One of the planks in the Obama administration’s plan for financial regulation is ensuring that states are allowed to strengthen mortgage standards if they feel that the federal standards are not tough enough or if they notice a problem unique to their state that needs addressing. Yesterday, the Mortgage Bankers Association (MBA) wrote a letter to Treasury Secretary Tim Geithner and National Economic Council Director Lawrence Summers to complain about this idea:

The Mortgage Bankers Association has weighed in against an Obama White House proposal to allow states to write tougher lending rules than the federal government. “Anything short of federal preemption risks perpetuating one of the problems of today’s regulatory structure for mortgages and would seem to be inconsistent with key objectives of the administration’s plan,” MBA Chief Executive John A. Courson wrote Thursday.

But we’ve been down that road before, and it’s one of the reasons that we’ve wound up with the mortgage mess that we have on our hands today.

In 2002 and 2003, various states, including Georgia, New York, New Jersey, and New Mexico, proposed laws aimed at cutting down on predatory lending and subprime mortgages, which were becoming increasingly large problems. But then, citing the “increased costs and an undue regulatory burden” on banks, both the Office of Thrift Supervision and the Office of the Comptroller of the Currency swooped in to exempt national banks from state standards, preempting anything that the states might do.

At the time, Diana Taylor, the New York superintendent of banks, said “I am concerned because this is an unelected official in Washington who is overruling state legislators by regulatory fiat. The state legislature has a better idea of the consumer situation in the state than an unelected official in Washington.” Of course, we now know the havoc that subprime lending wreaked on the economy.

Obama has already directed executive branch officials “to review every regulation adopted in the past ten years to scrub them of inappropriate preemption language.” His goal of not preempting state lending regulations is simply consistent with this approach. But the MBA would rather the banks stay under the same sort of regulatory regime that missed the subprime mess in the first place.

The Obama administration’s housing plan centers on the idea that, given enough in the way of incentives, lenders will modify loans for troubled homeowners, which enables both the homeowner to keep their home and the lender to keep receiving payments. However, the program is having some difficulty getting off the ground:

The Obama administration’s $75 billion program to reduce foreclosures has been beset by backlogs and delays, leading many overstretched homeowners to complain about unreturned phone calls and inaccurate information from lenders, while others say they were denied help for reasons that weren’t clear.

“The loan-modification program is suffering. What we’re doing right now isn’t working as expected,” says Richard Smith, CEO of Realogy. “Banks, unfortunately, just weren’t geared up for this.” This is troubling, especially since housing experts are warning that “a new wave” of foreclosures may be on its way — as borrowers with adjustable rate mortgages that were a step above subprime start to see their rates rise — which could cause as many problems, if not more, as subprime defaults did.

Fortunately, the good people at CAP have been thinking about this. In a paper coming out on Monday, Andrew Jakabovics and Alon Cohen recommend that the federal government do everything it can to ramp up mandatory mediation between borrowers and lenders as a way of nipping preventable foreclosures in the bud. The idea is that, before putting a homeowner into foreclosure, a lender would have to sit down with the borrower to see if they can work out an acceptable deal that will enable the borrower to avoid foreclosure.

The reason for this is that mandatory mediation — the simple act of forcing lenders to meet with borrowers — has already proven quite successful at the city and state level. Consider the example set by Philadelphia:

By requiring lenders seeking a foreclosure to sit down with the distressed homeowner and mediate a resolution, the Philadelphia Foreclosure Diversion Program has succeeded in keeping 78% of families in their homes. If those families had been in other jurisdictions they would have lost their homes to foreclosure.

A program in Connecticut has also seen some success, with 57 percent of borrowers who complete the program remaining in their homes. Connecticut also provides a template for how such a program can be designed at the state level.

While getting to more people than previous efforts (like Hope for Homeowners, which prevented a grand total of one foreclosure), the administration’s housing plan just don’t seem like it can keep up with the rapid rate of foreclosures. It’s worth giving mediation a shot, as foreclosures are proving to be a constant thorn in the side of economic recovery.