QRM's Missed Opportunities for Financial Stability and Servicing Reform

posted by Adam Levitin

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

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Credit Risk Retention Rules and QRM

posted by Adam Levitin

The long awaited credit risk retention rules for securitization are out. The big question--whether the qualified residential mortgage or QRM exemption would be narrower than the CFPB's qualified mortgage or QM safe harbor to the Ability to Repay requirement for mortgages is no. QRM=QM. The short version is that the rule doesn't require meaningful credit risk retention where it counts, and imposes significant market-shaping safe-harbor requirements where skin in the game isn't so important.

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Are You Sure That's Your Testimony?

posted by Adam Levitin

Yves Smith has had some great coverage of the AIG bailout trail over on Naked Capitalism.  While the litigation, as Yves has characterized it, is a bit like a brawl between the ugly stepsisters, it's telling us all kinds of stuff we didn't know (or at least couldn't document) about the 2008-09 bailouts.   

Today's coverage is a must-read piece by Matt Stoller about the civil service regulatory capture at the Fed, as personified by its general counsel.  The AIG trial has highlighted some of the worldview problems at the Fed. It has also included some jaw-dropping exchanges like the following:

Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.

You can't make this stuff up.  I'll let readers draw their own conclusions. 

Is a 36% Cap Radical?

posted by Nathalie Martin

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

Unseal the Doomsday Book!

posted by Adam Levitin

When I first heard about the NY Fed's Doomsday book, my initial thought was, "Wow, they've got a comprehensive survey of land titles, so MERS really isn't an issue!" Then I realized it was a Doomsday book, not a Domesday book. Apparently the Doomsday book is some sort of "in case of emergency" do-it-yourself bailouts manual that outlines the steps the NY Fed believes it can legally take to stave off economic Armageddon. 

I'm rather puzzled by the NY Fed's claim that it should be kept under seal.  I guess we'll find out more of the Fed's reasoning soon enough, but it hardly seems to be particularly sensitive of secret information.  This isn't the Coca-Cola recipe or some sort of trade secret. It's hard to believe that we didn't see the full panoply of the Fed's bailout powers on display in 2008, and perhaps then some. (A colleague has suggested that they might be developing some sort of secret, stress-tested, boilerplate clad bailout machine in the basement of the NY Fed. Of course such a bailoutbot would exercise its own free-living-will. Its only vulnerability would be following a haircut.)

The fact that the Doomsday book apparently contains legal advice is not a seal issue--that's a privilege issue. Once that privilege is waived (I'm guessing it has been), I can't see why the fact that the document includes legal advice presents cause for remaining under seal. 

Courts have a lot of discretion in what they can allow to remain under seal, but I just don't see the Doomsday book as fiting into traditional categories of sealed documents. But as I said, we will see.  

Bankruptcy Filings Are Low, But Not Everywhere

posted by Bob Lawless

Filings by Judicial District.Sept 2014Bankruptcy filings have dipped to their lowest rate since 1990, as previously blogged (ignoring anomalous statistical gyrations around the 2005 changes to the bankruptcy law). Over the past twelve months the bankruptcy filing rate per 1,000 persons has been 2.95, which is the first time it has been below 3.0 in almost 25 years. But, the filing rate is not that low everywhere.

Before discussing how the filing rates are different across the country, the usual question I get is why the bankruptcy filing rate has declined so much. The answer to that question is not this post. Rather, see many previous posts like here and here. The short version is that U.S. households are carrying less debt -- nothing more complicated than that. Along those lines see the post at Calculated Risk about the Fed's household debt service ratio being near record lows.

Continue reading "Bankruptcy Filings Are Low, But Not Everywhere" »

Would it Surprise You to Know

posted by Stephen Lubben

That I still think the "safe harbors" as currenlty drafted are a bad thing?

Econometric Optimization of Fresh Start Policy

posted by Jason Kilborn

"What is the optimal consumer bankruptcy law?" Now that's an abstract first line that grabs my attention! I've thought about this question for most of my academic career, and I've struggled to find solid bases for an answer. Now, Indiana Univeristy economist Gray Gordon offers an intriguing if difficult to understand possibility. In his paper, Optimal Bankruptcy Code: A Fresh Start for Some, Gordon actually quantifies the sweet spot: (1) an optimal system offers a discharge of debt (a constant refrain in policy papers, e.g., here and here), (2) it does so for households whose debt is 2.6 times their endowment, and (3) this optimal system results in a welfare gain of 12.2%. The conclusion is nowhere near as confusing for a non-economist (like me) as the proof, expressed in inscrutable Greek-symbol-filled equations which occupy the bulk of the paper. But this paper offers a rock solid answer to a question that has plagued Europe, in particular, for many years--how does one define "overindebtedness" and therefore the proper entry criterion for personal debt relief. Gordon's answer is very powerful, though I wonder how compelling the econometrics are behind these hard numbers. I'm not at all qualified to critique Gordon's proofs, but I'm a bit skeptical in light of Gordon's observation that "[r]elative to the U.S., the optimal policy results in a four-fold increase in the bankruptcy filing rate and a thirty-fold increase in debt." Whoah! Anyone care to comment on what could be a really groundbreaking new approach?

Here's the Contempt Order. Really.

posted by Mark Weidemaier

Not much new to say from the last time, except that this contempt order was signed by the judge. Argentina must "reverse entirely" the steps it has taken to remove BNY-Mellon and install a new trustee and otherwise start "complying completely" with the injunction. Or else....? The order doesn't say.

So, Argentina has been ordered to stop violating orders. If it doesn't, it will be in violation of another order. Which means basically nothing. Perhaps there was some doubt as to whether the judge meant the injunction as sort of a suggestion? Or perhaps this signals that the judge plans to skip the whole unenforceable-monetary-fine thing and get right to more innovative contempt sanctions if (when) Argentina fails to comply. Or maybe the order is an attempt to defer the confrontation as long as possible. Yawn. Wake me when something interesting happens.

 

IMF and Kazakhstan, Fixing Sovereign Debt in Unison

posted by Anna Gelpern

The IMF released its long-awaited paper on sovereign debt contract reform, advocating single-tier aggregated collective action (majority amendment) clauses and a clarification of the pari passu clause to preclude its future use to block payments on restrutured bonds, a la NML v. Argentina. An accessible summary of key points per IMF GC Sean Hagan is here. The recommendations were coordinated with ICMA (whose reform proposal is discussed here and here), as well as wealthy and emerging market governments.

Somewhat miraculously, Kazakhstan just issued a bond where it adopted the bulk of ICMA recommendations, which also puts it in line with the IMF's hot-off-the-press policy. The miracle is both in the issuer and in the timing. Kazakhstan's bond had been stop-and-go for some time (not the place one might expect experimentation). Moreover, the last time the IMF and its major shareholders advocated contract reform, it took YEARS for the first mover to emerge (Mexico). To be sure, first mover is no market shift, but a huge deal nonetheless.

I will have more on the whole subject of debt restructuring reform later, but for now, I just wonder why it was so hard the last time, and so not-nearly-as-hard this time. Is it that the market finally learned that CACs are an innocuous voting device, not the Trojan Horse of default? Is it that the Argentina mess has finally focused the minds? Is it that Kazakhstan balanced the new CACs with concessions to the creditors? Is it that none of it matters? Or that the relevant characters--government debtors, government creditors, market participants, lawyers, international organizations, and trade groups--have finally figured out how to work together?

Still thinking about the possibilities, but in all, indubitably a good thing.

Whitford Symposium

posted by Bob Lawless

Professor Bill Whitford of the University of Wisconsin will be an intellectual hero to many of the Credit Slips readers and contributors. Bill has done pathbreaking work in consumer bankruptcy law, consumer law, and corporate reorganizations. On October 24, the Temple Law Review will hold a symposium honoring Bill's career, "The (Un)Quiet Realist: Building and Reflecting on the Contributions of Bill Whitford." Speakers include current or past Credit Slips contributors Jean Braucher, Melissa Jacoby, Angie Littwin, Katie Porter, and me. The full agenda and more information can be found at the Temple Law Review web site. Attendees can earn up to five CLE credits (four substantive and one ethics).

When I first came into the legal academy, Bill was one of a small group of bankruptcy scholars getting out of their university offices and engaging with the world as it is. He is  a role model for me as an empirical scholar, and it is an honor to be asked to be part of this event.

Online Payday Loans Cost More Than Storefront Payday Loans And Customers Are Harassed More Egregiously

posted by Pamela Foohey

Over the last couple years, The Pew Charitable Trusts has put together a useful series of reports regarding payday lending in the United States. The fourth installment was released on October 2. Its title is quite descriptive: "Fraud and Abuse Online: Harmful Practices in Internet Payday Lending". The report documents aggressive and illegal actions taken by online payday lenders, most prominently those lenders that are not regulated by all states: harassment, threats, unauthorized dissemination of personal information and accessing of checking accounts, and automated payments that do not reduce principal loan amounts, thereby initiating an automatic renewal of the loan(!). Storefront lenders engage in some of the same tactics, but online lenders' transgressions seem to be more egregious and more frequent.

Putting these disturbing actions aside, are consumers getting a better deal online than at storefronts? Given the lower operating costs, it is logical to assume that these exorbitantly expensive loans might be just that much less expensive if purchased online? Nope. Lump-sum loans obtained online typically cost $25 per $100 borrowed, for an approximate APR of 650%. The national average APR of a store-front lump-sum loan is 391%. Why the disparity on price and severity of collection efforts?

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Goodbye to Military Lending Act Loopholes

posted by Nathalie Martin

How long will we be seeing signs like this in our communities?  Cash store smallerI refer specifically to the little sign in the store “Military Welcome,” which arises from sneaky loopholes that have been used for years to get around Military Lending Act (the “Act” or the MLA”), a bipartisan law passed by the House and Senate and signed into law by President George W. Bush as a part of the 2007 National Defense Authorization Act.  The law recognized that payday and other high cost loans interfere with military readiness and as a result, passed a rather uncontroversial 36 percent military APR, including all costs and fees. 36% period. End of story.

But we know it wasn’t true and as always they found their way around it, circumventing the definitions, increasing the terms, so on and so on. Last week, the Department of Defense released proposed rules to close the loopholes, thank goodness, given that no one opposed the MLA. The spruced up law still does not cover any transaction that is not covered by the Truth in Lending Act, meaning that big overdraft fees and rent-to own are still problems for Military personnel.  Also, the scope of the Act is still limited, so the Act still does not cover expensive auto purchase loans, mortgages, or purchase money goods, which can still cause hardship for Military families. Still, this is a big improvement in a situation that has circumvented the full supported MLA for a very long time. This DOD press release contains most of the details. Very nice.


Here's the (edit: Proposed) Contempt Order

posted by Mark Weidemaier

Edit: Oops... my automatic docket feed and determination to post before my morning class got the best of me. This is a proposed order, not signed as yet by the judge.

At a hearing on September 29, Judge Griesa indicated that he would hold Argentina in contempt of court but deferred his ruling on what the sanction would be. He has now issued the sanctions order. Somewhat surprisingly, the order does not impose even a monetary fine. (Perhaps the judge is not eager to deal with Argentina's inevitable noncompliance?) Instead, the order simply declares that Argentina will remain in contempt until it (i) "reaffirms and confirms" BNY-Mellon as trustee and (2) terminates any local trustee appointed as part of the already-not-too-attractive plan to let investors swap into local bonds. The order concludes by noting that the court "will consider the imposition of sanctions upon further application by Plaintiffs."

This is clearly an intermediate step, certainly as the plaintiffs view it. Footnote 5 of their contempt brief noted that Argentina would probably defy any order to pay a monetary fine and alluded to the possibility of additional, unspecified "non-monetary sanctions." What those sanctions might be is anybody's guess for now, but the real fireworks will begin when the plaintiffs propose them. For now, the judge has already ruled that the planned swap violates the injunction, so I don't expect this current order to make much difference.

Hacking and Systemic Financial Armageddon

posted by Adam Levitin

The revelation that 76 million JPMorgan Chase consumer accounts were compromised by hacking should be scaring the heck out of us. The Chase hacking is a red flag that hacking poses a real systemic risk to our banking system, and a national security risk as well. Frankly, I find this stuff a lot scarier than either ISIS or our still largely unregulated shadow banking space.  

Consider this nightmare scenario:  what if the hackers had just zeroed out all of those 76 million Chase accounts and wipes out months of transaction history making it impossible to determine exactly how much money was in the accounts at the time they were zeroed out? The money wouldn't even have to be stolen.  Just the account records changed.  What would happen then?

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Elizabeth Warren in Jeopardy! -- Em . . . That Is, the Game Show Jeopardy!

posted by Bob Lawless

Former Credit Slips blogger Elizabeth Warren who also happens to be the senior senator from Massachusetts was a category on Jeopardy! last night. H/T to the WSJ's Bankruptcy Beat, which has a more complete story on the topic including the questions that were asked. None of the questions related to Credit Slips probably because they would have been too easy. Please let me hold on to that illusion.

None of the contestants could correctly give the full name of the agency of which Senator Warren was interim director, "the CFPB for short." Although she was commonly referred to as the "interim director," the title I remember her holding is "assistant to the president and special advisor to the Secretary of the Treasury" (e.g., here and here). It's a trivial point -- which I suppose is the point of Jeopard! -- but was she ever formally the "interim director" of the CFPB?

Markets?

posted by Stephen Lubben

Some thoughts on how much faith we should have in the debt markets, and whether they are actually markets at all, over at Dealb%k.

Flagstar Servicing Enforcement Order

posted by Adam Levitin

The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).

The details given in the consent order tell an all-too-common picture about mortgage servicing.  

In 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. 

And we wonder why loss mitigation hasn't been more effective?

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What do bankruptcy mortgage servicing and ebola have in common?

posted by Katie Porter

A long long time ago in this same galaxy, I wrote what may be Credit Slips' most popular post: What do bankruptcy mortgage servicing and phone sex in common? Today, I bring you a new comparison: bankruptcy mortgage servicing and ebola. At the outset, let me be very clear that ebola is a tragic health care crisis. I do not mean to minimize those deaths and illnesses with a comparison to mortgage servicing--although to be sure, poor mortgage servicing has tragic financial consequences.

Here is the basic analogy. Ebola has a high kill rate. Similarly, screwed up mortgage servicing can be the death knell for homeownership. Ebola is currently epidemic in West Africa, just as the foreclosure crisis made mortgage servicing a top-line policy problem. And despite the publicity, both ebola and foreclosure--as epidemiological matters--are rare. This is one of the reasons that investment and research on both problems has lagged behind more common occurrences such as, respectively, malaria and mobile banking. We have known about the risks of ebola for years, yet the global community is still struggling to find fixes. Again, in parallel, it has been twelve years since Hank Hildebrand wrote "The Sad State of Mortgage Service Providers," and six years after Tara Twomey's and my research on mortgage servicing errors in bankruptcy hit the front pages of newspapers. While improved, bankruptcy mortgage servicing is still a threat to a healthy bankruptcy system.

Screen Shot 2014-09-24 at 10.27.33 AMMy favorite recent case in point:  In re Williams, in which a couple filed a second bankruptcy solely to save their home--the exact reason for their first bankruptcy. (At least you can only get ebola once!) The Williams alleged that Ocwen had not properly serviced their mortgage during their first bankruptcy. Ocwen pursued a foreclosure after the debtors had completed their chapter 13 plan and refused to accept debtors' payments. Its proof of claim alleged 28 missed payments and an arrearage of $43,388.82.  U.S. Bankruptcy Judge Brendan Shannon (Bankr. Del.) ultimately found the debtors owed only $16,164.24 (12 payments) and ordered Ocwen to pay the costs and fees of the debtors' second bankruptcy filing and litigation with Ocwen. In describing the situation, Judge Shannon, said that the bankruptcy servicing created an "ensuing mess [that] is "dispiritingly predictable." The system was bogged down with a second case, the debtors threatened and stressed by a second foreclosure, and Ocwen spent its resources on a second round of litigation (instead of helping homeowners get loan modifications.)

Continue reading "What do bankruptcy mortgage servicing and ebola have in common? " »

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