516 posts categorized "Mortgage Debt & Home Equity"

Turning Away From the Dark Side!

posted by Susan Block-Lieb

Just a quick note to follow up on previous posts (here and here) and report that the First Circuit reversed In re Traverse.  Thanks to Mike Baker for pointing this out to me.  Further reflections on this case and its implications later.

Larry Summers' Attempt to Rewrite Cramdown History

posted by Adam Levitin

Larry Summers has a very interesting book review of Atif Mian and Amir Sufi's book House of Debt in the Financial Times. What's particularly interesting about the book review is not so much what Summers has to say about Mian and Sufi, as his attempt to rewrite history. Summers is trying to cast himself as having been on the right (but losing) side of the cramdown debate. His prooftext is a February 2008 op-ed he wrote in the Financial Times in his role as a private citizen. 

The FT op-ed was, admittedly, supportive of cramdown. But that's not the whole story. If anything, the FT op-ed was the outlier, because whatever Larry Summers was writing in the FT, it wasn't what he was doing in DC once he was in the Obama Administration.

Let's make no bones about it.  Larry Summers was not a proponent of cramdown.  At best, he was not an active opponent, but cramdown was not something Summers pushed for.  Maybe we can say that "Larry Summers was for cramdown before he was against it." 

Continue reading "Larry Summers' Attempt to Rewrite Cramdown History" »

Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)

posted by Adam Levitin

I just read Jennifer Taub's outstanding book Other People's Houses, which is a history of mortgage deregulation and the financial crisis. The book makes a nice compliment to Kathleen Engel and Patricia McCoy's fantasticThe Subprime Virus. Both books tell the story of deregulation of the mortgage (and banking) market and the results, but in very different styles. What particularly amazed me about Taub's book was that she structured it around the story of the Nobelmans and American Savings Bank.

The Nobelmans?  American Savings Bank? Who on earth are they? They're the named parties in the 1993 Supreme Court case of Nobelman v. American Savings Bank, which is the decision that prohibited cramdown in Chapter 13 bankruptcy. Taub uses the Nobelmans and American Savings Banks' stories to structure a history of financial deregulation in the 1980s and how it produced (or really deepened) the S&L crisis and laid the groundwork for the housing bubble in the 2000s.

Continue reading "Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)" »

Working and Living in the Shadow of Economic Fragility

posted by Melissa Jacoby

OupbookCredit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live

The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.

Faith-Based Markets

posted by Adam Levitin

Paul Krugman has a column today about the blind, fundamentalist faith in efficient markets.  This is a phenomenon that Stephen Lubben and I have been discussing recently (did Krugman just preempt our paper idea?), as we've both encountered it in the financial regulatory policy debate: 

  • The Chapter 14 proposal that would resolve large financial institutions in bankruptcy takes it as a matter of faith that there would be sufficient private DIP financing available to resolve, say, JPMorgan Chase. I don't know how much would be needed, but it would be a multiple of the largest private DIP loans to date:  $10B for Energy Future Holding and $8B for Lyondell Chemical.  Where would the, perhaps $100B needed for a megabank come from?  Well, not from that megabank...  But don't worry, the market will provide.
  • Housing finance reform proposals that would either total privatize the housing market (the House Republican solution) or privatize 10% of the market (the Johnson-Crapo bill in the Senate).  We could have a completely private housing finance system.  But don't be surprised when home prices drop precipitously.  There just isn't enough private risk-capital willing to assume credit risk on housing to finance the whole market. It's not clear to me that there's enough private risk-capital willing to assume the credit risk on 10% of the market, and if there isn't it is going to result in at least a 50 basis point increase across the board, and much higher price increases for riskier borrower.  But don't worry about these details.  The market will provide. 

So here's the inconvenient paradox of market fundamentalism:  the idea that the free market can be directed. Either the market is free or it will follow direction, but it's not going to do both. Markets do what markets want.  

Continue reading "Faith-Based Markets" »

Reflections on the Dark Side

posted by Susan Block-Lieb

Thanks to all who commented on my earlier post on the interaction of §§ 544(a)(3) and 551 and homeownership in bankruptcy; as hoped, CreditSlip readers helped me frame the questions that I continue to have about Traverse and the larger policy questions it raises. Some readers emphasized the importance of variations in state mortgage law to the trustee’s strong-arm powers; others questioned whether these distinctions should affect the trustee’s power to sell the residence (or the avoided lien) following avoidance.

Clearly, the trustee had the power to avoid the unrecorded mortgage in Traverse; let’s assume for purposes of argument that he also had the power to sell full title to the debtor’s home after avoidance.  For me the more interesting question is whether the trustee should have exercised these powers, and also whether the exercise might be viewed as an abuse of discretion.

Another way to think about this question is from an even broader angle: What position should a trustee play in a individual borrower’s chapter 7 case?  Is a trustee’s role to maximize distributions to unsecured creditors, full stop? Or might the trustee’s fiduciary obligations to the estate sometimes sit in tension with an interest in maximizing creditors’ interests?

Continue reading "Reflections on the Dark Side" »

Supreme Court denies certiorari in Sinkfield (chapter 7 lien strip-off case)

posted by Jean Braucher

The U.S. Supreme Court has denied a petition for writ of certiorari in Bank of America v. Sinkfield, an 11th Circuit case raising the issue whether a junior lien wholly unsupported by collateral value can be stripped off in chapter 7. 

The high court's denial of certiorari yesterday (March 31) is a victory not only for the debtor who prevailed in the case below but also for the National Association of Consumer Bankruptcy Attorneys, represented by the National Consumer Bankruptcy Rights Center, which argued in an amicus brief against Supreme Court review on the ground that the case had not been fully litigated below and thus was a poor one for the Supreme Court to take up.   

The creditor in Sinkfield stipulated to the result that strip off was permitted in the case, based on an Eleventh Circuit opinion so holding in another case,  In re McNeal, 735 F.3d 1263 (11th Cir. 2012), one in which en banc rehearing has been sought.

The Supreme Court's decision not to review Sinkfield avoids for now the possibility of disturbing the solid precedent for lien strip off in chapter 13.  McNeal is the first circuit court case to allow lien strip off in chapter 7; two other circuits have extended Dewsnup v. Timm, 502 U.S. 410 (1992), to come to the opposite conclusion.  See here for background.  Lien strip off in chapter 13 has been one of the few ways for debtors in bankruptcy to hold on to homes on which they are underwater while making them more affordable by removing junior liens unsupported by collateral value.  Extending that sort of relief to chapter 7 cases would be helpful, but Supreme Court review also poses a serious downside risk of making bankruptcy less promising for consumer debtors. 

It's My Fault You Can't Get a Mortgage

posted by Adam Levitin

Can’t get a mortgage?  Turns out it’s my fault.  As in mine, personally.  Yup.  That’s the claim in a Housing Wire written by right-wing banking analyst R. Christopher Whalen.  Here is Whalen’s argument in a nutshell:  

Servicing regulations make banks really reluctant to deal with anyone but very good credit borrowers because it takes so long to foreclose on anyone anymore.  Servicing regulations are so onerous because of an article Tara Twomey and I wrote on mortgage servicing that said that servicers were doing bad things. The problem (in Whalen's view) is that Tara and I had it totally wrong.

I'm flattered that Whalen credits the article with having inspired all of the subsequent foreclosure regulation, but it would be nice if Whalen would accurately characterize the article. (Has he even read it?)  It would also be nice if Whalen would acknowledge that servicers have done an awful lot of bad things over the past several years, which might just possibily have something to do with the current regulatory enviornment for servicing. But such an admission that might get in the way of Whalen grinding his political axe (two legs good, regulation ba-a-a-d).

Continue reading "It's My Fault You Can't Get a Mortgage" »

A Dark Side to the Trustee's Strong Arm Powers

posted by Susan Block-Lieb

Conventional wisdom views bankruptcy as a place that protects homeowners and homeownership.  One of the primary reasons Chapter 13 allows debtors to retain all property of the estate, whether exempt or not, is to allow debtors to hang on to their personal residences even though applicable exemption law would not otherwise allow this.  OK Chapter 13 doesn’t permit modification of residential mortgages, but it does allow debtors to decelerate and cure mortgages in default, providing some consumer debtors some protection from foreclosure.  Chapter 7 is traditionally viewed as less protective of the homestead – that is, it protects residences only to the extent of applicable homestead exemption law, but it has been widely accepted that debtors might protect their homes in chapter 7 by combining a discharge from unsecured debts with reaffirmation of a residential mortgage. 

The recent financial crisis has strained both the state court foreclosure process and the federal bankruptcy system, raising questions about the continuing accuracy of the notion that bankruptcy provides a safe place for homeowners.  Whether bankruptcy does or even should protect homeownership is a very big question, one undoubtedly best answered in combination with careful analysis of data, and I won’t presume to tackle that question in a blog.  But I do want to use this format as a safe place for thinking about these issues.

Continue reading "A Dark Side to the Trustee's Strong Arm Powers" »

New Foreclosure Case Analyses Standing and Tangible Net Benefit

posted by Nathalie Martin

The New Mexico Supreme Court decided Bank of New York v. Romero, No. 33,224 slip op. (N.M. S. Ct. February 13, 2014), last Thursday, which can be found here. The court held that (1) the Bank of New York did not establish its lawful standing in this case to file a home mortgage foreclosure action, (2) that a borrower’s ability to repay a home mortgage loan is one of the “borrower’s circumstances” that lenders and courts must consider in determining compliance with the state Home Loan Protection Act (HLPA), which prohibits home mortgage refinancing that does not provide a reasonable, tangible net benefit to the borrower, and (3) that the HLPA is not preempted by federal law.

The opinion spelled out the tough standards banks must meet to have standing to  initiate foreclosures, reviewed a whole bunch of alleged “evidence” produced by Bank of NY to establish standing, including plenty of affidavits and testimony from people with no personal knowledge of what was going on. The opinion debunks the use of the business records exception to get in documents no one knows anything about and has some good MERS language too. The opinion on these facts should help homeowners with funky documentation in other states as the principles discussed are universal. As such, the case established strong principles for homeowner protection from unscrupulous lenders.

Continue reading "New Foreclosure Case Analyses Standing and Tangible Net Benefit" »

Insolvency + Tax Season = Good News?

posted by Jason Kilborn

After seeing yet another prominent news article grousing about the tax consequences of short sales and other forms of mortgage relief, I thought I'd pass along a discovery I made a few years back that seems to be ignored over and over in the popular press. Bottom line: the "income" from cancellation of debt (e.g., from a mortgage modification) is often NOT taxable to the debtor.

Continue reading "Insolvency + Tax Season = Good News?" »

The New Irish Split Mortgage Solution for Underwater Homeowners

posted by Jason Kilborn

This just in from Ireland:  A large mortgage bank there, AIB, has agreed to a plan to split some mortgages into a "good" tranche, equal to 80% of the current market value of the home (forgiving the other 20% of that tranche) and another, "bad" tranche equal to the remaining, underwater portion of the mortgage loan. The first tranche will be serviced regularly, vastly reducing the monthly payments of eligible borrowers. The second tranche will be "warehoused," not serviced at all and lying dormant, interest-free, for some period of years. There are provisions for offering homeowners incentives to pay down the remaining balances quickly, especially if their financial situations improve unexpectedly.

Sounds like just the type of creative solution the world has been looking for. Alan and other experts on these issues may see some hidden traps that I don't (perhaps strict eilgibility requirements, which are not reported in the story I saw), but this struck me as quite good news on the "actually looking for solutions" front.

This, I Don't Believe

posted by Bob Lawless

My friend, Frank Venis, sent me a link to a Planet Money/NPR story that 42.1% of home purchases are now in cash. I have been meaning to write up a quick post on the story since the story appeared, but my day job kept interfering.

Continue reading "This, I Don't Believe" »

Well-Healed Borrowers May Want to RUN for the Ultimate Refi

posted by Nathalie Martin

There have been many news stories reporting on how the CFPB’s new “ability to pay” mortgage rules, now in effect, will make it harder for regular hard-working Americans to get home loans. Many of the stories make the new rules sound just terrible, but really, the rules just make it more likely that loans go only to people who will be able to pay off their homes and not go into foreclosure.  Banks must now consider a consumer's financial health, including income, existing debt obligations and credit history, when making a loan. Makes sense to me, though I’d image some low income borrowers will not be able to get loans now. No doubt too, there will be fewer loans to make, if the borrowers need to be more stable financially. Nevertheless, there are mortgage brokers out there that just need something to do, not to mention mortgage lenders that need to lend. There is no doubt that people with excellent credit are now in hot demand by lenders. We are finding out about this in our household first hand and it is fascinating.

Continue reading "Well-Healed Borrowers May Want to RUN for the Ultimate Refi" »

How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit?

posted by Adam Levitin

        One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers. There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. I've blogged on aspect of QM before (herehere, herehereherehere, here, and here). Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. (I note that all of this is my tentative readings of the statute; we really don’t know how courts will interpret it, and others may see better readings than I do now.) 

        Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 18 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years.  Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. I invite those who would calculate this differently to weigh in in the comments—it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis.

        Ultimately, I don't think ATR liability really matters in terms of availability of credit. What matters is the lack of liquidity--meaning a secondary market--in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.

        Because this post is REALLY long (the Mother of All QM Posts), here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):

Continue reading "How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit? " »

Still Deleveraging American Homeowners

posted by Alan White

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...

Securitization, Foreclosure, and the Uncertainty of Mortgage Title

posted by Adam Levitin

I've got a new article out in the Duke Law Journal entitled The Paper Chase:  Securitization, Foreclosure, and the Uncertainty of Mortgage Title.  The article is about the confusion securitization has caused in foreclosure cases because of the shift in legal methods for mortgage transfer and title that accompanied securitization. 

The Paper Chase is not exactly a short article, but if you're the type that's into reading about UCC Article 3 vs. Article 9 transfer methods for notes and MERS, then this piece is for you. There's a lot of technical stuff in the article, but there's also a discussion of the political economy of mortgage title and transfer law, and some thoughts on how to fix the legal mess we currently have.  Abstract is below the break:

Continue reading "Securitization, Foreclosure, and the Uncertainty of Mortgage Title" »

Supreme Court Discrimination Case Settles

posted by Alan White

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.

The Frontiers of Mortgage Servicing, Part I

posted by Katie Porter

For the last 18 months, I've served as the California Monitor for the National Mortgage Settlement at the request of California Attorney General Kamala D. Harris. Disclaimer: This post does not necessarily represent the views of the CA AG or CA DOJ. It's just me, Professor Porter writing. And what I wanted to write about is the first in a series of thoughts that I have about where mortgage servicing policy needs to go in the future. 

My first topic where think mortgage servicing needs more conversation and reform is the role of the FHFA and Fannie/Freddie in having fostered/enabled/encouraged some of the unsavory practices in mortgage servicing through their servicing guidelines. Dustin Zachs' piece, Robo-Litigation, offers several detailed examples of how Fannie and Freddie were entangled with the law firms engaged in robo-signing and other illegal practices. He gives a detailed account of David Stern, named Fannie Mae's lawyer of the year in 1998 and 1999. But in 2002, the Florida Bar disciplined him for misleading affidavits in those prior years. Fannie and Freddie did not stop referring cases to him until October 2010. And then there was the litigation--brought by Stern against F/F to collect fees for his practices--not brought by F/F to recoup fees paid for work that Stern's firm may have done in violation of the rules of professional responsibility, state law, or the servicing guidelines.

Continue reading "The Frontiers of Mortgage Servicing, Part I " »

QM Isn't "Plain Vanilla"

posted by Adam Levitin

The American Banker's lead article today is about how the Qualified Mortgage (QM) concept is really an enactment of the "plain vanilla" mortgage provision that the White House had unsuccessfully pushed to have included in what become the Dodd-Frank Act. That's just wrong. 

Continue reading "QM Isn't "Plain Vanilla"" »

New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy

posted by Melissa Jacoby

RibbonHouse Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract:

We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.

Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.

Ribbon house image courtesy of Shutterstock.

Housing Finance Reform: the Role of the PLS Market

posted by Adam Levitin

I testified on housing finance reform today before Senate Banking. It was a strange experience being in the Hart and Dirksen Senate Office Buildings with the shutdown. The halls were eerily empty. Fortunately, the Senate Banking Committee is continuing to do the people's business.

My testimony focused on the ability of the private label securitization market to support the US housing finance system. Short answer is I'm skeptical that it can support more than a fraction of the market, and even to do that will require significant reforms, particularly focused on the duties and incentives of trustees and servicers.

Yves Smith has a generous and thoughtful write-up of the issue.  My testimony is here.  

QM and Nonjudicial Foreclosures

posted by Adam Levitin

The Dodd-Frank Act provides that failure to verify a borrower's ability to pay on a home mortgage entitles the borrower to a "asset a violation...as a matter of defense by recoupment or set off". 15 USC 1640(k). 

It's not clear me how this provision will play out in the context of nonjudicial foreclosures.  Does the ability to "assert a violation...as a matter of defense by recoupment or set off" enable borrowers to turn all nonjudicial foreclosures into judicial foreclosures? I don't know how one raises a defense or setoff to a nonjudicial foreclosure sale.  And if the foreclosure is nonjudicial, is the debtor's filing in court truly a defense?  Wouldn't it have to be a claim?  If so, would it create federal jurisdiction on federal question grounds?  Maybe the answer is to read 15 USC 1640(k) not as authorizing two types of defenses--recoupment and set off--but instead as authorizing either a defense (recoupment) and a claim (or counterclaim) for set off.

It's not clear to me exactly what was intended, but I have a lot of trouble seeing how 15 USC 1640(k) is going to work with nonjudicial foreclosure.  While I'm very skeptical about the strength of the remedy for violating the ability to pay requirement, I wonder 15 USC 1640(k) will herald greater judicialization (and possibly federalization) of foreclosures.

I'd love to hear thoughts on how 15 USC 1640(k) is likely to play out.

Foreclosure Crisis Update

posted by Alan White

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, bScreen shot 2013-10-01 at 9.34.57 AMut 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

Is Federal Preemption Assignable?

posted by Adam Levitin

Gretchen Morgenson had an interesting column today about judicial frustration with banks.  One of the opinions she references is a recent order by Judge William Young (Dist. Mass.) in a predatory lending suit.  The defendant Wells Fargo, as successor in interest to the lender, Wachovia FSB, argued that the state law causes of action on which the suit were based were preempted by a federal statute that governs federal savings banks.  Judge Young agreed, but ordered that:

Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat [the plaintiff homeowner's] claim.

In other words, the Judge wants to make sure that Wells CEO and board are aware of how it is evading liability.  This isn't the first time Judge Young has expressed his frustration with the mortgage industry. He authored one of the most colorful (and apt) descriptions of MERS:  the "wikipedia of land registration systems." Alas, as in this case, it was all in dicta. 

Putting aside the optics, I think there's an interesting legal issue possibly raised by the present case, Henning v. Wachovia:  does federal preemption under the Home Owners Loan Act (HOLA) apply to a mortgage that was made by Wachovia FSB, but is now owned by Wells Fargo, N.A.?  HOLA preemption only applies to federal savings and loans, not to national banks. So if a federal S&L makes a loan and holds it on balance sheet, it would seem clear that HOLA preemption would be relevant. But what if that federal S&L sold the loan to, say, me? Could I invoke HOLA preemption? That is, does HOLA preemption travel with the loan or is it personal to the federal S&L? 

I've got to think that the answer is that preemption is not assignable, but the law here is not as clear as it might be. The reason I think it has to be non-assignable is that it can produce a regulatory vacuum of preemption without regulation and because were preemption assignable, we'd face a problem of preemption laundering. I've written about this, at length, in an article considering, among other things, whether preemption rights travel with a loan when it is securitized (and is no longer held by a federally chartered depository of some sort, but by a state law entity, such as a trust). 

It was not clear to me from Judge Young's order whether the loan is currently owned by Wells Fargo directly or whether it is still held by Wachovia FSB as a Wells Fargo subsidiary or by some other entity. As far as I can tell, however, Wachovia FSB no longer exists.  The OCC's list of federal savings associations, as of August 31, 2013, does not lit a Wachovia FSB.  Therefore, it would seem that the loan is not currently owned by any entity that is regulated by HOLA and therefore entitled to HOLA preemption. 

There may still be a timing issue--is HOLA preemption determined at the time the cause of action arises or at the time litigation is brought or at the time of the decision?  I don't know what, if any, law exists on this.  Again, however, I don't know all of the facts of the case; I don't know if the attorneys for the plaintiff raised the question of whether Wells Fargo gets HOLA preemption via Wachovia, and don't know whether the issue is waived if they did not raise it. Preemption aside, it will be interesting to see how the order to the Wells Fargo board plays out.  

Supreme Court to Hear Housing Discrimination Case

posted by Alan White
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.

Fed Board Couldn't Be Bothered to Vote on Multi-Billion Foreclosure Settlement

posted by Adam Levitin

The foreclosure fraud settlements were already farcical, but it just gets worse and worse. Now we learn that the Fed approved the amendments to its consent orders with mortgage servicers without it actually going before the Board of Governors for a vote.  

I get that Fed regulations permit delegation of this sort to the Fed's staff, but the foreclosure fraud settlement wasn't some Mickey Mouse enforcement action against a community bank's holding company for a minor know-your-customer rule infraction. As far as I'm aware, this was by far the largest settlement of any sort in the Fed's history. This settlement was a policy statement as much as an individual settlement. The fact that the Fed's Board didn't even bother formally deliberating and voting on the settlement is indicative of how seriously the Fed's Board takes the foreclosure fraud issue:  the Board doesn't think that it's worth their time.  Not even a single Board member requested review of the action. Yet another exhibit for why consumer protection cannot be left in the hands of prudential bank regulators. 

Who is Mel Watt?

posted by Jean Braucher

On May 1, President Obama nominated Rep. Mel Watt (D-N.C.) to be the director of the Federal Housing Finance Agency, the conservator for the mortgage giants Fannie Mae and Freddie Mac.

These two entities together currently back a large majority of new mortgages and hold or guarantee about half of all U.S. mortgages. Like other entities immersed in the mortgage market, Fannie and Freddie suffered great losses in the mortgage meltdown and were taken over by the federal government at the end of the Bush administration in September 2008.

Watt could be a key figure in the late stages of the mortgage crisis and in redefining the role of Fannie Mae and Freddie Mac going forward.  So who is this eleven-term congressman and what does he care about most?

Probably the most important points to stress are these:  He rose from humble beginnings through the meritocracy and is a Yale-educated lawyer who likes to immerse himself in the facts.  He is broadly respected at home in Charlotte, N.C., and represents a safe district where he has biracial support.  He carefully listens to the financial services industry, a major player in his community, and one that has supported his campaigns.  Most important of all, he has made working for the economic well-being of African Americans his life’s work, whether as a lawyer in private practice representing minority businesses or as a lawmaker seeking to shore up consumer protection, particularly to strengthen the legal basis for challenging predatory lending, often used against racial minorities and other vulnerable populations.

Continue reading "Who is Mel Watt?" »

Jon Stewart's Residential Evil

posted by Bob Lawless
Any time The Daily Show has a piece that mentions both MERS and the OCC, it gets a link on Credit Slips. There is even a short clip featuring former Credit Slips blogger and current U.S. Senator (in that order) Elizabeth Warren. 

Obama to Replace DeMarco at FHFA

posted by Alan White

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.

Qualified Residential Mortgages

posted by Adam Levitin

The New York Times has a major article about the Qualified Residential Mortgage rulemaking under the Dodd-Frank Act. I think there's a lot of confusion about this ruling-making. I'm going to try and clarify a few things in this post.

Continue reading "Qualified Residential Mortgages" »

Adam Levitin awarded the Young Scholar's Medal of the American Law Institute

posted by Jean Braucher

Congrats to Credit Slip’s Adam Levitin for winning a prestigious honor! Of course, this award is well deserved.

The American Law Institute announced today that Adam Levitin of Georgetown Law Center has been awarded its Young Scholar’s Medal.  ALI says that this honor is “designed to recognize early-career law professors whose work is relevant to the real world and has the potential to influence improvements in the law.”

William Treanor, Dean of Georgetown Law Center, said: "Professor Levitin's work not only has the potential to improve American law, it already has influenced improvements in law in multiple areas across the financial sector."

Justice Goodwin Liu of the California Supreme Court, who chaired the Young Scholars Medal Selection Committee, said, "Professor Levitin's work on the recent financial crisis has helped to guide lawmakers in the areas of housing finance and bank regulation."

Continue reading "Adam Levitin awarded the Young Scholar's Medal of the American Law Institute" »

Mortgage Settlement Checks Bounce

posted by Nathalie Martin

Remember the $3.6 billion settlement the government made with huge lenders accused of wrongful evictions and other abuses? Wronged homeowners are beginning to get their settlement checks in the mail, only to find that some of them bounce. That’s right. After more than two years of waiting for the checks, the first round of checks arrived last week, but the company chosen to distribute the checks, Rust Consulting, failed to fortify the account upon which the checks were written, Huntington National Bank in Ohio. Read the dealbook story by Jessica Silver-Greenberg and Ben Protess here.

IFR Scandal: Magnitude of Mortgage Servicing Failure

posted by Alan White
Screen shot 2013-04-14 at 9.56.52 AM

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.

Fannie/Freddie to Homeowners: Do Nothing and Help Will Arrive

posted by Katie Porter

Housing Wire is reporting that Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, has launched a new loan modification program. The program is a major departure from HAMP and HARP (thankfully!). It puts mortgage servicers in charge of delivering relief, instead of requiring homeowners to run down, chase, and exhaust themselves contacting their mortgage company.

The basic details available so far are that the program will start this July 1 and end August 2015. It will be open to Fannie/Freddie homeowners who are 90 days or more delinquent on their mortgages. Homeowners will not have to submit proof of financial hardship or undergo extensive underwriting to be qualified for modifications.

This "Streamlined Modification Initiative" needs a better name, better branding, and at least so far, better publicity. But overall, I am very encouraged that FHFA is adopting this kind of program. It's what I call a "push program," requiring the servicers to deliver relief. We've seen at least two servicers roll out similar push programs as part of the National Mortgage Settlement. Bank of America sent letters to over 100,000 homeowners stating that if the borrower literally did nothing that their second mortgage would be forgiven and released, and the debt reported to credit bureaus paid in full. Guess what, 99% of homeowners who got this letter got the relief. Similarly, JPMorgan Chase rolled out a Settlement "refinance" program that was actually a simple, no-doc, interest rate reduction for the life of the loan. Their consumer response rate was multiples of other institutions that required full documentation for their Settlement refinance programs. Both programs are innovative and leverage the servicers' resources, while reducing the onus on everyday families.

Continue reading "Fannie/Freddie to Homeowners: Do Nothing and Help Will Arrive" »

Freddie Mac Indifferent to Homeowner Complaints

posted by Alan White
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. 

Why the Independent Foreclosure Reviews Were Doomed to Fail

posted by Adam Levitin

Apparently part of the bank flaks' talking points regarding the foreclosure reviews is that to the extent homeowners harmed by wrongful foreclosures, they were actually drug dealers. The message: we didn't foreclose on anyone who didn't deserve it. We were just foreclosing on some scumbags and doing you all a favor by getting the meth lab out of the neighborhood before it blew up. We're part of the war on drugs. 

This talking point is particularly revealing, I think, both about how seriously our largest financial institutions take sanctity of contract, and about the nature of the whole independent foreclosure review sham.  

Continue reading "Why the Independent Foreclosure Reviews Were Doomed to Fail" »

SCRA and Foreclosures

posted by Adam Levitin

The more we learn about the mortgage servicing settlement, the more rotten it's looking. I really didn't think it was possible, but this piece in the New York Times details more problems, including with Servicemembers Civil Relief Act (SCRA) violations in the form of foreclosures on active duty military members.  

I'm still trying to wrap my head around how mortgage servicers have been violating SCRA. This should be one of the easiest darn things for servicers to comply with. The Department of Defense runs a free SCRA database. It's really easy to run a SCRA check prior to commencing a foreclosure. The total transaction costs of doing the search are virtually zero--a couple minutes of time from a high school graduate is all that is necessary.  The fact that this doesn't seem to have happened in way too many cases is a sign of how bad compliance has been in the servicing space. 

Disclosure 2.0: Disclosure in the Lab

posted by Lauren Willis

If, as I suggested in my last post, making the consumer smarter is hopeless, at least for those of us whose prenatal and early childhood environments can no longer be altered, what about disclosure?  Could point-of-sale disclosure equip consumers to make good financial decisions? 

Simple disclosures appear effective in directly aiding consumer decisionmaking in some domains, the A, B, and C restaurant hygiene grades being the classic example.  But because financial products have many varying features that consumers need to understand to make good decisions, financial product disclosures are inevitably much more complex.  As a recent article by Omri Ben-Shahar and Carl Schneider details, generally speaking, consumers do not read, or if they do read they do not understand, or if they do understand they do not use correctly, the information presented in complex product disclosures.

Continue reading "Disclosure 2.0: Disclosure in the Lab" »

Fair Lending Law Developments

posted by Alan White

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.

The Bubble According to Todd

posted by Adam Levitin

Todd Zywicki has a long blog post criticizing the CFPB's Qualified Mortgage (QM) rule and using it as a jumping-off point for a call to transform the CFPB's leadership from a single Director to a commission.  Zywicki's primary criticism of the QM rule is that it fails to address what he believes was the root cause of the mortgage default crisis:  strategic borrower behavior, which he believes needs to be addressed through down payment requirements and real liability for mortgage deficiency judgments, so that there is borrower skin-in-the-game.  As Zywicki sees it, the housing bubble and its collapse as the result of ruthlessly strategic borrowers playing lenders.  In other words, the bubble was a safety-and-soundness problem, not a consumer protection problem.  The lenders were just helpless dopes, fooled by coldly rational borrowers.

The blame the borrowers move we see here is the same one Zywicki pulled during the bankrutpcy reform debates leading up to BAPCPA, and again it is made without an empirical basis.

Continue reading "The Bubble According to Todd" »

Inside the Foreclosure Reviews

posted by Adam Levitin

Yves Smith has a pair of damning posts about the OCC foreclosure reviews (part I and part II). Yves is compiling an extensive documentary record about the way the foreclosure reviews were structured to guarantee a whitewash that would provide little assistance even to borrowers who were seriously harmed. There's plenty of material here for any investigative journalist or Congressional committee to run with, and I really hope that this story gets picked up elsewhere.  

That said, I suspect that the complexity of the review process combined with the general ennui about foreclosure shennanigans will mean that the story doesn't go much further. After five years of regulatory tolerance of outrageous behavior involving loan modifications and foreclosures, it's hard for anyone to get excited about the problems with the review process.  I'm afraid it's become a dog bites man story. This isn't to say that it isn't all awful, but just to express my sense that media--and political--interest in the issue is waning. The only interesting and ironic twist with the last reconfiguration of the settlement was that it turned out that the accounting/consulting firms doing the reviews ended up squeezing the banks for a lot more money than they anticipated. 

QM Impact on the Mortgage Market

posted by Adam Levitin

The American Banker has a story (paywalled) about the impact of the QM rule on subprime lending. Subprime loans are unlikely to qualify for the full QM safe harbor because they are typically priced at more than 150 bps above prime. This means that subprime borrowers now have a possible foreclosure defense if they can show that the lender failed to properly account for their ability to repay. The result is to increase the risk lenders incur with subprime loans. But how much does this matter?

The American Banker story contains an estimate that only 5% of today's mortgage volume would fall outside of QM. Today, however, is an ultra conservative mortgage market. We can get a rough sense of what the impact of QM would have been in the past by looking at the market share of subprime and Alt-A loans.  

Continue reading "QM Impact on the Mortgage Market" »

Who Owns the MBS Claims? AIG or the Fed?

posted by Adam Levitin

Alison Frankel has a great column today on the fight going on between AIG and the NY Fed about who owns the securities fraud claims associated with the MBS that AIG sold to the NY Fed (or more precisely, its Maiden Lane SPV) as part of its bailout. 

I have no idea who is right in this dispute, but as Frankel observes, if the NY Fed is correct, it raises the question why the NY Fed has failed to prosecute the MBS fraud claims. The argument that there aren't meritorious claims is rather hard to swallow given that other regulators (FDIC, FHFA, NCUA) and institutions have brought fraud claims relating to MBS and some of those claims have resulted in settlements (including the still not finalized $8.5 billion settlement with BoA/Countrywide).  

Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

posted by Adam Levitin

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

Continue reading "Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule" »

CRA and the Housing Bubble

posted by Adam Levitin

There's an interesting new paper out on the role of the Community Reinvestment Act and the housing bubble. The paper, called "Did the Community Reinvestment Act (CRA) Lead to Risky Lending?" is by Sumit Agrawal, Efraim Benmelech, Nittai Bergman, and Amit Seru (ABBS). It is a serious economic analysis, which is a major departure from much of the post-2008 grumbling about the CRA. By exploiting the differences in lending behavior within census tracts between banks that are undergoing CRA exams and those that aren't, ABBS find that undergoing a CRA exam is correlated with a rise in mortgage lending and that those loans perform more poorly than those made in the same census tract by institutions not undergoing CRA exams. In other words, the CRA encouraged more lending and as a result it resulted in less prudent lending. 

There's already some smart commentary on the paper from Mike Konczal. I would add this. There are two separate issues with the CRA. The first is whether CRA caused the bubble, and the second is whether CRA is a good idea generally. My take from ABBS is that the answer to the first question is clearly no--indeed, it seems to provide further evidence of the key role of private-label securitization--while the second question is unanswered. 

Continue reading "CRA and the Housing Bubble" »

No Foreclosure for the Holidays?

posted by Adam Levitin

Fannie and Freddie are reportedly enacting a voluntary foreclosure (or really eviction) moratorium for the holidays. Much obliged guv'nor! 

I've got a beef with this foreclosure moratorium. It captures everything that is wrong with how the GSEs and FHFA have handled foreclosures.

Continue reading "No Foreclosure for the Holidays?" »

Where Are the Foreclosures?

posted by Adam Levitin

Bloomberg has a story Foreclosure Wave Averted as Doomsayers Defied. I think it's a great example of defining deviancy downward. There's no question that we haven't seen a foreclosure tsunami in the wake of the federal-state servicing fraud settlement. But there was little reason to expect one and let's not lose sight of the big picture--foreclosure levels are still incredibly high. 

Continue reading "Where Are the Foreclosures?" »

What’s Up With “Independent Foreclosure Review”: Boondoggle for Consultants and More Foot-Dragging by Servicers

posted by Jean Braucher

After the robo-signing scandal broke in the fall of 2010, followed by a huge bureaucratic in-fight, a federal interagency review produced the Independent Foreclosure Review Program, announced with great fanfare in April 2011. See here and, here.

The program contemplated that mortgage servicers would have to employ consultants for independent review of their foreclosure and related modification processing errors and then pay compensation to homeowners who suffered financial loss as a result, with awards of up to $125,000.  

So how’s that been going? As of now, the “independent” consultants are racking up bills for hundreds of millions of dollars (by September, a quarter billion to PricewaterhouseCoopers alone), while homeowners—according to American Banker—have so far gotten nothing!

Continue reading "What’s Up With “Independent Foreclosure Review”: Boondoggle for Consultants and More Foot-Dragging by Servicers" »

Race and the Housing Bubble

posted by Jean Braucher

While we wait to see if the second Obama administration will do anything new to help homeowners hit by the lingering mortgage crisis (finally replace Bush-holdover Ed DeMarco at FHFA to make way for debt relief?), there’s time to review a recent development that didn’t get the full attention it deserved.

I am referring to a lawsuit, Adkins v. Morgan Stanley, filed in the Southern District of New York in October by the ACLU. We don’t usually associate the ACLU with consumer protection in mortgage finance, and not surprisingly, it has brought a fresh perspective on the abuses that led to the housing bubble, highlighting race disparity in subprime originations.

Together with the National Consumer Law Center, the ACLU has brought a class action against Morgan Stanley charging that it financed a major subprime mortgage originator, dictated the nasty terms offered, and bought up a big portion of the resulting junk to feed its securitization maw.  The originator was New Century Mortgage Corp., which filed in bankruptcy in 2007.

The plaintiffs are African-American homeowners in Detroit who were sold New Century mortgages and who have ended up facing foreclosure. Also joining as a plaintiff is Michigan Legal Services, which has been swamped with mortgage cases in foreclosure ground zero, Detroit.

The legal theories used include the Fair Housing Act and the Equal Credit Opportunity Act, which are promising because these federal laws cover purchasing loans and also make disparate racial impact sufficient to make out a discrimination case. The 71-page complaint presents data that Detroit-area African-American customers of New Century were 70 percent more likely to end up in subprime loans than white borrowers with similar financial characteristics. The suit seeks a jury trial and disgorgement of ill-gotten gains, among other relief including appointment of a monitor (a good idea given the constancy of race discrimination in US housing finance practices).

Continue reading "Race and the Housing Bubble" »

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