Governor Paterson’s Remarks on the Adoption of Reforms to Address the Mortgage Crisis

State Capitol
Albany, New York
June 19, 2008

Good afternoon.  We are very, very pleased right now to announce that we have reached an agreement on subprime mortgage efforts that we’re making to help those who are in foreclosure or at risk of being in foreclosure—and to stop some practices that we feel helped this catastrophe to get where it was.

But before I talk about that, I want to thank Speaker Silver and Majority Leader Bruno.  This is an intricate set of principles and ideas that we had to work out.  It involves different agencies and aspects of the law.  This was very, very difficult.  And we’ve worked on this for a while.  We were not sure we could get it done by the end of the session.  But we knew that the people of this state who are in these types of problems really need help.  Now Albany has come through, and we will be able to help them.

There are two basic areas we are addressing.

The first would be for a person who is at risk of being in foreclosure or who is in foreclosure.

We are requiring pre-foreclosure notices.  These will be the ways in which a person doesn’t have the foreclosure sprung upon them, but the person finds out before the foreclosure.  So there’s a process that has to be undertaken to make it clear that the foreclosure is coming.

Then, we are insisting that there be mandatory conferences between the lender and the borrower to try to work something out—in other words, to review the status of the entire loan, so we have a sense of what’s actually happening.

Then we are going to make sure that we are dealing with the true owner.  In other words, there has to be an allegation of ownership, so that it is clear—with the loans being passed around and sold to this entity and that entity—that there is actually a demonstration that the person seeking the foreclosure is actually the owner of the loan at that point.

Finally, we want those who are engaged in lending to be registered with the State Banking Department.  We want to know who it is that’s making these loans so we can start to establish a track record—just as we’re trying to do with doctors, where you can get an idea of what the doctor’s record might be, we’re going to do the same thing for the companies, the mortgage lenders and the mortgage brokers.

Also, what we are going to do outside of the legislation is make sure that people in the Banking Department, and even people who deal with the criminal part of this, understand the process a little better than they do.  We’re going to have to train some of the workers—not only in the Banking Department but also in law enforcement and in district attorneys’ offices—to make sure that they understand what this is all about.

The second basic area involves trying to stop this from happening in the future.

To do this, we are going to criminalize some of the conduct.

When there’s a knock on the door, and an elderly man or woman answers the door, and someone says, “Well, I can give you $100,000 for a second mortgage,” we’re going to make sure there’s an ability to pay—that there’s an understanding that it would be reasonable that this person can pay for this mortgage.

If they’re not, there are going to be some criminal penalties, because you are obviously committing a fraud.  You are intentionally misrepresenting that the loan would be good for a homeowner, and it is an existing fact that you know it actually is not.  So ability to pay will be an issue as we move forward.

We’re going to have a “duty of care standard” for the mortgage broker, because sometimes you have these situations where the more profit the lender can get from the loan through the broker, it actually inures to the benefit of the broker.  We are going to enact a duty of care to require brokers to act in the borrower’s interest.

Two other points.  We want to eliminate these situations where people come in and try to rescue these individuals at the last minute from foreclosure—when they come in and say, “Well, look, you’re about to be foreclosed upon.  We’ll make a deal for you.”  And the deal is just as bad.  People refinance the loan, and the refinancing doesn’t benefit the homeowner at all.  It really just benefits the lender in this situation.

Finally we want to rid ourselves of the types of abusive practices, such as flipping the loans and having people pay these negatively amortized rates where the amount of money is increasing but they’re never really paying the principal down.

So there are a lot of different variables that we have put into this legislation.  We couldn’t have done it without Senator Farley, the Chairman of the Banking Committee in the Senate, and Assemblyman Darryl Towns, the Chairman of the Banking Committee in the Assembly—and a lot of the legislators who are here, and many who are not here, who have worked on this.

Regrettably, the American Dream—you buy a home, and then all of a sudden your life savings is going up in smoke, and you have this situation where people who buy homes are prime targets because they have an entity that has value.  And if you can get the entity away from them, you can create a huge profit.

But we’re not only doing this for the homeowners.  We also feel that, in the end, it will help the lenders.

Look at where the lenders are now.  Nobody’s even seeking loans right now because of what this crisis has done to the American public.

The American public has lost almost $5 trillion in the last decade from this source.  There are 9 million Americans now who hold mortgages that cost more than the property.  And clearly, the value of homes in the Standard & Poor’s yearly survey, the month-to-month survey, is down 4.4 percent ending April 30, 2008.

So, we’re doing our part.  We also hope this will send a signal to our federal government to try to do their part.