Is New Jersey fiddling while its housing stock is foreclosed?

That's the title of one of Linda Stamato's blog entries last Friday on NJ Voices. She talks about how the State of NJ is not doing anything to deal with the large numbers of foreclosures we're seeing while other cities and states are acting.

And in a previous blog entry of hers she highlights some examples of what other states are doing and suggests NJ needs to take similar action to provide immediate relief.

But, we continue to wait for action in New Jersey. As state agencies and court officials "plan and consider" what, if any, actions to take, citizen action groups, counselors, public interest lawyers and coalitions of citizens and activists are trying to fill the void.

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Why are other states in advance of New Jersey? The experience with the farm crisis that swept across the country in the 1980s-- that led to a successful use of mediation of troubled farm loans--provides one answer. Farmer-creditor mediation brought debt-burdened farmers and their creditors together to resolve loan problems before they reached the point at which the only options were foreclosure or legal action.

I take issue with these types of calls to action to fix the crisis and try and blame local and state governments for fumbling around while people are losing their homes and banks are failing. I don't mean to single out Linda Stamato, since there are others making similar statements. The reason I take issue with these statements is because years ago, some states and local governments, foresaw the problems with predatory lending practices and tried to put a stop to it years ago. Imagine a guy goes to the doctor. The doctor tells him he needs to start excersising more and eat better or he's going to have serious health problems. The guy doesn't heed his doctors warnings and with all the pressure from the fast food industry, his health slowly starts to decline. Years later, he goes back to the doctor who diagnoses the patient with life threatening ailments that would require a heavy regiment to even hope to correct. Now, you can have sympathy for the patient, who is now finaly trying to come to terms with his own mortality, but can you really criticize the doctor for "fiddling" around while his patient is dieing? I wouldn't. The doctor tried to head off the problem when it was still manageable. Now that the problem has compounded itself, it is more difficult to treat.

This Slate.com artile describes how in 2002 Georgia became the first state to enact laws against predatory lending that slowed down some of the practices that caused the current problem and how the federal government stepped in on behalf of the lenders and investment banks. Other states followed Georgia's lead. The "New Jersey Home Ownership Security Act of 2002" was our state's response. From the first paragraph in the Act we read (emphasis added):

Abusive mortgage lending has become an increasing problem in this State, exacerbating the loss of equity in homes and causing an increase in the number of foreclosures in recent years. One of the most common forms of abusive lending is the making of loans that are equity-based, rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages the repeated refinancing of home loans. The lender's ability to sell loans reduces the incentive to ensure that the homeowner can afford the payments of the loan. As long as there is sufficient equity in the home, an abusive lender benefits even if the borrower is unable to make the payments and is forced to refinance. In addition, the financing of high points and fees causes the loss of precious equity in each refinancing and often leads to foreclosure.

The act covers a variety of problems that led us down the path we are now including high cost loans and flipping. The FHA had even seen signs fo lenders artificially inflating house prices as early as 2001 and worked on rules to stop them. They didn't seem to be effective or they were allowed to be ignored. The rules were also recently suspended to help banks deal with the large number of foreclosures they are seeing.

So what happened with that legislation? As you can see from the Slate article, the Treasury Department's Office of the Comptroller of Currency stepped in at the request of the banks. Here's a quote from Slate's article:

While the banks' legal arguments were thin, the OCC issued regulations in early 2004 nullifying the state laws as they applied to national banks. In part, the OCC reasoned that the states just got it wrong: As the then-comptroller explained in a speech to the Federalist Society, "We know that it's possible to deal effectively with predatory lending without putting impediments in the way of those who provide access to legitimate subprime credit." With the state laws nullified, national banks were free to engage in the sharp practices the states were hoping to stamp out. (Indeed, Georgia scuttled its law because it didn't want to give national banks a competitive advantage over its state institutions.) Facing intense pressure from subprime lenders and Wall Street, and left without a real chance of holding investors responsible for purchasing ill-advised loans, state legislatures gave up.

The mortgage markets and banks did this to themselves and made billions of dollars in profits along the way. Both from borrowers and investors. Now they're feeling the pain and expecting the Fed and State governments to come to their rescues, just like a spoiled kid that doesn't listen to his parents and then when he gets jammed up expects mom and dad to come running to his rescue.

I'm not saying that we don't need to do anything, but lets not allow our sympathy for the millions of Americans losing their homes and jobs to do things that will only feed money back up the chain to protect the people behind this mess and allow them to collect their multi-million dollar bonuses at our expense.

Related Links:

• Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market