Why Ohio, not Pa., is a subprime mess

Why has Ohio been hit so much harder by foreclosures than Pennsylvania?

We have a better economy, better lenders and better laws.

Pennsylvania is not unscathed. Allegheny County could see as many as 4,700 foreclosures this year. That's up from last year and about two-and-a-half times as many as in 1983 when the steel industry was collapsing.

In Cleveland, though, it's far worse. Cuyahoga County had 15,000 foreclosures last year and will have 15,000 more this year, county Treasurer Jim Rokakis said.

"There was nobody home at the regulatory level in Ohio,'' Mr. Rokakis said. "Predatory lending practices were allowed to run wild and unabated.''

PNC Bank is buying a strapped National City, based in Cleveland, because "I think your banks were acting responsibly and ours were not. Period.''

In Ohio, there are 2.7 homes in foreclosure per 1,000 housing units, almost twice Pennsylvania's 1.5, according to statistics from the Federal Reserve Bank of New York. The percentage of homes where the lender has taken legal title is more than three times higher in Ohio than in Pennsylvania.

Mr. Rokakis is the self-described Cassandra who began warning of a mortgage meltdown in 2000. Ohio was then one of only a couple of states without a consumer and sales practices act, which meant the attorney general could go after someone who sold a bad toaster or TV but not one who sold a bad mortgage.

The cities of Cleveland, Dayton and Toledo adopted anti-predatory lending laws in 2001, but the Ohio Legislature swiftly overrode them. The Ohio legislators had been lobbied hard by bankers, led by National City, Mr. Rokakis said.

"If your major banks are willing to lead the charge into these risky lending practices, why should you be surprised that others followed?"

It wasn't until 2006 that Ohio adopted state legislation to rein in predatory lending. By then there was "fraud on an industrial scale,'' Mr. Rokakis said, and homes were wildly overvalued. The median sales price of homes in metropolitan Cleveland dropped from $138,900 in 2005 to $117,500 in the second quarter this year. Numbers are also down in metro Cincinnati and metro Columbus, according to the National Association of Realtors.

In the same period, the median price in Pittsburgh rose from $116,100 to $125,200. That remains low for a large metro area, but we're in one of the few regions that moved in a positive direction.

Steve Shivak, executive director of the Pittsburgh Community Reinvestment Group, says National City did not get into the same lending trouble here that it did in its home state. That's partly because, for the past 21 years, his watchdog group has demanded good loans from banks and has helped define what they should be.

The PCRG works with banks and community groups to make sure banks make some loans in neighborhoods where they take deposits. That's a requirement of the federal Community Reinvestment Act.

"As far as I know, there is no organization like PCRG in Ohio that held banks' feet to the fire and said they only want good products," Mr. Shivak said.

If a lender isn't accepting deposits in a given neighborhood, it doesn't fall under the Community Reinvestment Act, and these unregulated lenders have been causing the problems. Of more than 700 homeowners threatened with foreclosure who have come to the PCRG for counseling in the past three years, only three had loans from a PCRG banking partner, Mr. Shivak said.

Most people in trouble refinanced their homes, he said. "Many times they've refinanced themselves out of a good loan,'' to get money for college tuition, a leaking roof or new windows.

Lessons of the recent past may help our state now. The Pennsylvania Housing Finance Agency (www.phfa.org) has been offering emergency mortgage assistance since 1983. In July, Gov. Ed Rendell signed five bills to strengthen oversight of the mortgage industry, including a ban on any prepayment penalties for mortgages under $217,873. (It takes a committee to come up with such a number.)

The Pennsylvania Department of Banking has proposed a new regulation that will do away with "no doc'' loans. That means all borrowers will have to show documentation that they can afford the house they're buying. That may seem only common sense, but the proposal's arrival shows how far the lending industry has strayed from the old fundamentals.

Does that mean the crisis has bypassed Pennsylvania? Absolutely not. The Fed says 29 percent of subprime loans in Pennsylvania will reset to a higher rate in the next 12 months. That means trouble.

But for a frequent critic of state government like me, it's only fair to give a nod to some of what Pennsylvania has gotten right.

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