NYC Housing Advocates Challenge HUD Practice Of Peddling Delinquent FHA-Insured Mortgages To Hedge Funds, Private Equity Outfits; Claim Recently-Filed Lawsuit Will Expose Historic Racism In Housing Policy, Putting Black Homeowners At Greater Foreclosure Risk

In New York City, The New York Times reports:

• For years, the federal government avoided insuring mortgages in black neighborhoods, a practice known as redlining that exacerbated racial divides throughout America’s cities.
  
  Redlining has long been outlawed, but in New York City, the federal government is again disproportionately hurting black homeowners, according to a federal lawsuit filed by a nonprofit that represents low-income New Yorkers. This time, the suit says, the government is fueling racial disparities not through its lending policies but in how it handles foreclosures.
  
  Since the financial crisis pushed thousands of homeowners in New York and across the country into foreclosure, the federal Department of Housing and Urban Development has been selling insured delinquent mortgages to private investors, typically hedge funds and private equity funds, which then collect monthly payments.
  
  The investors, according to the lawsuit filed against the housing agency and a large private equity firm, Lone Star Funds, provide fewer protections to homeowners who fall behind on their mortgage payments than the federal government does, leading to higher rates of foreclosure.
  
  Most of the mortgages being sold to these investors are in predominantly black neighborhoods like in southeast Queens and the Canarsie section of Brooklyn. From 2012 to 2014, more than 61 percent of the government-backed mortgages sold to investors were in predominantly black neighborhoods, according to the lawsuit.
  
  Meanwhile, only about one-third of federally insured mortgages over all were issued in those same neighborhoods.
  
  Lawyers for the homeowners who filed the lawsuit say the concentration of the sales is putting black homeowners at greater risk of foreclosure and threatening to undermine decades of progress toward increasing homeownership in these neighborhoods.
  
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  The lawsuit, filed [last week] by MFY Legal Services(1) and the law firm Emery Celli Brinckerhoff & Abady in United States District Court in Brooklyn, is the latest tussle over how the government turned to Wall Street to help sort through the wreckage of the 2008 financial crisis. The mortgage sales are part of an effort by HUD to reduce the burden on its insurance fund that backstops home loans to lower-income borrowers who have gone into default.
  
  “This lawsuit exposes that the historic racism that has kept our communities segregated, that has blocked African-Americans from sustainable homeownership, and that increases the racial wealth gap in this country is still alive and well,” said Elizabeth Lynch, a supervising attorney at MFY Legal Services.
  
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  The battle over the mortgage sales has exposed a conundrum that the housing agency faces over its Federal Housing Administration mortgage program, which started in the 1930s. By selling the mortgages to the highest bidder — in this case private equity firms — the agency can bolster its insurance fund that had been eroded by the flood of foreclosures in the immediate aftermath of the housing crisis. The more flush the insurance fund, the more mortgages to lower-income borrowers the department can backstop.
  
  But housing advocates say that the agency is contradicting its mission by selling mortgages to investors that they say are pushing homeowners closer to foreclosure with loan modifications that offer little relief.
  
  In some cases, the modifications can leave borrowers in even more financial distress. For example, according to the lawsuit, the terms of one typical offer of relief from Lone Star’s servicing arm require a large balloon payment five years after the modification that can, lawyers say, significantly increase a homeowner’s mortgage costs.
  
  Another feature of that same offer allows borrowers to pay only interest on their loans, leaving them with a large unpaid balance.
  
  Ultimately, advocates worry that investment firms will be able to take possession of more houses across New York City, one of the nation’s hottest real estate markets, where virtually every neighborhood is rapidly changing through gentrification.

For more, see Sale of Federal Mortgages to Investors Puts Greater Burden on Blacks, Suit Says.

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(1) MFY Legal Services is a non-profit, public interest law firm that, among other things, provides direct civil legal assistance for residents of New York City who are low-income, disenfranchised or have disabilities.