Credit Slips

Bankruptcy Help for Students and Their Lenders?

Yesterday, the President signed into law H.R. 5715, the “Ensuring Continued Access to Student Loans Act of 2008.”  The law responds to a perceived liquidity crisis in student lending by allowing government purchases of privately-issued student loan portfolios, so that the lenders will have funds to re-lend. The law is characterized as a useful first step in the lead editorial of today's New York Times, but the Times urges a broader remedy: greater use of direct governmental student loans.

From the perspective of bankruptcy, though, the question is not how students can best get into educational loans, but how they can get out of them.  Under current U.S. bankruptcy law, all student loans are nondischargeable unless the debtor can establish “undue hardship” under a test that requires proof (among other things) that the debtor will not be able to repay the loan in the future—i.e., permanent disability—a very tough standard.  However, for at least some student debtors an easier way to get bankruptcy relief may be the suggested by In re Orawsky, a recent decision from a Philadelphia bankruptcy court.

Housing Bankruptcy Ripple Effect

We're starting to see the bankruptcy ripple effect of the housing crisis beyond the housing and financial services industry. Now municipalities are being forced to declare bankruptcy because property tax revenue has dried up while foreclosures have imposed significant strains on municipal resources.

While moral hazard concerns are a real issue for any government aid to borrowers or lenders, its worthwhile remembering a major exception to moral hazard--third-party costs. As Larry Summers summarizes: When the fire department rescues people who start fires by smoking in bed, it creates a moral hazard for in-bed smokers. But no one gets exercised about moral hazard, in part because we know that fires can spread and burn down neighbors' apartments in "contagion" fires and that the in-bed smokers won't take care to insure their neighbors. That's what we're seeing in foreclosure crisis--mounting third-party costs to neighbors and local government. If the municipal government goes bankrupt, it affects everyone in the community--indeed, those who had to relocate because of foreclosure escape this consequence. Foreclosure is a real problem for everyone, not just those who get kicked out of their homes or whose investment portfolios take a hit.

Preemption Chutzpah

Elizabeth Warren draws our attention to an astonishing example of banking industry chutzpah--claiming preemption protection against state foreclosure laws. Not only has no one ever historically believed that state foreclose law was preempted; the OCC's preemption reg's specifically carve out state debt collection law from preemption. There's no conflict preemption here, and given specific mortgage preemption laws like DIDMCA and AMTPA that preempt state usury limits on some mortgages and limits on exotic mortgage structures, it is hard to see how there is general field preemption or the like.

The preemption argument is even more chutzpadik, though, because banks hold only a small percentage of mortgages. Most mortgages are held by securitization trusts. The last time I checked, they are not federally chartered financial institutions nor are they operating subsidiaries or agents of federally chartered financial institutions. Thus it is utterly beyond me how anyone could claim that preemption applies to mortgages owned by securitization trusts, even if the mortgages were originated by national banks and are serviced by them. The preemption claim here doesn't even pass the straight-face test. As unbelievable as it is, though, perhaps legislation should clarify this just to, um, foreclose possible preemption arguments.

I'm curious whether the same financial institutions pushing the preemption claim are also the same institutions that are members of the HOPE Now Alliance, who have supposedly committed themselves to working to modify loans rather than foreclose. The preemption agenda is simply inconsistent with a commitment to efforts to avoid foreclosure.

Banks: State Laws Not for Us

Just when you think the mortgage mess can't get any worse, the banks come up with a new idea: They shouldn't have to obey state law when they foreclose on someone's home. 

Pre-emption has been a gravy train for the national banks, insulating their credit card business from state laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn't have to follow local foreclosure laws when they take people's homes.

Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws, just like they always have. Amazingly, this is expected to be a close vote. 

One More Means Test Problem

Another example of questionable legislative drafting in BAPCPA--the 2005 amendments to U.S. Bankruptcy Code--appears in an opinion of the Ninth Circuit BAP issued last month, In re Weigand.   At issue is whether “current monthly income” (CMI) includes the gross receipts from a debtor’s business or rental property or only includes the net income--gross receipts reduced by by business or rental expenses.  There can be a big difference between the two possibilities.   One Mary Kay saleswoman, for example, reported net income of $150 on weekly gross receipts of $620.  On an annual basis, that would be $32,240 in gross receipts versus $7,800 in net income.  The difference matters.  If a debtor’s CMI is greater than the median household income for the debtor’s state, there are two negatives.  First, the debtor has to fill out the complex statement of deductions from income to determine whether a means test presumption prevents the debtor from obtaining a Chapter 7 discharge.  Second, in Chapter 13, the debtor has to propose a five-year rather than a three-year repayment plan.  $7,800 doesn’t come close to any state's median income; $32,240 actually exceeds some of them.  It's pretty certain that counting gross business and rental receipts would make many debtors "above median" who otherwise wouldn't be.  So, are gross receipts part of CMI?

Still on Target for 1,000,000 Bankruptcy Filings

While I was busy with last week's Debtor World conference, the April 2008 bankruptcy filing figures became available from AACER. If I wanted to be sensational, I could compare the latest figures to the 2007 figures and tout how filings are up over 37% from the previous year. Or, I could compare the April 2008 total of 93,096 to the March figure and note filings climbed 3% in one month. Although both of those calculations are technically correct, they also are misleading.

On a daily basis, filings were 4,232 for each business day in April as compared to 4,301 for each business day in March. That is a slight decrease (a 1.6% decrease to be exact). Does this mean that filings are easing off? Not really. In recent years, April filings per day have been roughly the same as March. In fact,  if the past patterns hold, daily filings will hold steady until October or November when they again will climb. The calculations still suggest we'll see over 1,000,000 bankruptcy filings for all of 2008.

Many, Many Thanks to Mechele Dickerson

On behalf of all the regular Credit Slips bloggers, I wanted to express our deep appreciation to Associate Dean and Professor Mechele Dickerson. Her contributions were just superb. Professor Dickerson did a great job of blogging the Debtor World conference, bringing those papers and ideas to a wider audience. Also, in her first posts, Professor Dickerson discussed her most recent work on home ownership. Whether you agree or not, anyone with an interest in guiding this country toward a more coherent consumer credit regime must grapple with the issue Professor Dickerson raises about a housing policy that aims to put everyone into home ownership. Thanks again for all of your efforts, Mechele.

Lawyers Make Good Laws?

I attended last weekend's University of Illinois/ABI Symposium on Debt—a tour de force, as readers of Credit Slips can glean from Mechele Dickerson's recent reports. My main interest in attending was to gain insights about how to improve U.S. consumer bankruptcy law, and I got one insight in particular from an unexpected source--a paper on international corporate bankruptcy. The insight?  Bankruptcy lawyers really may be the best source for good bankruptcy laws.

Hasta La Vista

Let me (again) thank the Credit Slips bloggers generally, and Bob Lawless specifically, for inviting me to be a guest blogger. I have never done this before and, and quite honestly the thought of blogging terrified me. But, had I not been so fearful of having nothing to say this week, I might not have listened as intently to the talks at the Debt conference. Periodically zoning out would have been a grave error as the conference was one of the best I’ve attended in my academic career.

So, let me also take the opportunity to thank Professor Lawless, Deans Ralph Brubaker and Charles Tabb, and Sam Gerdano (ABI) for organizing that event and for asking me to attend it.

With that, I bid you a fond farewell.

Why People Should Be Allowed to Walk Away from Their Debts

Professor Heidi M. Hurd, a law and philosophy professor at the University of Illinois, ended the conference by discussing first principles in The Jurisprudence of Bankruptcy. Why should we forgive people who break contracts and harm others?

Where Do All the Corporate Debtors Go During Reform Time?

Dr. Terrence Halliday, a sociologist at the American Bar Foundation, shifted us back to corporate insolvencies. His paper, Missing Debtors: National Lawmaking and Global Norm-Making of Corporate Bankruptcy Regimes, discusses the systems that are created to regulate corporate debt and corporate debtors. He notes that some debtors who have a keen interest in corporate bankruptcy regimes are missing from the table when those regimes are being discussed at UNCITRAL meetings, in World Bank or IMF discussions. Why are they absent?

Gathering Your Private Information for Private Gain

Professor Elizabeth Warren’s (Harvard) paper, Balance of Knowledge, questions why academics do interdisciplinary work at all. But, she easily answered that question.

She noted the role that empirical data played during the BAPCPA discussions. She mentioned both the influence of the now-discredited $400 bankruptcy tax and also the study conducted by Creighton Law School Professors Marianne Culhane and Michaela White and how the Culhane/White study caused Congress to narrow the scope of the means test. She also discussed the way data has been used in the current mortgage policy debates. Professor Warren mentioned as well that Congress appears to be warming to the idea that empirical data has value, since credit card bills currently pending in Congress all have provisions that require credit card companies to make more data publicly available.

When Agencies Get it Wrong, They Reeeeeeeeeeeeeeeeeealy Get it Wrong

We ended the first day of the conference with management professors, Professor Gerry McNamara (Michigan State University) and Professor Paul M. Vaaler (University of Minnesota). They discussed How and Why Credit Assessors "Get It Wrong" when Judging the Risk of Borrowers: Past and Present Evidence at Home and Abroad. Professor Vaaler observed that the subprime meltdown is just one of the latest mistakes the rating agencies have made in recent times (he also points to the S&L crisis, Asian financial crisis). He argues, however, that private, credit rating agencies are at the center of the current housing crisis.

Professor Vaaler stressed that the agencies almost always get it right when assessing the risk posed by individual securities. But, when they get it wrong they get it wrong in a spectacular way.

How did Lenders Get it So Wrong?

An economist, Professor Amir Sufi (University of Chicago), shifted our focus in the afternoon session from debtor, to lender, behavior. In discussing his paper, Lender Incentives, Credit Risk, and Securitization: Evidence from the Subprime Mortgage Crisis, Professor Sufi asks why lenders made such bad decisions when making subprime mortgages. He concludes that securitization reduced lender incentives to scrutinize borrowers, because lenders knew they would sell virtually all the subprime loans they originated and, thus, knew they would shed the credit risk associated with those loans. Professor Sufi argues that this is to be expected, since financial intermediaries overcome information frictions only if they have an incentive to properly screen and monitor borrowers.

Proposed Fed/OTS/NCUA Credit Card Regulations

[Updated  5.4.08.  Updated language, largely comparing Regs to pending legislation, is in brackets.]

This afternoon, the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration unveiled a set of new, proposed unfair and deceptive practices (UDAP) rules under section 5(a) of the Federal Trade Commission Act.  A copy is available here.  Other materials are here.  It's not light reading--269 pages. 

Some of the proposed rules are quite favorable for consumer interests.  Others do not go far enough, however, and perhaps most importantly, there are several major issues that the proposed rules simply do not address. From an initial perusal, the gist of the rules (and what's missing) seems to be as follows (below the break):

Welcome to Judge Eugene Wedoff

I'm delighted to introduce Eugene Wedoff, who will be the first judge to guest blog at Credit Slips. He is a judge in the U.S. Bankruptcy Court in the Northern District of Illinois, a position that he has held since 1987. Last year, he concluded a five-year term as Chief Judge of that district. Judge Wedoff has overseen thousands of consumer and business bankruptcy cases, including the Chapter 11 reorganization bankruptcy of United Airlines. He has authored influential articles on the means testing, the provisions added to the Bankruptcy Code in 2005 to screen consumer debtors for eligibility for Chapter 7 bankruptcy. Judge Wedoff is a member of all the prestigious bankruptcy professional organizations (each of which has their own fancy acronym (NCBJ, ABI, AMC, and NBRC)). He's one of the brightest minds in the world of bankruptcy, and I hope our readers will join me in welcoming him.

Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

The Heady Conversation

After the lunch at the Debt conference on Friday, Professor Brian Knutson, a professor of Psychology & Neuroscience at Stanford, presented a paper on Brain, Decision, and Debt. The field of neuroeconomics (which has been around for about a decade) examines how the brain reacts when a person makes a decision, and how the brain causes individuals to make decisions. His research attempts to link the brain to debt – which he characterizes as a risk problem – and to show how people get into debt.

Maxed Out

The luncheon speaker for the conference was James. D. Scurlock, the director and producer of Maxed Out, which airs this month on Showtime. For those of you who haven’t seen the documentary, it’s a scathing, eye-opening depiction of how the financial services industry (most notably, credit card issuers, debt collection agencies) treats ordinary, hardworking Americans and how people are seduced into debt. He expressed his gratitude to the sponsors for inviting him to a conference where he was sure his talk wouldn’t be the most depressing.

The Very Big Men Who Sort Out Debt

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

Consumption Is Too Important to Be Left to Consumers

Professor George Ritzer, another sociologist (University of Maryland), presented a hyper paper ("Hyperconsumption" and "Hyperdebt": A "Hypercritical" Analysis). He argues that it has now become part of our public duty to consume. We were asked to consume after 9-11. We have been encouraged (really, really, encouraged – just ask WalMart) to spend the stimulus tax checks some of us might be receiving over the next few weeks. While consumers aren’t dupes, he stressed, we are being encouraged to do what producers want us to do.

Data, Data, Data

Provost (at Michigan) Teresa Sullivan presented the second paper of the morning, Debt and the Simulation of Social Class. She opened by repeating two conversations she heard while waiting at the airport yesterday. One involved a couple that was concerned that one of their neighbors might lose their home, and might have to file for relief under Chapter 13 of the US Bankruptcy Code. The second conversation involved parents who were discussing their child, a soon-to-be-college graduate, and the amount of student loan debt the child had. This debt level, the parents feared, would effect the type of job their child would be able to have, at least until the loan debt was repaid. She then observed that while debt is clearly on the mind of many people, it’s not a topic that has really concerned most sociologists (other than the ones who are attending the conference!)

God Was the Poor Man’s Only Surety

The Conference opened with a talk on "Debt, Credit and Poverty in Early Modern England" presented by Dr. J. Craig Muldrew, a history professor from Cambridge (the one in England, not the one in the US).  (He used the term that is the title for this post.)

Though his paper related to Early Modern England, you'll notice striking similarities between what happened then, and what's going on now.  Indeed, Professor Edward Balleisen (a history professor at Duke) connected the dots between then, and now, in his response to Dr. Muldrew's paper.

Live, From A Debt World

I just accomplished probably the most important thing I needed to do this morning.  I figured out how to log on the University of Illinois network.  Because I was a bit concerned that I would mess that up, I got here well before the first session -- just to be sure.  Since the U of IL and the ABI conference planners have made it impossible for me not to be able to blog this conference, once things get going, I'll be back with something a bit more substantive.

A Week in the Life of Mortgage "Reform"

Here's a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post.  Can you guess what these articles have in common?

On Sunday, Michelle Singletary's The Color of Money column discussed Treasury Secretary's Henry Paulson's recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers.  In her view, a new Commission isn't needed.  Instead, she argues that what we need to do is send some of these people to jail.  Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities. 

Streaming Academics

I hope our readers will excuse a little promotional material, but I have received several inquiries about our upcoming conference, "A Debtor World: Interdisciplinary Academic Symposium on Debt." Shockingly, Champaign, Illinois, is not a major travel destination for many of you, and readers have written me to ask about the conference proceedings.

If you are unable to join us here in Champaign, the conference sponsors (the University of Illinois and the American Bankruptcy Institute) have made available a live webstream for the conference. To view the live webstream, you would need to pay the same registration as the in-person attendees ($195 for ABI members, $395 for nonmembers). More information about the live webstream can be found here.

The papers presented at the conference will be collected for publication in an edited volume by an academic press. When that volume becomes available, I will make an announcement here on Credit Slips. We now return you to regular programming.

Homeownership Myth (Part II)

As I argue in the earlier posting, the Sunday Washington Post article raises a number of interesting points about the value of homeownership as an investment device.  I discuss many of these points in an article that will be published this Fall, and ultimately conclude that it is time to debunk some of the myths associated with homeownership. 

The Myth of Homeownership

An article in the Sunday Washington Post asks whether -- given the current housing crisis -- real estate or the stock market is the better investment.  Of course, the answer is -- it depends.  Formulating a longer, more sensible answer happens to be something I've been thinking about for the last several months and is the subject of my current research.  I'll discuss this article in two posts.  Here's the first one.

As the title of one of my forthcoming articles suggests ("The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing"), I challenge this country's obsession with Homeownership and the view that attaining homeownership is crucial to achieving the American Dream.  I'll discuss a few points raised in the Post article to explain how I've reached these somewhat heretical views.

Frontier and First Data Corp.

Felix Salmon has a great piece in CondeNast portfolio.com about the role of First Data Corporation in precipitating Frontier Airline's bankruptcy.  It's unusual to find a story that connects consumer credit card rights with a corporate bankruptcy, so I'll summarize the interaction beneath the break. 

Congrats to Professor Warren!

What do B.B. King, Justice John Paul Stevens, University of Illinois chancellor Richard Herman, and Credit Slips blogger Elizabeth Warren have in common? They were all named today as part of the 2008 class of fellows for the American Academy of Arts & Sciences. This is a major, major accomplishment. Congratulations, Elizabeth!

Student Loans, and the Housing Crisis

I am honored to have been asked to be a guest blogger on Credit Slips.  Not only is this my first posting for the week, this is the first time I’ve ever posted anything to a blog anywhere.  With that warning, here goes.

Thanks to the metastasizing housing crisis, the Bush Administration is urging Congress to increase the government's participation in the private student loan market.  Rather than just guaranteeing loans, though, President Bush urged Congress in his weekly radio address this Saturday to approve quite broad legislation that is designed to encourage private lenders to continue to remain in the federal student loan program.

Welcome to Mechele Dickerson

Credit Slips would like to welcome Professor Mechele Dickerson as a guest blogger. Dickerson is the Associate Dean for Academic Affairs and the Fulbright & Jaworski Professor of Law at the University of Texas School of Law. She is a widely known and respected scholar of bankruptcy law. Her current paper, forthcoming in the Indiana Law Journal is entitled "The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing," and I am sure we will hear little bit about that work. As an academic dean, Professor Dickerson also is uniquely situated to talk about how bankruptcy and credit is covered in the university classroom. At the end of the week, Professor Dickerson is joining us here in Champaign for "A Debtor World: An Interdisciplinary Academic Symposium on Debt," and she may have a few contributions for those of you who are unable to join us. Welcome to Credit Slips, Mechele.

Abe Simpson Gets His Wish?

Dear Mr. President:

There are too many states nowadays. Please eliminate three.

/s/ Abe Simpson

For those of you who do not watch The Simpsons as maniacally as I do--and that probably would be pretty much all of you--Abe Simpson is the senile grandfather who penned that letter. Now, according to a site calling itself the Los Angeles Chronicle, comes the news that Abe maybe has gotten his wish, and we perhaps have lost three states. Or, to quote Homer Simpson, "Anything is possible with President Koo Koo Bananas in charge."

The Future of Mortgage Servicing

In my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower's information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point--mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn't gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

Why Don't More Walk Away

My buddy, Buce over at Underbelly, has a post up using the concept of option value to help explain why more people are not walking away from their underwater homes. By "underwater," we're not talking about Homer Simpson's imaginary home under the sea, but situations where the mortgage on the residence is more than the value of the residence. A cool, rational economic actor would walk away from the home, leaving the lender to take a loss (assuming the lender has no legal or practical alternative to collect the difference from the homeowner). We're not seeing that as often as the cool, rational economic model might predict. Buce points out, correctly, that ownership of the house is just like having an option to buy (i.e., pay off the debt and the house is yours) and even underwater options have value. Thus, part of the reason why more people don't walk away from their homes is because of this option value.

MasterCard’s Machiavellian Twist

Having just spent the last six months or so giving job talks on a paper about why credit cards issuers should allow consumers to precommit to certain levels of spending and borrowing, I am simultaneously excited and disappointed to see MasterCard's latest offering, the "inControl" card, as reported by Aili McConnon in BusinessWeek. I'm excited because it shows beyond a doubt that allowing consumers to set predetermined limits on their spending and borrowing is technologically feasible and perhaps not even that expensive. (McConnon did not discuss the fee structure for the new product.)

I'm disappointed because of the product itself. Instead of using the technology to help consumers gain the credit control many so desperately seek, MasterCard is using it to allow employers to set limits on employee corporate-account spending. MasterCard is giving employers a diverse set of tools that are incredibly useful. Managers can set limits not only on the amount of spending, but on where and when employees spend, and it even offers the option of sending real-time text messages back to the company whenever employees use the card. These options are almost exact analogues of the ones I proposed:  allowing consumers to set their own hard credit limits, to "black out" certain stores they find particularly tempting, and to enable them to receive a receipt stating how much room they have left in their credit limit each time they make a purchase. The card is even called "inControl," when I'd suggested "You're in Charge" as a possible product name.

Lubben on Corporate Bankruptcy Costs

Professor Stephen Lubben of Seton Hall University (and a former Credit Slips guest blogger) has recently published the findings from his massive study of professional fees in corporate reorganizations. The paper appears under the very descriptive title of "Corporate Reorganization & Professional Fees" in volume 82 of the American Bankruptcy Law Journal at pp. 77-139. This paper will be a standard reference on corporate bankruptcy costs.

Lubben reports on a dataset of 1,026 cases that filed chapter 11 in 2005 in thirty-three separate judicial districts. Among Lubben's key findings:

• Courts rarely deny applications to retain professionals and rarely reduce professional fees
• Time in bankruptcy is not related to the level of professional fees
• Professional fees in chapter 11 are subject to economies of scale (i.e., larger bankruptcies result in a lower percentage of value being devoted to professional fees)
• Thirty-five percent of chapter 11 cases result in no payments to professionals whatsoever.

You'll have to read the study for the details. Professionals who work in chapter 11s and who like to get paid will want to do so. It contains a lot information about the expectations for the costs of an average chapter 11. In a "big case subsample," Professor Lubben provides separate data for the biggest corporate reorganizations.

I'm not quite sure how one goes about getting a copy of the study. The American Bankruptcy Institute, which provided the funding for Professor Lubben's study, was selling a CD-ROM with the study's contents. Full disclosure notice: I served on the advisory committee for Professor Lubben's study.

UPDATE (4/21): Professor Lubben wrote me to say a copy of the paper is available on SSRN here.

The Meaning of the Loss of Home

When Bob Lawless posted yesterday (April 17) the table showing the daily filings for March, 2008, it got me thinking about what exactly those numbers mean, and specifically, about the families who are represented by those statistics and in the middle of financial crises. And while I recognize that not all, or even most, of these filers are losing their homes in the process of bankruptcy, some will be. And this fact really tugged at my emotions.

Monthly Filings, Jan. 2006 - Mar. 2008

A reader asked about the total U.S. bankruptcy filings for a month earlier this year. Looking around, I found I had not updated those figures in a while, and I thought others also might have a use for those figures. Thus, presented without analysis and for everyone's convenience is this table with those figures, running from January 2006 to March 2008. The figures are for total U.S. bankruptcy filings. Clicking on the table should bring up a larger, more legible version.

The data are from Automated Access to Court Electronic Records (AACER). Over the past two days, there  have been news stories about the latest data from the Administrative Office of U.S. Courts (AO). The AO's  data are three and a half months old, from the last quarter of 2007. AACER's data are much more current.

Bankruptcy Filing Rates by District, Apr. 2006 to Mar. 2008

The March 2008 bankruptcy data showed that the U.S. average filing rate went over 4,000 per day for the first time since the 2005 bankruptcy. Bankruptcy filings have been steadily rising since the 2005 law's effective date, but national trends can mask local variation. Although bankruptcy data often is aggregated by state, it easily can be broken down to a little bit finer level. Bankruptcy filings are readily available by federal judicial district, for which there are ninety in the fifty states. Some districts occupy an entire state, but looking at districts allows us to see variation within a particular state. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER).

The map to the right shows how bankruptcy filings have increased from April 2006 to March 2008 in each of the ninety federal judicial districts. Yeah, I know, it's really small and illegible, but clicking on the map should open up a much bigger version. The states are color coded into deciles of growth, with the legend appearing in the lower right-hand corner. It won't be the greatest map you'll ever see, but I think it will serve the purpose. Also, no criticism of the selections of color codes will be brooked. I have a heck of time dressing myself in the morning--somebody could make a lot of money selling me Garanimals for Adults--and a coordinated color palette is too much to expect from me.

Before diving into what the heck this all means, a few caveats and explanations are in order. First, I picked April 2006 as the comparison date because it seemed like the first month after the 2005 bankruptcy law during which filings had returned to a somewhat normal pattern. Picking a different date, of course, could produce a different result. Second, every district in the country has had an increase in filing rates since 2006. Thus, even the tenth decile still represents an increase. It's just less of an increase than any other decile. Finally, consider that deciles are a convenient way to group, but they can be arbitrary cutoffs. For example, dividing ninety judicial districts into deciles means the 9th and 10th highest districts are grouped into different deciles. The map is best understood and used for its patterns.

Who Speaks for Mortgage "Lenders"?

Katie Porter makes an incredibly important point in her recent post about how securitization structures may be impeding mortgage modifications because the ultimate holders of risk on the mortgages are not the ones involved in the modification decision.  Mortgage servicers, who typically hold a small interest (if any) in the loans are the ones making the modification decisions.  When servicers do hold positions in the mortgage-backed securities, they are first lost positions, so the servicers likely takes a loss regardless of a modification or foreclosure, meaning that their interests are not aligned with the other MBS holders.

Let me take Katie's post a step further and suggest that the relevant voices on the lending side of the mortgage market have not been heard.  The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers.  These parties have been entirely absent from the conversation on modification and bankruptcy reform. 

The Stimulus that Can't Stimulate

Hanging the worldwide economic recovery on reigniting consumer spending is like investing in used fireworks.  The pizzazz is already gone. 

How are Americans planning to spend their stimulus checks?  According to a new poll, fully 41% say they will use their rebates to pay down debts.  Another 19% are trying to protect themselves by saving it, so that 60% have no spending plans at all.  Only 7% describe new spending.  Debt is blocking a large part of any impact the stimulus package might have had.

Negotiating with the Mortgage Company

At the heart of a loan modification is communication between a creditor and a debtor that leads to an agreement on new contract terms. If the debtor cannot get reach a person with authority to negotiate, a modification won't be possible. If the creditor can't get the debtor to return its calls or read its mail, a modification also won't be possible. The communication problems in today's securitized mortgage market are very different than during past real estate downturns, such as the Midwest farm crisis of the 1980s or the wave of foreclosures in the 1930s. Why? Because of the widespread use of mortgage servicers, third-party agents who collect payments from borrowers and remit them to the mortgage note holders (usually investors, often via a trust). Mortgage servicers are responsible for enforcing defaults, including pursuing foreclosures, and for engaging in loss mitigation. Gone are the days of sitting down with the bank that originated your loan and negotiating a new deal. Why am I making this very basic point? Because I am concerned that policymakers, including legislators, judges, and regulators still do not understand the barrier that loan servicing presents to voluntary or consensual loan modification.