Gill's Bill is Fishy

To understand your legislators, read their press releases. The PR for Senator Nia H. Gill's "Save New Jersey Homes Act of 2008" shows how little Gill (D-Essex and Passaic) understands the current fiscal crisis.

She says, "New Jerseyans are losing their homes at an alarming rate due to foreclosure and the home loan crisis which is going on nationwide." Fair enough, foreclosures are up. But then she adds:

The Legislature has an obligation to create a statutory scheme to allow protection for consumers who are struggling to live with the effects of a crisis created by the subprime lending practices of some predatory mortgage lenders.

Okay, I get it: mortgage lenders are evil. (Never mind the fact that nobody would own houses without them.) The best response to evil people is to pass laws that prevent them from hurting you (unless the evil person is Willie Horton, in which case the best response is to put him on furlough). So how should the New Jersey Senate's new law protect homeowners from "predatory mortgage lenders"?

The bill...would require mortgage companies to notify borrowers at 60 and 30 days prior to the date that the interest rates on their home loans reset. These notices would include information regarding the current interest rate under the introductory terms of the mortgage, the date at which the interest rate resets, an explanation of how the reset interest rate would be calculated, and the best estimate by the creditor of the amount of the monthly payment after the reset date. The notice would also include a list of alternatives the borrower can pursue prior to the reset date, including refinancing or renegotiating with the creditor, or applying for an extension on the introductory interest rate.

Ah, the solution is nagging -- forcing mortgage companies to spend millions on mailings to tell people things that they should already know.

Typical Democrats. In Godless, Ann Coulter said that writing letters to the New York Times is what people who don't fight do when they think they're fighting. This is the Senate's letter to the Times. It won't do anything -- if anything, it's an additional economic strain on an already strained industry -- but it will make them feel like they did something.

Where's the beef, then? Apparently, the Senate bill calls for more bureaucracy to ensure that

borrowers would be able to apply for an extension on the introductory mortgage interest rate, up to three years, if they could not afford the monthly mortgage payments after the interest rate resets. They would have to complete a certification of extension prior to the reset date, indicating that they do not have sufficient monthly income, after deductions for necessary living expenses, to pay the monthly payment on the post-reset mortgage, and that they agree to continue payments during the extension period of principal and interest calculated at the introductory rate. Eligible borrowers would still have to pay back the interest deferred during the extension when they sell their homes, and would forfeit the deferment of interest if the borrower fails to make regular payments during the extension.

...in other words, it puts the burden of absorbing the cashflow crunch onto the lender.

So the evil predatory mortgage lenders will be forced to spend more money on notifications to people and to do the things that they do anyway to avoid foreclosures, regardless of the lender's financial situation. This is in an industry that has seen billions of dollars in writedowns and tens of thousands of layoffs. The result is that they'll be more conservative in their loan-making, which will make it less likely that people will be able to afford New Jersey housing. (And have I mentioned property taxes recently?)

Good thing our legislators are spending their taxpayer-funded salaries thinking up ideas like this.

The press release for the Assembly's version of the bill (A-2780, link in PDF) deals with this fact in an even funnier way.

Finally, the legislation would benefit mortgage lenders by providing them with a continuing revenue source. Many lenders have had to close due to declining revenues linked to the loss of mortgage payments coupled by the additional expenses of having to own and maintain foreclosed properties. Lenders have stated they do not want to be real estate owners, particularly since the drop in real estate values means many cannot recoup their original investment.

Interesting. Before this bill, was there a requirement for lenders to foreclose on their borrowers? If not, then how does this "provide" them with a continuing revenue source? It simply forces them to do things that, if it were in their best interest, they would do anyway.

And as long as we're talking about their press release, consider their justification for the bill:

According to published reports, foreclosure rates in February 2008 – the latest month for which such statistics are available – were up 60 percent nationally over the same time from last year. A total of 223,651 homes received at least one notice from a lenders related to an overdue payment, with nearly half of the homes slipping into default for the first time.

New Jersey saw 53,652 foreclosure filings in 2007, a 34 percent increase over 2006.

Nationwide, over 2.2 million foreclosure filings – including default notices, auction sale notices and bank repossessions – were reported on 1.3 million properties in 2007, a 75 percent increase over the prior year. In excess of 1 percent of all U.S. households were in some stage of foreclosure during the year.
Industry analysts estimate that nationwide another 1.5 million mortgages are due to reset in 2008 and that as many as three million subprime mortgages could end up in foreclosure over the next three years.

They're trying to mislead us somewhat, of course -- the 2.2 million filings are up by 75% nationwide, but we're talking about 1.3 million properties -- but even if you look at the things they say in a straightforward way you see that things aren't as bad as they seem.

• "Nationwide, over 2.2 million foreclosure filings...were reported...in 2007, a 75 percent increase over the prior year", but "New Jersey saw...a 34 percent increase" in filings. That tells me that we're doing half as badly as the rest of the country.
• "In excess of 1 percent of all U.S. households were in some stage of foreclosure during the year" tells me that more than 98% of all U.S. households are not in dire straits.

Which makes this comment by Assemblyman L. Harvey Smith (D-Jersey City) all the more galling: "We must act, and act swiftly, before an entire generation of New Jerseyans are forced to join the ranks of the homeless."

I'm convinced that we need to reform our school system just so we can stop calling 1% of New Jerseyans "an entire generation" and to stop calling a 50% increase "a half a penny".

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