Tag: mortgage

  • Recheck the Math on Reverse Mortgages

    Posted by

    Katie Porter

    Tara Twomey is just a keen observer of the consumer finance world, and she recently alerted me to a trend. Reverse mortgages are being aggressively hawked as a valuable financial planning tool, and the media is picking up the story. Even the reverse mortgage industry rag is excited at its publicity rash. While I'm all for consumer finance journalism, these articles often report on studies that bear little resemblance to most Americans' situations.

    Shutterstock_196374512First a quick definition of reverse mortgages: a loan secured by a home that pays the homeowner money based on accumulated home equity with loan repaid in the future. In its most straightforward form, the homeowner gets a lump sum of cash and must repay the loan when she dies (presumably out of the proceeds of the house that is sold upon her death.)  Reverse mortgages are a complex product marketed specifically to older Americans. (If you doubt the complexity, read Tara's great article that ponders how a reverse mortgage should be treated in a homeowner's bankruptcy.) Precisely for this reason, FHA requires counseling for its reverse mortgage, called a Home Equity Conversion Mortgage (HECM).

    While we can hope that homeowners receive adequate information and make fully-informed decisions, the chatter about reverse mortgages is starting out their inquiry into reverse mortgages with some questionable math. The problem isn't the math itself, of course, but the assumptions. In a typical example featured in these stories, the couple owns a $400,000 home and has retirement savings of $1 million. Yeah, you read that right–tax-deferred, non-social security retirement savings of a cool mil'. Reality: about one-third of Americans have no retirement savings/pension at all. Even among those in the 55-64 year age bracket, one in five has zero dollars in retirement savings. Zero–to state the obvious–is a long way from $1 million. Even after excluding those with no savings,  the typical account balance of near-retirement households was only $104,000. Again, a long way from $1 million.

    Long ago, when Elizabeth Warren was building support for the CFPB, she argued there needed to be a dedicated "cop on the beat" for consumers. Check out the press release, CFPB Study Finds Reverse Mortgage Advertisements Can Create False Impressions, for evidence that the CFPB is hard at work in educating consumers. While its study identified more fundamental confusion about reverse mortgages, those attracted to the financial promises in reverse mortgage research or ads should check the math against their own means.

  • Mortgage Documentation Issues Close to (My) Home

    Posted by

    Jean Braucher

    The Arizona Supreme Court currently has under review a mortgage documentation case, Vasquez v. Saxon Mortgage, Inc. Just by chance, the Court was on its annual visit to the University of Arizona law college, where I teach, for the oral argument on Sept. 22. So of course I was in the audience at the argument, along with my students from our new Mortgage Clinic and a related course, called the Mortgage Crisis. We’ve been analyzing and debating the opposing arguments since.

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  • New Resource: NCLC’s Bankruptcy Mortgage Project

    Posted by

    Jean Braucher

    The National Consumer Law Center has launched a useful new resource for the bankruptcy community called the Bankruptcy Mortgage Project. See here. Those likely to find it handy include judges, consumers, trustees, mortgage servicers, attorneys, and academics. The website, created with a grant from the National Conference of Bankruptcy Judges’ Endowment for Education, collects all sorts of documents related to mortgage issues in consumer bankruptcy cases. It thus provides easy, free access to various local rules, forms, general orders, and court opinions.

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  • Foreclosure Fraud Settlement: The Empire Strikes Back (or Why Are Republicans So Obsessed with Backdoor Cramdown?)

    Posted by

    Adam Levitin

    It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here).  There seem to be three major lines coming out of the banks:

     (1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress.  

    Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected."  These House Republicans want to know:  "What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?"  .  Similarly a coterie of bank-friendly pundits chimed in calling this sub rosa cramdown.  

    (2) CFPB has no business being involved given that it doesn't have a director.  

    This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt.  At least one commentator was upfront about that in the American Banker.   

    (3) The settlement could negatively affect the safety and soundness of the banks.  

    Let me address all of these points.  There's a lot of willful confusion about this term sheet and what it is.  

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  • Are the Rich More Likely to Default on Their Mortgages?

    Posted by

    Adam Levitin

    The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments.  Put a different way, the consumption utility component of the home is relatively less important to the rich.  A house has two value components–it's an investment, and it is also a consumable (but durable) product.   The consumption value of a home is basically the same for everyone–I might derive more or less utility from any particular house, but it is all within a relatively constrained range, and my range is probably around the same as everyone else's.  That means that the consumption value component of a house is largely fixed, regardless of the house's price.  The more expensive the house, the smaller the ratio of the consumption value to the investment value.  Therefore, it would follow that people with more expensive houses place more value on the investment component and treat the house more like an investment.  

    I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment (although they are only playing by the rules of the game, which should have been priced in by lenders).  Here's what I wish the story had pointed out:

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  • Mortgage Servicing Problems for Prepayments

    Posted by

    Adam Levitin

    With all the problems in the mortgage industry caused by defaults, it's easy to forget that the traditional bugbear of mortgage lenders isn't credit risk, but prepayment risk.  If a lender contracted for a 6% return and the loan is prepaid, there's a chance that the best return the lender can get now is say 4.5%. 

    As it turns out, prepayments can cause just as many problems for servicers as defaults.  Recently, one of my relatives laid into me with this story about her problems getting her servicer to correctly credit her prepayments.  The servicer has been crediting them all to interest, not to principal, so the loan balance isn't getting paid down (and the servicer is making more money that way, at the expense of the investors).  What's worse, is that the servicer says it can't correct the problem because some of the prepayments were made before it acquired the servicing rights.  And, the servicer says that if it corrected the problem, it would result in the account being listed as 30-days late and credit reported because the servicer did not make an automatic withdrawal one month because it treated the prepayment as a regular (but partial) payment (even though the total prepayments should put the loan way ahead on its original amortization schedule). 

    Put another way, the servicer is saying that they cannot produce an accurate payoff balanceand that if the homeowner demands one it will result in her being credit-reported incorrectly. 

    This aggrevating situation illuminates what a mess the mortgage servicing world is in.  For all of the attention justly paid to mortgage servicing problems with defaulted homeowners and servicing fraud in the context of default, my relative's case makes me wonder whether the rot in the servicing industry extends all the way up the tree, to an inability to properly handle transferred servicing rights and an inability to properly handle prepayments. 

    And here's the real problem: consumers trust financial institution creditors to be competent and fair.  They trust that balances are right, that APRs are properly applied, that amortization schedules are correct, etc.  Without that trust, the entire system of financial intermediation cannot work.  Financial institutions trade in trust.  Absent that trust, every consumer would have to subject every credit card bill, auto loan bill, mortgage bill, and student loan bill, etc. to a forensic accounting.  That would be astonishingly inefficient.  We shouldn't want consumers to have to be so careful.  It's one thing to expect consumers to look at their bills to make sure
    that there are no unauthorized line items.  It's another to expect them
    to run interest and amortization calculations.

    For the most part the system works, as it's all highly automated.  But when it doesn't, the power imbalance between the financial institution and the consumer puts the consumer at a serious disadvantage.  We really need a better system for resolving consumer disputes with financial institutions.  I'm not sure what it is, but maybe the trick is to avoid the disputes by making sure the FIs get things right. The least cost avoider of the errors is the financial institution, and
    we should really have stronger incentives for FIs to get it right. 

  • More on the McCain Plan

    Posted by

    Adam Levitin

    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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  • Underwater Homeowners

    Posted by

    Adam Levitin

    1 out of every 6 US homeowners is underwater. There’s probably no better indicator than being underwater of a mortgagor who is likely to end up in foreclosure. That’s very worrisome. And it means that foreclosure prevention plans that don’t address the problem of underwater homeowners aren’t going to help a lot.

  • Credit Card Debt Absent the Mortgage Bubble

    Posted by

    Adam Levitin

    We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we’d be seeing much higher levels of credit card debt (and that’s where we’re headed).

    The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

    This has an important implication that has escaped notice.

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  • Who Speaks for Mortgage “Lenders”?

    Posted by

    Adam Levitin

    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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