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Speech
Superintendent of Banks, Richard H. Neiman Addresses the Regional Interagency Committee on the Subprime Mortgage Crisis

May 21, 2008

A.  Introduction

Thank you, Sarah, for that kind introduction.  I’m honored to be here, especially since this is the second year in a row that I’ve been invited to speak.  At least, I assume it’s an honor to be asked again- unless you have decided to give me another chance to get it right!  But it is certainly an honor to be here today with people who are doing so much to help consumers, like you and Vice Chairman Gruenberg.

I’d like to recognize the entire NHS team for the incredible work you’ve accomplished.  Your statistics for 2007 are amazing and worth repeating:

And a special “thank you” for NHS’s participation in the Department’s foreclosure prevention forums as well.  Your services to the community are needed more than ever.  

I’d also like to mention that NHS gave me my first up-close and personal experience with homeowners directly affected by the subprime problem.  My housing tour of Jamaica last spring left me with lasting impressions that enhanced my motivation to help solve this crisis.

I will never forget a homeowner in Jamaica who was about to lose her home in foreclosure. This woman was preparing to return to the shelter system after having her own home for the first time - with her three children.  She was very open about her experience, but her main concern wasn’t for herself.  She described the larger tragedy that there were four or five other families on her block who were in the same situation, but were too embarrassed or ashamed to seek help.

With thousands of cases like this to contend with, response efforts can seem overwhelming. However, as we see here today, there are always heroes among us willing to lead change.  Heroes that come from community groups like NHS, as well as committed industry leaders.  I’d like to take a moment to acknowledge the award recipients this morning- John Buran from Flushing Savings and Phil Grossman from Washington Mutual- for a job well done.

Real and lasting solutions to this crisis can only happen when all stakeholders join forces and work together.  The cooperation of RIAC is a perfect example of that successful cooperation.  I’m also confident that Vice Chairman Gruenberg agrees with me on the importance of these relationships.

In fact, I was honored to be with Marty last week, for the launch of the FDIC’s Alliance for Economic Inclusion campaign in Rochester.  The Alliance is the FDIC’s initiative to reach underserved communities with traditional financial services, and Rochester is the first city in New York to participate.  Thank you, Marty, for your assistance in making this possible. It was inspiring to see local, state, and federal government officials come together with financial institutions, the community, and academics, to address deep-rooted challenges in access to affordable credit.

Cooperation at the grassroots level benefits consumers and helps to stabilize the market for everyone.  I’d particularly like to acknowledge the critical role that nonprofits have played as sentries. You’ve been sounding an early warning on these credit issues for the past 10 years.

B. Scope of the subprime problem

No one could have fully anticipated the scope of the subprime problem, or the subsequent credit crunch which is complicating recovery.  But the consumer advocacy community was forward-thinking, and made the connection between lax underwriting and the risk of an economic implosion a long time ago.

The states agreed that trouble was brewing within the subprime sector, and took an early lead in response, through anti-predatory lending laws and enforcement actions.  Sadly, however, it wasn’t until Wall Street was directly impacted and the bad news ended up on the business page that the warning was more widely heeded on a federal level.

And even today, states face an uphill battle with federal preemption of consumer protection laws hampering efforts to help our residents.  What is most disappointing is that the preempted state laws have not been replaced by strong national minimum standards.

However, despite challenges of federal preemption, progressive state laws here in New York have made a positive difference.  But, while I am happy to say that New York as a state is not one of the hardest-hit in the nation, the foreclosure problem here is real and growing.   

The facts speak for themselves:

And what is perhaps more troubling, is that many at-risk consumers have no contact with their lender during the foreclosure process.  Through our work on the State Foreclosure Prevention Working Group, we’re getting a much clearer picture of what’s happening to consumers in that period between delinquency and final foreclosure.

The Group, composed of state attorneys general and state bank supervisors, has been trying to hold the industry accountable for its loss mitigation efforts.  We’ve been analyzing data that supports their claims that loan modifications are happening.

Unfortunately, I’m disappointed to report that several top servicers refused to provide this critical information to the states - yet another example of aggressive assertion of preemption frustrating a valid public purpose.  Despite this obstacle, we have acquired data that shows a persistent trend- seven out of 10 seriously delinquent borrowers are still not on track for any kind of workout.  And the rate of new foreclosure filings is outstripping the ability of the industry to respond in time.

When I spoke to you last year, I mentioned initial hopeful signs.  Servicers were developing foreclosure prevention units with catchy names such as the “Mod Squad.”  But time has shown that industry efforts alone, despite assistance at the federal level through programs such as HOPE NOW, are insufficient to handle a housing crisis of this magnitude.  That’s why I believe that additional government support is necessary.

While we wait for a more widespread federal response, I can assure you that New York has been very active on multiple fronts.  No one factor caused the subprime crisis, and no one solution will solve it.

We’ve harnessed the resources of all the state agencies that impact the mortgage market into one unified effort.  The resulting Governor’s HALT Task Force, to “Halt Abusive Lending Transactions,” was formed early last year.  As chair of the Task Force, I was pleased to submit a comprehensive progress report to the Governor last week which is available on our website.  We work closely with SONYMA in this effort, and I’m pleased to acknowledge Marian Zucker in the audience this morning.

As outlined in the report, I see our efforts falling into two main categories: 1) immediate efforts to assist existing homeowners and prevent unnecessary foreclosures, and 2) long-term strategies- including new legislation- to help ensure this type of financial crisis never happens again.

I’d like to offer a few representative examples of our initiatives in each of these two main areas.

C. State response- helping existing homeowners

While we are looking for systemic solutions to credit access issues, we have adopted something of a “triage” response to the foreclosure crisis in the near term.

1. Outreach- Operation Protect Your Home

First, to give immediate help, we’ve been holding a series of unique foreclosure prevention forums with state legislators, called Operation Protect Your Home.  At these events, borrowers meet face-to-face with their servicer to discuss possible solutions, including loan modifications or other workout arrangements.  Six forums have already been held this year in all the boroughs, as well as Yonkers and Buffalo.  The next forum will be in Long Island on June 7.  I’d like to thank all the lenders here today that have been participating in these events.

2. Legislation

In addition to this direct outreach, the Governor has introduced an important piece of legislation that contains key provisions related to the foreclosure process.  These areas are especially appropriate for state action, as they cover access to state courts and real property laws not typically subject to federal preemption.

  • Pre-foreclosure notice.  For example, the Bill requires a lender to send a pre-foreclosure notice at least 60 days prior to initiating foreclosure proceedings.  The notice would also contain the names of housing counselors.  If the borrower reaches out to the lender within 30 days, the lender would be precluded from continuing the foreclosure action for 60 days.  This is another opportunity for mediation before the foreclosure proceedings begin.
  • Mandatory settlement conference.  Once foreclosure proceedings have been initiated, it’s still not too late to find an alternative solution.  The Bill would require a mandatory settlement conference within 60 days of the answer date.  And if the homeowner appears without legal representation, the court would have the discretion to appoint counsel.
  • Rescue scams. Another example of relief relates to foreclosure rescue scams, which hurts people at their most vulnerable time.  The Bill would prohibit payment of fees before services are rendered and require a written contract with the opportunity to opt-out.

3. Grants

Another area that we consider critical is the support of nonprofit credit counseling and legal services providers. Skyrocketing foreclosure statistics translate into higher caseloads for those of you in the consumer advocacy community.  I know you are dedicated to your work.  You’re burning the candle at both ends to meet increased demands for services.  So, I’m particularly proud that the state has made a major commitment toward the sustainability of your efforts through a $25 million grant program.  And that’s on top of the $2 million in grants that the Banking Department is in the process of awarding, from fines recouped in predatory lending settlements.

D. State response-preventing future crises

These grant dollars help ensure you have the tools you’ll need both now and in the future.  We recognize the need for both pre- and post-purchase counseling.  That takes me to my next point- the work we’re doing at the state level to prevent future credit crises.

1. Heightened enforcement

First, we’ve ramped up our enforcement efforts, through the creation of a dedicated Mortgage Fraud Unit with increased ties to federal and state law enforcement.  We were also one of the first states to begin authorizing Mortgage Loan Originators through the National Mortgage Licensing System.  We’re in the process of authorizing approximately 20,000 individuals who originate mortgages in New York, not just the companies they work for.  This nationwide system includes a review of fingerprints, background checks, and an education requirement.  The system will also limit fraud, making it harder to evade enforcement, reopen shop, and engage in the same practices simply by crossing state lines.

2. Legislation- ability to pay standard

But even with our enforcement efforts running in high gear, we still need new legislation at the state and federal levels for long-term permanent change.  Because the uncomfortable truth is that many of the unscrupulous- even immoral- lending practices that precipitated the subprime crisis were not illegal.  This was particularly the case in certain segments of the non-depository financial services market.

The Governor’s Program Bill takes up this issue in detail, but this morning I would like to highlight one provision that I consider paramount - establishing an appropriate ability to pay standard for all mortgage loans.  It really doesn’t get more basic than that! Sometimes it still amazes me that this fundamental tenet of sound lending was routinely ignored.  And misaligned incentives- whether the broker’s profit motive or the lender’s short-term mindset in an originate-to-distribute model- certainly contributed to the toxic mix.

In drafting this and other provisions of the Bill, however, the Governor’s team was mindful of the need to keep affordable credit available.  We want options for people with alternative or less-than-perfect credit histories, as heightened underwriting standards are already leading to a consumers’ version of the credit crunch.  I am very conscious that we want the banks we supervise to remain active in originating residential mortgages.

Conclusion

When I spoke to you last year, I had been in my new position as Superintendent for just two months.  I was still in my orientation period. And much of what I learned about the extent of the housing problem and the challenges faced by counseling agencies came from discussions with Sarah and her staff.  I recall during last year’s speech struggling to remember to correctly pronounce Sarah’s last name- “Gerecke.”  This year I know her office and cell phone numbers by heart. Sarah and NHS have always been there for me, and I will continue to be there for her and to offer the Department’s support as we work together.  Because the other lasting lesson that I learned this past year is the important role that these private-public partnerships play.

During my whole career, I cannot think of another major issue facing this country that necessitates collaboration among industry, nonprofits, and all levels of government to the same extent as the current subprime crisis.  Through these partnerships we will continue to assess the extent of the problem, and continue to identify and implement solutions- whether in outreach and loan modifications, or in proposing and adopting new legislation.  We can all do more- and we must do more.  Based on the commitment and compassion evidenced in this room, I am confident that together we can yield results that will make a real difference in the lives of New Yorkers.  Thank you.

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