Tag: mortgage foreclosure

  • Good News on Mortgage Modifications

    Posted by

    Katie Porter

    Isn't it about time for some good news on mortgage modifications? Here is some, in the form of a paper titled Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts. The authors use data from the Home Mortgage Disclosure Act (HMDA) to assess borrower characteristics against the incidence of loan defaults and modifications on a group of more than 100,000 subprime loans.

    The first two findings are depressing and not surprising: loan modifications are rare, and minority borrowers are more likely to be delinquent. The good news is that minorities are faring well in seeking modifications. As a descriptive matter, among those 60 or more days delinquent, 11 percent of blacks and 9 percent of Hispanics received a loan modification, compared to 5 percent of whites. In regression modeling that controlled for borrower, loan, and housing/labor market conditions, blacks were slightly more likely to get modifications, conditional on being delinquent, than other races. This effect persists even when researchers control for the fact (also good news in my mind) that borrowers who got a high-cost loan are more likely to get a loan modification. In further analysis, the authors find that blacks receive a similar interest rate reductions to borrowers of other races.

    As with any empirical study, there are some limitations. The authors use data from only trustee (although several servicers) and examine loans originated in only three states–all Western and all non-judicial foreclosure. And, as the authors note, they cannot assess whether there are differences in loan modification denial rates. Put concretely, if blacks are applying at twice as high of a rate for loan modifications as whites, their analysis would not pick up this high rate of denial compared to applications. This paper ends with interesting thoughts on the racial disparities in loan origination, and why these patterns are not found in loan modifications. It asks whether there are lessons from HAMP or the loan modification process generally that could be useful in designing loan origination programs that reduce the longstanding racial disparity in that crucial financial transaction.

  • The Free House Myth

    Posted by

    Katie Porter

    As challenges to whether a "bank" (usually actually a securitized trust) has the right to foreclose because it owns the note and mortgage become more common, rumors swirl about the ability to use such tactics to get a "free house." There are a few instances of consumer getting a free house, see here and here, for examples, but these are extreme situations not premised on ownership, but on a more fundamental flaw with the mortgage. In general, the idea that even a successful ownership challenge will create a free house to the borrower is an urban myth. I'll explain why below, but there is a policy point here. The myth of the free house drives policymakers to complain about the moral hazard risks of holding mortgage companies to the law and tries to set up homeowners who are paying their mortgages against those who are not. It serves the banks' political agenda to be able to point to the "free house" as an obviously unacceptable alternative of consumers winning legal challenges. It's key then to understand that the "free house" is largely a creature of consumers' and banks' over-active imaginations.

    In sorting out why even a successful ownership challenge does not give homeowners a free house, it is helpful to parse some key concepts. The first one is standing, which is the right of a party to ask a court for the relief it seeks. This comes in different flavors, including constitutional standing, but in the foreclosure context, usually boils down to whether the moving party is the "real party in interest." In re Veal, the recent decision from the 9th Circuit BAP authored by Judge Bruce Markell, mentioned previously on Credit Slips , contains a discussion of standing in the foreclosure context. At least in part, the concern of the real party in interest doctrine is to make sure that the plaintiff is the right person to get legal relief in order to protect the defendant from a later action by the person truly entitled to relief. Note that standing is a concept that only applies in court; here that means in judicial foreclosures. In states that allow non-judicial foreclosure, the issue is slightly different. Does the party initiating the non-judicial foreclosure have the authority to do so under the state statute authorizing the sale? For example, cases such as In re Salazar discuss whether a recorded assignment of the mortgage is needed, as opposed to an unrecorded assignment, to initiate a foreclosure. Under either standing or statutory authority, a "win" by the homeowner leads to the same result. The foreclosure cannot proceed.

    But this win is not the same as a free house. Just because a party lacked standing or statutory authority does not mean that there is not some party out there that does have the authority to foreclosure. Nor does a win on standing mean that there cannot be action taken to give the initial foreclosing party the authority that they need, which might occur by transferring possession of the note or by executing a series of assignments, to foreclose at a later date. Unless other problems exist, there is still a valid note that obligates the homeowner to pay money due and there is still a mortgage encumbering the house. The homeowner does not get a free house. Rather, the homeowner just doesn't lose her house today to foreclosure. These are pretty different outcomes!

    This doesn't mean that I think the standing/ownership issue is inconsequential. For homeowners, a successful challenge that results in the dismissal of a foreclosure can lead to a loan modification or the delay itself can give the homeowner the time to find another solution. For investors in mortgage-backed securities, the problems with paperwork likely increase their loss severities in foreclosure, both because of increased litigation costs and because of delay in correcting problems. (And there may be even more serious problems for investors relating to whether the transfers even succeeded in putting the homes in the trust.) But we shouldn't confuse these issues with the idea that what is at stake in sorting out this mess is giving a "free house" to some Americans, despite the lamentations of this LaSalle Bank lawyer after a judge ruled that LaSalle as trustee lacked standing to foreclose. A fruitful discussion of these issues needs to begin with a clear understanding of the consequences of the problem, as well as empirical evidence on how widespread these problems are. The free house is political handwringing, not legal reality.