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Speech
Superintendent Neiman Testifies Before the Committee on Banks on Subprime Mortgages and Foreclosures in New York State


December 13 , 2007

TESTIMONY OF

RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS

On behalf of
THE NEW YORK STATE BANKING DEPARTMENT

On
“SUBPRIME MORTGAGES AND FORECLOSURES IN NEW YORK”

Before the
COMMITTEE ON BANKS

THE NEW YORK STATE SENATE
December 13, 2007, 10:00 a.m.

Good morning. Chairman Farley and distinguished members of the committee: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today and to provide an update on the subprime mortgage and foreclosure crisis in New York. 

Foreclosure is a personal tragedy, a business loss, and a community challenge, and we share your concern to assist borrowers in trouble and stabilize the mortgage market. I am pleased that the Committee is holding the hearing today as a venue for dialogue on this critical topic.

Nine months have passed since I began serving as Superintendent, and it has been quite an orientation period. The subprime mortgage crisis has been a primary focus for me since my appointment, and it is a top priority for the administration as well.  In providing a year-end update to the Committee, there are four areas I was asked to focus on in my testimony today:

  1. The current level of the subprime mortgage and foreclosure problem in New York State;
  2. Trends and outlooks for the near future, with options available for affected homeowners;
  3. The status of efforts by the Department and the Governor’s HALT Task Force; and
  4. Possible legislative responses.

As you know, back in March of 2007, Governor Spitzer created the interagency HALT Task Force to “Halt Abusive Lending Transactions,” which I chair. The goal is to unite the efforts of all the state agencies and departments related to the mortgage industry in responding to the subprime problem. The issues facing the mortgage market are complex, and effective solutions require cooperation across many levels of government and among government, community groups and industry.

A. THE CURRENT LEVEL OF THE PROBLEM
When the Task Force began its work, a first priority was the collection of data to begin quantifying the current level of the problem.  We maximized the resources of our in-house economic research unit, and leveraged our relationships with other state and federal regulators, to ensure that sufficient data was available to scope the problem.  

There are several areas that I would like to highlight:

  1. Patterns in higher-cost or subprime lending in New York, including the  disproportionate impact on minority neighborhoods;
  2. The rate of delinquency for subprime products statewide; and
  3. The counties most impacted by escalating foreclosures.

Collectively, these numbers tell the story of the developing subprime problem in New York. While the overall trends in New York are in-line with national averages, those national numbers are themselves a cause for concern. And when the state is examined more closely at the county level, it becomes clear that pockets of the state are being disproportionately affected with distress indicators far exceeding that average.

1. Patterns in subprime lending
The first step is to consider patterns in loan originations. Higher-cost, or “rate spread” loans, are identified based on the reporting criteria used in the Home Mortgage Disclosure Act (HMDA). Rate spread status is a common proxy for subprime.

Under HMDA, a loan is deemed to be higher-cost if the annual percentage rate exceeds the rate on the treasury security of corresponding maturity by 3% for a first lien and 5% for a subordinate lien. This rate spread information was an addition to the HMDA reporting requirements that became effective with the 2004 data submission. This publicly available rate spread information has opened a new window into lender pricing practices.

Statewide, approximately 1 in 4 loans are higher-cost, but this percentage is increasing. In 2005, 25.04% of new loans were higher-cost; by the end of 2006, the most recent year available, that number had crept up to 27.87%. These increases may not appear dramatic, but they represent a steady and worrisome trend that may have advanced further in 2007. A comparison at the county level illustrates this point.

In 2005, the five counties with the highest percentage of rate spread loans were the Bronx, Orleans, Sullivan, Queens, and Montgomery. These counties were all well above the 2005 state average and the increase they experienced in 2006 is significant: approximately 40% of the new loans in the Bronx and Montgomery are higher-cost or subprime.

County

% of higher-cost loans in 2005

% of higher-cost loans in 2006

Bronx

35.97%

39.47%

Orleans

33.43%

30.62%

Sullivan

32.01%

34.11%

Queens

31.45%

34.69%

Montgomery

31.19%

40.12%

Source: 2005 and 2006 HMDA data

The percentage of higher-cost loans in an area is only part of the picture, however. We are also concerned about the distribution of these subprime loans between categories of borrowers. Multiple external studies have made similar findings, which our internal research confirms:  minority borrowers and minority communities receive higher-cost loans at a disproportionate rate.

These rate spread disparities are raw, however, and compensating credit information such as credit score or debt ratio may exist. The question is whether such credit factors would fully explain the disparity and, if not, whether overqualified minority borrowers are being discriminated against and steered into higher-priced loan products.

Nevertheless, statewide in 2006, for every one borrower in neighborhood with a low Minority population that has a higher-cost or subprime loan, two borrowers in high-Minority neighborhood received a subprime loan. That’s a rate of 2 to 1. The disparity becomes starker when we sharpen the focus to the county level.

In 2005, the five counties with the highest disparity in rate spread loans based on census tract demographics were New York, Westchester, Monroe, Kings, and Albany. While this has moderated slightly in 2006, residents of minority neighborhoods in these counties still receive higher-cost or subprime loans at a rate of 3 or even 4 to 1, when compared to borrowers from white neighborhoods.

County

Number of higher-cost loans in a minority area for every higher-cost loan made in a
non-minority area:
2005

Number of higher-cost loans in a minority area for every higher-cost loan made in a
non-minority area:
2006

New York

6.10

3.98

Westchester

4.32

4.12

Monroe

3.37

3.30

Kings

3.21

2.94

Albany

3.05

2.45

Source: 2005 and 2006 HMDA data, US Census 2000
Minority area= 80-100% minority population census tracts
non-Minority area= 0-19% minority population census tracts

2. Delinquency rates
In many cases, these subprime mortgages that flooded the market and invaded some of our most vulnerable communities were also made without sufficient regard for the borrowers’ ability to repay the loan. Other risk-layers such as high LTVs, high debt ratios, and simultaneous second or “piggyback” loans compounded the risk profile. The charts below demonstrate the trend in this lack of underwriting discipline, with loans originated in 2006 having the highest risk factors across the board.

collateral attributes by vintage
                                Provided courtesy of the FDIC

With these worrisome vital signs, the next logical question is- what is the effect? How are these loans performing? Tragically, they are performing poorly, as their composite credit quality should have predicted. The chart below provides an initial overview:

 

 

 

New York
Subprime
Fixed Rate

 

US
Subprime
Fixed Rate

 

New York
Subprime
ARMs

 

US
Subprime
ARMs

 

90+ days past due

 

6.28%

 

6.61%

 

17.59%

 

15.63%

Source: Mortgage Bankers Association National Delinquency Survey

3. Foreclosures
These delinquent homeowners are on the brink of personal and financial disaster, which is also demonstrated by the rate of foreclosure filings.                             

 

 

New York
Subprime
Fixed Rate

 

US
Subprime
Fixed Rate

 

New York
Subprime
ARMs

 

US
Subprime
ARMs

 

Percent in foreclosure

 

3.39%

 

3.12%

 

13.25%

 

10.38%

Source: Mortgage Bankers Association National Delinquency Survey

As expected, both the higher delinquency and foreclosure filing rates are most pronounced for the adjustable rate category. Payments may be resetting to levels that overburdened homeowners are unable to maintain in a climate of flat or declining property values.  A particularly regrettable fact is that over 25% of these New York consumers with subprime ARMs had FICO scores of 660 and above, and therefore  may have qualified for more affordable alt-a or prime loans.

And once again, the impact of these foreclosures is uneven, with certain counties bearing the brunt of the crisis disproportionately.  The chart below highlights the counties with the highest rates of foreclosure activity- lis pendens, sales, and REO. To control for differences in population and provide a more consistent comparison, this ranking is expressed in relation to the number of owner-occupied units with a mortgage for each county included in the US Census annual survey.

Rank

County

Percent of Owner-Occupied Units
with a Mortgage with Foreclosure Activity

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%

Source: RealtyTrac, as of 9/30/07 and US Census community survey 2006

These percentages may not appear dramatic at first glance, but upon closer inspection they are shocking: at the end of the third quarter of this year, 1% or 1 out of every 100 homes with a mortgage in New York State had a foreclosure filing. For counties in New York City, such as the Bronx, Queens, and Kings, the picture is far worse, with the ratio rising to 1 in 40.

B. FUTURE TRENDS AND OPTIONS FOR HOMEOWNERS
Having briefly taken stock of the current state of the market, it is appropriate to consider future trends. In order to design the correct legislative, regulatory, and policy responses, we need to anticipate the ways in which the crisis may evolve.

Although the full scope of the subprime problem and the impact on New York is still being assessed, we anticipate that the turbulence in the mortgage market will persist for the next several years as adjustable-rate loans reset in waves. The resulting delinquencies and increased foreclosure filings will further extend out from the time of reset as a lagging indicator. The following graph illustrates the coming reset waves on a national scale.
subprime ARM resets
Provided courtesy of the FDIC

The Congressional Joint Economic Committee also expects that the crisis will deepen, with their recent report predicting 1.3 million sub-prime mortgage foreclosures across the country from 2007 to 2009, with an estimated 68,000 of them in New York. When you translate that into dollars, it equates to more than $9 billion in estimated losses to homeowners and neighboring property values. This estimate would position New York as the having the fourth highest foreclosure rate in the nation.

These projections were made by the JEC before the announcement last week by the Treasury Department of its loan modification proposal. The Treasury plan is a constructive first step, and by some estimates it may provide relief for as many as 15-20% of borrowers who obtained subprime loans from January 2005 to the end of July, 2007.  It would be premature and overly optimistic, however, to substantially revise projections for the near future based on this plan for two reasons.

First, in order to be eligible for a streamlined modification under the proposal, borrowers need to meet strict eligibility requirements. It is not a solution for homeowners who are already in default. And the plan only applies to recent loans, whereas the projections look to the broader population of loans outstanding. Second, it remains to be seen how many lenders and servicers will ultimately participate. Thus, while the Treasury plan ameliorates the subprime problem, the extent of unresolved loans is such that we anticipate that significant problems will remain and will require an ongoing federal and state response.

In the interim, we recommend that borrowers who are currently facing a mortgage hardship take the following steps:

  1. Contact the lender or servicer. This is the most crucial step, yet delinquent borrowers may be hesitant to reach out to their creditor or the creditor’s agent. We have heard repeatedly from the industry that it is difficult to connect with at-risk borrowers. But the servicer is in the position to modify the loan, and attempting to negotiate a workout arrangement early in the process may preserve the borrower’s credit history and their home.
  2. Contact the Banking Department at 1-877-BANK-NYS. Staff who are specially trained in mortgage issues are available to assist consumers in filing a complaint or to make referrals to appropriate service providers. The Department through the HALT Task Force has also partnered with the major national nonprofit NeighborWorks America in promoting their hotline, 1-888-995-HOPE.
  3. Contact a certified housing counselor. Housing counselors can provide advice on options and resources for dealing with debt, including helping consumers to find free or low-cost legal services and negotiating with the lender. The Banking Department has lists of certified counselors for each area of the state, which are also available on-line at www.banking.state.ny.us/legal/41ac.htm.
  4. Contact a lawyer. Borrowers should obtain independent legal advice, and have their loan documents reviewed to ensure that the contract is not in violation of New York’s High Cost Home Loans Act and any other laws governing predatory lending. The New York Bar Association’s Lawyer Referral Program can be reached at 1-800-342-3661, and homeowners who may be unable to afford a lawyer may contact the Department for assistance in locating free legal services.
  5. Beware of fraudulent foreclosure rescue offers.  Solutions that sound too good to be true usually are. The Department is responsible for over sight of the Home Equity Theft Prevention Act, which went into effect at the beginning of this year. I commend the legislature for having passed this law, which protects homeowners facing foreclosure from fraudulent sales tactics.

C.  RESPONSES BY THE BANKING DEPARTMENT AND HALT TASK FORCE
Outreach to borrowers through our Consumer Help Unit and the five steps above is only one piece of the state’s response. A problem of this magnitude requires a multi-pronged approach and there are a variety of state 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 time this morning, I’d like to highlight selected initiatives in the following three areas, as examples of the Banking Department and the HALT Task Force’s response:

  1. Outreach and consumer counseling;
  2. Affordable loan programs; and
  3. Heightened supervisory standards and enforcement.

I will include the work to date related to legislation separately, under the fourth heading for new proposals.

1. Outreach and consumer counseling
HALT Summits
In connection with the HALT Task Force, the Banking Department has been holding day-long HALT Summits across the state. Each region 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’re already planning the next Summit, which is tentatively scheduled for Albany in early spring of next year.

Other direct outreach efforts include participation in the public service ad campaign by NeighborWorks America to prevent foreclosures which, as I mentioned, includes a consumer helpline.

Grants for consumer counseling
We recognize the important role that consumer counselors, legal aid societies, and other nonprofits play in responding to the needs of financially distressed homeowners. Their efforts complement the work of the state agencies in meeting the needs of our residents. With the increasing case loads from the subprime crisis, however, we are concerned about the ability of these community groups to meet the expected demand.

Therefore, in November, Governor Spitzer announced the creation of a $2 million grant program with a matching feature, to provide ongoing support for consumer services. We consider partnership with these counseling groups to be one aspect of the state’s outreach effort. 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.

This new grant proposal is on top of other substantial awards that the state has provided to consumer counselors. Two Task Force member agencies, SONYMA and the d the Division of Housing and Community Renewal, have already made awards in excess of 600,000 to support counseling services related to the launch of new affordable loan programs.

2. Affordable loan programs
40-year fixed rate loans
Through SONYMA, the Task Force has developed new loan programs that provide affordable alternatives to the unsustainable nontraditional mortgages that have led to the subprime crisis. In May of 2007, 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.

“Keep the Dream” Program
And then in July of this year, SONYMA introduced the $100 million “Keep the Dream” refinance program, for eligible subprime borrowers facing a mortgage hardship.

3. Heightened supervisory standards and enforcement
New mortgage lending standards
The Banking Department issued new guidance in May of 2007. These heightened standards, developed in conjunction with the Conference of State Bank Supervisors,
apply to non-bank mortgage providers. The guidance addresses the lack of underwriting discipline that has left so many 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.

Systemic approach to loan modifications
The Department is participating in a multi-state working group of state banking departments and attorneys general to dialogue with the nation’s top servicers that cover 90% of the market.  The group formed back in August of this year, and the states were early leaders in reaching out to the industry to promote a systemic approach to loan modifications. In these meetings, the industry has stated 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.

We’re still assessing the impact of the new Treasury plan on these state efforts. As I mentioned before, however, we expect that there will be a continuing need for creative approaches to assist categories of distressed homeowners who are not eligible for the Treasury program.

Mortgage Fraud Unit
The Department also created a dedicated Mortgage Fraud Unit, to address the fraudulent practices that have contributed to the subprime crisis. The Unit is currently engaged in several joint investigations with prosecutorial agencies throughout the state.  In addition, the Department is conducting joint examinations with the Department of State through HALT to uncover fraudulent practices such as inflated appraisals, which are a common device used in predatory lending schemes.

Nationwide licensing system for mortgage loan originators
One of the most significant examples of our heightened supervisory standards is the roll-out of the new nationwide licensing system for mortgage loan originators (MLO). The MLO project will enroll individual mortgage originators, and not just the firms where they are employed. This nationwide system, organized by the Conference of State Bank Supervisors, 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.

New York was ahead of the curve on this issue, as the legislature had already passed a bill mandating enrollment of mortgage originators beginning in January of 2008, and the timing of the CSBS licensing system coincided. Providing additional supervision of mortgage bankers and brokers through the MLO law is a key part of the solution to the problems plaguing the mortgage market, and I commend the legislature for their foresight.

D. LEGISLATIVE PROPOSALS
I also appreciate this opportunity to explore other ways in which New York can take a progressive stand in responding to the subprime crisis through new forms of legislation.

Anti-predatory lending legislation
The HALT Task Force previously recommended the expansion of the state’s anti-predatory lending statute, Banking Law 6-l. I am pleased that this suggestion was acted upon, and this summer the law was updated to raise the loans limits for covered transactions to the Fannie Mae / Freddie Mac conforming loan 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 Governor Spitzer’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.

General mortgage data collection
When the Task Force began its work, a first priority was the collection of mortgage data to quantify the scope of the problem.  We quickly discovered that the industry is not required to compile and report the type of information that is needed in order for government to respond to a mortgage crisis of this magnitude. Updated data reporting requirements are clearly necessary.

A simple example of the current information gap will suffice. The reporting requirements under the federal Home Mortgage Disclosure Act (HMDA) do not even include a code to distinguish fixed rate from adjustable rate loans. This type of basic sorting criteria is vital to scope the size of the subprime problem, since it is adjustable rate loans, especially those with low introductory rates that are fixed for a short period, that account for much of the concern.

In the absence of federal action, we have taken steps at the Banking Department to compensate and begin collecting a portion of the needed information on new loan originations. We are in the process of revising the requirements for the annual volume reports submitted by state-licensed mortgage bankers. The list of new data fields includes this fixed rate versus adjustable rate distinction, as well as the ability to identify the volume of ARMs with initial fixed terms of 36 months or less.

While these revisions planned by the Banking Department are a positive first step, they cannot apply to all lenders operating in New York State, and the volume reports provide total numbers, as opposed to the loan-level information contained in HMDA. We will continue to work with the federal banking regulators, to vigorously encourage them to address the shortcomings in the federal standards for general mortgage data collection. Support from the Committee in this effort is welcome.

Foreclosure data collection
Within the topic of amending data collection requirements, improved access to foreclosure records is particularly vital. The Task Force has identified a number of inconsistencies with the foreclosure recording process across the state. Based on our current understanding, foreclosure data is currently available only at the county level, and we believe that for most counties, the data is unavailable online.  Having a central depository for this data would enable government officials and others to analyze broader data, identify communities most at risk, and act swiftly to address problems.

Presently, it is necessary to rely on foreclosure data purchased from third parties.  Vendors do perform a valuable service in collecting records that are otherwise time-consuming to compile. Nevertheless, if there were a central state repository for mortgage records, it would decrease dependency on vendor data and improve state response time.

The Banking Department would be willing to serve in that capacity, and we have taken initial steps to assess feasibility. In November, we sent a letter to the county clerks soliciting their feedback on the best means to reach the goal with the least burden. We will be following-up on that letter with a short survey, to inventory the current processes in place in the counties and note their suggestions. Once we have received the responses from the counties, we will be in a better position to determine whether we believe a legislative change to support centralized foreclosure data collection is needed. I would be happy to share the results of that research project with the Committee as soon as it is completed.

CONCLUSION
I welcome your comments on this concept for expanded data collection, as well as on the other initiatives I’ve mentioned. The Banking Department shares your concern to protect consumers and restore confidence in the mortgage market. We look forward to working with you in developing the best solutions for all New Yorkers. Thank you for the invitation to speak today, and I would be pleased to answer any questions you may have.

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