Are Mortgage Servicers Ready for the Loan Mod Rush?

On May 4, the CFPB issued a report sharing information the agency had gathered about mortgage forbearances and delinquencies. One notable takeaway is that Black and Brown homeowners, as well as low-income homeowners, are very prevalent among those in forbearance. A large portion of those in forbearance also have loan to value ratios north of 60%. All of this suggests that many who face chronic financial struggles and are most at risk of losing their homes, are also those currently benefiting from the forbearance programs.

This makes me immediately think: what happens when the forbearance periods are over? (which most believe will happen between September and November of this year) Specifically: what will their loan modifications look like?

Hinrichsen on Iraq’s Debt Restructuring

Iraq’s debt restructuring a decade and a half ago was one of the few things that went right with the US incursion into that country in 2003.  Thanks to a combination of an expensive war with Iran, mismanagement and corruption on the part of Saddam and his henchmen, and the debilitating effect of international sanctions on the economy, Iraq in 2003 found itself with one of the largest sovereign defaulted debt stocks in history.  Worse, thanks to the sanctions regime, much of the unpaid debt had, by the time of Saddam’s removal, matured into judgements and attachment orders.  That makes a debt restructurer's job much more difficult than in a normal sovereign restructuring.  And unlike other defaulting sovereigns in the past, who had precious few assets available for creditors in foreign jurisdictions to seize, the new Iraq had oil revenues that it desperately needed to use in order to try and get back to some semblance of normalcy and growth.

The fascinating story of how the debt was accumulated and then restructured has been told in bits and pieces.  But economic historian Simon Hinrichsen is the first, to my knowledge, to attempt to tell the full story. His draft article, “Tracing Iraqi Debt Through Defaults and Restructurings”, hot off the presses, is available on the LSE Econ History website here.  Among the most interesting aspects of the story are the use of UN Security Council Resolutions and US Executive Orders to immunize Iraqi oil assets (hence, neutralizing the risk of attacks by holdout creditors) and the attempted resuscitation of the ancient doctrine of Odious Debts. The former succeeded and the latter failed.  Many of these same issues are going to come up again when Venezuela embarks on its post-Maduro restructuring (see here and here).  I wonder how they will play out.

Simon's abstract is as follows:

In 1979 Iraq was a net creditor to the world, due to its large oil reserves and lack of external debt. Fifteen years later, its government debt-to-GDP was over 1,000%. At the time of the U.S. invasion in 2003, Iraq was saddled with around $130 billion in external debt that needed to be restructured. How does a country incur so much debt, so fast, and how does it get out of it? In answering this question, the paper makes two key contributions. First, I reconstruct the build-up of Iraqi debt through the 1980s and 1990s using mainly secondary sources. This paper is the first to create a debt series going back to 1979. The rise in Iraqi indebtedness was a consequence of global geopolitical trends in the 1980s where political lending trumped solvency concerns. Second, through primary sources and interviews with key actors involved, I use oral history to tell the story the Iraqi restructuring. It was one of the largest in history, yet no clear and detailed historical account exists. The restructuring was permeated by politics to inflict harsh terms on creditors at the Paris Club, at a time when creditor-friendly restructurings were the norm. In going for a politically expedient deal, however, the restructuring missed an opportunity to enshrine a doctrine of odious debt in international law

 

The Bootstrap Trap

I just had the pleasure of reading Duke Law Professor Sara Sternberg Greene's paper The Bootstrap Trap.  I highly recommend it for anyone who is interested in the intersection of consumer credit and poverty law.  The paper is chok full of good insights about the problems that arise when low-income households strive for the goal of self-sufficiency, which results in the replacement of a public welfare safety net with what Professor Sternberg Green describes as a private one of credit reporting and scoring systems.  The paper shows off Professor Sternberg Greene's training in sociology with some amazing interviews, particularly about the perceived importance of credit scores in low-income consumers' lives.  

Other respondents referred to their credit reports or scores as “the most important thing in my life, right now, well besides my babies,” as “that darned thing that is destroying my life,” and as “my ticket to good neighborhoods and good schools for my kids.” Many respondents believed that a “good” credit score was the key to financial stability.

One respondent, Maria, told a story about a friend who was able to improve his score. She said, “He figured out some way to get it up. Way up. I wish I knew what he did there, because I would do it. Because after that, everything was easy as pie for him. Got himself a better job, a better place to live, everything better.” Maria went to great lengths to try to improve her score so that she, too, could live a life where everything was “easy as pie.”

Credit scores have become a metric of self worth and the perceived key to success.  

Who is Helping Consumers With Defaulted Student Loans?

Clearly, the biggest surprise in consumer borrowing since the crash has been the explosive expansion of student loan debt. It has surpassed both auto lending and credit card lending. And, since it ties with Payday Lending and pre-crash sub-prime mortgage lending for the thinnest underwriting there are defaults aplenty. 

Consumer advocates are rightly urging the Department of Education to provide simpler and clearer paths forward for consumers with student loans in default but many people still need a helper.  As defaults in mortgage loans and on credit card loans have fallen, providers who live on the profits of counseling people who default on those loans have turned their attention and their advertising and marketing to consumers who are in trouble on their student

MyConsumerTips.info

I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

Debt Settlement Plans: Run as Fast As You Can, Consumers

Tell me the truth.  Does this sound legal?  Crystal has $12,000 in credit card debt, and ABC Debt Settlement Company advertised that they can settle credit card debts for 50 cents on the dollar.  We’ve all heard the ads “Do you have more than $10,000 in credit card debts?  Banks got their bailout, now it’s time for yours.” 

When Crystal contacts ABC about the program, ABC advises her to stop paying her debts in order to show the credit card companies whose boss.  ABC has her sign a $515 a month electronic funds transfer from her bank account.  This money will be put into an account to use to settle with her credit cards, but guess what?  ABC has no agreements to settle anything with anyone.  But they keep collecting the $515 a month.