NACBA warns of student loan "debt bomb"

At its annual Capitol Hill Day in Washington this week, the National Association of Consumer Bankruptcy Attorneys sounded an alarm about the growing student loan problem, calling it a “debt bomb.” NACBA released a survey of its members indicating that more potential clients these days have unmanageable educational loans and are facing aggressive collection efforts. See http://www.nacba.org/Legislative/StudentLoanDebt.aspx. It has become common for people to have two mortgage-size debts, one for a home and another for an education. The educational loan problem is looking something like the one a few years back with subprime mortgages.

Absent “undue hardship,” very hard to establish, student debt can be a life sentence because these loans are not dischargeable in bankruptcy. NACBA supports making private students loans dischargeable again (as they were before the 2005 law). Beyond that, it favors going back to the pre-1990 approach of allowing discharge of any student debt after five years. If the education isn’t paying off enough to make the loan repayable after that much time, something has to give so that people can get on with their lives--and some day buy a home, start a family, and save for their kids’ education and their own retirement.

As a participant in the Capitol Hill Day, I found congressional staff reacted very sympathetically. They are mostly young people carrying big student loans or with friends who have them. They know how hard it is to manage this debt even when you have a decent job. They easily recognize what a big problem this is for their generation and even more so for the next one. This issue isn’t going away.

Congressmen Raise New Questions About FHFA Resistance to Principal Reduction

The heat is cranking up on the seat of Edward DeMarco, acting head of the Federal Housing Finance Agency and a holdover from the last administration who has been standing in the way of a meaningful response to the mortgage crisis. FHFA is conservator of FannieMae and FreddieMac, owners or guarantors of a large percentage of US home mortgages, and thus in a position to direct the mortgage giants to take steps that would save taxpayers money, provide relief to struggling underwater homeowners, and revive the US economy. Congressmen Elijah Cummings and John Tierney yesterday released a smoking letter to DeMarco explaining that his agency's own analysis shows that a principal reduction program could save taxpayers $28 billion. http://democrats.oversight.house.gov/images/stories/Cummings_Tierney_DeMarco.pdf Even more revealing, they say a FannieMae whistleblower has disclosed that FHFA was poised to implement a pilot program along these lines just before the November 2010 election but then pulled back for political reasons. Things seem to be getting more interesting. Could we finally see some movement on this critical issue?

How to Address Apparent Racial Disparity in the Consumer Bankruptcy System

The article discussed in the N.Y. Times story today is heavily empirical. It is also deliberately light on the prescriptive. Bob Lawless, Dov Cohen and I did make two modest proposals: (1) that a question about race of the debtor should be included on the form for a bankruptcy petition to make it possible to confirm (or disprove) the finding that African Americans file in chapter 13 at a much higher rate than debtors of other races (about double in the data we have), and (2) that all actors in the bankruptcy system—judges, trustees, attorneys and clients—be educated about the apparent racial disparity and the possibility that subtle racial bias may be producing it. The Times certainly helped with the second one!

Beyond that, we leave it to others and to each of us individually to come up with policy responses. In my view, Henry Hildebrand, a longtime chapter 13 trustee in Tennessee, got the big picture exactly right; he is quoted in the Times story as saying we should “use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.” He will probably reappraise his views if he finds out that I agree with him! Those of us who participate in or study the system know that its complexity is onerous.

Principal Write-Down Pilot Program in Massachusetts

A Boston nonprofit, Boston Community Capital, is teaming up with some financial institutions, in particular Bank of America, in a pilot program that has the effect of writing down mortgages to close to home value. http://www.npr.org/2012/01/02/143601604/in-mortgage-crisis-some-banks-agree-to-cut-losses

BCC says it works with qualifying homeowners and banks to buy underwater homes, either in short sales or at foreclosure, and then sells them back to owners at just above current market value. The nonprofit takes the risk of making the resale and allows those buying back to use their own lender or a mortgage company that BCC works with. See the program’s FAQs: http://www.sunhomehelp.org/faq/sun

BCC is playing a gatekeeping role as far as who qualifies (there must be an ability to pay the written-down loan but an inability to pay the original loan). Also, BCC may have better credibility with distressed homeowners than financial institutions such as B of A do. The pilot is supposed to test whether such a program can be run without promoting “strategic default,” according to the NPR story.

Principal write-down is much needed relief to stabilize the housing market and reduce the lose-lose impact of foreclosure, so this is a pilot worth watching. A concern, however, is whether we can trust any reports that come out about it. There does not seem to be any neutral third-party such as an academic researcher studying what happens in the program. Also, a supposed fact cited in the NPR story is unattributed and highly doubtful—that 30 percent of private home loan modifications last year involved principal write-down. That certainly wasn’t true of the government-sponsored Home Affordable Modification Program, so if true about private modifications, it raises even more questions about the troubled HAMP.

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

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.)

Is the Jig up for MERS?

The Mortgage Electronic Registration System (MERS) has been the target in a lot of lawsuits during the mortgage crisis for its shoddy, opaque practices. But because these suits tend to be brought by borrowers in default, the courts have been willing to stretch the law to dismiss plaintiffs' claims. Something new is going on now. The Delaware Attorney General on October 27 sued MERS, a Delaware corporation, for deceptive trade practices for sowing confusion among investors and consumers and running an extra-legal registration system riddled with errors. The Delaware AG, Beau Biden, son of the vice president, is invoking the importance of transparent recording of property interests as a central part of American democracy since the colonial era. Some other AGs and other public officials are pursuing similar legal theories. The argument is that nothing is more important to our democracy than secure property rights recorded in transparent public records, and that the mortgage industry should not be permitted to take this away from us. To read about this new development, visit the Delaware Department of Justice web site, at http://attorneygeneral.delaware.gov/

Financial Stability Board Calls for Effective Consumer Finance Protection

The Financial Stability Board, an international organization operating under the auspices of the G20 countries, this week issued its Report on Consumer Finance Protection. http://www.financialstabilityboard.org/publications/r_111026a.pdf FSB emphasizes the link between international financial stability and consumer protection, particularly in the mortgage markets. It calls for regulation to assure assessment of borrowers’ ability to pay and to police credit product features that increase risk. The report engages in some comparative analysis and identifies national regulatory architecture that has been particularly effective, such as that of Australia. The report is part of an initiative to stimulate more international discussion of effective means of consumer protection, particularly concerning credit. FSB increasingly sees consumer protection as part of its mission to assess and address vulnerabilities in the international financial system. The report is worthy and sensible. Of course, implementation, primarily by domestic regulation of financial institutions, is a huge challenge.

Mortgage Documentation Issues Close to (My) Home

The Arizona Supreme Court currently has under review a mortgage documentation case, Vasquez v. Saxon Mortgage, Inc. Just by chance, the Court was on its annual visit to the University of Arizona law college, where I teach, for the oral argument on Sept. 22. So of course I was in the audience at the argument, along with my students from our new Mortgage Clinic and a related course, called the Mortgage Crisis. We’ve been analyzing and debating the opposing arguments since.

Brain-Injured Marines and For-Profit Colleges

Military personnel have long been targets of predatory creditors, going back to the moneylenders who followed the Roman legions. More recently, payday lenders clustered storefronts around military bases. The latest development is that subprime operators are hawking degrees at for-profit colleges to former and current service members.

Holly Petraeus, who heads up service member affairs in the federal Consumer Financial Protection Bureau, has a powerful account in an op ed for the NY Times of the targeting of current and former military personnel by for-profit colleges, including some seriously brain-injured Marines at Camp Lejeune, N.C. Appointing Petraeus, whose husband David is CIA director and former commander of American forces in Iraq and Afganistan, to this post was a stroke of genius. When general consumer protection arguments fail to get much traction, finding some military victims seems to help get the message across.

"Homeowners Need Help"

That's the headline of the lead editorial today in The New York Times.  The Gray Lady urges the Obama Administration to adopt solutions that reduce principal to restore homeowner equity as an essential step to economic recovery.  Principal pay down in bankruptcy gets a mention.  

Principal Pay Down in Chapter 13 as a Means of Foreclosure Prevention

As we have discussed recently, here and here, the Federal Housing Finance Agency has asked for ideas about how to dispose of foreclosed properties in bulk.  But there is no reason we shouldn’t take this request as also encompassing reducing foreclosed inventory by preventing foreclosures to begin with.  FHFA has the power to implement either type of program for loans or properties controlled by Fannie or Freddie, the government-sponsored entities under FHFA conservatorship.

So let’s talk about the idea of Principal Pay Down (PPD) in chapter 13 bankruptcy as a foreclosure prevention strategy.  FHFA could direct the GSEs to go along with chapter 13 plans that propose to pay down principal over five years, thus affecting a broad swath of home mortgages.

Here are the elements of PPD

The US Government and the Foreclosure Crisis: Out of Ideas or Out of Will?

It’s old news that federal housing agencies need better ideas about what to do about the foreclosure crisis.  The new development is that they realize it and have issued a blunderbuss “RFI” (request for information) seeking ideas from anyone willing to write in by September 15 describing business structures for the government to off-load foreclosed properties it is holding, particularly in “large scale transactions” to deal with the scale of the problem of lingering “inventory.”  See here.   An RFI is something short of an RFP (request for proposals).  Indeed, this new RFI is careful to note the distinction and also that there may never be a call for actual proposals.   So let’s not get too excited.  Furthermore, the problem of the continuing foreclosure crisis seems to be less about ideas than about will to act.  Most disturbing, the RFI does not even allude to the possibility of beefing up foreclosure prevention as an important way to stem growth in the volume of unsold and vacant foreclosed homes.

So first, what is the government looking for?  Specifically, the Federal Housing Finance Agency (FHFA), in consultation with Treasury and HUD, seeks new options for selling foreclosed one-to-four unit properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).   Bulk sales might be for resale, rental or demolition.

For-Profit Higher Education Industry Sues to Block Weak “Gainful Employment” Rule

Last week the Association of Private-Sector Colleges and Universities (aka the Career College Assn.) filed suit in U.S. District Court in Washington, D.C., to block enforcement of the U.S. Dept. of Education’s “Gainful Employment” regulation, issued in June.  See here for the complaint.   The for-profit colleges are challenging the agency's authority to issue that regulation.  It requires that, to be eligible to receive federal grant and loan funds, the colleges must show that 35 percent of former students are paying something (even $1) on their student loans (or that they must meet other benchmarks set in terms of debt to income).

So let’s back up and put this issue in context.  There is lately a general unease about whether the cost of higher education is worth it, even though income rises and unemployment decreases steadily with successive degrees (except that PhD’s are more likely to be unemployed than those with professional degrees, hardly a surprise).  See here.   

New Resource: NCLC's Bankruptcy Mortgage Project

The National Consumer Law Center has launched a useful new resource for the bankruptcy community called the Bankruptcy Mortgage Project. See here. Those likely to find it handy include judges, consumers, trustees, mortgage servicers, attorneys, and academics. The website, created with a grant from the National Conference of Bankruptcy Judges’ Endowment for Education, collects all sorts of documents related to mortgage issues in consumer bankruptcy cases. It thus provides easy, free access to various local rules, forms, general orders, and court opinions.

Mortgage Modification Mystery

Media reports have recently focused on big banks spontaneously offering mortgage modifications, even including principal reduction, to borrowers who are not in default and who haven’t even asked for them. See here.  The banks mentioned, JPMorgan Chase and Bank of America, both took over a lot of nasty mortgages from failed financial institutions (Washington Mutual and Countrywide Financial).

The modifications seem to be going in particular to current but underwater customers with pay option ARM mortgages (which allowed debtors not to pay for a while and add skipped payments to the principal).  Industry analysts have explained the banks’ actions as getting ahead of a problem that could affect their stock prices.  See here.  Apparently banks have been quietly modifying current mortgages for years, and hundreds of thousands of people, maybe more, have gotten improved deals this way.

But there is still a mystery.  Why don’t the banks wait for a missed payment or at least a request before making an offer?

Responsible Lending as an Emerging International Norm

The International Association of Consumer Law, with participants present from six continents, has been meeting at Brunel University in West London the last few days, hearing presentations from regulators, industry representatives, consumer advocates, and academics.   http://qwww.brunel.ac.uk/bls/research/events/ne_41734   Not surprisingly, regulation of consumer credit has been a prime focus, giving some perspective on US struggles to achieve more effective consumer financial protection. 

Professor Iain Ramsay of the University of Kent in the UK reported on initiatives for international cooperation to enhance consumer financial protection.   The G20, World Bank, Financial Stability Board, and Organization for Economic Co-operation and Development are all on board with this goal, seeing it as an essential part of a program to ensure that the international financial system is safe and sound.  The OECD is expected to issue draft principles of consumer financial protection soon, and comments will be invited.  Given the primarily prudential role of these organizations, balance from other sectors will be important.

Ramsay raised an underlying and overlooked question:   what is the economic and social value of consumer credit?