Mortgage Crisis Scholarship

The mortgage crisis is rightfully drawing the attention of scholars.  Here are links to a few papers on SSRN:

My St. John's colleague, Vincent DiLorenzo, is working on "Mortgage Market Deregulation and Equity Stripping Under Sanction of Law."  The abstract reads as follows:

Who is to blame for the large mortgage market losses borne by consumers, communities, the financial services industry and others? This paper explores government's responsibility. It explores whether the decision to deregulate the mortgage market to a degree that permitted both unsafe and unfair mortgage practices was the decision of Congress or the federal regulatory agencies. Part one of this paper explores Congress' viewpoint toward deregulation of the mortgage market. It differentiates two types of deregulation: (a) lifting of statutory requirements and substituting regulatory constraints, and (b) lifting of all government mandates and substituting a preference for market forces to police abusive practices. This paper examines Congress' actions and motivations over a thirty year period and initially concludes that Congress embraced the former view and not the latter. This view was consistently embraced in the period 1982 to 1994 to address unsafe banking practices and unfair banking practices. Unfortunately, Congress then provided mixed signals regarding its deregulation viewpoint in legislative enactments in 1994 when faced with unfair banking practices. This permitted regulatory agencies to continue to pursue a deregulatory agenda even when faced with evidence of abusive lending practices.

Part two of this paper explores the viewpoint of the federal regulatory agencies toward deregulation of the mortgage market. It examines the actions and viewpoints of the federal banking regulators in the last three decades. Two conclusions emerge. First, the agencies preferred a free market approach and implemented such an approach whenever statutes provided the discretion to do so. Second, the regulatory agencies embraced a decision making model that relied on predictions of net societal benefits as the determinant of a decision to intervene in the mortgage markets. Such a viewpoint led the agencies to typically shun government intervention. That decision led to equity stripping for over a decade, especially in low-income communities, more equity stripping in recent years as lax lending practices led to defaults and foreclosures, and even more in the coming year as foreclosures multiply.

Adam Levitin of Georgetown has written "Resolving the Foreclosure Crisis: Modification of Mortgages in Bankruptcy," 2009 Wisconsin L. Rev. ----.  Here's the abstract:

For over a century, bankruptcy has been the primary legal mechanism for resolving consumer financial distress. In the current foreclosure crisis, however, the bankruptcy system has been ineffective because of the special protection it gives most home mortgages. Debtors may modify the terms of all debts in bankruptcy except those secured by mortgages on their principal residences. A bankrupt debtor who wishes to keep her house must pay the mortgage according to its original terms down to the last penny. As a result, many homeowners who are unable to meet their mortgage payments are losing their homes in foreclosure, thereby creating significant economic and social deadweight costs and further depressing the housing market.

This Article empirically tests the economic assumption underlying the policy against bankruptcy modification of home mortgage debt - namely that protecting lenders from losses in bankruptcy encourages them to lend more and at lower rates, and thus encourages homeownership. The data show that the assumption is mistaken; permitting modification would have little or no impact on mortgage credit cost or availability. Because lenders face smaller losses from bankruptcy modification than from foreclosure, the market is unlikely to price against bankruptcy modification.

In light of market neutrality, the Article argues that permitting modification of home mortgages in bankruptcy presents the best solution to the foreclosure crisis. Unlike any other proposed response, bankruptcy modification offers immediate relief, solves the market problems created by securitization, addresses both problems of payment reset shock and negative equity, screens out speculators, spreads burdens between borrowers and lenders, and avoids both the costs and moral hazard of a government bailout. As the foreclosure crisis deepens, bankruptcy modification presents the best and least invasive method of stabilizing the housing market.

Lauren E. Willis of Loyola L.A. has written "Stabilize Home Mortgage Borrowers, and the Financial System Will Follow;" Alan White quoted some of her views here.  At the risk of repetition, the abstract follows:

To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar. And the taxpayer did not pay a penny.

This trick could only be performed once, now that gold clauses are out. So is there a way to eliminate today's mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets? Yes. We have not yet used our most potent weapon against the crisis: eminent domain.

John Tatom of Indiana's Business School has written "The U.S. Foreclosure Crisis: A Two-Pronged Assault on the U.S. Economy."  A final abstract:

The U.S. mortgage loan foreclosure crisis has been called the worst financial crisis since the great depression. There are two distinct channels of influence of the subprime problem. The first is the rise in foreclosures that affects homeowners and the real estate industry most directly. The second channel is financial, flowing from the effects on lenders' financial viability and on financial markets. The timing of developments in these two channels will determine how fast markets work through these problems and restore stability and growth to the nation's housing and financial markets. The problem is rooted in the housing market, and this market is likely to be very slow to adjust. It takes time for good mortgages to go bad and to then move through to the end of the foreclosure process. While financial markets work much more quickly, they will be held hostage to the unfolding effects of the foreclosures in the housing markets and among lenders. Mortgage loan related losses will continue along with foreclosures over the next year or so and these losses will plague firms even if they have already taken adequate write-downs on their asset values. Complicating the picture is the response of the Federal Reserve, which has reacted chaotically by creating new lending programs that have transformed its credit supply from government securities to private financial institutions, and in the process, violated the first rule of central banking to lend liberally in a liquidity crisis. This failure, compounded by providing a backstop to questionable securities, has slowed market adjustment and risks lengthening and deepening the financial crisis. This paper reviews the emergence of the foreclosure crisis and its real impacts in the economy, the financial market effects of the surge in mortgage foreclosures, the monetary policy response to the problem, and provides an assessment of the outlook for the crisis.

Comments

[dave]

Everyone is spending to much time pointing fingers and creating blame. It is time to look forward. The crisis is here and now, and rather then looking back, its time to focus on looking forward. Time to start focusing on strategies on how to weather the storm and come out ahead.

Sites like http://ShopYourDebtAway.com and other debt elimination strategies are were the focus needs to shift.

[Alessandra]

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Alessandra

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