Author Archives: David Reiss

Consumer Thoughts on Credit Reports

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The Consumer Financial Protection Bureau has issued a report, Consumer Voices on Credit Reports and Scores. This report builds on other recent work from the CFPB about how much people really understand about consumer finance. The answer — they still have a lot to brush up on. The CFPB conducted a series of focus groups about credit reports and credit scores. The CFPB concluded that

that many consumers are interested in and concerned about credit reports and scores. We found that some of the consumers we talked to expressed confusion about the best way to access credit reports and scores, what makes up credit reports and scores, and how to improve their scores. Some of the consumers we spoke to often do not feel empowered to take action to improve their credit histories, to use their credit reports and scores to negotiate better credit terms, or, ultimately, to use credit reports and scores as a helpful tool in achieving their financial goals.
The diversity of consumer perceptions, attitudes, and behaviors we heard around credit reports and scores suggests that there is much work to do in helping consumers understand and manage this complicated financial topic. Because consumers have a wide range of knowledge about and perceptions of credit reports and scores, there is no single message or approach to encourage consumers to engage more fully with their credit histories.
However, consumer perspectives on credit reports do suggest that many consumers feel that the credit reports are “hard to get, and hard to read.” Efforts by credit reporting agencies to make it easier for consumers to access and interpret their reports could be a useful contribution tohelping consumers navigate their credit histories.
The growing number of financial services companies that provide their customers with regular access to their credit scores on monthly credit card statements or online provides an opportunity to engage consumers around their credit reports. Once consumers see their credit scores, they may be motivated to learn more about their credit histories, check their full credit reports, and take action to improve their credit reports and scores. (19)
I am happy to see that the CFPB is trying to understand where consumers are at in terms of their financial literacy. This should help them to target their financial education efforts realistically. The report notes that the subject of credit reports is a complicated one. The mortgage application process is far, far more complicated so this report gives us a sense of how much work is to be done for consumers to achieve financial well-being.

Mortgage Assignment Mayhem

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Judge Drain issued a biting Memorandum of Decision on Debtor’s Objection to Claim of Wells Fargo Bank, NA in the case In re Carrsow-Franklin (No. 10-20010, Jan. 29, 2015). The Court granted the debtor’s claim objection “on the basis that Wells Fargo is not the holder or owner of the note and beneficiary of the deed of trust upon which the claim is based and therefore lacks standing to assert the claim.” (1)

This blog, and many other venues, have documented the Alice in Wonderland world of mortgage assignments in which something is true because the the foreclosing party, like the Red Queen herself, says it is.

Judge Drain adds to the evidence with ALLCAPS, a touch I can’t remember seeing in another judicial opinion that I have blogged about:

Because Wells Fargo does not rely on the Assignment of Mortgage to prove its claim, the foregoing evidence is helpful to the Debtor only indirectly, insofar as it goes to show that the blank indorsement, upon which Wells Fargo is relying, was forged. Nevertheless it does show a general willingness and practice on Wells Fargo’s part to create documentary evidence, after‐the‐fact, when enforcing its claims, WHICH IS EXTRAORDINARY. (17-18, emphasis in the original, footnote omitted)

In retrospect, legal historians will be shocked by the lending industry’s practices which seemed to ignore the law in favor of convenience. MERS, and the practices which arose from it, was an attempt to circumvent clunky laws in favor of efficiency. For many years, many judges went along with this regime. Since the foreclosure crisis began, however, more and more judges are engaging in a more rigorous analysis of the documents in a particular case and the applicable law governing mortgage notes and foreclosures. When these judges find that a transaction does not comply with the relevant law, it is incumbent upon them to deny the relief sought by the foreclosing party as Judge Drain did here.

Reiss on Buying a Home

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Mainstreet.com quoted me in Potential Homeowners Should Seek Counseling Before Making First Purchase. It reads, in part,

Many consumers have made buying their first home less of a daunting task by seeking housing counseling from a non-profit organization.

In 2014, more than 73,000 people received housing counseling from the National Foundation for Credit Counseling’s member agencies, making it the highest volume experienced during the past five years. The renewed interest in housing counseling could be an indicator that many people are considering home ownership as an affordable option.

*     *     *

Homeowners should look at a range of mortgages before committing to one since the typical American homeowner moves every seven years, said David Reiss, professor of law at the Brooklyn Law School in N.Y. For example, obtaining a “relatively expensive 30-year fixed rate mortgage may not make sense,” he said, if you can save a lot in monthly payments with an adjustable rate mortgage (ARM).

ARMs have a certain period of time where the interest rate remains the same, such as 84 months for a 7/1 ARM or 120 months for a 10/1 ARM and then it adjusts each year for the remainder of the mortgage.

“This might be particularly true for very young households or for empty nesters, both of whom may have different needs in five or ten years,” Reiss said. “It is hard to predict where interest rates and prices are going, so holding off on buying when it seems like the right time to do so for your personal situation is risky.”

Treasury Gives RMBS a Workout

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The Treasury has undertaken a Credit Rating Agency Exercise. According to Michael Stegman, Treasury

recognized that the PLS market has been dormant since the financial crisis partly because of a “chicken-and-egg” phenomenon between rating agencies and originator-aggregators. Rating agencies will not rate mortgage pools without loan-level data, yet originator-aggregators will not originate pools of mortgage bonds without an idea of what it would take for the bond to receive a AAA rating.

Using our convening authority, Treasury invited six credit rating agencies to participate in an exercise over the last several months intended to provide market participants with greater transparency into their credit rating methodologies for residential mortgage loans.

By increasing clarity around loss expectations and required subordination levels for more diverse pools of collateral, the credit rating agencies can stimulate a constructive market dialogue around post-crisis underwriting and securitization practices and foster greater confidence in the credit rating process for private label mortgage-backed securities (MBS). The information obtained through this exercise may also give mortgage originators and aggregators greater insight into the potential economics of financing mortgage loans in the private label channel and the consequent implications for borrowing costs.

While this exercise is very technical, it contains some interesting nuggets for a broad range of readers. For instance,

The housing market, regulatory environment, and loan performance have evolved significantly from pre-crisis to present day. Credit rating agency models appear to account for these changes in varying ways. All credit rating agency models incorporate the performance of loans originated prior to, during, and after the crisis to the degree they believe best informs the nature of credit and prepayment risk reflected in the market. Credit rating agency model stress scenarios may be influenced by loans originated at the peak of the housing market, given the macroeconomic stress and home price declines they experienced. The credit rating agencies differ, however, in how their models adjust for the post-crisis regime of improved underwriting practices and operational controls. Some credit rating agencies capture these changes directly in their models, while other credit rating agencies rely on qualitative adjustments outside of their models. (10)

It is important for non-specialists to realize how much subjectivity can be built into rating agency models. Every model will make inferences based on past performance. The exercise highlights how different rating agencies address post-crisis loan performance in significantly different ways. Time will tell which ones got it right.

Hockett on Postliberal Finance

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Bob Hockett has posted Preliberal Autonomy and Postliberal Finance to SSRN. The abstract reads,

Even American Founders whose views diverged as dramatically as those of Jefferson and Hamilton shared a view of finance and of enterprise that one might call “productive republican.” Pursuant to this vision, financial and other forms of market activity are instrumentally rather than intrinsically good — and for that very reason are of interest to the public qua public rather than to the public qua aggregate of “private” individuals. Citizens are best left free to engage in financial and other market activities, per this understanding, only insofar as these are consistent with sustainable collective republic-making. And the republic — the res publica or “thing of the public” — for its part devotes many of its energies to the task of fostering and maintaining a materially independent republican citizenry. State and citizen are thus mutually constituting and mutually supporting, per this vision, and finance is important primarily in its capacity to nurture that symbiosis.

The productive republican view of finance can be illuminatingly contrasted with another view of more recent vintage, which one might call “liberal.” The liberal view takes market activity to be an intrinsic good, if not indeed a matter of inherent political-cum-moral right. Markets on this view are as it were natural social outgrowths of and aggregated counterparts to inherently “free” individual choices — choices that all of us, in both our individual and our collective capacities, are ethically bound to respect insofar as they don’t impose illegitimate costs upon others. So-called “public” interventions in “private” markets are accordingly fit subjects of suspicion and scrutiny per the liberal view. They are presumptively problematic unless and until proven otherwise, while “proof otherwise” for its part typically takes the form of proof that the intervention protects putatively pre-political freedom itself.

I claim in this article, a solicited symposium contribution, that American financial law, and economic law more generally, were once highly productive-republican in character, and that many financial, economic and, in consequence, political dysfunctions with which we have become familiar in recent decades stem from those laws’ having become steadily more liberal in character over time. I also argue that a number of essays, articles, and monographs published over the last twenty years or so under the rubrics of “banking the poor,” “alternative banking,” or “democratized finance” are, in effect if not self-conscious intention, attempts at partial recovery of the productive republican tradition — at least in the realm of finance. They are in this sense what might be called “post-liberal” in sensibility, if not quite in self-conscious aim. Their project can accordingly be aided, I aim to show, by affording them a form of reflective project-consciousness. That consciousness, however, once attained, will not be satisfied with post-liberal finance alone. It will demand a post-liberal economics.

This symposium piece is particularly compelling because it includes a personal story about Bob’s involvement with a “homeless kibbutz.” No spoilers, so you’ll have to read it yourself.

Segregation in the 21st Century

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NYU’s Furman Center has posted a research brief, Race and Neighborhoods in the 21st Century. The brief is is based on a longer paper, Race and Neighborhoods in the 21st Century: What Does Segregation Mean Today? (One of the co-authors of the longer paper, Katherine M. O’Regan, is currently Assistant Secretary for Policy Development and Research at HUD.) The brief opens,

In a recent study, NYU Furman Center researchers set out to describe current patterns of residential racial segregation in the United States and analyze their implications for racial and ethnic disparities in neighborhood environments. We show that 21st Century housing segregation patterns are not that different from those of the last century. Although segregation levels between blacks and whites have declined nationwide over the past several decades, they still remain quite high. Meanwhile, Hispanic and Asian segregation levels have remained relatively unchanged. Further, our findings show that the neighborhood environments of blacks and Hispanics remain very different from those of whites and these gaps are amplified in more segregated metropolitan areas. Black and Hispanic households continue to live among more disadvantaged neighbors, to have access to lower performing schools, and to be exposed to more violent crime. (1)

And the brief concludes,

Black and Hispanics continued to live among more disadvantaged neighbors even after controlling for racial differences in poverty, to have access to lower performing schools, and to be exposed to higher levels of violent crime. Further, these differences are amplified in more segregated metropolitan areas. Segregation in the 21st century, in other words, continues to result not only in separate but also in decidedly unequal communities. (5)

This conclusion makes clear that segregation is not merely the result of poverty. It is important to understand how segregation persists even though the legal support of segregation has been dismantled. Richard Brooks and Carol Rose’s work in this area is a good start for those who are interested.

Washington’s Farewell

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President Washington had this to say in his farewell address:

The unity of government which constitutes you one people is also now dear to you. It is justly so, for it is a main pillar in the edifice of your real independence, the support of your tranquility at home, your peace abroad; of your safety; of your prosperity; of that very liberty which you so highly prize. But as it is easy to foresee that, from different causes and from different quarters, much pains will be taken, many artifices employed to weaken in your minds the conviction of this truth; as this is the point in your political fortress against which the batteries of internal and external enemies will be most constantly and actively (though often covertly and insidiously) directed, it is of infinite moment that you should properly estimate the immense value of your national union to your collective and individual happiness; that you should cherish a cordial, habitual, and immovable attachment to it; accustoming yourselves to think and speak of it as of the palladium of your political safety and prosperity; watching for its preservation with jealous anxiety; discountenancing whatever may suggest even a suspicion that it can in any event be abandoned; and indignantly frowning upon the first dawning of every attempt to alienate any portion of our country from the rest, or to enfeeble the sacred ties which now link together the various parts.

We should heed these words as much today as in Washington’s own time. And while they should guide us in many areas, I would focus on what they mean in the context of housing finance reform.

Democrats and Republicans have not found common ground on the future of Fannie Mae and Freddie Mac. And yet the nation is likely to be made worse off by leaving them in limbo for so long, with a variety of crises lurking just over the horizon. I hope Congress can hear Washington’s advice to his fellow citizens and commit to placing the reform of these two gargantuan financial institutions at the top of its agenda for the coming year. Seems like a good way to truly commemorate his contribution to our country.