Consumer Law & Policy Blog

Minnesota Foreclosure Freeze Vetoed

Minnesota governor Tim Pawlenty vetoed a bill that would have delayed residential foreclosures on subprime and negative amortization loans. The bill would have allowed owner-occupants to delay foreclosure by up to one year, by paying at least 65% of their current monthly payment. This was the first state legislative attempt to enact a moratorium in the current crisis. It will be interesting to see whether Senator Obama, speaking in Minnesota tonight, has any comment. Pawlenty has apparently been mentioned as a possible running mate for Senator McCain.

Tokyo Drift

By Alan White

From 1992 to 1998, Japan’s economy drifted in what became known as the Heisei depression, as banks and regulators stubbornly refused to recognize losses on overvalued loan and real estate assets. The prolonged crisis in Japan had been preceded by a bubble in real estate and stock prices, leading to a huge debt overhang based on inflated values. Sound familiar?

HOPE NOW April numbers and spin

By Alan White

On Friday HOPE NOW, the mortgage servicer coalition, released its April numbers for foreclosures and loan workouts. Unlike its prior reports, the April tally does not include new foreclosures started in April. Instead of showing both the number of new foreclosure starts and completed foreclosure sales, they only report the completed sales. New starts have been running at about three times the number of foreclosure sales, and perhaps the number was just getting too big. The press release touts April's increase in repayment plans and loan modifications, not surprisingly. While these increases are good news, they are not very meaningful without knowing if they are keeping pace with the rise in delinquencies and new foreclosures. In the last report (for the quarter ending in March) workouts were not keeping up with the rise in foreclosure filings.

I think HousingWire's analysis is correct: loan modifications are just not keeping pace with the growth in foreclosure sales. It's hard to know without the number of new starts, but I suspect that the pace of workouts is also continuing to fall behind the rising foreclosure inventory. Although HOPE NOW's headline says "Workouts Reach Record Level", they could just as well have said "Home Losses Reach Record Level", or "Foreclosure Starts outpacing Workouts."

The other continuing difficulty with the HOPE NOW reports is the inclusion of the undefined Repayment Plans in the category of workouts. We know from the MBA report that nearly 30% of foreclosure sales involve failed payment plans. Repayment plans can include something as limited as obtaining a promise from the homeowner to bring their loan current within the next 90 days. In my view, the main thing that the Repayment Plan category tells us is how many delinquent homeowners have recently been in contact with their servicer; it is not very good evidence of much else.

BK Court: Lender Can't Rely on Liar Loan App

A California couple with income of about $65,000 recently lost their home to foreclosure after having refinanced their mortgage debt up to about $680,000. How did they manage to borrow that much? Stated income (no-doc) mortgages, of course. After they lost their home, the lender took the rather aggressive tack of objecting to the couple's Chapter 7 discharge of the deficiency (the $250,000 alleged difference between the foreclosure proceeds and the mortgage debt.) The bank claimed that the couple had procured their mortgages by fraud, namely by lying about their income, and therefore were barred from discharging the debt under Section 523 of the Bankruptcy Code.

The couple claimed that they knew nothing of the false statements in their application, but the Bankruptcy Court's decision (Download) did not find their testimony credible on this point. However, the judge went on to find that the inflated income was so obviously implausible, given the borrowers' occupations, that the bank could not reasonably have relied on their stated income. The result was a finding against the bank, and a discharge of the unpaid debt.

HT to April Charney.

Loan Modifications and PSA contract limits

One of the obstacles to preventing foreclosures through loan modifications has been the restrictions in securitization contracts. The pooling and servicing agreements ("PSAs") that create securitization trusts usually limit the servicer's authority to rewrite mortgage terms on behalf of the investors, even when the modification will prevent a foreclosure and produce a higher return than foreclosure. PSA provisions vary, but it is not uncommon for the servicer's discretion to be limited by a percent-of-pool cap on modifications.

Residential Funding Corp., an affiliate of GMAC and securitizer of subprime mortgages, recently requested and obtained approval from bond rating agency Moody's (Download) to increase the 5% cap on loan modifications in seven loan pools.

The particular contract term in one of the RFC-sponsored trust agreements (Download) is interesting because although it contains a 5% modification cap, it permits the cap to be increased, with the consent of the rating agencies and the insurer (and without the need for consent of the investors). This farsighted PSA contract term solves at least one of the problems that has prevented mutually beneficial mortgage modifications by other servicers. Kudos to whoever drafted this contract! The pool in question has reached a 20% foreclosure rate and cumulative net losses of 2.38%.

HT to Kevin Byers for spotting this on HousingWire.

Countrywide weary of homeowner pleas for help

Angelo Mozilo, CEO of Countrywide, inadvertently replied to a homeowner's email requesting foreclosure prevention help by saying he found these requests disgusting and unbelievable (because the homeowner used a template from a website to write his hardship letter.) Apparently, the homeowner in question has now settled his dispute with Countrywide, subject, however, to some sort of confidentiality agreement. Perhaps this explains why Countrywide seems to offer fewer loan modifications than other subprime servicers.

50% for Housing?

By Alan M. White

One question posed in the Federal Reserve's pending mortgage regulation is what percentage of income Americans should devote to housing. The question isn't posed in quite those terms, but those are the terms in which I think it should be asked. The subprime mortgage industry decided, sometime around 1994, that it was unreasonable to limit mortgage applicants to paying 41% of their income to their monthly mortgage payments (and all other installment debt.) Somehow the idea that 50% of gross income was a more reasonable limit gained currency, and some subprime lenders even went to 55% and 60% debt-to-income ("DTI") ratios. This was one of many ways in which mortgage underwriting standards, that previously had evolved through the long experience of the FHA program and Fannie and Freddie, were cast out the window.

It is true that the prior DTI caps, whether at 35% or 41%, excluded some consumers who could take on larger mortgages without defaulting. Even Fannie and Freddie have moved away from strict DTI caps because of their experience successfully making mortgages at higher ratios (albeit usually with other compensating factors.)

Increasing DTI ratios is a way to qualify more buyers for homes, or to qualify more existing homeowners to take out larger home equity loans. The industry (by which I mean not only mortgage lenders but also home builders and realtors) touts the loosening of underwriting standards as improving "affordability", by which they mean increasing the number of people who can buy homes. Of course, raising the DTI does not increase affordability at all, in the literal sense. It is simply a way of saying we will now devote a larger percentage of our incomes (which are not growing much) to housing. As Elizabeth Warren has pointed out, the fact that Americans are devoting a greater share of income to housing, along with the rising cost of health care, is a central feature of the declining living standard of the middle class. It is also one reason that home prices could increase faster than incomes.

The DTI ratio also does not account for taxes or any other expenses. As a result, a 50% DTI ratio is more like 70% of after-tax income for many middle income taxpayers. The industry has suggested that repayment ability should be presumed for consumers up to a 50% DTI. I have urged the Fed not to adopt any such safe harbors, on the grounds that such ratios lead to unreasonable foreclosure risk, especially for refinance mortgages to existing homeowners. I also think the housing payment ratio should be the subject of a national conversation. It is at the core of our sense that the welfare of ordinary Americans is no longer improving.

Foreclosure Crisis Update

By Alan M. White

Six months ago I reported that mortgage servicers were much more likely to foreclose than to offer loan modifications, based on data from monthly remittance reports to investors. Since then far more data have become available, from reports issued by the Mortgage Bankers Association, the state regulators' foreclosure prevention working group, and the HOPE NOW servicer alliance. I also retrieved some April 2008 remittance reports to update my prior investigation. Although the number of loan modifications rose rapidly in the last six months, the number of foreclosures has risen even faster. While hundreds of thousands have already lost their homes, there are millions in the foreclosure pipeline who could still be helped. What else do the numbers tell us?

First, the crisis continues to deepen. According to HOPE NOW, 547,000 foreclosures were started in the first three months of 2008, and 205,000 foreclosure sales were completed. Those numbers are 14% and 36% higher than in the fourth quarter of 2007. In all likelihood we will see more than 2.5 million foreclosures started this year and more than 1 million homes will be lost (compared with 1.5 million starts and half a million completed foreclosure sales in 2007). The completed sales do not include homeowners who are forced to sell their houses themselves or who simply walk away.

Senate Negotiators and Banking Committee Agree on Aid for Those Facing Foreclosure

Today's Times has an article headlined "Senate Leaders Reach Deal on Housing Assistance."  Here's an excerpt:

Senate negotiators on Monday said they had reached a deal on legislation aimed at helping hundreds of thousands of homeowners in danger of foreclosure by expanding the availability of government-insured mortgages.

The Bush administration, which previously said it would oppose legislation to rescue troubled homeowners, suggested that it was willing to consider the Senate deal because lawmakers had found a way to eliminate any direct cost to taxpayers.

The Senate bill would create an affordable housing fund, financed by the government-sponsored mortgage-finance companies, Fannie Mae and Freddie Mac, and that fund would be used in its first year to provide about $500 million for the foreclosure rescue effort.

The Times web site reports here that the Senate Banking Committee approved the resulting bill today by a vote of 19 to 2.

FTC Workshop on Consumer Information and the Mortgage Market

On May 29, the FTC will host what sounds like an important conference on the role of consumer information in the mortgage marketplace.  Here's an excerpt from the FTC's announcement:

* * * The purpose of this conference is to highlight and assess the role of consumer information in the current mortgage crisis from an economic perspective. An economic analysis that includes a historical understanding of developments in the mortgage market, as well as empirical research on consumer use and understanding of mandatory, pre-purchase, information disclosures, can link together disparate elements of the current mortgage policy debate.

Experts from several relevant specialties, including real estate finance and economics, consumer behavior, and information regulation, will be brought together to examine how consumer information, and information regulation, affects consumer choices, mortgage outcomes, and consumer welfare. For example, panelists will discuss the causes and effects of mortgage market product developments, the role of consumer information in the mortgage market and how it relates to the current mortgage crisis, and strategies for ensuring that new consumer protection regulations, especially mandatory information disclosures, will be designed in ways that will provide the greatest possible long-run net benefit to consumers. This exchange may yield concrete ideas for the development and implementation of more cohesive, comprehensive, and effective consumer information policies.

You can learn more here.  Included at that site is a list of speakers, an agenda, relevant articles by participants, and a link for a web cast.