On the Home Mortgage Stripdown Bills…Why Perpetuate Philosophical Inconsistencies and Hurt People for No Gain?
Thank you for the opportunity to guest blog. As Bob indicated, I will blog about the stripdown of home mortgages for a couple days, take a brief hiatus and be back with you at the first of the year. Some of the things likely to be bloged about next year include the “so called” exemption of federal benefits from execution (sounds boring but boy does this ever work differently than what we’ve been telling our students), a little about my upcoming payday lending study, and perhaps a small taste of financial literacy/anti-consumerism to boot. Thanks and I look forward to conversing with you!!
Now on to the home mortgage issues……
It seems that most of the arguments against the current senate bills on stripdown of home mortgages boil down to one notion: when some people don’t pay their debts, others are disappointed. Bankruptcy laws, as well as state collection laws from real estate foreclosures to Article 9, all recognize that some debts simply will not be paid back. This is economic, rather than legal, realism.
December 12, 2007 at 10:52 AM in Mortgage Debt & Home Equity | Permalink
Mortgage Deal Reached in House of Representatives
Newspaper reports (e.g., here from the Wall Street Journal) say that a deal has been reached in the U.S. House of Representatives to advance legislation that would give bankruptcy judges more power to adjust the payment terms of a home mortgage. For those who want the basic background, I wrote a post trying to explain what this legislation would do. The short version is that home mortgage lenders get special protections in bankruptcy court that most every other lender does not get, including lenders on rental and vacation property. These bills would eliminate this special protection and put home mortgage lenders on the same footing as other lenders.
Democrats apparently have received the backing of Rep. Steve Chabot (R-Ohio) who had his own version of the legislation. To get this deal, Democrats apparently had to agree to limit its applications to loans made after January 1, 2000 that already are in default or in foreclosure at the time of bankruptcy filing. Also, the bankruptcy judge would have discretion to reject a debtor’s request to modify the mortgage if the judge determined the debtor had sufficient income to pay the mortgage under its original terms.
The politics of this deal are murky. I completely agree with my the comments of my co-blogger, Elizabeth Warren (here and here), that the mortgage deal reached last week wasn’t much of a deal at all and was primarily an industry job designed to give the appearance of action to head off legislative efforts at real mortgage assistance. I’m glad to see that little bit of political theater has been unheeded at least in some quarters. The big lenders, including those represented by the Financial Services Roundtable, continue to oppose these changes to the Bankruptcy Code. This latest development may get the bankruptcy changes out of a House committee but it is unlikely any legislation would emerge from the House before the end-of-the-year recess. Even if it gets past the House, it will have a lot of hurdles to become law. The banking industry appears to be relying on the Senate and the White House to block the bankruptcy legislation. It would be helpful if this legislation were to become law, but those facing home foreclosures should not expect the bankruptcy laws to change anytime soon.
December 12, 2007 at 9:17 AM in Mortgage Debt & Home Equity | Permalink | Comments (1)
The Sandbag Plan
I’ve been struggling to understand the real point of the Administration’s headline-grabbing plan to deal with subprime mortgages. Now, thanks to Bob, I’ve read it, and the plan seems to be nothing more than a guideline for when some lenders or servicers might let some borrowers extend lower interest payments for a while before the interest jumps up later. The loan on the house stays the same, even the family owes much more than the house is now worth–a circumstance that will cut off any refinancing option and any real resolution of the problem. The plan doesn’t require any new laws or government intervention because no one is bound to anything. I can’t quite figure out what the plan accomplishes that the lenders couldn’t do without the plan–if they were in a mood to deal fairly with borrowers, acknowledge their losses, and start cleaning up the mess before it takes down the whole economy. So why trumpet a plan that doesn’t do anything? CongressDaily (no link) found the answer: “‘Totally will sandbag the bankruptcy stuff,’ one lobbyist said of the White House announcement.” So that’s what the plan is designed to accomplish–kill off the bankruptcy proposal to deal with home mortgages.
December 7, 2007 at 5:48 PM in Mortgage Debt & Home Equity | Permalink | Comments (2)
Show Us the Fine Print!
From what I’ve seen, I completely agree with my fellow Credit Slips blogger Elizabeth Warren’s characterization of the president’s subprime announcement as a “slick deal.” It looks like too little with too many loopholes. Although it will help a few homeowners, the ones who most need relief will be left out. The primary effect of the announcement is to give the Bush administration and the lenders some cover to make it look like they are taking serious steps to address the problems from the explosion of home mortgage foreclosures.
But, I base all that on what I’ve seen in media reports. As I write these words (about 3:15 PM CST on 12/6/07) I cannot find the actual text of the agreement anywhere on the Internet. I’ve looked on the web sites for the White House, the U.S. Department of Treasury, and the Department of Housing and Urban Development. I’ve also searched through a few major media outlet web sites. As a lawyer, I know the important terms are always in the fine print. Exactly what does this agreement provide? Who has signed the agreement? In his remarks, Treasury Secretary Paulson characterized the agreement as “industry standards.” Is there any requirement that mortgage servicers abide by the terms of this agreement? What happens if they don’t? The agreement supposedly freezes interest rates. What happens to the foregone interest? Is it forgiven?
It worries me greatly that this agreement is not widely available. If it is great as its proponents claim, why not let the world see it? Until we know precisely what the agreement says, none of us can be sure that the agreement will provide any relief for homeowners. An industry group made of major players in the residential mortgage industry forged this agreement. Are we just supposed to trust them? Surely, an important document like this agreement will not and should not be hard to find. If anyone has a copy, send it to me, and I’ll post it here.
UPDATE: The agreement can be found here: http://www.americansecuritization.com/uploadedFiles/FinalASFStatementonStreamlinedServicingProcedures.pdf. Thanks to Valparaiso law professor Alan White for pointing me to this link in his comment below.
December 6, 2007 at 3:29 PM in Mortgage Debt & Home Equity | Permalink | Comments (4)
Slick Deal on Subprimes
Later today George Bush will announce his administration’s plan to deal with the subprime meltdown. Instead of a change in the law, this is a voluntary deal negotiated with some large mortgage lenders and mortgage servicers. If it works, it’s a slick deal for the lenders. But it may be too small to do any good. The plan has two features that shape the whole deal:
1) The lenders decide who gets the benefits and who doesn’t. This seems to be the Goldilocks Game. If the borrower is too cold (not credit worthy even for the teaser rate), no deal. If the borrower is too hot (could pay on the reset), no deal. Only borrowers who are just right (can pay currently, but can’t pay more) will get the deal. And the mortgage servicer decides who gets to be Goldilocks.
2) No permanent solution. People will have up to five years at teaser rates and then they are on their own. The only way this doesn’t recreate the mortgage crisis down the line is if families can figure out on their own how to refinance into sustaintable (usually fixed) mortgages. Refinancing means more people heading to mortgage brokers and more fees, etc.
December 6, 2007 at 9:18 AM in Mortgage Debt & Home Equity | Permalink | Comments (4)
Reported Deal Reached on Mortgage Relief
The New York Times is reporting that a deal has been reached on a five-year interest-rate freeze for certain home mortgage. Details will be forthcoming, we’re told. A few days ago, Credit Slips blogger Elizabeth Warren made a few comments about the nature of this solution as a “non-bankruptcy bankruptcy solution.” What do Credit Slips readers think? Is this plan a step in the right direction?
December 5, 2007 at 6:10 PM in Mortgage Debt & Home Equity | Permalink | Comments (0)
A Non-Bankruptcy Bankruptcy Solution?
The rumor mill is starting to sketch in details of a deal negotiated Treasury Secretary Paulson and a coalition of big lenders to stop the subprime mortgage meltdown by leaving borrowers in their current teaser rates longer. The idea is that homeowners in trouble will be divided into three categories: those who can continue payments after an increase, those who can continue payments only on the teaser rate, and those who can’t even pay the current teaser rate. The plan is that first group pays, the middle group gets help, and the last group gets moved out.
The economic idea behind the plan is that dumping all the foreclosed properties on the market at the same time will chase the market down further, further depressing prices in the real estate market, so holding people in their teaser-rate mortgages will stop the freefall in prices. The tool looks a lot like something the Chapter 11 folks are familiar with: a non-bankruptcy bankruptcy in which the parties negotiate something that has many of the features of a bankruptcy, but it is all handled privately. As the plan emerges, there are at least three things to watch out for:
December 1, 2007 at 9:53 AM in Mortgage Debt & Home Equity | Permalink | Comments (7)
No Charge to Call Your Mortgage Servicer?
William Launder at American Banker did a story about my earlier Credit Slips post, What do Phone Sex and Mortgage Servicing Have in Common? In the post, I reported on an actual mortgage proof of claim that listed a the creditor’s phone number that was a toll service that charged $9.99 per minute. After calling several people at Household Finance Corp and its parent, HSBC, Mr. Launder concludes in his story that the phone number was the result of a typographical error, a possibility that I acknowledged in my initial post. HSBC said that the misprinted phone number was an “isolated incident of error.” However, HSBC never responded to the debtor’s objection, causing the debtor’s attorney and the court to need to take further action by entering an order resolving the objection in the debtor’s favor. Additionally, the Chapter 13 trustee spent time trying to contact the servicer and did not have any other contact information than the mistaken toll-charge number. The effect of the servicer’s mistake was to tax the bankruptcy system.
I’m glad to know that borrowers aren’t being charged a per minute fee to talk to their mortgage servicers. That’s a welcome change from standard servicing practices that do charge consumers to receive information: payoff statement fees, fax fees, email fees, etc. In this case, the debtors were fortunate. Their attorney didn’t charge them additional legal fees to file the objection. As a general matter, however, the costs of servicing errors fall on debtors, who are already cash-strapped and struggling to save their homes.
November 26, 2007 at 8:39 AM in Mortgage Debt & Home Equity | Permalink | Comments (0)
Hostage Value
The secured transactions course nearly always includes a discussion of hostage value, and the bankruptcy course offers the antidote. But the subprime mortgage market is giving us a new teachable moment.
Because foreclosures in Massachusetts have tripled in the last year, the governor set up a $250 million rescue fund to try to help families get out of crazy mortgages and into affordable, fixed mortgages. The Globe reports today that so far not one single family has qualified for the rescue. Other states with similar funds are also reporting dismal results. There are many reasons for the failure, but a critical problem is the hostage value of the house.
November 21, 2007 at 4:54 PM in Mortgage Debt & Home Equity | Permalink
Mortgages in Bankruptcy 101
A few weeks ago, Katie Porter discussed how the Wall Street Journal mischaracterized U.S. bankruptcy law while its editorial page criticized bills that would give relief to beleaguered homeowners. Yesterday, the New York Times mischaracterized U.S. bankruptcy law while its editorial page supported bills that would give relief to beleaguered homeowners. Sorry New York Times, but it is not true that “Under current law, mortgages on primary homes are the only type of secured debt that is ineligible for bankruptcy protection.” Mortgage debt is part of the bankruptcy case–it is just treated differently from other debt in chapter 13. And, after the 2005 law, some other debt in chapter 13 does get similar treatment. Long sigh.
At the least, we can say that the mischaracterizations are now equal on both sides of the political fence. I doubt either the WSJ or the NYT set out to deliberately mislead. What’s the quote? “Never blame malice or ill-will where sloth or ignorance can explain.” The complexity is pretty high here. A number of reporters have asked me for an explanation of how bankruptcy law currently treats home mortgages. With these bills pending in Congress, it is not just the reporters who are interested, so I’ve posted what I hope is a clear explanation below the fold. Bankruptcy jocks and other legal eagles should avert their eyes lest they be exposed to overgeneralization and blinding statements of the obvious (to them).
November 20, 2007 at 7:51 PM in Bankruptcy Generally, Mortgage Debt & Home Equity | Permalink | Comments (3)
CNN/Money on Foreclosure & Crime
The CNN/Money web site currently has a story about the link between crime and foreclosure rates. This relationship should come as no surprise, and the CNN/Money story is not the first source to point it out. As foreclosure rates increase, home ownership declines, and vacant houses and vacant lots become havens for criminal activity. The CNN/Money story has a new twist, however, as it reports how criminals are looting abandoned houses in a hard-hit Cleveland neighborhood for the siding, PVC, copper, and other materials within the structures.
Increased crime rates are just one externality of the subprime crisis and climbing mortgage foreclosure rates. The costs did not just fall on the lending institutions and borrowers foolish or unwise enough to make these loans. The costs also are being borne by the communities with a high incidence of mortgage foreclosures. The subprime crisis is not just a market failure that the market can correct. It’s also causing losses that the market participants have no incentive to fix because the they are not the ones bearing these externalized losses.
November 19, 2007 at 10:24 AM in Mortgage Debt & Home Equity | Permalink | Comments (1)
Newsflash: The Law Matters!
In its role as a big-time mortgage servicer, Deutsche Bank has carefully instructed the courts that the rules requiring the foreclosing party to demonstrating standing (e.g., the movant holds the mortgage and the note) were just too old fashioned to survive in the hip world of SIVs. Unfortunately for DB, the federal judge in the case just wasn’t hip enough. The rule, said the court, is the rule. If you try to foreclose, come up with the documentation that shows you are legally entitled to do so. The court then dismissed 14 foreclosure motions.
Gasp! The law matters.
The piece on the front page of today’s NYT is important for at least three reasons:
November 15, 2007 at 2:11 PM in Mortgage Debt & Home Equity | Permalink | Comments (2)
Anti-Predatory Lending Legislation in House
The U.S. House of Representatives currently has pending before it H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007. Among other things, this bill would impose liability for violations of the lending standards set out in the bill. Liability on whom, you ask? That is the question addressed in a letter by Professors Alan White of Valparaiso University, Patricia McCoy of the University of Connecticut (and former Credit Slips guest blogger), Kathleen Engel of the Cleveland-Marshall College of Law (and former Credit Slips guest blogger), and Kurt Eggert of Chapman University. The professors’ letter was written to the three sponsors of the legislation (Reps. Frank, Watt, and Miller).
The professors’ letter points to a potential loophole in the bill’s liability scheme, which would simply allow the loan originators to make sure liability rested with an empty corporate shell. The details are best left to the professors’ letter. As a service to Credit Slips readers and with the professors’ permission, we have posted the letter here. The professors also call for broader liability than the bill currently contemplates, including the possibility of liability resting with the assignees of any mortgages. That is a much more controversial proposition, but it is one that deserves airing.
November 12, 2007 at 3:29 PM in Mortgage Debt & Home Equity | Permalink | Comments (1)
A $50 Fee There, a $75 Fee There, and Soon It Adds Up to Real Money
Credit Slips own Katie Porter is the subject of a front-page article in today’s N.Y. Times. The article discusses Porter’s recent paper on mortgage claims in bankruptcy cases. Porter found questionable fees added to more than half of the claims and found significant discrepancies between what the bank and the debtor claimed were owed. Fees such as a “fax fee” or demand fee” were added to claims Porter found. In some egregious cases, banks also claimed to be owed far more than was actually due.
Although Porter’s paper studies claims made in bankruptcy cases, I think it has broader implications for consumers. There is no reason to think these errors are not made systematically across the mortgage industry. In bankruptcy court, the claims are made in an adversarial setting and subject to scrutiny by the court and the debtor’s lawyer. If overcharges are commonly occurring in the bankruptcy system, they are likely occurring across a much broader spectrum of claims.
UPDATE (11/6/07): Professor Porter’s paper can be accessed on SSRN here.
November 6, 2007 at 8:36 AM in Bankruptcy Generally, Mortgage Debt & Home Equity | Permalink | Comments (3)
Reporting on the “Mortgage Meltdown”
Journalists have produced some really excellent stories about the rising foreclosure rate and the struggles of families to save their homes. I’ve previously blogged about an interesting LA Times piece about the lack of reliable data about foreclosure numbers; another favorite article is the NY Times story, Can These Mortgages Be Saved?, about difficulties that consumers have in obtaining loan modifications from servicers.
In recent days, however, the Wall Street Journal has published pieces about bankruptcy that contain inaccuracies. An editorial on October 24th, The Mortgage Meltdown, grossly mischaracterizes pending bankruptcy legislation. The bill, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609), would reverse the existing preferential treatment in Chapter 13 bankruptcy law for home mortgages and permit debtors to modify their home loans in certain ways. The Wall Street Journal says that the legislation will “allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt.” The editorial then sarcastically posits “Guess how eager lenders will be to offer low mortgage rates if they have no better chance of collecting on a mortgage than they do on a credit card?” This characterization isn’t mere alarmist hyperbole. It’s flatly wrong. Mortgages are liens; they give the lender a security interest in the debtor’s real property. Absent unusual circumstances, secured creditors retain their property interestsin the collateral. If they aren’t paid–inside or outside of bankruptcy–they can foreclose on the property. In contrast, credit cards are normally unsecured debt. The lenders have no collateral. Unsecured debt and secured debt are treated differently in bankruptcy law, just as they are in state law. The apt comparison for HR 3609’s proposal is that home mortgage lenders would be treated just like lenders whose collateral are vacation homes, or commercial property, or rental houses, or whose collateral are cars, motorcycles, or appliances. The Wall Street Journal should print a correction, making clear that the bill would not put mortgage lenders on par with credit card companies, and retracting its suggestion that the legislation would thereby cause mortgages to have the same interest rates as credit cards. Perhaps some would excuse the Journal because these statements were in an editorial. But a recent news article on bankruptcy as a home-saving device was also misleading.
October 27, 2007 at 7:12 PM in Bankruptcy Data, Bankruptcy Generally, Mortgage Debt & Home Equity | Permalink | Comments (6)
What Do Phone Sex & Mortgage Servicing Have in Common?
Question: What do phone sex and mortgage servicing have in common?
Answer: They both cost $9.99 a minute.
This isn’t a joke. It’s a real-life example of the difficulties that consumers sometimes face in working with their mortgage servicers. As part of a study of mortgage claims that I’m conducting, I came across an objection to a mortgage claim where the debtor asked for the court’s help to avoid paying $9.99 a minute to talk with his mortgage servicer. The mortgage company had filed SIX duplicate claims, each for an identical amount. These claims were not marked as amended claims, so the debtor wanted to ensure that he only was on the hook for his mortgage debt one time. Since these claims were obviously mistakes, the question is why didn’t the debtor just contact the creditor and tell them–“Hey, stop spitting out these claims and withdraw the extras and let’s just get on with this bankruptcy.” In fact, the debtor’s attorney and the Chapter 13 trustee both tried to do just that. They called up the creditor at the listed phone number, but were directed to call another number if they needed actual assistance. The hitch–that other number required them to pay $9.99 A MINUTE. Frustrated, the debtor’s attorney went the formal route and filed a claims objection, which I’ve put below the jump.(Click on it to see it big enough to read clearly; you may need to adjust to 50% in the picture viewer to see the bottom).
Continue reading “What Do Phone Sex & Mortgage Servicing Have in Common?” »
October 23, 2007 at 2:12 PM in Consumer Contracts, Mortgage Debt & Home Equity | Permalink | Comments (4)
Reining in Home Mortgage Creditors
Thanks to everyone at Credit Slips for this opportunity to share a few thoughts about consumer credit and bankruptcy. True to my earlier promise, in my last post I want to come back to the topic of proposed legislative changes to chapter 13.
Four bills are pending in Congress which seek in different ways to limit the special protection mortgage lenders have in chapter 13 cases, so that home mortgages may be modified like other secured debts. A comparison of the four bills prepared by Mark Scarberry is available on the ABI website. An earlier post by Bob Lawless refers to a position paper, or “call to action”, on the subject prepared by four consumer organizations (National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center, Center for Responsible Lending and Consumer Federation of America). My testimony at a House subcommittee hearing last month (and the testimony of Eric Stein of CRL) discusses reasons why the law should be changed. In this post, however, I put forth a different justification for doing away with the anti-modification provision in section 1322(b)(2) of the Bankruptcy Code.
October 22, 2007 at 8:20 AM in Mortgage Debt & Home Equity | Permalink | Comments (4)
Loan Modifications . . . Where is the Decider?
Thanks to Bob Lawless and the crew at Credit Slips for this opportunity for the guest blogger spot for the next week. I’ll begin with a something on the mortgage foreclosure crisis. Don’t worry, I will touch on other subjects as well.
Finger-pointing among mortgage industry players in the current foreclosure crisis has really gotten quite interesting. Some of this has helped to validate what consumer advocates have been saying for years. A fine example is the letter recently sent by the Consumer Mortgage Coalition, a trade association of large national mortgage lenders and servicers, to Chairwoman Sheila Bair of the Federal Deposit Insurance Corporation. The letter describes problems in the securitization structure which prevent loan modifications from being made.
Continue reading “Loan Modifications . . . Where is the Decider?” »
October 15, 2007 at 10:11 AM in Mortgage Debt & Home Equity | Permalink | Comments (7)
On Mortgage Brokering
I’m still trying to understand fully how this market works, and I’ve got some outstanding questions about which I’d be interested in getting some more information.
1) Many commentators contend banks charge more for their retail rates than mortgage brokers are able to procure for buyers (and still make a comfortable profit margin for the broker to boot). This was certainly my experience when I tried using a broker and phoning some banks directly. But I don’t understand how that business model is economically tenable. If this is pervasive, why wouldn’t banks drop their rates and squeeze out the middleman? Something doesn’t add up here, but maybe it’s just a market failure.
2) If part of the added value the broker brings to the table is fostering competition among originating banks, does the rise of the internet and the easier dissemination of information mean the days of brokers are numbered? I am reminded of how the garden-variety travel agency business basically vanished when airlines started going online and price shopping became easy for consumers.
3) What is the profit incentive of the mortgage broker? If she is an agent of the buyer (which the buyer would surely be reasonable in believing if the broker refers to the buyer as her “customer” or even her “client”), then I would expect, for an alignment of principal-agent interests, that the broker’s profit would be incentivized to reduce the buyer’s loan cost (i.e., interest rate). That is, if the broker gets a 5% mortgage for the buyer, she gets paid X, but if she gets 4.9% mortgage, she gets paid something > X (which hopefully is less than 0.1%!). Yet as I understand it, the broker gets more if she convinces the buyer to take a higher priced mortgage (i.e., earns something > X if she gets buyer to take mortgage at 5.1%). Have I got that right? (Note that I am, for purposes of this question, agnostic as to the structuring of that compensation, be it a flat fee paid at closing or a deferred fee achieved through a YSP.) Similarly, does the broker have an incentive to get the buyer to take out more debt rather than less debt (that is, does the greater face amount of the mortgage increase the broker’s profit)? If so, I again worry about a potential disalignment of incentives.
Now, a comment (or at least semi-rhetorical question):
I understand some defenders of the YSP pricing structure to be making the argument that if we assume the mortgage broker has to be paid (which seems a reasonable assumption), then compensating him through a YSP is just spreading out what would otherwise be a flat fee up front. If so, it has the potential advantage of providing further financing for buyers who would otherwise be unable to afford mortgage brokers. That seems to make sense. My concern, however, is that if I make a further assumption — that the mortgage broker’s fee is a small outlay in relation to the overall mortgage debt — then we are talking about putative buyers who are so close to the margin that they cannot afford to secure the financing if forced to pay a small portion of it (the brokerage cost) as an upfront fee. Pursuing that assumption, I have misgivings whether it is socially beneficial to put these people into home mortgages. Perhaps they’d be better off renting a bit longer until becoming more financially secure, as surely they are the marginal consumers who will take the first hits when the market sours. I worry there’s something regressive lurking here.
October 13, 2007 at 8:03 PM in Mortgage Debt & Home Equity | Permalink | Comments (4)
What Does a Broker Say?
One advantage to posting on CreditSlips is that I get a lot of people who try to help me understand things. I had a long, interesting conversation yesterday with a person who has been a mortgage broker and who current trains mortgage brokers. He said, “If I go to Macy’s and they have a shirt for $60, and I go down the street to Sears and they have the same shirt for $40, it is up to me to figure out that I should buy the $40 shirt. Why is it different with a mortgage broker?”
Why indeed? In fact, as we talked, he–the broker–came up with five big differences:
October 11, 2007 at 2:46 PM in Mortgage Debt & Home Equity | Permalink | Comments (19)
Hate Mail
Last Tuesday I published an Op-Ed in the Boston Globe about mortgage companies that pay brokers to sell higher priced mortgages to customers. (E.g., a customer qualifies for a 6% mortgage, but the mortgage company pays the broker a higher fee to sell him a 7% mortgage.) I called the payments “bribes” paid by the mortgage companies to the brokers to boost mutual profits at the expense of the homeowner. I was in good company. The Vice-President of the Fannie Mae Foundation called them “kickbacks.” After the op-ed was published, I was flooded with hate mail. It was so bad that when there was no let up by the end of the third day, I thought I might have to change my email address.
Some of it was funny (“your stupid”), weird (“I thank God my son went to BU instead of Harvard”), or silly (“you must be a Communist”). But most of the correspondence fell into three main buckets:
October 10, 2007 at 8:26 AM in Mortgage Debt & Home Equity | Permalink | Comments (52)
Put Down the Crow over AHM Escrows
Loren Steffy, a business reporter for the Houston Chronicle, headlines a recent blog post with a suggestion that he’ll eat crow over his previous commentary on American Home Mortgage. A reader had inquired whether his escrow payments were safe with bankruptcy-filer AHM. Steffy had responded that AHM’s bankruptcy should have no effect on his reader’s escrow. A few news stories have since appeared that AHM was bouncing checks to local taxing authorities, but, Mr. Steffy, I think you can put down that crow. The problem now seems to be fixed and attributable (I hope) to a temporary glitch involving the far-flung banking operations of a complex financial company.
Still, the story got me thinking a little bit about the consequences of AHM’s bankruptcy filing on its escrow accounts.
September 25, 2007 at 2:49 PM in Mortgage Debt & Home Equity | Permalink | Comments (0)
More Subprime Side Effects?
When credit card borrowers have trouble paying their debts, issuers respond in a number of ways, but one of them is particularly surprising: they often extend more credit. According to the Boston Globe article Credit Card Companies Woo Struggling Mortgage-holders, issuers are extending this strategy to subprime homeowners as well. Globe staffer Robert Gavin reports on a study by Mintel International Group, which claims that as the subprime mortgage market continues to implode, credit card issuers are stepping in to offer more credit to struggling homeowners.
Or at least that’s what the headline says.
September 5, 2007 at 10:17 PM in Credit & Debit Cards, Mortgage Debt & Home Equity | Permalink | Comments (2) | TrackBack (0)
“The Best Loan Possible” from Whose Point of View?
“I want to be sure you are getting the best loan possible,” is a line from a Countrywide Financial Service Corporation sales pitch. Since a sales person would be the one saying it, borrowers could be forgiven for thinking that this meant the “best loan” for them. But as Gretchen Morgenson shows in an expose in Sunday’s New York Times, it apparently means the “best loan possible” for Countrywide. Relying primarily on anonymous interviews with former employees and documents they provided, Morgenson demonstrates how every aspect of Countrywide’s business steers borrowers towards loans that are more profitable for the company and therefore more expensive for the borrower.
Continue reading “”The Best Loan Possible” from Whose Point of View?” »
August 27, 2007 at 9:13 PM in Mortgage Debt & Home Equity | Permalink | Comments (2) | TrackBack (0)
Blaming the Correct Governmental Body
Bob should be pleased to see that today’s New York Times editorial on taxing debt forgiven in foreclosure puts the blame squarely on Congress’ shoulders. On Monday, Bob posted about a New York Times news article on the same topic. He argued that the problem was real, but the responsibility lies with Congress, not the I.R.S., on the sensible grounds that Congress has the power to write the rules, whereas the I.R.S. just enforces them. The New York Times editorial page apparently agrees, because today’s piece says that it’s not the I.R.S.’ fault and ends with a call to Congress to provide relief.
I, for one, am going to take this as confirmation that the Times’ editorial board is composed of Credit Slips readers.
August 24, 2007 at 6:18 PM in Mortgage Debt & Home Equity | Permalink | Comments (3) | TrackBack (0)
Let’s Give the IRS a Break
Geraldine Fabrikant has a story in today’s New York Times tells a story about how U.S. homeowners can get hit for a big tax bill after a foreclosure. That is correct. If someone lends you $200,000 and then later forgives the debt, you’ve made money. The income tax laws treat the forgiven debt as taxable income. The reason should be clear. If we did not tax forgiven debt as income, consider the huge loophole that otherwise would exist. Parties could transfer all sorts of wealth by pretending it was “forgiven debt.” Our taxing authorities would spend all sorts of enforcement resources policing such abuse.
The rules on forgiven debt are known as the “Cancellation of Debt Income” or “COD” rules, and they apply to the largest corporation and to the modest homeowner. Thus, when a bank takes a home in foreclosure and forgives the remainder of the mortgage debt, the difference between what was paid (i.e., the home’s value) and what was owed is taxable income to the homeowner. The New York Times story relates how several homeowners ended up with tax bills for tens of thousands of dollars.
August 20, 2007 at 11:58 AM in Mortgage Debt & Home Equity | Permalink | Comments (5)
Onion Soup
Angie Littwin pointed out The Onion’s pseudo-survey of what people who are trapped in subprime mortgages are planning to do. Great sport, but what ARE families going to do? For all their fulminations, most of the Washington crowd is focused on developing regulations to stop the next credit bubble–not to help millions who will be hurt by this one.
Bankruptcy law is the final arbiter of debtor-creditor rights, but it is always tough to teach this particular asymmetry in the law: If a corporation can no longer afford the mortgage on its factory, it has powerful tools to rewrite the mortgage in bankruptcy. But if a homeowner is in exactly the same trouble following an interest rate hike, those same tools are unavailable.
August 16, 2007 at 7:16 PM in Mortgage Debt & Home Equity | Permalink | Comments (8)
Leave It to “The Onion”
After John’s thoughtful post on the sub-prime meltdown yesterday, I thought I would respond in a less thoughtful vein: via everyone’s favorite satirical newspaper, The Onion. Today, it posted its reaction to the sub-prime mortgage crisis with a “Statshot” (“A look at the numbers that shape our world”) entitled “How Are We Paying Off Our Subprime Mortgages?” It is worth a look for some gallows humor on a difficult topic. My favorite response — provided by 17% of the paper’s fictional respondents — is, “Getting a job at loan office, bringing down company from inside.”
August 15, 2007 at 5:11 PM in Mortgage Debt & Home Equity | Permalink | Comments (0) | TrackBack (1)
Musings on Sub-prime Meltdown
I have been wrestling with posting about the remarkable global economic occurrences triggered by the sub-prime mortgage meltdown in the United States, but I’m still not entirely sure I fully appreciate what is going on, let alone have anything helpful to share with Credit Slips readers. I am astounded not just at the scope of the crunch (as in its penetration around the world) but also the depth of the turmoil (commercial paper is being hit because of sub-prime mortgage jitters?!). As I struggle to comprehend just what is going on, I’m left with a couple thoughts/questions.
1) Is what we’re seeing here like a macro-economic manifestation of the Two-Income Trap? That is, we thought we were making families better off with the entry of the wife into the workforce. It turns out, rather than diversifying risk we were inadvertently multiplying it. Is this just what happened with bundling and packaging out sub-prime mortgages? Instead of healthily diversifying risk, all we did was spread around the scope of possible entities (German banks!) to be hurt in the event of a collapse.
2) Can risk every be priced “accurately”? It seems to me that as investment funds chased higher and higher returns (which we can blame on, pick your scapegoat — how about cheap Chinese currency forcing a huge trade deficit and concomitant buy-up of U.S. debt?), that there was increasingly willful blindness regarding risk portfolios. Was it really that hard to foresee CDOs eating up through the tranches to even the “safest” tier? Even the quantiest of quants seemed to bet wrong, which strikes me as a sober reminder that humans, after all, oversee these programs and continue to suffer cognitive frailties.
3) Is it possible to isolate the effects of something like the mortgage market to mortgage investors? Tough love regulators of course don’t want to respond to “mere losses” in the investment markets by cutting interest rates, which should be the province of monetary policy, although that won’t stop them from cheating (ie., achieving the same effect, admittedly with more control, by injecting the sorts of funds that the Fed and ECB have just done). But as we’re seeing, we can’t just sit by and let a supposedly discrete group of investors take their lumps — when credit gets squeezed in commercial paper, we realize it’s just not that easy when credit gets crunched. Call these what you want (“externalities” or whatever), but it strikes me that we’re coming to the painful conclusion that the economic dislocation of Jack losing his sub-prime financed (declining valued) home involves a lot more pain than just that felt by Jack. (And let’s also not forget that Jack’s hurting too).
I wish I had more learned or scholarly insight for readers, but I find myself intellectually overwhelmed….
August 14, 2007 at 4:51 PM in Mortgage Debt & Home Equity | Permalink | Comments (5)
“Countrywide” Mortgage Delinquencies
Yesterday, both the Wall Street Journal (piece 1 and piece 2) and the New York Times had prominent stories about a 33% drop in second quarter net income at Countrywide Financial. The company reported not only a jump in late payments on subprime mortgages (from 15.33% to 23.71% over the same period in 2006), but also escalating delinquencies among prime borrowers. Countrywide officials said that piggyback loans to prime borrowers were a main source of its earnings drop and noted that many consumers who put little or no money down when they purchased a home have no equity to tap because of falling or stagnant housing prices. Countrywide’s CEO, Angelo Mozilo, has years of industry experience, and Countrywide restricted its subprime and alternative lending well ahead of some of its competitors. If Countrywide is facing this level of delinquencies, other lenders may fare much worse.
By the way, Credit Slips readers who followed the extended comments on my post entitled Blunt Talk about Borrowing Standards may be interested in the op-ed in yesterday’s NYT that criticizes the reaction of all three credit rating agencies (including Standard & Poors) to the subprime lending crisis. I thought this passage was particularly interesting: “And the ratings agencies are far from passive arbitrators in the markets. In structured finance, the rating agency can be an active part of the construction of a deal. In fact, the original models used to rate collateralized debt obligations were created in close cooperation with the investment banks that designed the securities. Fitch, Moody’s and S.&P. actively advise issuers of these securities on how to achieve their desired ratings. They appear to be helping investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors, to develop the worst possible product that would still achieve a certain rating.” The op-ed goes far beyond the original point in my post, which was that S&P’s profits are partially driven by the quantity and size of credit transactions, which grew as subprime lending standards relaxed.
July 26, 2007 at 10:14 AM in Mortgage Debt & Home Equity | Permalink | Comments (2)
Blunt Talk about Borrowing Standards
The August 2007 Smart Money magazine featured a Q&A interview with Terry McGraw, CEO of McGraw-Hill Companies, which owns debt-rating company Standard & Poors. The interview asked him about the potential of the fall-out in the subprime market to hurt Standard & Poors. First, he bluntly admitted that while he “feels badly if somebody lost his home,” that Standard & Poors makes money regardless. It’s refreshing to see an industry executive being honest on this point. Profits frequently turn on the existence of the transaction, not its ultimate success. Ronald Mann made a similar point in his Sweatbox article about credit card issuers–consumers can struggle and sometimes fail to repay and the industry profits handsomely nonetheless. The bankruptcy debate was sometimes portrayed as a necessary antidote to the problem of consumer default, a characterization that misses the real world reality that profitability does not require a consumer to repay in full and on time. Standard & Poors is an excellent example of an organization that continues to profit, even if consumers suffer. I can think of many others–law firms securitizing receivables, investment banks putting together bond issues, mortgage brokers, real estate agents, and originating lenders every time a consumer buys a home, etc.
McGraw didn’t stop his remarks with expressing sympathy for the harms that accompany S&P’s profits.
July 19, 2007 at 10:46 PM in Credit Policy & Regulation, Mortgage Debt & Home Equity | Permalink | Comments (11)
Bad Hippo
The New York Times has a double dose of consumer credit pieces today. If you haven’t seen them yet, the first is an editorial about the intersection of bankruptcy law and the rise in home foreclosures. Interestingly, the editorial’s primary concern is not with the changes from 2005, but about a 30-year-old provision prohibiting the modification of repayment terms on primary residence mortgages in Chapter 13. The editorial argues that this provision may have been sensible when most mortgages were straight-forward, low-risk loans, but that with the rise of riskier, more complicated mortgage products, courts need more discretion to protect homeowners.
Second is Erik Eckholm’s article, “Enticing Ad, Little Cash and Then a Lot of Regret” about the new wave of mail-order-financed computer companies, such as BlueHippo, Circuit Micro, and Financing Alternatives, where customers make small installment payments through bank-account deductions in exchange for computers that (ideally) arrive by mail. I had heard BlueHippo’s radio ads and wondered about the service. I have my own variation on the motto, “if it seems too good to be true, it probably is,” which is that, “if it’s a new, heavily advertised financing option aimed at low-income people that seems reasonable at first, it’s probably not.” So I’d assumed there was something fishy about the service, but I hadn’t had a chance to look into it. Fortunately, the New York Times did the investigation for me. It turns out that Better Business Bureaus across the country have been flooded with complaints about these services. Financing Alternatives is currently the Norfolk, Virginia office’s number one subject of complaints. The Orange County office has had a similar relationship with Circuit Micro. And attorneys general in Maryland, Illinois, and West Virginia have taken action against BlueHippo.
In theory, a service that enables low-income consumers to buy computers using small payments over time is a good idea. These days, computer competence is a basic prerequisite of upward-mobility. Most higher educational institutions assume (or require) that their students have computers. Obtaining the skills to compete with their middle-class, My Space-entrenched peers is crucial for the younger generation of low-income people. For low-income parents who want their children to do well, finding them a computer is a pressing concern. There are two major problems with these computer sellers, however.
July 14, 2007 at 4:38 PM in Consumer Contracts, Mortgage Debt & Home Equity | Permalink | Comments (4) | TrackBack (0)
In the Tuesday News Bin
Again, things pile up in my e-mail folder for “stuff to write about on the blog.” In the absence of time for longer posts:
- The Fed reported on July 9 that consumer credit rose increased at an annual rate of 6.4% in May. That was dramatically up from April when the increase was 1.1% an an annual rate but the same as March when it was again 6.4%. The monthly fluctuations are noise, but the trend is clear. Consumer credit continues to rise even after the 2005 bankruptcy law went into effect.
- The UK is adding a course to its curriculum for all 11 – 16 year olds on “economic wellbeing and financial stability.” The London Times has the story. The Children, Schools, and Families Secretary placed the curricular within the context of a UK that has seen skyrocketing consumer debt and rising personal insolvency rates. More consumer education undoubtedly is needed–especially in light of the statistic that 5 million British people are consider innumerate and 17 million scarcely have the skills to make change on a simple transaction. Still, as Oren Bar-Gill discussed in his posts last week here at Credit Slips, consumers are subject to all kinds of biases that consumer lenders are more than happy to exploit (and I would exploit too if I were in the business of consumer lending). These biases are ingrained, part of the human condition. Although consumer education is good, policymakers should not be deluded that it will lead to huge improvements. (Thanks to Gary Neustadter at Santa Clara for bringing this story to my attention.)
- A day late and literally a dollar short (given the newsstand price) is to note yesterday ‘s(July 9) front-page article in the New York Times on the high foreclosure rate in Atlanta. I suspect most Credit Slips readers have seen it, but if you have not, it is definitely worth a read. In the middle of the story is a paragraph describing how Atlanta’s unemployment rate and growth rate mirror the country. The area is not doing poorly, but the foreclosures come as an income shock such a job loss or health problem leads to financial distress.
July 10, 2007 at 1:45 PM in Credit Policy & Regulation, Mortgage Debt & Home Equity | Permalink | Comments (1)
Equity Stripping
Today’s New York Times Business Section includes an interesting article on equity stripping: “Predators Bilk Struggling Homeowners” by Gretchen Morgensen and Vikas Bajaj. The article explains how sophisticated predators target desperate homeowners and steal the equity that they have in their homes:
“The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes.”
These schemes, which are attracting the attention of regulators, pray on the imperfect rationality of distressed homeowners. First, they exploit myopia by offering short-term benefits, while downplaying future risks. Second, they hide the true costs and benefits of this complex transaction in lengthy incomprehensible form contracts.
But, most importantly, these fraudulent schemes are driven by simple lies: Knowing that their targets will not read the contracts and would not understand them even if they did try to read, the predators blatantly mischaracterizing the transaction in the representations they make to homeowners.
Worth a read.
July 3, 2007 at 5:11 AM in Mortgage Debt & Home Equity | Permalink | Comments (4)
In the Monday News Bin
Each day, I run across a few news items on which I want to make a few comments on the blog. Awaiting for the moment when I have a lot of time to do an extended analysis, these items typically languish in my e-mail inbox and then eventually get deleted. Rather than let these items suffer the same fate:
- On Friday (June 29), the federal banking regulators issued an interagency statement about their expectations for underwriting standards for so-called hybrid adjustable rate mortgages (ARMs). The regulating agencies were the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. As banking regulators, these agencies collectively have a regulatory interest in ensuring that lenders do not overextend themselves in making risky loans to bank customers. Perhaps the most important item was the agencies’ statement that they expect lenders to qualify borrowers for loans based on the “fully-indexed” rate for the loan. “Fully-indexed” is the technical term for the rate after the teaser period is over. In other words, it’s not enough that the borrower qualifies for the two-year low teaser rate, but that the borrow qualify for a loan based on the higher rate that will apply later.
- Paul Krugman has a column in today’s (July 2) New York Times ($) about the complicity of the rating agencies and regulators in making securitized subprime loans look less risky than they really were. Krugman writes, “But the securities were never as safe as advertised, because the risk transfer wasn’t anywhere near big enough to protect investors from the consequences of a burst housing bubble.” It’s worth a read.
That’s all for now.
July 2, 2007 at 2:32 PM in Mortgage Debt & Home Equity | Permalink | Comments (0)
Is Anyone Rational?
Many people, myself included, believe that consumer behavior deviates in important ways from the predictions of the rational choice model. This belief has led to the development of alternative, more realistic models of decisionmaking, and to the application of these new models in studying consumer markets. But while the rational choice model inadequately describes consumer behavior, it is believed to offer a fairly accurate description of the behavior of more sophisticated parties, like sellers and lenders.
Of course, sellers and lenders are also human and prone to error, but the assumption is that organizational and market forces serve as an effective check on the behavior of these sophisticated parties, preventing substantial departures from the predictions of the rational choice model. As Milton Friedman famously argued, it is not that firms are necessarily rational profit-maximizers, but firms behave “as if” they are rational profit-maximizers. Otherwise, they would be selected out of the market.
Recent events have caused me to question this belief that sellers and lenders behave rationally. I am referring to the rise in foreclosures in the subprime mortgage market, and its effect on lenders. It is not a surprise that irresponsible practices in the subprime market have caused substantial harm to consumers. The surprise is that allegedly sophisticated lenders, and the Wall Street firms that back them, have been suffering substantial losses. Numerous lenders have filed for bankruptcy. Bear and Stearns recently invested $3.2 billion to rescue a hedge fund that was heavily invested in the subprime market—the biggest such bailout since 1998. Wall Street is supposed to be good at managing risks. But here it looks like some top-of-the-line professionals have made big mistakes. Of course, suffering losses is a part of taking risks. But this looks like more than absorbing the foreseeable downside of a calculated bet.
July 2, 2007 at 11:57 AM in Mortgage Debt & Home Equity | Permalink | Comments (2)
The New York Times on Bear Stearns and the Foreclosure Crisis
It was easy to miss among the multitude of legal news articles about the Supreme Court rulings, but the New York Times issued an excellent editorial today on “Housing and Hedge Funds.” The piece picks up where Credit Slips blogger Elizabeth Warren left off on Sunday and is well worth a read. One of the editorial’s most interesting points is that the involvement of hedge funds in the mortgage crisis means that struggling homeowners are no longer the only people suffering as a result of bad mortgages. Wall Street is now losing money too. And the negative effects could spread throughout the whole economy. This makes it more likely that Congress will step in and take action, but it also makes the ethics of Congressional intervention more complicated. Congress would no longer be helping only ordinary families working to keep their homes; it would also be bailing out Wall Street firms who squarely shouldered the risk.
June 28, 2007 at 7:05 PM in Mortgage Debt & Home Equity | Permalink | Comments (3) | TrackBack (0)
Catching My Eye This Morning
A few tidbits here and there catching my eye on a rainy Thursday morning here in Champaign:
- The FDIC has approved a pilot project to encourage banking institutions to offer small-dollar lending products that would compete against the incredibly high-priced products offered by payday lenders and their ilk. Under the FDIC program, participating banks would offer loans of no more than $1,000, require mandatory savings components, have payment periods that extend beyond a single pay cycle, not impose prepayment penalties, and would have origination fees only in an amount that reflects the actual cost of originating the loan. When we talk about payday lending here at Credit Slips, the question is sometimes asked why mainstream lending institutions do not step into the gap. They are, slowly and carefully.
- The New York state legislature has approved a bill banning universal default clauses in credit card agreements. As far as I know, the bill is still awaiting Governor Spitzer’s signature. This move follows on the heels of a bill signed into law in Nevada also banning the clauses. Both pieces of legislation will have little effect, however, as they will be preempted by the National Banking Act.
- In a prepared committee statement, Senator Charles Schumer signaled his intention to make his bill regulating mortgage brokers (S. 1299) a legislative priority (well, a priority right after they get done with the constitutional struggle of having the executive branch thumb its nose at the Senatre Judiciary Committee’s subpoenas of yesterday). Consumer credit, be it mortgage debt or credit card debt, seems to be a hot topic on Capitol Hill. It looks like we will see some legislation coming out of Congress this term on the topic of consumer credit. Whether the White House will sign it will be another question.
June 28, 2007 at 9:53 AM in Credit & Debit Cards, Mortgage Debt & Home Equity, Payday & Title Lending | Permalink | Comments (0)
Blame the Borrower
These days, smart opponents of regulating controversial lending practices talk in terms of consumer choice. They portray people like me who often think regulation is a good idea as the ones hurting consumers by limiting their options. So it’s a rare occasion to come across someone who is willing to blame the borrower as thoroughly and openly as Kris Frieswick does in her piece “Here Comes the Repo Man” in this week’s Boston Globe Magazine (free registration required).
The article’s subtitle: “It’s easy to scold sub-prime lenders for the glut of home foreclosures. It’s also wrong. Blame the buyers.” Her take on current proposals to regulate subprime mortgage lenders and brokers in Massachusetts: “I applaud the licensing and counseling concepts, but legislators must accept that home buyers deserve the bulk of the blame for the foreclosure crisis.” And her solution for halting the rise in home foreclosures: “We don’t. Time does.”
June 25, 2007 at 10:05 PM in Mortgage Debt & Home Equity | Permalink | Comments (16) | TrackBack (1)
More Risk in the Mortgage Market?
The big financial news this week-end is Bear Stearns’ decision to put $3.2 billion into its struggling hedge fund to try to stave off collapse of both the fund and the mortgage securities market. An academic paper, “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions,” presented early this spring at the Hudson Institute suggests that the mortgage market has been structurally realigned, and that the whole system is far riskier than rating agencies, regulators or investors have perceived. If the paper is right, Bear Stearns has taken the financial equivalent of striking up the Titanic band to play “Nearer My God to Thee.”
June 24, 2007 at 10:56 AM in Mortgage Debt & Home Equity | Permalink | Comments (3)
Can People Learn to Be Good Borrowers?
Today’s New York Times has a story about a mandatory mortgage counseling program here in my home state of Illinois. The pilot program started last fall as a way to deal with skyrocketing mortgage foreclosure rates. The idea was that persons who wanted to take out a mortgage in the ten zip codes with the highest increases in foreclosure rates would have to go through a mandatory financial counseling session. The program was suspended in January after charges of racial discrimination because the ten zip codes were concentrated in areas with a high percentage of minorities.
I’ll leave to the NYT story the details on what might happen next (including a possible reintroduction and expansion of the program). Rather, what intrigued me were the reports about experiences while the law was in effect. The story quotes a report from the nonprofit Housing Action Illinois: “More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.” Further in the story, it goes on about the persons who borrowed after counseling:
While the counseling sessions persuaded some like Ms. McKinney to back out, counselors said that other borrowers went ahead with dubious loans, because they felt trapped by credit card balances, medical bills and other debt. . . .
It is unclear how many borrowers who were counseled closed on their mortgages, since the state has not provided an analysis of a database it maintains on the loans. The Greater Southwest Development Corporation, one of the counseling agencies, estimates that up to 60 percent of the people it talked to closed on a loan, based on a survey of public filings. But it does not know how many renegotiated the terms of their loans.
It seems to me there are two possibilities here, generally speaking. First, it is entirely possible that the counseling was simply unhelpful. Given the experience with analogous credit counseling before filing bankruptcy, it could be that this mortgage counseling was not designed to be very useful. The story does discuss the experience of one borrower who found the counseling little more than verification of the documentation she already had provided to the bank. Second, it could be that we are not constructed to make good borrowing decisions because of overoptimism and other well-known biases that are part of the human condition. Either possibility (or, most likely, a combination of the two) suggests it might be most effective just to regulate the terms under which high-risk borrowing can occur.
June 12, 2007 at 9:47 AM in Credit Policy & Regulation, Mortgage Debt & Home Equity | Permalink | Comments (1)
Mutual Finger-Pointing
As Lisa Lerer wrote in The Politico last week, mortgage lenders and mortgage brokers are fingering each other as the culprit in the recent rise of home foreclosures. In her article Lawmakers Seek to Protect Borrowers, Lerer reports on Mortgage Bank Association Chairman John Robbins’ speech at the National Press Club, where Robbins blamed brokers for steering consumers into risky subprime loans.
The National Association of Mortgage Brokers did not take these charges lying down. The association’s president, Harry Dinham, responded in an email that, “It is truly unfortunate that the president of the Mortgage Bankers Association has attempted to shift blame away from Wall Street, federally chartered banks, state-chartered lenders and underwriters for the subprime situation we find ourselves in today.” The brokers are even going so far as to lobby for more regulation . . . of the mortgage lending industry, naturally. They are seeking national standards for continuing education and criminal background checks for banks and other lenders. Such requirements might improve the quality of brokers as well, but who’s counting?
What’s positive about this inter-industry lobbying squabble is that it means both groups are worried. If lenders and brokers did not think that consumer-protection bills such as those introduced by Senators Charles Schumer and Jack Reed had some chance of passing, they might have shown more restraint in attacking each other.
Finally, here’s a war where consumers benefit no matter who wins.
May 30, 2007 at 5:03 PM in Mortgage Debt & Home Equity | Permalink | Comments (0) | TrackBack (0)
Measuring the Problem: Foreclosures
On Credit Slips we have posted about the difficulties in obtaining timely and reliable bankruptcy data. (See here and here for some examples). Each of us is involved in the 2007 Consumer Bankruptcy Project, a new iteration of a decades-long effort to gather detailed data about a sample of bankruptcy cases to enrich (and sometimes critique) the very limited publicly available data. Apparently, similiar attention to the quality of released data and scholarly efforts to improve data are needed for foreclosures. Tara Twomey pointed me to this article in today’s Los Angeles Times, Getting a Fix on Foreclosure Data, that explains growing concern with the divergent foreclosure numbers being hawked by different companies. The article itself is worth a read, offering some juicy quotations from testy company analysts asserting that their numbers are accurate.
Foreclosure data typically come from public real estate records. Since all companies look same place, how do they get different numbers? The answer may partly rest with quality issues with public data, but mostly comes from how one defines a “foreclosure.” The LA Times writer, David Streitfeld, nicely explains: “Foreclosure is popularly understood as an event. . . Yet, foreclosure is really a process, one that can stretch over a year and vary from state to state.” Does putting a “1” in the foreclosure tally require that a family must actually lose their house? Or merely that a foreclosure action has been filed? How do we count judicial and non-judicial foreclosures, which proceed in very different ways? Does a foreclosure occur if a lender files a notice of default but the homeowner then sells the house?
May 29, 2007 at 11:37 AM in Mortgage Debt & Home Equity | Permalink | Comments (0)
How Smart Do They Think I Am?
Bob Lawless’ recent query How Dum Do They Think I Am? (sic) immediately caught my attention. I was shocked at Bob’s opening himself up to the obvious comeback from his smart-aleck friends by posing that question. But the other reason his question resonated with me was a full-page Wall Street Journal advertisement that I had just seen made a different assertion about consumers and their use of credit. In huge letters, the ad states “People are smart.” It goes on to claim that “[t]his isn’t an opinion. It’s a fact.” The advertiser is Ditech, which is the home financing arm of GMAC. Ditech is telling consumers that people “know what’s best for them and their family. And they know if we offer competitive home mortgages and smart financial solutions, together, we can make the most of our smart.”
The psychology of this ad seems to be to allay doubt in a customer’s mind about whether a home equity loan is a good idea and confirm that people should trust their financial instincts. This perspective is counter to the insights of behavioral law and economics scholars. Their research shows that people often make mistakes in decision making, and that “smart” doesn’t prevent this type of error. I was also struck by the anti-paternalism agenda of this ad. It strikes a libertarian cord, encouraging consumers to do what they want and trust that it will all work out. Of course, many experts disagree, as this interview done as part of a Bankrate financial literacy series for consumers explains. My final thinking on the ad is to wonder how financial educators would respond to this assertion. I don’t doubt anyone’s “smarts” but the research that I’ve seen reflects a strong belief by consumers that they need more financial education, that they are frequently worried that they do not understand lending products, and that they feel stressed and unsettled about financial issues. Suggesting, as the ad does, that because people know “it’s not a good idea to stick a fork in a light socket,” they can navigate the American credit economy seems to underrate the complexity of the home economics facing today’s families.
May 24, 2007 at 5:42 PM in Credit Policy & Regulation, Mortgage Debt & Home Equity | Permalink | Comments (1)
Senate Thinks About the Middle Class
For those of us who care about credit issues, yesterday’s Senate Finance Committee hearing, called by Senator Baucus, was instructive. The title: “Can the Middle Class Make Ends Meet?” I testified, along with a Brookings fellow, a social worker specializing in pediatric oncology, and the president of a tax-cut foundation. Three of us thought the middle class was in trouble, and the fourth thought that thanks to tax cuts the middle class was doing great and the with more tax cuts they would be even better off. (You can guess who took what positions.)
While the senators focused mostly on specific issues like paying for college or the impact of a medical problem, everything said in that room (except maybe the tax cut stuff) was also about credit. Rising debt, falling savings, bankruptcy, aggressive credit marketing, aggressive collection–it all plays out against the background of what’s happening to the middle class. If families could still afford to put away 11% of their incomes in savings, as they did in 1972, then the credit and bankruptcy issues we discuss would be very different.
May 11, 2007 at 12:20 PM in Bankruptcy Generally, Consumerism, Medical Debt, Mortgage Debt & Home Equity, Sociological Perspectives | Permalink | Comments (2)
Stripping in Chapter 13
We’ve been at this blogging thing for almost ten months now, and I’m finding the title to each blog post can be the most challenging. How about that one? Do I have your attention? We’re actually not talking about that kind of stripping but lien stripping.
The concept of lien stripping is simple. A lender is owed, let’s say, $150,000, but the collateral for the loan is only $130,000. Under U.S. bankruptcy law, lien stripping would reduce the lender’s lien to $130,000 and leave the remaining $20,000 as unsecured debt. The idea is that outside of bankruptcy, the lender would have received the collateral worth $130,000 and be left chasing the debtor for the remaining $20,000. The bankruptcy result is thus a recontracting of the lender and debtor’s relationship, consistent with the notion that the bankruptcy is a fresh start for the debtor. In other words, the bankruptcy result essentially gives the lender and debtor the terms of a new loan as if credit was extended at the moment of bankruptcy filing.
Unfortunately, the U.S. Supreme Court has issued a series of rulings that have sharply changed the concept of lien stripping that Congress laid out in 1978 when it passed the Bankruptcy Code. One of these decisions was a case called Nobelman v. American Savings Bank (1993) which interpreted language in chapter 13 that said a debtor could modify the rights of secured creditors except creditors with a claim “secured only by a security interest in real property that is the debtor’s principal residence.” The Court interpreted that language to mean that lien stripping was not allowed on a debtor’s house.
At the hearings before the U.S. House of Representatives on Thursday, one witness (Shirley Jones Burroughs) described how she and her husband were struggling to save their house in chapter 13. To make matters worse, the bank larded up their claim against the couple with all kinds of fees and charges. Under current law, Ms. Burroughs and her husband will have to pay all these fees and charges to save their home. To make matters worse, the Burroughs are struggling to make ends meet on the reduced income that resulted from Mr. Burroughs’s call to active military service in Iraq. This is not the fresh start Congress intended when it passed the 1978 Bankruptcy Code.
Both Ms. Burroughs and the next witness, Henry Sommer (president of the National Association of Consumer Bankruptcy Attorneys), proposed a simple solution — Congress should restore the bankruptcy law to its original intent before the Supreme Court’s decision in Nobelman. Although neither mentioned Nobelman by name, that was the clear result of their proposal to restore lien stripping of home mortgages in chapter 13. This proposal would merely put mortgage lenders in the same position they would occupy outside of bankruptcy court. It is not a gift to the debtor who must still pay the full value of the house over time or lose it to foreclosure. In a time of rising mortgage foreclosures, this would be a small change in the law that would provide enormous benefits.
(In his testimony, Mr. Sommer mentioned a more detailed appendix laying out the legislative proposals. That appendix did not make to the House web site. If someone has a copy and would send it along, I would be appreciative. My e-mail is rlawless-at-law-dot-uiuc-dot-edu.)
UPDATE (5/7/07): Mr. Sommer was kind enough to send me a copy of the legislative proposals and give me permission to make it available here.
May 1, 2007 at 5:59 PM in Bankruptcy Generally, Mortgage Debt & Home Equity | Permalink | Comments (1)
Are Mortgages the New Credit Cards?
Today, Harvard’s Joint Center for Housing Studies released two reports on understanding the home mortgage market. One study, entitled “Mortgage Market Channels and Fair Lending: An Analysis of HMDA Data,” explores the dramatic changes in the mortgage market over the course of the past two decades, including the rise of subprime lenders offering risk-based pricing. The other report, “Understanding Mortgage Market Behavior: Creating Good Mortgage Options for All Americans,” analyzes the cognitive and behavioral biases that limit consumers’ ability to compare different types of mortgage products in accordance with their own long-term preferences. For example, the study explains how some consumers will have difficulty evaluating products such as adjustable-rate mortgages because many people face cognitive distortions when comparing short-term and long-term risks. It also documents how, as the number and type of mortgage products have multiplied, choosing a mortgage has become breathtakingly complex.
Both reports have several compelling findings, including some important analysis on racial and ethnic disparities in mortgage types. But what fascinates me is how familiar this all sounds. There is another industry frequently discussed on Credit Slips that has recently expanded into subprime territory, that is accused of playing on cognitive biases to induce customers to take out loans that are ultimately unaffordable, and that features contracts so complex law professors must work to understand them. The good news is that we can use these similarities to cross-pollinate our ideas for improving both systems, adapting for the mortgage context ideas that were developed for credit card borrowing and applying mortgage reform proposals to credit cards. The bad news is that there are now two ways for people to find themselves in unforeseen unmanageable debt.
April 26, 2007 at 1:52 PM in Credit & Debit Cards, Mortgage Debt & Home Equity | Permalink | Comments (0)
Triumph for Federal Inaction
The Supreme Court issued its opinion today in Watters v. Wachovia Bank. The 5-3 decision (Thomas did not participate) affirmed the Sixth Circuit’s decision that a mortgage lending subsidiary of Wachovia Bank is subject to regulation by the Office of the Comptroller of the Currency under the National Banking Act and is not required to comply with the licensing and reporting regime of the state of Michigan in which it operated. Writing for the majority, Justice Ginsburg held that federal law preempted two Michigan statutes that purported to regulate mortgage lenders, including national bank operating subsidiaries. The statutes at issue did not regulate depository institutions such as national or state banks and had consumer protection (rather than protection of bank depositors) as their purpose.
The dissent was authored by Justice Stevens and joined by the Chief Justice and Justice Scalia, a rather odd group of bedfellows. In Part V, Justice Stevens identifies as the most pressing question whether “Congress has delegated to the Comptroller of the Currency the authority to preempt the laws of a sovereign State as they apply to operating subsidiaries, and if so, whether that authority was properly exercised here.” Justice Stevens concludes that it is inappropriate to grant Chevron deference to a federal agency’s own decision about the scope of its premptive powers, which he concludes is the thrust of the majority’s analysis. The majority decision, however, studiously avoids relying on Chevron. Perhaps the failure to rely on Chevron permits a narrowing reading of the decision that it holds only that state licensing is preempted by the National Banking Act but that substantive regulation remains open to state action unless expressly preempted by a federal statute.
On the other hand, the decision may deter or prohibit state and local authorities who have developed and implemented a variety of innovative responses to non-traditional mortgage products and the risks of subprime mortgage lending. Shackling state regulators and relying on the OCC to supervise mortgage lending restrains localities from responding to particular concerns in their jurisdictions. Recently, Congress has called federal regulators to task for their failure to monitor the subprime market. While Watters looks like a victory for federal regulators, the decision may fuel Congress’ scrutiny of the actual job that federal regulators have done in recent years.
April 17, 2007 at 10:40 AM in Mortgage Debt & Home Equity | Permalink | Comments (3)
One Take on the Subprime Fiasco
A post worth reading over at Underbelly from an insider on how the subprime lending fiasco may play out for consumers and the economy: Who Would JP Morgan Invite–Part II.
April 12, 2007 at 11:53 AM in Credit Policy & Regulation, Mortgage Debt & Home Equity | Permalink | Comments (0)
Subprime Lenders in Bankruptcy
New Century Financial Corp. filed for Chapter 11 yesterday in Delaware (case # 07-10416). At least four other lenders have filed bankruptcy in the last three months (Ownit, Mortgage Lender’s Network, People’s Choice Home Loans, and ResMAE Corp.). As Tara Twomey noted in a recent post, the financial pressures on these companies from bad loans leaves them with fewer dollars to put to their servicing responsibilities.
Now that these companies are in bankruptcy, I see another challenge: How, if at all, should these companies deal with their liability to borrowers that may have claims against them for TILA, state predatory lending violations, FDCPA claims, etc? Courts use a variety of measures–conduct test, relationship test, or state law accrual test–to determine whether pre-petition claims exist. I think consumer borrowers may be bankruptcy claimants under any of these tests. Given the origination practices of some of these lenders, such companies may be wise to ask the court to address this potential liability in their reorganization plans. (I gather that New Century is going to attempt to reorganize and not merely liquidate as it has arranged for $150 million in post-petition financing.) Of course, many consumers may not yet be aware of their lending claims, making it difficult or impossible for them to file individual proofs of claim. A couple of solutions seem possible, depending on a court’s inclination: permitting a “class claim” on behalf of all similarly situated consumers or the appointment of a future claim representative. Such claims would be paid in tiny bankruptcy dollars but given my skepticism about the post-petition fate of these lenders, consumers may be well-advised to assert bankruptcy claims to get a seat at the negotiating table and a stake in the reorganization outcome.