The Times, Trenton

Examining How To Help Subprime Victims

The Times of Trenton — Friday, April 20, 2007

BY SAM ALI
Newhouse News Service

In an echo of the savings-and- loan industry collapse of the 1980s, a growing number of lawmakers and consumer groups are calling for measures to bail out homeown ers who are at risk of losing their homes in foreclosure.

Yesterday, it was New Jersey Assemblyman Neil Cohen's turn to take a whack at what is fast be coming an increasingly controversial topic: Just how far should the government go to rescue homeowners who many believe were lured into "subprime" mortgages by lenders who concealed the risks? Should taxpayers foot the bill? Private industry?

Cohen, a Union County Democrat who chairs the Assembly's committee on financial institutions and insurance, held a special hear ing in Trenton yesterday to address those questions. Judging by the often-conflicting views shared by industry and state officials and consumer groups who testified, there are no easy answers.

"What's going on in the subprime market affects nearly every segment of the economy, whether you live in Montclair or Passaic or Vineland or Cape May," said Cohen. "Something has to be done immediately in order to get ahead of the curve.

"The subprime market was wonderful when it was good, and now there are problems with it and there is an enormous rippling effect that could cause a meltdown in the state."

Earlier this month, Cohen called upon the state's attorney general to impose a 180-day moratorium on subprime mortgage loan foreclo sures, to give the state time to investigate and address the problems.

The moratorium would involve lenders that are going out of business, such as New Century Financial Corp., Accredited Home Lenders Holding Co., as well as firms that are in jeopardy of closing or "wherever there are suspect problems," Cohen said. Exactly how the state would decide which lenders would be covered by the moratorium was not clear.

According to New Jersey Citizen Action, a consumer watchdog group, three of New Jersey's Metropolitan Statistical Areas, including Camden, Newark and Edison, were ranked in the top 50 in the country in terms of the most foreclosures in 2006.

"Blaming the borrower for the foreclosures and calling the cur rent crisis a mere market correc tion as lenders have done is unconscionable," said Phyllis Sa lowe-Kaye, the executive director of Citizen Action.

She said that while 7.6 percent of the subprime loans originated in New Jersey between 1998 and 2001 ended in foreclosure, a re cent study predicts that 19.6 percent of the state's subprime loans originated in 2006 will end in foreclosure. A subprime mortgage is a high-interest-rate loan for people with poor credit.

"For most subprime borrow ers, the nightmare is only just be ginning," she said.

E. Bob Levy, the executive di rector of both the state's Mort gage Bankers Association and the Association of Mortgage Brokers, argued that placing a six- month moratorium on foreclo sures was not the answer.

In fact, Levy said the market has already started correcting the problem. Lenders have dramatically cut the availability of risky products, such as loans that re quire no down payment or proof of income, or those that allow borrowers to decide for themselves how much to pay each month.

Levy warned that lawmakers should be careful not to "throw the baby out with the bath water."

He said the subprime market has enabled countless homeown ers with less-than-perfect credit who could not obtain a loan in the prime market to own a home they wouldn't otherwise have been able to afford. He said 80 percent of those borrowing in the subprime market are paying their loans according to their terms.

A better solution, he said, would be to educate both consumers and the loan officers.

Levy said his group intends to propose a bill to license loan solicitors in the state.

"Today in New Jersey, we register loan solicitors but we do not license them and we have no educational or examination require ments for them," he said. "Licensure is critical because it creates accountability."

During the hearing, Terry McEwen , the director of the New Jersey Department of Banking and Insurance, raised a possible snag to many of the solutions being offered.

State regulators, he noted, have limited authority when it comes to regulating national banks, like Washington Mutual or Wells Fargo, that conduct business on New Jersey turf. Just this week, the U.S. Supreme Court ruled that state financial regulators have no authority over subsidiaries of national banks.

Although the ruling did not di rectly involve subprime lending, it raised a big question as to how states can enforce their own consumer protection laws when deal ing with national banks.

"As a consequence, federal institutions can engage in aggressive lending activities through their subsidiaries that would otherwise violate state law and yet remain insulated from liability for those activities," McEwen said.

Other states also have been examining the problems facing the subprime mortgage market. Last month, lawmakers in California held a special hearing on the issue. And Ohio, which had the highest foreclosure rate in the country, recently said it plans to issue $100 million in taxable municipal bonds to help homeown ers refinance mortgages they can't afford.

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