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Foreclosure moratorium weighed by legislators Penalties eyed for subprime abuse

In response to the surge in subprime loan defaults, state legislators are considering a six-month moratorium on mortgage foreclosures and stiffer penalties on brokers who fraudulently complete borrowers' applications.

State Sen. Jeffrey D. Klein, D-Bronx, said there could be 28,000 foreclosures in New York this year just from loans originated in 2005. That assumes 21 percent of subprime loans are foreclosed and is based on research by the Center for Responsible Lending, a Durham, N.C., group opposing what it sees as abusive lending practices.

"Loans that home buyers took a few years ago are now being reset with higher rates -- 9.9 percent and 10 percent -- and people who can't afford the payments are losing their home," Klein said.

Both Democratic and Republican lawmakers said they are looking at possible ways to deal with effects of the subprime defaults. Legislative hearings are planned, and Gov. Eliot Spitzer's administration is considering ways to help affected homeowners find refinancing, Klein said.

The parts of the state with the most subprime borrowers vulnerable to foreclosure are Long Island, New York City and White Plains in Westchester County, Klein said, based on research he commissioned from the center.

Subprime borrowers are those whose low income or weak credit history lead lenders to require higher interest rates than better-qualified borrowers.

Many subprime borrowers are victims of fraud by mortgage brokers who filled out applications with exaggerated incomes so the home buyer would be eligible, Klein said. Other borrowers weren't well enough informed about their loan to evaluate whether they could afford it.

"I see potential for class-action lawsuits here," said Klein, a lawyer. "I'm looking into it," on a pro bono basis, he said.

Without shutting the money spigot to low-income home buyers entirely, "we have to stop the practice of determining eligibility for subprime loans without evaluating the borrowers' credit," Klein said.

A bill he introduced last week would require subprime lenders to verify borrowers' income. Violations could eliminate lenders' rights to collect payments.

In addition to a six-month moratorium on foreclosures, Klein said other possible legislation could allow the State of New York Mortgage Agency to create a refinancing program for subprime loans without exposing itself to too much loss.

He said Spitzer's staff is considering an expanded role for the state mortgage agency. Officials in the governor's office weren't immediately available for comment.

The state could also provide more funds to groups who help educate potential home buyers, Klein said.

Republicans in the State Senate "are looking at stronger penalties on brokers who fraudulently complete loan applications," said Mark Hansen, a spokesman for Senate Majority Leader Joseph Bruno.

Klein said Democratic members of the Senate Banking Committee will hold hearings on subprime lending around the state to assess the problems and consider remedies.

Other measures, such as limiting loans whose interest rates start low and then increase, may require federal legislation, Klein said.

The Assembly is scheduling a series of public hearings on subprime lending to start May 29 in Albany. "We want to determine the nature of the problem and then look at what we can do to reduce the distress on New York homeowners and their communities," said Sisa Moyo, a spokeswoman for Assembly Speaker Sheldon Silver, D-Manhattan.

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