"Second chance mortgages" for New York state residents who have been turned down by primary lenders will be offered starting next month from a pooled fund now being set up by mutual savings banks. This is believed to be the first such statewide mortgage fund in the country.
Unlike statewide automobile insurance pools that must provide coverage (usually at high rates) for bad drivers refused by private insurance companies, the mortgage pool is not intended to guarantee home loans for those whose original applications were not approved by commercial or savings banks. Nor is it aimed at high risk customers.
Officially known as a mortgage review fund, it is being established to help eliminate "redlining" -- the practice of refusing to make loans in certain areas -- by lenders. The second change mortgages are sold to otherwise credit-worthy persons who happen to live in -- or want to move into --decaying urban areas. Speculators will be excluded.
To date 44 out of the 118 mutual savings banks in New York state have pledged to the pool one tenth of one per cent of their assets, for a total of $30 million. The goal is $50 million.
The second chance mortgage works like this: An applicant's request is first reviewed by one of the seven regional boards in the state. The board consist of six members, including three public representatives and three bankers. If a board approves the application, it is referred to the original lender or other savings banks in the same area with a recommendation that the loan be granted.
Thus far, the process closely resembles that of mortgage review boards in a number of other cities, including Milwaukee, Boston, Pittsburgh and Chicago.
In this area, the Metropolitan Washington Savings and Loan League is talking about establishing a mortgage review board, though not a pool. A mortgage pool is not only unnecessary, league president Dewitt T. Hartwell said, but would be costly to set up and administer, and might get its members into higher risk mortgages.
The differences between New York's plan and those of other cities is up-front money.
"We are putting down cold cash to produce credibility," said Vincent J. Quinn, chairman of the Brooklyn Savings Bank.
When an applicant is favorably reviewed by the New York board, but still turned down by savings banks, he is then referred to a committee of 10 officials of the savings banks that set up the pool. If the committee approves the loan, it is granted from the pooled funds.
The terms, set by the committee, must not exceed current market rates. Mortgages will be administered by the Institutional Securities Corp.
According to Quinn, the mortgage review fund is patterned after that of the Bedford-Stuyvesant Restoration Corp., which operates in a largely black and low income area of Brooklyn. In the first 10 years of the nonprofit corporation's existence, a coalition of 30 banks and nine insurance companies have generated more than 1,110 loans totalling more than $21 million to residents of the area. The foreclosure rate has been less than 1 per cent.
On the other hand, Quinn notes that only about 25 per cent of the amount put up by commercial and savings banks was ever used because there were not enough qualified applicants.
Supporters of the New York state fund anticipate that it will be able to place a higher percentage of its funds than the neighborhood corporation, but critics are skeptical. Writing in National Thrift News, editor Stan Strachan expressed a view held by a number of those interviewed: "The new 'review' idea could, of course, work too well," he said. "If the second chance organizations granted a great number of mortgages to individuals that previously were refused, charges of discrimination might increase. And, if a lot of loans were emanating from these sources, lenders might be too quick to say no, rationalizing that the applicant will get another hearing."