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:

• First, the magnitude of the problem in New York City and the communities most directly affected
• Second, what the State and HALT Task Force are doing to assist struggling homeowners
• Third, what should be done to prevent a future subprime mortgage crisis
• Fourth, the role of the federal government

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

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

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 

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

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:

• Servicers are increasing their level of loan modifications and home retention efforts, but these efforts fall far short of the need. Servicers have tried to stem the foreclosure crisis through increased staffing and creative outreach, but delinquencies are increasing faster than loss mitigation efforts.
• As of the end of October, 45% of all loss mitigation efforts in process were directed to loan modifications.  This is in contrast to mortgages closed in October where 9% were loan modifications.
• Payment resets on hybrid ARMs have not yet been a driving force in foreclosures. A significant percentage of subprime adjustable rate loans are delinquent before they experience payment shock, reflecting weak underwriting or origination fraud. This portends increasing foreclosures if servicers do not find ways to fix loans before payments increase further.
• 32% of subprime ARMs and ALT-A scheduled to reset in 2008 and 2009 are already delinquent by 30 days or more
• 3% of the currently delinquent subprime and Alt-A loans were loans that entered delinquency in the first three months after an interest rate reset.
• Of the 1.1 million subprime loans reported, more than 22% are delinquent by 30 days or more
• Seven out of ten seriously delinquent borrowers are not currently on track for any loss mitigation option. The lack of interaction between mortgage servicers and homeonwers remains a major problem.  While creative outreach efforts and increased staffing are helpful, the data shows a large gap between need and assistance.
• The sum total of all loss mitigation efforts surveyed account for only 24% of seriously delinquent (60 days +) subprime loans.
• The refinance option has nearly evaporated.  Historically, serial refinancing was the primary way that the mortgage industry and homeowners managed delinquencies in subprime loans. Despite recent interest rate cuts, the mortgage industry will not be able to refinance its way out of this crisis absent dramatic changes in available loan products.  Only 4% of loss mitigation outcomes closed in October were refinanced or paid in full. 

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.

• New York City Foreclosure Forums

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.

• 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.

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.

• 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
  Last July, SONYMA introduced the $100 million “Keep the Dream” refinance program, for eligible subprime borrowers facing a mortgage hardship.

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

• 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 and modeled after the guidance adopted by the federal regulators, 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.
• 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) this past January. The MLO project will enroll individual mortgage originators, and not just the firms where they are employed. This nationwide licensing system, operated under the auspices of the Conference of State Bank Supervisors (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. 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:  

• Enhanced protections for all borrowers

• Prohibit lenders from underwriting such loans without regard to the borrower’s ability to repay the loan at the fully indexed rate
• Impose a duty of care on all mortgage brokers to act in good faith and in the borrower’s interest
• Create the specific crime of mortgage fraud 

• Expand protections for high cost loans
• Expand the protections in New York’s current high cost loan statute to borrowers of  subprime or “rate-spread” loans, defined by the current HMDA standard of 3 and 5 % over treasury yield for first and second lien loans respectively
• Require verification and documentation of the borrower’s income and expenses
• Restrict stated income and negative amortizing loans
• Prohibit refinancings that don’t provide a net tangible benefit to the borrower

• Provide additional protections for borrowers facing foreclosure
• Require lenders to send pre-foreclosure notices to homeowners at least 60 days before a lender can start foreclosure proceedings in order to encourage borrowers from taking action before it is too late. If the borrower engages a housing counselor or reaches out to the lender the lender will be precluded from initiating or continuing a foreclosure action against the borrower for a specified period of time
• Require lenders to prove that they have ownership of the note and mortgage when they initiate foreclosure proceedings
• Protect borrowers from foreclosure scams targeting homeowners in default

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.