The Star-Ledger

State's Job In Mortgage Crisis A Tricky Balance

The Star-Ledger — Sunday, August 26, 2007

Star-Ledger Staff

Word started trickling out early on March 20 that LoanCity, a mortgage lender doing business in New Jersey, was shutting its doors.

A notice on the company's Web site confirmed the news later that day: "Today, March 20, 2007, is the last day we will be funding loans."

So, why did it take the New Jersey Department of Banking and Insurance until April 13 – more than three weeks later – to order the California-based lender to cease operations in the state and revoke its license?

It has been a recurring theme since mortgage companies started running into financial troubles amid a slump in the housing market and a spike in mortgage defaults: A lender blows up, files for bankruptcy and goes out of business. And then, like an out-of-shape boxer struggling to answer the bell in the 12th round, the state's banking regulators come out swinging days, weeks, sometimes months later.

Some affordable housing advocates complain state regulators have been slow and ineffective in responding to the mortgage industry meltdown.

"There is nobody over there who is on top of this stuff," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action. "What good is it to tell us that they are going after a company after it has closed up?"

Jaimee Gilmartin, a spokeswoman at the Department of Banking and Insurance, acknowledged it may appear state regulators have been on time-delay. "It's pretty easy to understand why someone might think the cow was out of the barn," she said.

But nothing could be further from the truth, she said.

Regulators have been working behind the scenes with troubled lenders from the get-go, Gilmartin said. In these situations, she added, state regulators must walk a fine line, protecting consumers' interests without undermining a lender's financial stability or creating a panic.

"If 10 state regulators come out and say Company B is in trouble, any investor thinking about giving money to Company B isn't going to do it," Gilmartin said. "We don't want to scare off (a lender's) investment source or contribute to their demise by pulling the trigger too soon."

When a lender is about to buckle, it often stops accepting loan applications. But loans in the pipeline that have already closed or are in the process of closing can be left in limbo, she said. In these cases, the aim of state regulators is to help consumers obtain the loans they've already been approved for.

"The reason you don't see cease-and-desist orders issued immediately is because we are still trying to negotiate the funding for those loans," Gilmartin said.


Consider the case of New Century, one of the biggest subprime lenders in the country, and one of the first to go belly-up.

New Century officially stopped accepting loan applications March 8 because its institutional backers cut off financing.

On March 13, the state's banking and insurance agency issued a news release ordering New Century to stop doing business in New Jersey.

But by then, the New York Stock Exchange had already halted trading of New Century's stock and the company's shares had lost 90 percent of their value.

Another example of the state's delayed reaction?

Terry McEwen, director of the division of banking within the Department of Banking and Insurance, said state banking regulators from across the country hold daily and weekly conference calls to compare notes about ailing lenders.

When New Century first started having liquidity problems in early March, state regulators huddled on a conference call with the lender to get what McEwen called "a pipeline report" to assess the potential damage to each of the states and determine how many consumers would be impacted.

McEwen said when New Century officially stopped accepting loan applications, there were about 1,600 consumers in New Jersey that had recently closed on their loans or were heading toward a closing who suddenly found themselves in limbo.

Through a series of last-minute maneuvers and negotiations, McEwen said, regulators in his department reached out to other lenders to help fund loans for the stranded borrowers.

The result: None of the 1,600 loans approved by New Century fell through, McEwen said.

Critics contend the mortgage crisis could have been avoided if New Jersey had not rolled back a tough predatory lending law back in 2004 in response to pressure from lenders like New Century.

In May 2003, former Gov. Jim McGreevey signed what was then one of the toughest laws in the nation aimed at stopping "predatory" mortgage lending.

A study by Professor Richard Demong of the University of Virginia found originations of subprime home-improvement loans fell 75.4 percent immediately following the law's passage.

One of the most vocal critics of the new measure was the now-defunct New Century. In a news release in November 2003 – just days before the new law went into effect – New Century said it "expects to make 60 percent fewer loans in the state."

"New Century will reduce purchase money and refinance lending in New Jersey because the new law . .. creates unacceptable legal and reputational risks," the release said.

In June 2004, the Legislature amended the law, watering down key provisions.

James Bednar, a real estate expert and author of the popular blog "New Jersey Real Estate Report," said the law led to a liquidity crisis when lenders withdrew from the state. The Demong study found that nearly 40 percent of lenders and mortgage brokers closed their offices or sharply curtailed lending in the state.

"It's ironic because today, a lot of states in other parts of the country are issuing legislation that is very similar to the legislation New Jersey rescinded back in 2004," Bednar said. "We were way ahead of the curve at the very beginning when subprime lending was first becoming popular but we pulled back."

Critics of the state's regulatory efforts say the Banking and Insurance Department needs to be more consumer friendly and reach out to victims who have been bilked or misled by lenders.

"They have a section on their Web site about predatory lending, but they haven't gone out and solicited information from people who were dealt with unfairly," Bednar said.

Salowe-Kaye agrees.

"They haven't put themselves out there as being the go-to place," she said. "They have the capacity to investigate, to go on the radio and television and publicize this stuff."


State officials dispute such claims. Gilmartin said New Jersey banking regulators have been first or second in the country to issue cease-and-desist orders against troubled lenders.

In April, New Jersey was the first state to crack down on mortgage lender Dana Capital for making loans through unlicensed branch offices and unregistered loan officers.

Other states quickly followed, and within three months the company closed its doors.

"New Jersey has been ahead of the curve," Gilmartin said.

And while it may seem pointless for the department to issue a cease-and-desist order long after a lender has shut down, McEwen said it provides an additional layer of consumer protection.

A cease-and-desist order requires a lender to place any fees or deposit money they may have collected from consumers whose loans have not been funded into an escrow account, he said. This makes it easier for consumers who paid the lender any money to get a refund in the event the lender files for bankruptcy.

"Understand that once a company goes to bankruptcy ... if we don't file a cease-and-desist before the actual bankruptcy filing, then we haven't protected the rights of consumers because then they become another unsecured creditor," McEwen said.

Top Top | NJCA Homepage | NJCA in the News