Foreclosure Crisis Update

posted by Alan White

Is the foreclosure crisis over? Yes and no. Since 2007, about six million homes have been sold at foreclosure sales (Foreclosures Public Data Summary Jan 2015). Today, about one million homes are still somewhere in the foreclosure process. Homeowners behind in their payments have declined from 15% at the 2010 peak of the crisis to less than 8% now (MBAA delinquent plus in foreclosure at 12/31/14).  Most of the still-troubled loans were originated before 2007. The best news is that new foreclosure starts are now down to pre-crisis levels, at less than IMG_20120203_132449 one-half of one percent of all mortgages, if we take 2006 to be the pre-crisis level.

So new home loans, those made since 2008, are doing very well, and what remains is the legacy of those bad loans that triggered the crisis, right? Not exactly. 

The first problem is to define what we mean by pre-crisis levels. Subprime mortgages expanded rapidly from 2000 to 2007, accounting for an ever-increasing share of all mortgages, and skewing delinquency rates upwards. So for a real pre-crisis baseline, we need to go back to earlier times, or to look at mortgage default rates for prime and FHA loans only. Today in 2015 there are virtually no subprime mortgages being originated. As the inventory of old subprime loans winds down, we should expect to see default rates well below those for the early 2000s, and we are not there yet.

The second problem is negative equity. At the end of 2014, 16.9% of residential mortgages were underwater, i.e. the debt exceeded the current home value. Home price appreciation is not projected to solve this problem any time soon. This situation is historically unprecedented, and leaves millions of homeowners at continuing risk of default should the economy falter.

The third problem is the fragile inventory of nontraditional and modified loans that remain from the subprime bubble. There are perhaps 3 to 4 million active mortgages that were modified to avoid foreclosure in the past seven years. Some of these have temporarily low rates, as low as 2%, that will adjust upwards soon. Others have large balloon payments or payment terms than extend for 40 years, making repayment or refinancing difficult.  And of course there are still plenty of homeowners stuck in non-amortizing mortgages or ARMs that are vulnerable to coming interest rate hikes.

At this point, we can begin to identify some lessons from the long and painful process of deleveraging America's homeowners. In future posts I hope to look at some available data showing what worked and what didn't, as we consider various policy measures to reform housing finance and mortgage foreclosure.

Clickwrap Contracts and the Federal Government

posted by Adam Levitin

The government is a major player in the marketplace as a buyer of goods and services, but legal scholars seldom pay attention to the law governing federal acquisitions. As it turns out this nearly completely ignored branch of contract law is actually way ahead of the curve, at least on the question of shrinkwrap and clickwrap contracts.  Title 48 of the Code of Federal Regulations contains the Federal Acquisition Regulations promulgated by the General Services Administration. Among them is a true gem that was promulgated in 2013 that addresses contracts that purport to bind the government to indemnify the government contractor in violation of the Anti-Deficiency Act:

If the EULA, TOS, or similar legal instrument or agreement is invoked through an “I agree” click box or other comparable mechanism (e.g., “click-wrap” or “browse-wrap” agreements), execution does not bind the Government or any Government authorized end user to such clause.

If such a provision is good enough for Uncle Sam himself, shouldn't it be good enough for the taxpayers who would ultimately foot the bill? Contract law went off on a very bad trajectory when courts began to uphold clickwrap contracts based on arm-chair economics efficiency theories. It may well be that such contracts are efficient, at least in some cases, but contract law has never been solely about efficiency. Absent some meaningful evidence of a meeting of the minds between counterparties, it is hard to conclude that we are getting the mutual gains from trade we hope contracts produce, and a mere click isn't very good evidence of assent to particular terms. Hopefully the Restatement-in-Progress of the Law of Consumer Contracts will take note. 

Auto Title Loans: Like Payday Loans, But Larger and Riskier

posted by Pamela Foohey

The Pew Charitable Trusts today released a report focusing on the market for auto title loans. The report brings together data from a wide variety of sources (including Slips contributor Nathalie Martin's work) to provide a clear, succinct, and thorough overview of the mechanics of this under-studied industry. It also, and most interestingly, includes the results of Pew's nationwide survey of borrowers and discussions with focus groups.

The empirical data underscore how similar auto title loans are to payday loans, and how regulation of this part of the alternative finance industry also is greatly needed. The report is particularly timely in light of the Consumer Financial Protection Bureau's anticipated upcoming release of payday loan rules, and its field hearing tomorrow in Richmond on payday lending.  

People reported taking out auto title loans for similar reasons as to why they take out payday loans: they make less than $30,000 a year and primarily need money to meet everyday expenses, though some use the money to pay unexpected expenses. People also reported having other options to borrow money or cut expenses. Even so, they focused on the ease of getting money, relying on lender location and advertisements, and word of mouth, rather than comparison shopping or considering other ultimately less expensive ways to obtain credit. What is perhaps most disturbing is that a sizable portion of people reported paying back these loans via the exact means that they rejected when taking out the loans: borrowing from friends and family, going to banks or credit unions, and using credit cards.

Continue reading "Auto Title Loans: Like Payday Loans, But Larger and Riskier" »

Consumer Bankruptcy with Chinese Characteristics?

posted by Jason Kilborn

Yuan trapDeng Xiaoping's famous description of the "new" Chinese development-oriented economy begs the question of what that system intends to do with the inevitable casualties of consumerism and economic development. What of the increasing number of people in danger of falling out (or who have already fallen out) of the new middle class? In contrast to 20 years of concentrated efforts to establish and reform a business insolvency regime, it looks at though China is still very far from introducing a relief mechanism for consumer insolvency. The simple basis for debtor-creditor law in China is Article 108 of the PRC General Principles of the Civil Law:  "Debts shall be paid" (also allowing for installment payments pursuant to "a ruling by a people's court").  I suspect the Chinese phrase long predates "pacta sunt servanda."

Continue reading "Consumer Bankruptcy with Chinese Characteristics?" »

The Costs of Chapter 11

posted by Stephen Lubben

Although I keep swearing off the topic, I've written something about chapter 11 professional fees.  Again.  Over at Dealb%k.

Rodgin Cohen: Pay No Attention to That Man Behind the Curtain

posted by Adam Levitin

The Wall Street Journal ran a story today about H. Rodgin Cohen, the Senior Chairman of Sullivan & Cromwell and "one of Wall Street's top lawyers" decrying "the myth of regulatory capture." All I can say is wow. That's some chutzpah. 

For Rodgin Cohen to downplay regulatory capture is a like the scene in the Wizard of Oz when the Wizard says, "Pay no attention to that man behind the curtain." It's hard to think of an individual more at the center of the regulatory capture phenomenon than Rodgin Cohen.  Cohen plays a particular and unique role in the regulatory capture problem. Cohen is not just "one of Wall Street's top laywers". He is the top bank lawyer. He's a node through which all sorts of connections happen. Cohen is the eminece grise of financial services law and is an institution unto himself. Think of him as a sort of super-consiglieri or Mr. Wolf. There's no one who quite plays the role of Cohen in the world of financial regulation, and he's rightly greatly respected. 

I don't think of Cohen as an anti-regulatory ideologue (heck, regulation is how he earns a living), but he is deeply implicated in the regulatory capture problem because his strong suit is mediating between financial institutions and regulators. His job is to convinece regulators that they are on the same team as the banks and to get issues resolved quietly and out of the spotlight. Cohen, for example, was a drafter of the little noticed 1991 amendment to section 13(3) of the Federal Reserve Act that enabled the Fed to bailout non-banks like AIG and Goldman Sachs. Cohen's skill in persuading regulators to advance the financial services' industry's agenda is part of why Cohen is so respected and valued. But it also means that for him to admit that there's a capture problem of any sort would be to admit that financial institutions and regulators do not have aligned interests and to recognize that he's an advocate for financial institution clients, whose interests are not those of the public. And that would undercut the very sort of cozy relationship between banks and regulators that he aims to foster. Cohen's success is based in part on capture, so he's the last person who'd want it to go away. 

Continue reading "Rodgin Cohen: Pay No Attention to That Man Behind the Curtain" »

Are we poor?

posted by Katie Porter

If you have kids who talk as much as mine (gee, wonder where they picked up loquacity as a trait), conversations can go nearly anywhere. My boys, ages 9 and 6, are quite interested in money lately, a phenomenon driven in part by the tooth fairy and their discovery of gift cards at a recent birthday party. Here is a recent excerpt:

"Mom, is the reason that I can't have the Lego Batman DC set because we are poor? Jpeg-194x300

"We are not poor."

"Well, if are rich, then why can't I have it?"

"I didn't say we were rich. We aren't rich."

"Mom . . . . [big sigh of frustration] . . . Are we rich or are we poor?"

I recently read the Opposite of Spoiled by Ron Leiber, a NY Times money reporter. He provides straightforward advice on how to handle these questions and more. Even if one takes a slightly different tact with their kids, I completely agree with his main point:  parents should not avoid these conversations because they are uncomfortable or inconvenient or difficult. Kids talk about this stuff and draw conclusions. Creating a conversation is a way to share your values and learn about your children.

Continue reading "Are we poor? " »

Community Banks and the CFPB

posted by Adam Levitin

I'm testifying before the House Financial Services Committee on Wednesday at a hearing entitled "Preserving Consumer Choice and Financial Independence." I'm the only non-industry witness (no surprise there). For those interested, my testimony is linked here.  Here's the highlight:  

Community banks face a serious structural impediment to being able to compete in the consumer finance marketplace because they lack the size necessary to leverage economies of scale. The CFPB has repeatedly acted to ease regulatory burdens on community banks in an attempt to offset this structural disadvantage. While community banks continue to face serious problems with their business model, their profits were up nearly 28% in the last quarter of 2014 over the preceding year, which strongly indicates that they are not being subjected to stifling regulatory burdens.

Ultimately, if Congress wants to help community banks, the answer is not to tinker with the details of CFPB regulations... Instead, if Congress cares about community banks it needs to take action to break up the too-big-to-fail banks that receive an implicit government guarantee and pose a serious threat to global financial stability. Until and unless Congress acts to break up the too-big-to-fail banks, community banks will never be able to compete on a level playing field. 

Fifty Lashes and Hobson's Choice, Argentina Edition

posted by Anna Gelpern

Big day in sovereign debt. After months of kicking the can down the road and a couple of anticlimactic decisions from English courts that made no practical difference in the pari passu injunction, a giant big shoe has just dropped in the Southern District of New York. Judge Griesa ruled that Argentina's dollar-denominated local law bonds were covered by his injunction just the same as New York and English law bonds. In the process, he defined (or redefined?) the injunction super-broadly, effectively blocked Argentina from issuing new foreign currency debt under its own law, potentially expanded the reach of the pari passu clause for other sovereigns, told Argentina that it was all out of comity, and told Citi to choose between New York and Cristina Fernandez de Kirchner.

Continue reading "Fifty Lashes and Hobson's Choice, Argentina Edition" »

Ukraine: One Debt Tea Leaf in the IMF Program

posted by Anna Gelpern

The IMF has approved a new 4-year $17.5 billion program for Ukraine, with an immediate disbursement of $5 billion. This is a big economic, institutional, and geopolitical deal. I will comment on one small piece of one small piece: the treatment of Russia's $3 billion loan to the last Ukrainian government, about which I have written at various levels of weediness herehere, and here.

The IMF program is approved under the Fund's existing "exceptional access" (huge $$) policy, which has been interpreted to require debt restructuring unless the country's debt is "sustainable with high probability" (for some of the back-and-forth on the reform proposals, see here, or watch here and here). The Ukraine program therefore expressly hinges on a government and government-guaranteed debt "operation" to achieve sustainability, plus rolling over most of the debts owed by Ukrainian banks and corporations (lots of it to Russia). Brilliant minds are crunching the numbers now to figure out whether Ukraine's bondholders might get by without principal reduction, and without suspending interest payments, based on any realistic set of assumptions.

I am struck by one bit of arithmetic: Ukraine has about $7.7 billion in external sovereign debt payments due in 2015, of which $5.8 billion is principal, of which $3 billion is to Russia  (see p. 138). The IMF document contemplates $5.2 billion in financing from the "debt operation" in 2015 (see p. 12). Since 7.7-5.2=2.5, and since 2.5<3, Russia does not seem to be getting its $3 billion repayment in December. The fact that the IMF board, which includes Russia, approved this scenario, seems important. But (a) the details are super-foggy and (b) I may be missing something, like a big guarantee payment.

The IMF press release says that the debt operation must have "high participation" and be successfully concluded by the first program review, scheduled for June 15. If participation is not high, it would have to be ocean-deep. Since Russia and Franklin Templeton together likely hold more than half of the debt, a deal without both seems inconceivable. On the other hand, the top two creditors also presumably have blocking positions in lots (if not all) bonds for purposes of a restructuring vote--though other creditors could also coordinate to block votes. This will be one fascinating "voluntary" "operation."

To its credit, the IMF document highlights a slew of risks to the program and the debt restructuring operation, all of which seem scary-plausible, especially considering the optimistic gloss that must go with program approval. Buckle up. 

Dysfunctional Analysis Part 2

posted by Jay Lawrence Westbrook

Shutterstock_112522430Per Part 1 of this post, the word “executory” under section 365 of the Bankruptcy Code should be defined by its original, common law meaning per Williston: a contract in which some obligations remain. That common law definition was the one on the table when Congress originally adopted this ancient provision and there is no longer any justification for imposing the labyrinthine elements of executoriness on top of it. These additional executoriness requirements were developed by the courts in the olden days when court approval of AorR was not required and executoriness was a way to protect estates from trustee foolishness or carelessness. (See my old article for details at A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227 (1989).)  During that time, the Countryman test did a brilliant job in greatly improving the policing of those failures. However, the Countryman test is not needed for that purpose now that court approval is required for AorR. It also does not solve the underlying problem, which is manipulation of the label “executory” in lieu of applying the statute as written to cover modern problems like options and licenses. The result is confusion and unpredictable injustice to estate and counterparty alike.

Under the form of Functional Analysis that I have suggested, the basic approach to AorR is taken from the words of the statute and is simplicity itself:

Continue reading "Dysfunctional Analysis Part 2" »

Dysfunctional Analysis Part 1

posted by Jay Lawrence Westbrook

Warning: Grumpy Alert. I am grumpy because the ABI Commission’s recent report rejected any reform of the bizarre American approach to executory contracts, which requires a quality of “executoriness” in a contract before it can be assumed or rejected. (Think of Stephen Colbert and “truthiness.”) Worse still, it recommended codifying the Countryman test, which was a great advance in its day but has been rendered hopelessly outdated by statutory changes and modern contract practices—e.g. in options and LLC memberships. Shutterstock_112522430

One reason for the Commission’s recommendation was “the perceived value in maintaining some type of gating feature to vet those contracts that a debtor in possession could assume, assign, or reject in the chapter 11 case.” A reasonable conclusion from that would be that the reason for retaining the old test was that continued confusion and inconsistency would help counterparties to maneuver in the fog. But no. The Report explains that the case law is so predictable that eliminating executoriness would just create more litigation. For those who have recently reviewed that case law, I can only assure you I am not making this up. (Please note I don’t for a moment blame this error of the Commission majority on its excellent reporter.)

Some twenty-five years ago I was guilty of an article on this subject called A Functional Analysis of Executory Contracts. Unfortunately, some cases used the phrase to mean that executoriness should depend on benefit to the debtor, while my pitch was to abolish the executoriness requirement altogether. Herewith a brief reprise of that old article and perhaps an intimation of a new one.

Continue reading "Dysfunctional Analysis Part 1" »

New Chair for Bob Lawless (And I Don't Mean a Recliner)

posted by Melissa Jacoby

LawlessPictureJust saw a terrific announcement: the University of Illinois is recognizing Credit Slips' fearless founder, Bob Lawless, with the Max L. Rowe Professorship.

Bob has done so much for our field and the legal academy that attempting a quick summary is futile. And, putting aside the recliner quip, roasting is best left to others. So I'll leave it at this for now: Bob is a role model for working harder and smarter, and with modesty. To see such contributions rewarded is satisfying indeed.




Archdiocese's Potential Fraudulent Transfer Not Protected by RFRA, First Amendment

posted by Pamela Foohey

The Archdiocese of Milwaukee’s Chapter 11 case remains the longest running Chapter 11 case filed by an Archdiocese or other Catholic entity. It filed in January 2011, and because of religious-based objections to the application of the Code's fraudulent and preferential transfer provisions, Bankruptcy Judge Susan Kelley has declined to rule on any reorganization plan until the objections are settled.

The main hang-up is an April 2007 pre-petition transfer of $55 million from the Archdiocese’s general accounts to a trust earmarked for maintaining cemeteries--generally known as the "Cemetery Trust Fund." Post-filing, the Archbishop, acting in his role as the trustee of the Cemetery Trust Fund, sought a declaratory judgment from the bankruptcy court that the $55 million would never be part of the Archdiocese's bankruptcy because the First Amendment and/or the Religious Freedom Restoration Act (RFRA) barred the application of the Code's avoidance provisions. The action was defended by the Unsecured Creditors' Committee -- because the DIP was just a tad conflicted given that it acts through its sole corporate member, the Archbishop.

The question made its way up to the 7th Circuit, which issued a long awaited opinion today. The rulings are: (1) RFRA is not applicable because it only applies to suits in which the government is a party, and the Creditors' Committee is not the government; and (2) the Archbishop's free exercise rights are not violated by application of the Code's generally neutral principles that are narrowly tailored to support a compelling government interest in protecting creditors. In short, the Archdiocese decided to file under Chapter 11 and now it cannot seek a religious exemption for purported fraud.

Continue reading "Archdiocese's Potential Fraudulent Transfer Not Protected by RFRA, First Amendment" »


posted by Bob Lawless
A comic strip for the Credit Slips crowd from Stephan Pastis:

Pearls Before Swine Comic Strip, March 06, 2015 on

Bankruptcy Filings Down Again 10.1% in February 2015

posted by Bob Lawless

2015 February.Year over Year ChangesThanks to Epiq Systems, the latest monthly bankruptcy figures are out, and they show a 10.1% year-over-year decline. We now have had 52 straight months of year-over-year declines in the U.S. bankruptcy filing rate. The graph to the right shows the trend in year-over-year changes.

There was a daily average of 3,422 bankruptcy filings in February, compared to 3,804 from the previous year. Total February bankruptcy filings were just over 65,000. (Daily averages are computed based on business days.)

I forecasted approximately 800,000 bankruptcy filings for the 2015 calendar year, and the first two months of the calendar year suggested we are spot on that forecast. The first few months of the calendar historically see the highest filing rates of the year. January and February usually account for about 15.5% of the annual total, and extrapolating that historical pattern to the 124,052 filings so far in 2015 puts us right at 800.000 for the calendar year.

(For new readers, reasons for the decline are explained in many of my posts collected here.)

Credit Slips Bloggers' Amicus Briefs in Caulkett

posted by Bob Lawless

With my attention drawn to other matters, my personal blogging has been light for the past month. One of the things that had my attention was the Caulkett case currently pending before the Supreme Court. The issue in Caulkett is whether a wholly underwater second mortgage can be avoided in a chapter 7 bankruptcy. Without any value to reach, a wholly underwater second would not seem to be an allowed secured claim within the meaning of section 506.

Along with fellow Credit Slips blogger, John Pottow, and Professor Bruce Markell, I filed an amicus brief in Caulkett supporting the debtor.  One of our points is that Long v. Bullard, which supposedly stands for the proposition that "liens ride through bankruptcy," involved other issues entirely. I'll try to expand on that point in another blog post. But, we were not alone in representing Credit Slips in the case. Blogger Adam Levitin filed his own superb amicus brief supporting the debtor that provides an in-depth look at the facts, evidence, and policy around second mortgages. All of the briefs in the case can be found at SCOTUSBlog.

Servicing Matters

posted by Katie Porter

I am so pleased to offer the following post by Carolina Reid, a premier housing researcher at UC Berkeley, about her excellent study of how mortgage servicers matter in creating home-saving opportunities. Welcome Carolina to Credit Slips.

By now we’re all familiar with a plethora of Wall Street financial acronyms, from ABSs to CDOs and CDSs. But what about MSRs (mortgage servicing rights)?  Until a year ago, I had never heard of MSRs, so I was surprised to find out that the rights to collect my mortgage payment are traded on Wall Street, much in the same way mortgage backed securities are traded. And, as a borrower, I have very little control over who purchases the servicing rights to my mortgage, despite the fact that it is usually the servicer who decides whether to offer a loan modification or start the foreclosure process if I become delinquent. Borrowers can’t “shop around” for the best servicer – you get who you get (but maybe you should get upset).

Continue reading "Servicing Matters" »

Sheep, Goats, and Government Debts - Happy Lunar New Year, 1937 Edition

posted by Anna Gelpern

Sheep & Goat 1Like many others, I have been struggling to figure out whether the new lunar year is a Sheep or a Goat. I found the answer last week in the archives of the League of Nations Committee for the Study of International Loan Contracts, which spent four years from 1935 to 1939 investigating why sovereign debt was so screwed up, and what to do about it. During these four years, committee notables and their experts managed to foresee just about every 21st century sovereign debt controversy, from pari passu and feckless trustees to the epic and tiresome battle between contractual and statutory sovereign bankruptcy. The 1937 meeting minutes below also show a solid grasp of Odious Debt and sovereign lemons. Some governments might walk away from their debts just because, others have good economic or moral reasons not to pay, but the creditors cannot tell the two apart. The committee saw this as a problem of "telling the sheep from the goats," and ultimately concluded that there was not much to be done about it -- but not before considering contract reforms to let creditors monitor whether loan proceeds were used for the benefit of the country.

Bottom line: you cannot tell a sovereign sheep from a sovereign goat. And 1937 was the year of the [Ram] OX (aaargh!!! How many horned animals are there ...).

Continue reading "Sheep, Goats, and Government Debts - Happy Lunar New Year, 1937 Edition" »



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