24 posts from December 2011

A New Theory of the Role of the GSEs in the Housing Bubble

posted by Adam Levitin

Bill Black has an interesting new take on the role of Fannie and Freddie in the housing bubble. He sees their investment in non-prime mortgages as being driven by executive compensation, rather than a fight for market share against investment bank securitization conduits or govt affordable housing policy. The government affordable housing policy point has been repeatedly debunked (and Susan Wachter and I have a new paper that adds to this debunking via an examination of the commercial real estate bubble, where there was no government involvement whatsoever). Black is not, however, able to disprove the market share theory. What he does point to is that the GSE's involvement with nonprime mortgages was as whole loans kept in portfolio, rather than securitized (and also via purchases of MBS), which he says was a move to increase the short-term yield for the GSEs and thus maximize short-term executive compensation.

I think this is an interesting theory, but there are a few data points necessary to make it work, and I'm skeptical that they all support Black. 

Continue reading "A New Theory of the Role of the GSEs in the Housing Bubble" »

Anna Nicole Smith, the Constitution, and Bankruptcy

posted by Alan White

To all law profs out there who plan to attend next week's Association of American Law Schools annual meeting, be sure not to miss the Creditors' and Debtors' Rights section program Saturday morning at 8:30.   The theme of the program:  "Marathon at 30:  A Retrospective on Bankruptcy Court Jurisdiction in the Shadow of Article III."  Bankruptcy Judge J. Rich Leonard will moderate a discussion featuring Douglas Baird, Susan Block-Lieb and Troy McKenzie.  The panelists will consider, among other issues, the confusion sown by the Supreme Court in the process of resolving claims to the estate of Anna Nicole Smith's billionaire husband in Stern v. Marshall.  For some background on the case, see CS posts here, here and here

Whence Corporate Bankruptcy

posted by Bob Lawless

A correspondent and I were discussing the changes wrought by the 1978 enactment of the current U.S. Bankruptcy Code. My correspondent noted that corporate bankruptcy became more salient after 1978 and linked this phenomenon to the 1978 law. My perception is the same: corporate bankruptcy became more salient after the 1978 enactment of the Bankruptcy Code, and my guess would be that many experts would have the same reaction. We all remember big cases like Johns-Manville, Drexel Burnham, most all of the airline cases (Pan-Am, Eastern, Braniff), and many others. These cases all tend to occur after 1978 suggesting that the 1978 law did lead to a boom in corporate bankruptcy filings. Then I wondered whether my perception was backed by empirical fact.

Continue reading "Whence Corporate Bankruptcy" »

Your Favorite Business Bankruptcy/Restructuring Lingo?

posted by Melissa Jacoby

One more quick poll: off the top of your head, what lingo/cryptic terms do business bankruptcy professionals use regularly that are important to understanding the operation of the system in the real world (e.g., DIPs, cramdown, roll-ups, carve-out, stalking horse)? We talk about lingo in the basic bankruptcy class, but I want students to engage more with the concepts in the advanced class. Please list the first ones that come to your mind in the comments; you are also welcome to use bankruptcyprof@gmail.com.

Thanks, in advance, for your helpful feedback! 

More Rot in the OCC Foreclosure Reviews

posted by Adam Levitin

Michael Olenick, Gretchen Morgenson, and Yves Smith have all written pretty damning things about the foreclosure reviews persuant to the OCC consent orders with major mortgage servicers. (For my own previous thoughts, see here and here.) I've just started to peruse some of the engagement letters with the firms conducting the reviews, and the rot is even worse that these other critics portray.

What follows is in no way a comprehensive cataloging of the problems in the OCC foreclosure review process--this is just what I spotted from the briefest of perusals.  Yet it is clear that there are two types of serious problems:  conflicts of interest and flawed substance of the review process. I'll lay both out below and then give some thoughts as to what could and should be done to remedy this farcical process in order to ensure some accountability to the public and justice for homeowners. The post concludes with some thoughts about the core problem--the OCC--and what can be done to remedy it.   

Continue reading "More Rot in the OCC Foreclosure Reviews" »

How Does the New Federal Venue Law Affect Corporate Bankruptcy?

posted by Melissa Jacoby

On December 7, 2011, President Obama signed the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63. The bill does not amend 28 U.S.C. 1408, the primary venue provision for bankruptcy cases in the U.S. Nonetheless, the changes should make us think again about the propriety of place of incorporation as a basis for chapter 11 venue (hat tip to Elizabeth Gibson, who figured this one out right away).

Continue reading "How Does the New Federal Venue Law Affect Corporate Bankruptcy?" »

One in Five American Families Have Medical Bill Problems

posted by Melissa Jacoby

According to this new report. As Mirya Holman and I have explained in the bankruptcy context, measuring medical bill problems and debt is notoriously contested, but the Center for Studying Health System Change does try to make clear its methods and also uses similar metrics over time. The report also contains statistics on the proportion of their sample that considered filing for bankruptcy and actually did file. Definitely worth reading.  

Occupy Bank of America?

posted by Adam Levitin

Who knew that Mitt Romney had outflanked Obama on the left? Well, it took Nixon to go to China, but I expect we'll see a lot of backpedaling here. 

It's a bit troublesome, though, that a Harvard Law grad like Romney would believe that small claims court would possibly be the venue for resolving a wrongful foreclosure. Leaving aside jurisdictional issues, small claims courts are basically debt collection courts:  they're used by debt collectors, not by homeowners who can't afford legal counsel and are seeking injunctive relief. It explains a lot about the state of our legal system if the Romneys of the world honestly believe that small claims court is a the way middle class folks can receive justice. 

The Value(s) of Foreclosure Law Reform?

posted by Melissa Jacoby

As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?

Continue reading "The Value(s) of Foreclosure Law Reform?" »

Revamping the Advanced Bankruptcy Class

posted by Melissa Jacoby

Thanks, Bob, for welcoming me back. I'd like to start with a quick poll. Credit Slips readers, off the top of your head, what short writings (say 5 pages or fewer) should law students be doing that would be directly relevant to business bankruptcy practice? They can be related to business cases of any size, and can be litigation, counseling, or transactionally oriented. If you'd prefer to write me directly than to comment below, I welcome your thoughts at bankruptcyprof@gmail.com. Feel free to forward my inquiry to bankruptcy listserves for which this would be appropriate. Thanks for sharing your expertise!

Welcome Back Melissa Jacoby

posted by Bob Lawless

A few evenings ago, a wonderful e-mail arrived in my inbox from Melissa Jacoby, the Graham Kenan Professor of Law at the University of North Carolina. Melissa was one of the founding members of Credit Slips, and she was writing to accept our invitation to come back and guest blog. Melissa is a nationally recognized expert on bankruptcy, debtor-creditor, and commercial law. It is great to have her voice back with us even if it is just for a while.

Robbing Peter to Pay Paul: US Economy Edition

posted by Adam Levitin

The Administration seems to have cut a deal to extend the payroll tax cut, which is a smart economic move in terms of trying to support demand. But it's being paid for by an increase in the "G-fee" (guarantee fee) charged by FHA and Fannie Mae and Freddie Mac on the loans they purchase. In other words, anyone refinancing or taking out a mortgage now will be subsidizing reduced payroll taxes.  The result is robbing Peter to pay Paul, which means the economic benefits from extending the payroll tax cut are going to be muted by the chill this puts on the struggling housing market.  

The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts. Homeowners don't choose whether they have a GSE loan or not. They choose whether to do FHA or not, but if it's not an FHA loan, the homeowner doesn't know if the loan is going to stay in the lender's portfolio, be sold to another lender, be sold to a GSE (and maybe securitized by the GSE) or be privately securitized. Raising the costs of the GSE execution might encourage more portfolio lending, but it's hard to believe that a few basis point change in GSE execution costs is going to suddenly make the private-label securitization market revive.  The problems in that market aren't just the economics--particularly of servicing--but the utter lack of trust investors have in the underwriting, documentation, and servicing. For the private-label market to revive, there will need to be a much more significant difference in execution costs between private-label and the GSEs. The increased G-fee doesn't do it. 

It's painfully apparent that this Administration doesn't have a housing policy, and that's a serious problem when housing is the anchor weighing down the economy.  Consider, on the one hand, the Administration tries to make refinancing easier via the expansion of HARP.  Then it raises the "G-fee" that Fannie Mae and Freddie Mac charge on every loan they purchase, which gets passed on the homeowner in the form of a higher mortgage rate.  (I'm not sure of the pass-through rate, but I'd guess it's pretty high.)  If the Administration is trying to fix the housing market, this sure isn't the way to do it.

Foreclosure Statistics for New Mexico: These Just Out

posted by Nathalie Martin

Foreclosure statistics obviously vary from local jurisdiction to jurisdiction, as well as from one time period to the next. For example, sometime back in 2008, New Mexico was 36th in the nation in the number of foreclosures, obviously lower than average. Now it is 11th in the nation. Right now, one in every 452 Santa Fe homes and one in every 550 Albuquerque homes is in foreclosure, and about 15,000 cases are filed each year, about half in Albuquerque. The lack of lawyers reported by the New York Times in February of 2011 is still palpable. Attorney Angelica Anaya-Allen, from the United South Broadway Corporation, which defends foreclosures in New Mexico, did an analysis of the reported decisions in all foreclosure cases in Santa Fe over a two year period. She found that of the 828 reported decisions that favored lenders during the one-year period in which she looked, 600 were default judgments. Ms. Anaya-Allen reports that out of the 15,000 cases filed per year, she’d be surprised if more than 500 borrowers, or roughly 3%, were represented. 

People Are Not Corporations, and Financial Journalists Are Not Ordinary People

posted by Jean Braucher

It is getting really old, the exasperation of entitled financial journalists that ordinary folks are not walking away from their underwater homes as much as they supposedly should. The latest to sound this tired refrain is James Surowiecki in The New Yorker (Living By Default, Dec. 19, 2011), who also makes the clichéd comparison to corporate decisions to shed debt using chapter 11 bankruptcy. He calls on underwater homeowners to do "the smart thing" by walking away.

According to Mitt Romney, “Corporations are people.” Whether or not you agree with that proposition, what is empirically true when it comes to debt is that people are not corporations. People don’t view walking away from debts that they can afford as a no brainer if it improves the bottom line. They agonize. They feel bad. They care about their homes and neighborhoods. Walking away is extremely painful, not a simple financial calculation. And, oh by the way, the further down you are in the 99 percent, the more likely that the financial calculation is negative, given impact on credit reputation from defaulting on a mortgage when your income is low. (On the other hand, many people worry about their credit reputations way after they have hit bottom and bankruptcy could actually improve their access to credit, more evidence that people don't take bankruptcy or any other form of walking away lightly.)

Continue reading "People Are Not Corporations, and Financial Journalists Are Not Ordinary People" »

Bankruptcy Filings Drop for 13th Consecutive Month

posted by Bob Lawless

Monthly Bankruptcy Filings.Jan 2004 to Nov 2011On a year-over-year basis, the U.S. bankruptcy filing rate dropped for the 13th consecutive month in November. According to statistics from Epiq Systems, Inc., the November daily bankruptcy filing rate was 4,923, a decline of 12.5% from one year ago. November marks the first time that the daily bankruptcy filing rate has dropped below 5,000 since January 2009.

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NPR Reports that Debtors' Prisons Are Alive and Well

posted by Nathalie Martin

Although debtors' prisons are illegal across the country, you can apparently still end up in jail for an unpaid bill. I first came across this reality reading one of Lea Shepherd’s (Loyola Chicago) law review articles, Creditors Contempt. NPR  tells the story of Illinois debtor Robin Sanders in Illinois, who was stopped by police for a loud muffler but taken directly to jail on an arrest warrant for failure to appear at a hearing on an unpaid medical bill, all in a lawsuit she was unaware of. Similar stories have been reported in Indiana, Tennessee and Washington, and all involve selling debt to a collection agency, that then files a lawsuit against the debtor requiring a court appearance. A notice to appear in court is supposed to be given to the debtor. If they fail to show up, a warrant is issued for their arrest. According to the story, despite that debtor’s prisons were outlawed early in our country’s history, one-third of all states still allow people who have not paid bills to be jailed.

Continue reading "NPR Reports that Debtors' Prisons Are Alive and Well" »

We Get a Chapter 11 Case!

posted by Stephen Lubben

The Supreme Court has granted cert. in RadLAX Gateway Hotel, LLC, a case involving the right to credit bid when a sale is done as part of a chapter 11 plan. The Code clearly allows credit bidding in 363 sales, but the courts had split on the issue in the plan context.

Don't Give Me Whys and Wherefores

posted by Stephen Lubben

Some initial musings on the ethics of chapter 11, over at Dealbook.

Lies and Denial: the 2012 GOP Strategy

posted by Adam Levitin

The last 24 hours have witnessed some remarkable historical revisionism on financial regulation coming out of the GOP.

First, we had one of the most bizarre and simply untrue attack ads I've ever seen, courtesy of Karl Rove's Crossroads GPS outfit. The ad calumnies Elizabeth Warren, claiming that first she was responsible for the TARP bailout and then set out to butter up bankers. Is this man on drugs? Rove seems to be confusing Elizabeth Warren with George W. Bush. 

Let's set the record straight.  Elizabeth Warren involvement with TARP was as chair of the Congressional Oversight Panel.  That was a body created by Congress to monitor and report on the effectiveness of TARP bailout.  The Oversight Panel did not create the bailout.  Congress did at the urging of the Bush Administration. The Oversight Panel had absolutely no authority to direct the use of the bailout. Its sole authority was to act as a watchdog.

And what a watchdog it was! It was Elizabeth Warren's trenchant criticism of the bailout that catapulted her to the national stage. The reason she started being invited to appear on the Daily Show and the like was because there was no better and more articulate critic of the bailout than Elizabeth Warren. The Oversight Panel could easily have been a sleepy, impotent backwater. Elizabeth Warren turned it into a ferocious bully pulpit for the interests of middle class Americans who were confused and angry over what was happening to their country. To blame Elizabeth Warren for the bailout is like calling Larry Bird the greatest New York Knick ever. It's so ridiculous that it's insulting. (And fighting words in Boston.) 

Then there's a hooter of a claim that Elizabeth Warren was courting bankers. Let's put that in some context to show how silly the charge is.  Elizabeth Warren left the Oversight Panel to help push for the creation of the Consumer Financial Protection Bureau, and for a long time it was thought that she would be nominated as the Bureau's Director. One reason she wasn't nominated was because the banks took an "over our dead [but now rescusitated via bailouts thank you very much] bodies" approach to Warren, claiming that she was "anti-bank."

Now, some might think that's a compliment, but Warren tried to show that she's not anti-bank. She just wants fair, transparent markets.  (Apparently, that's a problem for banks.  Heck, apparently, if you want market to be fair, and transparent and work as they are supposed to that makes one anti-bank, a socialist, a communist, or worse.  Capitalism, it turns out has nothing to do with markets.) To show that she wasn't anti-bank, Warren took great pains to reach out to banks and to show them that she's open-minded and willing to listen to their concerns, especially the concerns of small community banks and credit unions.  So now Elizabeth Warren is being damned for having been gracious and fair and open-minded. 

For more commentary on this lunacy, see here and here

Continue reading "Lies and Denial: the 2012 GOP Strategy" »

This-Is-It EU Summit Eupdate

posted by Anna Gelpern

A few quick thoughts as the Make-or-Break, Life-or-Death, Now-or-Never EU Summit gets going.

Previews from Merkozy earlier this week got no love, and now that Mr. Draghi has shelved the Big Bazooka idea (HT Hank Paulson), I am not entirely sure what can possibly surprise on the upside. Then again, maybe the dithering is good news--if EU policy makers had really thought this was the abyss, surely they would have done something.

I would not claim summit reading as a specialty. Besides, I am exhausted from trying to unpack decisions that have had the average lifespan of a mayfly. That is why, instead of laboring through substance, this time I will be looking for glaring signs of fecklessness. So far this week I have seen two: Private Sector Involvement and Rule Obsession.

Continue reading "This-Is-It EU Summit Eupdate" »

Laboratories of Democracy and the Commissioners of Uniformity

posted by Alan White

States have passed a variety of changes to foreclosure laws and court rules in response to the foreclosure crisis, including new notice and mediation requirements to stimulate workouts between lenders and borrowers.  Some of these laws have been found effective in reducing foreclosures.  Subprime mortgages with delinquent payments are much more likely to end in foreclosure sales in nonjudicial foreclosures states, while states with both judicial foreclosure and strong consumer protections, like New York and Pennsylvania, have modification rates well above the national average (Download Delinquent Subprime Loan Outcomes by State Excel table.)

On the other hand, nonjudicial foreclosure is faster and cheaper, which can be an advantage when dealing with abandoned properties.   States also vary considerably in the amount of time homeowners have to cure a default before foreclosure, or redeem a property after foreclosure.

The Uniform Law Commission, who bring you the Uniform Commercial Code and other model state laws, is launching a project to consider drafting a uniform foreclosure law for the 50 states.  The study group consists of professors, judges, and lawyers, but notably absent is any member who could be regarded as a consumer or homeowner advocate or even sympathizer.  Interested parties may request to participate as observers, and I am told that observers have had some influence on these uniform law projects in the past.  Of course, whatever the ULC drafts does not become law until a state legislature chooses to adopt it.

In the case of foreclosure notices, ADR, redemption, and the judicial/nonjudicial debate, my own view is that uniformity among states is neither likely nor especially desirable. Nevertheless, this ULC project bears watching.



Big Banks Finance Payday Lenders: You Knew that but did you Know some also Make payday loans?

posted by Nathalie Martin

This video is totally worth you 2 minutes. It describes big banks in rather unflattering terms (as parasites, for example) but the main thing I got out of it is that big banks finance payday lenders. Yes, it is true that the same banks that received TARP bailout money are funding payday lenders.  The payday lenders include Advance America, Cash America and ACE Cash Express, which allow customers to borrow against future paychecks, and which charge an average interest rate of 455 percent on top of fees of $15-18 per $100 loaned. These lenders depend on the big banks' financing for their business.  Moreover, Wells Fargo, Fifth Third Bank, and U.S. Bank, all make their own payday loans too.Talk about double dipping!

Continue reading "Big Banks Finance Payday Lenders: You Knew that but did you Know some also Make payday loans?" »

Occupiers Target Foreclosures

posted by Alan White

Occupy Wall Street have announced a national day of action around mortgage foreclosures and evictions, to be held on Tuesday December 6.  My comments on the protest and the current state of the foreclosure crisis at salon.com are here.

Consumers Beware of Gas Well Leases, Especially Around the Holidays

posted by Nathalie Martin

For those contracts professors who teach Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962), there is a modern version this 1962 case going on right now in the gas drilling context. In the venerable Peevyhouse case, Willie and Lucille Peevyhouse owned a farm that contained coal deposits, and entered into a contract with Garland Coal & Mining Co. allowing Garland to strip mine the coal, in return for a royalty. In the contract, Garland promise that the land would be restored once they were done. The court refused to enforce the clean-up provision, however, finding it incidental to the main purpose of the contract. The land was left a hot mess.

Continue reading "Consumers Beware of Gas Well Leases, Especially Around the Holidays" »


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