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

Insurance Capital Games and PMI Reinsurance Kickbacks

The New York Times carried an important story about the risky investment moves of life insurance companies. There's a lot of good stuff in the story, but it missed an important angle, namely the consumer harm that has already resulted from bank affiliation with captive reinsurers in the private mortgage insurance space, namely inflated and unecessary private mortgage insurance premiums because of illegal kickback arrangements. 

Fast Foreclosures, Slow Foreclosures

At the onset of the current foreclosure crisis, banks bemoaned their inability to get homeowners in default to respond to their generous offers of loan modifications and other foreclosure alternatives. Homeowners, it seemed, were like ostriches with their heads in the sand. Outreach efforts were launched to bring the homeowners in from the cold. Foreclosure sales, banks told us, were the worst possible outcome, and everything should be done to avoid them.

Fast forward a few years, and we no longer hear about those unresponsive homeowners. In fact, the mortgage servicing industry, starting around 2009, was rapidly overwhelmed with homeowners seeking loan modifications and other workouts. Soon homeowners were the ones complaining about getting no responses from servicers. Diligent homeowner attorneys uncovered the robosigning scandal, courts and regulators demanded that servicers clean up their act, and foreclosure cases languished while servicers gave homeowners applying for loan modifications and short sales the runaround. Today the banking industry complains of spending too much time talking to homeowners, claiming that long foreclosure delays resulting from homeowners massively coming in from the cold are just wasting everyone’s time and money.

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.

Community Banks and the CFPB

I'm testifying before the House Financial Services Committee on Wednesday at a hearing entitled "Preserving Consumer Choice and Financial Independence." I'm the only non-industry witness (no surprise there). For those interested, my testimony is linked here.  Here's the highlight:  

Community banks face a serious structural impediment to being able to compete in the consumer finance marketplace because they lack the size necessary to leverage economies of scale. The CFPB has repeatedly acted to ease regulatory burdens on community banks in an attempt to offset this structural disadvantage. While community banks continue to face serious problems with their business model, their profits were up nearly 28% in the last quarter of 2014 over the preceding year, which strongly indicates that they are not being subjected to stifling regulatory burdens.

Ultimately, if Congress wants to help community banks, the answer is not to tinker with the details of CFPB regulations... Instead, if Congress cares about community banks it needs to take action to break up the too-big-to-fail banks that receive an implicit government guarantee and pose a serious threat to global financial stability. Until and unless Congress acts to break up the too-big-to-fail banks, community banks will never be able to compete on a level playing field. 

Credit Slips Bloggers' Amicus Briefs in Caulkett

With my attention drawn to other matters, my personal blogging has been light for the past month. One of the things that had my attention was the Caulkett case currently pending before the Supreme Court. The issue in Caulkett is whether a wholly underwater second mortgage can be avoided in a chapter 7 bankruptcy. Without any value to reach, a wholly underwater second would not seem to be an allowed secured claim within the meaning of section 506.

Along with fellow Credit Slips blogger, John Pottow, and Professor Bruce Markell, I filed an amicus brief in Caulkett supporting the debtor.  One of our points is that Long v. Bullard, which supposedly stands for the proposition that "liens ride through bankruptcy," involved other issues entirely. I'll try to expand on that point in another blog post. But, we were not alone in representing Credit Slips in the case. Blogger Adam Levitin filed his own superb amicus brief supporting the debtor that provides an in-depth look at the facts, evidence, and policy around second mortgages. All of the briefs in the case can be found at SCOTUSBlog.

Servicing Matters

I am so pleased to offer the following post by Carolina Reid, a premier housing researcher at UC Berkeley, about her excellent study of how mortgage servicers matter in creating home-saving opportunities. Welcome Carolina to Credit Slips.

By now we’re all familiar with a plethora of Wall Street financial acronyms, from ABSs to CDOs and CDSs. But what about MSRs (mortgage servicing rights)?  Until a year ago, I had never heard of MSRs, so I was surprised to find out that the rights to collect my mortgage payment are traded on Wall Street, much in the same way mortgage backed securities are traded. And, as a borrower, I have very little control over who purchases the servicing rights to my mortgage, despite the fact that it is usually the servicer who decides whether to offer a loan modification or start the foreclosure process if I become delinquent. Borrowers can’t “shop around” for the best servicer – you get who you get (but maybe you should get upset).

A 21st Century Trust Indenture Act?

MBS investors suffered a serious legal blow a couple of months back when the Second Circuit held that the Trust Indenture Act of 1939 doesn't apply to MBS. 

The Second Circuit's decision hinges on treating a "mortgage" as a "security." That's rather counterintuitive.  The Trust Indenture Act doesn't define "security," but refers to the Securities Act's definitions. The Securities Act defines "security" to include "any note" but the definition bears the caveat "unless the context otherwise requires." I'd think that the context would have pretty easily counseled for reading "note" not to include residential mortgages. What the Securities Act is trying to pick up are issuances of corporate notes.

Frankly, I think the Second Circuit's reading (and the resulting decision) are absurd.  First, it is hard to see any context in which "note" should be read to include "residential mortgage" (especially in light of all of the other things that constitute a "security" under the Securities Act, when Congress could easily have included a "mortgage" in the definition).  Second, the Second Circuit's reading arrives at an absurd policy result.  It excludes from the Trust Indenture Act the very sort of securities (proto-MBS) that were the driving force behind the creation of the Trust Indenture Act of 1939 (and the NY state Trust Indenture Act of 1935 before that).  The groundwork for the federal Trust Indenture Act was a 1936 SEC report authored by William O. Douglas, Jerome Frank, and Abe Fortas (among others) that documented in incredible detail the abusive role of trustees in mortgage bond reorganizations.  (While bankruptcy scholars have tended to focus on the railroad reorganizations chapter of the report, the real estate chapter is just as important, and goes a long way to understanding why Douglas was such a champion of the absolute priority rule.)

The point here isn't to belabor a questionable decision by the Second Circuit (which did not mention the policy issues in its decision, but I don't know if they were argued), but to underscore the ruling's consequence. At least in the 2d Circuit, it's now clear that MBS investors are not protected by the Trust Indenture Act, and that's a bad thing. This decision means that there's very little (if anything) protecting investors from wrongdoing by MBS trustees, whether acts of omission (e.g., failing to police servicers) or commission (e.g., entering into sweetheart settlements of rep and warranty liability). This is exactly what the Trust Indenture Act was supposed to prevent. If Congress cares about investor protection, it's time to devise a 21st century Trust Indenture Act. 

[Update:  A state securities regulator emailed me to draw my attention to the Supreme Court's 1990 decision in Reves v. Ernst & Young.  That decision expressly adopted an older 2d Circuit case's test regarding what is a security. That case excluded residential mortgage loans from the definition of "security" in the context of a securities fraud action. The 2d Circuit cited to its older decision (but not the Supreme Court's subsequent adoption of its test), but said that the context was different. Unfortunately, the 2d Circuit didn't think it was necessary to explain what about that context was sufficiently different to merit a different result. I can't see any plausible contextual distinction. There's really no context in which loans made for personal, family, or household purposes should ever be considered securities. They are subject to entirely different regulatory regimes, they are part of different markets, and no one would ever think to refer to such loans as securities. Except, apparently the 2d Circuit. It's one thing to arrive at the wrong conclusion after a serious analysis, but I am troubled that the 2d Circuit didn't bother to explain itself in this context.]  

 

Sh*t In, Sh*t Out? the Problem of Mortgage Data Corruption & Empirical Analysis

Empirical economic analysis is a powerful tool. It can elucidate correlations and sometimes even get us to causual explanations. But it has a serious weak-spot:  its value is entirely dependent upon the integrity of the data analyzed. To put the problem succinctly: sh*t in, sh*t out.

This brings us to analyses of the housing bubble. There's a sizeable academic literature on the housing bubble (and relatedly also expert witness reports on loss causation in MBS litigation) that rely on loan-level data. The problem is that a lot of that loan-level data is suspect. That should hardly be a surprise: the industry even referred to some products as "liar loans". And there were also FBI Mortgage Fraud reports indicating an uptick in mortgage fraud. But it was easy for economists to ignore the data integrity problem as long as the problems were merely anecdotal (e.g., the mariachi musician with the six-figure income), and could be blissfully assumed to only affect a small number of loans.

No longer. It's hard to show mortgage fraud empirically, but there's a growing empirical literature about mortgage fraud. There are now a couple of academic studies demonstrating significant inflation of borrower income on loan applications (here and here and here and here and here). (To be clear, this does not mean that the income was inflated by the borrowers. It could be inflated by either borrowers or lenders, including loan brokers.) There's also a Fitch Ratings report from late 2007 that shows questionable stated income, employment, FICO scores, property occupancy status, and appraisals on a large percentage of a small sample of subprime loans. 

I want to emphasize that this literature does not undermine all empirical work on the housing market during the bubble years. But it should give us pause when considering any analysis that relies on either loan-level or pool-level loan characteristics such as income, DTI, FICO, occupancy status, and LTV/CLTV. I suspect that the empirical mortgage fraud literature will not deter many economists from plowing ahead whenever their data produces a regression with statistical significance. And the studies might well be right in the end. But it should tell the rest of us to consume the studies with a grain of salt.

The Disappearance of HOEPA Loans

While I'm on the subject of dead markets, what about HOEPA loans? HOEPA loans are super-high-cost loans that qualify for special consumer protections under the Home Owners Equity Protection Act of 1994. (Yes, that's the one that directed that the Fed "shall" implement a rule on abusive lending, which the Fed understood to be discretionary until 2008.) 

HMDA data has previously been a bit of a pain to manipulate to get summary statistics--big data sets and annoying variable labels.  No longer. The CFPB has an amazing on-line HMDA data tool that is a lot of fun to explore. The CFPB's created the Rolls-Royce LoPucki-BRD of HMDA data.  It's a real public service. My only complaint is that the CFPB only has data going back to 2007. Hopefully the Bureau will add in 2005-2006, at least (there was a reporting change in 2004). The Urban Institute also has a nice HMDA data page, but it's really more for power users. 

OK. So what's gone on with HOEPA loans? HOEPA status was always a kiss of death, but in 2005, there were 35,980 HOEPA loans made. In 2013 (still under the same definitions), there were just 1,873. That's a 95% decline in HOEPA lending. Now it might well be that lenders are making lots of loans just under the HOEPA reporting thresholds. But there's little reason to think that they suddenly started doing that in 2013--that trick's been around for a while. Instead, what we're seeing is that high-cost mortgage lending has simply disappeared in the United States, much more so than lending has contracted in general.

Just How Dead Is the Private-Label MBS Market?

Pretty darn dead. In 2014, there were all of 22 private-label RMBS deals. These deals provided $5.67 billion in financing for 7,342 mortgages. Let that sink in for a second. The private-label market financed fewer home mortgages than were made in the District of Columbia last year.  

Perhaps the private-label market's defenders will finally accept that it is a seriously broken market and that fixing it isn't just a matter of interest rates moving a few basis points. This is a market that needs to take major steps to restore investor confidence, and that means, among other things, a total redesign of servicing/trustee compensation structures and roles and a major standardization of deal documentation so that investors won't have to worry about what language got snuck in on page 73 of a 120 page indenture.

Second-Liens and the Leverage Option

Susan Wachter and I have a new (short!) paper up on SSRN. It's called Second-Liens and the Leverage Option, and is about the curious absence of negative pledge clauses in US home mortgages, which enabled enormous amounts of second-lien leverage (much more than anyone realized) during the housing bubble. We have a very simple, narrowly tailored legislative fix that should make additional mortgage leverage via junior liens a bargained-for matter between the borrower and the senior lienholder(s), rather than an absolute right of the borrower. 

Abstract is below the break:

Corporate Recidivism? Ocwen's Charter Problems

Last month mortgage servicer Ocwen (that's NewCo backwards) was mauled by the NY State Department of Financial Services. Now the California Department of Corporations is seeking to revoke Ocwen's license to do business in that state. 

Here's the thing that is often forgotten:  this ain't the first time!  Ocwen used to be a federal thrift. In 2005, however, Ocwen "voluntarily" surrendered its thrift charter in the face of predatory lending/servicing investigation. And here we are, a decade later. What's changed?  By the NY and California allegations, not much. In other words, we're looking at a potential case of corporate recidivism. I'll refrain from commenting on the merits of the allegations, but there should be zero tolerance for corporate recidivism. 

Consumers Don't Shop for Mortgages and the CFPB Intends to Change That

Richard Cordray, the director of the Consumer Financial Protection Bureau, gave a short speech today at the Brookings Institution. In his speech, he outlined several steps the CFPB is taking to help fix the mortgage market. In his view, one of the chief problems with the mortgage market is that consumers do not shop around for mortgages the same way they shop for other products, including houses. According to a recent CFPB study, "almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply."

The CFPB's aims to solve this problem with some new tools. More after the break.

Nostradamus-Style Predictions for Consumers in 2015

First some easy ones you all know:

1. The stock market will drop, perhaps precipitously, making now great time to rebalance retirement portfolios.

2. The price of gas will inch up and in the meantime, more states will add a little gas tax here and there to quietly fill empty coffers.

On Mortgage Lending:

3. There will be more low rate, “no closing costs” home refinancings available to good credit risks, as lenders try to figure out what to do with themselves. Not much of a spoiler here, since this is already happening.

4. More lenders will be answering the phones when borrowers want to settle up their mortgages. Lenders will be cutting the red tape that is costing them a fortune. Also, more lenders will be settling pending home foreclosure litigation. Something is better than nothing, some might be thinking. 

5. Cases that don’t settle will result in more large judgments against lenders, in part because lenders did not do some of the things mentioned above all along.

On High -Cost Lending:

6. The CFPB will announce its long-awaited payday lending rules, which will apply to all high-cost loans, including payday loans, title loans, and high-cost installment loans.  These new rules will go a long way (though perhaps not all the way) to curbing high-cost lending abuses and protecting consumers from the debt trap. After all, the bureau is called the Consumer Financial Protection Bureau. Lenders will not like the rules much and may even sue over them but they won’t have a high-cost leg to stand on.

Foreclosure News: Who Gets to Decide Whether a State is a Judicial Foreclosure State or a Non-Judicial Foreclosure State, Legislatures or the Mortgage Industry?

Apparently some mortgage lenders feel they can make this change unilaterally. Big changes are afoot in the process of granting a home mortgage, which could have a significant impact on a homeowner’s ability to fight foreclosure. In many states in the Unites States (including but not limited to Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin), a lender must go to court and give the borrower a certain amount of notice before foreclosing on his or her home. Now the mortgage industry is quickly and quietly trying to change this, hoping no one will notice. The goal seems to be to avoid those annoying court processes and go right for the home without foreclosure procedures. This change is being attempted by some lenders simply by asking borrowers to sign deeds of trust rather than mortgages from now on.

Mortgage Servicer Privity with Borrowers

A lot of the mortgage servicing litigation over the past seven years has faltered on standing issues. Does the borrower have standing to sue the servicer? This has been a problem for RESPA and HAMP suits, where there are questions about whether there is a private right of action, as well as for plain old breach of contract actions. The point I make in this post is that borrowers almost always have standing to sue the servicer for a breach of contract action arising out of the mortgage loan contract itself because the servicer is an assignee of part of the mortgage note. This was an issue that lurked in the background of a case I recently testified in, and I think it's worth highlighting for the Slips readers.  

A lot of courts have misunderstood the nature of the servicing relationship vis-a-vis the borrower and assumed that because the servicer is not expressly a party to the note and security agreement that there is no privity between the borrower and servicer and hence the borrower cannot maintain a breach of contract suit.  That's wrong. The servicer is not on the note or the security agreement, but the servicer is an assignee of the note, just like the securitization trust, and that provides all the privity needed for a breach of contract suit.  

Sign of the Times: Tightening Mortgage Rules in Europe

Two stories in today's world news caught my attention because they were both related to rising consumer debt and tightening mortgage rules. 

First, Sweden is proposing a particularly aggressive approach to reducing the weight of mortgage debt on consumers' balance sheets. The new accelerated amortization rules really struck me from a comparative US perspective: Swedes borrowing more than 70% of the value of their homes would have to pay the loan down by 2% a year (that's 2% of the principal) until the LTV falls to 70%, then 1% of the principal of the loan each year until LTV reaches 50%, the desired level. Wow. In the 15 years that I've been wrestling with a variety of home mortgages, I don't think I've ever paid 2% of the principal (given the back-loaded amortization schedule of most standard US home mortgage loans). To make matters worse (better?), the Swedish central bank is also considering grabbing onto the third rail of US tax reform--reducing tax deductions for mortgage interest. These are pretty aggressive moves to cool off the mortgage market and bring down consumer leverage, and they stand in stark contrast to efforts in the US and the other country in today's news ...

QRM's Missed Opportunities for Financial Stability and Servicing Reform

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

Flagstar Servicing Enforcement Order

The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).

The details given in the consent order tell an all-too-common picture about mortgage servicing.  

In 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. 

And we wonder why loss mitigation hasn't been more effective?

What do bankruptcy mortgage servicing and ebola have in common?

A long long time ago in this same galaxy, I wrote what may be Credit Slips' most popular post: What do bankruptcy mortgage servicing and phone sex in common? Today, I bring you a new comparison: bankruptcy mortgage servicing and ebola. At the outset, let me be very clear that ebola is a tragic health care crisis. I do not mean to minimize those deaths and illnesses with a comparison to mortgage servicing--although to be sure, poor mortgage servicing has tragic financial consequences.

Here is the basic analogy. Ebola has a high kill rate. Similarly, screwed up mortgage servicing can be the death knell for homeownership. Ebola is currently epidemic in West Africa, just as the foreclosure crisis made mortgage servicing a top-line policy problem. And despite the publicity, both ebola and foreclosure--as epidemiological matters--are rare. This is one of the reasons that investment and research on both problems has lagged behind more common occurrences such as, respectively, malaria and mobile banking. We have known about the risks of ebola for years, yet the global community is still struggling to find fixes. Again, in parallel, it has been twelve years since Hank Hildebrand wrote "The Sad State of Mortgage Service Providers," and six years after Tara Twomey's and my research on mortgage servicing errors in bankruptcy hit the front pages of newspapers. While improved, bankruptcy mortgage servicing is still a threat to a healthy bankruptcy system.

My favorite recent case in point:  In re Williams, in which a couple filed a second bankruptcy solely to save their home--the exact reason for their first bankruptcy. (At least you can only get ebola once!) The Williams alleged that Ocwen had not properly serviced their mortgage during their first bankruptcy. Ocwen pursued a foreclosure after the debtors had completed their chapter 13 plan and refused to accept debtors' payments. Its proof of claim alleged 28 missed payments and an arrearage of $43,388.82.  U.S. Bankruptcy Judge Brendan Shannon (Bankr. Del.) ultimately found the debtors owed only $16,164.24 (12 payments) and ordered Ocwen to pay the costs and fees of the debtors' second bankruptcy filing and litigation with Ocwen. In describing the situation, Judge Shannon, said that the bankruptcy servicing created an "ensuing mess [that] is "dispiritingly predictable." The system was bogged down with a second case, the debtors threatened and stressed by a second foreclosure, and Ocwen spent its resources on a second round of litigation (instead of helping homeowners get loan modifications.)

Is Housing Such a Bad Investment? Maybe Not...

One of the post-bubble conventional wisdom stories that has gotten a lot of traction is that housing is a bad investment and that consumers would do better to rent and invest in the stock market.  The problem is that it's wrong.

The prooftext for the idea that housing is a bad investment is a straightfoward comparison of the returns on stock market indices with those on housing market indices.  If one compares the return on the S&P500 index vs. the S&P/Case-Shiller Composite 10 index from the beginning of the Case-Shiller data (1987) to present, one sees that the S&P500 went up 630%, while the Case-Shiller went up only 197%.  Even if one uses an average return (averaging the monthly index values, relative to the starting value), S&P500 is 244%, while Case-Shiller is 98%.  Ergo housing is a bad investment compared to the stock market, right?

That's certainly what a bunch of smart people have argued. (I won't link or name names, but Google isn't coy.) There are two problems with this line of argument.

First, it fails to account for the leveraged nature of housing investment.  Most homes are purchased on leverage, and housing is the only leveraged investment broadly available to the middle class. When one factors in leverage, housing massively outperforms stock market mutual funds, making it a pretty sensible investment in most cases.   

Second, the simple return comparison fails to account for the indirect benefits of housing, such as school districts, commuting time, quality of life etc. I'm not going to try to quantify the indirect benefits, although some of them definitely translate into pecuniary terms (schooling, for example).

If you'll indulge me with some number play below the break, you'll see that the leverage point alone blows the "housing is a bad investment" argument out of the water. Leverage is not without its complications, though.  

Duties to Serve in Housing Finance

Mark Fogarty has a nice write-up in National Mortgage News of a book chapter about duties to serve in housing finance that I wrote with Jannecke Ratcliffe for a volume entitled Homeownership Built to Last (Brookings/Joint Center on Housing Studies 2014).  It's a real pleasure to realize that someone has actually read our chapter! 

Turning Away From the Dark Side!

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

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." 

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

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.

Working and Living in the Shadow of Economic Fragility

Credit 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

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.  

Reflections on the Dark Side

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?

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

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

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).

A Dark Side to the Trustee's Strong Arm Powers

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.

New Foreclosure Case Analyses Standing and Tangible Net Benefit

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.

Insolvency + Tax Season = Good News?

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.

The New Irish Split Mortgage Solution for Underwater Homeowners

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

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.

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

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.

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

        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 (here, here, here, here, here, here, 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!):

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...

Securitization, Foreclosure, and the Uncertainty of Mortgage Title

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:

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.

The Frontiers of Mortgage Servicing, Part I

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.

QM Isn't "Plain Vanilla"

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. 

New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy

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

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

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

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

Is Federal Preemption Assignable?

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

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

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.