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).

Does it really matter who services your loan?  To date, research has very little to say about this, though ask any housing counselor who has tried to shepherd a distressed loan through the modification process and the answer will be “most definitely.”  Unfortunately, most data on loan performance don’t allow researchers to identify the institution that services the loan, which makes analysis of servicer performance challenging.  So other than headlines about robo-signing or dual tracking, we have few studies that systematically study servicers and the ways in which they assist distressed borrowers. 

My colleagues, Carly Urban and J. Michael Collins, and I recently released a Fisher Center Working Paper that explores differences in servicer behavior, to shed some light on the servicing industry.  Using a unique dataset on subprime loans that were at least 60 days delinquent, we examined the modification practices of 20 large, national servicing institutions. We wanted to know whether servicers differed in the likelihood of offering modifications with interest rate or principal reductions, even for similar borrowers living in the same neighborhood. And we wanted to know whether some servicers did a better job of helping borrowers retain their homes, all other things being equal.   

What we found is that servicers differ dramatically in their loan modification practices and their loan cure rates.  Servicers with higher cure rates performed permanent modifications on almost 48 percent of their delinquent loans, while servicers with the lowest cure rates only granted modifications to 2 percent of delinquent borrowers. Some servicers favored interest rate reductions; others were more willing to offer borrowers principal write-downs, or even offer a second modification. These differences in servicer practices led to very different cure and re-default rates for distressed borrowers, even after controlling for a wide range of borrower, loan, and housing market characteristics. Who your servicer is really does matter.  We also examined whether there were differences across servicers for Black, Hispanic, Asian and white borrowers.  In general, we did not find any substantive race or ethnicity effects within any one servicer, rather, the differences across servicers remained constant. In other words, if you end up with a servicer unwilling to do modifications, you’re not getting a modification regardless of your race. 

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 ...).

Sheep & Goat 2

SPOE: Backdoor Bailouts and Funding Fantasies?

posted by Adam Levitin

I'm thrilled that Jay Westbrook has finally come into blogosphere with his posts on Single-Point-of-Entry.  I've blogged a little on SPOE already, but I want to highlight what I still think are two critical problems with SPOE.  In keeping with Jay's spirit, let's call them "Backdoor Bailouts" and "Funding Fantasies". 

Continue reading "SPOE: Backdoor Bailouts and Funding Fantasies?" »

Translating the Warren-Yellen Exchange

posted by Adam Levitin

Senator Elizabeth Warren surprised a lot of people by laying into Federal Reserve Board Chair Janet Yellen as hard as she ever laid into Timothy Geithner. I think this was a really important exchange. But it's easy to miss exactly what's being communicated in it. Senator Warren's comments can basically be translated as follows:  

"Janet, I like you, but let me level with you. You need to replace your General Counsel, pronto. He's not on the same page about regulatory reform, and it's a problem. There's really no place for obstruction by Fed staffers, even the General Counsel. It's time for him to go."

There was a further subtext, though, that I think should be highlighted, and that's "What you do about your GC is a shibboleth about whether you're serious on regulatory reform."

Continue reading "Translating the Warren-Yellen Exchange" »

TBTF and The Single Point of Entry (SPOE): Part Two

posted by Jay Lawrence Westbrook

In an earlier post I described the FDIC’s proposed SPOE approach to resolution of SIFI banks and other financial institutions under Title II of Dodd-Frank. That post discussed two of the three components of SPOE: control of the process by the regulator and no bailout for management or owners. This post lays out the role of the third component, the “forlorn hope” debt. Shutterstock_95970961

That debt is unsecured debt owed to a bank holding company (BHC) and predestined to get little or nothing in case of the failure of the BHC. It serves in effect as a debt reserve to buffer the financial distress of the bank group. By being dumped, it would make the group as a whole solvent. By contrast, legislation already passed by the House would ignore the need for the reserve, thus setting up another bank bailout. The reserve debt component of SPOE awaits a strong rule from the Fed to make it a reality. This post discusses what the rule must do.

Continue reading "TBTF and The Single Point of Entry (SPOE): Part Two" »

Busted Banks: TBTF and the Single Point of Entry

posted by Jay Lawrence Westbrook

Shutterstock_95970961A Single Point of Entry (SPOE) sounds like the route of a returning astronaut or perhaps a building’s security plan or even a sex guide, but actually it is the FDIC’s proposal for saving the financial system when a giant financial institution strikes out on the derivatives market or discovers it has a school of London Whales. SPOE is important because the FDIC and the Bank of England have agreed on it as the best approach to a global resolution of a failing SIFI, the polite term for a TBTF bank. That agreement is crucial, because the largest banks can only be resolved on a global basis.

SPOE is a method of resolution of a SIFI in financial distress without having to choose between a government bailout or the collapse of the global financial system. By contrast, legislation passed by the House would privatize the SPOE process and likely result in future bailouts. The legislation is being marketed under the term SPOE, but bears little relationship to the FDIC proposal. The three key aspects of the FDIC plan are that a) the resolution process will be controlled by the regulator; b) there will be no bailout of the SIFI’s owners and management; and c) the creditors of the parent holding company will be tossed overboard, returning the bank group to solvency by erasing debt and lessening the need for government money to make the process work. This post discusses the first two points, control and no bailout, while a second post will talk about the debt dump. 

Continue reading "Busted Banks: TBTF and the Single Point of Entry " »

Welcoming Jay Westbrook to Credit Slips

posted by Bob Lawless

It is with great pleasure that I welcome Professor Jay L. Westbrook of the University of Texas as a guest blogger for Credit Slips. To people in the bankruptcy community, Professor Westbrook needs no introduction. He is a leader in both international bankruptcy and empirical studies of bankruptcy. The phrase "see Sullivan, Warren & Westbrook" is often the cite for any fact we need to know about the bankruptcy system. There is nobody I know who does not think the world of him, both professionally and personally. We have hoped for many years that he would take a turn at Credit Slips, and we are glad the time has finally come.

Welcome to Credit Slips, Jay!

All Late-Filed Taxes Now Nondischargeable?!

posted by Jason Kilborn

Tax formSometimes a tax return is not a tax return. As a result, bankruptcy is becoming a less effective response to back tax woes in the US. Yesterday, the 1st Circuit joined the 5th and 10th in holding that old income tax debts are nondischargeable if the taxpayer-debtor filed the related tax returns late. This is the latest negative impact of BAPCPA and an oddly worded statute with an even odder citation.

Section 523(a)(1)(A) of the Bankruptcy Code has long made nondischargeable recent income tax debts, for taxes for which the return was due within three years before the bankruptcy filing. But older tax debts might also survive the discharge thanks to section 523(A)(1)(B)(i). That section renders taxes nondischargeable if the taxpayer-debtor failed to file a return. Not surprising. What is surprising is a recent revision and its expansive interpretation, which have created a vast new category of nondischargeable tax debts.

Continue reading "All Late-Filed Taxes Now Nondischargeable?!" »

A 21st Century Trust Indenture Act?

posted by Adam Levitin

MBS investors suffered a serious legal blow a couple of months back when the Second Circuit held that the Trust Indenture Act of 1939 doesn't apply to MBS

The Second Circuit's decision hinges on treating a "mortgage" as a "security." That's rather counterintuitive.  The Trust Indenture Act doesn't define "security," but refers to the Securities Act's definitions. The Securities Act defines "security" to include "any note" but the definition bears the caveat "unless the context otherwise requires." I'd think that the context would have pretty easily counseled for reading "note" not to include residential mortgages. What the Securities Act is trying to pick up are issuances of corporate notes.

Frankly, I think the Second Circuit's reading (and the resulting decision) are absurd.  First, it is hard to see any context in which "note" should be read to include "residential mortgage" (especially in light of all of the other things that constitute a "security" under the Securities Act, when Congress could easily have included a "mortgage" in the definition).  Second, the Second Circuit's reading arrives at an absurd policy result.  It excludes from the Trust Indenture Act the very sort of securities (proto-MBS) that were the driving force behind the creation of the Trust Indenture Act of 1939 (and the NY state Trust Indenture Act of 1935 before that).  The groundwork for the federal Trust Indenture Act was a 1936 SEC report authored by William O. Douglas, Jerome Frank, and Abe Fortas (among others) that documented in incredible detail the abusive role of trustees in mortgage bond reorganizations.  (While bankruptcy scholars have tended to focus on the railroad reorganizations chapter of the report, the real estate chapter is just as important, and goes a long way to understanding why Douglas was such a champion of the absolute priority rule.)

The point here isn't to belabor a questionable decision by the Second Circuit (which did not mention the policy issues in its decision, but I don't know if they were argued), but to underscore the ruling's consequence. At least in the 2d Circuit, it's now clear that MBS investors are not protected by the Trust Indenture Act, and that's a bad thing. This decision means that there's very little (if anything) protecting investors from wrongdoing by MBS trustees, whether acts of omission (e.g., failing to police servicers) or commission (e.g., entering into sweetheart settlements of rep and warranty liability). This is exactly what the Trust Indenture Act was supposed to prevent. If Congress cares about investor protection, it's time to devise a 21st century Trust Indenture Act. 

[Update:  A state securities regulator emailed me to draw my attention to the Supreme Court's 1990 decision in Reves v. Ernst & Young.  That decision expressly adopted an older 2d Circuit case's test regarding what is a security. That case excluded residential mortgage loans from the definition of "security" in the context of a securities fraud action. The 2d Circuit cited to its older decision (but not the Supreme Court's subsequent adoption of its test), but said that the context was different. Unfortunately, the 2d Circuit didn't think it was necessary to explain what about that context was sufficiently different to merit a different result. I can't see any plausible contextual distinction. There's really no context in which loans made for personal, family, or household purposes should ever be considered securities. They are subject to entirely different regulatory regimes, they are part of different markets, and no one would ever think to refer to such loans as securities. Except, apparently the 2d Circuit. It's one thing to arrive at the wrong conclusion after a serious analysis, but I am troubled that the 2d Circuit didn't bother to explain itself in this context.]  

 

Scarcity of Money? Or Time?

posted by Katie Porter

How is it that I never find the time to blog? My answer would be that I simply do not have the time. But of course I have the same hours in a day as my co-bloggers. I could argue that I have more demands on my time, but I know very well that we are all busy. Scarcity, a book by Sendhil Mullainathan and Eldar Shafir, has many lessons for busy people, including those of us who are busy thinking about the difficulties faced by people who have a scarcity of income or disposable income after debt. 

The book looks at scarcity in varied contexts such as time, money, food, friendship. It argues that there is a common logic to situations of scarcity: a mindset that captures our attention and changes how we think. At an optimal level, scarcity can create positive focus. But the same capture of the mind can preoccupy us and make us vulnerable to poor thinking and impulse control. ScarcityThe authors find, for example, that being poor reduces a person's cognitive capacity more than going one full night without sleep.

The implications for those in financial scarcity are powerful, particularly in terms of policy intervention. The authors focus on the need for "slack" in program design; for example, job training programs with modular classes that can be taken out of order so if a person misses a class, they can more easily make up the class rather than falling behind on linear content and having to drop out.

My thinking went to chapter 13 and the debate about a "cushion" in chapter 13 plans. While some judges and trustees permit this (or even insist on it), others see it as an indication of weakness. If you deserve a discharge, you need to learn within limits. The scarcity of a confirmed chapter 13 plan, with its 100% draw on all disposable income, creates a mindset that can itself be harmful. People with some financial slack may, in fact, be better able to build the financial habits and position themselves for the rehabilitation that is bankruptcy's goal. Building financial savings into chapter 13 as a necessary expense would reduce the cognitive burden of bankruptcy and insulate people from the harms of financial scarcity after bankruptcy. The result, according to the research of Mullainathan and Shafir, would be debtors emerging from bankruptcy with better self-control, more focus, and stronger decisionmaking.

Hacking and Systemic Financial Risk (Encore)

posted by Adam Levitin

The data breach stories just don't seem to stop. (And why would they?). The latest (I think) is about a massive and sophisticated multi-million dollar hacking of several banks.  If you read down through the story, one of the things the hackers did was manipulate the balances of real accounts.  They'd change a real $1,000 balance to $10,000 and then have $9,000 wired to an account at another institution.  

But why take out only $9,000?  The hackers were being nice, I suppose, in that they didn't steal any actual depositor's funds (as far as we know). And that was also probably smart, because if they zeroed out an account, there might be a bounced transaction that would alert the consumer and then the bank to the theft.  But I don't know that we can count on future hackers being so polite, considerate, or careful. Indeed, they might actually want to create havoc by messing with account balances.  

I raised this scenario several months ago, and before that a couple of years ago. I think today's news confirms that the financial Armageddon via hacking scenarios I have nightmares about aren't totally farfetched. Between state-sponsored hacking (I'm looking at you DPRK), terrorist hacking (ISIS and Newsweek), and rogue individuals, I think we're looking at a matter of when, not if, we see consequences from financial hacking that go beyond a few hundred million in losses and result instead in institutions failing. 

Coming to Law -- Churches in Bankruptcy Edition

posted by Bob Lawless

Credit Slips contributor Pamela Foohey has just posted her most recent work in her series of articles on churches in bankruptcy. I have been a big fan of this research project since Pamela was a fellow at the University of Illinois. She tells us not only about bankruptcy but also about the ways in which these churches look like most any small business. Most impressively, the work builds on existing literature on how people come to law to solve their problems and expands that literature into a new and nonobvious setting, suggesting this literature may have deep explanatory power to help us understand more about how people perceive and use law. It is exactly what we need more of in the law reviews -- scholarship using rigorous social science to help us understand what actually happens in the legal system.

Pamela's most recent paper, "When Faith Falls Short: Bankruptcy Decisions of Churches," relies on structured interviews with church leaders and and their lawyers. One of the most surprising things is the church leaders did not see their problems as legal. Foreclosure may have beckoned, but the leaders had to be brought to law. They turned to social and professional networks both to get information about the law and for support that bankruptcy was the correct thing to do. There is much more in Pamela's paper. Get it before SSRN runs out of electrons to send it to you.

Man Bites Dog! Regulatory Edition

posted by Adam Levitin

I woke up this morning to see an abstract of a paper entitled Is Regulation to Blame for the Decline in American Entrepreneurship? When I saw that one of the co-authors was on the George Mason University economics faculty, I said to myself, "Well I know how this plays out." But then I read the abstract, which concludes: Federal regulation has had little to no effect on declining dynamism."

I wonder what the same commentators who trumpeted the "Dodd-Frank is killing community banks" stuff will think of this paper. I'm personally skeptical that one can measure the stringency of regulation in any quantifiable way, much less for different industries, but I'll just flag that this paper is out there.

This Morning, I Woke Up With This Feeling

posted by John Pottow

I feel compelled to share this sad but not unexpected filing.  I hope he will not run into any trouble under section 523(a)(9).

Puerto Rico's Municipalities

posted by Stephen Lubben

As previously predicted, and in light of recent events, legislation has been reintroduced to allow Puerto Rico's municipalities into chapter 9. Two Slipsters are quoted in the accompanying press release.

Meanwhile, the Commonwealth has appealed to the 1st Circuit. I would note that once the district court found the Recovery Act preempted by the Bankruptcy Code, and thus enjoined the Recovery Act, the point of the remainder of the opinion becomes something of a mystery to me. In short, there probably is no problem appealing from the district court's order at this point.

Consumer Bankruptcy Circles the Globe

posted by Jason Kilborn

Peace around the worldAs of 2015, for the first time, laws providing for insolvency relief to natural persons (consumers) now form an unbroken chain around the world (at least on the land masses of the Northern Hemisphere). North America has been covered for some time now, of course, and individual debt adjustment laws have been spreading across Europe for three decades. The big missing link was Russia. On 29 December 2014, the final legislative steps were taken in the adoption of a long-pending bill to incorporate procedures for natural persons into the 2002 law "On Insolvency (Bankruptcy)". The new Russian law will become effective on 1 July 2015.

I have not had time to analyze the new law in detail yet, but it appears to provide for a liberal "fresh start" liquidation very much in line with the US approach, though with a minimum debt limit qualification of 500,000 Rubles (currently only about US$7500, but surely substantially more on a PPP basis). I understand that many Russian consumers are struggling with debts of at least this size, so it will be very interesting to see how the courts deal with the burden of this new procedure and how the process plays out, especially the provisions on suspending the liquidation proceedings if the debtor and creditors hammer out an agreed composition. I anticipate that real or imagined debtor fraud and "abuse" of this new relief process will be a big issue, and agreed compositions will be as rare as coconuts in Krasnoyarsk. We'll see.

Peace Around the World image courtesy of Shutterstock

Size Matters: Community Banks' Real Problem

posted by Adam Levitin

Community banks are ailing.  Over the past decade many of them have failed or been gobbled up by larger banks. What's going on? 

A new study by a fellow and a masters student at the Harvard Kennedy School of Government thinks it has found the culprits:  Dodd-Frank!  The CFPB!  Regulation! Not surprisingly, this paper is already getting circulated by bank lobbyists as a prooftext for their anti-regulatory agenda. 

Let me make no bones about this study. It is gussied up to look like serious academic research, with footnotes and working paper series cover page, but don't let looks fool you. The study doesn't conform with basic norms of scholarship, such as discussing contrary evidence and having conclusions flow from evidence. Instead, the study is really a mouthpiece for a big bank anti-regulatory agenda that pretends to really be looking out for community banks.  

I'm not going to spend the time on a full-blown Fisking of this piece, but let me point out some serious problems and then talk about the real problem facing community banks and how big banks exploit community banks' problems to advance their own agenda. 

Continue reading "Size Matters: Community Banks' Real Problem" »

Sh*t In, Sh*t Out? the Problem of Mortgage Data Corruption & Empirical Analysis

posted by Adam Levitin

Empirical economic analysis is a powerful tool. It can elucidate correlations and sometimes even get us to causual explanations. But it has a serious weak-spot:  its value is entirely dependent upon the integrity of the data analyzed. To put the problem succinctly: sh*t in, sh*t out.

This brings us to analyses of the housing bubble. There's a sizeable academic literature on the housing bubble (and relatedly also expert witness reports on loss causation in MBS litigation) that rely on loan-level data. The problem is that a lot of that loan-level data is suspect. That should hardly be a surprise: the industry even referred to some products as "liar loans". And there were also FBI Mortgage Fraud reports indicating an uptick in mortgage fraud. But it was easy for economists to ignore the data integrity problem as long as the problems were merely anecdotal (e.g., the mariachi musician with the six-figure income), and could be blissfully assumed to only affect a small number of loans.

No longer. It's hard to show mortgage fraud empirically, but there's a growing empirical literature about mortgage fraud. There are now a couple of academic studies demonstrating significant inflation of borrower income on loan applications (here and here and here and here and here). (To be clear, this does not mean that the income was inflated by the borrowers. It could be inflated by either borrowers or lenders, including loan brokers.) There's also a Fitch Ratings report from late 2007 that shows questionable stated income, employment, FICO scores, property occupancy status, and appraisals on a large percentage of a small sample of subprime loans. 

I want to emphasize that this literature does not undermine all empirical work on the housing market during the bubble years. But it should give us pause when considering any analysis that relies on either loan-level or pool-level loan characteristics such as income, DTI, FICO, occupancy status, and LTV/CLTV. I suspect that the empirical mortgage fraud literature will not deter many economists from plowing ahead whenever their data produces a regression with statistical significance. And the studies might well be right in the end. But it should tell the rest of us to consume the studies with a grain of salt.

Puerto Rico – Recovery Delayed?

posted by Stephen Lubben

As Melissa has noted, the district court has ruled that Puerto Rico's Recovery Act is preempted by the Bankruptcy Code, among other things. I want to amplify one point that she made in her post.

The court's preemption analysis is exceedingly week. In particular, the court never grapples with the 10th Amendment implications of its decision, despite holding that no state can address municipal insolvency, even those jurisdictions that do not allow their municipalities to file under chapter 9. Treating the 10th Amendment as a dead letter seems like something that is about two Chief Justices too late.

In a recent article, I argued that this Constitutional problem, and some statutory conflicts (like the definition of "creditor" in section 101) can be avoided by reading section 903 to only apply to municipalities that are eligible under chapter 9 (because their state governments permit filing, and the Code does not otherwise prohibit entry into chapter 9 – cf. §101(52)).  The district court gives that argument the back of the hand in footnote 19.

The obvious solution is to fix section 101(52) and allow Puerto Rican municipalities into chapter 9. But absent Congressional action, the First Circuit awaits.

Puerto Rico Preemption

posted by Melissa Jacoby

PRholdingLast summer, PREPA bondholders filed actions challenging the constitutionality of Puerto Rico's recently enacted, but as yet unused, Public Corporation Debt Enforcement and Recovery Act. Last night, the district court filed a seventy-five page opinion. It did not dispose of the actions in full (e.g., the contract clause challenges remain alive but not decided), but did hold the Recovery Act is preempted. Given that the judge's order permanently enjoins Puerto Rico from enforcing the Recovery Act, I believe it is immediately appealable under 28 USC 1292(a)(1).

Continue reading "Puerto Rico Preemption" »

Legal Options for Ukraine's Russian Debt Problem

posted by Mark Weidemaier

Shutterstock_233925478Ukraine's financial position is worsening, restructuring seems likely, and the big question is what to do about the $3 billion loan Victor Yanukovych saddled the country with before fleeing. Coverage of the loan here and here on Credit Slips, and bonus coverage on FT Alphaville (free registration required). Though a government-to-government loan in substance, the loan is disguised as an ordinary eurobond issue, with contract terms that give Russia extraordinary leverage. These include the right to accelerate early, trigger cross-default, and block or impede restructuring. That may be why recent reports suggest the plan is to pay Russia in full when the bonds mature in December 2015, though I can't imagine either Ukraine or its official lenders are thrilled at the prospect.

Perhaps there are other options. The academic literature on sovereign debt often discounts the relevance of law and legal institutions, although Mitu Gulati and I argue here that this may be a mistake. Ukraine's case may illustrate the point. The country's leverage - what little it has - depends in part on whether it can place meaningful legal barriers in the way of any effort to enforce the bonds. That would likely involve English law and courts (see par. 16, page 35 of the prospectus). Below the jump, I discuss two possibilities. The first is a proposal by Anna Gelpern described in detail in this paper (which also has good background on the loan) and this blog post. The second is a brief but tantalizing proposal by Joseph Blocher and Mitu Gulati in the final section of this paper. In short, Anna proposes legislation making the debt unenforceable in English courts. Joseph and Mitu suggest that Ukraine is entitled to compensation for Russia's annexation of Crimea and can use this claim as a set-off against the debt. Both proposals raise unique challenges and questions.

Continue reading "Legal Options for Ukraine's Russian Debt Problem" »

Thank You to Michelle Harner

posted by Bob Lawless

Credit Slips thanks Michelle Harner for guest blogging. She shared her own personal views about reforms for chapter 11. Although Harner was here in her personal capacity and speaking only for herself, her role as the reporter for the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11 gives her a valuable and informed perspective on the issues. Thank you, Michelle.

The Disappearance of HOEPA Loans

posted by Adam Levitin

While I'm on the subject of dead markets, what about HOEPA loans? HOEPA loans are super-high-cost loans that qualify for special consumer protections under the Home Owners Equity Protection Act of 1994. (Yes, that's the one that directed that the Fed "shall" implement a rule on abusive lending, which the Fed understood to be discretionary until 2008.) 

HMDA data has previously been a bit of a pain to manipulate to get summary statistics--big data sets and annoying variable labels.  No longer. The CFPB has an amazing on-line HMDA data tool that is a lot of fun to explore. The CFPB's created the Rolls-Royce LoPucki-BRD of HMDA data.  It's a real public service. My only complaint is that the CFPB only has data going back to 2007. Hopefully the Bureau will add in 2005-2006, at least (there was a reporting change in 2004). The Urban Institute also has a nice HMDA data page, but it's really more for power users. 

OK. So what's gone on with HOEPA loans? HOEPA status was always a kiss of death, but in 2005, there were 35,980 HOEPA loans made. In 2013 (still under the same definitions), there were just 1,873. That's a 95% decline in HOEPA lending. Now it might well be that lenders are making lots of loans just under the HOEPA reporting thresholds. But there's little reason to think that they suddenly started doing that in 2013--that trick's been around for a while. Instead, what we're seeing is that high-cost mortgage lending has simply disappeared in the United States, much more so than lending has contracted in general.

Just How Dead Is the Private-Label MBS Market?

posted by Adam Levitin

Pretty darn dead. In 2014, there were all of 22 private-label RMBS deals. These deals provided $5.67 billion in financing for 7,342 mortgages. Let that sink in for a second. The private-label market financed fewer home mortgages than were made in the District of Columbia last year.  

Perhaps the private-label market's defenders will finally accept that it is a seriously broken market and that fixing it isn't just a matter of interest rates moving a few basis points. This is a market that needs to take major steps to restore investor confidence, and that means, among other things, a total redesign of servicing/trustee compensation structures and roles and a major standardization of deal documentation so that investors won't have to worry about what language got snuck in on page 73 of a 120 page indenture.

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