Regulator defends subprime lending

By J. Patrick Coolican

Sunday, Sept. 9, 2007 | 1:21 a.m.

Joe Waltuch, the new head of the Nevada Mortgage Lending Division, defended the subprime mortgage industry and downplayed the foreclosure crisis in his first interview.

Although he acknowledged a problem, he said, "You're missing the positive side of all this."

Subprime loans - high interest loans given to people with spotty credit histories - represent just 15 percent of the market, he said. Only 1.5 percent of all mortgages, he said, will end up in foreclosure: "Everybody seems to think we need to protect the 1,500 at the expense of the 98,500 good loans."

"We put a lot of people in homes who wouldn't otherwise be in homes," he said.

The comments were counterintuitive, considering recent grim data: Foreclosures nationwide hit a record high in the second quarter, and Nevada is one of four states - along with Florida, California and Arizona - driving the national numbers, according to a survey released last week by the Mortgage Bankers Association.

The problem will worsen in the coming months as 2 million adjustable-rate mortgages across the country switch to higher rates, often beyond what the borrower can afford.

A number of economists disagree with Waltuch's sunny assessment, pointing to the crisis' ripple effect across the economy, especially in places such as Nevada. They say more robust regulat ion could have prevented the current mess.

It should come as no surprise, though, that Waltuch would defend the subprime lending industry.

He spent seven years as an in-house lawyer for a large subprime lender, with his last position as vice president and senior counsel for regulatory and legislative affairs at New Century Financial Corp., an Irvine, Calif., based subprime lender, once the second largest in the country but now defunct and the target of a criminal investigation.

His appointment, made by Mendy Elliott, who is Gov. Jim Gibbons' director of the Business and Industry Department, has been widely panned by Republicans and Democrats alike.

They're baffled that Gibbons and Elliott would turn to a failed subprime mortgage company official to regulate Nevada's troubled home loan industry.

"It's a terrible appointment. It's mind-boggling," said a prominent Republican in the mortgage industry who asked not to be named , fearing retribution. Republicans are especially bothered, as the appointment follows several flops during Gibbons' young tenure.

The governor's spokeswoman did return a call seeking comment.

Assembly Speaker Barbara Buckley, a Las Vegas Democrat who has a long record fighting predatory lenders, called New Century "the poster child for what's wrong with the subprime lending industry."

"Just Googling them and looking at this stuff - the bankruptcy, the testimony of former employees, the federal investigation - it's just shocking," she said.

(According to a Washington Post report, for instance, employees feared retribution if they rejected loan requests from borrowers they considered unfit, and were often overruled by higher-ups when they did reject a risky borrower.)

Waltuch said he'd been unfairly maligned and had nothing to do with the alleged malfeasance. He wasn't in the executive suite and hasn't been named as a target of the investigation, both he and Elliott said.

Waltuch said he doesn't expect to be deposed or interviewed by law enforcement because he knows nothing - and is as much a victim as the thousands who were laid off with him last spring.

Elliott defended the appointment, which the Nevada Mortgage Advisory Council OK'd.

"People need to understand the depth and breadth of his experience and his passion for that industry," Elliott said.

"Not every executive at Enron was a crook," she said.

Waltuch said he offered legal opinions on compliance issues. So, for example, if a mortgage examiner asked for information, he would advise the compliance department on whether it should be provided or was confidential. That's just one of myriad kinds of legal advice he might give, he said.

Before working at New Century, Waltuch was a lawyer for the California Legislature 's research arm and for the Federal Deposit Insurance Corp. Earlier, he was in private practice .

He said he had been misidentified in the Las Vegas Review-Journal as a lobbyist. Indeed, he is not a registered lobbyist in California, where New Century is located, or Washington, D.C., where it had many legislative and regulatory issues at stake.

Still, he said he would educate legislators, give them data, correct misperceptions and give guidance on statutory language. Although most lobbyists would define their jobs as exactly that, Waltuch said he never specifically advocated, and was with a registered lobbyist whenever he was speaking to a legislator.

Most concerning to Buckley, as well as members of both parties concerned about the mortgage lending crisis in Nevada, are Waltuch's views as a defender of the subprime industry and an opponent of aggressive government regulation.

"In the mortgage lending business, government is already involved to a very high extent on the state and federal level. The level is more than sufficient," he said, implying he favors some deregulation.

Waltuch, who said he'd yet to meet with Gibbons, also said he has "no long-term agenda."

When he was asked what regulators might have done to prevent the steep rise in foreclosures, he replied: "I don't want to get into that. I don't think even Ben Bernanke can give you that answer," referring to the chairman of the Federal Reserve.

A number of economists and policy analysts have been sounding a loud alarm bell for years and have pushed for specific reforms.

Indeed, some quick Googling confirms that the Center for Responsible Lending, the National Consumer Law Center, Yale economist Robert Shiller, University of California, Berkeley economist Brad DeLong, Dean Baker at the Center for Economic and Policy Research and New York University economist Nouriel Roubini are just some of the prominent institutions and widely read writers who have been talking about the dark portents of the subprime lending crisis - for years.

These analysts have proposed more disclosure to subprime consumers, a more watchful eye over lenders, and an earlier interest rate hike to prick the bubble before it grew too large. They've also proposed "suitability standards," which would require a broker to assure borrower s that loans were suitable to their financial outlook, thus preventing loans with skyrocketing payments they couldn't afford down the road.

But many conservative economists and subprime lending advocates believe these remedies could be Draconian and carry the unintended consequence of preventing working-class people from buying homes.

Christian Weller, an economist and a senior fellow at the liberal-leaning Center for American Progress, said there should be a healthy debate about remedies, but no debate about the scale of the problem.

So he found Waltuch's downplaying of the crisis curious. He noted that in 2004 and 2005, 40 percent of mortgage originations were to subprime borrowers. That pushed up housing prices long after the increases became untenable. Once some borrowers couldn't make their payments, they put their homes on the market. (In Southern Nevada, there are 25,000 houses for sale, half unoccupied.)

Soon, the housing market was glutted and prices began dropping. Neighborhoods emptied, which forced prices down even more. Developers stopped building. Layoffs. And the process starts all over again.

Weller said the disruption, which has now caused a credit crunch and is preventing some consumers from getting loans, will cost the U.S. economy 1.5percent growth this year and next.In other words, he said, the real estate crash will make Americans $300 billion poorer.

Sun reporters Mary Manning and Brian Wargo contributed to this report.