Consumer Law & Policy Blog

CRA and Affordable Housing Goals Didn't Cause Crisis

I wrote about this some time ago here.  Fed economists Robert Avery & Kenneth Brevort have a new paper out using a sophisticated empirical analysis to compare very similar mortgages that did or did not qualify for Community Reinvestment Act or GSE affordable housing goals credit.   Consistent with prior studies, they find that CRA/GSE loans performed better, i.e. were less likely to contribute to the foreclosure crisis, than similar non-CRA/GSE loans.

The ideological battle over the story of the crisis, and the relative roles of regulation and deregulation, is fought as much with slogans and beliefs as with facts, but for those who think facts matter, this study is worth reading.

Ray Brescia Paper on the Robo-Sign Scandal and UDAP Statutes

Raymond H. Brescia of Albany has written Leverage: State Enforcement Actions in the Wake of the Robo-Sign Scandal.  Here's the abstract:

In the fall of 2010, in one of the largest scandals to ever hit the American court system, information gathered from lawsuits across the country revealed that tens of thousands of foreclosure filings were likely fraudulent - if not outright criminal. These revelations sparked a nation-wide investigation by all 50 state attorneys general to assess not only the extent of the scandal and its potential impacts but also potential legal and policy responses to such behavior. One of the tools at the state attorneys general’s disposal that might rein in this behavior includes each state's Unfair and Deceptive Acts and Practices (UDAP) laws. Such laws typically prohibit "unfair" and "deceptive" practices and often give consumers, as well as state attorneys general, the ability to bring affirmative litigation to rein in practices that violate their terms. UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to rein in abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. This paper explores the availability of UDAP laws and the remedies they provide to rein in the range of practices revealed in the so-called "robo-sign scandal." It concludes that such practices - the false affidavits, reckless claims and improper notarizations - all violate the essence of most state UDAP laws; accordingly, the remedies available under such laws may be wielded by state attorneys general to halt abusive foreclosure practices throughout the nation. Such remedies include civil penalties, actual and punitive damages, attorney's fees and injunctions. What's more, UDAP actions in light of robo-sign abuses could help chart a path towards a more robust mortgage modification regime, one that would result in principal reduction, which is the clearest path out of the current crisis.

HAMP Homeowner Bailout . . . money goes to banks, mostly

On November 30, Treasury finally began reporting how much it is actually paying out for foreclosure prevention to various banks and servicers  (HAMP Incentive Payments 11-30-10).    So far $728 million has been paid out to encourage mortgage modifications and prevent foreclosures.   Of that total, less than $100 million has gone to homeowners.  Nearly half the money was paid to servicers (mostly banks), and about 40% was paid to investors holding the mortgages (in many cases, banks).   This relative trickle of homeowner bailout spending, one-tenth of one percent of the TARP bailout budget, turns out to end up mostly where the rest of TARP money ended up:  going to the banks. 

Meanwhile, the Congressional Oversight Panel's latest report finds that the Administration's foreclosure relief program has fallen woefully short of its targets, and concludes that the money set aside by Congress for homeowners may never get spent.  The program's failure is partly due to bad program design, but also because Fannie Mae and Freddie Mac, charged with administration and enforcement of the HAMP contracts with banks, have failed in their roles.  Pacta sund servanda.

Geithner's solution for Robosigning: Don't Fund Legal Aid for Homeowners

The Nation reports on a little-noted controversy between Ohio's Congressional delegation and Treasury Secretary Geithner, about whether states can use the Hardest Hit Fund (TARP money set aside for states clobbered by the crisis) to fund legal aid and counseling for homeowners in foreclosure.  Treasury apparently could not rely on its own legal staff to interpret the statute, and so called on a Wall Street law firm, Squires, Sanders & Dempsey.  The leader of that firm's financial services litigation team lists the following as a firm achievement:  "Representing an industry organization with regard to recent mortgage foreclosure issues and litigation in Ohio and at the national level."  Not surprisingly, SS&D advised Treasury that Hardest Hit Funds could not be used for legal aid for homeowners in foreclosure.  Senator Sherrod Brown's June 1 letter presenting the argument in favor of funding legal aid is here.  The statute itself is available here.

Foreclosure Deed may be Voided by Mortgage Transfer or Servicing Problems

A Federal District Court, in a December 7 order, has denied a motion to dismiss a homeowner's lawsuit to set aside the nonjudicial Missouri foreclosure sale based on a deed of trust, based on allegations that 1) the homeowner was not in default and 2) the nonjudicial sale was baed on an invalid transfer of the mortgage and note.  This decision illustrates the potentially broad ramifications that defective mortgage transfers and wrongful foreclosures will have for any house titles derived from foreclosure sales in nonjudicial foreclosure states.

More specifically, the homeowner alleges that she made all payments when due, until instructed by the servicer to stop making payments in order to qualify for a modification.  She also submitted the mortgage transfer documents that showed a significant break in the chain of ownership.  In a deed of trust state, instead of a mortgage the loan originator typically files a deed of trust, which transfers a power of sale from the homeowner to a trustee, usually a local lawyer, on behalf of the trust deed beneficiary, who is the lender or investor.  In order to transfer the mortgage, there needs to be a transfer of the note and a change in the beneficiary of the trust deed.  This is routinely done by filing a substitution of trustee with the local recorder of deeds.  The substitution of trustee names a new trustee with a power of sale, and a new beneficial owner of the mortgage/deed of trust.  In this case the substitution of trustee form listed a grantor of the transfer, i.e. the prior owner of the loan, that did not match the identified beneficial owner of the original deed of trust.  This break in the chain, according to the court and basic logic, would render the subsequent trustee deed invalid.

A second, independent basis for setting aside the foreclosure deed was the alleged absence of a default.  In a nonjudicial foreclosure, there is no court judgment establishing that the homeonwer defaulted on the loan.  For that reason, a completed foreclosure sale can later be set aside if there was in fact no default.  The homeowner's allegation in this case was that she was current in payments until the servicer instructed her to stop paying so that it could modify her loan.  This type of servicer-induced payment interruption can be characterized as either nondefault based on a modification of the contract, a waiver of the payment obligation by the servicer as agent for the mortgagee, or perhaps a repudiation by the servicer.  In any case, this scenario is sufficiently common to raise serious questions about large numbers of property titles in nonjudicial foreclosure states.

Fed Governor Gets It Right - Mortgage Servicing is Broken

by Alan White

The newest Federal Reserve Governor and former state banking regulator, Sarah Bloom Raskin, spoke at this week's National Consumer Law Center conference in Boston about systemic problems in mortgage servicing.  Unlike other bank regulators, she does not attempt to minimize the failures revealed by the robosigners scandal. 

Foreclosure affidavits attest, among other things, to the fact that a homeowner is in default.  Servicers are getting this wrong on a regular basis, as a result of misapplication of payments, forced-place insurance, and other errors.  Governor Raskin also points out that there are no major economies of scale in servicing defaulted mortgages, and no effective competition for the business.  The implication is that homeowners and investors are not well served by the extreme level of concentration in this slice of the banking industry (the big four banks service more than half of all mortgages.)

This sentence from the Governor's speech sums it up nicely:

"While there may be some specific practices--"robo-signing" among them--that are possible to isolate and eliminate, chronic, uncured problems continue to plague this industry."

Property Outlaws

In fine American property tradition, squatters are taking matters into their own hands to respond to the huge inventory of foreclosed, bank-owned homes.  Hernando de Soto reminds us that the origins of many U.S. property titles derived from squatters, and professors Penalver and Katyal have educated us on the important expressive and reformist functions that property outlaws perform.

HAMP Modifications Down Again, BofA Worse than Others

Treasury reports that September HAMP activity continued the depressing trend: there were fewer than 30,000 new permanent mortgage modifications and 36,000 temporary mods canceled. 

Huge variations among banks and servicers continue as well.  Bank of America lags in pretty much every category of performance, although it can always tout higher numbers of everything, since BofA services more loans than any other company.  ProPublica put together this helpful graphic scorecard showing each mortgage servicer's rate of success and failure in converting temporary modifications.  My chart shows how badly BofA does even in helping homeowners who whose HAMP requests were canceled or rejected.

30,000 modifications a month is just not going to make a dent when there are still nearly 200,000 new foreclosures started each month.  Nor is there any reason Treasury should continue to tolerate servicers like BofA who fall so far short of even the weak average performance under HAMP contracts. 

A Different Approach to Foreclosures: When the Debt Survives Foreclosure and is Not Dischargeable

That's how it works in Spain, as this Times article points out.  The result:

Not only are Spanish mortgage holders personally liable for the full amount of the loan, but throw in penalty interest charges and tens of thousands of dollars in court fees, and people can end up, like Mr. Marbán, facing a mountain of debt. Bankruptcy is not the answer, either. Mortgage debt is specifically excluded here.

“Effectively, you can never get rid of this debt,” said Ada Colau, a human rights lawyer who works for Plataforma, a new advocacy group formed both to give legal advice to homeowners and to push for reform of the country’s foreclosure laws.

The article describes the hardships this imposes on consumers, who may effectively work for the bank their entire lives (HT: Norm Silber of Hofstra).

Three thoughts on the foreclosure documentation scandal

by Christopher Peterson

On monday the American Banker ran a well written story by Jeff Horwitz on the document problems slowing down foreclosures. It focuses on whether document custodians actually have the possession of key documents, including especially promissory notes. The article (subscription requried; 2010 WLNR 21191843) quotes document custodians insisting that they have all the documents they need, but it also includes some scepticism from Diane Thompson, April Charney, and Max Gardner. It is good to see financial journalists paying more carefull attention to consumer rights advocates.

This being said, I think the story is still missing some important points. Because I have a million other things to do today, I’ll limit myself to three thoughts that jump to mind. First, one reason some originators may have been lax in sending proper documentation on to the depositor (and in turn the document custodian or trustee) is a false belief that designating MERS as the mortgagee or deed of trust beneficiary would facilitate quick foreclosures without all the proper documentation. MERS is an important partial driver of the affidavit problems. Some financial institutions convinced themselves that MERS would  be a cradle-to-grave proxy eliminating the need for them to keep the collateral jackets with blue ink documents that old-fashion lenders once maintained. Why keep track of paperwork if MERS is just going to do your foreclosures for you? This is an easy thing to believe when (1) they really wanted to believe it and (2) the motto of company is “process loans, not paperwork.” Should we be surprised that the paper might not have actually changed hands?

Second, the representations the document custodians are making in Mr. Horowitz’s article are inconsistent with what some mortgage bankers themselves have admitted. A brief (Download Here)the Florida Bankers Association submitted to the Florida Supreme Court takes the totally opposite view on whether the promissory notes are lost. It states, “The reason ‘many firms file lost note counts as a standard alternative pleading in the complaint’ is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file.” Yikes! Memo to all bankers: destroying promissory notes is a bad idea. But don’t trust me. Instead very carefully read this next sentence recently written by two Judges on the American Bankruptcy Institute’s Uniform Commercial Code Committee: “for the note to be enforced, the person who asserts the status of the holder must be in possession of the instrument.”

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