Superintendent Neiman Delivers Keynote to the Third HALT Campaign Summit
Held in Farmingdale, NY
October 17 , 2007
Good morning. I’m Richard H. Neiman, the Superintendent of Banks for New York and I’m pleased to welcome you here today. This is our third HALT summit to “Halt Abusive Lending Transactions” and address the consequences of the subprime situation.
Back in March, Governor Spitzer formed the interagency HALT Task Force, which I chair, to unite the efforts of all state agencies that relate to the mortgage industry. I’m pleased that we have members of the Governor’s Task Force here today:
- Marian Zucker, Executive Vice President at SONYMA, and;
- Daniel Shapiro , First Deputy from the Department of State.
They are both speaking on our government panel, and their participation is an example of the Task Force’s accessibility. Through the HALT summits, the Task Force is reaching out at the grassroots level. We want to identify avenues for cooperation between the local community, industry and government. Working together, we can develop practical solutions to the subprime issue and the rising rate of foreclosures.
There are two areas I’d like to focus on today:
- The impact that the subprime situation is having on Long Island, and;
- The role of government in addressing the problem.
We have all been reading and hearing the recent news coverage on the situation around the country. I want to sharpen that focus and talk first about the specifics for New York.
A. THE IMPACT ON LONG ISLAND
Across the state, we’re seeing the negative effects of undisciplined- and even fraudulent- mortgage lending. We all recognize the universal causes, such as loans being made without due regard for the borrower’s ability to pay. But we’ve also found precipitating factors at the local level. This is the kind of feedback we’re gathering at our HALT summits:
- At the first Summit in New York City, a concern was the relative lack of availability for prime credit choices in minority areas. Where borrowers may have been inappropriately steered into higher-cost alternatives.
- At our second HALT Summit in Buffalo, destructive property flipping was a major issue. Population shifts have left large numbers of units vacant, which deflated property values and attracted speculative investors.
The local situation here in Long Island is different from New York City and Buffalo. Long Island has credit choices and vacant properties are the exception. But what Long Island does have in common with these two other areas of the state is a soaring rate of foreclosure filings. So I think it’s appropriate that our third Summit is being held on Long Island.
Nassau and Suffolk counties have been greatly impacted by the subprime situation. A Joint Economic Committee report from Congress identified Nassau/Suffolk as the metro area with the second highest rate of foreclosure filings- and that rank is not just for the state, but for the entire Northeast region. With one out of every 69 households entering the foreclosure process, clearly there are urgent local issues right here on Long Island.
But this community is an extremely appealing place to live and work. And ironically, those very attractions may have conspired to drive home prices out of reach for many working families. Long Island was caught up in the housing bubble, where real estate values here were rising at an unprecedented rate. Many consumers were struggling to save for a down payment to purchase a home, or needed to cover higher cost of living expenses. Lenders offering artificially low initial payments with no money down recognized a ripe market. Then as housing appreciation began to cool, there was no longer a ready source of equity to sustain repeated refinancing. So when adjustable rate loans reset, overburdened consumers may have found themselves with an unaffordable loan and no equity to fall back on.
The situation is sobering- but solutions do exist. Hard facts shouldn’t cause us to become resigned or to think that the problem is too large to tackle. It is too complex for any one group to manage alone, however. And that’s why the Banking Department and the Governor’s HALT Task Force are combining our government resources and inviting you as community and industry leaders to partner with us.
B. COOPERATION AND THE ROLE OF GOVERNMENT
The dialogue in this Summit today is an example of that partnership. And it is just one of our responsibilities as regulators- to serve in a “convening” or “facilitating” role and bring parties together to identify issues and develop solutions. Yet some are still debating whether there is a role for government in solving the potential foreclosure crisis, or whether consumers and market forces should weather the storm on their own. Well, I for one firmly believe that government has a critical role to play. When government is engaged and supportive of positive moves made by the private sector, we’re more likely to achieve lasting solutions. Like I said, it’s going to take all of us working together to spare consumers, communities, and our economy from the devastating effects of foreclosures.
In view of the media reports I mentioned earlier, there has been a lot of finger pointing. I think we should all stop focusing our energy on finding someone to blame. Everyone in this industry contributed to the problem to some extent. The fact that the origins of the problem are diverse is part of the reason it’s so challenging to resolve. Part of the solution is recognizing where the process went awry. It touches all market participants.
- It’s the mortgage loan originators, who have an economic incentive to put customers into unaffordable loans.
- It’s the mortgage brokers, who don’t provide sufficient supervision to the MLO’s who work for them.
- It’s the mortgage bankers who know they’re going to securitize all the mortgages they fund, and who don’t underwrite as if they were going to hold the loans for 30 years.
- It’s the investment bankers, who securitize mortgage loans and believe that disclosure cures all.
- It’s the secondary market purchasers who are reaching for yield and ignore the risk of the assets they buy.
- It’s the rating agencies, who should have figured out that the underwriting standards had become more lax.
- Investors- worldwide- simply clambered for more.
- And regulators had their own issues- with uneven enforcement among the states, and with federal regulators thwarting state consumer protection efforts through preemption.
It’s instructive to know how the process failed. Not for the purposes of assigning blame, however, but in order to pinpoint where changes need to be made. And to identify where supportive government intervention would be constructive, not intrusive.
There are many ways in which regulators can offer that support and protect consumers. I could speak about our new guidance for mortgage lenders. That guidance may serve as a model for minimum national standards which individual states could exceed. Or I could discuss the efforts to increase state-federal regulatory cooperation through pilot programs for interagency examinations. There are a variety of initiatives underway, some of which I’ve addressed in other settings. But there are two other current examples that I would like to cover in detail instead:
- First, state regulators are heightening standards and promoting uniformity through the development of a nationwide licensing system.
- And second, regulators are acting as facilitators in encouraging the private sector to offer loan modifications.
Success in both of these endeavors depends upon the same process: Cooperation. We have to work together- as community groups, industry, and government- in order to achieve these goals.
1. NATIONWIDE LICENSING SYSTEM
I’d like to start with the state-run nationwide licensing system that New York will be participating in. This system will go a long way toward closing the gaps and harmonizing state enforcement of mortgage bankers and brokers.
New York was ahead of the curve on this issue. We passed our own mortgage loan originators’ law early this year that goes into effect in January. Under the new law, the Department will be responsible for enrolling every loan originator, every employee, and not just the mortgage firms.
The timing of our new law dovetailed with the establishment of a national licensing system under the aegis of the Conference of State Bank Supervisors.
Perhaps most importantly of all, the new system will help to curb mortgage abuse. Fraudsters who run afoul of the laws in one state cannot evade enforcement and reopen shop, just by migrating across state lines.
This new multi-state system obviates the need for developing any cumbersome and expensive new federal bureaucracy. But I do think it’s appropriate for a federal solution to kick in as a backup measure. For example, if any individual state found itself unable to support its participation in the CSBS system.
In addition to promoting heightened regulatory standards, the role of the private sector in cooperating with government is an idea I’d like to explore further. In the time remaining, I’d like to leave you with food for thought on an additional way in which the future response to the subprime issue could evolve: through creative modification solutions.
2. LOAN MODIFICATIONS
The pressing need for loan modifications is a perfect example of a solution that needs private sector collaboration in order to succeed. As I said, no one wins when a mortgage goes into foreclosure. So it is in the best interests of all parties concerned to find a viable alternative by offering a financially responsible workout whenever possible. I’m pleased that a number of the initial tax and accounting obstacles to loan modifications have been resolved or mitigated already. In order for modifications to help borrowers in distress and stabilize neighborhoods, however, time is still of the essence.
Because one drawback to modifying loans on an individual basis is that it’s a time-consuming process. And thousands of adjustable rate subprime loans will reset in waves over the coming months and even for the next few years. Leaving that bulge of potentially unaffordable loans unresolved is a recipe for additional consumer harm. And it prolongs market uncertainty. That’s not a good outcome, even though modifications are a good solution. Creative thinking is needed to overcome this on a practical level.
We want help to reach consumers before they lose their home or destroy their credit rating. It’s important to increase the amount of consumer contact. Borrowers should be given ample notice of rate resets. And they should be contacted early in the default process. Active monitoring of consumer complaints is also part of a proactive intervention strategy. Consumers and lenders both benefit when issues are resolved promptly, before the account is turned over for collections.
We’ve been reaching out to the industry and in particular to loan servicers to learn more about their plans to reach out and modify unaffordable loans. The Department is participating in a multi-state working group of state banking departments and attorneys general to engage in that dialogue. The group recently met in Chicago with the nation’s top servicers. The answer we heard is that they are being proactive in offering modifications. We’ve asked for data to support that claim. We want to be sure there’s no disconnect between what we’re hearing from servicers and what we’re seeing in practice. Moody’s recently reported that only 1% of these loans have been modified. If that report is accurate, the percentage of borrowers in need of help remains potentially overwhelming.
That’s why I was encouraged to see the Chairman of the FDIC take the bold step of suggesting that loans be modified on a mass scale. To convert the introductory rate to a fixed rate for owner-occupied borrowers who are current. To abandon laborious one-at-a-time restructurings and adopt a more comprehensive approach. This suggestion has real merit and deserves to be explored further. Implementation of this core idea could be coupled with a “triage” strategy to sort loans into basic categories, for large-scale yet customized treatment. There may be solutions appropriate for broad classes of subprime borrowers that could approximate ability to pay. Considering for example:
- whether the loan is current, or the stage of delinquency;
- the borrower’s credit score;
- the percentage of payment increase; and
- whether the initial interest rate is above or below market.
In my view, mass modifications can be made under appropriate circumstances.
Is there a way to make that a reality? To offer:
- the right modifications
- to the right borrowers
- at the right time?
I believe there is, but it will take both creativity and the kind of cooperation among stakeholders that we’re here to foster at the HALT summits.
A large scale solution doesn’t have to involve a public fund, like the Resolution Trust Corporation that responded to the savings and loan crisis. There are intriguing and somewhat disturbing similarities between that past event and the current turmoil in the subprime sector. But the problems and their respective solutions are distinguishable.
In the case of the subprime situation, there is ample room for a private sector response. You have probably seen reports this week about a private conduit fund to be set up by some large national banks to help stabilize the asset backed commercial paper market. We are watching this very closely. However useful, such a fund will not directly address the immediate issues faced by current subprime borrowers. This immediate concern also presents an opportunity for a similarly creative response from the private sector. Perhaps in the form of a fund that could unite capital from philanthropic organizations and private investors to provide emergency mortgage assistance.
I’d certainly like to hear your reaction to these ideas and your thoughts on other potential avenues for action.
That’s why we’re here today, to create a space where we can envision new ways to combat an issue that affects us all: “the rising foreclosure rates in New York that are devastating households and eroding our communities”.
But if we cooperate and pool the resources and brainpower that’s assembled here today, I have no doubt that we will respond with the kind of innovative and efficient approach that’s so characteristic of New Yorkers.