldn't have gotten the loan in the first place. After all, many of the kinds of high-cost loans once available to those with poor credit or no income no longer exist. Making matters worse, many area borrowers have tapped out the equity in their homes and now owe more than the houses are worth, Wright said. And even when the only option is to sell the property and take a loss, that's not simple either, at a time when there are for sale signs on every block. Soon, it seems, they've exhausted every option.
"Many people are stuck in these subprime mortgages and it's becoming very difficult for them" to find a way out, said Westbury bankruptcy attorney Craig Robins. "There are people who could have refinanced even half a year ago, but now ... there are very few lenders who will consider them."
Those who started with a better mortgage are certainly more likely to find a way out. Central Islip residents Tanya and David Lindo had trouble making the $2,300 monthly payments on their fixed, conventional mortgage when Tanya was pregnant with their third child. Tests revealed potential abnormalities in the baby, and she was sent from doctor to doctor, running up medical bills the couple said their insurance didn't cover. Even as their daughter was born without abnormalities, the Lindos never found their way out of the financial hole.
They first missed a payment in 2006, and tried calling their bank - but say they never got calls back. Before they knew it, their house was in foreclosure and they owed $25,000 in back payments and fees.
A year later, as the bank began talking about establishing a sale date, the Lindos found a solution. They were able to get a loan through the Long Island Housing Partnership's Homeowners' Emergency Mortgage Assistance Program, or HEMAP. That loan, combined with a modification through their bank, saved the house.
Now, the Lindos have cut out all the extras, from movies and nights out to shopping and redoing the kitchen floor or living room carpet. "It's tight," said Tanya Lindo, who attributes the family's ultimate success to prayer and persistence. "It's better to own your own house and you know your kids are safe, but it's not easy."
The impact on LI
The total volume of these types of mortgages that originated on LI in 2006. Experts say these loans, which were nearly a third of all mortgages issued in that year, are far more likely to default. One in five subprime loans originating nationally in 2005 and 2006 will end in foreclosure, one advocacy group says.
The number filed in the first six months of 2007. Lis pendens, the first legal filing in the foreclosure process, doubled from the first six months of 2005 to the first six months of 2007.
SUFFOLK HOME PRICES
NASSAU HOME PRICES
The amount home prices have fallen in Suffolk and Nassau. The volume of homes for sale is so high it would take more than a year to sell all.
THE SITUATION: A 35-year-old man bought his Mastic-Shirley area home in early 2006 for $243,000.
THE PROBLEM: His credit was poor and he financed 100 percent of the cost in two mortgages. His first mortgage, for $194,400, came with a 15 percent interest rate and was negatively amortized over 30 years. That meant he could make a minimum monthly payment amounting to less than interest owed, but the rest of the interest would be tacked on to the end of the loan. His second mortgage, at 23 percent, was $48,600. In October 2006 he refinanced. His home was appraised at $285,000 and he took out a 30-year adjustable loan for the full amount, with a 10.35 percent rate to start. His monthly $2,504.26 payment will adjust higher next year.
NOW: He is current on his payments and has improved his credit. Lynn Law, director of education and counseling for the Long Island Housing Partnership, thinks she'll be able to find a way for his lender to modify his loan.
THE SITUATION: A married couple in their mid-60s had decent credit and an income of about $60,000, mostly on his government job.
THE PROBLEM: They had owned their Deer Park home for years, but refinanced in April 2005 with a $300,000 loan. With a 9 percent interest rate, the loan was already high cost. But it was a negative amortization loan - and that made the situation worse. They had a choice: pay $3,104 a month, the full monthly payment, or make a minimum payment of $1,416, covering only part of their interest expenses. They settled on the lower number, and the remaining interest was tacked on to the end of the loan. The total loan amount has since risen to $332,000. Meanwhile, there's a second loan, too - for another $30,000, with a monthly payment of $291 a month.
NOW: The couple desperately wants to refinance, but probably can't make a fully amortized monthly payment on their income.
THE SITUATION: A single mother of two bought her house in Centereach for $329,000 in early 2006.
THE PROBLEM: On an annual income of $30,000, she took out a mortgage for $324,000, with an interest rate of 9 percent, for a monthly payment of $2,500. Six months later, she took out a home equity line of credit for $100,000, at a 12.25 percent interest rate. That costs her $1,000 a month. On top of both payments are her taxes, which add up to another $6,000 each year.
NOW: The 36-year-old mother is in foreclosure and owes a year's worth of back taxes. She's hoping to do a short sale - where she would sell her home for less than she owes - but needs bank approval on the deal. She has sought help from the Long Island Housing Partnership in Hauppauge. She's hoping to rent an apartment and start over.