Martin Feldstein has been pushing a mortgage bailout proposal that has been getting some undeserved attention (see here and here, e.g.). Feldstein gets (here, and here)
how central negative equity is to the economic crisis. Homeowners with
negative equity have a reduced incentive to stay in their home if the
mortgage is burdensome. Negative equity fuels foreclosures, which in
turn force down housing prices, setting off a downward spiral.
Feldstein is right to focus on negative equity as a key issue for
housing market stabilization. The problem is in his solution–it is based on a few erroneous factual premises, all of which could have been discovered with very limited Google searches.
Tag: foreclosure
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The Role of Recourse in Foreclosures
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More on the McCain Plan
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Now it appears that the McCain plan is to pay 100% of the outstanding balance on distressed mortgages (and, presumably prepayment penalties if applicable). What isn’t clear is whether the government refinancing will be for fair market value or at the old outstanding balance. If the later, it really won’t help folks with negative equity.
If the McCain plan is going to buy mortgages at 100 cents on the dollar and then replace them with, say, 80 cents on the dollar mortgages, there’s good news and bad.
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When Kids Lose Their Homes
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The ABLJ just published a new paper, Parents in Financial Crisis: Fighting to Save the Family Home. The paper uses data from the 2001 Consumer Bankruptcy Project to examine the differences in how hard people struggle to save a home based on the presence–or absence–of minor children in the house. The data support the claim that families with children work harder to try to hang on to home both before and during bankruptcy. The finding is consistent with the thesis that families buy homes as a way to buy opportunities for their children (schools, neighborhoods) and that the potential loss of a home is more painful to parents who fear the lifetime impact of the loss on their children.
The data pre-date the current mortgage crisis, but they are useful on several levels for thinking about what is happening now. At one level, the data reported in Parents in Financial Crisis are a reminder of the impact of a wave of foreclosures. For adults to pick up stakes and move to a rental in a less desirable part of town can be painful, but they can go to the same work every day and continue the same after-work activities. For a child, however, foreclosure may mean transferring to a weaker school, losing a chance to play in the band or on a softball team, dropping out of a scout troop, and losing all the friends she has ever known. Sure, we’re a highly mobile society, and children move all the time. But a move to a nicer house or a move so mom can take a better job is a move that most parents undertake at least in part with an eye toward improving a child’s lifetime chances. A move from a foreclosure is not a move up.
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Preemption Chutzpah
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Elizabeth Warren draws our attention to an astonishing example of banking industry chutzpah–claiming preemption protection against state foreclosure laws. Not only has no one ever historically believed that state foreclose law was preempted; the OCC’s preemption reg’s specifically carve out state debt collection law from preemption. There’s no conflict preemption here, and given specific mortgage preemption laws like DIDMCA and AMTPA that preempt state usury limits on some mortgages and limits on exotic mortgage structures, it is hard to see how there is general field preemption or the like.
The preemption argument is even more chutzpadik, though, because banks hold only a small percentage of mortgages. Most mortgages are held by securitization trusts. The last time I checked, they are not federally chartered financial institutions nor are they operating subsidiaries or agents of federally chartered financial institutions. Thus it is utterly beyond me how anyone could claim that preemption applies to mortgages owned by securitization trusts, even if the mortgages were originated by national banks and are serviced by them. The preemption claim here doesn’t even pass the straight-face test. As unbelievable as it is, though, perhaps legislation should clarify this just to, um, foreclose possible preemption arguments.
I’m curious whether the same financial institutions pushing the preemption claim are also the same institutions that are members of the HOPE Now Alliance, who have supposedly committed themselves to working to modify loans rather than foreclose. The preemption agenda is simply inconsistent with a commitment to efforts to avoid foreclosure.
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Banks: State Laws Not for Us
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Just when you think the mortgage mess can’t get any worse, the banks come up with a new idea: They shouldn’t have to obey state law when they foreclose on someone’s home.
Pre-emption has been a gravy train for the national banks, insulating their credit card business from state laws. Some banks now want another ride on the pre-emption train, claiming that they shouldn’t have to follow local foreclosure laws when they take people’s homes.
Tomorrow Congressmen Brad Miller (D, NC) and Steve LaTourette (R, OH) will introduce HR 5380 to make it clear that the banks have to follow the state law foreclosure laws, just like they always have. Amazingly, this is expected to be a close vote.
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Who Speaks for Mortgage “Lenders”?
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Katie Porter makes an incredibly important point in her recent post about how securitization structures may be impeding mortgage modifications because the ultimate holders of risk on the mortgages are not the ones involved in the modification decision. Mortgage servicers, who typically hold a small interest (if any) in the
loans are the ones making the modification decisions. When servicers
do hold positions in the mortgage-backed securities, they are first
lost positions, so the servicers likely takes a loss regardless of a
modification or foreclosure, meaning that their interests are not
aligned with the other MBS holders.Let me take Katie’s post a step further and suggest that the relevant voices on the lending side of the mortgage market have not been heard. The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers. These parties have been entirely absent from the conversation on modification and bankruptcy reform.
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Reexamining Non-Judicial Foreclosures
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Katie Porter’s posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question: why aren’t states reconsidering non-judicial foreclosure? Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses. And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure. But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.
[UPDATED LINK 3.4.08 at 5:06pm]
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HOPE Now January Report
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HOPE Now, the government-encouraged alliance of mortgage servicers assembled to facilitate mortgage workouts, has released its January 2008 numbers. There’s good and bad news in these numbers.
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Will the Mortgage Industry Fix the Mortgage Mess Itself? A Look at Project Lifeline
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The mortgage industry has been arguing against bankruptcy reform legislation that would permit the court-supervised modification of single-family principal home mortgages in bankruptcy. The industry argues that permitting mortgage modification in bankruptcy would result in higher interest rates and that its private efforts will solve the problem. In an earlier post and in a working paper, I have shown that we are unlikely to see higher interest rates as a result of allowing bankruptcy modification. Here, though, I want to take issue with the mortgage industry’s claim that its private efforts will solve the problem.
Hopefully the mortgage industry is correct about this. But there is good reason to doubt the efficacy of the industry’s efforts. To date, the mortgage industry’s efforts to fix the foreclosure crisis have been a lot of sizzle, but not much steak. Unfortunately, this seems to be the case with Project Lifeline, the latest half-measure to come out of the mortgage industry. As I explain below, the very structure of Project Lifeline means that homeowners in a significant number of states will be unable to take advantage of Project Lifeline’s meager offering because it will kick in only after their homes have been sold in foreclosure.
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Mortgages at the Dem’s Debate
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To my surprise, the second thing out of Hilary Clinton’s mouth, after “health care,” when asked about the differences between her and Barack Obama, was “mortgages.” It’s about time that the foreclosure crisis is getting prime billing in the presidential race.