CL&P Blog

Paper on Whether Regulation Curbs Foreclosures

Fernando López Vicente of the Bank of Spain has written The Effect of Foreclosure Regulation: Evidence for the US Mortgage Market at State Level.  Here's the abstact:

Do laws to protect borrowers curb foreclosures? This question is addressed by analysing the impact of foreclosure laws on default rates at state level in the US mortgage market. Using panel data techniques, we find a statistically significant effect of regulation on the different stages of the foreclosure process. More precisely, we analyse the effect of regulation on 60-day delinquencies and foreclosure starts, with a focus on three protective elements commonly found in state foreclosure laws, namely requiring a judicial process, granting a redemption period and banning a deficiency judgment. We find that, whereas protective states exhibit, on average, lower 60-day delinquency rates, more protection does not ultimately bring about lower foreclosure rates. Lenders seem to ration credit to mitigate costly protective laws, thereby reducing delinquency rates; but this effect is overshadowed by a moral hazard problem since, once borrowers are delinquent, they have incentives to take advantage of the protection due to the lower costs of foreclosure. We also find that the recent housing market crisis has exacerbated that behaviour. Finally, we show that lengthening the foreclosure process is no cure for the foreclosure crisis.

Pat McCoy on Barriers to Foreclosure Prevention

Patricia A. McCoy of Connecticut has written Barriers to Foreclosure Prevention During the Financial Crisis, forthcoming in 55 Arizona Law Review. Here's the abstract:

The number of modifications to distressed residential loans has been subpar to date compared to the number of foreclosures. This raises concerns about the presence of artificial barriers to loan modifications in situations where foreclosure should be avoidable. Numerous theories have been advanced for the relatively low level of modifications, including restrictions on loan modifications in private-label servicing agreements, threats of lawsuits by private-label investors, servicer compensation arrangements, the high cost of loss mitigation, accounting rules, junior liens, and tax considerations. This Article concludes that servicer compensation coupled with the costly nature of loan workouts, accounting standards and junior liens form the biggest impediments to an efficient level of loan modifications. These factors also distort the mix of loan modifications that are made toward types of modifications with higher redefault rates. Other explanations, such as servicing agreement restrictions, tax consequences, and the threat of lawsuits, either are not at play or are of second order importance.

Langdon on Underwater Mortgages and Eminent Domain

Joel Langdon of Emory has writen The Importance of a Promise: Underwater Mortgages and a Municipal Rescue Attempt Through Eminent Domain, forthcoming in 45 Urb. L. (Summer 2013). Here's the abstract:

Millions of Americans purchased real estate during the housing bubble of the mid 2000s, when prices reflected a constant upward trend, and real estate appeared to be an ideal investment. When the bubble burst, however, the value of real property plummeted, yet homeowners remain obligated to pay their bubble era mortgage amounts. This has created a situation where many Americans must pay creditors significantly more than the current value of the properties for which they borrowed to purchase. When property values plummet in this way foreclosure rates skyrocket and in a cyclical manner, values continue to drop, crime rates rise, and tax bases and consumer markets whither.

State and federal governments have struggled, with minimal success, to address the issue of excessive debt created by the housing bubble as it continues to mire the economy in a slow and lurching recovery. Most efforts to eliminate debt overhang have been based on incentivizing lenders to forgive and restructure debt in various ways. Unfortunately these incentives have generally not been sufficient, and programs have foundered.

This Article examines an alternative plan to address excessive housing debt through the operation of investor funded use of the governmental power of eminent domain to acquire and restructure debt. This Article argues that this plan has the potential to resolve many of the shortcomings of previous efforts to alleviate debt, but that, as conceived, this plan also has many problems. This Article will identify the primary barriers to the operation of such a plan and thereby indicate how to modify the plan to address those barriers.

Dustin Zacks Paper on Foreclosure Firms

Dustin A. Zacks of King, Nieves & Zacks PLLC has written Robo-Litigation, 60 Cleveland State Law Review 867 (2013).  Here's the abstract:

The recent housing crisis increased demand for attorneys to process foreclosures through state courts. This increase in demand was coupled with a desire for the fastest and cheapest legal services available. As a result, large foreclosure firms designed to handle an enormous number of foreclosure cases quickly and inexpensively evolved and flourished. During their ascendancy, these firms consistently generated complaints about their conduct, including questions about their ethical decision-making and about the veracity of the pleadings and documents they filed. Scholarly literature on the housing crisis, however, is largely devoid of commentary on ethical issues related to increased foreclosures.

This Article tracks the rise and fall of several notorious high volume foreclosure firms and examines the numerous instances of serious misconduct their attorneys and paralegals perpetrated. The Article accordingly examines the curiously muted reaction from state bar associations, judges, and state legislators.

The Article then proceeds to examine how these foreclosure firms differ in makeup from traditional large law firms. Notable characteristics of these foreclosure firms include lenders and servicers’ relentless demand for increased speed and low costs, lack of firm-specific capital at foreclosure law firms, and a factory-like atmosphere of legal practice. The Article concludes with an examination of three policy options to prevent another surge in attorney misconduct: changing ethical rules, improving ethical education, and increasing state bar association funding and authority.

Fnancial Times: Few errors found in ‘robosigning’ review

by Jeff Sovern

Here. But their definition of "few" still seems high.  "Only" 4.2% of the consumers whose homes were foreclosed upon are said to have been "harmed" by robosigning.  That seems to come from a report from the OCC which has historically been captured by the banks, though since the appointment of Thomas Curry as its head, seems to be less so.  And the articles notes that "some auditors" have found much higher error rates.

Paper on the Foreclosure Crisis in Appalachia

Jenna Rosie Tighe of Appalachian State has written Responding to the Foreclosure Crisis in Appalachia: A Policy Review and Survey of Housing Counselors, 23 Housing Policy Debate No. 1 (2013). Here's the abstract:

Existing research on the foreclosure crisis tends to focus on national trends or on metropolitan areas. Few studies focus on rural areas, and none look at Appalachia in particular. Existing research on rural housing challenges suggests that rural communities face unique challenges in the wake of the foreclosure crisis due to capacity constraints, lack of qualified counselors in rural areas, and lack of funding availability. This study investigates the impact of existing policies upon Appalachian communities and households – analyzing whether communities suffering from widespread foreclosures lack the governmental and non-profit resources necessary to adequately utilize funding and other resources to respond to the crisis. We present findings from a survey of housing counselors serving the Appalachian region, which suggests that lack of federal funding is placing enormous strain on counseling agencies. These challenges often prevent them from getting distressed homeowners aid in a timely manner or help them to make modifications to their mortgages. Finally, we make policy and planning recommendations to target assistance to these and other rural and distressed communities suffering from foreclosures.

Foreclosure Crisis Update

The crisis tally so far: about 4.7 million completed foreclosure sales from July 1 2007 through 2012 (extrapolating the 4th quarter), and more than 12 million foreclosure starts.  Adding short sales brings the total home losses to well above 5 million.  If we define the shadow inventory as mortgages presently more than 90 days delinquent or in the foreclosure process already, another 3 to 3.5 million homes are at risk, although the success of modifications will determine how many of those end in home losses.

The trends are all in the right direction, but the rate of recovery is still agonizingly slow. Beware of charts that start on or after January 1, 2007.  To return to normal foreclosure levels, we need to see all these rates return to something like early 2006 levels.  For example, the third quarter 2012 foreclosure numbers are the best since 2008, but still 2.5 to 4 times what they were in 2006.  The foreclosure inventory is still 4% of first lien residential mortgages, down from its 4.6% peak in 2009 but still way above its 1% level in 2006.

For the mortgage bubble to burst (as contrasted with the home value bubble) total mortgage debt needs to come down from its $11 trillion peak, but as of September 30 residential mortgage debt has just dipped below $10 trillion.  

The combined effect of plummeting home prices and downward-inching mortgage debt is pictured in the chart.  Trillions of dollars of home equity wealth were wiped out in the first years of the crisis, and the recent gains, touted by HUD in the chart title, are dwarfed in comparison.  

The bright spot in the third quarter data is the continued upward trend in principal reduction modifications.  OCC reports that a stunning 75% of modifications made by banks on mortgages in their own portfolios included principal reduction.  For Fannie and Freddie mortgages, on the other hand, principal reductions, at 0%, showed no change.

More From Robert Hockett on Using Eminent Domain to Solve the Underwater Mortgage Debt Problem

Robert C. Hockett of Cornell has written Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt that Can Benefit Literally Everyone. Here's the abstract:

This essay provides updated argumentation for and abbreviated specification of the municipal eminent domain plan for underwater mortgage loans that the author lays out in his earlier piece titled It Takes a Village. The nation's ungoing foreclosure crisis and economy-stifling mortgage debt deflation will not be arrested and reversed, the paper argues, until mortgage debt principal is written-down to post-bust home equity levels. Once that is done, however, literally everyone can benefit - from homeowners and bondholders to neighbors, communities, and local and regional economies.

Unfortunately, a host of classic collective action problems presently stand in the way of the 'win-win' solution here. Such problems require collective agents for their resolution, which is what private label securitization (PLS) trustees and even loan servicers are. But the pooling and servicing agreements (PSAs) pursuant to which many PLS trusts are formed, hurriedly drafted as they were during the bubble years when many pushed product and few apparently anticipated system-wide housing price crash, prohibit or effectively prevent even value-raising modifications or sales of sufficient numbers of underwater mortgage loans. This means that government alone - the sole entity able to sidestep dysfunctional contract rigidities, by use of the eminent domain authority - can serve as the requisite collective agent.

In theory, the essay continues, our federal government, through any number of instrumentalities, could play the appointed role. But political paralysis in Congress shows that it now faces collective action hurdles of its own. All that is left, then, is state and local government. But the latter, it happens, is happily best situated in any event to exercise the eminent domain authority to take underwater loans at fair value and modify them to benefit homeowners, bondholders, and third parties alike. For the nation's underwater mortgage loan problem is heavily localized in character, and municipalities in any event face the brunt of foreclosure-induced homelessness, tax base decline, and consequent blight wrought by ongoing defaults wrought by negative home equity - the makings of 'public use,' per our constitutional limits on eminent domain use, par excellence.

Alan White on the Mortgage Loan Transfer System

CL&B blogger Alan M. White of CUNY has written Losing the Paper – Mortgage Assignments, Note Transfers and Consumer Protection, 24 Loyola Consumer Law Review 468 (2012). Here's the abstract:

In this article, I survey the state of the mortgage loan transfer system, the legal rules that govern it, and the widening gap between those rules and the practices in the secondary mortgage market just prior to the 2008 crisis. The review includes some empirical assessment of the extent of errors and execution problems; the damage done by “robo-signing;” the Mortgage Electronic Registration System (MERS) and note delivery practices; and the extent to which courts will prevent or reverse foreclosure sales based on those errors and problems. I then examine why existing legal structures, for both paper-based and electronic transfers, are not working, and the extent to which they have failed, I also identify the key consumer and investor protection values and interests (finality, transparency, fraud protection, and so forth) that must be addressed by the law governing secondary market transfers of home loans. I conclude by outlining options for reforming the mortgage loan transfer system, including the use of a single document merging the note and mortgage, and a structure for the registration of a single authoritative electronic version of the mortgage/note and of all changes in parties to, and terms of, the transaction.

Paper on Defending Foreclosure Actions

Marcia Johnson of Texas Southern and Luckett Anthony Johnson have written Defending Foreclosure Actions, 49 Real Estate Law Journal 516 (2012). Here's the abstract:

With the rising incidences of residential foreclosures, many homeowners are overwhelmed by the foreclosure process and anticipated costs and often opt to vacate the premises without offering any defense. The American justice system rests on the premise that no person will be deprived of their liberty or property without due process. Procedural due process requires that a person have notice of the charges against them as well as a reasonable opportunity to defend against them. Reasonable opportunity is circumvented when the defendant is effectively without the means to defend. This is especially offensive to our notions of justice when the defendant has legitimate bases for defense but is effectively denied the opportunity to urge such defenses because of finances. This article is written to examine the defenses available to homeowners facing foreclosure and to provide a practical approach to defending against foreclosure.