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Speech
Jane Azia Testifies Before The Subcommittee on Financial Institutions and Consumer Credit on the Effects of the Subprime Mortgages Crisis in New York City


TESTIMONY OF
JANE M. AZIA
DIRECTOR OF NON-DEPOSITORY INSTITUTIONS AND
CONSUMER PROTECTION
On behalf of
THE NEW YORK STATE BANKING DEPARTMENT
On
“EFFECTS OF THE SUBPRIME MORTGAGES CRISIS IN NEW YORK CITY”
Before the
THE SUBCOMMITTE ON FINANCIAL INSTITIUTIONS AND CONSUMER CREDIT
U.S. HOUSE OF REPRESENTATIVES
Monday, February 11, 2008, 11:00 a.m.

Good morning. Chairwoman Maloney 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 discuss the subprime mortgage crisis as it pertains to New York City. 

This crisis has a profoundly personal effect on New Yorkers throughout the State, and particularly in the five boroughs.  It has been the major focus of the Department since I became Director of Consumer Protection this past April.

Governor Eliot Spitzer has made the subprime crisis a top priority for his administration.  One of his first subprime initiatives was to create the interagency HALT Task Force to “Halt Abusive Lending Transactions,” which is chaired by the Superintendent of Banking. The goal of the Task Force is to unite the efforts of all state agencies and departments related to the mortgage industry in responding to the subprime problem.

The issues facing the mortgage market are complex, and there is no single solution.  An effective response requires cooperation across many levels of government and among government, community groups and industry. 

Today I’d like to address the following areas:

A. THE CURRENT LEVEL OF THE PROBLEM IN NEW YORK CITY

While the rising rate of foreclosures is of tremendous concern throughout the State, New York City is the State’s hardest hit region.  At the end of the third quarter of 2007, one out of every 100 homes with a mortgage in New York State had a foreclosure filing.  In New York City, the statistics were even starker.  One out of every 40  homes with a mortgage in New York City had a foreclosure filing.  For all of 2007, New York City accounted for more than 18,000 total foreclosure filings or just over 52% of all filings in the State.  Queens and Kings Counties led the state with nearly 14,000 foreclosure filings, just under 40% of foreclosure filings statewide.1 Of the remaining New York City counties, Bronx was fifth with 2,234 foreclosure filings, Staten Island eighth with 1,663 filings and Manhattan eleventh with 806. 

Table I
Total foreclosure filings in NYC2
Year-end as of 12-31-07

Rank

Borough

Total Foreclosure Filings

Percentage of State

1

Queens

7373

20.87%

2

Kings

6464

18.29%

5

Bronx

2234

6.32%

8

Richmond

1663

4.71%

11

New York

806

2.28%

Source:  Realty Trac

And, although the focus of today’s hearing is New York City, the impact is even greater when the city is viewed in conjunction with the greater New York City metropolitan area.  The surrounding metropolitan counties are also among the State’s highest foreclosure rates.  Suffolk and Nassau ranked third and fourth in foreclosure filings and along with Westchester, Rockland and Putnam counties experienced nearly 32% of last year’s foreclosure filings.  These counties, when combined with all of New York City, represent more than 80% of foreclosures statewide.

Table 23
Total foreclosure filings in
Surrounding Metropolitan Counties
Year-end as of 12-31-07

Rank

County

Total Foreclosure Filings

Percentage of State

3

Suffolk

4346

12.30%

4

Nassau

3523

9.97%

6

Westchester

2111

5.97%

10

Rockland

824

2.33%

12

Putnam

456

1.29%

Another grim reality is that four New York City boroughs – the Bronx, Queens, Brooklyn and Staten Island – make the list of top ten counties statewide of   homes  with a mortgage that are facing foreclosure.  For the Bronx, Queens, and Kings counties, 1 in 40 homes with a mortgage is facing foreclosure.

Table 34
Total Foreclosure Activity  as a Percent of
Owner-Occupied Units
with a Mortgage 

Rank

County

Percentage

1

Bronx

2.53%

2

Queens

2.46%

3

Kings

2.45%

8

Staten Island

1.38%

 

1. Minority Neighborhoods are the Hardest Hit

There is a disturbing correlation between foreclosures and subprime loans.  As of 30 June 2007, subprime loans in New York were about 11 times more likely to be in foreclosure than prime loans. Subprime loans made up 15% of the State’s mortgages but 60% of its foreclosures.5

Even more disturbing is the evidence that minority borrowers and minority communities receive higher-cost loans at a disproportionate rate.  An analysis of the recently released HMDA6 data demonstrates that for every one borrower in neighborhood with a low Minority population that has a higher-cost or subprime loan, there are two borrowers in high-Minority neighborhood who received a subprime loan.  Residents of minority neighborhoods in certain New York City boroughs received higher-cost or subprime loans at an even higher rate.  For example, in 2006, residents of minority neighborhoods in New York county received subprime loans or a rate of 4 to 1, when compared to borrowers from white neighborhoods.  For residents of Kings county, that rate was nearly 3 to 1.

Table 4
Total Subprime Originations in NYC in 2006


County

Total Subprime Originations

Originations in Minority Areas

Originations in Non-Minority Areas

Bronx

40.7%

46.5%

22.4%

Kings

35.1%

47.2%

15.4%

Queens

34.9%

46.3%

19.3%

Staten Island

28.6%

46.6%

20.9%

New York

4.2%

11.7%

2.3%

Total

31.4%

45.7%

14.4%

 

2. The Foreclosure Crisis Holds Profound Economic, as Well as Social, Implications for  New York City

Foreclosures clearly hurt everyone.  Families lose their homes and any equity they had and also face the emotional consequences of displacement.  Lenders and investors lose the anticipated return on their investments.  Communities also suffer as property values decline, vacancies increase and the local economy suffers.  The U.S. Conference of Mayors estimates that New York City, which unlike many other parts of the country has not experienced a steep decline in overall property values, will nevertheless feel the negative effects of the mortgage crisis.  In a report issued this past November, the Conference predicted that in 2008 New York City would lose more than $10 billion in economic growth, $686 million in property tax income, $97 million in sales taxes and $47 million in realty transfer taxes.7 

B.  RESPONSES BY THE BANKING DEPARTMENT AND HALT TASK

A problem of this magnitude requires a multi-pronged approach and there are a variety of state initiatives underway. 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.

I’d like to highlight selected initiatives in the following five areas, as examples of the Banking Department and the HALT Task Force’s response:

  1. Outreach and consumer counseling;
  2. Long-term, sustainable loan modifications
  3. Affordable loan programs;
  4. Heightened supervisory standards and enforcement; and
  5. Needed legislative reforms

1.  Outreach:  The HALT Summits and Other Efforts

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. 

The Department also has its own consumer help unit and hotline at 1- 1-877-BANK-NYS (1-877-226-5697).Staff in this unit are specially trained in mortgage issues and 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 foreclosure prevention hotline, 1-888-995-HOPE.

2. Working For Systemic and Sustainable Loan Modifications:  Multi-state effort

Since September, the Department has been participating in a multi-state working group of state banking departments, attorneys general and the Conference of State Bank Supervisors (CSBS) to reduce unnecessary foreclosures and promote a systematic approach to loan modifications.  The State Working Group met with the nation’s top servicers covering 90% of the market.  In these meetings, the industry has stated that they are being proactive in offering modifications, and we asked for data to support that claim and to ensure that there’s no disconnect between what we’re hearing from servicers and what we’re seeing in practice.

Last Thursday, the State Working Group released its first subprime mortgage servicing performance data report on Thursday.8  The report summarizes the efforts of these servicers during October 2007.  Its key findings are:

The State Working Group intends to continuing collecting monthly data from reporting servicers in order to provide public information on trends in the servicing industry as we move through this foreclosure crisis.
Unfortunately, the State Working Group reached the conclusions in its first monthly report based on somewhat limited data.  Although the group collaborated with industry and federal regulators, including OFHEO, the FDIC and the Federal Reserve, to develop a uniform data reporting format to collect data, only 13 (or 58% of the subprime servicing market) of the top 20 servicers contributed data.9  Some major national banks that service subprime loans, including Chase and Wells Fargo, declined to provide the State Working Group with data based on advice or direction from the Office of the Comptroller of the Currency (OCC).  Another federally-chartered thrift refused to provide data based on its participation in the industry-led HOPE NOW data collection effort. The State Group contacted the OCC to encourage it to permit these banks to provide data to the State Working Group, but the Comptroller John Dugan declined to so, stating that the States’ project would produce “inconsistent and incomplete” data that would “not be constructive to achieving an accurate picture of delinquencies and loss modification.”10
The State Group continues to seek cooperation from the servicers that did not participate in the initial report.  The Group also continues to call on the OCC to urge national banks to report data to the State Working Group, so that we will be able to provide a complete picture of the subprime servicing market.  We believe that providing the public with this information is vitally important, that it complements the efforts of the HOPE NOW initiative and that it does not impinge on the OCC’s jurisdiction with respect to its supervision over national banks.  This is a time for cooperation – not jurisdictional battles.

3. Working For Systemic and Sustainable Loan Modifications:  Local efforts

In addition to our work on a multi-state level, we are also supporting a number of initiatives at the local level to prevent unnecessary foreclosures and promote long-term, sustainable loan modifications.

Just yesterday, the Banking Department, in conjunction with State legislators, other public officials and community groups such as NeighborWorks and ACORN, announced a series of weekend forums in New York City to bring together mortgage servicers and borrowers facing resets or having difficulty paying their mortgage.  These forums will present a unique opportunity for borrowers and lenders to identify possible solutions to enable borrowers to stay in their homes.  Housing counselors will also be present to help assist borrowers.  These forums are scheduled for:

Saturday February 23 in the Bronx:
Location: Cardinal Spellman High School
Time: 12-8 pm

Sunday, February 24 on Staten Island
Location: College of Staten Island
Time: 12-8 pm

Saturday March 1 in Queens
Location: Campus Magnet High School
Time: 10 am-6 pm

Sunday March 2 in Queens
Location: Medgar Evers College-CUNY
Time: 12-7 pm

Upcoming forums including ones in Westchester and Long Island on Saturday March 22 and another to follow in Western New York.  The success of these forums depends in large part in reaching borrowers.  Whatever help the Committee can extend in this regard will be greatly appreciated.

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.

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 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.

3. Affordable loan programs:  The Governor has also announced two new loan programs.

4. Heightened supervisory standards and enforcement:  The Banking Departmenthas taken a number of steps to heighten its regulation of the mortgage industry.

5. Needed Legislative Reforms

Although the Department did adopt guidances on subprime and non-traditional mortgage products this past spring, we believe additional legislative measures are needed to ensure that the kind of lax underwriting and most abusive practices we have witnessed do not occur in the future. We have been closely monitoring proposals at the federal level and support the adoption of laws that will create minimum standards for lending nationwide.  We are also reviewing the Federal Reserve’s proposed changes to Truth-In-Lending and HOEPA and will be commenting on those proposed changes as part of a review with CSBS. 

While these federal efforts are of great interest to us, we are working with the Governor’s office on proposed legislative reforms at the state level to prevent future lending abuses.  States have always been effective laboratories of experimentation.  Indeed, we believe that had states not been preempted from enacting strong laws against predatory lending earlier in the decade, we would not be facing the extent of the crisis before us today.  Governor Spitzer, as part of his state of the state message, announced the outlines of some key legislative reforms.  These include:  

D.   The Role of the Federal Government

As vital as cooperation between the states is, lasting solutions also demand an engaged federal partner. There has been progress on this front, but there have also been moments of frustration.

As the Superintendent noted recently in a letter to Secretary Paulson, it was disappointing that the Treasury Department’s HOPE NOW Alliance did not include a state government representative. This omission could undermine the group’s effectiveness, because it is missing the perspective from an important regulatory partner, which is the sole supervisor for a significant portion of the mortgage industry.  Greater state involvement in federal initiatives is part of the recipe for success.

As I noted above, we were also disappointed that the OCC advised national banks not to participate in the State Working Group collection of data relating to their loss mitigation efforts.  We urge Congress to use its authority to encourage greater cooperation.

Nevertheless, there are positive signs that a new era in state-federal cooperation may be in the offing, particularly in relation to supervision and examinations. Early in his tenure the Superintendent reached out to Comptroller Dugan to identify ways in which we could work cooperatively together, to move beyond the heated preemption debate and focus on the subprime problem.

There are two unique state-federal exam pilot programs under development. The  first is a joint exam effort where the OCC would examine a national bank at the same time we are examining a mortgage broker who was originating mortgages for that national bank.  

In another pilot, the states and the Federal Reserve, OTS, and FTC will be joining forces in the review of selected mortgage subsidiaries of bank and thrift holding companies.   Both of these pilots are critical in connecting the dots and gaining a more comprehensive view of lending.

Beyond working together with federal regulators, there are a number of initiatives that are beyond the State’s purview and must be addressed at the federal level. The federal government has the opportunity to: develop new standards for lending that will operate as a floor for states to expand upon; adopt tax and bankruptcy reforms to protect homeowners facing foreclosures; and most importantly, explore the establishment of a housing fund to assist borrowers.

CONCLUSION

I welcome your comments on the various initiatives I’ve described today. The Banking Department shares your concern for protecting consumers and restoring 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.


1 Source:  RealtyTrac

2 These filings include lis pendens, notice of sale, etc.

3 Source:  RealtyTrac

4Source: RealtyTrac, as of 9/30/07 and US Census community survey 2006

5 Foreclosure Trends in NY, NeighborWorks Report, Sept 2007

6 HMDA stands for the Home Mortgage Disclosure Act.   HMDA imposes annual reporting requirements for higher cost or “rate-spread” loans, defined as loans where 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. Rate spread status is a common proxy for subprime.

7  The United States Conference of Mayors and the Council for the New American City, The Mortgage Crisis:  Economic and Fiscal Implication for Metro Areas, prepared by Global Insight, November 2007, available at http://usmayors.org/metroeconomies/1107/report.pdf

8 To access the October report, go to http://www.csbs.org/Content/NavigationMenu/Home/StateForeclosurePreventionWorkGroupDataReport.pdf.  Overall, the report finds over 150,000 delinquent loans were in the process of receiving a loan modification or other home retention accommodation at the end of October.

9 These servicers represent approximately 58% of the total subprime servicing market. Reporting companies serviced 5,110,678 subprime and Alt-A loans.

10 Letter to North Carolina Deputy Commissioner of Banks Mark Pearce from Comptroller of the Currency John Dugan, February 1, 2008

 

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