Earlier this year City Limits published an investigation that explored at an often overlooked part of the housing crisis in New York: the role banks do—or don't but should—play in monitoring conditions in the multifamily buildings on which they hold the note.
After all, if lousy landlords didn't get the loans that let them purchase buildings where other people live, they wouldn't be landlords in the first place.
We reported then that the state's Division of Financial Services was considering updating its bank examination process to incorporate concerns about housing conditions. Specifically, DFS was looking at adding loan soundness and housing-code compliance as criteria in its Community Reinvestment Act evaluations, which grade banks on whether they are adequately serving the communities from which they draw deposits.
Banks face two related criticisms: One is that there is not enough attention to building conditions like lead paint, broken elevators and bad plumbing when banks issue, refinance or just service a mortgage. The other is that banks sometimes provided mortgages too expensive for a building's rent roll to support—meaning the landlord either has to get rid of low-income tenants and import richer ones or, more likely, save money by neglecting maintenance.
In a letter published on Tuesday but issued earlier this month, DFS superintendent Benjamin Lawsky outlined final regulations that make changes to CRA aimed at reining in banks.
"Unfortunately, indicators of distress previously witnessed during the real estate bubble are also beginning to rise," the letter notes. Now, it continues, state examiners will "consider whether a bank has met its responsibility to ensure that a multifamily loan submitted for affordable housing or neighborhood revitalization credit under CRA contributes to, and does not undermine, the availability of affordable housing or neighborhood conditions."
From now on, "where a concern around overleveraged or distressed lending is raise d on a multifamily loan submitted for CRA credit," the state will look to see if it actually adds affordable housing, whether the housing is up to standard and whether the mortgage math makes sense.
The state won't give credit for housing loans that facilitate "substandard living conditions as evidenced by a high number of housing code violations, emergency repair liens, water bill liens or indexes of such measures such as those contained in the New York City Department of Housing Preservation and Development ’s At - Risk Multifamily Building Data, the University Neighborhood Housing Program’s Building Indicator Project Database" and other sources.
In a blog post, the Association of Neighborhood Housing Developers called the state's move an "effective way to encourage responsible lending and discourage predatory lending."
"We especially applaud the attention to overleveraging and the encouragement of close collaboration with community groups that are working directly with tenants to monitor and respond to issues in their buildings," ANHD blogger Jaime Weisberg added. "This could—and should –be a model for state and federal exams nationwide."