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Speech
Superintendent Neiman Testifies Before the City of New York Committees on Housing & Buildings and Consumers Affairs on the Scope of Subprime Lending and Mortgage Foreclosure Crisis in New York City


November 20 , 2007

TESTIMONY OF
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS

On behalf of
THE NEW YORK STATE BANKING DEPARTMENT

On
“SCOPE OF SUBPRIME LENDING AND MORTGAGE FORECLOSURE CRISIS
IN NEW YORK CITY”

Before the
COMMITTEE ON HOUSING AND BUILDINGS
COMMITTEE ON CONSUMER AFFAIRS

THE COUNCIL OF THE CITY OF NEW YORK
November 20, 2007, 11:00 a.m.

Good morning. Chairman Dilan, Chairman Comrie, and distinguished members of the Committees: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today, and to present an overview of the Department’s response to the subprime issue and the escalating foreclosure rates across the City.     I am pleased that the Committees have chosen to hold this hearing to address this foreclosure crisis, and we share your concern that our residents be given every opportunity to avoid the personal and financial tragedy of losing their homes.

My name is Richard H. Neiman, and I serve as the Superintendent of Banks. The Department is the largest state banking regulator in the country, overseeing approximately 300 state-chartered depository institutions and 3,300 state-licensed non-depository institutions including mortgage brokers, mortgage bankers, check cashers, money transmitters and budget planners. The total assets of the depository institutions under supervision exceed $1.8 trillion.

The subprime mortgage crisis has been a primary focus for me since my appointment as Superintendent earlier this year, and it is a top priority for the administration as well.  I also serve as the Chairman of Governor Spitzer’s interagency HALT Task Force to “Halt Abusive Lending Transactions.”  Back in March, the Governor formed the Task Force to unite the efforts of all the state agencies and departments related to the mortgage industry.  The subprime problem is complex, and effective solutions require cooperation across many levels of government and among government, community groups and industry.

There are two areas I would like to focus on in my testimony today:

  1. The impact that the subprime situation is having on New York City, and;
  1. The role of state government in addressing the problem.

A. THE IMPACT ON NEW YORK CITY
It was immediately evident to the Task Force that areas of the state are being disproportionately affected. Through day-long HALT summits that we have been holding across the state, bringing together community groups, industry leaders, and government, we have identified regional challenges facing New Yorkers. Three summits have already been held in New York City, Buffalo, and Long Island.  Each area we visited is experiencing the crisis in unique ways, whether it is steering and the lack of traditional credit choices in minority neighborhoods in New York City, the vacant housing and property flipping in Buffalo, or the high housing costs on Long Island.

We chose to hold the first event in New York City because the city leads the state in foreclosure filings.  In our rank of counties, the Bronx, Queens and Brooklyn are the top three counties for 1-4 family homes entering the foreclosure process. The filing rate in these boroughs is more than double the state average.

Rank

County

Percent of 1-4 family properties
with a foreclosure filing,
based on the number of owner-occupied units with a mortgage

1

Bronx

2.53%

2

Queens

2.46%

3

Kings

2.45%

4

Niagara

1.92%

5

Monroe

1.46%

6

Putnam

1.45%

7

Richmond

1.38%

8

Rockland

1.29%

9

Nassau

1.13%

10

Westchester

1.09%

 

New York State

1.04%

The number of 1-4 family foreclosure filings for 2007 is as of September 30 (source: RealtyTrac).
The number of owner-occupied units with a mortgage is for 2006 (source: Census Bureau).

We are also concerned that minority communities are paying more for credit and are being targeted for nontraditional and higher-cost products. Our first HALT report to the Governor highlighted this problem, and analyzed the distribution of higher-cost loans under the Home Mortgage Disclosure Act. While there may be credit explanations for these findings, the disparity is clear and disturbing. In Brooklyn, for example, borrowers in heavily minority neighborhoods receive higher-cost loans at a rate of more than 3 to 1, when compared to those in non-minority neighborhoods.   

Location

Number of higher-cost loans in a minority area for every one higher-cost loan made in a
non-minority area

Bronx

2.52

Kings

3.21

New York

6.10

Queens

2.94

Richmond

2.21

New York State

2.20

These statistics are sobering, and we share the council’s sense of urgency in developing an integrated response both to help individual borrowers and to stabilize our communities. 

B. THE ROLE OF GOVERNMENT
A problem of this magnitude requires a multi-pronged approach and there are a variety of government initiatives underway, some of which I’ve addressed in other settings. While there is still much work to be done, the Task Force and the Department have been proactive in helping consumers to weather the turmoil in the mortgage market.

In the brief time this morning, I would like to offer five examples that are representative of initiatives in the following areas: outreach, loan programs, grants, enforcement, and legislation.

1.  Outreach
First, the Task Force has been engaged in outreach by holding day-long HALT summits. We plan to continue hosting these summits, and I am interested in proposals from local government and nonprofits on ways to expand this effort to continue reaching out at the grassroots level to contact homeowners in distress. An additional effort in that regard has been our participation in the public service ad campaign by NeighborWorks America, which includes a consumer helpline.

With the anticipated high volume of calls, additional resources will be needed and I also commend New York City government for their outreach through the PACE initiative and the 311 hotline. I am in conversation with Commissioner Donovan from the Department of Housing Preservation and Development on the PACE program, to consider features that could be exported at the state level. I would also like to offer the Banking Department’s support in follow-up efforts and coordinated outreach.

2. Loan Programs 
Second, through SONYMA, the Task Force has developed new loan programs that provide affordable alternatives to the unsustainable nontraditional mortgages that have flooded the market in recent years. In May, SONYMA began offering a 40-year fixed rate loan, which offers the low monthly payment of the longer term with the security of a predictable monthly payment. And in July, SONYMA introduced the $100 million “Keep the Dream” refinance program, for eligible subprime borrowers facing a mortgage hardship.

One aspect of the loan program effort has been to encourage lenders and servicers to offer fiscally responsible loan modifications. In May, we issued a guidance letter encouraging supervised institutions to work with mortgage borrowers in trouble. The Department is also 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, and we’ve asked for data to support their claims that modifications are happening.

A drawback to modifying loans on an individual basis, however, is that it is 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 disaster for consumers.   We want help to reach borrowers before they lose their home or destroy their credit rating.  For this reason, a tiered and systemic approach to modifications may be necessary. While being mindful of legal, tax, and accounting restrictions, there may be room to streamline the process. For example, by identifying similarly-situated borrowers who may be eligible for one of several standard modification options.

3. Grants 
Third, in support of “Keep the Dream,” SONYMA dedicated $250,000 in grants to fund related consumer counseling. The Division of Housing and Community Renewal also made awards to nonprofits of $388,000 for counseling services. These existing grants represent a substantial investment already, and another major commitment of resources is planned.

Two weeks ago, Governor Spitzer announced that a $2 million grant program with a matching feature has been created to provide ongoing financial support for counseling groups and legal aid societies for consumer services. As caseloads have grown, the sustained ability of these agencies to respond to the increasing need is a critical issue. The new grant money will help to ensure that community groups have the tools and training they need. The funds are being allocated from settlement funds recouped from prior enforcement actions by the Department, and I consider this to be a most appropriate use of those funds.

4. Supervision and enforcement
In our fourth action area of enforcement, we’ve heightened the standards that apply to our supervised institutions, as well as strengthened the processes we use to ensure compliance.

In terms of heightened standards, we have issued new guidance on nontraditional and subprime mortgage lending directed towards our non-depository mortgage bankers and brokers. Developed in cooperation with the Conference of State Bank Supervisors, this guidance addresses the lack of underwriting discipline that has left so may consumers saddled with unaffordable loans. It contains provisions for documenting and calculating a borrower’s ability to pay, especially at the fully indexed rate, not the introductory interest rate.

On the depository side, we realize that the banks we regulate, while not the main originators of subprime loans, may be indirectly involved through their purchased loans and investment activity. Therefore, we are reiterating our previous Community Reinvestment Act guidance from 2001, which emphasized that CRA credit will not be awarded for activities that facilitate predatory lending. We are also in conversation with the federal bank supervisors to consider new ways to maximize the positive impact that CRA has made in expanding access to credit, and have issued new guidance offering CRA credit for workout programs designed to prevent foreclosure.

We have also strengthened the enforcement mechanisms to support existing consumer protection laws. While this is a comprehensive retooling, there are two developments that deserve special mention: the creation of a dedicated Mortgage Fraud Unit and the development of a system for licensing all mortgage originators. The Mortgage Fraud Unit was formed earlier this year within our criminal investigations division, to root out fraudulent practices such as inflated appraisals. 

The new licensing system will enroll individual mortgage originators, and not just the firms where they are employed. This nationwide system, organized by CSBS, will help to curb mortgage abuse by making it more difficult for bad actors to evade enforcement and reopen shop simply by migrating across state lines. Components of the plan include authorization by the states, fingerprinting, and an education requirement.

5. Legislation 
In addition to expanding our supervision of mortgage originators, we are also expanding the scope of the law. As a final example of our progress to date, we sought and obtained an amendment to Banking Law 6-l, the state’s anti-predatory lending statute. This law was one of the first of its kind in the nation, and the amendment expanded the scope of its protection by raising the loan limits for covered transactions to Fannie Mae/Freddie Mac conforming limits. The downstate region and New York City were particularly helped by the change, since home prices here are typically higher.

But this is just a beginning, and a more sweeping reform of Section 6-l is being considered with the Governor’s support.  The goal is to work towards a consensus legislative proposal that would, at a minimum, require more in-depth evaluation of a borrower’s ability to repay, prohibit certain loan practices, clarify mortgage brokers’ duties to borrowers, and further strengthen state enforcement tools. The market has evolved since the law was first written, and we need to keep up with the risks that consumers face today.

CONCLUSION
I invite the Council to provide feedback on ideas for legislative reform; we need to work together as state and city government to find solutions that work. Cooperation between government agencies through the HALT Task Force had already yielded initial results that are tangible, and we are looking to expand our work to more directly involve both the private sector and local government.

I am in conversation with some of the largest financial institutions that operate in the state, to engage them in developing creative public-private sector initiatives to prevent foreclosure. Because no one wins in foreclosure- it is a personal tragedy, a community challenge, and a business loss.

We know that these issues deeply concern all of us and require a coordinated response, particularly among the various branches of government. We look forward to working with the Council to develop solutions for protecting New Yorkers from abusive lending practices and help keep consumers in their homes. The joint Committee hearing today is another venue for this important dialogue on consumer protection issues, and I am grateful for this opportunity to discuss ways in which we can work together to protect our most vulnerable residents. Thank you.

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