Thursday, April 28, 2016
The Transactional Records Access Clearinghouse (TRAC), housed at Syracuse University, is a super helpful organization that I've used for a number of years now. The group issues TracReports that provide free monthly information on, among other things, civil litigation throughout the U.S. federal district courts. One item of interest that the group reports on deals with the number of new foreclosure filings each month. Check out this latest report:
The latest available data from the federal courts show that during March 2016 the government reported 505 new foreclosure civil filings. According to the case-by-case information analyzed by the Transactional Records Access Clearinghouse (TRAC), this number is up 12.7 percent over the previous month when the number of civil filings of this type totaled 448. The comparisons of the number of civil filings for foreclosure-related suits are based on case-by-case court records which were compiled and analyzed by TRAC (see Table 1).
When TRAC last reported on this matter, foreclosure lawsuits had declined from a peak reached in May and June of 2012 but seemed to have bottomed out in January 2014. Indeed, as can be seen in Figure 1, the monthly count remained relatively stable from that point until about a year ago. When foreclosure civil filings for March 2016 are compared with those of the same period in the previous year, their number was up by nearly one third, or 32.7 percent. Filings for March 2016 are still substantially lower than they were for the same period five years ago however. Overall, the data show that civil filings of this type are down 25.1 percent from levels reported in March 2011.
Top Ranked Judicial Districts
Relative to population, the volume of civil matters of this type filed in federal district courts during March 2016 was 1.6 per every million persons in the United States. One year ago the relative number of filings was 1.1. Understandably, there is great variation in the per capita number of foreclosure civil filings in each of the nation's ninety-four federal judicial districts. Table 2 ranks the ten districts with the greatest number of foreclosure lawsuits filed per one million population during March 2016.
The District of Nevada — with 15.9 civil filings as compared with 1.6 civil filings per one million people in the United States — was the most active through March 2016. The District of Nevada was ranked first a year ago, while it was ranked fourth five years ago.
The District of Rhode Island ranked second and also ranked second a year ago.
The Southern District of Illinois now ranks third.
Recent entries to the top 10 list were Vermont, the Northern District of Georgia (Atlanta) and the Western District of Kentucky (Louisville), which are ranked seventh, eighth and sixth, respectively.
The federal judicial district which showed the greatest growth in the rate of foreclosure civil filings compared to one year ago — up 700 percent — was the Western District of Kentucky. Compared to five years ago, the district with the largest growth — 239 percent — was the Northern District of Florida.
Sunday, April 24, 2016
Chris Odinet (Southern) has posted The Unfinished Business of Dodd-Frank: Reforming the Mortgage Contract (SMU Law Review) on SSRN. Here's the abstract:
The standard residential mortgage contract is due for a reappraisal. The goals of Dodd-Frank and the CFPB are geared toward creating better stability in the residential mortgage market, in part, by mandating more robust underwriting. This is achieved chiefly through the ability-to-repay rules and the “qualified mortgage” safe harbor, which call for very conservative underwriting criteria to be applied to new mortgage loans. And lenders are whole-heartedly embracing these criteria in their loan originations — in the fourth quarter of 2015 over 98% of all new residential loans were qualified mortgages, thus resulting in a new wave of credit-worthy homeowners that are less likely than ever before to default. As a result of this and other factors, the standard form residential mortgage contract, with its harsh terms and overreaching provisions, should be reformed. This is necessary not only due to the fact that such terms should no longer be needed since borrowers are better financially positioned than in the past, but also because of a disturbing trend in the past few years where lenders and their third party contractors have abused the powers accorded to them by the mortgage contract — mostly through break-in style foreclosures. This Article argues for a reformation of the Fannie Mae/Freddie Mac standard residential mortgage contract and specifically singles out three common provisions that are ripe for modification or outright removal.
April 24, 2016 in Common Interest Communities, Home and Housing, Law & Economics, Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recent Cases, Recent Scholarship | Permalink | Comments (0)
Sunday, January 31, 2016
This past Friday I had the pleasure of participating in a symposium on Housing for Vulnerable Populations and the Middle Class: Revisiting Housing Rights and Policies in a Time of Expanding Crisis, hosted by the wonderful faculty and law review folks at the University of San Francisco School of Law (and a special hat tip to our very gracious host, Tim Iglesias). The timing of this gathering couldn’t have been better. 2015 was a busy year in the housing world as SCOTUS upheld the validity of the disparate impact theory under the Fair Housing Act and HUD issued its significantly updated regulations on the obligation to affirmatively further fair housing. Moreover, cities and local governments are being looked to more than ever to solve major and seemingly intractable issues around housing, spurring a host of new policies, programs, and initiatives. The impressive participants of the USF symposium (coming from practice, government, non-profit, and the academy) explored these and related issues, including potential solutions to pressing problems of housing. Here’s an overview of what the panelists had to say:
What’s the matter with housing?
Rachel Bratt (Harvard Joint Center) kicked off the day by giving an overview of the nation’s current housing woes. She noted that the increase in income inequality over the last 20 years, combined with disinvestment and misinvestment of public resources, has been at the core of the affordable housing issue. She also described how political spending has played a role in further entrenching existing housing interests (in 2015, $234M was spend on real estate/finance lobbying, second only to healthcare). Bratt also explained the uneven distribution of federal housing benefits to the wealthy and the continued persistence of concentrated racial segregation. Rosie Tighe (Cleveland State-Urban Affairs) followed by describing the particular housing problems facing so-called “shrinking cities” (those places in an intense population-decline). She noted that the issue for these cities has more to do with poor quality affordable housing, rather than quantity. Tighe described the failure of low-income housing tax credits to meet the needs of these locales, and discussed the need for more scattered-site developments in these areas, while recognizing the financing and property management challenges inherent in such developments. Peter Dreier (Occidental-Poli Sci) rounded-out the discussion by pointing out that the current political discussions around the presidential election have focused much on wages and other issues, but not at all on housing. He described some reasons for the absence of attention to this important area, and drew the strong connection between household over-all health and housing.
What’s the matter with our current solutions?
Chris Odinet (Southern) started the discussion by describing some current efforts by states and local governments to deal with the fall-out from the housing crisis and on-going issues of blight and abandoned property. He then explained a number of recent federal court cases and acts taken by the FHFA that have significantly frustrated these efforts and also seriously call into question the ability of states and local governments to be innovative in dealing with issues of housing when federal programs are involved. Michael Allen (Relman, Dane, & Colfax) discussed the Fair Housing Act and the new “affirmatively furthering” regulations. He went into depth on contemporary disagreements between affordable housing advocates (who support more affordable units) and fair housing groups (who support integrated housing, and advocated for a way to reconcile their views under the auspices of these new HUD regulations. John Infrana (Suffolk) followed by describing the types of housing in and changing household composition of many cities. Despite these changing demographics, however, housing has not kept pace. In connection with this, Infranca pointed to the many possibilities that micro-housing and accessory-dwelling units (ADU) provide in the way of meeting this need. He noted that ADUs allow for greater economic diversity and can better align with demographic trends, but noted current legal barriers to them such as occupancy requirements and zoning restrictions. Marcia Rosen and Jessica Cassella (both of the National Housing Law Project)) concluded the panel by discussing the current state of the public housing program in the U.S., noting that there are currently 1.2M units (and ever-declining). She described HUD’s recent efforts to give public housing authorities (PHAs) a financing tool to rehab and rebuild these properties through the Rental Assistance Demonstration Program (RAD). This program essentially allows PHAs to convert their public housing stock into section 8 funded housing, and to combine section 8 with tax credits and other forms of debt and equity financing to fund the project. Cassella stated that although the program has great potential in terms of revamping old and decaying public housing properties, there are draw-backs in the way of transparency and long-term funding stability.
What are some new solutions?
For this final panel, John Emmeus Davis (Burlington Community Development Associates) gave an overview of community land trusts (CLTs)—currently over 280 exist nationwide—and their successes across the country. He noted that these types of entities are usually most successful in communities where there would otherwise be no affordable housing available. He noted the ability of CLTs to empower communities, protect tenants, and provide street-level land reform. Andrea Boyack (Washburn) followed by noting the current lack of rental stock compared to the growing demand across the country. She pointed out that in 2015 over half of the population of the U.S. is renting, with an annual demand of 300K new rental units per year. She followed by describing some current statistical trends in American homeownership and posited a number of ways in which cities and states in particular can seek to achieve solutions to these major housing problems. Lastly, Lisa Alexander (Wisconsin) discussed the the human right to housing, not through the lens of federal law, but rather through the ways in which localities across the country are building legal structures that provide many of the rights associated with a right to housing. She noted that market participation has been important to this process, and she used the “tiny homes for the homeless” movement and community control of vacant land as examples.
You can watch each of these presentations by clicking on the youtube video above. Participants, moderators, and USF Dean John Trasviña (former HUD assistant secretary for fair housing) are pictured below.
January 31, 2016 in Conferences, Home and Housing, Land Use, Landlord-Tenant, Law Reform, Mortgage Crisis, Real Estate Finance, Real Estate Transactions, Recording and Title Issues, Takings | Permalink | Comments (0)
Monday, January 18, 2016
It's fitting that on MLK Day we remember Dr. King's property law legacy. Last year topics related to fair housing and access to mortgage credit filled the headlines (from the Inclusive Communities case to continuing issues of access to credit for blacks, Hispanics, and other underrepresented groups). As we enter 2016, let us all be mindful of Dr. King's words:
"Let us therefore continue our triumphant march . . . until every ghetto or social and economic depression dissolves, and [we] live side by side in decent, safe, and sanitary housing."
Dr. Martin Luther King, Jr.
March 25, 1965
Friday, December 21, 2012
Back in 1938, the Roosevelt Administration, in order to save the housing finance industry, created a federal agency called the Federal National Mortgage Association. The FNMA got banks lending to home buyers by agreeing to purchase the loans from the banks, so long as the loans met certain quality standards.
It was a smashing success! The banks made high quality loans to borrowers (20% down payment, fixed rate, roughly 30% debt-to-income ratio), then sold the loans on the secondary market to the FNMA, and housing boomed. By the 1960s, the FNMA owned about 80% of all the home loans in the United States.
But wait! The federal government owned about 80% of all private home loans in the United States? Wasn't that a little, well . . . socialist? Couldn't private industry do it instead? Yes, indeed. So in 1968 the federal government did something unprecedented: it privatized an entire federal agency. The agency became Fannie Mae, with a public offering and everything. In return for certain tax advantages, it had certain obligations to the federal government, but it was a private entity. And soon it was competing with other private entities purchasing loans on the secondary market, all of whom were securitizing those loans and selling the securties -- mortgage-backed securities. Those entities were competing for loans, so they couldn't be too picky about quality any more.
Fast forward to 2008. Remember that old LendingTree ad, "When Banks Compete, You Win!"? We all found out that was true -- so long as by "win" we meant "live in economically disastrous times."
Suddenly, things were a lot like 1937 again: the housing finance industry was dead. Banks weren't lending -- it was too risky, since borrowers couldn't repay their loans and third parties wouldn't buy mortgage-backed securities. How could the industry be revived?
Fannie Mae, on the verge of failure, was re-nationalized. Quality standards were imposed, mortgages were acquired and re-financed with an assist from the federal government, and banks could make loans and sell them to Fannie Mae. Extremely slowly, haltingly, the housing finance industry began to revive.
Back in 2008, I predicted this would happen. It didn't take a genius, that's for sure. As I wrote back back then (Nationalization, De-Nationalization, Re-Nationalization), we have a history of nationalizing, de-nationalizing and re-nationalizing lending in the United States. We tend to nationalize in a crisis, ending the crisis, then de-nationalize because of our ideological preference for a laissez-faire market system . . . which leads eventually to a crisis . . . repeat.
All that had to happen in 2008 was that history needed to repeat itself, and that was the path of least resistance. But, it also seemed likely that, if it worked -- if the re-nationalized Fannie Mae got the housing finance industry stabilized -- then it wouldn't be long before someone realized that the federal government owned a huge protion of the home loans in the United States and that would seem a little, well . . . socialist. Therefore, as soon as the program was successful, people would want to get rid of it.
The superb news site ProPublica, as part of its series on the housing crisis, is running a very interesting article entitled, We’ve Nationalized the Home Mortgage Market. Now What? It makes the point that suddenly things look alot like 1968 again: 9 out of 10 home loans in the U.S. today are backed by the federal government through Fannie Mae. The chart below, from the article, shows the percentage of home loans backed by the federal government.
What happens next? Well, if history is any guide, the cycle will continue. We will de-nationalize the industry, until the next crisis; then we will re-nationalize the industry to solve the crisis; then we will wonder why an industry that could be private is nationalized, so we will de-nationalize it . . . etc. etc.
Mark A. Edwards
Wednesday, October 3, 2012
Monday, February 13, 2012
The following is a guest post from Rebecca Tushnet of Georgetown. Check out her impressive scholarly contributions here. Also, if you're interested in false advertising and other IP issues, then you really should follow her blog. Without further ado:
I recently started teaching the subprime mortgage crisis in my first-year Property class. We use Dukeminier et al., though I’ve supplemented with a bunch of other material, in part because the book came out in 2010. When I was preparing the syllabus, I’d planned to teach McGlawn v. Pennsylvania Human Relations Commission, 891 A.2d 757 (Commonwealth Ct. Penn. 2006), which I found out about in the excellent book Integrating Spaces: Property Law and Race. But then I saw that the most recent edition of the Dukeminier casebook had added a new section on subprime mortgages that contained Commonwealth v. Fremont, on which McGlawn relies for principles about what subprime loans were unfair, so—busy and trusting—I put Fremont on the syllabus instead.
Here’s the thing: McGlawn introduces students to a number of actual victims of predatory lending, including the financial and emotional losses they suffered, while Fremont simply recites the predatory features of the loans, making it harder to see why we should care. Then, in the questions following the case, the Dukeminier casebook asks why consumers took these terrible loans. It cites some law & economics scholarship and some behavioral economics, suggesting that the problem was excessive consumer optimism (as opposed to, in McGlawn, a fair amount of pure fraud as well as misunderstanding).
What the casebook doesn’t ask is why lenders made these terrible loans. The questions we ask influence the answers we get. It’s also notable that the casebook only asks about the consumers in a paragraph that suggests (contrary to all credible evidence) that the Community Reinvestment Act had some causative relationship to the subprime crisis.
The casebook additionally says in the same paragraph, “Because a large proportion of home mortgage loans are sold into the secondary mortgage market, most equitable defenses are unavailable to homeowners as a result of the holder-in-due-course doctrine.” Most students won’t really know what that means; I’ve found that they are disturbed enough by the concept of void versus voidable title—which shows up earlier in the course in the O’Keefe v. Snyder case. But it may be worth telling students that this statement—the foundation of securitization of mortgage loans—is not as certain as the casebook presents it. Among other things, if the note and mortgage were actually assigned in order to perform the foreclosure after the loan went into default (which wasn’t supposed to be the sequence but apparently often was), it’s not clear why the holder is a holder in due course with no notice of the problem with the underlying debt.
I don’t think Dukeminier et al. is an evil casebook, nor do I think that the authors consciously chose to strip out the homeowner-victims in order to reduce them to people who made bad bets and must inevitably suffer the consequences. (And many of the chain of title problems were just coming to light in 2010, which explains why they aren’t in the casebook.) But case selection and questions asked of students have powerful effects on what new lawyers think of as the baseline of the law, and this new section in the casebook is a good example.
Wednesday, February 8, 2012
It seems as though every day for weeks now we've been told a settlement between state attorneys general and fraudulent foreclosers -- by which I mean the largest home mortgage lenders in the country -- is imminent. The banks appear to be balking because they expected the type of suit filed by New York Attorney General Eric Schneiderman to be prohibited under the settlement -- but since Schneiderman is one of the key players in the settlement talks, there seems to have either been a serious misunderstanding or a serious play for leverage by Schneiderman. For an excellent analysis of the negotiations, and of the foreclosure crisis generally, I can't recommend Yves Smith's blog Naked Capitalism highly enough.
One issue that MUST be non-negotiable is the ability of people who were wrongfully foreclosed upon to maintain civil suits against their foreclosers. There is no indication that such suits will be barred under the settlement, but since the negotiations are not transparent we can't know until the settlement is announced. My first year property students have now spent weeks studying the crisis -- in part because I'm hoping to ready these young lawyers-to-be to take up the fight to ensure that foreclosure fraud doesn't pay and that its victims receive restitution. But if the state attorneys general negotiate away the only avenue victims of wrongful foreclosure have for relief, it will be the final injustice in a long, long line of them in this crisis. Not to mention a defeat for the rule of law.
For a very good discussion of how we should assess the settlement, when it is finally arrived at and released to public scrutiny, see this article by Richard Eskow.
Mark A. Edwards
Monday, January 16, 2012
Is the residential housing market improving? That's a difficult question to get a straight answer to. Last month, the National Association of Realtors announced that it had double-counted some home sales since January 2007, and revised five years worth of sales numbers, reflecting a much weaker market than previously understood.
A New York Times article also demonstrates that we need to be cautious in taking national statistics, or even state and regional-level statistics, at face value. For example, a new report indicates that home sales in New Jersey picked up in the latter part of 2011, with increases in contracts signed in six of the seven months between May and November. However, the report also reveals "A great division in market fortunes between northern and southern Jersey — and urbanized areas close to Manhattan and more rural regions..." For example:
"Salem County, rich in historic houses and farmland but short on well-paying jobs or a quick commute to an urban center, has the largest inventory of all 21 counties surveyed: 44.5 months’ worth of houses, the preponderance of them priced under $400,000."
“Simply put,” said Dawn Rapa, a Coldwell Banker Elite agent working in rural Salem County, “the only people I’ve seen selling their houses recently are those who absolutely had to — because they were in financial disarray, a job change, divorce or death.”
In my work on the commercial real estate market, I've noted that a few large markets, such as New York City, Washington, D.C., and San Francisco, distort national and regional statistics for two reasons: (1) those real estate markets are largely immune to severe or long-term economic downturns because of there is still more demand than supply; and (2) property values are significantly higher in those markets than in the remainder of the country. In other words, Class A commercial real estate in New York has remained strong through the financial crisis. Those high-value transactions mask continued weakness in cheaper Class B and C assets, and make the commercial real estate market look more vibrant than it really is. Although I haven't taken a close look at the residential real estate statistics, it appears that the same distortions may be taking place.
Monday, November 28, 2011
The housing market remains in flux (to put it mildly), and many people who could afford to and have sufficient credit to purchase a house or condo are wondering if renting might be a better idea. Answering that question depends upon a number of variables, including the local real estate submarket and the economics of the properties under consideration. The New York Times has a tool that allows you to crunch the numbers and determine whether it is better to rent or buy a particular property. It tells me that the townhouse I'm currently renting would only be better to buy if I stay there 13 years, even if I assume a mortgage rate of 4%.
Friday, November 11, 2011
On October 27th, Delaware Attorney General Beau Biden filed a verified complaint asserting that MERSCORP, Inc., a Delaware corporation, has repeatedly violated the state's Deceptive Trade Practices Act. Delaware asserts that MERS's deceptive trade practices fall into three main categories:
1. Through its opaque registry of mortgages and assignments, MERS knowingly obscures important information from borrowers. This harms consumers because many borrowers do not know the true identity of the holder of their mortgage, which impairs their ability to raise defenses in a foreclosure action. It also makes it more difficult for borrowers to identify their lender to seek a modification.
2. MERS often acts as an agent without authority from its proper principal, in part because it "often" does not know the identity of its property principal.
3. "MERS is effectively a 'front' organization that has created a systemically important mortgage registry but fails to properly oversee that registry or enforce its own rules on its members that participate in the registry." The de-centralized structure of MERS has contributed to the robo-signing scandal and similar systemic breakdowns.
I have written about MERS before and am not a fan. You can download a copy of the Delaware complaint, an explanatory press release, and obtain other information at the Delaware Attorney General's website.
Monday, October 24, 2011
The Federal Housing Finance Authority (FHFA) today announced that it is overhauling the Home Affordable Refinance Program (HARP) in order to make it accessible to more Americans. HARP allows homeowners who are current on their existing mortgages, but "underwater" (meaning that their loans exceed the value of their homes) to refinance and take advantage of historically low interest rates. A homeowner who has a loan at 7%, for example, could refinance around 4%, saving hundreds of dollars per month in interest.
HARP only applies to mortgages owned or guaranteed by Fannie Mae and Freddie Mac. It only applies to loans where the borrowers are current on their obligations. Still, the modified program announced today could benefit many homeowners by (1) reducing or eliminating refinancing fees; (2) removing the 125% loan-to-value ratio ceiling for fixed-rate mortgages backed by Fannie and Freddie; (3) eliminating the requirement of an updated appraisal; and (4) extending HARP to December 13, 2013.
HARP has been around since April 2009, but fewer than 900,000 households have taken advantage of the program. However, based on data provided by FHFA, HARP refinancings have provided the bulk of refinancings in the past two years. Hopefully, this modified program will help underwater homeowners take advantage of low mortgage rates.
Although I think that this expansion of HARP is a positive move, it will do little to address the most significant problem facing the residential real estate market. We (the homeowners of America) remain massively overleveraged. The residential market and the broader economy cannot recover until a significant deleverage takes place. Unfortunately, neither the administration nor any of the GOP candidates have proposed a plan that will allow this deleveraging to take place in an orderly fashion. Our default (pun alert) deleveraging strategy is thus bankruptcy and foreclosure. HARP will help many homeowners make their monthly payments, but lowering interest rates (and presumably adding to the principal through closing costs) will do nothing to help homeowners deleverage.
Just another cheery observation for your Monday afternoon.
Monday, October 3, 2011
I'm teaching a course on the Financial Crisis this semester. We have been examining various explanations of the "cause" of the Financial Crisis. Freakonomics has a great piece by James Altucher that sums up much of our discussion.
Friday, September 2, 2011
This week has been good news/bad news for Bank of America. Good news -- Warren Buffet invested $5 billion in new preferred shares, and gave investors a confidence boost in the bank. Bad news -- the New York Times reports this morning that the Federal Housing Finance Agency (FHFA), the "conservator" agency over Fannie Mae and Freddie Mac, is preparing to file a lawsuit against Bank of America, JP Morgan Chase, Goldman Sachs, Deustche Bank, and others, alleging that the due diligence that they conducted on residential mortgages prior to securitizing and selling them, violated federal securities law. This is, of course, in addition to the actions of the 50 state attorneys general, the $10 billion lawsuit by AIG against Bank of America, and the lawsuits by various private investors.
In other words, this is the perfect semester for me to be teaching my seminar on the Financial Crisis.
Tuesday, August 30, 2011
The New York Times explores how new limits on federally guaranteed mortgages will have a disparate impact on the housing market in big cities:
On Oct. 1, when the limit on federally guaranteed loans drops to $625,500 from the current level of $729,750, hundreds of buyers in the city and nearby suburbs will either have to come up with larger down payments to stay under the new limit or face the prospect of applying for jumbo loans — anything above $625,500 — which have higher interest rates. . . . “Across the country this is not a big deal,” said David Maundrell, the president of aptsandlofts.com “but in New York, because our prices are where they are, it’s going to be an issue.”
Monday, August 22, 2011
I admit that when I first read the title of this photo essay in the New York Times, I thought that it was about haunted houses. But sadly, it is a haunting reminder that the housing bubble was not just an American phenomenon. Although the architecture of the homes depicted in Valérie Anex's photo essay are uniquely Irish, the vibe is similar to the Guardian's photo essay "Detroit in Ruins," which we linked to earlier this year.
On a related note, also in today's New York Times, an editorial reminding us that despite the fact that American mortgage interest rates are at an all time low (as Steve posted this morning), millions of homeowners are still underwater on their mortgages. The editorial advises us that "Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans." More on this editorial later (if I make some progress on my class prep).
Tuesday, June 7, 2011
Five months ago, Bank of America filed foreclosure papers on the home of Maurenn Nyergers. The trouble for Bank of America is that Nyergers never had a mortgage - she paid cash for her house.
The case eventually went to court and Nyergers was able to prove she didn't owe Bank of America a dime. In fact, the judge ordered Bank of America to pay Nyergers' legal fees.
But then, Nyergers said she waited more than five months for a check. So the family's lawyer, Todd Allen, moved to seize the bank branch's assets. Allen instructed sheriff's deputies and movers to remove desks, computers, copiers, filing cabinets and any cash in the teller's drawers.
According to sources, bank employees were locked out of the branch and the bank's manager appeared "visibly shaken" and "bewildered." Yet, within the hour, a fairy tale ending; The bank manager handed over a check to the lawyer for the legal fees.
Friday, May 20, 2011
John Pottow (Michigan) has posted Ability to Pay on SSRN. Here's the abstract:
The landmark Dodd-Frank Act of 2010 transforms the landscape of consumer credit in the United States. Many of the changes have been high-profile and accordingly attracted considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau (CFPB). But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as CFPA did get into the law: imposing upon lenders a duty to assure borrowers’ ability to repay. Ensuring a borrower’s ability to repay is not an entirely unprecedented legal concept, to be sure, but its wholesale embrace by Dodd-Frank represents a sea change in U.S. consumer credit market regulation. This article does three things regarding this new duty to assess a consumer’s ability to pay mortgage loans. First, it tracks the multifaceted pedigree of this requirement, looking at fledgling strands in U.S. consumer law as well as other areas such as securities law; it compares too its more robust embrace in foreign systems. Second, it offers conjecture regarding just how this broadly stated principle might be put into practice by the federal regulators. Finally, it provides a brief normative comment, siding with the supporters of this new obligation on lenders.
Thursday, May 19, 2011
One of the eye-opening aspects of blogging here is this: often, if one of us puts up a post that contains the word "mortgage," we get spam in the comments box. I would not be in the least surprised to find a comment on this post tomorrow that reads something like this:
This is a very interesting discussion of will mortgage scammers never cease. I like to read about will mortgage scammers never cease. Will mortgage scammers never cease is very important.
Refi-now [at] lowestrates [dot] com
Since these usually come in response to a post about the latest mortgage industry outrage, it (frankly) pisses me off.
And just tonight, during dinner, I got a call from someone in Newport, CA, claiming to be working for Fannie Mae. He told me my mortgage had "crossed his desk" and he wanted me to know, as a public service, that I could get a much lower rate, and he was prepared to tell me how. I told him . . . well, I suppose this is a family blog, but I told him that I did not think highly of him.
I was naive enough to think that the mortgage crisis would have put, if not an end, at least dampener on this type of despicable activity. This is exactly how so many people's lives were ruined, and exactly why the mortgage industry became such a chaotic, undisciplined, unethical nightmare that lenders can't even produce the note for mortgage loans on which they intend to foreclose.
But if it wasn't apparent before, it should be apparent now that the mortgage crisis -- that is, the crisis of the mortgage industry -- is in the past. Its particpants either walked away before the scam collapsed, or got bailed out if they were left holding the cards.
Now they're back in action. Want proof? The front page of the on-line version of today's New York Times has an ad for "Orange Home Loans As Low as 3.05% APR." Click on the link, and you get an offer for a 5 year fixed rate mortgage loan at 2.99% if you can put 20% down, but with monthly payments set as if the loan were a 30 year fixed rate. In other words, when 5 years have gone, and you need to re-finance, you'll have built up no new equity in the home because you've been paying as if you had 30 years to pay it off, not 5. You'll essentially have to purchase the home again, at a much higher rate. And this isn't some fly-by-night company. At least they require 20% down.
So the crisis of the mortgage industry is over. Instead, what we have now is a foreclosure crisis. A crisis that is rendering families homeless, destroying equity in homes, and in some places (here's looking at you, Florida) undermining the rule of law.
Soon we'll have a restitution crisis.
If we get any spam in response to this post, I'll post it as an addendum here.
Mark A. Edwards
[comments are held for approval (and now you know why), so there will be some delay in posting]
Christopher J. Mayer (Columbia Business), Edward R. Morrison (Columbia Law), Tomasz Piskorski (Columbia Business) and Arpit Gupta (Columbia Business) have posted Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide on SSRN. Here's the abstract:
We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.