Six years away from paying off his mortgage, Victor Ortiz of Rochester was ready to refinance.
He knew what he wanted: an introductory interest rate of about 2.75 percent and an escrow account for his taxes and insurance.
But Ortiz had experienced bankruptcy in the past, so he believed he couldn’t get a traditional mortgage.
That’s how he was drawn to a subprime mortgage broker. After a couple weeks of work, the broker called him with a deal that sounded too good to be true.
Turns out, it was.
At the closing, his broker pressured him into signing a 30-year mortgage — which did not include taxes and insurance — at a rate of 8.5 percent, Ortiz said. The broker said there was a paperwork mistake.
“I didn’t like that at all, but the broker kept saying that everything was cool,” Ortiz said.
After the closing, Ortiz made numerous calls to get his loan rate corrected, but his broker had no answers and eventually stopped returning his calls. Ortiz now worries he will default on his mortgage, so he is working with Rebecca Case-Grammatico, a consumer-law attorney with the Rochester nonprofit Empire Justice Center. She warns that cases like that of Ortiz can be difficult to bring to court.
In May, Ortiz told his story to statewide media in Albany as consumer advocates press for new subprime regulations. A Catholic who has attended St. Francis Xavier and Holy Redeemer parishes in Rochester, he said he wants to make sure others aren’t misled like he was.
According to lenders, a subprime loan is one made to a borrower who has less than an optimal credit rating, whether because of income, a bankruptcy, owning a business, late or missed payments, or having a lot of credit in use. Sometimes subprime lenders charge exorbitant fees, lie on loan applications or prey on a borrower’s unfamiliarity with mortgage lending, advocates say.
“It’s something that definitely requires a little more questioning for a prospective borrower,” said Tracy A. Martinez, mortgage manager for Family First of NY Federal Credit Union, which she said does not do a lot of subprime lending.
Many subprime loans are adjustable-rate mortgages with low initial monthly payments. Borrowers should be able to afford the payments if rates go up, Martinez said.
“As consumers, we have a certain amount of accountability and responsibility,” she said.
State officials are predicting many more foreclosures when rates reset on mortgages originated in 2005 and 2006. Speaking to state Assembly committees in May, Richard H. Nieman, superintendent of the state Banking Department, said foreclosures in 2006 increased by 40 percent, putting about 50,000 New York homes in some stage of foreclosure.
A wave of bankruptcies among national subprime loan originators may indicate a widespread problem, said Ruhi Maker, an Empire Justice Center attorney. The lenders went bankrupt after regulators forced them to take back bad subprime loans that were sold as securities, she said.
Maker said 20 percent of loans in Rochester are high-cost loans, but it’s unclear how many are predatory.
“It’s really something we need to care about,” Maker said. “When suddenly all these homes are in foreclosure, it brings down housing prices.”
While acknowledging that nonpredatory subprime loans can help people become homeowners, consumer advocates recommend people educate themselves, so they don’t fall victim to predatory lenders.
Affordable-housing agencies are better alternatives to subprime lenders, said Rosie Zifchock, housing program manager with Better Housing for Tompkins County, which offers downpayment assistance.
“We try to convince people that (subprime loans are) not the best way to go,” Zifchock said.
New York tightened lending regulations in April of 2003, but problems have cropped up with new mortgage products such as loans that allow a minimum repayment option, which subtracts equity from a borrower’s home, Case-Grammatico said.
“Not all mortgage brokers are bad,” she said. “But a lot of brokers are taking advantage of the system in that they don’t have to get the best price for borrowers.”
New Yorkers for Responsible Lending wants loan originators to make sure borrowers can afford a loan if its rates reset; mortgage brokers to tell the truth about loan terms and to work to get the best rate possible; and loan-payment estimates to include any applicable escrow. Similar laws and $300 million for nonprofit refinancing programs have been proposed at the federal level.
A local mortgage broker said a few bad brokers have hurt the industry. Whereas local mortgage brokers are governed by strict state and federal laws, some national brokers have found legal loopholes and a lax regulatory climate, according to Michael Swanson, president of R&M Mortgage Inc. in Rochester, one of two certified residential-mortgage specialists in the state. Many of the areas hardest hit by the subprime fallout are those with inflated house prices and slowing sales, such as California and Florida, he said.
New York officials have promised action. Gov. Eliot Spitzer has appointed a task force on predatory lending that will meet June 28 in Buffalo. The group aims to help homeowners at risk of foreclosure, create education programs, propose changes to laws and encourage law enforcement to crack down on predatory lenders or brokers. The state’s mortgage agency is also creating a refinancing option for low- and moderate-income borrowers.
Federal data show minority communities are hardest hit by abusive lending. In March, the Empire Justice Center released a study that showed nearly nine out of 10 prime mortgages in Rochester in 2005 went to white borrowers. Among loans made to black and Hispanic homebuyers, 38 percent were high cost, while fewer than 14 percent to white borrowers were high cost.
“Do I believe (subprime) lenders are targeting (minorities)? Absolutely,” Case-Grammatico said.
One lender settled allegations of discrimination. In December, the state attorney general’s office got lender Countrywide Loans to agree to monitoring, compensation and financial education due to a high rate of subprime lending to minorities.
Broker Swanson said he does not discriminate. The same goes for local credit unions, officials say.
“I have been on the loan committee for a number of years, and we’ve made a lot of loans that the average bank would have turned down,” said John Stich, marketing director for St. Pius X Federal Credit Union in Chili, which in October of 2006 merged with the Rochester-based Holy Family Parish Credit Union. “It’s because of the attitude — the Christian attitude — that we have.”
Martinez, who attends St. Rita Parish in Webster, said she has never seen an instance lending discrimination. She did note that minority borrowers might have a hard time getting prime loans due to a lack of credit history if they rent apartments or buy cars with cash.
“They have to prove themselves to be eligible for a better rate,” she said.
Martinez suggested borrowers make good-faith payments and be honest about their problems.
“The biggest thing they can do is to be up front with their lender,” Martinez said.
EDITOR’S NOTE: For help, call the U.S. Department of Housing and Urban Development’s hot line at 800/569-4287 or TDD 800/877-8339.