CHICAGO -- While some parts of the country have suffered the effects of the subprime mortgage meltdown in terms of increased foreclosures and declining property values, New York is feeling an even greater impact from Wall Street's woes.

Less than year ago, the seemingly endless good news for New York City's economy and conservative fiscal management earned Gotham upgrades from the big three rating agencies. Today the picture has changed dramatically as investment banks that are either headquartered in or have sizeable operations in the city have written down billions of dollars of assets.

The bubble burst on the booming national real estate market last year as subprime mortgage borrowers began to default and banks tightened their lending practices. The contagion spread to bond insurers that had exposure to the market through insurance on collateralized debt obligations and other asset-backed obligations. The subsequent downgrades and potential for downgrades to insurers drove up the cost of insurance and was a factor in the collapse of the auction-rate securities market, which raised costs for borrowers and turned assets that were once seen sold as cash equivalents into illiquid securities.

The seemingly endless spate of bad Wall Street news this year has caused state tax revenue projections to be revised downward.

"Since the beginning of [fiscal 2008] we've lowered our revenue expectations for the current year and next year by probably over $1.5 billion," said state budget director Laura Anglin. "The credit crunch has been having an effect on a lot of the large corporations, corporate profits." She said the Budget Division is closely monitoring corporate profits, bonuses, taxable capital gains, employment, and write-downs.

"We've positioned ourselves well for next year by lowering our revenue expectations and also lowering our spending and having our agencies look very closely at their discretionary spending and ensure that they're only spending on necessary things, absolutely necessary things," Anglin said.

The state's reliance on the financial services industry - it gets 20% of its revenue from corporate and personal income taxes related to the sector - makes it acutely vulnerable to downturns. New York City gets 9% of its revenue from the financial sector. Wall Street profits in 2006 reached $20.9 billion, the second best year ever, according to office of management and budget documents. Market turbulence in the second half of 2007 cut those profits down to an estimated $2.8 billion. New York City's January financial plan assumes the financial securities industry will lose 8,000 jobs. Unemployment has crept up slightly in the state, to 5.6% in January 2008 from 5% in January 2007, according to not seasonally adjusted figures from the state Labor Department.

The state division of budget estimates that Wall Street bonuses, which greatly affect personal income tax collections, didn't take as a big a hit, falling 5.7% to an estimated $36.3 billion for fiscal 2008 from $38.4 in fiscal 2007.

"The thing obviously important for the state is personal income tax, bonus distributions and some of the financial market turmoil now maybe didn't affect this year's bonus, but certainly it has significant implications for next year's bonus pool and next year's employment levels," said Standard & Poor's director Robin Prunty. "Not all of the financial services layoffs have been centered in New York but most of the large firms are announcing employment reductions ... just the health of the sector has implications for New York state's revenue base."

The state has also endured a prostitution scandal that forced Gov. Eliot Spitzer to resign just weeks before the state budget was due. While Gov. David Paterson's administration seems to promise an end to the acrimony between the executive and legislative branches that colored much of Spitzer's tenure, it's unclear how Paterson will craft his own fiscal policy.

Conventional wisdom has been that the real estate boom bypassed upstate New York and thus the state was spared the worst of the bust. But that is challenged somewhat by a report on foreclosures in 2007 by RealtyTrac, an online marketplace that specializes in foreclosures. Seven New York metropolitan statistical areas were among the top 100 in the nation for foreclosures in 2007.

"A deflated housing market is ultimately going to affect the tax base of different communities across the state," said Jim Fuchs, spokesman for state Comptroller Thomas DiNapoli. The comptroller's office plans to publish a report on the impact of declining housing market on local tax revenues and how that affects their ability to finance operations and capital projects, Fuchs said. The report is expected to be out by May.

New York metropolitan areas don't appear on the RealtyTrac list until number 54, with Long Island's Suffolk and Nassau counties, where 0.973% of houses are in some state of foreclosure, less than the national average of 1.033%. Other metropolitan areas in the top 100 include Rochester, the combined New York City, White Plains, and Wayne, N.J. area, the Buffalo area, the Poughkeepsie and Newburgh area, the Albany and Schenectady area, and Syracuse. Those areas combined saw 57,290 foreclosures in 2007 compared to 39,863 foreclosures in 2006.

"The real estate market for New York has been much less impacted than California or Florida but clearly things have slowed depending on the area," Prunty said. "Anecdotally, foreclosures have increased [but] that hasn't translated in to significant valuation declines."

According to RealtyTrac, foreclosures in the Buffalo metropolitan area, which is in Erie County, increased 74% to 3,850 in 2007 compared to 2006, but even with that increase the rate of foreclosures as a percentage of housing stock is a low 0.426%.

Erie County Comptroller Mark Poloncarz said the subprime mortgage mess hasn't shown up in county finances which take in property tax revenue.

"We didn't have the most robust real property market in the last 15 years so we were never at such a high that we would see a bust," he said. "We don't have as many subprime mortgages in this area as some other parts of the country. If it has impacted Erie County it's because of the effect its had on bond insurers and therefore resulting in an increase in bond insurance cost."

Poloncarz said that bond insurance has risen to almost double the price it was a year ago.

Last summer, New York began a $100 million program through the State of New York Mortgage Agency to refinance adjustable-rate, interest-only, or "other unconventional mortgages" as 30-year or 40-year fixed-rate mortgages at competitive interest rates. But the "Keep the Dream" program - which only helps people before they get into foreclosure - has found few takers. As of mid-March, only eight homeowners in the state had used the program.

"We really need to reach out to homeowners at risk and persuade them to learn more about this program before they fall so far behind," said SONYMA spokeswoman Tiffany Berns. "The agency has taken steps to increase eligibility and is focusing on better outreach," she said.

Total Foreclosure Filings: 57,350 Rate Increase: 10%

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