Foreclosure Crisis Update

Is the foreclosure crisis over? Yes and no. Since 2007, about six million homes have been sold at foreclosure sales (Foreclosures Public Data Summary Jan 2015). Today, about one million homes are still somewhere in the foreclosure process. Homeowners behind in their payments have declined from 15% at the 2010 peak of the crisis to less than 8% now (MBAA delinquent plus in foreclosure at 12/31/14).  Most of the still-troubled loans were originated before 2007. The best news is that new foreclosure starts are now down to pre-crisis levels, at less than one-half of one percent of all mortgages, if we take 2006 to be the pre-crisis level.

So new home loans, those made since 2008, are doing very well, and what remains is the legacy of those bad loans that triggered the crisis, right? Not exactly. 

The first problem is to define what we mean by pre-crisis levels. Subprime mortgages expanded rapidly from 2000 to 2007, accounting for an ever-increasing share of all mortgages, and skewing delinquency rates upwards. So for a real pre-crisis baseline, we need to go back to earlier times, or to look at mortgage default rates for prime and FHA loans only. Today in 2015 there are virtually no subprime mortgages being originated. As the inventory of old subprime loans winds down, we should expect to see default rates well below those for the early 2000s, and we are not there yet.

The second problem is negative equity. At the end of 2014, 16.9% of residential mortgages were underwater, i.e. the debt exceeded the current home value. Home price appreciation is not projected to solve this problem any time soon. This situation is historically unprecedented, and leaves millions of homeowners at continuing risk of default should the economy falter.

The third problem is the fragile inventory of nontraditional and modified loans that remain from the subprime bubble. There are perhaps 3 to 4 million active mortgages that were modified to avoid foreclosure in the past seven years. Some of these have temporarily low rates, as low as 2%, that will adjust upwards soon. Others have large balloon payments or payment terms than extend for 40 years, making repayment or refinancing difficult.  And of course there are still plenty of homeowners stuck in non-amortizing mortgages or ARMs that are vulnerable to coming interest rate hikes.

At this point, we can begin to identify some lessons from the long and painful process of deleveraging America's homeowners. In future posts I hope to look at some available data showing what worked and what didn't, as we consider various policy measures to reform housing finance and mortgage foreclosure.

Still Deleveraging American Homeowners

We still have a ways to go, five years after the Global Financial Crisis.  Total mortgage debt has eased down from 10.5 trillion dollars to 9.3 trillion, but that 10% drop aligns poorly with the 25% drop in home values, not to mention stagnant real wages.  Reuters reports that home equity lines of credit (HELOCs) will be the next wave of defaults as many 10-year interest-only periods expire.  After that will come the mortgages modified to below-market rates, which go back up after 5 years...

Supreme Court Discrimination Case Settles

Banks and insurance companies are apparently gnashing their teeth at the news that the Mt. Holly case pending before the Supreme Court has been settled.  The case itself does not involve financial services; it arose from a Fair Housing Act claim that a neighborhood redevelopment plan would  have a discriminatory impact on black residents.  The legal issue is whether the Fair Housing Act permits discrimination claims based on disparate impact.  This issue has been resolved unanimously by 11 Circuit Courts of Appeal.   HUD, the agency charged with enforcing the FHA, recently issued regulations confirming its long-standing interpretation that disparate impact claims are permitted. The Supreme Court's grant of review in the case is a clear signal that at least 4 activist Justices were prepared to overrule all 11 Courts of Appeal and HUD, and insist on proof of discriminatory intent in fair housing suits. 

The 1968 Fair Housing Act is not new, nor is disparate impact analysis, i.e. establishing race discrimination without showing intent to discriminate. What has prompted an all-out assault by banks and their lawyers is the decision by the Justice Department under Attorney General Holder and by other federal agencies to use disparate impact analysis against mortgage lenders, and not just against realtors and landlords.  Banks and their allies in the business press are hysterical about disparate impact analysis because it forces financial institutions to be mindful of the impact their credit policies have on the huge and recently expanded racial wealth gap in this country, and to adjust lending policies to mitigate the racial divide.  Between 2005 and 2009, white Americans lost 16% of their net worth; black Americans lost 53% of their net worth.  Access to mortgage credit, and the interest rates paid for that credit, have a major impact on family wealth.

If realtors and landlords must avoid discriminatory policies to further the goal of equal housing opportunity, it seems only fair that banks, beneficiaries of continuing taxpayer subsidies and safety nets, should have some duty to advance the same public goal.

New State Exemption Survey

Federal bankruptcy law defers to the states on a critical issue: what is the basic minimum income and property that debtors need not surrender to creditors.  Four states protect 100% of workers' wages, while 21 states allow creditors to garnish debtors' wages down to 50% of the poverty level for a family of 4, according to a new report from the National Consumer Law Center.   Similarly only 9 states protect a used car of  average value from seizure, and state home exemptions are still all over the map.  Even the exemptions that exist are often evaded by the $100 billion debt buyer industry, whose collection suits are dominating civil court dockets around the country. 

This comprehensive and timely survey will be an essential tool not only for bankruptcy research, but also for anyone who cares about economic inequality and the plight of the working poor.

Foreclosure Crisis Update

Year Six of the great foreclosure crisis came to a close on June 30 with no real end in sight.  Five million homes have been foreclosed and another million or more were surrendered by distressed home owners in short sales or otherwise.  We are still far from returning to a stable mortgage market.  In normal times (from 1942 to 2005 for example) about 1% of mortgages are in the foreclosure process at any given time, and another 4% or so are delinquent.  At June 30, about 7% of mortgages are delinquent and more than 3% are in the foreclosure process. These distress rates are down from their peak (10%/4.6%) of March 2010, but are still double to triple their pre-crisis levels.

This foreclosure crisis has already outlasted the foreclosure crisis of the Great Depression.   Foreclosures exceeded 1% only from 1931 through 1935, then slowly returned to normal levels by 1942.  State foreclosure moratoria, along with the massive New Deal loan purchases and modifications by the HOLC, mitigated and eventually ended the crisis.

On the bright side, new foreclosure starts are now down to only 1.5 times pre-crisis levels. For two reasons, this is not a signal that foreclosures will soon return to normal.  First, there is a large inventory of seriously delinquent mortgages held up by robosigning and other problems that must work through the system.  Second, millions of modified mortgages could blow up in the next five years, when temporary rate reductions phase out.  The typical HAMP modification brought the interest rate down to 2% for five years, but then returns to market rates (now around 4.2% and likely to rise).  This means that many homeowners' payments will double in the near future, at a time when incomes are stagnant.    

There may be no quick policy fixes at this point, but if there was any inclination to try, a couple of measures might help.  First, FHFA could direct Fannie and Freddie to do what banks are doing with their distressed mortgages, and start writing principal balances down to home values.  Second, homeowners successfully paying on their 2% modified loans could receive a notice that the 2% rate will be fixed for the life of their mortgage.  Third, the CFPB and the Attorneys General could keep turning up the heat on the major servicers for as long as it takes to get them to underwrite and process modifications as efficiently as they underwrite new mortgage originations.

Download Foreclosures and Mods Public Data Summary

Crisis books

I recently stumbled on this excellent compendium of more than 300 books on the financial crisis.  It also includes a list of 25 or so books that predicted the crisis, as well as a useful link to an annotated list of individuals who can be given credit for predicting various aspects of the crisis.

Bipartisan Deal to Reduce Deficit on Backs of Student Borrowers

Congress and the President are making huge decisions about the future of our biggest consumer credit markets – mortgages for homebuyers and college loans for students.  Unfortunately critical policy choices are being avoided, ignored, or obfuscated.  I’ll comment on student loans in this post, housing finance reform in a future post.

The student loan bill about to be signed by the President is touted as “reducing” interest rates for students.  This is nonsense. The “reduction” is only from the jacked-up rates that went into effect a few weeks ago on July 1 because of a prior legislative gimmick.  The basic undergrad student loan rate of 3.4% was scheduled to go up to 6.8% on July 1 mostly so that the federal deficit over multiple years would appear smaller in out years.  Most observers assumed that the rate hike would not happen, but deficit hawks used this gimmick as another pressure point to advance their agenda.  If you compare interest rates before July 1 with rates being charged under the new law, students are paying more interest, not less.  The CBO scores the bill as reducing the federal deficit by about $700 million.  Instead of a fixed 3.4%, students will pay 3.9% this year, and the 10-year Treasury bill rate plus 2.05% in future years.  Graduate students will pay much more (and are lower credit risks.)

More problematically, the “rate reduction” bill continues a practice, never fully debated, of using student loan interest as a profit center for the federal Treasury. The student loan Treasury profit is a consequence of the Clinton Administration’s Direct Loan program.   Under that program, instead of subsidizing banks to fund student loans, the Treasury lends money directly to students (albeit through private servicing contractors).  In the 1990s, banks and their Congressional mouthpieces vigorously disputed the proposition that direct Treasury lending would be cheaper than the old system of subsidizing the banks to fund student loans.  Not only were they wrong, but they were so wrong that the same interest rates that had to be subsidized when offered by banks produced a net profit to the Treasury under the Direct Loan program.  For many years, Congress was not willing to offer cheaper interest rates on Direct Loans than on bank loans, so the Direct Loan borrowers effectively subsidized the guaranteed bank loans.  The fact that the government could be the low-cost provider was just too mind-blowing for the Washington consensus.  In recent years, it has been convenient for Congress to ignore the fact that Direct Loan student borrowers pay much higher interest rates than are necessary to cover the costs of the program.

Senator Warren has proposed pegging student loan rates to the low rates paid by banks borrowing from the Federal Reserve.  This is an interesting idea, but it seems to me we should begin with the proposition that students pay no more interest than is needed to cover the cost of the student loan program, i.e. that we run it as a break-even operation rather than a money-maker for the Treasury. 

Here is the Senate vote on the bill, and here is the House roll call.

Supreme Court to Hear Housing Discrimination Case

The Supreme Court granted certiorari today in MOUNT HOLLY, NJ, ET AL. V. MT. HOLLY GARDENS CITIZENS, on the question whether Fair Housing Act claims of race discrimination in the sale, rental or financing of housing can be proven based on evidence of disparate impact. The case does not directly involve credit, but is being watched closely by bank lawyers and fair lending advocates for the impact it will have on Fair Housing Act litigation against mortgage lenders.

Obama to Replace DeMarco at FHFA

with Mel Watt, according to an AP story today. Congressman Watt of North Carolina was a moving force behind Miller-Watt-Frank, the mortgage reform legislation that eventually found its way into Dodd-Frank financial reform. Given that our all-but-nationalized housing finance system is directed by this somewhat obscure agency, the occupant of this post can have a huge influence on the future direction of credit, housing and the economy.

If he is confirmed, Watt can be expected to make major changes to Fannie and Freddie policies, for example on principal write-downs and cracking down on mortgage servicer errors and abuses. Perhaps he could also begin to envision a more rational future assignment of the public and private roles in financing homes, in which public subsidy serves a public purpose and private capital carries the burden of its own credit risk.

IFR Scandal: Magnitude of Mortgage Servicing Failure

A remarkable tabulation of the more than 3 million homeowners found to have been victims of mortgage servicing errors or fraud was released last week by the Fed and other bank regulators.  About 25,000 foreclosures were started while homeowners were in bankruptcy, nearly 200,000 foreclosures were completed on homeowners in approved modification plans, and another 168,000 foreclosures sales were conducted while modification requests were pending. 

Recall that these wrongful foreclosure tallies include only servicing in 2009 and 2010, and that the 3 million estimated violations by 11 banks are out of a nationwide total of about 50 million mortgages outstanding, about 7 million of which were delinquent at any given time in that period. 

Worse, Senator Warren extracted an admission from bank regulators and the "independent consultants" at a hearing on Thursday (short version here) that neither the regulators nor the consultants checked the tally, which was produced by the bank servicers themselves.  The Fed and OCC also declined to release bank-by-bank tallies, or to share their investigation results with consumer victims who might want to seek compensation from the civil justice system.  If the large bank servicers are too big for the Fed and OCC to regulate, perhaps the CFPB can tackle this job when its mortgage servicing rules go into effect next January.

Freddie Mac Indifferent to Homeowner Complaints

That is the finding of a report released yesterday by the Inspector General of FHFA, the agency that oversees our nationalized mortgage funders Fannie Mae and Freddie Mac.  Mortgage servicers are paid incentives by Freddie for quick foreclosures, but not for resolving homeowner complaints about mishandled foreclosure prevention and loss mitigation.  Bank of America took an average of 59 days to resolve homeowner complaints, well beyond the 30-day limit imposed by the servicer alignment initiative, and as of January 2014, by CFPB mortgage servicing regulations. 

Student Loan Bubble Data

The New York Fed has posted a new analysis of student loan debt.  Depending on how you read the data, student loan borrowers are either in serious trouble, or are no worse off than consumers with credit card debt or car loans.  The bad news is that only 39% of borrowers are paying down their student loan debt. The rest are either in deferment, income-based repayment (which permits paying less than the interest coming due), or default.  On the other hand, only 14% of borrowers are contractually delinquent in payments. The NY Fed bloggers have yet another way to slice the delinquency data: of those borrowers who appear to be in repayment, rather than in deferment or income-based repayment, about 27% are delinquent.

As for the total debt, it grew to $870 billion as of September 30, exceeding total credit card debt and exceeding total auto loan debt.  The median loan amount is $12,800, which does not seem so unmanageable, but the average is $23,300, meaning a small percentage of borrowers have large amounts of debt. Borrowers like the law students we worry about, with $100,000 of debt or more, are a very small percentage of the student loan population, about 3% of borrowers.  On the other hand, many of those with small balances are college drop-outs, who also struggle.

The bubble aspects of student loan debt are suggested by two statistics.  First, 40% of all borrowers are under 30, and they hold 33% of all the debt and 25% of past due loans.  Given that this group includes every student who has just signed up for her first loan, the future of student loan debt is clearly worrisome.

Second is the 39% figure mentioned earlier; 61% of borrowers are in deferment or income-based repayment paying less than the interest coming due each month. 

So, how many student loan borrowers and how many student loan dollars are in income-contingent repayment and in negative amortization, i.e. the student loan equivalent of Option ARM's? (Actually, not quite equivalent, because unlike neg. am. mortgages, neg. am. student loans are paid off by taxpayers after 25 years, not by borrowers.) The NY Fed data cannot distinguish borrowers in income-contingent repayment from those who aren't repaying because they are still in school.  After some fruitless googling at the Education Department, CBO and think tank web pages I can't seem to find the answer to this obviously important question.  Readers?

Fair Lending Law Developments

Race -it continues to determine the availability and the price of credit, and particularly home financing, as each annual release of the Home Mortgage Disclosure Act data reminds us. No matter how much empiricists control for credit scores, home values, and other relevant variables, racial minorities, especially African-Americans, are more likely to be denied credit or charged higher rates than similarly-qualified Whites. 

The Department of Housing and Urban Development has just issued its final rule confirming that the Fair Housing Act prohibits home lending practices with a discriminatory impact on protected groups, and not just overt intentional discrimination.  Disparate impact analysis, based on the Supreme Court's longstanding interpretation of Title VII of the Civil Rights Act, has been approved as a method of proving discrimination in all the Courts of Appeals to consider the issue. For example, the Justice Department's 2011 case against Countrywide alleged that the lender gave pricing discretion and created incentives for loan officers that resulted in discriminatory pricing.  The case resulted in a $335 million settlement.

Nevertheless, lenders' lawyers have been vigorously contesting the disparate impact issue in cases under the Fair Housing Act and also under the Equal Credit Opportunity Act, which bans discrimination in all forms of credit.  The Supreme Court accepted cert. in a Minnesota case in 2011, but the City of St. Paul was persuaded to withdraw the case to avoid a ruling.  Civil rights advocates are hopeful that the HUD regulation will receive some deference from a Supreme Court that might otherwise be inclined to go with the banks on this issue.  Another cert. petition is pending before the Court in a case against Mt. Holly New Jersey.  The Court asked the Solicitor General to file a brief in the case in October, but has not ruled on the cert. petition yet. For more details, see the ProPublica story here.

OCC Review Whistleblower

Adam Levitin predicted here that the "independent" review of banks' foreclosure files ordered by the OCC in the wake of the robosigning scandals would be a sham, based among other things on the adverts to hire the reviewers.  Now, one apparently overqualified reviewer has told his story at Naked Capitalism, and it is worse than Adam predicted.  The banks are actively and successfully suppressing efforts  by reviewers to identify foreclosure errors and abuses and to identify and compensate victims.  Perhaps this could be the subject of a hearing for the newly constituted Senate Banking Committee...

What I Love about Kiva.org

Kiva.org is the on-line microlending network that allows anyone to lend $25 or more to individual low-income borrowers around the world for micro-enterprise and housing.   Kiva is an entirely different way of thinking about credit and financial intermediation. While it may be small, it is an example of the real utopias described by Erik Olin Wright in his 2012 presidential address to the American Sociology Association.

Through kiva’s web site, anyone wishing to make a loan can browse the descriptions of borrower projects. For example, a woman in Central America has applied for $350 to buy bricks, cement, wire, sand, gravel and iron to build on to her house, and proposes to repay over 15 months. NGOs prepare the loan descriptions, disburse and collect loans and provide support services to borrowers. 

The interest paid by the borrower covers the costs of payment transfers, underwriting and supervision of the loans and the administration of the program.  Lenders receive no interest.  Those of us with some surplus wealth can put it to productive use without insisting on enriching ourselves as a reward for being (at least relatively) wealthy.   This is especially painless at the moment when interest rates for savers in the conventional retail banking sector are low, but it can also give us an opportunity to reflect on the deep capture of contemporary economic thinking by the idea that capital is entitled to, and must always, earn interest for being put to use.

With its capacity to connect thousands of individual lenders with thousands of individual borrowers, kiva also points one way to solving to the maturity mismatch that creates so much risk for conventional banks.  An individual lender/saver can browse a list of thousands of potential loans of varying maturities, and match his or her own cash needs with the borrower’s.  There are no 30-year mortgages on kiva (yet) but the possibility is there. 

Whether microlending and microfinance generally are a net welfare benefit for poor borrowers is a complex and controversial question, to which there are a variety of empirical and theoretical responses.  Other peer-to-peer lending and crowdfuding experiments without the social mission have raised a host of problems, including high default rates.  I can say, though, that I experience more happiness browsing my kiva.org portfolio (see picture) than any of my other account statements.

Foreclosure Crisis Year Six

While industry and government news releases emphasize the declining rates of delinquency and foreclosure, the declines remain agonizingly slow.  Yes, serious defaults on mortgages are down from their peak in 2010.  On the other hand, there have been 4.5 million completed foreclosure sales since 2007 and there are still between 4 and 5 million mortgages delinquent or in foreclosure now.  Defaulted mortgages are still considerably more than 10% of all mortgages, at least double the rate in normal times, and the foreclosure inventory is still at about quadruple the pre-crisis rate.  There are many ways to extrapolate the trends, depending on whether you use quarter-over-quarter changes or year-over-year changes, but we undoubtedly have years to go before the foreclosure crisis can be declared over.

The good news is that the performance of modifications continues to improve, according to the latest OCC mortgage metrics.  As more and more modifications reduce interest rates and payments, and even principal, the number of re-defaults steadily and continually goes down.  Only 22% of 2011 modifications later went seriously delinquent or were foreclosed. 

Principal reductions were included in 10% of all modifications in the 2nd quarter of 2012.  The 10% number masks some interesting variations.  Principal write-downs were featured in 20% of HAMP mods versus about 7% of in-house mods.  Bank regulators and FHFA clearly have different views on the soundness of principal reductions; banks are writing down principal on 28% of their portfolio loan mods and 16% for private securitized loan mods, while principal reduction for Fannie and Freddie mortgage mods remain at 0%. 

Interestingly, the OCC attributes the slow decline in completed foreclosure sales to “servicers holding loans in the foreclosure process for longer periods of time in an effort to accomplish alternate loss mitigation or home forfeiture actions.”  There is no mention of state laws.  The states with the most modifications are, in order, California, Florida, Illinois, Texas, New York, Georgia and New Jersey.  FHFA is proposing to surcharge new mortgages in four of those states.

FHFA punishes states

My comments on the FHFA mortgage fee increase for NY, NJ, FL, IL and CT, here at Consumer Law & Policy.

Mortgage Market 2011 - Not a Pretty Picture

The annual Federal Reserve report on Home Mortgage Disclosure Act (HMDA) data for 2011 paints a bleak picture.  Despite interest rates at or below 4%, mortgage lending volume continued its four-year decline.  The drop in mortgage lending was particularly steep for minority home buyers, and in distressed neighborhoods.  More than 40% of home purchase loans that were made were backed by government (FHA or VA) insurance.  Overall mortgage denial rates were 31% for black applicants compared to 12% for non-Hispanic whites.  Some of the difference is explained by income and credit variables, some by lender choice (or steering) and some remains unexplained.

Interestingly, the Fed staff also measured the extent to which homeowner income was overstated on 2005 and 2006 mortgage applications, by comparing HMDA and Census income information for those years.  They found that incomes were significantly inflated on applications for mortgages in Florida, California, Hawaii, Nevada and Rhode Island.  (Does this make Rhode Island a sand state?)

If historically cheap mortgage credit is not increasing supply or stimulating demand, then there remains a fundamental misalignment between home prices and household incomes and balance sheets.  Deleveraging still has a ways to go.

Consumer Bankruptcy Fee Study

I have just finished reading Lois Lupica’s paper on her impressive consumer bankruptcy fee study.  This is a model of what empirical, law-and-society research should be – it combines data from electronic court records with focus groups and key player interviews to give a textured understanding of the role lawyer’s fees play in this particular legal system. 

The finding that jumped out for me was a little-discussed but critical aspect of local bankruptcy culture: not how much, but when the trustee pays Chapter 13 lawyers’ fees (pp. 105-106). I practiced in a district where (before BAPCPA) the trustee paid out the fees as the first priority claim i.e. ahead of even secured creditors, but adequate protection payments (current mortgage and auto loan payments, e.g.) were paid directly to the creditors.  There are apparently districts where every plan must include a $200 monthly payment for the first 15 months to pay the attorney, others where the pre-confirmation adequate protection payments are diverted to the attorney’s fees and added to the arrears paid over the remaining plan life (i.e. borrowed from secured creditors), and many other fascinating variations.

Considering the practical consequences of these disparate rules for attorneys as they decide what cases to take, and how to structure plan payments, it is easy to see why Chapter choice, and Chapter 13 success rates, would vary so dramatically from one district to another.  For example, the front-loading of payments for the legal fee, followed by a payment step-down, would seem to increase the risk of plan failure. The sooner the lawyer is paid, the less risk she takes in filing the case.  That could increase access, but could also encourage filing more risky Chapter 13 plans. If we are concerned about the high failure rate of Chapter 13s on the one hand, and the high costs and difficulty of obtaining counsel on the other, we might do well to study these variations further to see what outcomes they produce for debtors, creditors and lawyers.

It also struck me that Professor Lupica's extensive data tables with fees actually paid, by chapter, state, district and case outcome, and no-look fees for Chapter 13, can provide important independent variables for other studies modeling bankruptcy outcomes.

The Student Loan Tax

As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax.  He didn’t tell the half of it.  Congress’ dirty secret is that the government makes a huge annual profit on student loans.   According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.)   The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year.  The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.

How does the government profit from student loans?  In two words, yield spread. 

Call for Papers - AALS 2013

The Creditors' and Debtors' Rights section of the Association of American Law Schools invites paper proposals for the January 2013 conference program.  The program theme is "The Great Deleveraging: Bankruptcy after the Crisis, Formal and Informal."  Complete information on the call for papers appears below the break.

New Panel Data!

The Fed has just released their data from the 2007-2009 panel Survey of Consumer Finances.  The SCF, conducted every three years, includes hundreds of variables on the assets, liabilities, income, and financial product shopping and utilization of American consumers.  Some questions include "what was the most important factor in your decision to refinance your mortgage?" and "during the past year, have you taken out a payday loan?".  The 2007-2009 panel data set is especially valuable because it offers a picture of household finances before and after the Global Financial Crisis; the 2007 survey respondents were resurveyed in 2009.  There is also a separate 2010 SCF survey, but those data have not been released yet. 

Possible research subjects one might explore with this data set include the relative wealth loss of different racial and ethnic groups, what type of consumers chose different types of mortgage loans and other credit products, and how financial product choice interacted with changes in consumer finances as the crisis unfolded.

The Fed staff's own summary of the data is here.  The paper describes wealth losses by wealth category and geographic region, but not by race or ethnicity.

No Mortgage Deal but Banks get Free Pass

The national mortgage settlement among federal and state regulators and major banks, announced with much fanfare on February 8, still has not produced an actual written settlement agreement, judging by the dead link on the settlement web page. That hasn't stopped the Treasury Department from announcing that Chase and BankofAmerica will receive millions in HAMP payments previously being withheld because the banks were not complying with promises they made in their contracts with Treasury to modify loans. The announcement does not say the banks are now in compliance. This is a bit ironic, given that the point of the settlement was supposed to include improving mortgage servicer performance in preventing foreclosures. It does not bode particularly well for enforcement of any future promises made by the banks in the someday-to-be-released settlement.

Kudos to Arthur Delaney at HuffPo for reading the press release, with the anodine tag line "Obama Administration Releases February Housing Scorecard," all the way through.

FHFA's Fake $100 Billion Number

The critical point made in the Democratic Congressmen's letter to FHFA is this:  Director DeMarco's widely reported claim that principal write-downs on Fannie and Freddie mortgages will cost taxpayers $100 billion is simply false.  There are two reasons the statement is a complete misrepresentation.  First, the $100 billion is simply the aggregate amount of underwater mortgage principal on all Fannie and Freddie loans, not just those at risk of foreclosure or where borrowers are seeking modifications.  Second, Fannie and Freddie will lose more than $100 billion on underwater loans in foreclosure sales, according to their own projections, if the loans aren't given principal write-downs.

The relevant comparison is between the foreclosure losses on underwater and defaulted mortgages, on the one hand, and the net payouts from modified mortgages with principal reduction on the other hand; in other words, the dollar difference between doing the write-downs and not doing them.  FHFA's own analysis shows that changing from the current policy--to postpone but not eliminate excess mortgage principal--to a policy of writing down that excess principal, would yield a positive net present value of $28 billion.  This is because fewer homes would end up in foreclosure sales, where losses exceed 50% of principal, and more homeowners could pay their (reduced) debt.

The Permanent Foreclosure Crisis and Obama's Refinancing Obsession

For the umpteenth time, President Obama has announced that his solution to the foreclosure crisis is to encourage "responsible" homeowners to refinance at lower interest rates.  Adopting the Tea Party rhetoric and blaming home buyers who got houses in 2006 for their inability to foresee what few economists foresaw, Obama has steadfastly refused to push for principal reductions and payment suspensions for homeowners behind in payments, lest their luckier neighbors who bought at lower prices become resentful.  As a result, he continues to offer help to homeowners who need it least.

Behind the rhetoric is an important policy choice: who will bear the billions of mortgage losses that have yet to be flushed out of the system.  Principal reduction modifications for defaulted borrowers would distribute the losses among taxpayers (via Fannie and Freddie), private investors and banks (who hold non-GSE loans), and give underwater homeowners some relief.  More importantly, principal modifications mitigate the aggregate losses to the system while accelerating the necessary deleveraging. Refinancing current borrowers does nothing to prevent the huge deadweight losses from continuing foreclosures, at 50% loss severities, on homes whose owners are delinquent.  Choosing to do no more for the 7 million or so delinquent mortgage debtors means maximizing losses to those homeowners, but also to taxpayers and investors.  It would certainly help to continue driving down home prices, which does benefit new first-time buyers, but at a huge aggregate cost. 

In fact, as conservator of the nationalized Fannie Mae and Freddie Mac, the federal government could make the needed modifications of delinquent mortgages happen with a stroke of the pen, more or less. Instead, the Administration proposes the dubious strategy of loading up the FHA portfolio with 4% mortgages at 125% loan-to-value ratios, thus continuing the process of transferring future mortgage losses from banks to taxpayers, and amplifying those losses, while letting the foreclosure crisis continue, just as Mitt Romney proposes.  Nothing about the refinancing strategy moves forward the process of realigning mortgage debt to home values.  Instead, the strategy relies on the doubtful proposition that home values will soon return to rising at their pre-2007 clip.

Pacta sunt servanda and the housing market and broader economy be damned. 

Justice Calls for Foreclosure Mediation Support

The Justice Department's project on access to justice has issued a report summarizing current research on state foreclosure mediation programs, calling for more funding and support.  The report offers an excellent summary of the best available research on foreclosure mediation programs, including the very successful Philadelphia and Connecticut programs, that have participation rates as high as 60% to 70% of defendants, and whose participants achieve settlements keeping them in their home in as much as half of the cases. 

The industry, led by federal bank regulator OCC and housing finance regulator FHFA, is promoting the idea that all foreclosures are hopeless, homeowners are using state law solely for the purpose of delay, and that massive foreclosures are inevitable, that most judicial foreclosures just result in default judgments, so let's get on with it.  The empirical evidence from states where adequate resources are applied, and mortgage companies are compelled to evaluate each and every homeowner with an income and a desire to pay, belies this myth. 

Justice now joins the Federal Reserve in advocating for fewer, not more, foreclosures.

Anna Nicole Smith, the Constitution, and Bankruptcy

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. 

Laboratories of Democracy and the Commissioners of Uniformity

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.

 

 

Occupiers Target Foreclosures

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.

Get your Independent Foreclosure Review!

OCC and the Federal Reserve announced this week that banks who service mortgages will be sending letters to homeowners this month and next, offering them an opportunity to request review of any 2009 or 2010 foreclosure.  Every homeowner who asks gets a full independent review by a foreclosure auditor.  A homeowner who was in any stage of foreclosure in 2009 or 2010 is eligible for review and possible compensation.  The request for review runs to five pages, and the web site is not exactly user-friendly.  There is also a toll-free number to apply:  888-952-9105.

Compensation will be paid (in the amount determined by the independent reviewers discussed on this blog previously) for financial injuries resuting from errors, misrepresentations or deficiencies in the foreclosure process.  Examples include foreclosures during bankruptcy or against an active-duty service member, improper legal or other fees, or foreclosure while a homeowner is in trial or permanent modification plan.  The deadline to request a review is April 30, 2012.  A request for review will not stop foreclosure, and redress payments will not require borrowers to release claims or affect any pending foreclosure litigation or bankruptcy proceeding.  The foreclosure reviews are being done by consulting firms, such as Price Waterhouse and Promontory.

However weak or unreliable this process may be, homeowners have nothing (other than some time) to lose by applying for a review.  Borrowers in foreclosure litigation or bankruptcy might also want to seek discovery of their audit/review files to see what deficiencies were identified (or missed).

Occupiers on Bank Law: Fix It

If the Occupy Wall Street protests stand for anything they stand for a popular demand to rein in the banks and to bail out the victims of bank excesses.  Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do. 

Dodd-Frank fell short.  It consisted of a series of half-measures and punts to various agencies.  Break up banks that are too big to fail?  Dodd-Frank instructed the FSOC to think about it but not too much, and so far FSOC has followed its mandate.  Limit executive compensation? Instead we got shareholder say on pay.  Separate utility functions of banks from casino gambling?  In lieu of restoring Glass-Steagall, the watered-down Volcker Rule. Require banks to prevent every preventable foreclosure? Hasn't happened. Make them offer transparent and competitive retail credit and savings products?  Still waiting on a CFPB director appointment before we can work on that item.

Banks don’t make anything; they either provide payment and intermediation services, or they engage in various forms of gambling with other people’s money.  The first two functions used to be thought of as low-profit utility services (3-6-3), and were separated by Glass-Steagall and its weaker cousin Section 23A of the Federal Reserve Act  from gambling and speculation. 

Banks make, sell and rent money.  Our fiat currency (decoupled from gold by Republican President Richard Nixon), consists of IOUs from banks, which in turn depend entirely on the faith of people and businesses in those IOUs, and on the willingness of the United States taxpayers to back them up.  In other words, banks trade on government backing; it is their essential product.  The days are long gone when any sensible person would accept a purely private bank note as money.  For this reason, banking is fundamentally different from industries that make things and sell them.  We need to vigorously reassert this principle, and end the charade that regulation of banking is some sort of unwarranted intrusion into a free market enterprise.  We need to get serious again about real banking regulation.

Foreclosure Crisis in Europe vs US

While European markets have seen increases in mortgage foreclosures, more robust regulatory intervention seems to have kept defaults and foreclosures to much lower levels than we are experiencing in the United States.  At the peak of the crisis a year ago, about 9% of US mortgages were in serious default (90 days or more past due or in foreclosure.)  The United Kingdom and Spain had default rates of less than 3%, which they still regard as a crisis.  The only EU country with mortgage defaults exceeding US levels is Latvia.  Detailed information on European foreclosure rates and prevention measures are available at the EU web site on the new mortgage credit legislation.  The report containing the table on the right is available here.

 European banks argue that the lower default rates are a result of less reckless lending prior to the crisis, compared to the US subprime market, and that may be true.  It is also clear from the EU Commission summaries that most European countries have actively required or strongly encouraged lenders to work out as many troubled mortgage loans as possible, and have introduced delays and procedural hurdles in the foreclosure process to further stimulate workouts. 

The UK launched two subsidy programs at about the same time that the US Administration launched HAMP in 2009.  The Homeowner Mortgage Support allowed borrowers with a temporary income loss to defer payments for up to two years, with the government providing the lender a guarantee in the event the borrower defaults in repaying the deferred interest.  It expired in April 2011.  The Mortgage Rescue Scheme provided government support for shared equity and right to rent programs, and the Support for Mortgage Interest program subsidizes interest payments for homeowners receiving income support benefits.

In 2009 there were about one million completed foreclosure sales in the US (out of about 60 million mortgages outstanding.)  In the UK there were 54,000 (out of about 15 million mortgages.)

Fannie Mae Pushing Foreclosures

Story in the Detroit Free Press today here, and my commentary at Consumer Law & Policy here.

Fed to Wells: $7000 for Wrongful Foreclosure

Yesterday the Fed announced a settlement with Wells Fargo of claims that its subprime unit had 1) deliberately steered prime borrowers into higher-cost subprime mortgage refinancings and 2) falsified income documents to put subprime borrowers into unaffordable loans.  The settlement provides for an $85 million fine, plus an elaborate claims-based compensation procedure for victims, who may number 10,000 or more.  Notably, families who lost their home in foreclosure as a consequence of Wells Fargo's illegal steering are to receive $7,000 for the loss of their home.  That should cover some moving costs and a month's rent or so.   As far as I could tell the agreement does not provide for consumers to release claims in exchange for these paltry sums, but advocates would be well advised to review settlement notices with affected consumers carefully.

The Fed announcement touts this wrist-slap settlement as the largest consumer protection enforcement fine in its history.   Ample evidence that consumer protection against financial institutions needs to be transferred to a real enforcement agency at the earliest.

Too Big to Comply

Treasury released a detailed  report for the HAMP mortgage modification program today, for the first time rating the major banks and servicers on a variety of metrics.  Worst in three of four categories was BankofAmerica.  BofA, along with Wells Fargo and Chase, will have payments from Treasury suspended until their compliance under the HAMP contracts improves.  The report provides a trove of statistical confirmation of what homeowners, counselors and legal aid lawyers around the US are experiencing - temporary agreements that never become permanent, servicers losing and misrecording borrower information, and not communicating effectively with homeowners about applications and decisions. 

Apart from the failures of the big three banks, HAMP is improving in some ways, but still not reaching enough homeowners.  Only 30,000 HAMP modifications are being added each month, while new foreclosure starts hover around the 150,000 to 200,000 per month level.  The number of temporary modifications in limbo past the 3-month program limit before becoming permanent is way down, except at the big three banks, which now account for half of all temporary mods passing their six month mark.  Last month's report also showed that reperformance is improved:  even after 12 months fewer than 20% of HAMP modified mortgages were back in default, a far cry from the 60% to 70% failure rates of the industry modifications done in 2007 and 2008. 

The retooling of BofA's servicing shop so far does not appear to have produced much improvement.  With the housing market in a double-dip, and foreclosures stubbornly refusing to abate, it may be time for Treasury to face up to the deleterious consequences of the massive concentration in the mortgage industry. 

It will also be interesting to see what steps, if any, our nationalized-but-still-imagining-themselves-as-private GSE's might take.  Treasury's sanctions don't cover the GSE loans that are being maladministered by the big banks.  Will Fannie and Freddie follow Treasury's lead?

IMF Structural Adjustment for US - Write Down Mortgages

I have argued for some time that deleveraging U.S. homeowners, who still carry more than $10 trillion in mortgage debt, is not only a social imperative but essential for the economic recovery.  According to the IMF in its latest semiannual report, failure to deleverage American borrowers is a continuing threat to global economic stability.  The Washington consensus is now fractured, apparently, with the IMF and economists on one side and the banks bleating on the other, with Treasury dithering in ambivalence.

Meanwhile, in vaguely related news, S&P, in a bid to restore its credibility after the massive reclassification of AAA mortgage-backed securities to junk, now takes a flyer into the budget debate and announces US Treasury debt's AAA rating is under review.  Really S&P?  Where would you then suggest SWF's park their excess capital instead?  Fannie and Freddie issues, perhaps.

ACLU Suit to Bar Florida Foreclosure Rocket Docket

My post on yesterday's ACLU petition for a writ of prohibition is at Consumer Law & Policy here.

Foreclosures = Affordability Problem?

Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with.  The data realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? 

As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes.  The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000.   Only 11% of applicants have incomes below $2,000 per month, in poverty-level range.

OCC Findings: Illegal Foreclosures, Critical Deficiencies

At today's Senate Banking Committee hearing on Dodd-Frank implementation, Comptroller John Walsh's testimony gave a preview of some findings from the federal agencies' investigation of mortgage servicing and the robosigning scandal:

"In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole."

More specifically, federal examiners looked at 2800 foreclosure files, and found "a small number" of plainly illegal, completed foreclosure sales, that violated a bankruptcy stay, the Servicemembers Civil Relief Act, or a temporary modification agreement.  The Wall Street Journal reports that the OCC plans to impose fines; the affected homeowners are probably hoping for more remedial measures.  In the meantime, the state attorneys general investigation is proceeding.  It will be interesting to see whether in the post-Dodd/Frank era, the OCC is more willing to play nice with the state AGs. 

Bankruptcy Robosigning Business Challenged by Debtors, Trustee

A new amended class action complaint filed on behalf of Chapter 13 debtors, with their Trustee as additional plaintiff, describes in exhaustive detail the business of Lender Processing Services and its network of creditor attorneys and mortgage servicers.  The gist is that LPS sells the dominant software product to mortgage servicers, and the software is designed to refer all foreclosure and bankruptcy cases to LPS-affiliated firms, which then share legal fees earned by litigating stay motions and claims in bankruptcy with LPS companies.  In the process, LPS firms and their nonattorney employees allegedlly produce robosigned missing mortgage assignments and bankruptcy court filings.

This colorful pleading describes LPS as Mephistopheles and the participating law firms as Faust.  Some of the practices are familiar, thanks to Judge Sigmund's decision in the Taylor case, discussed here previously.  LPS and its affiliates, of course, vigorously dispute all allegations and claim that their business is perfectly legal, and does not constitute unauthorized practice of law, although their SEC filings are considerably more ambivalent on the latter point.

More details on this and related litigation are available in this detailed report.

Vallejo's Chapter 9 plan

The City of Vallejo has filed its Disclosure Statement and plan in its Chapter 9 bankruptcy case.  The plan proposes paying general unsecured creditors, mostly employees and retirees, about 5 cents on the dollar from a $6 million fund, an amount roughly equivalent to the legal fees paid in the case through December 2010.  Vallejo apparently did not finance capital projects with unsecured general obligation bonds typical of many state and local governments.  Instead it had complex financing using sale and leaseback arrangements with certificates of participation, with certain city revenues earmarked as collateral for the financing, in a kind of factoring or receivables financing deal.  The resulting $50 million or so in non-employee debt was therefore secured, and because of a prepetition default, was held by the bank that insured the deals.  The plan proposes to pay these claims in deferred payments, at a reduced interest rate, represented as a 40% reduction in their present value, i.e. 60 cents on the dollar.  It is hard to say what precedent this will set for other local governments considering a bankruptcy.

What the disclosure statement does not quantify is the savings/cuts in employee wages, health care and pensions resulting from the rejection of the prepetition union contracts and their replacement with new contracts.   Depending on which commentator you read, Vallejo has either impoverished its workers to repay the bank, or missed an opportunity to tackle the greedy unions.  Because the cuts in worker pay and benefits were negotiated as part of an executory contract rejection, the disclosure statement doesn't really spell out in clear terms how losses were allocated among taxpayers, banks and workers.  Of course, the disclosure statement has not been approved yet.

 

Republicans back Bankruptcy Expansion

For states.  Republicans including Newt Gingrich and Texas Senator John Cornyn are advocating amendments to the Bankruptcy Code to permit states to file for relief from their debts.  Last week's New York Times front-page article gives added heft to this idea, as did Penn law prof David Skeel's article in the Weekly Standard.

Obviously, these Republicans' agenda is to shift credit crisis losses from state taxpayers to public sector union employees, consistent with their efforts to shift auto industry losses to workers in that industry.  Bankruptcy reform for homeowners is anathema, because it shifts losses from middle class people to banks and institutional investors.  It is unclear how bankruptcy for the states could be used to stiff union pension funds without also wreaking havoc with the bond market, and bond investors would normally be a favored Republican constituency.  For this reason, other conservatives are not so crazy about this idea.  Presumably, any legislative proposals for Chapter 9.5 would carefully craft priorities for favored constituencies.

Must-read Crisis Book

Today's mail brought my hot-off-the-press copy of the essential crisis reference, The Subprime Virus by Kathleen Engel and Patricia McCoy.  Subprime Virus chronicles the rise and fall of the subprime market and the regulatory (non) response, from the Clinton Administration through the 2007/2008 financial crisis, the bailout and the Dodd-Frank reform legislation.  The most vital contribution comes in Part III, where the authors relentlessly catalog the missed opportunities, systematic capture and complete failure of one regulatory agency after another, including the Federal Reserve, the banking regulators and the SEC.  The authors, of course, enjoy a unique credibility for having warned us early and often about the dangers of subprime lending and securitization, for both homeowners and investors. For those looking for an authoritative, scholarly and accessible account of the subprime crisis from its origins in the predatory lending of the 90's through the bubble, blow-up and bailouts, look no further.

Subprime Crisis Books

As the subprime crisis enters its fourth or fifth year, depending on when your version of the story begins, there is an ever-expanding menu of crisis books to choose from.  I have particularly enjoyed the less scholarly and more journalistic tales set in the boiler rooms of Orange County California (the Monster, by Michael Hudson) and the towers of Wall Street (Griftopia, by Matt Taibbi).  Others on my list include Dan Immergluck’s Foreclosed, and Thirteen Bankers, by Simon Johnson and James Kwak, which tell the stories of mortgage regulation/deregulation and the financial-regulatory complex, respectively, less colorfully but more exhaustively.  Next on my list:  The Big Short and Too Big to Fail.  The bookshelves are also bulging with chronicles of collapsed (or nearly collapsed) companies—Lehman Brothers, AIG, General Motors, etc… So gentle readers, which are your favorite crisis books?

Welfare Economics and Consumer Credit Paper

I have just posted a working paper on the welfare economics of microcredit and payday lending.  The paper tries to address some of the questions raised by, among others, Jim Hawkins, discussed in previous posts here and here.  Post-crisis consumer credit regulation, it seems to me, will have to proceed from norms other than revealed preferences utilitarianism.  Accepted criteria for judging the success or failure of  future regulation will be an essential first step in elaborating a fact-based regime of consumer credit rules.

Erroneous Foreclosures

At this week’s hearings on mortgage servicing and robosigning, featuring the able testimony of Credit Slips’ Adam Levitin, members of Congress asked the usual unimaginative question, “aren’t all these borrowers delinquent, so that foreclosure is inevitable?”  The answer to this question comes in two parts: 
1) No. 
2) Even homeowners who are indeed delinquent should not be foreclosed in the current housing market if any reasonable workout is possible. 

Erroneous foreclosures thus come in two flavors.  Foreclosing someone who is not actually behind, or whose default was precipitated by junk fees, unnecessary or overpriced forced-place insurance, or payment application errors (common in bankruptcy cases) is obviously wrong.  Equally wrong, however, are foreclosures of homeowners who have sufficient income to fund a modified loan that will produce significantly higher investor returns than a distressed foreclosure sale.  Contrary to the pronouncements of servicers and Treasury officials, modification and workout consideration is not happening before foreclosure starts, it runs on a parallel track with foreclosure processes.  Frequently, the foreclosure train wins the race.

Mad About Debt

Exit polls tell us that the economy was forefront in the minds of yesterday's voters, but also that the national debt was high on the list of concerns.  The deep personal anxiety about the national debt surely is not just civic worry about Uncle Sam's credit rating.  Americans are in some measure projecting their own debt anxieties onto the government.  While one in three voter's family has experienced a job loss, household debt is affecting nearly everyone.

Nearly four years into the crisis (formerly called the subprime mortgage crisis) we are still suffering a massive hangover from the debt binge of the last decade.  In ten years household debt exploded from five and a half trillion to nearly fourteen trillion dollars.  From the onset of the crisis in 2007 through June 2010 mortgage debt and all the rest (credit cards, student loans) has inched down painfully slowly.  It would take thirty years at the present rate to bring household debt back to something like its 2000 levels.  Folks seeking mortgage workouts, over a million of them, are paying an average of 80% of gross income for debt service.  Students are graduating college with six-figure debt.

WSJ Blames Evil Consumer Lawyers

Although the Wall Street Journal has provided some excellent coverage of the foreclosure crisis, this story by Robbie Whelan (via Naked Capitalism rebuttal) is pure drivel.  The ludicrous premise is that a coterie of clever consumer lawyers have contrived to keep deadbeat homeowners out of foreclosure by raising silly technicalities.  Never mind that the case used as an illustration involved a homeowner whose timely payments were improperly refused by GMAC Mortgage, and whose dispute is still in litigation. 

Moratorium for What?

There is little to be accomplished by halting foreclosures and sales in process without some plan resolve the 5 million seriously delinquent mortgages other than by foreclosure sale.  While something can be said for delays that stretch out the process of dumping more unsold homes into a saturated existing homes inventory, we are only about one-third of the way through the crisis at present (having foreclosed or forced the sale about two to three million homes since 2007).  If a moratorium is to do some good, it has to result in diverting some foreclosures to better resolutions. 

The Shadow Consumer Bankruptcy System

    Bankruptcy filings have not risen at anything like the rate at which consumer debt defaults have risen since 2007.  Part of the explanation may lie in the shadow bankruptcy system, a network of alternative service providers who purport to save debt-burdened consumers from the bankruptcy court.  While consumers being sued on delinquent credit cards and mortgages receive solicitations in the mail from bankruptcy attorneys, they are also deluged with a variety of other offers of aid.  These range from foreclosure rescue scams to a wide range of legitimate and dubious debt advice and counseling services, to debt elimination and debt settlement schemes.  While pondering this post I searched in the usual places for any good empirical data on the number of consumers participating in non-profit counseling, or the number of customers enticed by those who promise to make debt disappear, with no success.   We don't seem to know how many debtors go to these debt advice services.