Thursday, May 5, 2011

Boyack on Keeping HOAs Above Water in Foreclosure Storms

Andrea Boyack (GW) has posted Community Collateral Damage: A Question of Priorities. In it, she deals with the very timely issue of lien priority for statutory condominium and homeowner association (HOA) dues. Many such common interest communities are facing high homeowner foreclosure rates and an inability to maintain services without a viable collection mechanism. The Maryland state legislature has now passed a lien priority bill of the kind discussed in the article. The Governor should be signing it into law any day now. Here's the abstract:

Today’s soaring mortgage default rate and the uncertainty and delay associated with mortgage foreclosure proceedings threatens to cause financial tragedies of the commons in condominiums and homeowner associations across the country. Assessment defaults in privately governed communities result in an inequitable allocation of upkeep costs, and current law provides no way to prevent this spillover effect. But the collateral damages caused by delayed foreclosures and insufficient recoveries can be minimized by gradually increasing the priority position of the association lien.

In a majority of states, association liens are completely subordinate to the first mortgage lien. At foreclosure of the mortgage lien, the junior priority assessment lien will be extinguished whether or not there are sufficient proceeds to reimburse for community charges. Assessment delinquencies grow over time, so the longer it takes to complete foreclosure, the greater the costs to the neighborhood. Although several states have adopted a limited lien priority for up to six months’ worth of unpaid assessments, foreclosures today take far longer than six months, and the amount ultimately owed to a community can be significant and far exceed that cap. Federal housing policy impacts the resolution of the issue because the FHA, Fannie Mae and Freddie Mac only permit qualifying mortgages to be subject to a six-month assessment lien priority. The decelerating pace of foreclosure further exacerbates the already unjustifiable financial impact borne by non-defaulting neighbors. The lien priority status quo fails to adequately protect communities in today’s context of widespread and delayed foreclosures and under-collateralized mortgage loans. Decreasing the first mortgage lien’s priority during a foreclosure delay would mitigate the harm.

Lien priority statutory changes can protect association finances in the future, and such provisions may be applied retroactively as well. In other contexts, states have held that changes to a lien priority regime can apply to existing associations and existing mortgages without unconstitutionally impairing contract or property rights. This is particularly true where the association’s lien is deemed to be created as of the date the organizational documents for the community were recorded (prior in time to any unit’s mortgage). Bank lobbyists have historically opposed any enhanced assessment lien priority, but supporting property upkeep and making assessments more predictable and collectible would actually benefit lenders by shoring up the value of their collateral. Better certainty with respect to homeowner payment obligations will also enable more responsible credit underwriting and contribute to economic recovery. Shoring up assessment lien priority not only ensures a fair allocation of community costs, but also helps to contain the current housing market decline.

Jim K.

May 5, 2011 in Common Interest Communities, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Saturday, April 23, 2011

Reiss on Fannie, Freddie, and the Future of Federal Housing Finance Policy

David J. Reiss (Brooklyn) has posted Fannie Mae, Freddie Mac, and the Future of Federal Housing Finance Policy: A Study of Regulatory Privilege, published in the Alabama Law Review, vol. 61 (2010).  The abstract:

The federal government recently placed Fannie Mae and Freddie Mac, the government-chartered, privately owned mortgage finance companies, in conservatorship. These two massive companies are profit-driven, but as government-sponsored enterprises they also have a government-mandated mission to provide liquidity and stability to the United States mortgage market and to achieve certain affordable housing goals. How the two companies should exit their conservatorship has implications that reach throughout the global financial markets and are of key importance to the future of American housing finance policy.

While the American taxpayer will be required to fund a bailout of the two companies that will be measured in the hundreds of billions of dollars, the current state of affairs presents an opportunity to reform the two companies and the manner in which the residential mortgage market is structured. Few scholars, however, have provided a framework in which to conceptualize the possibilities for reform.

This Article employs regulatory theory to construct such a framework. A critical insight of this body of literature is that regulatory privilege should be presumed to be inconsistent with a competitive market, unless proven otherwise. The federal government's special treatment of Fannie and Freddie is an extraordinary regulatory privilege in terms of its absolute value, its impact on its competitors and its cost to the federal government. Regulatory theory thereby clarifies how Fannie and Freddie have relied upon their hybrid public/private structure to obtain and protect economic rents at the expense of taxpayers as well as Fannie and Freddie's competitors.

Once analyzed in the context of regulatory theory, Fannie and Freddie's future seems clear. They should be privatized so that they can compete on an even playing field with other financial institutions and their public functions should be assumed by pure government actors. While this is a radical solution and one that would have been considered politically naive until the recent credit crisis, it is now a serious option that should garner additional attention once its rationale is set forth.

An important and innovative analysis; we're fortunate to have a number of sophisticated takes on the transactional finance system coming out right now.

Matt Festa

April 23, 2011 in Affordable Housing, Development, Federal Government, Finance, Financial Crisis, Globalism, History, Housing, Mortgage Crisis, Mortgages, Scholarship | Permalink | Comments (0) | TrackBack (0)

Boyack on the Role and Control of Fannie Mae and Freddie Mac

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.

Matt Festa

April 23, 2011 in Federal Government, Finance, Financial Crisis, History, Housing, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Sunday, March 27, 2011

Lind on Public Nuisance Law and Bank Foreclosures

This blog has had the good fortune to feature the amazing work of Cleveland-Marshall's Urban Development Law Clinic (here and here, too) as well as dispatches from the front lines of the foreclosure fallout in Cleveland's neighborhoods from the Clinic's outgoing director, Kermit Lind (Cleveland State).  Kermit has now posted Can Public Nuisance Law Protect Your Neighborhood from Big Banks?, 44 Suffolk L. Rev. 89 (2011).  Here's the abstract:

One manifestation of the mortgage crisis of the past decade is the destabilization of housing markets and neighborhoods where mortgage defaults were concentrated. As banks and their mortgage servicers employ business practices that result in banks or their agents controlling or owning vacant dwellings, the noncompliance with housing and other municipal codes by these institutional absentee owners presents neighborhoods and cities with a huge and costly public nuisance problem.

This article explores both the theory of public nuisance law and the experience of applying nuisance law in practice to mitigate the harmful consequences of bank debt collection and REO management. It looks at how and to what extent public nuisance law provides protection for those non-defaulting homeowners whose health, safety and welfare are threatened by the business practices of big banks. It compares litigation that applies public nuisance law in different ways to distinguish viable uses from unsuccessful uses of public nuisance law doctrine. The recent efforts to use public nuisance law against manufacturers and marketers of harmful products like guns and tobacco are distinguished from the application of public nuisance law against owners of real estate maintenance deficiencies are in violation of laws protecting the public health, safety and welfare.

Jim K.

March 27, 2011 in Crime, Economic Development, Financial Crisis, Local Government, Mortgage Crisis, Mortgages, Nuisance, Redevelopment, Scholarship | Permalink | Comments (1) | TrackBack (0)

Monday, March 21, 2011

Brescia on State Enforcement Actions and the Robo-Sign Scandal

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.

Matt Festa

March 21, 2011 in Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property, Real Estate Transactions, Remedies, Scholarship, State Government | Permalink | Comments (0) | TrackBack (0)

Thursday, March 17, 2011

Osofsky on Diagonal Federalism and Climate Change

Hari M. Osofsky (Minnesota) has posted Diagonal Federalism and Climate Change: Implications for the Obama Administration, Alabama Law Review, vol. 62 (2011).  The abstract:

The Obama Administration’s efforts on climate change continue to face daunting challenges domestically and internationally. This Article makes a novel contribution by exploring how the Obama Administration can meet these challenges more effectively though systematically addressing the multiscalar character of climate change in the areas where it has greater regulatory control. Mitigating and adapting to climate change pose complex choices at individual, community, local, state, national, and international levels. The Article argues that these choices lead to many diagonal regulatory interactions: that is, dynamics among a wide range of public and private actors which simultaneously cut across levels of government (vertical) and involve multiple actors at each level of government that it includes (horizontal).

After assessing the Obama Administration’s progress on climate change and energy issues, this Article develops a theory of diagonal federalism to explore how the Obama Administration might engage in more effective crosscutting regulatory approaches. It proposes a taxonomy for under-standing how these diagonal interactions vary across multiple dimensions over time. Specifically, the taxonomy includes four dimensions: (1) scale (large v. small); (2) axis (vertical v. horizontal); (3) hierarchy (top-down v. bottom-up); and (4) cooperativeness (cooperation v. conflict). The Article then applies this taxonomy to the case example of the Obama Administration’s efforts at reducing motor vehicle greenhouse gas emissions to demonstrate how it can be used as a tool in policy-making.

The Article argues that existing diagonal efforts to regulate what cars we drive tend to be predominantly large-scale, vertical, and top-down, in line with their direct impact on automobile companies. In contrast, approaches targeting how we drive those cars, which affect those companies less directly and are grounded in land use planning, are more likely to be small-scale, horizontal, and bottom-up. This divergence creates an opportunity for normative reflection. The Article argues that the Obama Administration should consider whether these skews are appropriate by taking into account the benefits and limitations of such skews in particular contexts. It then proposes ways in which the Administration could create more balance in the dimensions and argues for the value of that balance. Specifically, the Obama Administration could explore additional opportunities for (1) greater smaller-scale governmental involvement in technology-oriented financial incentives programs; (2) federal-level, top-down, vertical initiatives connecting federal approaches to highways, railroads, and gas prices with smaller-scale efforts to have people drive less in their communities; and (3) litigation, which often has a rescaling effect, by interested individuals, non-govermental organizations, corporations, and government.

Matt Festa

March 17, 2011 in Climate, Environmentalism, Federal Government, Financial Crisis, Scholarship, Transportation | Permalink | Comments (0) | TrackBack (0)

Sunday, February 27, 2011

2011-- End of the Housing Crash?

Well, this might be some good news about the housing market from Simon Constable in the Wall Street Journal: Why 2011 May Be the End of the Housing Crash.  Although, when you read the whole article it seems decidedly more mixed than the headline might seem to indicate.  From the article:

There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop. . . .

"Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own," says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.

It is definitely bullish. But what about timing?

"Housing prices will probably bottom in 2011," says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.

The article also notes that because it might be a prolonged recovery, prospective homebuyers should plan to stay in place for at least 10 years (much more than the old conventional wisdom of three or four years to break even on the transaction costs).  How does this square with the new mobility that has been all the rage in social commentary over the last couple decades?

Matt Festa

February 27, 2011 in Financial Crisis, Housing, Mortgage Crisis, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 26, 2011

Land Use in the State of the Union

I didn't have time to watch it last night, so I asked my students this morning to identify the land use issues in the President's speech.  They mentioned two things: high-speed rail, and clean energy.  From the Associated Press  report, here's the key quote on HSR:

Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail. This could allow you to go places in half the time it takes to travel by car. For some trips, it will be faster than flying - without the pat-down. As we speak, routes in California and the Midwest are already under way.

Potentially faster than flying, and they won't touch your junk!  And here are two early responses.  First, from Transportation Secretary Ray LaHood's Fastlane blog, America has a Future to Win; DOT stands ready to help:

As the President said last night, American businesses and workers are now competing in a global economy. If we are to thrive in competitive markets, we must be able to move goods and people faster and more reliably than ever.

At DOT we have been working hard to help do just that. And the projects we are supporting to rebuild America's transportation infrastructure are creating good jobs for American workers.

But the Reason Foundation's Samuel Staley is not so sanguine.  Noting that the President cited China's massive investments in HSR, Staley argues that historical, economic, and geographic factors will render a similar HSR program impractical in the U.S.  From President Obama, China, High-Speed Rail and the Sputnik Moment:

A key factor in ensuring high-speed rail's success is the closeness of employment and population centers. The largest Chinese cities aren't nearly as spread out as U.S. cities in terms of distance and the high speed rail lines are connecting larger urban cities.

China has 120 cities with populations of one million or more, and its cities are expected to add the equivalent of another United States - 300 million people - by 2025. The high-speed rail line will connect to most cities with populations greater than 500,000. Given existing levels of very low mobility and income, rail would be a natural beneficiary of rising travel demand as the travel market matures.

It will be interesting to see where the debate over HSR goes from here, particularly in light of the new fiscal and political constraints.  I'm also curious about how many people out there may not have thought very much about the HSR issue before the President gave it a mention in the State of the Union.

UPDATE: I was planning on posting this anyway, but then as I was preparing for my afternoon Property I class, I realized it's a great tie-in to the famous INS v. Associated Press case that was assigned for today:  If INS can't report the news it learns from AP's public bulletin, how come it's OK for me to blog about information I got from the AP's website?  Discuss!  Fun stuff.

Matt Festa

January 26, 2011 in California, Clean Energy, Comparative Land Use, Federal Government, Financial Crisis, History, Politics, Transportation | Permalink | Comments (0) | TrackBack (0)

Monday, January 24, 2011

First Ibanez, next Bevilacqua: Title Insecurity and the Mortgage Securitization Mess

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.

Jim K.

January 24, 2011 in Caselaw, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Remedies | Permalink | Comments (1) | TrackBack (0)

Thursday, January 20, 2011

The Full Story of the Ibanez Case



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. 

Jim K.

January 20, 2011 in Caselaw, Finance, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions, Remedies | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 19, 2011

Marsh on Foreclosures and the Failure of the American Land Title Recording System

Tanya D. Marsh (Wake Forest) has posted Foreclosures and the Failure of the American Land Title Recording System.  The abstract:

In this essay, Marsh argues that the current foreclosure crisis should serve as a wake-up call for a long-overdue modernization of the American land title recording system. Lenders invented the Mortgage Electronic Registration System (MERS) because the land title system, developed in a far different time and place, failed to meet the needs of the modern real estate industry. But a private MERS-like system is not the answer. Instead, Marsh argues that the federal government should implement a solution that replaces both the existing local land title system and MERS.

An ideal system should be organized around some clear principles. It should be transparent. It should be easy to search, through dynamic, robust indexing, and easy to access, preferably through the Internet. Documents in PDF form should be down-loadable. Electronic filing should be facilitated. There should be uniformity and consistency in the rules governing the form and substance of documents eligible for recording. The system should be public. Establishing and protecting a clear registry of property interests is and should continue to be an essential function of government.

Matt Festa

January 19, 2011 in Federal Government, Financial Crisis, Mortgage Crisis, Mortgages, Scholarship | Permalink | Comments (0) | TrackBack (0)

Saturday, January 15, 2011

Validity of Foreclosure Titles after Ibanez

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?

Jim K.

kellyj@wlu.edu

January 15, 2011 in Caselaw, Finance, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (2) | TrackBack (0)

Saturday, January 8, 2011

Housing and Community Development, 4th ed.

Carolina Academic Press has just released the 4th edition of Housing and Community Development: Cases and Materials (Amazon has a substantial preview). Barbara Bezdek (Maryland) has joined the already prominent list of eight community development and law professor editors.  The first revision in more than eleven years clearly bears the imprint of Barbara’s hard work.  New excerpted material puts the very timely topic of revitalization front and center and includes post-Kelo redevelopment, vacant building receivership (full disclosure, this one’s mine), tenants of foreclosure propertiesPeñalver and Katyal on Property Outlaws.   

 Jim K.

January 8, 2011 in Affordable Housing, Books, Community Economic Development, Development, Economic Development, Eminent Domain, Federal Government, Financial Crisis, Housing, Planning, Property, Property Rights, Race, Redevelopment, Sustainability, Takings | Permalink | Comments (0) | TrackBack (0)

Thursday, December 23, 2010

Levitin & Twomey on Mortgage Servicing

Adam J. Levitin (Georgetown) and Tara Twomey (Nat'l Consumer Law Center, Nat'l Ass'n of Consumer Bankruptcy Attys) have posted Mortgage Servicing, Yale Journal on Regulation, Vol. 28, No. 1 (2011) [first 2011 pub date on the blog so far?].  The abstract:

This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis.

A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized. Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.

Servicers’ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors’ interest in maximizing the net present value of the loan. Instead, servicers’ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.

This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. It explains why the Home Affordable Modification Program (“HAMP”) has been unable to adequately address servicer incentive problems and suggests possible solutions, drawing on devices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.

Matt Festa

December 23, 2010 in Federal Government, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Avery & Brevoort on Lender Regulation and the Subprime Crisis

Robert B. Avery & Kenneth P. Brevoort (Federal Reserve) have posted The Subprime Crisis: How Much Did Lender Regulation Matter?  The abstract:

The recent subprime crisis has spawned a growing literature suggesting that regulatory preferences for lower-income borrowers and neighborhoods, embodied by the Community Reinvestment Act (CRA) and affordable housing goals for the Government Sponsored Enterprises, Fannie Mae and Freddie Mac (GSEs), may have caused or contributed to the crisis. For the most part, the empirical analyses presented in this literature have been based on associations between aggregated national trends. In this paper we examine more directly the links between these regulations and outcomes in the mortgage market, including measures of loan quality and delinquency rates. Our analysis has two components. The first component focuses mainly on the CRA. We argue that historical legacies create significant variations in the type of lenders that serve otherwise equal neighborhoods and that, because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the impact of the CRA. The second component of our analysis uses all lenders but takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations and which are not. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility. We argue that if the CRA or GSE goals had an impact, it should be clearest at this point. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA show less, not more, evidence of risky lending or ultimately higher mortgage delinquency rates. Similarly, the threshold tests show no evidence of a regulatory effect.

Matt Festa

December 23, 2010 in Community Economic Development, Federal Government, Financial Crisis, Mortgage Crisis, Mortgages, Politics, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 22, 2010

Banks struggling with glut of foreclosures

Most banks were not prepared to foreclose and own hundreds-of-thousands of properties. The housing bust required a range of mass-scale foreclosure and re-sale processes unfamiliar to these lenders and mistakes soon followed. National media reported on notary fraud and other irregularities in the foreclosure process.

Andrew Martin in the New York Times now reports a rise in bank break-ins.

In Texas, for example, Bank of America had the locks changed and the electricity shut off last year at Alan Schroit’s second home in Galveston, according to court papers. Mr. Schroit, who had paid off the house, had stored 75 pounds of salmon and halibut in his refrigerator and freezer, caught during a recent Alaskan fishing vacation. (emphasis added).

Lacking power, the freezer’s contents melted, spoiled and reeking melt water spread through the property and leaked through the flooring into joists and lower areas.

Of course, banks are not without excuse. Many mortgages allow lenders to enter a property in default and secure it, if deemed abandoned. From the apparent rise in unwarranted bank break-ins, however, it seems lenders expend little effort in determining whether such homes are truly abandoned.

In another case, a homeowner in default was still negotiating loan modification when the bank broke in and took everything:

Near Halloween 2008, work crews broke in and cleaned out the place, taking Persian rugs, china, furniture bought on a trip in Peru, skis, photos of her marriage and childhood in Iran. Her husband’s ashes were taken from the couple’s master bedroom.

Certainly a spike in volume of foreclosures accounts for the increase in such break-ins. But should volume excuse unwarranted break-ins?  It will be interesting to track the lawsuits brought against lenders in the following months. 

McKay Cunningham

December 22, 2010 in Caselaw, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property Rights | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 14, 2010

WSJ says More Office Jobs going from Suburbs to Downtowns

For decades the trend in most American cities has been one of jobs moving from downtowns to the suburbs.  A recent Wall Street Journal piece suggests that this trend may be shifting: Downtowns Get a Fresh Lease: Suburbs Lose Office Workers to Business Districts, Reversing a Post-War Trend.  From the article by Anton Troianovski:

As the market for office space shows signs of recovery, the suburbs are getting left behind.

For decades, the suburbs benefited from companies seeking lower rent, less crime and a shorter commute for many workers. But now, office buildings in many city downtowns have stopped losing tenants or are filling up again even as the office space in the surrounding suburbs continues to empty, a challenge to the post-war trend in the American workplace and a sign of the economic recovery's uneven geography. . . .

Statistics show that suburban office markets were hit harder by the recession than their downtown counterparts and are recovering more slowly. The national office vacancy rate in downtowns was 14.9% at the end of the third quarter, the same level as in early 2005—while the suburban vacancy rate hit 19%, 2.3 percentage points higher than in 2005, according to data firm Reis Inc.

In the first three quarters of this year, businesses in the suburbs vacated a net 16 million square feet of occupied office space—nearly 280 football fields—while downtowns have stabilized, losing just 119,000 square feet.

You might argue that simply losing fewer square feet than the suburbs (where the harder-hit industries such as mortgage lending and home building tend to be located) doesn't necessarily presage the long-awaited Return to Downtown.  But real estate guru and urbanism advocate Christopher Leinberger detects something bigger going on:

[S]ome scholars, urban advocates, and developers believe a secular shift is under way in the American workplace.

"Young people don't want to be out on the fringe...and as people are beginning to figure that out, it's beginning to get factored into office relocations," said Christopher Leinberger, a real-estate developer and a visiting fellow at the Brookings Institution. "It's a major structural trend that we in real estate are going to have to adjust to."

The WSJ article has lots of links to photos, data, and interactive maps.  Thanks to Houston Tomorrow for the pointer.

Matt Festa

December 14, 2010 in Downtown, Exurbs, Financial Crisis, Houston, Real Estate Transactions, Sprawl, Suburbs, Urbanism | Permalink | Comments (0) | TrackBack (0)

Friday, December 3, 2010

Furman Center's NYC Quarterly Housing Report

NYU's Furman Center for Real Estate and Urban Policy has published its New York City Quarterly Housing Update for 3d Quarter 2010.  A taste from the press release:

NYU’s Furman Center for Real Estate and Urban Policy released, for the first time, a quarterly update on six key indicators of housing market performance, based on a variety of administrative data sources.

The Furman Center found that while the volume of home sales declined by 14% from the second to third quarter of 2010, it remains higher than it was in the third quarter of 2009. Citywide, prices have stabilized, increasing slightly between the second and third quarters of 2010, and changing little since the same period last year. Prices in the third quarter of 2010 were 22% lower than they were at the peak of the market.

There's lots of great data and analysis in the full report.

Matt Festa

December 3, 2010 in Affordable Housing, Financial Crisis, Housing, Mortgage Crisis, Mortgages, New York, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Monday, November 29, 2010

WSJ Number of the Week: 492

The Wall Street Journal's Economics Blog, in a post by Mark Whitehouse, has as its "number of the week" the number 492, as in the average of 492 Days from Default to Foreclosure.

The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.

Some may not be inclined to shed tears for the banks, who recently had to slow down their already-backlogged foreclosure process even more due to the revelations of robo-signing, but Whitehouse notes that this statistic could also provide a powerful incentive to other homeowners:

Millions of Americans still are paying their mortgages even though they owe more than their homes are worth. The more banks’ backlog grows, the more likely they are to join it, adding to the already giant pile of foreclosures weighing on the housing market.

Matt Festa

November 29, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (1) | TrackBack (0)

Tuesday, November 16, 2010

Miller on the Strategic Default Debate Among Contract Scholars

Meredith R. Miller (Touro) has posted Strategic Default: The Popularization of a Debate Among Contract Scholars, forthcoming in the Cornell Real Estate Law Journal.  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.

Matt Festa

November 16, 2010 in Contracts, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)