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The Subprime Mortgage Crisis: Facing a Financial Sunami by Steven M. Goldman, Commissioner, New Jersey Department of Banking and Insurance

The subprime mortgage crisis has been likened to a Financial Tsunami which is threatening the housing and credit markets, financial institutions, and homeowners across the country.

Although millions of Americans have achieved home ownership through subprime loans (defined as higher-interest, often adjustable-rate mortgages offered to borrowers with lower credit qualifications) many have not been so fortunate. Some borrowers simply took out higher loans than they could afford, others could not pay as the initial low rates were adjusted upward, and some borrowers may have been exploited by lenders.

As a result, an estimated 2.4 million people nationally are in danger of losing their homes, and major banks and financial institutions have reported losses of $175 billion on subprime backed loans as of January 2008, with the financial markets fearing more to come.

The effects of this situation are moving beyond the subprime market and are now threatening prime borrowers as well as borrowers who have begun to fall behind on their home, auto and credit card debt.


While New Jersey is faring better than many other states because of the relative health of our overall economy, thousands of state residents may be facing foreclosure, homelessness, bankruptcy, or other financial difficulties because of the subprime situation.

About 1.56 percent of the more than 1.2 million loans being serviced in New Jersey in the third quarter of calendar 2007 were in foreclosure, slightly less than the national rate of 1.69 percent, according to Mortgage Bankers Association (MBA) figures.

But the situation in New Jersey is far from rosy. Residential foreclosure filings have nearly doubled in the last two years. Filings totaled 34,457 in 2007; up 50 percent from the 23,044 filings in 2006 and up 91 percent from the 18,046 in 2005, according to data from the state Administrative Office of the Courts.

The seven cities in the state with the highest foreclosure rates are Newark, Paterson, Plainfield, Elizabeth, Trenton, East Orange and Camden.

Subprime borrowers who took Adjustable Rate Mortgages (ARMs) were hit the hardest. While the foreclosure rate for prime loans in the third quarter of last year was 0.72 percent, the foreclosure rate for subprime loans was 7.26 percent and for subprime ARMs 11.25 percent.

As of September 30, 2007, the total number of subprime ARMs in foreclosure or default was roughly 22,000.

NJHOPE: A Broad Coalition To Help Consumers The New Jersey Department of Banking and Insurance (DOBI), as the regulator of state-chartered banks and licensed lenders, has been taking actions on many fronts. These include raising consumer awareness, working with other government agencies, financial institutions and trade associations to help consumers and continuing strong regulatory oversight of financial institutions.

One of the most far reaching efforts announced by DOBI in October is the establishment of the New Jersey Home Ownership Preservation Effort (“NJHOPE”), a public-private alliance which will work with consumers, government, and financial institutions to monitor and help mitigate the effects of the crisis in the mortgage market on New Jersey consumers.

NJHOPE includes representatives of the U. S. Department of Housing and Urban Development (HUD), NeighborWorks America, New Jersey Citizen Action, the New Jersey Bankers Association, the New Jersey Credit Union League, the New Jersey League of Community Bankers, the New Jersey Mortgage Bankers Association, the Department of Banking and Insurance, the New Jersey Department of Community Affairs, and the New Jersey Housing and Mortgage Finance Agency (HMFA).

The organization aims to preserve home ownership by raising consumer awareness of available mortgage products and funding, providing increased access to credit and loan counseling for those who need it and providing temporary assistance to consumers who are in immediate danger of foreclosure.

For more information, homeowners can call the DOBI Consumer Hotline, at (1-800-446-7467), or visit the NJHOPE Web site at

NJHOPE, DOBI and NJ League of Municipalities Working Together The alliance expanded its efforts earlier this year with the formation of the NJHOPE Task Force, which consists of DOBI, DCA, HMFA, financial trade associations and non-profit and faith-based housing and consumer advocacy groups.

The alliance also formed the NJ HOPE Advisory Committee of Elected Officials, which includes the New Jersey State League of Municipalities, New Jersey Conference of Mayors, New Jersey Association of Counties, Constitutional Officers of New Jersey, partisan staff of both houses of the legislature and legislative leaders of interested committees.

While The Task Force will coordinate the myriad efforts of NJHOPE, the advisory committee will provide much needed input and advice from municipal and county officials. The League of Municipalities is a key partner with DOBI on this initiative and will communicate with municipalities to provide information and coordinate efforts.

The Task Force has begun forging partnerships, including the HMFA agreement with NeighborWorks to train credit and crisis counselors for 18 agencies statewide enabling them to increase their reach to consumers. 

The group is also discussing a public relations campaign to raise awareness of the problem and of the financial and counseling assistance available as a solution.

Task Forces have also been assembled in Newark and Urban Essex County and in Trenton, where Mayor Palmer has taken an active role in addressing these issues locally and also nationally. Department representatives are participating and supporting these efforts.

DOBI’s Consumer Awareness Efforts  DOBI has also made its own efforts to increase public awareness of the subprime issue over the last six months.

Since October 2007, DOBI, in cooperation with local mayors, has held 10 community forums to offer information to homeowners who are having difficulty making their mortgage payments.

Among the goals: to assist people caught in this credit crisis, such as those who bought unconventional mortgage products and saw payments balloon to unaffordable levels, and to let people know how to avoid loans with potentially catastrophic consequences.

Initial sessions were held in Paterson, Bayville, Edison, Vineland, East Orange and Trenton, where counseling and information resources were offered to area residents. Additional forums will be scheduled in conjunction with the NJHOPE alliance. Each forum provided information from HUD, as well as credit counselors, debt adjusters and mortgage bankers.

DOBI staff have also participated in numerous events around the state hosted by other parties; notably foreclosure prevention events hosted by Senator Ron Rice and by HUD in Newark and a New Jersey Law Center seminar.
In partnership with the financial services industry, DOBI and HMFA, promoted efforts to provide homeowners with affordable mortgage products, closing cost assistance, debt adjustment services and credit counseling.
DOBI also set up a toll-free hotline (1-800-446-7467) to offer guidance and has enhanced its online resources ( to include licensed debt adjusters and credit counselors.

The department has also published a brochure, “A Homeowner’s Guide to Subprime,” for distribution throughout New Jersey to state and local governmental offices and assistance organizations. The brochure is also available via the DOBI website (

Collaboration with Other Organizations At the same time the department was stepping up consumer awareness efforts, it was also working with other state and federal agencies, representatives of financial services institutions and their trade associations.

DOBI and DCA announced assistance from various financial institutions to consumers including $433 million in available mortgage refinancing, highlighted by the HMFA’s Homeownership Preservation Refinance Program, a $30 million pilot program serving families earning up to 140 percent of the state’s median income. For more information see the agency’s website at

HMFA’s Homeownership Preservation Refinance Program will offer fixed-rate loans, closing cost assistance, credit counseling and other services.

DCA and HFMA, along with other partners, have also made available $1 million to train additional New Jersey credit and loan counselors.

Continuing Regulatory and Consumer Protection Efforts The department has continued its strong regulatory oversight of financial institutions while its Office of Consumer Finance has handled an increasing number of consumer complaints.

The department received over 9,100 consumer complaints against banks and other lending institutions in 2007, up substantially from the previous year, and helped return over $1,836,000 to borrowers.

As problems affecting the mortgage industry arose in 2007, DOBI took quick enforcement actions. DOBI’s Enforcement Bureau took 729 enforcement actions for regulatory violations, and collected $600,000 in fines and penalties. The department’s examinations function collected $443,613 in refunds from troubled lenders, and filed 12 cease and desist orders against licensed mortgage bankers. It also helped find alternate funding sources for 1,600 borrowers whose applications with New Century and Home 123 were in the pipeline when those organizations lost their financing.

The department has addressed lending industry issues with licensees; issuing industry bulletins on best practices applicable to non-traditional mortgage products, subprime lending practices, and urging firms involved in servicing mortgages to step up efforts to work out arrangements with at-risk New Jersey borrowers to preserve homeownership.

On the national front Governor Corzine wrote to Ben Bernanke, Chairman of the Federal Reserve Bank, in August, calling for new regulations under the Federal Home Ownership Equity Protection Act to limit predatory lending practices and provide more consumer protections.

The Governor requested regulations that would require the evaluation of a subprime borrower’s ability to repay a loan at the fully-indexed rate, with appropriate consideration of available income and/or assets, the establishment of reasonable debt-to-income and debt-to assets standards for gauging mortgage costs against a borrower’s other financial obligations, establishment of an escrow account for taxes and insurance, and the prohibition of prepayment penalties by all lending institutions. The Federal Reserve Board proposed such regulations late last year, and DOBI generally supports them.

What’s Next By all accounts, the effects of the subprime lending situation are going to continue for the forseeable future. Based on rate reset projections indicating peaks in the next 12 to 18 months, the Report and Recommendations by the Majority Staff of the Joint Economic Committee estimates foreclosures will continue at a high rate nationally, with about 35,000 subprime foreclosures in New Jersey from the third quarter of 2007 through the fourth quarter of 2009. So there is still much to be done.

As the NJHOPE Task Force continues its work and more elected officials become involved through the efforts of DOBI and the NJ League of Municipalities, more information and assistance should reach distressed borrowers.

The department will continue and expand its program of consumer education in all areas including first time home buying, predatory lending and other topics that over the last two years have reached 25,000 New Jersey residents.

The department remains committed to providing leadership, support and service in this area, as regulators at the state and federal levels work together with industry and non-profit consumer assistance entities to provide help for New Jersey borrowers.


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