Saturday, April 23, 2011
Andrea J. Boyack (George Washington) has posted Laudable Goals and Unintended Consequences: The Role and Control of Fannie Mae and Freddie Mac, forthcoming in the American University Law Review. The abstract:
The United States is struggling to emerge from an era of loose mortgage underwriting standards – lapses in credit analysis that led to origination and securitization of toxic loans. The fallout has been crippling, costing borrowers their homes, investors their money, and the government its taxes.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed last summer was the first comprehensive effort to address the problems in the system that led – in sequence – to the subprime crisis, the housing crisis, and the financial crisis. The Dodd-Frank Act, which contains over 2,300 pages of legislation, is very broad as well as very detailed – even though hundreds of rulemakings have yet to completely define its parameters. But this extensive legislation deliberately did not deal with the biggest elephant (or perhaps elephants) in the room: Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs), behemoths of the secondary mortgage market, are currently in conservatorship and have (so far) cost taxpayers over $130 billion. Yet our current residential mortgage market is utterly dependent upon them for credit and liquidity. With political pressures to stop taxpayer bailouts and the reality of a frozen mortgage market should Fannie Mae and Freddie Mac cease to exist, when it comes to the GSEs, the administration feels damned if they do and damned if they don’t.
For decades, the U.S. mortgage finance system was the envy of the world – the only industrialized nation to have a significant segment of housing costs covered by private capital through a securitization investment system. The United States is the only country to routinely offer homebuyers 30-year fixed-rate pre-payable mortgage loans. Better capital accessibility has made more homeownership opportunities more available to more Americans. The GSEs have performed a vital role in financing the production of rental housing as well. Our real estate capital markets set the gold standard worldwide for what is possible in freeing trapped asset values and increasing the wealth of borrowers and investors alike.
Over the past decade, this system undoubtedly became unhinged – and it is critical to reform its failings. But a complete wind-down of the government sponsored enterprises that are the linchpin of our housing finance system goes too far. Subtracting Fannie Mae and Freddie Mac from the finance equation may very well be market suicide, and the repercussions for borrowers, communities and investors would be dire indeed. Furthermore, this extreme step is unnecessary: the system’s failures can be adequately (and better) addressed within the GSE framework.
Undoubtedly there is still ample dirty “bathwater” to throw out as we reform the mortgage finance market system. But it would be an excruciating mistake to bow to political pressures and throw out the “baby” too. Current and future mortgage borrowers will only be adequately “protected” if they are empowered through access to capital, appropriately constrained by valid underwriting criteria. A well functioning market – rather than political scapegoating – is the best way to emerge from the recession and protect future buyers and investors alike.
This article first discusses the history and purposes of the GSEs and what went wrong with the system that led to the 2008 conservatorship and bailout. With reference to the Obama Administration’s February 2011 Report to Congress, “Reforming America’s Housing Finance Market,” Part II analyzes proposals to reform and wind down the GSEs in light of their likely legal and market impact. Part III offers some general suggestions on better approaches to crafting America’s future mortgage market and advocates for solutions more precisely tailored to remedy apparent systemic problems while achieving the identified policy goals.
One of several interesting articles coming out this year that will add to our knowledge about Fannie, Freddie, and the mortgage crisis. An interesting take on reforming the system from within--check it out.
April 23, 2011 in Federal Government, Finance, Financial Crisis, History, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)
Monday, March 21, 2011
Raymond H. Brescia (Albany) has posted Leverage: State Enforcement Actions in the Wake of the Robo-Sign Scandal. The abstract:
In the fall of 2010, in one of the largest scandals to ever hit the American court system, information gathered from lawsuits across the country revealed that tens of thousands of foreclosure filings were likely fraudulent - if not outright criminal. These revelations sparked a nation-wide investigation by all 50 state attorneys general to assess not only the extent of the scandal and its potential impacts but also potential legal and policy responses to such behavior. One of the tools at the state attorneys general’s disposal that might rein in this behavior includes each state's Unfair and Deceptive Acts and Practices (UDAP) laws. Such laws typically prohibit "unfair" and "deceptive" practices and often give consumers, as well as state attorneys general, the ability to bring affirmative litigation to rein in practices that violate their terms. UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to rein in abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. This paper explores the availability of UDAP laws and the remedies they provide to rein in the range of practices revealed in the so-called "robo-sign scandal." It concludes that such practices - the false affidavits, reckless claims and improper notarizations - all violate the essence of most state UDAP laws; accordingly, the remedies available under such laws may be wielded by state attorneys general to halt abusive foreclosure practices throughout the nation. Such remedies include civil penalties, actual and punitive damages, attorney's fees and injunctions. What's more, UDAP actions in light of robo-sign abuses could help chart a path towards a more robust mortgage modification regime, one that would result in principal reduction, which is the clearest path out of the current crisis.
March 21, 2011 in Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property, Real Estate Transactions, Remedies, Scholarship, State Government | Permalink | Comments (0) | TrackBack (0)
Monday, January 24, 2011
The most viewed business article today on the Boston Herald website examines the next foreclosure-mess case coming to the Supreme Judicial Court of Massachusetts and its impact on the title marketability of foreclosed homes there. Francis Bevilacqua paid for a property in Haverhill, Mass. pursuant to a foreclosure on a mortgage in a securitized trust supervised by U.S. Bancorp. Judge Keith Long of the Massachusetts Land Court found that Bevilacqua had no title to the property because the foreclosure was invalid. In its recent decision in U.S Bank v. Ibanez (see my earlier post), the SJC upheld another Judge Long decision finding a completed U.S. Bank foreclosure to be invalid.
According to an attorney quoted about the foreclosure buyer's predicament, even should he lose on appeal, Mr. Bevilacaqua may be able to take advantage of a color-of-title-shortcut adverse possession statute and obtain valid title in as little as three years. (To think, I was concerned that nonjudicial foreclosures and botched mortgage securitizations might combine to create serious, widespread title problems.) Stay tuned, the SJC will hear the case in April.
Thursday, January 20, 2011
Following up on a post I made last week, I wanted to share an item that might be useful to those of us trying to teach on (and/or sort out ourselves) the ongoing mortgage mess. Tracy Alloway of Financial Times has put up a blog post illustrating (literally) the tangled web of mortgage securitization missteps that led to the Massachusetts Supreme Judicial Court's recent ruling in U.S. Bank v. Ibanez.
Wednesday, January 19, 2011
Last week we posted a link to the new article by David Matthew Levinson (Minnesota) and Bhanu Yerra (Minnesota), How Land Use Shapes the Evolution of Road Networks. Here's another road article from Levinson and Jason Junge (Minnesota): Property Tax on Privatized Roads. The abstract:
Roads cover a significant fraction of the land area in many municipalities. The public provision of roads means this land is exempt from the local property tax. Transferring roads from public to private ownership would not only remove maintenance costs from city budgets, but increase potential property tax revenue as well. This paper calculates the value of the land occupied by roads in sample cities and determines the potential revenue increase if they were subject to property tax. Further calculation computes the extent to which the property tax rate could be reduced if the land value of roads were added to the tax base. Property tax on privatized roads could generate meaningful revenue, but a corresponding reduction in rate for existing property would be small.
Saturday, January 15, 2011
This past week the Supreme Judicial Court of Massachusetts issued a slip opinion in the case of U.S. Bancorp v. Ibanez unanimously affirming a Land Court decision invalidating a nonjudicial power-of-sale foreclosure because the foreclosing party had not produced a valid chain of title with regard to the mortgage. The SJC rejected the bank's arguments that a mortgage automatically passes to the assignee of the note and that an assignment in blank is a valid transfer of a mortgage. The SJC acknowledged that an executed Pooling Service Agreement (PSA) that properly identified the subject property could authorize foreclosure but found that the bank lacked the necessary paperwork in this case. Adam Levitin (Georgetown) analyzes the decision in a post at the Credit Slips blog.
Even though the majority of states allow assignment of the note alone to provide authority to foreclose, this decision has significant ramifications for the validity of many foreclosure titles in Massachusetts and the states that may follow the SJC's reasoning. The slapdash volume-maximizing paperwork practices of the mortgage securitization industry are hardly limited to robo-signing of foreclosure affidavits. Pre-default shortcuts such as improperly executed PSAs, missing collateral schedules, and incomplete transfers appear to be all too common.
What seems to be missing from the conversation so far is any discussion of how the nonjudicial nature of these foreclosures perpetuates the mess. In the context of botched mortgage securitizations, properties transferred by nonjudicial power of sale processes enjoy little of the title assurance that properly noticed judicial proceedings confer. Without the built-in action to quiet title provided by a judicial foreclosure, will those trying to prevent abandonment of foreclosed homes in the many power-of-sale states have to turn to title-clearing litigation just to make these properties bankable for rehabilitation and resale? Will our inner-ring suburbs be peppered with chronically derelict houses because our mortgage foreclosure proceedings are now producing titles as unreliable as those that tax foreclosure actions have produced for inner-city vacants in years past?
Tuesday, December 7, 2010
Thomas W. Mitchell (Wisconsin, Law), Stephen Malpezzi (Wisconsin, Real Estate & Urban Economics), and Richard Green (USC, Lusk Center for Real Estate) have posted Forced Sale Risk: Class, Race, and The 'Double Discount', Florida State University Law Review, Vol. 37 (2010). The abstract:
What impact does a forced sale have upon a property owner's wealth? And do certain characteristics of a property owner such as whether they are rich or poor or whether they are black or white, tend to affect the price yielded at a forced sale? This Article addresses arguments made by some courts and legal scholars who have claimed that certain types of forced sales result in wealth maximizing, economic efficiencies. The Article addresses such economic arguments by returning to first principles and reviewing the distinction between sales conducted under fair market value conditions and sales conducted under forced sale conditions. This analysis makes it clear that forced sales of real or personal property are conducted under conditions that are rarely likely to yield market value prices. In addition, the Article addresses the fact that judges and legal scholars have utilized a flawed economic analysis of forced sales in cases that often involve property that is owned by low- to middle-class property owners in part because those who are wealthier own their property under more stable ownership structures or utilize private ordering to avoid the chance that a court might order a forced sale under the default rules of certain common ownership structures. The Article also raises the possibility for the first time that the race or ethnicity of a property owner may affect the sales price for property sold at a forced sale, resulting in a "double discount," i.e. a discount from market value for the forced sale and a further discount attributable to the race of the property owner. If minorities are more susceptible to forced sales of their property than white property owners or if there does exist a phenomenon in which minorities suffer a double discount upon the sale of their property at a forced sale, then forced sales of minority-owned property could be contributing to persistent and yawning racial wealth gaps.
Friday, December 3, 2010
John Mixon (Houston) has posted Fannie Mae/Freddie Mac Home Mortgage Documents Interpreted as Nonrecourse Debt (with Poetic Comments Lifted from Carl Sandburg), from the California Western Law Revew. The abstract:
Virtually no home mortgage borrower who has not had (1) extensive professional training, or (2) prior experience as a foreclosed borrower, understands that home mortgages include the potential of a hovering judgment lien for deficiency after foreclosure. This lack of understanding makes any pretense of consent to liability for deficiency after foreclosure pure rationalization. Law acts in complicity with lenders to commit virtual fraud when it imposes this consequence on home buyers without full disclosure and real, intelligent consent.
The language problem is not lack of formalistic disclosure of the terms of the home loan itself. Virtually all home mortgage transactions provide borrowers with disclosure statements that spell out the full terms of their loans. But the consequence of lingering liability after foreclosure, which can be far worse than a misstated interest rate, is not disclosed (and perhaps cannot be disclosed meaningfully) to lay borrowers. Even the standard FNMA/GNMA documents are ambiguous and subject to interpretation as non-recourse obligation. These documents dominate the field, and their uniform covenants apply throughout the United States' mortgage market. This article proposes that they be re-read and interpreted as not imposing recourse liability, thereby eliminating deficiencies after foreclosure for most homeowners.
Tuesday, October 12, 2010
Meredith R. Miller (Touro) has posted Strategic Default: The Popularization of a Debate Among Contract Scholars, Cornell Real Estate Journal, Vol. 9, Forthcoming . The abstract:
A June 2010 report estimates that roughly 20% of mortgage defaults in the first half of 2009 were “strategic.” “Strategic default” describes the situation where a home borrower has the financial ability to continue to pay her mortgage but chooses not to pay and walks away. The ubiquity of strategic default has lead to innumerable newspaper articles, blog posts, website comments and editorial musings on the morality of homeowners who can afford to pay but choose, instead, to walk away. This Article centers on the current public discourse concerning strategic default, which mirrors a continuing debate among scholars regarding whether the willful breach of a contract has a moral element.
For those scholars that maintain that it is possible to describe and prescribe contract law with a general, unifying theory, the debate is primarily one between promise-based theories and economic theory. This debate between promissory and economic theory reflects a perpetual volley concerning whether contract law should reflect the primacy of morality or efficiency.
The argument of those that support strategic default reads like a case for efficient breach. Many of these commentators argue that the mortgage contract simply presents home borrowers with a choice: pay or surrender the property in foreclosure. If a homeowner is deep underwater, she is better off defaulting and the lender is no worse off relative to the bargain (after all, the lender agreed to foreclosure as a remedy). However, those who argue in favor of strategic default are counteracting a prevailing social norm that it is fundamentally immoral to willfully breach a contract. Many of the blog comments and even newspaper editorials have reflected a general sense that the homeowners who strategically default are acting shamefully.
The public discussion further mirrors the academic debate about whether encouraging efficient breach enables the greatest public good or, instead, undermines the very convention of contracting. On the one hand, strategic default serves as an example of how encouragement of breach of contract may lead to a breakdown of confidence in the marketplace and, in turn, could inhibit market activity. On the other, it is difficult to muster sympathy for lenders, whose imprudent loans are a large piece of the systemic problems that precipitated the housing crisis.
In the end, to the extent that questions of morality are nuanced and contextual, the example of strategic default elucidates the futility of either morality or efficiency as a unifying descriptive or normative theory of contract law. Indeed, it suggests that instead of focusing on individual contracts between borrowers and lenders, a more fruitful public discourse should be reframed to focus on appropriate systemic reforms to prevent the practices that played a part in devastating outcomes for the housing industry, families and communities. Because the concerns about strategic default – neighborhood depreciation and market collapse – are systemic, the solutions should be driven by those concerns, rather than shaming individual borrowers who decide to walk away.
Tuesday, October 5, 2010
George Lefcoe (Southern California) has posted Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing. The abstract:
We're working on TIFs right now in my state & local government class. Students find these animals to be challenging and interesting, because they are very powerful drivers of land use yet fairly obscure to the general public. This article helps explain TIFs and put them in the context of land use debates over density, development, and urbanism.
October 5, 2010 in Community Design, Density, Development, Environmentalism, Finance, Local Government, New Urbanism, Pedestrian, Planning, Redevelopment, Scholarship, Suburbs, Transportation, Urbanism | Permalink | Comments (0) | TrackBack (0)
Saturday, August 14, 2010
I really enjoyed reading the article linked in Chad's post yesterday, and the good points in the comments so far. I've linked or mentioned a few times about the need to rethink housing policy with respect to the primacy of homeownership. But with all the talk in the article and elsewhere of reforming or replacing Fannie and Freddie, there is talk in the wind of a different plan: a Fannie-Freddie Bailout.
James Pethokoukis, the Reuters money & politcs blogger, wrote recently about such a bailout as an August Surprise:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
Then a couple of days ago the Boston Globe published an op-ed by Paul McMorrow titled One More Bailout.
WHEN PRESIDENT Barack Obama signed legislation overhauling the nation’s financial regulations last month, he declared an end to Wall Street bailouts. Going forward, he said, failing finance houses won’t skirt by on the taxpayers’ dime. Bay State Representative Barney Frank characterized the new law as a death penalty for reckless institutions.
Both men are only half right. Congress has one more bailout to complete. That job — bringing Fannie Mae’s and Freddie Mac’s toxic balance sheets onto the government’s ledger — was left out of last month’s financial overhaul because the job is so massive and so politically unpalatable that it dwarfs every record-breaking handout that came before it.
That approach is also the only realistic option on the table.
Next Tuesday, policymakers will convene a summit to help determine what to do with Fannie and Freddie, the two government-owned mortgage giants. It’s bound to conclude that there’s little to do but nationalize them, stuff them with $300 billion in taxpayer funds, and hope that when they’re eventually able to stand on their own as semi-private corporations, the nation’s economy doesn’t implode again.
We'll we're certainly seeing mixed signals in the air about the future of housing, real estate, and land use in public policy and finance. Keep your eyes on Tuesday's Treasury meeting
August 14, 2010 in Affordable Housing, Budgeting, Federal Government, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)
Tuesday, August 10, 2010
James Charles Smith (Georgia) has posted The Structural Causes of Mortgage Fraud, forthcoming in the Syracuse Law Review, Vol. 60. The abstract:
I saw Prof. Smith present an early version of his research on mortgage fraud last year; he announced "tentatively, I'm against it." That cracked me up. Anyway, check out the paper.
Friday, August 6, 2010
Lee Anne Fennell (Chicago) and Julie Roin (Chicago) have posted Controlling Residential Stakes, University of Chicago Law Review, Vol. 77, p. 143 (2010). The abstract:
As you might expect, this looks like a very interesting and important paper.
August 6, 2010 in Finance, Housing, Landlord-Tenant, Local Government, Mortgage Crisis, Mortgages, NIMBY, Property Theory, Real Estate Transactions, Scholarship, State Government | Permalink | Comments (0) | TrackBack (0)
Wednesday, August 4, 2010
Richard D. Marsico (New York Law School) has posted Looking Back and Looking Ahead as the Home Mortgage Disclosure Act Turns Thirty-Five: The Role of Public Disclosure of Lending Data in a Time of Financial Crisis, published in the
Monday, July 12, 2010
Amnon Lehavi (Interdisciplinary Center Herzliyah - Radzyner School of Law) has posted The Global Law of the Land, University of Colorado Law Revew, vol. 81, p. 425 (2010). The abstract:
Sunday, May 30, 2010
Wednesday, May 26, 2010
This weekend is the always-excellent annual meeting of the Law & Society Association in Chicago. I haven't scoured the program, but there is sure to be a plethora of interesting panels and events. I do have firsthand knowledge, however, of one particular land-use panel that is guaranteed to present fascinating projects from interesting up-and-coming scholars.
Panel: Fri., May 28, 12:30-2:15
Chair: James J. Kelly, Jr. (University of Baltimore)
The Effects of SmartGrowth on the Preservation of Historic Resources, William J. Cook (Charleston School of Law)
Debtors' Environmental Impact: Structured Finance and the Suburbanization of Open Space, Heather Hughes (American University)
Sustainability and the Practice of Community Development, James J. Kelly, Jr. (University of Baltimore)
The Artifice of Local Growth Politics: At-Large Elections, Ballot Box Zoning, and Judicial Review of Land Use Initiatives, Kenneth Stahl (Chapman University)
May 26, 2010 in Charleston, Chicago, Community Economic Development, Conferences, Environmental Law, Finance, Financial Crisis, Historic Preservation, Local Government, Politics, Scholarship, Smart Growth, Suburbs, Sustainability | Permalink | Comments (0) | TrackBack (0)
Sunday, May 9, 2010
Eric S. Belsky (Harvard--Joint Center for Housing Studies & Graduate School of Urban Design) and Susan M. Wachter (Penn--Wharton, Real Estate) have posted The Public Interest in Consumer and Mortgage Credit Markets. The abstract:
Friday, May 7, 2010
Heather Hughes (American University) has posted Enabling Investment in Environmental Sustainability, Indiana Law Journal, Vol. 85, No. 2 (2010). The abstract:
This Article proposes an “environmental practices money security interest” (EPMSI) that could be added to Uniform Commercial Code (UCC) Article 9 to facilitate transactions that enable good environmental practices. EPMSI rules would grant priority over earlier investors to financers whose extensions of credit enable debtors to invest in improving environmental impact. This work suggests that we should not rely exclusively on government subsidies such as tax credits and subsidized loans to induce investments in improved environmental impact when we could also enact commercial law devices that do so. An EPMSI would add to states’ legislative efforts to address climate change by enabling companies to issue high-priority debt to finance improvements in sustainability. Article 9’s blend of first-in-time priority rules and later-in-time interests that enjoy exceptions to these rules is, essentially, about benefits and drawbacks of new money. As we consider these benefits and drawbacks, two points about Article 9 become important: first, legal scholars overstate the extent to which the purchase-money rules avoid dilution risk by limiting purchase-money collateral to new goods, and, second, scholars overlook the existence of production-money interests in agricultural finance in analyses of Article 9 and interests with later-in-time priority. Ultimately, levels of commitment to mechanisms for private funding of improved environmental sustainability, and of tolerance for risk of dilution to secured creditors’ positions, are for collective determination. Through making a concrete reform proposal, this Article intends to animate, in the context of UCC Article 9, questions about environmental costs and financing of improvements in sustainability.
An environmental law article focusing on the UCC? This will warm the heart of my South Texas colleague and noted UCC apologist Tim Zinnecker. Looks like a very interesting and innovative approach.
Tuesday, April 13, 2010
Illustrious economist and New York Times columnist Paul Krugman has directed his learned attention toward the failure of small banks in Georgia. Why? Embarrassingly enough, it's because Georgia leads the nation in bank failures, and the majority of those banks are small.
Georgia is part of what Krugman charmingly labels "Flatland" - where "permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble." In most of Flatland, by Krugman's reckoning, no housing bubble means fewer bad mortgages means fewer bank failures. No so in Georgia.
Georgia’s debacle is that it doesn’t seem to have anything to do with the issues that have dominated debates about banking reform. For example, many observers have blamed complex financial derivatives for the crisis. But Georgia banks blew themselves up with old-fashioned loans gone bad.
And for all the concern about banks that are too big to fail, Georgia suffered, if anything, from a proliferation of small banks. Actually, the worst offenders in the lending spree tended to be relatively small start-ups that attracted customers by playing to a specific community. Thus Georgian Bank, founded in 2001, catered to the state’s elite, some of whom were entertained on the C.E.O.’s yacht and private jet. Meanwhile, Integrity Bank, founded in 2000, played up its “faith based” business model — it was featured in a 2005 Time magazine article titled “Praying for Profits.” Both banks have now gone bust.
So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing — in particular, breaking up big banks — will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.
Krugman's formula for reform in Georgia is better protections against predatory lending. Former Democratic Governor (and predatory lending lawyer) Roy Barnes tried hard for those protections when he was in office, only to have them later rolled back. Will this latest crisis change that calculation? Probably depends on the next governor, who might be - Roy Barnes. Predictions about how that race might come out are probably beyond even Krugman's prognosticating skills.
Jamie Baker Roskie