(This piece was done as a capstone project in my senior year of college.)
In a sequestered area of Medford, New York, a neighborhood is riddled with “For Sale” signs. Dilapidated homes with vinyl siding peeling away, door handles hanging off their frames, and house numbers spray-painted on the front of the houses. From the street you can hear the sounds of children inside, some laughing and some crying. The driveway is overflowing with cars, despite the home being no more than three bedrooms, and it being 2:15pm on a Tuesday. This home is in foreclosure, and at some point in the future the family inside will likely be evicted. Dozens of homes within five miles will be in foreclosure in the coming months.
These scenes have played out all across New York in the last year, particularly in Suffolk County. The state and county have been outliers in the national trend of plummeting foreclosure rates. The rate of foreclosure and delinquency in the United States are at their lowest in levels in 10 years, according to real estate news publication Think Realty. While that trend holds true nationwide, six states have seen an increase in the number of foreclosures between 2016 and 2018. New York had the third highest increase in foreclosures during this period with a rate of 9%, being beaten only by Vermont with 27% and West Virginia with 33%, according to Attom Data Solutions.
“There’s no way they (foreclosure rates) can’t go up. People can’t hold on anymore,” said foreclosure attorney Catherine Laviano when asked about the excessive business she’s seen in people trying desperately to avoid foreclosure.
Homeowners come to attorneys like Mrs. Laviano when they’ve been served foreclosure notices by their mortgage lender, usually a bank, for failing to make their mortgage payments. They will typically request a mortgage modification, which functions as a “re-negotiation” of their mortgage contract, allowing them to set up a period of very low interest for several years, with interest increasing on a yearly basis. It allows people to try and catch up with their payments and prevent the banks from proceeding with the foreclosure process. Laviano has several clients that have defaulted several times and come to her for a second or even third mortgage modification.
When most of us think about foreclosure, we imagine after not making mortgage payments, the banks go up to a delinquent homeowner and kick them out of the house right then and there. They put signs on the windows and board up the doors and that’s that. This does happen in some states, but New York is what’s referred to as a “judicial state.” In a judicial state, the homeowner has a legal right to fight the foreclosure process and attempt to keep their home. Often they will go through mortgage modifications. A mortgage modification is essentially a re-negotiation of a mortgage contract to a lower interest rate for a period of time with the intent of making the loan more affordable. Sometimes they’ll declare bankruptcy. Often they will do both.
Laviano and dozens of other attorneys provide a necessary service to those struggling with keeping their homes. Often they’ll reach out for those services after their third missed payment. After the third missed payment, most mortgage lenders won’t allow the homeowner to pay any partial debt, it becomes all or nothing. If a homeowner owes $10,000 and they have $9,500 in their account, it doesn’t matter. The bank moves forward with foreclosure.
When the bank decides to move forward with foreclosure, they sue the homeowner, and the case goes to court. This begins an often lengthy process of dragging out the trial for as long as possible. Often, that involves the homeowner declaring bankruptcy. If the home is owned by a couple, one will declare bankruptcy to delay the trial and then the other will follow suit. In these cases homes can stay in the foreclosure anywhere from 3-7 years.
During this time the residents can live in the home, and no mortgage is paid until the case is settled or the homeowners are evicted. Some homeowners will rent out the the house in a last desperate attempt to save their home. Andrew Owad was one of the tenants that lived in a home that was being rented out in an attempt to save it.
“I think it started with a nasty divorce,” Mr. Owad said. “That was enough for them to nearly lose their home.”
POTENTIAL FOR PROFIT
While the rise in foreclosures has been a nightmare for homeowners and those in poor financial circumstances, house flippers have been swimming in a sea of cheap real estate and potential investments.
Kyle Clark is one of those making use of the lucrative situation. He is 22 years old. A tall and thin young man dressed in slightly baggy jeans a grey hoodie, he doesn’t quite have the look that comes to mind when you think “real estate shark.” He went to college for about a year before dropping out, deciding that school was never for him. His day job is at a printing company, but he started flipping houses for extra money three years ago. He is currently working on a house he bought in Mastic, one of the harder-hit neighborhoods in terms of foreclosure. It was sold at a bank auction for $230,000. It is expected to sell for around $400,000.
The house he is renovating is in shabby condition, with mold in the kitchen, antiquated windows, plumbing and electrical problems and in need of a cosmetic re-design. The two-floor home is fairly large compared to others in the area, but much of the inside is antiquated and isn’t up to Town of Brookhaven code. Despite the unsightly conditions, Clark says that this house is in the best condition of those he has purchased.
“I probably need to put around 70 to 80 thousand worth of work into the place, which is a lot but still nets me about 100 thousand in the end,” said Clark.
In the case of this home, the homeowners left the state several months after beginning to default on their mortgage. They had renters in the home when they left, and when the owner stopped paying their mortgage, the tenants stopped paying their rent. They lived in the house without paying rent for seven years, riding the wave of the foreclosure machine. After finally being evicted, it was repossessed by the bank and sold to Mr. Clark, though it wasn’t a simple purchase.
“There are usually around 10-15 people bidding on the same houses. Everyone from professional investors or people with extra money are jumping to invest,” Clark said.
While Clark stands to make a substantial amount of money from his investment, the seven people that lived in that home were forced to find a new place to live, just some of thousands in Suffolk County that will be evicted from their homes in the next several years.
THE “WHY” OF FORECLOSURE
The most significant cause for this regional rise in foreclosures is the cost of living on Long Island. The average cost for property taxes on a $400,000 home in Medford, NY is $8,876 annually. This is a rate of 2.219% of the home value. The national average is 1.211%. The statewide average for property tax is 1.65%, according to smartasset.com‘s property tax calculator.
Property taxes don’t seem to be getting any lower in New York. The average property tax has increased for the last three years, according to data taken by ATTOM Data Solutions.
The Long Island Housing Partnership is one of dozens of non-profit organizations set up in New York to aid in keeping homeowners in their homes as well as helping find affordable housing and providing counseling on first time home buyers. These groups have subsisted off of funding taken from the settlements from lawsuits involving the nations largest banks after the 2008 housing crisis.