September 9, 2013
Arizona Court Affirms a Lower Court Decision That Possession of Note Was Not Needed for a Party to Initiate a Non-Judicial Foreclosure
The Arizona court in Maxa v. Countrywide Loans, Inc., 2010 WL 2836958 (D. Ariz. 2010) affirmed a lower court decision that possession of the note was not needed for a party to initiate a non-judicial foreclosure. The court also affirmed that MERS had the authority under the deed of trust to commence foreclosure.
The court in reaching their decision rejected the plaintiff‘s claim that the defendants lacked the right to enforce the note; therein making the foreclosure was invalid. The court noted that a trustee’s sale was not an action to enforce the note, but rather it was an exercise of the power of sale upon default.
The court explicitly held that Arizona law bestowed power of sale on the trustee upon default or breach of the contract secured by the trust deed without reference to enforcing or producing a note or other negotiable instrument.
The court in reaching their decision also found that the plaintiff not only gave the power of sale to the trustee, but also agreed to empower MERS, as the lender’s nominee, to exercise the right to foreclose. Lastly, the court directly rejected the plaintiff’s claims of fraudulent misrepresentation based upon the notion that MERS was not a valid beneficiary.
September 9, 2013 | Permalink | No Comments
Myths About Home Buying
I was quoted by MainStreet.com in Top 5 Myths About Home Buying Today. It reads in part,
The fact is, buying a home today is absolutely, totally different from buying one in 2003. And right there is why so many myths swirl around a process that, in many ways, is utterly novel from what it has been. What was true isn’t anymore.
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Myth 3: Fixed rate mortgages are the only way to go.
Not true, said David Reiss, a professor at Brooklyn Law School who specializes in real estate. He elaborated: “The necessity of getting a 30-year fixed rate mortgage is one of the biggest myths about homebuying. The average American household stays in their home for about seven years. Typically, 30-year fixed rate mortgages have higher interest rates than adjustable rate mortgages (ARMs). Homebuyers should take a hard look at their plans for the new home.”
Only 6.5% of applications for mortgages in a recent period were for ARMs, according to the Mortgage Bankers Association. A typical ARM went out at 3.21% interest, versus 4.69% for a typical 30 year fixed rate. That adds up to a difference worth tens of thousands of dollars over, say, a seven year probable life of the loan.
Do the math.
September 9, 2013 | Permalink | No Comments
September 6, 2013
Benefit Ratios for Qualified Residential Mortgages
As I had noted previously,
the long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).
The Proposed Rule notes that in “developing the definition of a QRM in the original proposal,” the six agencies [OCC, FRS, FDIC, FHFA, SEC and HUD] responsible for it “articulated several goals and principles.” (250)
First, the agencies stated that QRMs should be of very high credit quality, given that Congress exempted QRMs completely from the credit risk retention requirements.
Second, the agencies recognized that setting fixed underwriting rules to define a QRM could exclude many mortgages to creditworthy borrowers. In this regard, the agencies recognized that a trade-off exists between the lower implementation and regulatory costs of providing fixed and simple eligibility requirements and the lower probability of default attendant to requirements that incorporate detailed and compensating underwriting factors.
* * *
Fourth, the agencies sought to implement standards that would be transparent and verifiable to participants in the market.” (250)
After reviewing the comments to the 2011 Proposed Rule, the agencies concluded that “a QRM definition that aligns with the definition of a QM meets the statutory goals and directive of section 15G of the Exchange Act to limit credit risk, preserves access to affordable credit, and facilitates compliance.” (256)
I was somewhat disturbed, however, by the following passage. The agencies are
concerned about the prospect of imposing further constraints on mortgage credit availability at this time, especially as such constraints might disproportionately affect groups that have historically been disadvantaged in the mortgage market, such as lower-income, minority, or first-time homebuyers. (263)
While it is important to make residential credit broadly available, the agencies will be doing borrowers no favors if their loans are not sustainable and they end up in default or foreclosure. The agencies should come up with a metric that balances responsible underwriting with access to credit and apply that metric to the definition of a QRM.
Quercia et al. have developed one such metric, which they refer to as a “benefit ratio.” The benefit ratio compares “the percent reduction in the number of defaults to the percent reduction in the number of borrowers who would have access to QRM mortgages.” (20) A metric of this sort would go a long way to ensuring that there is transparency for homeowners as to the likelihood that they can not only get a mortgage but also pay it off and keep their homes.
September 6, 2013 | Permalink | No Comments
September 5, 2013
Reiss on the FHA and Low Downpayment Mortgages
I will be speaking at the Cleveland Fed’s 2013 Policy Summit on Housing, Human Capital, and Inequality on Thursday, September 19 from 2:40PM-4:10PM. My panel is on
Affordable Housing, Mortgage Underwriting, and Default: The Case of the FHA
In the past few years FHA’s market share has increased substantially, as have its default and foreclosure rates. Recently, the White House announced that the FHA may have to make a capital call to Treasury for the first time in its history, prompting much debate over the future of the organization. In this session, a panel of experts will discuss the FHA’s financial situation, its role in providing affordable housing, and explore potential policy responses.
Moderator:
Emre Ergungor, Senior Research Economist, Federal Reserve Bank of Cleveland
Speakers:
Edward J. Pinto, Resident Fellow, American Enterprise Institute, How the FHA Hurts Working-Class Families
David Reiss, Professor, Brooklyn Law School, How Low is Too Low? The Federal Housing Administration and the Low Downpayment Loan
Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York
Interpreting the Recent Developments in Housing Markets
My summary and implications are below and those for the other speakers can be found at the link above.
Summary and Findings
The Federal Housing Administration (FHA) has been a flexible tool of government since it was created during the Great Depression. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety additional social goals. It achieved success with some of its goals and had a terrible record with others. Today’s FHA is suffering from many of the same unrealistic underwriting assumptions that have done in so many subprime lenders as well as Fannie and Freddie. The FHA has come under attack for its poor execution of some of its additional mandates and leading commentators have called for the federal government to stop undertaking them. This article takes the long view and demonstrates that the FHA also has a history of successfully undertaking new programs. It also identifies operational failures that should be noted to prevent them from occurring if the FHA were to undertake similar ones in the future. The article first sets forth the dominant critique of the FHA and a history of its constantly changing role. It then addresses the dominant critique of the FHA and evaluates its priorities in the context of legitimate housing policy objectives. It concludes that the FHA has focused on an unthinking “more is better” approach to housing, but that the FHA can responsibly address objectives other than the provision of liquidity to the residential mortgage market.
Implications for Policy and Practice
Leading commentators on the FHA do not fully appreciate the extent to which down payment requirements alone drive the success and failure of new FHA initiatives. Central to any analysis of the FHA’s role is an understanding of its policies relating down payment size. Much of the FHA’s performance is driven by its down payment requirements, which have trended ever downward so that homeowners were able to get loans for 100% of the value of the house in recent times. As is obvious to all, the larger the down payment, the safer the loan. What appears to have been less obvious is that very small down payments are unacceptably risky. Given that the FHA insures 100% of the losses on its mortgages, the down payment requirement is a key driver of its performance. From an underwriting perspective, 20% is clearly desirable as the risk of default is very low even in a down market. But from an opportunity perspective, a 20% down payment requirement would keep large swaths of potential first-time homeowners from entering the market. If down payments are set too high, than an important social goal may be left by the wayside. So it is important that the public discourse weighs the costs and benefits of setting a fixed down payment requirement versus taking a risk layering approach to down payments. In either case, the FHA must balance the goal of safe underwriting with the goal of making homeownership available to households who could maintain it for the long term.
September 5, 2013 | Permalink | No Comments
September 4, 2013
Leverage and the Foreclosure Crisis
Dean Corbae and Erwan Quintin have posted Leverage and the Foreclosure Crisis to SSRN (behind a paywall; available here for free). They ask how “much of the recent rise in foreclosures can be explained by the large number of high-leverage mortgage contracts originated during the housing boom?” (1) Their model and counterfactual experiments suggest that “the increased availability of high-leverage loans prior to the crisis can explain between 40% and 65% of the initial rise in foreclosure rates.” (1)
September 4, 2013 | Permalink | No Comments
September 3, 2013
Arizona Court Rejects Plaintiff’s Argument That MERS Lacked Authority to Foreclose
The Arizona court in Kane v. Bosco, No. 10-CV-01787-PHX-JAT, 2010 WL 4879177 (D.Ariz. 2010), after considering the plaintiffs contentions that MERS lacked the power to assign mortgages, proceeded to reject those arguments.
In making such a rejection, the court held that MERS could assign mortgages. Contrary to plaintiffs‘ allegations, the court failed to see how the MERS System lacked authority as a nominee of lenders to assign deeds of trust. Further, the court failed to see how MERS, in assigning deeds of trust, committed any form of fraud as the plaintiff alleged.
September 3, 2013 | Permalink | No Comments
Arizona Court Dismisses Plaintiff’s Show-Me-The-Note Claim in Its Entirety
The Arizona Court that decided AOM Group LLC et al v. Mortgage IT, Inc. et al., No. CV 09-2639-PHX-SRB (D.Ariz.)(2010) held that the plaintiff’s ‘show me the note’ argument was lacking in merit.
The plaintiff brought an action that challenged the validity of completed trustee sale. The plaintiff made several allegations, one of which was unlawful fraudulent foreclosure by MERS and the servicer. The court after considering the arguments dismissed the plaintiff’s action its entirety.
September 3, 2013 | Permalink | No Comments
