Risky Loans Help Build Ghost Town of New Homes

Along the streets of Far Rockaway, many recently built two- and three-family town houses sit waiting for even one family to move in. Some have boarded-up windows, while others have clumps of garbage in driveways that have never seen a car. Desperate developers hoping to cover their bets — and stem their losses — tape up both For Rent and For Sale signs inside windows that face nearly deserted streets.

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City Councilman James Sanders Jr. talking with constituents in southeast Queens. Mr. Sanders said his district has been hit hard by a credit and foreclosure crisis.

The same blocks were once home to sprawling single-family houses with wraparound porches. But during the superheated real estate market of just a few years ago, longtime residents sold out to developers who rapidly demolished the old to build rows of plain vanilla town houses sold, it seemed, to anyone who could sign a mortgage application.

But as the market cooled and credit got tighter, many of the new homes sat empty. On a few blocks, developers have built nothing but plywood walls to hide the weed-choked lots after the old houses were torn down.

“Folks just went crazy and got into the feeding frenzy,” said City Councilman James Sanders Jr., whose Far Rockaway office is wedged between undeveloped lots and mostly vacant town houses. “They thought money was going to come to everybody left, right and center. Irrational exuberance is what I call this.”

The empty homes and undeveloped lots, he said, are part of the unacknowledged effects of the larger credit and foreclosure crisis in minority neighborhoods, where subprime and predatory loans were common. Real estate values rose steadily, as did the optimism of aspiring first-time buyers, who entered into mortgages without fully understanding the terms of the loan or the responsibilities of ownership. When budgets got tight, they could always refinance, they were told.

Not anymore. Now, in large swaths of Mr. Sanders’s district in southeastern Queens, For Sale signs are as common as trees, as people try to bail out before losing what little equity remains in their homes. Similar scenes are found in central Brooklyn and the northeast Bronx, strongholds of minority homeowners whose fortunes have declined. While regulators have long been reluctant to rescue individuals they considered victims of their own greed or bad decisions, entire communities are now facing the consequences.

“Whole neighborhoods are wiped out, crime increases, the neighborhood’s reputation goes down, quality of life is undermined, and people can’t sell their houses,” said Susan Saegert, a professor at the Graduate Center of the City University of New York, who recently completed a study of homeowners facing foreclosure. “That has already happened in Ohio and the Rust Belt. And it is starting to happen in New York.”

This has not come as a surprise to housing policy analysts and advocates who have been warning about the disastrous consequences of the freewheeling subprime market. At least five years ago, they sounded alarms over the spike in foreclosures among elderly homeowners who had been persuaded to take out costly refinancing loans to do repairs or raise money for emergencies. More recently, they saw a surge of first-time buyers taking out 0,000 mortgages at unfavorable terms even though they earned only ,000 or less annually.

Sarah Ludwig, the executive director of the Neighborhood Economic Development Advocacy Project, said many people — first-time buyers who relied upon one-stop shops that provided a mortgage broker, appraiser and lawyer, and homeowners who refinanced their existing mortgages — were lured by offers of low monthly payments on adjustable rate loans. But those loans could become unaffordable once the interest rates reset, as is expected to happen in the coming months for many mortgages that began in 2005.

Ms. Ludwig’s group estimates that by year’s end, at least 14,700 homeowners in the city could be in default, mostly in minority neighborhoods, which she said were singled out for these loans.

“We have seen for the last 10 years a very serious problem with the concentration of high-cost loans, foreclosures and people losing their homes,” she said. “What is the toll of these loans?”

In many cases, when the true costs are revealed, the brokers who arranged the mortgages at unfavorable terms have long moved on with their fees, while the original lenders have already sold the loans on the secondary market to banks that used them to back securities. Increasingly, housing advocates have taken to task the big banks that scooped up these high-risk loans.

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