Turning Point or Temporary Respite?
By Robert Brannum
The New York State Banking Department recently made public its findings of how the state was impacted regarding mortgage foreclosures during the fourth quarter of 2008, and during the full 2008 calendar year. The Department also reported the initial impact of recent statewide efforts to combat the rising tide of foreclosures through governmental efforts, including new legislation signed by Governor David A. Paterson in August 2008.
The report was issued by The Governor’s Interagency Task Force to Halt Abusive Lending Transactions (known as HALT). HALT, which is chaired by state banking Superintendent Richard Neiman, is a task force that links the efforts of all the state’s agencies and departments that are involved in the mortgage industry. Those agencies and departments include: the New York State Banking Department, the Department of State, the State of New York Mortgage Agency, the Division of Human Rights, the Consumer Protection Board, the Division of Housing and Community Renewal, and the Governor’s Office of Regulatory Reform.
Industry-wide malaise affects New York state
HALT’s report to the Governor provided a series of metrics to measure the condition of the mortgage market in the state. At the start of the fourth quarter, New York had nearly 45,000 homes participating in some stage of the foreclosure process, which is a 43 percent increase over the pervious year. The HALT study identified subprime adjustable rate mortgages as the primary factor of both delinquencies and foreclosures in the state.
According to the report, “The results for the third quarter of 2008 demonstrate the sluggishness in New York’s housing market.” Indeed, as measured by a variety of yardsticks, including mortgage originations, existing home sales, and mortgage delinquencies, the state experienced a dreadful 2008 through three quarters of reporting (see Exhibit 1, facing page).
The HALT task force was formed in March 2007 to coordinate statewide efforts around foreclosure assistance and consumer protection, and it initiated its first campaign in April of that year. The task force was supported by then-Governor Eliot Spitzer, and continues to enjoy the support of Governor Paterson. HALT’s key mission is to address the tidal wave of mortgage foreclosures that have their roots in predatory lending schemes, by combating fraudulent and abusive lending practices and aiding the victims of predatory lending. An additional objective of the task force is to promote those lenders and brokers who abide by responsible lending practices. To help achieve that goal, New York is among the first states to participate in the National Mortgage Licensing System, a nationwide effort to register individual loan originators. The state has already registered nearly 10,000 lenders, and expects to reach 20,000 in early 2010.
Although the state has suffered through the economic downturn with the rest of the nation, some key industry statistics show that New York has fared better than average on key fronts:
Between late 2007 and late 2008, the Case and Shiller Home Price Index reported that the value of New York State homes dropped 7 percent, while home values nationally dropped 21 percent. During the same period, home building permits in the state fell nearly 32 percent, which was still better than the northeast region as a whole, which dipped 37 percent (see Exhibit 2, facing page).
4Q data and the impact of HALT & new legislation
During the summer of 2008, the state legislature passed Governor Paterson’s Subprime Lending Reform Bill, which was created to protect a larger community of subprime borrowers, and which instituted many progressive changes to the consumer foreclosure process.
The state’s subprime legislation, which the Governor signed into law in August 2008 and which went into effect on September 1st, included among its main provisions a mandatory 90-day pre-foreclosure notice. This element of the law requires lenders of high-cost home loans, subprime home loans, and non-traditional home loans to send a notice to borrowers at least 90 days before the lender can begin foreclosure processing. This 90-day waiting period, also known as a “Right to Cure Period,” is intended to provide a cooling period during which lenders, borrowers, and counseling agencies have a reasonable amount of time to try to rework the loan, before having to resort to foreclosure. Typically, if consumers are able to “cure” their default within the 90-day window, their loan is reinstated without any additional charges to the borrower.
It’s too soon to know whether the 90-day delay will lead to a permanently reduced number of foreclosures, or just a one-time, three-month delay. However, with fourth quarter data starting to become available, early indications look positive:
• During the fourth quarter, New York State foreclosure filings dropped 42 percent compared to the third quarter, and decreased 33 percent when compared to the fourth quarter in 2007.
• For the full calendar year 2008, foreclosure filings in New York State increased 29 percent, considerably lower than the 81 percent national increase.
• At the end of 2008, New York ranked 35th highest in the country in total foreclosure filings, an improvement over 2007, when it was ranked 27th.
In a statement, Superintendent Neiman was optimistic that the positive fourth quarter results might be long lasting, “The good news is that we are seeing a reduction in foreclosure filings for the full year and a particularly significant drop in the fourth quarter. We believe this demonstrates the effectiveness of the multi-agency HALT Task Force initiatives and programs throughout the state.”
While the longer-term impact of the Right-to-Cure law is still unknown, some insights can be drawn from the recent results seen in Massachusetts from its own 90-day waiting period legislation. That law went into effect on May 1, 2008, four months earlier than New York’s legislation.
As was seen in New York, the immediate impact of the law was made clear by the precipitous drop in filings, called “petitions” in Massachusetts, in the first month the law was on the books: April petitions reached 3,327 while May petitions dropped to 390 (see Exhibit 3, this page).
While petitions initiate the foreclosure process in Massachusetts, foreclosure deeds are the final step in the process, and Massachusetts has been tracking them as well. Deeds, which have exhibited a delayed reaction to the legislation, also seem to be trending downward. While there were 1,334 deeds filed in April, Massachusetts has now had five straight months with sub-1,000 deed filings.
Petition filings have spiked since the initial data became available, but the current rate of filings has stayed well below the pre-law numbers. For the year 2008, Massachusetts recorded 26 percent fewer foreclosure petitions than in the previous year, with more than half of those filings occurring during the first four months of the year before the law went into effect.
Positive news statewide; troubling news in specific NY counties
Tempering the positive results of the legislation was evidence that many counties in New York state were still experiencing very high foreclosure rates. “The bad news is that there remains a disproportionate impact in several counties where neighborhoods are devastated,” said Superintendent Neiman. “While the overall numbers are improving, they are still too large in certain areas and suggest evidence of predatory lending.”
During the fourth quarter, there were 8,366 foreclosure filings across 62 counties in New York State. The worst 20 counties accounted for 92 percent of that total, with the other 42 counties sharing the remaining 8 percent. By far, the worst county was Queens, which alone represented 19 percent of foreclosure filings.
Although the absolute number of foreclosures is still large, there were some indications of turning the corner, with several quarter-to-quarter improvements: each of the counties ranking among the top 10 in largest number of foreclosure filings reduced its number in the fourth quarter. Overall, 44 of New York’s 62 counties registered fewer foreclosure filings.
Robert Brannum is a freelance writer based in Boston with special expertise in the financial industry.