Thursday, December 23, 2010

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 7, 2010

Mitchell, Malpezzi, & Green on Forced Sale Risk: Class, Race, and the "Double Discount"

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.

Matt Festa

December 7, 2010 in Finance, Housing, Mortgage Crisis, Mortgages, Property, Race, Real Estate Transactions, Scholarship | 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)

Mixon on Home Mortgage Documents Interpreted as Nonrecourse Debt

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.

Matt Festa

December 3, 2010 in Finance, Housing, Houston, Mortgage Crisis, Mortgages, 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)

Monday, November 8, 2010

Adverse Possession and the Foreclosure Crisis?

This New York Times article, At Legal Fringe, Empty Houses go to the Needy, tells the story of a guy in Florida who seems to be attempting to use adverse possession to take abandoned homes and then lease them for low rent to needy families.  

NORTH LAUDERDALE, Fla. — Save Florida Homes Inc. and its owner, Mark Guerette, have found foreclosed homes for several needy families here in Broward County, and his tenants could not be more pleased. Fabian Ferguson, his wife and two children now live a two-bedroom home they have transformed from damaged and abandoned to full and cozy.

There is just one problem: Mr. Guerette is not the owner. Yet.

In a sign of the odd ingenuity that has grown from the real estate collapse, he is banking on an 1869 Florida statute that says the bundle of properties he has seized will be his if the owners do not claim them within seven years.

A version of the same law was used in the 1850s to claim possession of runaway slaves, though Mr. Guerette, 47, a clean-cut mortgage broker, sees his efforts as heroic. “There are all these properties out there that could be used for good,” he said.

Apparently most of the homes are in foreclosure.  Guerette has taken possession, made some improvements, and is paying the property taxes.  The tenants and the neighbors--at least the ones quoted in the article, who understandably prefer occupied to abandoned houses next door--think he is doing a great thing.  The State of Florida disagrees.  He is being prosecuted for fraud.  

Is this an innovative response to the foreclosure crisis, or is it a scam?  No one likes adverse possession in theory when they first hear about it.  Students always ask, like Jennifer Aniston in Office Space, "so how is that not stealing?"  But of course the justification for AP--we prefer that abandoned land go to someone who will put it to its highest and best use--seems to have some application here.  On the other hand, this certainly isn't a "good faith" trespass under a belief in legitimate title.  The article quotes Florida law prof Michael Allan Wolf, who expresses concern that using adverse possession this way can lead to a serious disruption in chains of title and with the foreclosure process.  And it's not hard to see how this kind of activity could lead to widespread confusion and potential fraud.  

If this idea takes it a little too far, then what can we do about the parallel problems of massive foreclosures, abandoned buildings, and the lack of affordable housing?  Thanks to Scott Rempell for the pointer.  

Matt Festa

November 8, 2010 in Affordable Housing, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Property, Property Theory, Real Estate Transactions, Suburbs, Sun Belt | Permalink | Comments (1) | TrackBack (0)

Thursday, October 14, 2010

Levitin and Wachter on Information Failure and the U.S. Mortgage Crisis

Adam J. Levitin (Georgetown) and Susan M. Wachter (Penn--Wharton, Real Estate) have posted Information Failure and the U.S. Mortgage Crisis.  The abstract:

This paper argues that during the housing bubble, housing finance markets failed to price risk correctly because of information failure caused by the complexity and heterogeneity of private-label mortgage-backed securities and structured finance products. Addressing the informational problems with mortgage securitization is critical not just for avoiding future housing bubbles but for rebuilding American housing finance. The continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression, depends on the continued viability of securitization. The paper proposes that mortgage securitization and origination be standardized as a way of reducing complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

Matt Festa

October 14, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 12, 2010

Miller on Strategic Default

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.

Matt Festa

October 12, 2010 in Contracts, Finance, Financial Crisis, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Sunday, October 10, 2010

Peterson on Demystifying MERS' Land Title Theory

Christopher Lewis Peterson (Utah) has posted Two Faces: Demystifying the Mortgage Electronic Registration System's Land Title Theory, forthcoming in the Real Property, Probate, & Trust Law Journal.  The abstract:

Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system. This Article concludes with a discussion of steps needed to rebuild trustworthy real property ownership records.

Matt Festa

October 10, 2010 in Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 7, 2010

Report: Housing Market 2010 First Half Recap

The excellent Real Estate Center at Texas A&M University has issued its report on the Housing Market: 2010 First Half Recap.  Authored by research economist James P. Gaines, the report has analysis of the national and Texas markets and a preliminary forecast for the next six months.  It's a quick read.  From the analysis:

The housing market during the first half of 2010 showed marked improvement over the same period in 2009 largely attributable to unprecedented government stimulation. Year-over-year data comparisons for the first six months of 2010 with the same period in 2009, when the original tax credit was just getting under way, suggest an improving market. However, sustainability during the second half of the year with no incentives remains questionable.

Going forward?

The second half of 2010 holds significant challenges for the housing market. It remains to be seen to what extent the private market can support the market without significant government inducements. Pending sales, nationally and in most Texas communities, and applications for purchase mortgage financing are depressed substantially, indicating much-reduced sales volumes in the next few months.

Dr. Gaines concludes, however, that if there is less-than-exepected dropoff in the coming months, it could be a sign of economic recovery.  If you're not familiar with the Real Estate Center, they are an outstanding resource for reports and data; they also have a regular listserv and podcast.  

Matt Festa

September 7, 2010 in Federal Government, Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Thursday, August 26, 2010

Samuelson on The Homeownership Fetish and the American Dream

Robert J. Samuelson (Newsweek/Washington Post economics columnist) has an article called Remodeling the American Dream (Newsweek) or alternatively How a Homeownership Fetish Hurt the American Dream (WaPo).  Samuelson writes about some of the topics we have been talking about here, such as the question of whether the overpromotion of home ownership as national policy inflated the bubble that burst into the mortgage crisis.  The article begins:

The question of what to do about Fannie Mae and Freddie Mac -- the two government-created enterprises that have backed massive loans to the housing market -- involves much more than finance or real estate. It marks the end of an era. The relentless promotion of homeownership as the embodiment of the American dream has outlived its usefulness. . . .

Unfortunately, we let a sensible goal become a foolish fetish.

Samuelson goes on to critique the Fannie/Freddie story but pulls back from the precipice of radical reform in conclusion:

"This is not a good time to make permanent solutions for housing," says Guy Cecala, publisher of Inside Mortgage Finance. The single-minded promotion of homeownership failed and, paradoxically, undermined the American dream. It contributed to the housing "bubble" and favors housing investment over new industries and technologies. But to end it, we need to make haste slowly.

Matt Festa

August 26, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Monday, August 16, 2010

Diamond on Homeownership and Shared Equity in the Context of Poverty

Michael Diamond (Georgetown) has posted The Meaning and Nature of Property: Homeownership and Shared Equity in the Context of Poverty, St. Louis University Public Law Review, Vol. 29, pp. 85-112, 2009.  The abstract:

While a Blackstonian view of property envisaged a "despotic dominion" of an owner over a thing, property has never been so absolute. In fact, as I argue in this paper, the nature of property has been culturally constructed and property means different thinks across cultures and even over time within the same culture. The question of the nature of property was highlighted for me when a student questioned whether equity limitations placed on homes purchased by low income buyers using subsidized public financing created a "second class" form of homeownership.

In attempting to answer this question, I examined the ideas of property and ownership over various cultures and then concentrated on those ideas in the American cultural, legal and political history. After examining the various views of property in America, I examine the reality of property ownership and the restrictions on such ownership in today’s legal and political milieu. I conclude by suggesting that the equity restrictions associated with some publicly financed mortgages are not different in kind from other restrictions on property generally that are widely accepted in society. Finally, I suggest that a concept of property might be broadened to include the reasonable expectations of future potential users. Thus, a recognized principle such as stewardship might give property like entitlements to generations of low income persons who will be seeking decent affordable housing in the future.
Matt Festa

August 16, 2010 in Affordable Housing, Community Economic Development, History, Housing, Mortgages, Property Theory, Scholarship | Permalink | Comments (0) | TrackBack (0)

Saturday, August 14, 2010

Fannie & Freddie Bailout?

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

Matt Festa

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

Smith on the Structural Causes of Mortgage Fraud

James Charles Smith (Georgia) has posted The Structural Causes of Mortgage Fraud, forthcoming in the Syracuse Law Review, Vol. 60.  The abstract:

Mortgage fraud, often a violation of federal and state criminal statutes, covers a number of different types of behavior, all of which have the common denominator of conduct that has the intent or effect of impairing the value of residential mortgage loans. Mortgage fraud has become prevalent over the past decade and shows no signs of diminishing despite the collapse of domestic housing markets during the past two years. This paper analyzes the complex relationships between prime mortgage loan markets, subprime markets, and various types of mortgage fraud. This paper concludes that the root causes of mortgage fraud are associated with the core institutional and structural components of mortgage markets, which cut across all types of residential mortgage products. The organizing principle is the historical evolution from proximity to distance within the mortgage market, which is explored along three axes. First, geographical distance between lenders and borrowers has replaced geographical proximity. The mortgage market is national, with local lending institutions no longer making a significant proportion of the loans that are originated. Second, transactional distance has replaced transactional proximity. Lenders and borrowers have little direct contact; instead intermediaries such as mortgage brokers, appraisers, insurers, and closing officers, separate the principals. Third, financial distance has replaced financial proximity. Previously both borrowers and lenders had significant financial interests in the mortgage loan transaction. The borrower had equity in the property, and the lender held the loan in its portfolio. Presently many borrowers have no equity (or negative equity) in their homes, and due to the securitization of loans through the secondary mortgage market, few originating lenders retain a stake in the loans they create. Reforms that could serve to reduce borrower-lender distance or to ameliorate its effects include the fashioning of better closing procedures for verifying borrower identity, providing a premium for community-bank loans to local borrowers, making originating lenders liable for all misconduct by appraisers, requiring significant down payments for borrowers, and allowing secondary market purchasers full recourse against originating lenders for losses caused by borrower defaults.
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.

Matt Festa

August 10, 2010 in Finance, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (2) | TrackBack (0)

Friday, August 6, 2010

Fennell & Roin on Residential Stakes

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:

Local communities often suffer when residents have too small a stake in their homes — a point underscored by recent rashes of foreclosures and abandonments, and implicated by longstanding questions about the effects on communities of renters and owner-occupants, respectively. However, homeowners with too great a financial stake in their homes can also cause difficulties for local governance by acting as risk-averse NIMBYs. Local governments should have a strong interest in helping members of their communities move away from problematic forms of stakeholding and toward more desirable intermediate positions. This essay examines how and why governmental entities at the state and local levels might regulate or shape the financial stakes that residents have in their homes. We give particular attention to the role local governments may play in facilitating homeowner and tenant access to index-based financial instruments that adjust residential risk-bearing. More radically, we suggest that local governments, assisted by state law, could formulate shared equity arrangements in which local residents hold stakes in the housing markets of surrounding localities as well as in their own jurisdictions.

As you might expect, this looks like a very interesting and important paper.

Matt Festa

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

Marsico on the Home Mortgatge Disclosure Act at Thirty-Five

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 Review of Banking and Financial Law, Vol. 29, No. 205, 2009-2010.   The abstract:

This article examines the history of the Home Mortgage Disclosure Act (HMDA) and makes proposals for improving it to help prevent another economic crisis. Passed in 1975, HMDA requires most lenders to disclose information about their home mortgage loans, including the number of home mortgage applications it received; the purpose of each application; the type of loan; the decision on the application; the race, gender, and income of the loan applicant/borrower; the location of the loan and the median income and racial composition of the neighborhood; and the interest rate on the loan. HMDA was originally conceived of as a tool to detect and prevent redlining. It was later expanded to cover lending discrimination and reverse redlining. However, Congress and the Federal Reserve have not required lenders to disclose enough information to permit HMDA to do its job. The pending financial reform legislation would expand HMDA's mission to detect and prevent predatory lending, but once again, the legislation does not require lenders to disclose sufficient information to accomplish its goal. The article proposes several types of information that should be added to the legislation, including, most importantly, the applicant's housing debt/income ratio and overall debt/income ratio.

Matt Festa

August 4, 2010 in Finance, Financial Crisis, History, Housing, Mortgage Crisis, Mortgages, Race, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 30, 2010

Hauser on the Case for Allowing Mortgage Modifications in Bankruptcy

Susan E. Hauser (North Carolina Central) has posted Cutting the Gordian Knot: The Case for Allowing Modifications of Home Mortgages in Bankruptcy, Journal of Business & Technology Law, Vol. 5, p. 207, 2010.  The abstract:

More than 5 million mortgages have gone into foreclosure since 2007, and an additional 8 to 13 million foreclosures are projected to follow before the current foreclosure crisis abates. Voluntary loan modification programs have failed to ameliorate the crisis, in large part because mortgage lending abuses and declining home values have left many borrowers stranded in "under-water" mortgages.

This article endorses a targeted amendment to section 1322(b)(2) of the Bankruptcy Code that would allow bankruptcy judges to oversee the modification of residential mortgages written to borrowers during years when mortgage-lending abuses were most rampant. Part I of this Article examines existing Bankruptcy Code provisions that allow the modification of other types of loans and then traces the history of the existing statutory and case law that currently prevents borrowers from modifying the terms of most residential mortgages in bankruptcy. Part II describes legislation presently pending in Congress and explains why allowing home mortgages to be modified in chapter 13 bankruptcy offers an efficient and fair solution that not only allows borrowers to remain in their homes, but also benefits lenders and taxpayers. Part III considers and distinguishes the counterarguments offered by the mortgage banking industry. 

My conclusion is that allowing mortgages to be modified in chapter 13 plans offers distinct advantages to all parties. Accordingly, a time-limited amendment to section 1322(b)(2) would provide a simple and elegant mechanism for reducing the pain that the home mortgage crisis is causing to borrowers, communities, creditors, and the national economy. 
Matt Festa

June 30, 2010 in Federal Government, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions, Scholarship | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 23, 2010

NYT on the Housing Market Slowdown

Speaking of New York Times features on the real estate market and mortgage crisis, they had this one last week: Housing Market Slows as Buyers Get Picky.  

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price. . . . 

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided. 

Bad news for the housing and construction industries, and a possible signal of a double-dip recession.  I think that last part about the $8000 tax credit is telling.  Once again, the market for housing was artificially propped up by a policy decision to promote home ownership.


Matt Festa

June 23, 2010 in Financial Crisis, Housing, Mortgage Crisis, Mortgages, Real Estate Transactions | Permalink | Comments (1) | TrackBack (0)