Foreclosure Fallout

Governor Paterson signed new foreclosure legislation into law today. While most commentators have focused on the foreclosure provisions, the law also amended provisions of the Banking Law restricting many practices which many analysts deem responsible for the "sub-prime" crisis.

The part of the bill that restricts foreclosures will certainly ease some of the problems caused by the large number of defaults which have been occurring. The new law requires additional notice and pre-foreclosure work-out efforts. It also calls for conferences after foreclosures begin to give defaulting borrowers every chance to maintain their homes.

The restrictions on lending practices will, however, lead to an almost complete loss of mortgage money for lower-income New Yorkers. There is no doubt that weakened underwriting standards contributed to increased defaults, however, those relaxed standards were encouraged by "advocates" for lower income borrowers who had been "left out" of the housing boom. Now lenders will shy away from any borrower without prime credit ratings. That is being called proper business practice, in today's situation, but 10-15 years ago, lenders sticking to strict underwriting standards were called red-liners and racists.

The law of unintended consequences has not been repealed. I remain concerned about the long-term impact on New York's economy.