PropertyProf Blog

Homeowner Forecloses on Bank of America Branch

Revenge!

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.

Steve Clowney

Pottow on Consumers' Ability to Pay Mortgage Loans

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.

Steve Clowney

Will Mortgage Scammers Never Cease

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.

Signed,

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

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Mayer et al. on Mortgage Modification and Strategic Behavior

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.

Steve Clowney

 

Demiroglu, Dudley, & James on Strategic Default and the Foreclosure Process

Cam Demiroglu, Evan Dudley, and Christopher James (Florida - Finance) have posted Strategic Default and the Foreclosure Process on SSRN.  Here's the abstract:

Strategic defaults occur when borrowers default on their mortgages even though they can afford to continue to make their mortgage payments. Prior research suggests that the economic incentives in terms of the borrower’s equity in the home as well as non-economic factors such as moral attitudes about default are important determinants of strategic default. In this paper, we examine how differences in state foreclosure laws impact the likelihood of strategic default. Specifically, we examine how judicial review requirements and lenders’ recourse rights (deficiency judgments) affect the likelihood of default. We argue that state foreclosure laws should have little effect on the likelihood of non-strategic default and thus provide a good instrument for identifying the costs and benefits of strategic default. Consistent with this argument, we find that the effect of state foreclosure laws varies with the borrower’s equity position, with borrower-friendly foreclosure laws having a significantly greater effect on default rates for borrowers with negative equity. We also examine how recent state and federal loan foreclosure-prevention programs have affected the likelihood of strategic default. Overall, we find a significant reduction in the effect of state foreclosure laws on strategic defaults following the introduction of loan modification programs after late 2008. Our results suggest that programs meant to prevent foreclosures have also reduced the effectiveness of foreclosure laws that discourage strategic defaults.

Steve Clowney

Rose on The Due Process Rights of Tenants in Mortgage Foreclosure

Henry Rose (Loyola Chicago) has posted The Due Process Rights of Residential Tenants in Mortgage Foreclosure Cases (New Mexico Law Review) on SSRN.  Here's the abstract:

The purpose of this article is to explore the rights of tenants who reside in buildings undergoing foreclosure to receive notice and an opportunity to be heard when foreclosures threaten to terminate their tenancies. The federal Protecting Tenants at Foreclosure Act of 2009 (PTFA) will significantly reduce the incidence of residential tenancies being terminated as a result of foreclosure. However, PTFA offers weak procedural protections if the mortgagee or the person who acquires ownership pursuant to a foreclosure seeks to terminate the tenancies of residents in the foreclosed building. In those states that require judicial foreclosures, the Due Process Clause of the Fourteenth Amendment to the United States Constitution should afford tenants faced with termination of their tenancies due to foreclosure with notice and an opportunity to be heard before their tenancies are terminated. In states that allow non-judicial foreclosures, Due Process protections are not likely to be available to tenants due to a lack of state action in the foreclosure process. PTFA should be amended to afford all tenants, including those who reside in non-judicial foreclosure states, with notice and an opportunity to be heard before their tenancies are terminated pursuant to a foreclosure.

Steve Clowney

From the Department of Disastrous Timing . . . Housing Counseling Funds Eliminated

Funding for HUD's housing counseling program has been eliminated.  Not to worry: not many people need housing counseling these days.

The counseling program cost $88M, or approximately 1.25 C-130J long-range military transport planes. 

Also from the same Department: Law Professor's laptop goes belly up during finals week; dog's leg is paralyzed, wife's back goes out.  I apologize for the lack of posts lately, but it''s been a wild two weeks.

Mark A. Edwards

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Boyack on Regulating Fannie Mae and Freddie Mac

Andrea Boyack (George Washington) has posted Laudable Goals and Unintended Consequences: The Role and Control of Fannie Mae and Freddie Mac (American Law Review).  Here's the abstract:

The United States is struggling to emerge from an era of loose mortgage underwriting standards – lapses in credit analysis that led to origination and securitization of toxic loans. The fallout has been crippling, costing borrowers their homes, investors their money, and the government its taxes.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed last summer was the first comprehensive effort to address the problems in the system that led – in sequence – to the subprime crisis, the housing crisis, and the financial crisis. The Dodd-Frank Act, which contains over 2,300 pages of legislation, is very broad as well as very detailed – even though hundreds of rulemakings have yet to completely define its parameters. But this extensive legislation deliberately did not deal with the biggest elephant (or perhaps elephants) in the room: Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs), behemoths of the secondary mortgage market, are currently in conservatorship and have (so far) cost taxpayers over $130 billion. Yet our current residential mortgage market is utterly dependent upon them for credit and liquidity. With political pressures to stop taxpayer bailouts and the reality of a frozen mortgage market should Fannie Mae and Freddie Mac cease to exist, when it comes to the GSEs, the administration feels damned if they do and damned if they don’t.

For decades, the U.S. mortgage finance system was the envy of the world – the only industrialized nation to have a significant segment of housing costs covered by private capital through a securitization investment system. The United States is the only country to routinely offer homebuyers 30-year fixed-rate pre-payable mortgage loans. Better capital accessibility has made more homeownership opportunities more available to more Americans. The GSEs have performed a vital role in financing the production of rental housing as well. Our real estate capital markets set the gold standard worldwide for what is possible in freeing trapped asset values and increasing the wealth of borrowers and investors alike.

Over the past decade, this system undoubtedly became unhinged – and it is critical to reform its failings. But a complete wind-down of the government sponsored enterprises that are the linchpin of our housing finance system goes too far. Subtracting Fannie Mae and Freddie Mac from the finance equation may very well be market suicide, and the repercussions for borrowers, communities and investors would be dire indeed. Furthermore, this extreme step is unnecessary: the system’s failures can be adequately (and better) addressed within the GSE framework.

Undoubtedly there is still ample dirty “bathwater” to throw out as we reform the mortgage finance market system. But it would be an excruciating mistake to bow to political pressures and throw out the “baby” too. Current and future mortgage borrowers will only be adequately “protected” if they are empowered through access to capital, appropriately constrained by valid underwriting criteria. A well functioning market – rather than political scapegoating – is the best way to emerge from the recession and protect future buyers and investors alike.

This article first discusses the history and purposes of the GSEs and what went wrong with the system that led to the 2008 conservatorship and bailout. With reference to the Obama Administration’s February 2011 Report to Congress, “Reforming America’s Housing Finance Market,” Part II analyzes proposals to reform and wind down the GSEs in light of their likely legal and market impact. Part III offers some general suggestions on better approaches to crafting America’s future mortgage market and advocates for solutions more precisely tailored to remedy apparent systemic problems while achieving the identified policy goals.

Steve Clowney

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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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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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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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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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.

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.

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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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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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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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

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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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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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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Foreclosure Crisis Update

The number of foreclosures in Minnesota quintupled between 2005 and 2008, according to this report  released by www.Housinglink.org.  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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