Explaining the Housing Bubble

Some self-promotion:  I've posted a new paper to SSRN, coauthored with Susan Wachter (Wharton).  It's entitled "Explaining the Housing Bubble."  Here's the abstract:

    There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. None of these explanations, however, is capable of fully explaining the housing bubble, much less the parallel commercial real estate bubble.

    This Article posits a new explanation for the housing bubble. It demonstrates that the bubble was a supply-side phenomenon, attributable to an excess of mispriced mortgage finance: mortgage finance spreads declined and volume increased, even as risk increased, a confluence attributable only to an oversupply of mortgage finance.

    The mortgage finance supply glut occurred because markets failed to price risk correctly due to the complexity and heterogeneity of the private-label mortgage-backed securities (MBS) that began to dominate the market in 2004. The rise of private-label MBS exacerbated informational asymmetries between the financial institutions that intermediate mortgage finance and MBS investors. The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.

    Despite mortgage securitization’s inherent informational asymmetries, it is critical for the continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression. The benefits of securitization, therefore, must be reconciled with the need for economic stability. The Article proposes the standardization of MBS to reduce complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

Direct-to-author (not posted) comments are most welcome.  

HAMP fizzles

Treasury reported Friday that a hopelessly inadequate 37,000 mortgages were permanently modified as a result of the Administration’s HAMP program in July.   The program, funded by TARP bailout money, offers mortgage servicers incentives and subsidies to modify mortgages, something they were doing before and should be doing far more anyway.  Last month's total translates to fewer than half a million modifications annually, compared with perhaps 3 million new foreclosure starts and 1 to 2 million completed foreclosure sales we can expect in this Year Four of the foreclosure crisis.  The future prospects of the program are dim:  fewer than 25,000 new trial modifications were generated last month, compared to the more than 100,000 monthly at the program's peak in the fall of 2009.

Portrait of California Foreclosures

An important and empirically robust new study belies the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.

The typical California home in foreclosure is a very modest 1,500-square-foot, 2- to 3-bedroom house in the Central Valley or Inland Empire, refinanced in 2005 or 2006 by a Latino family.  The average home value at the time of the loan was about $400,000, considerably less than the $500,000 median home price statewide.   At today’s prices, that average California foreclosure property is likely to be worth between $200,000 and $300,000.   Fewer than half of mortgages in foreclosure were purchase loans.  Thus, the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes.  Essentially half of all foreclosures in California involve Hispanics, roughly in the same proportion that subprime mortgages were given out in the years prior to the crisis.  Thus, the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.

The picture that emerges from this foreclosure study is of a generation of Hispanic homeowners, typically refinancing an existing, modest home, rather than buying an extravagant McMansion, losing years of accumulated wealth and savings in the process.  Opponents of foreclosure relief and debt reduction regularly invoke the useful fiction of foreclosure victims as profligate yuppies with surplus bathrooms.  The facts are otherwise.

Bankruptcy and the Crisis: Why so Few?

Many thanks to Bob for the invitation to guest blog here.  Those who follow Bob's postings on bankruptcy filing numbers will have seen that U.S. consumer bankruptcy filings have been plodding upwards steadily, but only to roughly where they were before the BAPCPA bubble back in 2005.  One of the inscrutable mysteries of the financial crisis of 2007-??, which is after all a housing and consumer debt crisis, has been how few bankruptcies have been filed.  Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect.

HAMP Update: Still Ineffective

Another HAMP data report is out.  Same old story--HAMP isn't doing very much for very many people. We're up to 398,021 permanent modifications. That's out of around 1.7 million HAMP eligible mortgages and 5.7 million mortgages that are 60+ days delinquent (the June report doesn't contain the updated eligibility waterfall, unfortunately). Drop in the bucket. The trial modification numbers are a bit better, at 1.28 million, but the number of new trials each month seems to be flattening out--just 15,153 new trials started in June.  That means new permanent modifications will also start to taper off in a few months. And there are an awful lot of failed trial modifications, as Felix Salmon (commenting on the May numbers) has noted. 

I've long been skeptical about HAMP as doing too little at too high a cost, and I think the numbers bear out that skepticism. How much evidence has to amass about the failure of HAMP to provide effective foreclosure relief before the program is canned and the policy debate is refocused on providing meaningful foreclosure relief? 

Foreclosure Update: the Good and the Bad

Here's the good news: foreclosure starts in Q1 2010 fell a bit, to 691,017, their lowest number since 2008, according to HOPE Now. It's encouraging to see the numbers fall, rather than rise, but they are still at extremely high levels.  

Here's the bad news: completed foreclosure sales in Q1 2010 rose significantly to 291,381, their highest number in US history. Some of this might be a matter of reporting over quarters--the Q4 2009 numbers were down, perhaps because of Yuletide forbearance. But the clear message from these numbers is that we are nowhere close to being out of the woods on foreclosures.

Getting Rid of Nonrecourse Mortgages?

It's interesting to look at some of the reader comments to the NY Times article about the rich being more likely to default on their mortgages.  A lot of them are aghast that a mortgage might not be full recourse--that one can walk away and have no personal liability.  What happened to one's word being their bond, honor, etc?  

Since the onset of the mortgage crisis, some commentators (starting with Martin Feldstein in 2008) have been discovering to their horror that a lot of mortgage lending is nonrecourse.  They think this situation is an invitation to moral hazard and argue that we should do away with nonrecourse mortgages and otherwise punish strategic defaulters (without ever saying how we identify a strategic default--not everyone who walks away from an underwater property is a strategic defaulter...)  Putting aside the issue that a lot of mortgages are recourse, I don't think these commentators have fully thought through the implications of doing so.  

Are the Rich More Likely to Default on Their Mortgages?

The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments.  Put a different way, the consumption utility component of the home is relatively less important to the rich.  A house has two value components--it's an investment, and it is also a consumable (but durable) product.   The consumption value of a home is basically the same for everyone--I might derive more or less utility from any particular house, but it is all within a relatively constrained range, and my range is probably around the same as everyone else's.  That means that the consumption value component of a house is largely fixed, regardless of the house's price.  The more expensive the house, the smaller the ratio of the consumption value to the investment value.  Therefore, it would follow that people with more expensive houses place more value on the investment component and treat the house more like an investment.  

I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment (although they are only playing by the rules of the game, which should have been priced in by lenders).  Here's what I wish the story had pointed out:

Bank of America Settlement -- A Sign of True Progress?

In my last post I noted the beginnings of some positive movement by consumer protection agencies that have been largely dormant and, in some cases like the United States Trustee program, actively anti-consumer. A few weeks ago, as Katie Porter noted in a recent post, Bank of America (BOA) reached a settlement with the Federal Trade Commission with respect to certain mortgage overcharges, including overcharges in bankruptcy, on mortgages formerly serviced by Countrywide Mortgage. The settlement requires reimbursement to consumers who were overcharged. BOA, in addition to agreeing not to lie, steal, or file documents without reviewing them, will also have to follow notice procedures similar to those that are already required or are likely to be required for all mortgage companies once new Bankruptcy Rule 3002.1 becomes effective in December, 2011. The United States Trustee (UST) Program assisted the FTC in its efforts.  This settlement is the first significant positive result of increased UST scrutiny of mortgage lenders, although the extent of the UST’s participation is not known.

Combining Chapter 13 with a Voluntary Mortgage Modification

First of all, thanks to the Credit Slips gang for giving me a chance to venture into blogging on their site. I hope people find my posts to be of interest.

Most of us are all too familiar with the failure of Congress to pass legislation allowing judicial modification of mortgages in chapter 13 bankruptcy cases. Sadly, our predictions of millions of foreclosures, most of which could have been prevented by that legislation, are coming true, and most knowledgeable observers believe the worst is yet to come. In the absence of a law requiring lenders to modify mortgages, creative bankruptcy attorneys have been doing the best they can with the tools that are available and are having considerable success.  

$108 Million Settlement on Countrywide's Servicing Practices

Last week, the FTC announced a $108 million settlement with Countrywide based on allegations that Countrywide's loan servicing operations collected excessive fees. The complaint describes Countrywide's servicing practices for default fees as part of its strategy to keep on profiting from consumers, even in hard economic times. I've previously commented on Countrywide's description of this as a "countercyclical diversification strategy" that it trumpeted to investors, and what Senator Schumer thought of such a strategy. The complaint alleges that Countrywide used subsidiaries to mark-up fees--often by 50-100%--on default services such as property inspections. Instead of Countrywide loan servicing working directly with vendors for these default services, Countrywide loan servicing would contract with its subsidiary, who would then work with the vendor. And that extra step--from one Countrywide entity to another--dramatically boosted the fees that got charged to struggling homeowners. To me, the lesson of the FTC's enforcement action is that businesses can use subsidiaries but they can't use subsidiaries to upcharge consumers and obscure the real costs of services.

The settlement also addresses the problems with Countrywide's mortgage servicing in bankruptcy. The FTC alleged many of the same wrongs that I identified in a law review article on mortgage servicing in 2008, including that filing claims that it could not substantiate. The UST Program cooperated with the FTC on the enforcement activity, and the settlement also resolves the UST litigation against Countrywide.

If you are a consumer who filed a chapter 13 bankruptcy case with a mortgage serviced by Countrywide, you may be eligible for a cash award. The FTC website has more details.

How to Find the Owner of Your Mortgage

Concerns continue about parties filing foreclosures when they do not own the note. Florida recently enacted a rules requiring plaintiffs in foreclosure to verify ownership of the note. (Here's a brief article on the rules, with the original subheading "Bankers Don't Like It"). While these concerns may be interesting for those of us who understand civil procedure, standing, and the importance of the rule of law, the practical problem looms for homeowners who want to know who owns their note. Particularly, in non-judicial foreclosure states or for those families who are not in foreclosure, they do not have the option to ask the judge to order the plaintiff (foreclosing lender) to prove ownership.

John Rao, an attorney at the National Consumer Law Center and Credit Slips guest blogger, wrote a great short piece in the National Association of Bankruptcy Trustees publication this winter called "Six Ways to Find Out Who Owns and Services the Mortgage." I can't seem to find an online version, so I'll give the short story here. For ownership (rather than servicing), the best options that John identifies are:

Putting the Bankruptcy Option Back on the Table for Distressed Homeowners

The New York Times editorialized that "it is time to revive the fight to open the courthouse door to bankrupt homeowners." Specifically, the NYT wants to revive the proposal to let homeowners use the bankruptcy process to write down the principal balance on their mortgages to the value of the home. Yes, exactly right, as discussed many times here, here, here, here, here, here, here, and here on Credit Slips.

The Business of Document Production

In legal circles, "document production" is a term of art usually used to describe the transmission of evidentiary documents from one side to another as part of the discovery process in civil procedure. With the mortgage crisis, it also now can refer to the business of documenting the complex ownership chains that were created when mortgages were passed from originator to bank to securitization pool and then perhaps even further down the line. As Katie Porter commented a few weeks ago here at Credit Slips, there seems to be a boom industry in creating the documents to be back upon lenders' claims that they own a particular mortgage. (If you're unfamiliar with these issues, Porter's post provides the relevant background plus some links for more information.)

Now comes a Wall Street Journal story, courtesy of reporter Amir Efrati and Carrick Mollenkamp, saying there is a criminal probe involving one of the top providers of mortgage documents to the lending industry. According to the story, prosecutors are said to be "reviewing the business procedures" of Docx LLC, a subsidiary of Lender Processing Services, Inc. Given the problems that have been reported about mortgage documentation, I was surprised that this article did not get more attention. The article also links to some bankruptcy court documents where LPS services were used, and court sanctions are being sought. Well worth a read.

Warren op-ed: Banking on Hypocrisy

Check out Credit Slips co-blogger Elizabeth Warren's op-ed on Politico, entitled Banking on Hypocrisy. She quotes extensively from a letter that the American Bankers Association sent to banking regulators in 2006 in opposition to the proposed intra-agency guidance that would have required better underwriting of nontraditional and subprime loans. While it's entertaining--and painful--to read just how wrong the ABA was in its assessment of mortgage risk, Professor Warren's point is to compare the ABA's position on consumer protection regulation in 2006 with its current stance. In the memo, the ABA decried the "marriage of inconvenience between supervision and consumer protection," saying that it blurred "long-established jurisdictional lines." The ABA recommended that the safety and soundness provisions be separated from consumer protection provisions. Yet, now the ABA has opposed a stand-alone Consumer Financial Protection Agency, saying that safety and soundness and consumer protection need to be performed by the same agency. The ABA reminds me of Mayor Quimby from the Simpsons: "Very well, if that is the way the winds are blowing, let no one say I don't also blow."  (Thanks to Bob Lawless for offering up this quote the other day in another context; it's so apt these days!)

Redemption (of the 722 variety) for Struggling Homeowners

Homeowners continue to struggle, foreclosures continue to climb, and loan modification efforts continue to lag. A persistent problem, pointedly described in these letters (July 10, 2009 and March 4, 2010) from Rep. Barney Frank to the large banks, is that the banks that hold second mortgages are not modifying those loans. (Yep, these are the same banks that took TARP money). The reluctance of the second lienholders to agree to a modification gums up the process for trying to get a modification on first, and usually much larger, mortgages. The investors in the first loan somewhat sensibly resist modifications, particularly those with principal write-downs, pointing out that it doesn't seem right that they should take a haircut, while junior lienholders refuse to modify their loans. And while the Administration announced new initiatives with HAMP and FHA to help with the second lien problem, I remain skeptical. After all back in April 2009--a year ago, they also made an announcement that they were revising their loan modification programs to deal with second liens. Hhmm . . . Deja vu? Why wait another year while servicers build a platform and train personnel, and Treasury writes regulations, etc.

Here's a legislative solution to the second lienholder hold-out problem. Congress should amend section 722 to permit chapter 7 bankruptcy filers to be able to redeem any junior loan on a debtor's principal residence. Current bankruptcy law permits debtors in chapter 7 bankruptcy to redeem personal property, such as cars, by paying the lienholder the value of the collateral. This redemption right exists regardless of the terms of the loan contract. The effect of the redemption is to remove the lien from the collateral. To redeem, a debtor must pay the secured party the amount of the allowed secured claim that is secured by such lien in full at the time of the redemption. If a secured party is completely underwater because the value of the first mortgage exceeds the house's value, the debtor would file a motion to redeem under 722 and pay nothing (that's the amount of the allowed secured claim!))  I think this legislation would provide some real leverage to get banks to agree to write down second loans.

Foreclosures: What About the States?

Here's something that's puzzled me:  no state has yet to enact any serious foreclosure moratorium.  In the 1930s, these moratoria sprouted up all around the country, and foreclosure rates (but not default rates), were much lower than today.   California imposed a 90 day moratorium, but that's not going to do much.  Why haven't Nevada or Arizona enacted a more serious foreclosure moratorium?  What's the political economy story in those states?  Any thoughts?

Produce the (Bogus?) Paper

 In 2007, I wrote an article showing that notes and mortgages were often missing from bankruptcy mortgage claims, despite a clear rule that they should be attached. That finding did not establish that companies do not have such documentation. At that time (a long-ago era of blind faith in commercial entities), some people suggested to me perhaps creditors simply do not wish to be bothered with the time and expense to comply but that all transfers were valid. In the intervening years, story after story has emerged about mortgage servicers who brought foreclosure cases without being able to show their clients had a right to foreclose. Homeowners, desperate to stave off foreclosure while negotiating for a loan modification or waiting for HAMP to become operational, are increasingly demanding that lenders "produce the paper." In legal terms, this means the servicer should show that it is the authorized agent of a trust or other entity that is the holder of the note and the assignee of the mortgage.

Upon challenge, many companies have been unable to show they had the paperwork, leading to their cases being dismissed (see here, here and here for some examples). The hard part has been to figure out the longer term consequences of lacking a proper chain of negotiation and assignment. What is the effect of an assignment of a mortgage in "blank"? Is this an incomplete real estate instrument that has no valid effect, similar to a deed without a grantee? Can parties go back after the fact and create assignments today to correct problems in transfers from years ago (and if so, what about when the chain of title involves a now defunct lender or bank? what about corrections to chains of title made after the debtor files bankruptcy and the automatic stay is in place?)

Lenders and their agents seem to busy churning out assignments to repair defects and create a paper trail. Of course, with all this paperwork creation, there are bound to be some slips-ups. Follow this link and click on "view image" to see the public recordation of an assignment "for good and valuable consideration" of a mortgage to "Bogus Assignee for Intervening Asmts, whose address is XXXXXX." If this works to assign a mortgage, what is the purpose of requiring assignments at all?

Monetary Policy and the Housing Bubble

A popular explanation of the financial crisis lays the blame at the feet of the Federal Reserve for lax monetary policy.  In this story, the Fed dropped interest rates starting in 2001 and kept rates too low for too long.  Low rates induced an orgy of mortgage borrowing for leveraged home speculation. 

It's a nice story.  Only problem is it doesn't really hold up under inspection.  Low rates in 2001-2003 did fuel an amazing mortgage refinancing boom, but not a purchase boom, and the boom was mainly in conventional fixed-rate mortgages, not the exotic products later years.  Moreover, despite the refinancing boom, no housing bubble was emerging in this period. 

The Fed started to raise rates in mid 2004 and continued to do so until mid-2006.  It was during this period that the bubble emerged, when rates were going up.  (To be fair, some might argue for an earlier date to the bubble, even as far back as the late 1990s.)  If we date the bubble from 2004, it's not consistent with a rate-driven bubble story, although rates were still extremely low in absolute terms during this period. 

The monetary policy story, however, really falls apart when one compares the US and Canada, as the graph below does.  Canadian interest rates, and perhaps more importantly, Canadian mortgage rates, track US rates pretty closely.  Yet the US had a housing bubble, and Canada did not.   This means we have to look somewhere other than monetary policy to explain the housing bubble.  The answer, I believe, lies in method and regulation of housing finance. 

Modification Scams

While the loan origination fraud is largely shut down, the foreclosure crisis has spawned a whole new consumer fraud in the form of foreclosure rescue and loan modification scams. These companies offer to help consumers get a loan modification or to fend off a foreclosure in return for high, upfront fees. A great insider view of how these companies profit on the backs of desperate consumers is available in the receiver’s report in U.S. Foreclosure Relief, which was shut down in response to enforcement action by the Federal Trade Commission and the Missouri and California State Attorneys General. The receiver describes the business as a “high-pressure, cash-up-front telephone sales business targeting distressed homeowners” and gives details on just how these companies rake in incredible profits while stringing along homeowners. In the case of U.S. Foreclosure Relief, the company advertised a “90% success rate” when in fact only 11% of its clients got completed modifications (no details on whether the terms of such modifications offered any meaningful relief or not). Sales agents competed to win a Rolex watch, were told to “stop being so nice” and instead to hammer home to consumers how much worse their problems would get if they didn’t hire a modification consultant, and got paid a bonus if the consumer paid via direct deposit. How profitable was this model? Consumers paid $2950 for “assistance,” and U.S. Foreclosure had gross revenue of $5.9 million, with operating expenses of $1.7 million, producing $4.5 million in profit. Nice margin, huh?

Thinking of starting up such a business yourself but, of course, being honest and legitimate? Think again. The receiver concluded that if the business were run lawfully, profitability would be “severely challenged.” In fact, I recently asked a panel of experts on foreclosure rescue scams if they thought ANYONE, even one of them, could legitimately advertise that they provided loan modification assistance. Given the long odds in getting a loan modification, even with HAMP finally somewhat operational, perhaps the best one can offer is to take on the frustrating work of trying to get a modification. But without some chance of success, perhaps most modification assistance is a mirage.

Subprime, Exotic or "Crap?" Mortgage Industry Lingo

Former Credit Slips guestblogger Max Gardner is always trying to understand the real mechanics and economics of mortgage servicing. At one of his infamous bootcamps, he had an employee at a now-deceased mortgage servicer share an insider’s perspective on default mortgage servicing. The employee used some terms of art that are pretty revealing of the serious problems in the mortgage industry. For example, servicing technicians who have to load a new set of subprime or Alt-A loans into the system call those loans “Crap of the Crop,” because even on arrival at the servicer all or almost all of the loans already have major problems such as incomplete documentation, existing defaults, etc. Another popular term is “scratch-and-dent” loans. Quite a bit more colorful, then “subprime” isn’t it?

The explanation for why homeowners can’t get reliable answers on loan modifications is that the default servicing technicians are “cab drivers,” when successful HAMP and other loss mitigation programs would require “cup drivers” in NASCAR parlance. The servicing industry doesn’t care much for “CRAMP,” their term for Hope Now and HAMP, which the former employee described as a vehicle designed for an 8-lane Interstate running on a two-lane country road. And those qualified written requests that consumers can use to get information on their mortgage loans? Those QWRS are “Quite a lot of Written Regurgitated S**t” because most consumers won’t know what to do with the information that the system spits out in response to the request. Depressing that the best legal tool consumers have may be aptly described with such acronym. If there is a bright spot here, it’s that folks like Max who are holding the industry’s feet to the fire are making a difference. In fact, Max got his own term. A “BCA” is a boot camp attorney, whose request means a lot of work and trouble for the unlucky servicing tech who gets such correspondence.

How to Fail My Secured Credit Exam Two Different Ways

By way of Underbelly comes this story from the Seattle Times chronicling the many failures at the now defunct WaMu. Among the stories was that a WaMu banker gave O.J. Simpson a second mortgage on his Florida home despite the existence of a huge judgment lien against Simpson arising out of his civil trial for killing his wife and her friend. Why did WaMu think it could collect the second mortgage? According to the news story, Simpson had put a note in the file saying he did not do it, and therefore the judgment was "no good." OK, that's pretty dumb and, for my students who read the blog, would not be a passing answer in my secured credit class.

What the reporter (but hopefully not my students) missed is that the second mortgage was likely collectible anyway. Florida has an unlimited homestead exemption that would prevent enforcement of the judgment lien against the home, assuming it otherwise met the definition of a homestead. Voluntary transfers, like a second mortgage, are not protected by the homestead statute. (If you're wondering why that is, consider how much mortgage lending there would be if the mortgage could not be enforced because of a homestead statute.) A comment on the Daily Weekly blog (hosted by the Seattle Times) picked up on the point about the homestead exemption and the role it should have played in this lending decision.

The "note in the file" story sounds too funny to be true, and in this case, I think it probably is. Florida (and every other state) law is the reason some WaMu Florida banker thought they could enforce the second mortgage. Of course, this is just the legal part of the lending decision. As the Daily Weekly blog story asked, why was WaMu so willing to give Simpson the benefit of the doubt and extend a loan?

Risks of Reverse Mortgages

In a world of news stories about crippled credit markets, at least one group of Americans still faces the problem of aggressive loan marketing. Senior citizens are on pace to set a new record in 2009 for reverse mortgages, complicated financial products that enables seniors to extract equity in their homes. A new report from the National Consumer Law Center makes parallels between today's reverse mortgage market and the subprime market of a few years ago (yes, the market that exploded the world economy). Tara Twomey, a repeat Credit Slips guestblogger describes in the report how incentives for broker compensation, a rapidly growing securitization market, and weak or non-existent regulation all expose seniors to risky transactions.

The key recommendation is the imposition of a suitability standard on lenders. That is, lenders and brokers would have to make a good faith determination of whether a loan was appropriate given a senior's situation. The NCLC made this same recommendation for subprime loans in 2006, and it was ignored. Given the relatively modest size of the market ($17 billion), the vulnerability of the senior population, including the fact that these are once-in-a-lifetime/no-learning-curve transactions, and the collossal fallout from identical conditions in the subprime market, the reverse mortgage market seems like an ideal chance to give the suitability standard a real-life test drive. If America had a Consumer Financial Protection Agency, it might take-up that opportunity. In the meantime,it's consumer regulation as usual, with some occasional words of warning from regulators with limited authority and pending Congressional legislation that takes aim at only the most egregious abuses.

Tenant Protections in Foreclosure

A foreclosure has a ripple effect, as a number of commentators have observed. Foreclosed properties often sit vacant, leading to nuisance concerns, lower property values for neighboring houses, and higher crime rates. But some properties are not vacant on the day of foreclosure, and these occupied properties generate their own externalities. 

After foreclosure, the new owner (usually the lender is the purchaser at the foreclosure sale) will typically send someone to see if the property is vacant. If not, the lender files an eviction or lawful detainer action. In many instances, especially in those formerly-booming real estate markets like Florida and Nevada, the occupants are tenants, not the homeowners. Depending on state law, renters often have no right to notice of the foreclosure and no right to remain in the property. The Chicago sheriff, Thomas Dart, stopped doing evictions after foreclosure last fall because of concerns about unjust harm to tenants. 

Title VII of the Helping Families Save Their Homes Act provides uniform federal protection to tenants after foreclosure--at least until the law expires on Dec. 30, 2012 (apparently the date by which someone thought the foreclosure "crisis" will have abated). The law requires the new owner of a foreclosed property to allow tenants to stay in the foreclosed property for the remainder of the lease. If there is no lease, or if the lease is terminable at will under state law, tenants must be given at least 90 days' notice before they may be evicted. This is a floor that does not preempt more generous state law. 

I'm interested in how financial institutions and tenants are going to deal with these requirements. Lenders have attorneys who routinely handle evictions after foreclosure. Being a landlord is a different task. Are tenants supposed to call the former owners' mortgage servicer when their pipes burst? If not, how is the tenant supposed to learn exactly who is the new owner of the property? Are note holders actively hiring property management companies to comply with this rule? Perhaps more interestingly, the bill doesn't seem to permit an eviction during the 90 days even if the tenants declare they aren't going to pay a dime of rent!

The Office of the Comptroller of the Currency has hardly offered answers to national banks. After waiting three months after the law's effective date, it put out a one-page release advising banks to "adopt policies and procedures to ensure compliance." Gee, that's helpful. I'm betting the readers of Credit Slips will have some more concrete thoughts about this.

Overspenders to Face Tax Audits?

A recent article in the Wall Street Journal reported on a new effort by the IRS to catch tax cheats. The IRS is going to compare data on mortgage-interest payments provided by financial institutions with homeowners' declarations of income on tax returns. The idea is that people must have more income than they reported to the IRS if they are able to make their mortgage payments, the bulk of which for homeowners with new loans from purchase or refinance, will be payments toward interest. Using data from 2005, the Treasury inspector general said that "tens of thousands of homeowners who paid more than $20,000 in mortgage interest" reported income that appeared "insufficient" to have covered their mortgage payments and basic living expenses. I don't doubt that fact, but I see an alternate hypothesis to explain the situation. These families are accurately reporting their income, but they are just spending more than they earn. They have houses they cannot afford, and they use Capital One to finance their basic living expenses so their income dollars can go to mortgage payments. Back in 2003-005 when these data were gathered, the credit market was loose and many families made up shortfalls in monthly living using credit cards, or in some instances, doing a cash-out refinance, and then living off the cash, expecting the housing market to sustain this strategy. Relying on debt to make ends meet has always carried risks, including bankruptcy risk. Should we add the risk of a tax audit to the reasons that families need to keep income and expenses in alignment?

Mortgage Modification Investor Lawsuit

The District Court ruling in Greenwich Financial Services v. Countrywide, addressing the servicer safe harbor provision for doing loan modifications, is linked here.  See here for the NYTimes story.  See here for the complaint. 

Quick version:  the ruling went against Countrywide, but it was a procedurally based ruling about whether the case belongs in Federal District Court or state court at this point, not on the merits.  (As an aside, I think the reason this case wasn't removed to the Federal District Court on diversity jurisdiction grounds is because Countrywide is a "citizen" of New York, so under the Class Action Fairness Act removal isn't possible.  28 U.S.C. 1441(b).)

What I find most fascinating about this case is that it is the only investor lawsuit related to modifications about which I know.  (But please post in the comments if I'm wrong on this.)  For a while the story we heard from servicers was one of avoiding loan mods due to the fear of litigation (of course, there could just have easily been litigation for not doing mods).  Interesting how that litigation never materialized. 

Complaining to HUD about Servicing: Thunder on Deaf Ears?

In my own research, and frequently on Credit Slips, I've noted problems that homeowners face in dealing with their mortgage servicers. As a recent post from guest blogger Max Gardner explained, many of these problems are structural to the servicing industry. I think the people on the phone are good folks, trying to be helpful, but without the tools, training, and resources that they need to do so. One marker of the increasing pressure that servicers are under is the HUD complaint statistics. According to this Pro Public report, mortgage servicing issues were 31% of  complaints to HUD in 2006. Just two years later in 2008, that fraction has jumped to 78%. No surprise here. More families are in default or foreclosure and that means more friction between homeowners and servicers. And as many of us have pointed out, consumers aren't the mortgage servicers' customers--the mortgage note holders are. So it makes sense that consumer satisfaction ("non-customer satisfaction", so to speak) is low in the industry.

The interesting part to me is that HUDs own complaint website doesn't even list mortgage servicing as an area of concern. Four out of five consumers who contact HUD are frustrated with their mortgage servicer, but HUD doesn't even acknowledge--at least in the obvious location--that it is in charge of complaints about mortgage servicing? I think this reflects a real problem in consumer protection regulation. Perhaps HUD sees mortgage servicing as just pretty far afield from its core concerns about housing discrimination and federal housing programs. HUD, more than any other agency anyway, has authority to implement the Real Estate Settlement Procedures Act (RESPA), which provides a process (a QWR) for consumers to motivate servicers to respond to problem. But historically, and still today, HUD's oversight of mortgage servicing could generously be characterized as "thin." Is mortgage servicing an example of the need for a Financial Product Safety Commission or will the mortgage market (when, and if, it revives itself) offer new and improved servicing models that reduce consumer frustration and improve transparency?

Private Tax Collection

The New York Times has a story today that Credit Slips readers will want to check out. It catalogs the growing trend of local governments to sell their real estate tax debts to private investors. The reporter, Jack Healy, succinctly states the opposing policy points:

Investors say the arrangement actually benefits everyone. School districts, fire departments and public parks get an infusion of cash. The investors take on a risky but potentially high-yielding investment. And taxpayers do not have to pick up the slack from scofflaw landlords or tax evaders.

Governments, of course, can charge interest and penalties too, and they foreclose on properties for back taxes. But governments charge interest rates that are half what private investors charge — often offering no-interest payment plans — and are also more likely to be concerned about the long-term prospects of neighborhoods.

All good points, but there is nothing that the ivory tower can't make more confusing.

Show Me the Original Note and I Will Show You the Money

As mortgage delinquencies rise each month, and as the number of foreclosures increase each quarter, the “new mantra” of many pro-se and represented consumers is to demand that the mortgage servicer “prove up the original note.” Is this just some new and creative gimmick that has been sold to the desperate homeowners and to a few lawyers who have attended “progressive” seminars or is there really something to it? I submit that there is really something to it.

In my last Credit Slips post, I wrote about what I call the “Alphabet Problem.” Succinctly stated, this problem arises out of the necessity for a true sale of the mortgage note and mortgage from the originator to the sponsor for the securitized trust; then from the sponsor to the depositor for the securitized trust; and finally from the depositor to the owner Trustee for the trust. These multiple “true sales” are necessary in order to make the original asset (the note and mortgage) bankruptcy-remote and FDIC-remote frin the originator in the event the originator files for bankruptcy or is taken over by the FDIC.

The Alphabet Problem and the Pooling and Servicing Agreements

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

What Does RESPA Have to do with Consumer Bankruptcy Cases?

I have trained over 350 attorneys at my Bankruptcy Boot Camps and to my surprise less than 10 percent know what I mean when I refer to a "QWR." This is shocking in that a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor's money and the disbursements on the arrearage claim from the Chapter 13 Trustee. It can also be used to identify all of the "ancillary fees" and "collateral charges" that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account, without any notice or the right to a hearing.

The provisions of RESPA which deal with mortgage servicing are generally found in either 12 U.S.C. § 2605 or § 2609. Section 2605, known as the "Servicer Act," requires servicers to respond to borrower requests for information and correction of account errors. The "Servicer Act" provisions are where you find the authority for a Qualified Written Request. The Servicer Act provisions in § 2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in § 2605(f).

Countrywide Sanctioned by Ohio Court Citing Porter & Twomey

As many Credit Slips readers may be aware, Countrywide Home Loans (which is now part of Bank of America) has been the subject of proceedings in several bankruptcy courts because of the shoddy recordkeeping behind their claims in bankruptcy cases. Judge Marilyn Shea-Stonum of the U.S. Bankruptcy Court for the Northern District of Ohio recently sanctioned Countrywide for its conduct in these cases. Having previously found Countrywide to have committed sanctionable conduct, the question for Judge Shea-Stonum was the appropriate penalty.

The resulting opinion makes extensive reference to Credit Slips regular blogger Katie Porter and guest blogger Tara Twomey's excellent Mortgage Study that documented the extent to which bankruptcy claims by mortgage servicers were often erroneous and not supported by evidence. Specifically, the court adopted Porter's recommendation from a Texas Law Review article that mortgage servicers should disclose the amounts they are owed based on a standard form. Judge Shea-Stonum found that such a requirement would prevent future misconduct by Countrywide. All of Countrywide's claims now or hereafter pending in this court have to be supported by the form attached to the end of the opinion.

If you look at the form and wonder "Weren't mortgage servicers disclosing this information anyway?" The answer is that they often were not. Hence the need for such a form. Although the issue before the court was only what do to with Countrywide, we should move toward this sort of form as a requirement nationally for all mortgage servicers. (Hat-tip to Professor Marianne Culhane for pointing me toward this opinion.)

HAMP--Is It Really All About the Money?

Are mortgage servicers really refusing to modify mortgage loans solely because of all of the "ancillary fees" they can generate from a completed foreclosure? Is the problem really all about the money or is there something more to it?

The New York Times reported about ten days ago that the HAMP mortgage servicers were reluctant to engage consumers in modifications because the companies collect such lucrative fees on delinquent mortgage loans. There is certainly a substantial body of evidence to support the "lucrative fees" disincentive theories. For example, the Federal Reserve Bank of Boston recently shed some light on this problem with a new study that concluded that only 3% of the seriously delinquent mortgages had been modified due to the "the simple fact that the lenders expect to recover more from a foreclosure that from a modified loan." And, the number of reported bankruptcy cases where mortgage servicers have been sanctioned for imposing unlawful, illegal and unreasonable "collateral and ancillary fees" is substantial and perhaps monumental in their numbers.

Truth in Lending or Truth in Ownership of Residential Mortgage Notes

During my last two Bankruptcy Boot Camps, one of the topics we have discussed has been the recent amendments to the Truth in Lending Act, brought about by Section 404 of Public Law 111-22. Specifically, our interest has been focused on the new statutory requirement that a consumer-borrower must be sent a written notice within 30 days of any sale or assignment of a mortgage loan secured by his or her principal residence. Violations of this Section provide for statutory damages of up to $4,000 and reasonable legal fees. The amendments also clearly provide that the new notice rules are enforceable by a private right of action. 15 USC 1641.

Mortgage Servicing Update

Complaints about mortgage servicers are piling up almost as fast as foreclosures. Yesterday CNN reported that the GAO has concluded that the Obama Administration's HAMP and HARP programs to do loan modifications are off to a very, very slow start. The programs were announced in February, and to date we have 180,000 people in three-month trial modifications. That's a far cry from the 3-4 million people the Administration believed would be helped. Consumer advocates say that servicers remain unresponsive to requests for loan modifications, citing the same stories of incompetent or inadequate personnel, lack of follow-up, and refusal to modify unless a homeowner is in default.

At the same time, judicial criticism of mortgage servicing is picking up steam. A good example is Bankruptcy Judge Diane Weiss Sigmund's opinion, In re Taylor, released in April. The thoughtful opinion sheds light on the underbelly of mortgage servicing. She details the relationship between local and national counsel, Lender Processing Services (formerly d/b/a Fidelity National), and the mortgage servicer. Among other things, she finds that the attorney signing the proof of claim, a legal document filed with the court, reviewed a "sample" of 10% of the claims that his own signature was affixed to. In Taylor the proof of claim had the entirely wrong person's note attached to it (I wonder about a privacy violation here as bankruptcy documents are public), and an incorrect payment amount.

On a monthly basis, Tara Twomey and I post an updated version of our Mortgage Servicing Resources document to our Mortgage Study website, which also contains our papers on the subject. We are grateful to colleagues from around the country who forward us interesting cases that we collect in this document, but we wish studying mortgage servicing wasn't such a growth industry. We hope the Obama Administration can find a way to shape up mortgage servicers in time to help Americans keep their homes.

Can You Judge an Industry By a Few Blog Comments?

I'm annoyed this morning. OK, for those of you who know me, I'll make the necessary correction -- I'm annoyed more than usual. And, yes, I've had my morning cup of coffee.

It seems that we are getting more and more of these sorts of comments on the blog: "Very informative post." /s/ Friendly Mortgage Modifiers.com. Of course, the signature is always hyperlinked to a web page where someone purports to want to help people save their homes. These comments are a transparent attempt to draw traffic to these sites and always will be deleted pursuant to our policy against commercial marketing in the comments.

Is Bankruptcy Mortgage Modification Back?

As I write this, the Senate Judiciary Committee's Subcommittee on Administrative Oversight and Courts is holding a hearing entitled, "The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform." The witnesses include Credit Slips's own Adam Levitin.

After the Senate failed to support changing the Bankruptcy Code to allow judges to do mortgage modifications, it appeared to be a dead issue. The hearing is great news and hopefully an indication there may be some interest in moving the legislation forward. There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know -- who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece -- the stick that makes the program work.

Does Securitization Affect Loan Modifications?

A few days ago I wrote a long and detailed critique of a Boston Federal Reserve staff study that argued, among other things, that securitization was not a factor in the paucity of loan modifications.  The study reached this conclusion based largely on the similar rate of modifications for portfolio and securitized loans.  Although the study controls for the effect of the modification in terms of monthly payment, it otherwise assumes all modifications are created equal.  But clearly they are not.  There is a significant difference in redefault rates for securitized and portfolio loans, and the securitized loan mods perform much worse.  This is something the Boston Fed's study cannot explain other than if there is (1) unobserved heterogeneity in the loans or (2) differences in the loan mods.  

The nature of unobserved heterogeneity in data is that it can't be observed, so all that can be said of (1) is that it is a possibility.  But assuming that there isn't a heterogeneity problem about the unmodified loans, what about the mods?  Is there heterogeneity problem in mods that makes comparisons of mod rates a poor measure for evaluating the impact of securitization.  It appears that there is. 

The Boston Fed study did not control for the effect of the loan modification on the homeowner's equity. It does have controls for LTV and negative equity, but those don't seem to have been applied to the serviced/portfolio distinction, at least in the paper.  I'm not sure whether there is sufficient data to do this, but what the study could have controlled for, but did not, was whether the modification involved a reduction in the unpaid principal balance.  In this aspect, there is a significant difference between portfolio and securitized loans.  

OCC/OTS Mortgage Metrics Data for the first quarter of 2009 indicates that very few loan modifications have involved principal balance reductions.  In fact out of 185,186 loan modifications in Q1 2009, only 3,398 (1.8%) involved principal balance reductions.   All but 4 of those 3,398 principal balance reductions were on loans held in portfolio.  The other 4 are quite likely data recording errors.  This means that there is heterogeneity in loan mods between securitized and portfolio loans.   

The difficulty in doing principal reduction mods for securitized loans is quite important because to the extent that negative equity is driving foreclosures (and there is significant evidence that it is), principal reduction modifications are the tool for eliminating negative equity (with an shared appreciation clawback or not).  The quality of loan modifications matters, and securitization affect the quality.  

There is also a major difference in the ability of portfolio lenders and Fannie/Freddie/Ginnie servicers to extend the term of a mortgage that private-label servicers don't have.  Not all securitization is the same.   Private label servicers can usually stretch out the term of a loan by no more than a year or so because the servicing contracts prohibit the extension of the term beyond the last maturity date of any loan in the pool, and pools are usually of similar vintage and duration loans.  Fannie/Freddie/Ginnie loans can be bought out of a pool and modified, making them more like portfolio in this regard.  Thus 49.2% of portfolio loan mods, 50.8% of Fannie, 61.2% of Freddie, and 17.2% of Ginnie mods involved term extensions, but only 3.9% of private-label securitization mods.  

Quite likely there is other heterogeneity that cannot be as easily discerned.  This makes sense--portfolio lenders are much less constrained in modifications than securitization servicers.  Attempts to quantify servicers' constraints by looking at contract language are inherently limited, as there are structural and functional constraints that are not apparent from an examination of the face of the servicing agreements. Moreover, securitization servicers are adverse to principal write-downs because that affects their compensation far more than an interest rate reduction.  The agency problem just doesn't exist for portfolio loans.  

Finally, the study has a very strange observation that there is a moral hazard problem in principal balance reductions, but apparently not for interest rate reductions:  "Balance reductions are appealing to both borrowers in danger of default and those who are not."  Therefore, borrowers might default to get principal reductions.  Sure, that's right, but everyone would also like a lower interest rate too.  I don't see why a principal reduction presents a different level of moral hazard from an interest rate reduction.  In terms of net present value, principal and interest rate are interchangeable (yes, there's an interest deduction, and a principal reduction changes the ability to refinance, but that's not the distinction at issue).  The bigger factor pushing against principal reductions (other than servicer compensation) is an accounting issue.  A principal reduction shows up on the balance sheet immediately.  A reduction of interest just reduces future income.

The take-away here is that even if the Boston Fed staff is right that securitization doesn't affect the prevalence of loan modifications, it clearly affects the quality of those modifications, and that is every bit as important, not least because the performance of past modifications is the basis for servicers' calculation of the redefault risk that the Boston Fed staff emphasizes as constraining modifications.  If servicers do bad mods and have high redefaults, that will make them more adverse to doing mods in the future because they will think that the mods don't work. 

Is Redefault Risk Preventing Mortgage Loan Mods?

There's a very interesting new study on mortgage loan modifications out from the Boston Federal Reserve staff.  This sort of study is long-overdue and from an academic standpoint, there's a lot I really like about this study.  But the study is going to get a lot of policy attention, and I think it's important to point out some of the problems with the study that limit its ability to serve as a policy guide.  

Skin in the Game

The proposed skin-in-the-game requirement for securitization strikes me as misguided, no matter how its structured. Different industries use securitization for different purposes, and while skin in the game might not have much of an impact in some, it runs contrary to the (legitimate) purposes of securitization in others.

Some industries securitize primarily to gain off-balance sheet and immediate revenue-booking accounting benefits and because it is a cheaper funding source than other methods. Industries like these often have significant skin in the game (e.g., the credit card industry, where a 7% vertical slice is the typical minimum requirement and it's usually much higher). Other industries, like non-GSE mortgages securitize primarily to shift credit risk. The whole point of securitization is not to have skin in the game.

The skin in the game requirement is being driven by the experience in mortgage securitization, not other types of securitization, and imposing a skin in the game requirement probably won't do much to non-mortgage securitization, where there might already be more than 5% retained interest. But for housing finance, skin in the game is really counter productive.

AP Launches the Economic Stress Index

The Associated Press has launched the Economic Stress Index. Credit Slips readers will find it very useful and interesting. For a dataphile like myself, it's just plain cool. OK, it's not cool at all because it shows the tremendous depth and breadth of middle America's suffering. But, it shows what someone with real data know-how and computer graphic skills can do.

The Economic Stress Index "weighs three economic variables -- unemployment, foreclosures and bankruptcy -- to produce a score on a scale of 0-100 that measures how the recession is affecting a county compared to all others." You can scroll over each county and get a separate measure for each of the components or for the composite Economic Stress Index. The press release indicates the index and data will be updated monthly. Check it out.

Does Anybody Know If Credit or Foreclosure Counseling Helps?

The infusion of millions of dollars to pay "counselors" to forestall foreclosures on behalf of consumers who are delinquent on their mortgage payments seems as American as apple pie and should perhaps help some homeowners. These dollars are split among neighborhood non profits, specialized housing counseling organizations and a considerable amount has flowed to providers that have historically spent most of their time counseling consumers with credit card delinquencies. A group of United Way supported family and children service agencies also receive some of these funds.

Anecdotal reports indicate that the housing counselors are a cut above the historic credit card counselors. The credit card counseling industry agencies were mostly begun by creditors and their funding has always been supported by payments from creditors. The housing counseling organizations began with funds from HUD and the Ford Foundation and the extensive new dollars have come from the Federal government through a central organization called Neighbor Works. The neighborhood organizations obtain their funding all over the lot. The cultures of the various organizations differ a good deal among themselves and between the various types of providers.

Mortgage Modification Vote in Senate

Credit Slips has featured a lot of articles about a legislative proposal to give bankruptcy judges the power to modify home mortgages in chapter 13 (here, here, here, here, and here for a just a few examples). Heck, we were blogging about back this idea back in 2007. In March, the House passed H.R. 1106, the Helping Families Save Their Homes Act of 2009, which would enact this proposal into law. Since then, it has faced an uncertain future in the Senate. Yesterday, CongressDaily reported that Senate Majority Leader Harry Reid will bring the mortgage modification proposal for a floor vote in the Senate. Although this might seem like good news for supporters of the legislation, close observers of the political scene seem to be predicting defeat. Two Democratic Senators (Ben Nelson of Nebraska and Jon Tester of Montana) and Republican Senator Bob Corker of Tennessee are quoted in the CongressDaily article as being against the legislation, with Corker going so far as to say "Cram-down is dead."

If you support the legislation, however, now would be a good time to tell that to your senators -- or, in the case of Minnesota, senator. It's not over until the fat lady lets the horses out of the barn.

Mortgage Symposium at Pepperdine

On Friday, Pepperdine University School of Law is hosting a symposium entitled, "Bringing Down the Curtain on the Current Mortgage Crisis and Preventing a Return Engagement." As the announcement notes, the Pepperdine Law Review is bringing top scholars and Bob Lawless to campus. OK, it doesn't actually say that explicitly, but I've always wanted such an announcement to say something like that. Besides myself, the speakers include Ann Burkhart, Rick Caruso, Deborah Dakin, Wilson Freyermuth, Sam Gerdano, Melissa Jacoby, Alex M. Johnson, Jr., Timothy Mayopoulos, Grant Nelson, Mark Scarberry, and Dale Whitman. Truly trivial question: which four were once colleagues at the University of Missouri School of Law?

The papers will be published in the Pepperdine Law Review. My contribution has been co-authored by my research assistant extraordinaire, Jeff Paulsen. Before he goes off for a two-year clerkship with Judge Jack Schmetterer in the bankruptcy court in Chicago, I wanted to take advantage of his talent work with Jeff on a scholarly piece. We have a working title of "The Missing History of Bankruptcy Mortgage Modification." The short version is that the current rule against modifying mortgages in bankruptcy is not the considered policy choice as it is often portrayed. Rather, like many things, the history is much messier, and path dependence explains a lot of it. When we have a version for SSRN, I'll post a more detailed summary.

How to Start to Get Trillions in Lost Wealth Back

The fact that wealth is rapidly declining deserves public policy attention. Wealth serves critical functions in the U.S. economy that relies heavily on individual initiative. It is primarily an insurance against a range of economic risks. The more such insurance exists for the typical family, the less a family has to worry about their basic necessities and the more they can focus on longer-term economic growth. A family that has the basics covered can take more chances by sending their kids to college and letting them choose a degree that suits their abilities. Also, family members can more easily switch jobs to match their particular skills. And, a family with enough wealth is in a better position to let their creative side take hold and start a business. The entire economy wins from letting people gain more skills and apply those skills most effectively in their job or by starting a business.

Recommending what the government should and should not do about rebuilding family wealth has become as ubiquitous as real estate ads in the mid-2000s and dot-com IPO discussions in the late 1990s. Here are just a few principles that will likely guide the reform debate.

Our House in the Middle of Our Street is no Longer Our House

Here’s a news flash: The housing market is bad. Actually, it is really bad, historically, woefully bad. And, the bad news won’t stop coming. Housing wealth is dropping precipitously, families own ever smaller shares of their own homes, and home owners are falling behind in their mortgages in record numbers.

According to data from the Federal Reserve, housing wealth has taken a nose dive for two years. In December 2006, housing values reached a peak of $18.9 trillion (in 2008 dollars). By December 2008, they had fallen by $3.9 trillion to $15.1 trillion.

This reflects a historically fast depreciation of housing wealth. Over the past two years, real housing wealth dropped by 20.5%, a record for any two-year period since 1952. In fact, before this crisis occurred, there had never been a two-year period when real housing value fell by more than six percent. 

Great New Reading on Mortgage Modification

It's not all just fun and games with old credit cards at Katie Porter's house!  She and a couple of co-authors have a great new paper on SSRN describing the history of the anti-modification provision for principal residence mortgages, an empirical study of home mortgage burdens in Chapter 13 plans, and some comments on how reasonable forced modifications of those burdens could save not only these folks' homes, but Chapter 13 in general.  This had not occurred to me (I admit), but the 66% failure rate for Chapter 13 plans must be in large part explained by the burden of bloated mortgage obligations. Katie's paper more or less confirms this suspicion empirically. Reducing that burden to a reasonable level would therefore not only help people to stay in their homes, but it could result in a much higher plan-completion rate in Chapter 13 generally. This would be a great double-whammy. The paper deserves a close look by anyone interested in this hot topic. 

In other related news, another CreditSlips blogger has released a particularly high-profile paper on the subject of addressing mortgage foreclosure woes. Elizabeth Warren heads the Congressional Oversight Panel looking into foreclosure mitigation practices, and the panel released its report last Friday. I can only assume the report was authored in large part by Elizabeth--it has the tell-tale signs of her incredibly lucid and incisive writing style, backed up by a wealth of empirical knowledge about how struggling with mortgages and other debts really looks in practice. Check it out!

Congressional Oversight Panel Foreclosure Report

The Congressional Oversight Panel's foreclosure report will be out tomorrow.  I'm hoping it advances the discussion on foreclosures and foreclosure mitigation efforts and helps focus what is still a rather amorphous debate in which there seems to be too little common ground.  

Bankruptcy Bill Passes in the House

H.R. 1106, the Helping Families Save Their Homes Act of 2009, which will allow modification of all types of mortgages in Chapter 13 bankruptcy, passed the House today by a vote of 234-191.  

I haven't found a link yet with the vote breakdown or any other details, but will post more when I do.  

Bankruptcy Mortgage Modification Getting More Attention

You know the steam is starting to pick up for the horses to close the barn door before the barn burns done while we're counting our chickens when .... let me try that again.

Bankruptcy mortgage modification is moving beyond the specialty blogs such as this. David Abromowitz over at The Huffington Post has a post up advocating passage of a bankruptcy mortgage modification bill. I'm hoping the fact that the bill is getting broader attention means the train is about to sail.