Reducing home mortgage foreclosures in a predatory lending environment: a case study of a mid-sized city in Central New York.

 
Introduction 
  I. Predatory Lending: Features and Tactics 
 
 II. Syracuse Case Study 
     A. Neighborhood Characteristics/Area Examined 
     B. Bank Performance 
        1. Conventional Mortgage Lending 
        2. Subprime Mortgage Lending 
     C. Foreclosure Findings 
     D. Education Program Intervention 
 
III. Recent Federal Legislation 
     A. Education Is Key 
 
Conclusion 
 
Appendix A: Map of the SUN Area of Study 

INTRODUCTION

As the new millennium was ushered in, home sales exploded. The year 2000 proved to be a banner year for home purchases, and by the end of 2004 more Americans owned homes than at any other time in history. (1) However, this positive momentum soon took a turn for the worse, starting in the summer of 2004, when short-term interest rates rose dramatically. (2) The housing bubble began to burst. (3) Almost immediately, home prices fell, (4) and subsequently home sales have slowed significantly. (5) According to the National Association of Realtors, as of June 2008, existing home sales declined 15.5% over the year before and dropped 2.6% from the previous month. (6) Concurrently, interest rates continued to rise and now many people with variable-rate mortgages are unable to make their mortgage payments. (7) Events such as a housing bubble and burst, plunging home values, declining home sales, and increasing interest rates each has the potential to amplify loan defaults. Further, when combined with nefarious tactics of predatory lenders, loan defaults quickly become mortgage foreclosures.

In areas where predatory lending practices occur, the impact is not only devastating to the families involved but also poses a larger threat to the community as a whole because the homes targeted typically remain vacant for prolonged periods of time and are poorly maintained. Uninhabited homes are breeding grounds for crime, which fosters neighborhood instability, in part because businesses are reluctant to locate to these areas. (8)

Part I of this Article illustrates the common and growing problem of predatory lending, especially in low-income, inner-city, neighborhoods and demonstrates why we should take steps to change current practices. Part II of this Article presents a case study of communities in Syracuse, New York; documents mortgage lending activities and foreclosure patterns in central New York; and reinforces the need for continued education throughout the home-buying process. Although there are a number of studies that focus on predatory lending in large urban areas and one study with a focus on rural communities, this study provides additional novel insight into this pervasive problem by examining a smaller urban area, and describing a program that reduced foreclosures in low-income urban neighborhoods. Part II also identifies red flags so that those involved in the eradication of predatory lending will be alerted and can take corrective action. Part III discusses recent federal legislation to strengthen mortgage lending guidelines and reduce foreclosures.

I. PREDATORY LENDING: FEATURES AND TACTICS

Predatory lending is a complicated issue currently debated among academics, real estate professionals, legislators, the Federal Reserve, and consumers. Although there is no consensus on a single definition of predatory lending, several common features are recognized. Predatory lending typically entails unfair lending terms and tactics which limit or distort information, and in some instances involve outfight deceit and fraud. (9) It strips potential or current homeowners of their most valuable asset and is characterized by pressure tactics, false advertising, exorbitant fees, and inordinately high interest rates.