PropertyProf Blog

Editor: Stephen Clowney
Univ. of Arkansas, Fayetteville

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Saturday, April 16, 2011

Levitin Rips Mortgage Servicers' Study

Over at Credit Slips, Adam Levitin has yet another spot-on analysis related to the mortgage and foreclosure crisis.  This time he rips apart a study, bought and paid for by mortgage servicers, that purports to reveal the costs they'll reluctantly have to pass on to borrowers if they are forced by states to act lawfully.  It's well worth reading.

Mark A. Edwards

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April 16, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Thursday, April 14, 2011

Levin-Coburn Report on the Financial Crisis Released

Today I particularly love being a law professor.  Why?  Because the Senate Permanent Subcommittee on Investigations released its 635-page final report on the Financial Crisis yesterday and gosh darn it, I'm going to read the whole thing. 

According to the press release, it should be an interesting read:  "The report catalogs conflicts of interest, heedless risk-taking and failures of federal oversight that helped push the country into the deepest recession since the Great Depression."  The committee reviewed nearly 6,000 pages of documents, including e-mails and internal memos from Washington Mutual, Deutsche Bank, Goldman Sachs, and other parties deeply involved in the residential mortgage bubble. 

Here is a link to the press release, and at the bottom of the press release you can click through to download the full report.

Tanya Marsh

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April 14, 2011 in Mortgage Crisis | Permalink | Comments (2) | TrackBack (0)

Thursday, April 7, 2011

Illinois court halts 1,700 Cook County foreclosures

Well, this is a new one.  We've seen robo-signing, we've seen lost documents and notes, we've even seen foreclosures on the wrong houses.  But to my knowledge, this is the first time we've seen a mortgage servicer's counsel adding new pages to affidavits and then re-attaching the signature page.

From the Chicago Tribune comes the story of how 1,700 foreclosure proceedings were halted, due the practices of mortgage servicers' attorneys:

The admission to the court by Fisher and Shapiro does not involve rubber-stamping of documents but rather removing the signature page, altering the affidavit's content and reattaching the signature page, the court said.

The changed contents included the addition of attorneys' fees, insurance costs, preservation costs, inspection costs and taxes on the property, costs that may have been incurred before or after the servicer signed the original affidavit, [Judge] Jacobius said in his order dated March 2.

The firm's admission signals a note of caution to purchasers of distressed homes, which represent about 50 percent of local home sales, because of potential lingering legal issues if the title transfer process was faulty.

I believe that last sentence is what we call a 'buried lede.'  Or at least one heck of an understatement.

Big hat tip to the blogging savants at Credit Slips for linking to the article first.  It's impossible to keep up with those people.

Mark A. Edwards

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April 7, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 6, 2011

Case Western Students Smack Property Fraudsters (Civilly)

Congrats to students from Case Western's Milton A. Kramer Law Clinic Center, who successfully sued a fraudulent home repair financing company preying on Cleveland homeowners, obtaining a whopping $1.1M in damages.

According the Cleveland Plain-Dealer,

The verdict itself was unusual -- a Cleveland family winning $1.1 million after they were ripped off in a home-repair and financing scheme.

But if you consider who handled the case  --  two law students -- it was almost unheard of.

Now, the reality is that they'll be lucky to collect any of it, since the defendant is now out of business.  But, at the very least, that verdict gives predatory and fraudulent financing companies a good reason to hesitate before they go looking for victims in Cleveland.  There's real (albeit limited) value in that.  And that's enough. 

Good work, Case Western students!

Mark A. Edwards

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April 6, 2011 in Law Schools, Mortgage Crisis | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 29, 2011

Leaving the Barn Door Open

It's bad to close the barn door after the horse is gone.  But it's just as bad to fill the barn back up with horses, then reassure everyone that it is now secure, because the barn door is only open wide enough for the horses to escape in single file.  That's what the FDIC appears to be ready to do with regard to mortgage-backed securities.

According to the New York Times, the FDIC is about to adopt rules that would go a long way to correcting some systemically catastrophic faults in the securitization business.  For that, they deserve praise (and I should point out, the FDIC under the admirable Sheila Bair has truly been a stand-up force throughout this mess).  But going a long way is like closing the barn door most of the way -- it doesn't help much if the horses can still slip through.

Ssb guide to mbs

Frequent readers here might remember that I've argued several times that the single most effective way to reform the MBS industry is to require loan originators to retain a certain percentage of the loans they make, and to choose those retained randomly.  I've suggested 20% be retained in-house, randomly chosen. The MBS industry can thrive, providing liquidity for the residential market, but originators are bound to the risk of the loans they originate, which creates every incentive for them to lend wisely.

The proposed FDIC rules, thankfully, adopt that very principle -- but then gut it in the details.

Rather than a simple percentage rule with randomized selection for the retained loans, under the proposed rules,

  • high quality loans are exempt from the risk retention pool, off-the-top;
  • only 5% of the risk from mortgage-backed securities derived from lower quality of loans that make up the risk retention pool must be retained;
  • the risk can be split among the loan originator, loan aggregators, and loan securitizers -- that effectively reduces the risk to any of them well below the 5% line;
  • the lenders have considerable flexibility in choosing their method of exposure to the 5% risk -- either by retaining a 5% exposure in all securitizations, or retaining a representative sample of loans in-house equivalent to a 5% exposure -- but the proposed rules do not specify a mechanism by which the 5% are selected or determined to be 'representative.'   

The proposed rules do not do enough, in my opinion, to make sure that the risk retained by originators is of sufficient quantity and quality to incentivize them to make only sensible loans.  Under the system that crashed the U.S. economy in 2008, lenders could reap the benefit of originating all loans, since the cost of originating bad ones was externalized to the usually uninformed holders of MBSs.  There are lots of potential ways of reforming the system, but none is as clean and efficient as requiring that a substantial portion (I still say 20%, as is required in Canada, which did not suffer an MBS crash) of risk is retained in-house, and that percentage is chosen randomly.  That system requires relatively little oversight, and no wiggle room for escape.

Bank of Canada

The proposed rules don't leave the barn door open as much as they might have, but closing it 2/3rds of the way doesn't help much if the horses can still get out.

There will be a comment period after the proposed rules are announced.  I hope to submit some, and I'd like to hear yours.

Mark A. Edwards

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March 29, 2011 in Law Reform, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Monday, March 21, 2011

The Rise of ARMs

The New York Times reports that more borrowers are opting for adjustable rate mortgages:

In the years since the financial crisis, adjustable-rae mortgages, or ARMs, with their low initial interest rates that changed over time, have been considered riskier than fixed-rate loans and shunned by most buyers. But these days more people are being persuaded to give the loans a try.

Mortgage brokers and lenders say the loans most in demand are the “5/1” and “7/1,” in which the initial interest rate is fixed for the first five or seven years — after which many homeowners typically think about selling or refinancing anyway — then adjusted annually at a capped rate toward a maximum level.

Steve Clowney

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March 21, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Thursday, March 17, 2011

The Mounting Costs of Foreclosures

The Home Defenders League, a community activist organization in California, released a report this week with the provocative title of “Home Wreckers:  How Wall Street Foreclosures are Devastating Communities.”  You can find the report here

The report concludes that the true cost of foreclosures in California will be $650 billion to $1 trillion.  It estimates a $632 billion to $1 trillion loss in property values; $3.8 billion in lost property tax revenue; and $17.4 billion in foreclosure-related costs to be borne by local government.

I'm working on an op-ed for the Huffington Post regarding the property tax piece.  It is a variation on an argument you've probably heard from me before.  It makes no sense that we are embracing a policy that forces borrowers and lenders (and, by extension, taxing authorities) to internalize temporarily depressed property values, particularly given the long-term costs of doing so.

Tanya Marsh

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March 17, 2011 in Mortgage Crisis | Permalink | Comments (1) | TrackBack (0)

Friday, March 11, 2011

Defending the 30 Year Fixed Rate Residential Mortgage

[The following was published in Huffington Post on March 9th]

The New York Times ran a story earlier this week suggesting that if Fannie Mae and Freddie Mac cease to exist, the 30-year fixed-rate residential mortgage loan would become a "luxury" product rather than the norm. This kind of shift could have profound economic consequences that policymakers need to carefully consider.

As the story noted, the 30-year fixed rate loan is an aberration that exists primarily because of government support. There are three key characteristics of the now-typical loan that merit discussion: (1) its long-term nature; (2) the fixed interest rate; and (3) the full amortization.

--more after the jump--

Continue reading

March 11, 2011 in Mortgage Crisis | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 8, 2011

Hundreds of Foreclosures Halted in Oregon

Perhaps -- perhaps -- the tide is finally turning in the foreclosure crisis: courts are actively preventing unlawful foreclosures (Florida excepted).  I think that's a very, very good thing, because (1) I have a soft spot for the rule of law and (2) most foreclosures serve absolutely no one's interest except the mortgage servicer's, who collects fees for foreclosing.  The borrower is worse off, and both the lender and the investors in the securities backed by the loans are worse off in a stagnant re-sale market. 

But undoing the unlawful foreclosures that have already been completed will take many, many years.  Ibanez was likely the tip of a very large iceberg.  We had a mortgage crisis; we now have a foreclosure crisis; get ready for the restitution crisis.

From the Oregonian:

Since October, federal judges in five separate Oregon cases have halted foreclosures involving MERS, saying its participation caused lenders to violate the state's recording law. Three of those decisions came last month, the key one in U.S. Bankruptcy Court in Eugene.

Attorneys say it's not clear whether lenders in Oregon will simply start over or head to court to foreclose, steps that could prolong the crisis for months and drive up costs, attorneys say. Some suggest lenders might not have access to the documents they need to comply with state law.

"A lot of us are questioning whether there is a solution," said David Ambrose, a Portland attorney who represents lenders in mortgage transactions. "It's pretty amazing. There are a lot of unanswered questions."

MERS is listed as an agent for lenders on more than 60 million U.S. home loans, about half of all such loans.

Mark A. Edwards

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March 8, 2011 in Home and Housing, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Monday, March 7, 2011

Marsh on the Commercial Real Estate Debt Crisis (again)

I have posted Too Big to Fail vs. Too Small to Notice: Addressing the Commercial Real Estate Debt Crisis on SSRN. (This is the bigger article that I teased earlier.)

I have directed this article to policymakers and scholars, but I hope that it may also be useful for those teaching Real Estate Transactions, to supplement textbooks by providing a current snapshot of the state of the commercial real estate industry.  

Many thanks to Jim Durham of Dayton for taking time out of his vacation to read and comment on this piece! 

Here's my abstract:

The commercial real estate industry has been devastated by the current economic crisis, losing 40% in value since the end of 2007. As a result, commercial real estate borrowers owe lenders $1 trillion more than their properties are worth. Although the federal government has been warned that the commercial real estate debt crisis may cause a double-dip recession, the government’s response thus far has been to allow the market to work itself out. This Article argues that this laissez faire response rests upon flawed assumptions about the structure of the commercial real estate industry. Compounding the problem, policymakers are incorrectly interpreting increased lending and transactions in the upper echelons of the market as a signal that their policies are working. Instead, the current approach has forced sales at distressed prices, numerous foreclosures, and, perhaps most importantly, significant small bank failures without any systemic benefits. Policymakers have seen these losses as an unfortunate but unavoidable cost of the recovery process, and dismissed these small actors as not “systemically important.” In fact, this Article argues that in the aggregate, small commercial real estate borrowers and small banks are vital to fueling job creation and economic recovery. By focusing primarily on the health of large financial institutions, borrowers, and properties without due consideration for the smaller players, the current policy may lengthen the economic crisis by placing further stress and uncertainty on some of the most vulnerable segments of the economy.

As always, comments are much appreciated!

Tanya Marsh

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March 7, 2011 in Mortgage Crisis, Real Estate Transactions, Recent Scholarship, Teaching | Permalink | Comments (0) | TrackBack (0)

Sunday, February 27, 2011

Restrictive Covenants in Custom Home Subdivisions

The Indianapolis Star has an interesting article this morning describing a situation that is doubtlessly occuring in many upscale communities across the country.  There are several subdivisions in Hamilton County, just north of Indianapolis, that were marketed as available to custom home builders only.  The large lot sizes, large home sizes, and required architectural features were supported by both restrictive covenants and zoning restrictions.  But, as you may have heard, the economy crashed.  Many smaller custom home builders in Indianapolis have gone out of business.  The original developers of the subdivisions either lost unbuilt lots to the bank or have been forced to sell them in a bulk sale to production home builders.

So the people who built their $1 million plus custom dream homes (which is a VERY VERY nice house in Indianapolis) in these subdivisions are now battling to keep out the $350,000 to $500,000 production homes. 

Lawsuits have already been filed, so I suspect that we will be seeing more appellate court decisions across the country soon interpreting restrictive covenants that the homeowners understood as limiting the subdivisions to custom-built homes.

Tanya Marsh

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February 27, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 15, 2011

Foreclosure Crisis Update

The number of foreclosures in Minnesota quintupled between 2005 and 2008, according to this report  released by  And the trend is continuing upwards on an annual basis (although foreclosures dropped in the 4th quarter of 2010).

Foreclosures cause foreclosures, because each foreclosure drives down surrounding property values, pushing more borrowers underwater, and making it more difficult for them to re-finance as adjustable rates adjust and balloon payments become due.  Barring a moratorium, the crisis is unlikely to stop until either (1) some extrinsic factor causes economic growth or (2) homeowners who in the past five years secured short term adjustable rate or balloon payment loans with mortgages are mostly shaken out of the market through foreclosure. 

Assuming, of course -- and it's not a safe assumption by any means -- that lenders, if challenged, can produce the note and establish the right to foreclose.

Mark A. Edwards

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February 15, 2011 in Home and Housing, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Friday, February 11, 2011

White House Releases Plan for the Future of Housing Financing Market

The White House released a proposal today that would dramatically alter the long-term future of the American housing financing market, in ways that are almost as important and fundamental as the creation of the FNMA (later Fannie Mae) in 1938.

Starting in 1938, the U.S. government created and became the most important -- and often only -- player in the secondary mortgage market.  The FNMA bought loans and mortgages from banks, thereby allowing lenders to transfer the risk of default, but only if those loans met certain quality standards.  The secondary mortgage market was a great success and was responsible for much of the post-war housing boom in America.  The FNMA was semi-privatized in 1968, becoming Fannie Mae.  It helped created the mortgage-backed securities market, but when faced with competition from other players in the secondary mortgage market who captured market share by purchasing and securitizing loans that didn't meet its quality standards, Fannie Mae lowered its standards.  Because the appetite of investors for mortgage-backed securities was voracious, there was soon a race to the bottom through subprime lending.  Because Fannie Mae still had special privileges with regard to taxation and borrowing from the federal government, many investors assumed or gambled that Fannie Mae would be rescued by the federal government in the event it began to crash.  It did, and they were right.

The new plan's main objective is to release the United States from it's role as a de facto backstop for Fannie Mae, so that taxpayers aren't liable for reckless lending -- and presumably, so that reckless lending is less likely since liability for it will stay with lenders.  It offers 3 paths to that goal, essentially gradations of the same objective -- either (1) limiting its backstop role to certain targeted borrowers (such as lower income borrowers purchasing affordable housing), who meet the previously enforced Fannie Mae quality standards; (2) limiting its role to those borrowers during a time of crisis; or (3) eliminating its backstop role entirely. 

If implemented, any of these plans is likely to raise the cost of borrowing, since the risk of default must be priced into the private market system in ways that it may not have been previously.  I intend to write more about the plan's implications as I have more time to study it, but it is safe to say that what is envisioned is a reduced participatory role for the government in home lending; what isn't yet clear to me is whether the regulatory role of the government will increase or decrease correspondingly.

An apparently ideologically-distasteful truth in this mess is that the FNMA worked very well from 1938 to 1968.  But there is no stomach now for a government agency capturing an entire private market, even though it was able to impose quality standards that kept the market stable and functioning.  Since there is no stomach to dominate the market, the question is whether any participation is appropriate.  The plan's answer: perhaps, but only in the most limited sense.  My concern is that in the absence of significant particpation, quality assurance can only be achieved either by extensive oversight, or by rules that cause lenders to impose quality on themselves.

Given that, I still like my half-baked idea: lenders can make loans on whatever terms they choose, but they can't sell them all on the secondary market.  Instead some percentage -- let's say 20% -- must stay in-house in the portfolio of the originator.  But here's the key: that 20% is chosen randomly, by some computer sitting in a government agency that knows only the loan number.  It's lending Russian roulette.  Lenders can decide there own risk tolerance, but they can't fully escape it.  That should reduced the number of risky loans.

Meanwhile, the 80% of loans that enter the secondary market create capital for home lending.

Got another idea?  Speak up -- let's get in on the conversation about the future of housing finance in the United States.  If not us, who?

Mark A. Edwards

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February 11, 2011 in Home and Housing, Law Reform, Mortgage Crisis, Real Estate Finance, Real Estate Transactions | Permalink | Comments (0) | TrackBack (0)

Thursday, February 3, 2011

COP Hearing on Commercial Real Estate and Banks

The Congressional Oversight Panel will be holding a hearing tomorrow, February 4th at 10:00 a.m. in room 538 of the Dirksen Senate Office Building to "examine the current state of the commercial real estate market and its implications for bank stability and returns to the Troubled Asset Relief Program."  Since, as I mentioned yesterday, I am writing a paper on this very topic, I am abnormally interested in this hearing.  The witnesses will be:

            Sandra Thompson, Director, Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation

Patrick Parkinson, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve

David Wilson, Deputy Comptroller for Credit and Market Risk, Office of the Comptroller of the Currency

            Matthew Anderson, Managing Director, Foresight Analytics

Richard Parkus, Executive Director, Morgan Stanley Research

Jamie Woodwell, Vice President of Commercial Real Estate Research, Mortgage Bankers Association

The COP held a similar hearing in May 2009 and issued a very thorough report last February which I have found very useful in my research and as a teaching tool.

The COP hearing will be webcast live on the website or you can wait a few months and read the report.

Tanya Marsh

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February 3, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 2, 2011

The Commercial Real Estate Debt Crisis and Online Law Reviews

The Harvard Business Law Review Online just published a short essay that I wrote about the commercial real estate debt crisis.  As readers of the blog may recall, I am working on a much larger piece that will analyze the current problems suffered by the commercial real estate sector and evaluate potential policy responses.  I'm trying to get that finished within the next month or so.  (One problem with writing an article so focused on numbers -- you have to update it every quarter.  I just need to finish it before first quarter is over!)

Anyway, the piece published at focuses on one sliver of that larger paper -- understanding what the commercial real estate debt crisis is and why it happened in the context of considering an the appropriate governmental response.  I think that some policymakers have adopted the narrative of the residential crisis (irresponsible borrowers, greedy banks) and applied it to commercial real estate, without supporting empirical evidence.  Because that narrative assigns moral blame to the borrowers and banks for their respective roles in the crisis, it impacts policy choices and political support.

This is the first of two pieces that I wrote specifically to be published in online law reviews (the second will be published by Columbia Law Review Sidebar in a few weeks).  Both are off-shoots of larger pieces that I'm working on.  It wasn't too time-consuming to write them, and I think that the vehicle is well-suited for smaller, more concise arguments that may be more widely read because they are shorter. 

I'd love to hear your thoughts, either about the HBLR piece, or the idea of publishing in online law reviews at all.

Tanya Marsh

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February 2, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 25, 2011

Foreclosing on God

The Wall Street Journal has an article today regarding an upswing in foreclosure actions against religious groups.  I don't think I can link to it since it is in a part of that is subscription only, but the article is entitled "Churches Find End Is Nigh: The Number of Religious Facilities Unable to Pay Their Mortgage Is Surging," by Shelley Banjo.

The article makes a few interesting points, including that lenders were eager to make loans to religious congregations for two reasons -- (1) the weekly contributions and (2) the willingness of pastors (or other religious leaders) to put their own money into the project in order to avert foreclosure, even though they had no contractual obligation to do so.  I would have thought that religious congregations would have found it difficult to get a loan because of the lack of contractual income (rent) and difficulty of adapting a religious building to an income-producing, commercial use.  If I were a lender, I wouldn't want to foreclose a religious building because I would assume that even in good times there would be a limited market.  Plus, by foreclosing on God, you earn a lot of bad press.

Tanya Marsh

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January 25, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Friday, January 7, 2011

Massachusetts Supreme Judicial Court Restitutes Foreclosed Homes to Borrowers

Yesterday the Massachusetts Supreme Judicial Court voided two foreclosures carried out by  U.S. Bancorp and Wells Fargo in 2007.  Both banks were acting as trustees for securitized pools of mortgage loans that allegedly included the borrowers' mortgage loans.  However, neither bank had been assigned the mortgages, and thus had no right to foreclose on the properties. 

There are many, many thousands of potential cases out there that are identical on the pertinent facts to these two.  Unlawful foreclosures have been so rampant in the past few years that the next stage of this ongoing mortgage crisis may well be a huge wave of restitutions of unlawfully foreclosed properties to borrowers.  Despite what many banks have suggested, undoing unlawful foreclosures is not simply a question of retroactively crossing t's and dotting i's; it is a question of undoing the unlawful dispossession of private property rights of huge numbers of people.  No amount of going back and filling in the holes in paper trails can cure it.  Restitution will be necessary, and it will require overcoming enormous practical problems.

As the lawyer for one of the restituted homeowners said, this case was "merely the first petal off the rose."       

Mark A. Edwards

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January 7, 2011 in Home and Housing, Mortgage Crisis | Permalink | Comments (1) | TrackBack (0)

Monday, January 3, 2011

B of A settles with Fannie and Freddie

Bank of America announced today that it has settled its outstanding dispute with Fannie Mae and Freddie Mac stemming from sales of faulty subprime mortgages by Countrywide to the two GSEs.  Bank of America acquired Countrywide, and therefore the liability associated with the bad loans, in 2008.  Fannie and Freddie have pursued several large banks on the theory that the loans breached representations and warranties made to the GSEs regarding borrowers' incomes, the value of the underlying real estate, and other incomplete and/or misleading data.  Here is a summary of the deal, courtesy of Bloomberg:

Bank of America paid a premium, $1.28 billion, to Freddie Mac to resolve $1 billion in claims currently outstanding because the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008, the Charlotte, North Carolina-based lender said in a presentation on its website. The bank paid $1.52 billion to Fannie Mae to resolve disputes on $3.1 billion in loans that were currently outstanding, or about 49 cents on the dollar. Bank of America’s total loss on the loans after recovering collateral and other assets is about 27 percent, said Jerry Dubrowski, a spokesman.

Bank of America is still liable for $2.1 billion in repurchase requests from Fannie Mae as well as any future demands. The agreement also didn’t cover $600 million in buyback demands from Freddie Mac as well as loans covered by the deal that turn out to be fraudulent or violated fair lending laws, said Michael Cosgrove, a spokesman for Freddie Mac.

News of the settlement sent B of A shares up 6.4% today.  I can see why, if the bank was able to dispatch $127 billion in future claims for the bargain price of $1.28 billion, although the caveat from the Freddie Mac spokesman regarding fradulent loans is interesting.  I'm not up to speed on the specifics of the GSEs' claims, but this seems like a curious settlement for Freddie in particular to accept.  The Bloomberg article, which can be found here, proposes that this agreement will serve as a template for the resolution of other Fannie and Freddie claims against subprime mortgage originators. 

Tanya Marsh

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January 3, 2011 in Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Monday, December 27, 2010

Loan Servicers and Modification: the Critical Flaw in Satisfying Our Self-Interest

Since I've been blogging incessantly about the grinding, often needless, sometimes unlawful, disaster that is the foreclosure wave, I was heartened to read in this week's New York Times an article by Gretchen Morgenson that acknowledged both the irrationality of some foreclosures and the severe external costs they impose on others.  But Morgenson's article does more: it pinpoints the flaw that is producing these disastrously irrational results.

Happily, the article describes the successful effort of a homeowner to modify their mortgage loan in order to keep their home -- an effort that became successful only after the New York Times contacted the borrowers' loan servicer.  But such modifications are exceedingly rare.

Morgenson accurately notes that "millions of Americans have been sucked into the foreclosure maelstrom that is ruining their finances and their lives."  The fundamental question about the foreclosure wave, according to Morgenson, is: "should homeowners simply [continue to] be foreclosed upon en masse, or should banks work with them to modify mortgages and reduce the loans to levels that homeowners can manage?"  Perhaps another, equally important question is, why should we care?

The answer is simple: it's in our self-interest to care very deeply that banks modify mortgage loans to prevent foreclosure.  That may seem counter-intuitive: why would it be in our self-interest to, in essence, reward borrowers who borrowed irresponsibly during the housing market madness of recent years?

Here's why: in Morgenson's words,

Foreclosures blight neighborhoods, put financial pressure on families and drive down local real estate values.  Investors who hold loans in securitization trusts are also hurt be foreclosures, because recoveries on these properties are low.  And consumers, made more cautious by a crippled housing market, spend less freely, curbing the economy's growth.

So, why, then are loan modifications exceedingly rare?  Because one group is profiting immensely from foreclosures: loan servicers.  The very same people that most borrowers first contact seeking loan modification.  As Morgenson says, "loan servicers can profit significantly by pushing borrowers into foreclosure."

In other words -- and this is absolutely critical to understanding the foreclosure wave -- loan modifications are in the self-interest of every actor affected by foreclosures except the one actor to whom borrowers first turn when seeking a modification: loan servicers.  Loan servicers have the opposite incentive: to refuse modification and force foreclosure.  Loan servicers are externalizing the costs of foreclosure onto the rest of us, and internalizing the benefits.  That, of course, is what they should do, as rational, profit-maximizing entities.

We need to change the rules of the game so that it is in loan servicers' self-interest (through carrot, stick, or a combination of both) to permit loan modification.  Until we do, loan modification will remain exceedingly rare and foreclosure will continue, catastrophically, en masse -- even though it is in nearly every party's interest that just the opposite is true.  

Mark A. Edwards

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December 27, 2010 in Home and Housing, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 22, 2010

Foreclosures and Unlawful Bank Break-Ins

I apologize for continuing to beat the same drum I've been pounding on for a few months here, but today there is yet more news that management of the foreclosure crisis has gone badly awry.

We already know about a host of severe problems: banks foreclosing on properties despite not having the right to do so, sham affidavits used in support of foreclosure proceedings, sham special courts specifically designed to process foreclosures as rapidly as possible.  Today we can add to that list that banks are illegally breaking into homes and stripping them of their possessions.    

In some cases, because of negligent record-keeping, banks have entered and cleaned out homes of that are not in foreclosure -- even some properties that have no connection to the bank whatsoever.  In one case, described in today's Times article, the owner's property was wrongfully foreclosed upon, without notice to her.  She notified the bank; it promised to rescind the foreclosure.  Then, again without notice to the owner, the bank broke into the property and removed all of her belongings -- including the ashes of her dead husband.    More commonly, without notice, banks have entered and cleaned out homes of borrowers who were negotiating loan modifications with the banks in good faith, even after the banks had promised not to foreclose. 

Banks aren't foreclosing unlawfully out of malicious intent.  They're foreclosing unlawfully out of negligence.  But negligence is a choice too; it is a choice to refuse to invest sufficient resources to act with reasonable care.  At some point, indifference to one's own negligence becomes recklessness.  And a reckless disregard for the rights of others becomes, over time, a type of malevolence.  

The word 'system' is used routinely to describe, in general terms, the foreclosure process.  I think that word is inapt.  Foreclosures are occurring in massive numbers, but there is no real system.  The process is often improvised, contradictory, and often nothing we'd describe as 'due.'  Worse, the substantive results of that process are too frequently unjust and irrational. 

Here's why I say that: foreclosure is a scourge that feeds upon itself, reducing neighborhood property values, making more foreclosures more likely.  It is often manifestly against the lenders' own self-interest.  It renders people homeless.  It destroys decades of work.  Now, add to that witches brew that foreclosures are too frequently unlawful -- and that undoing unlawful foreclosures will likely take years of work and consume enormous resources -- and you get a sense of the irrationality at work here.  And yet, through our courts, we are stamping both irrational and unlawful dispossessions with the imprimatur of our approval.

One day we will shake our heads and wonder what we were thinking.  I'm more and more convinced the answer will be: we weren't.

Mark A. Edwards

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December 22, 2010 in Home and Housing, Mortgage Crisis | Permalink | Comments (0) | TrackBack (0)