May 6, 2013
Principled Forgiveness
The Congressional Budget Office issued a report, Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness, that reviews where we are with principal-forgiveness loan modifications. It notes that “Fannie Mae and Freddie Mac have not been allowed to implement principal forgiveness out of concerns about fairness, implementation costs, and the incentive that the approach could provide for people to become delinquent in order to obtain principal forgiveness.” (1)
The report examines how the GSEs could employ principal forgiveness. A key issue that the report addresses is how to deal with the moral hazard of homeowners “becoming delinquent in order to obtain principal forgiveness.” (3) This could result in large costs for the federal government and would be inequitable to those who are similarly situated who choose not to become delinquent.
The CBO analyzes three principal forgiveness options. Each option would allow a GSE to choose between a standard HAMP modification or one that involved principal forgiveness, “depending on which one lowered the government’s expected costs more.” (3) CBO estimates that 1.2 million borrowers might be eligible for such a program, which would be about 40 percent of all underwater borrowers. CBO estimates that the federal government would save a modest amount of money with these options.
The CBO’s cost-benefit principle seems like a reasonable basis upon which to expand principal forgiveness loan modifications. The FHFA should pursue these options even before its new leadership is in place.
May 6, 2013 | Permalink | No Comments
May 3, 2013
Noncompliance with PSA Voids Assignment of Note and Mortgage
Wells Fargo Bank, N.A. v Erobobo, 2013 NY Slip Op 50675(U) (Sup. Ct. Kings, Apr. 29, 2013) reaches a pretty extraordinary result: noncompliance with the assignment provisions of a Pooling and Servicing Agreement voids the assignment of a note and mortgage. In particular, the court found that
The assignment of the note and mortgage from Option One [the first assignee] rather than from the Depositor ABFC violates section 2.01of the PSA which requires that the Depositor deliver to and deposit the original note, mortgage and assignments to the Trustee. The assignment of the Defendant’s note and mortgage, having not been assigned from the Depositor to the Trust, is therefore void as in being in contravention of the PSA.The evidence submitted by Defendant that the note was acquired after the closing date and that assignment was not made by the Depositor, is sufficient to raise questions of fact as to whether the Plaintiff owns the note and mortgage, and precludes granting Plaintiff summary judgment. (13)
If the Court’s reasoning holds up on appeal or is adopted in other jurisdictions, it could have a big, big impact on Foreclosure litigation.
May 2, 2013
The Weak Can Never Forgive?
S&P has issued a report, Principal Forgiveness, Still The Best Way To Limit U.S. Mortgage Redefaults, Is Becoming More Prevalent, that asserts that its research “demonstrates the likelihood that servicers will recover a greater portion of their receivables through principal forgiveness versus other modification tools,” such as rate modification. (5) In particular, the authors found that as of March of 2013, “loans that received a principal reduction maintained the highest percentage (about 76%) of current-pay borrowers. By contrast, on average less than 50% of loans outstanding that received a modification other than principal forgiveness remained current.” (4)
I am not sure that their research actually demonstrates a causal connection between principal modification and recoveries as opposed to just providing a correlation between the two. This perhaps naive analysis does, in any event, raise interesting and important questions about the efficacy of modifications.
And modifications are increasing. Indeed, as of “February of this year, more than 1.5 million homeowners have received a permanent modification through the U.S. federal government’s Home Affordable Modification Program (HAMP).” (1) Since last year, there has been “22% rate of growth in the number of modifications on an additional $2.4 billion in mortgage debt.” (1) Among the big five servicers, “principal forgiveness, as a percentage of average modifications performed on a monthly basis, has increased by about 200% since the latter half of 2011.” (1) And since 2009, “servicers have forgiven principal on approximately $45 billion of outstanding non-agency mortgages.” (1)
At the beginning of the crisis, many were terrified about the impact that principal modification would have on investors. FHFA Acting Director DeMarco was also concerned about the impact of Fannie and Freddie principal reductions on taxpayers. With a new Director for FHFA on the horizon, there might be a change of direction on this.
Gandhi said that forgiveness is an attribute of the strong. Perhaps, our housing market is now strong enough to contemplate some serious loan forgiveness.
May 2, 2013 | Permalink | No Comments
May 1, 2013
Disney-fied Homeownership Policy
The Census Bureau just released a report indicating that the homeownership rate is 65 percent, which is its lowest in since 1995. (5) While some will greet this news with dismay, it provides an opportunity to ask — what are we trying to do with homeownership policy anyway? For the longest time, both Democratic and Republican Administrations acted as if more homeownership was always better. More recently, commentators on the Left and Right have begun to question that unthinking devotion to such a goal.
I have previously argued that federal housing policy should work toward ensuring that all Americans live in a safe, well-maintained and affordable housing unit. Note that such a goal does not require homeownership, just a home. For too long rental housing, which is more appropriate for all sorts of people, has been treated as the Cinderella of housing, with all the perks (for example, the mortgage interest deduction and property tax deduction) going to single family homeowners (Drizella?) and owners of coop and condo units (Anastasia?).
Politicians make all sorts of claims about the benefits of homeownership to justify this special treatment for the mostly upper-middle class households that benefit from these perks. After our experience with the Boom and Bust of the 2000s, the financial benefits of homeownership must be evaluated with the financial risks that it poses in mind as well as its upside.
There is also a significant amount of scholarship that argues that there are a range of non-economic benefits that result from homeownership. Supposed benefits include better outcomes for homeowners and their families in education, health and employment. The supposed benefits also include increased civic engagement, as demonstrated through higher levels of volunteerism and participation in community activities. Homeownership policy is thereby often justified by the claim that it helps to achieve better outcomes for residents regarding these non-economic benefits. But the connection between homeownership and these benefits has not been clearly demonstrated.
The bottom line: let’s develop a housing — not homeownership — policy that would make old Walt proud. That would be one where everyone can live stably ever after in a “castle” of their own, not just the upper middle class homeowners who get a bunch of tax breaks for living in a big, expensive house.
May 1, 2013 | Permalink | No Comments
April 30, 2013
Empire State Building IPO To Proceed
Justice Sherwood ruled in favor of the proponents of the Empire State Building IPO a few hours ago. I discussed the case on Fox Business earlier today. The clip is here:
April 30, 2013 | Permalink | No Comments
April 29, 2013
The Servicing Field Is Wide Open
The CFPB has proposed an additional comment to Regulation X to emphasize that that regulation does not preempt state regulation of mortgage servicing:
Proposed comment 5(c)(1)-1 would state further that nothing in RESPA or Regulation X, including the provisions in subpart C with respect to mortgage servicers or mortgage servicing, should be construed to preempt the entire field of regulation of the covered practices. The Bureau believes that this proposed addition to the commentary would clarify that RESPA and Regulation X do not effectuate field preemption of States’ regulation of mortgage servicers or mortgage servicing. The comment also makes clear that RESPA and Regulation X do not preempt State laws that give greater protection to consumers than they do. (12)
This proposed comment is pretty belts-and-suspenders given that preamble to the 2013 RESPA Servicing Final Rule said as much. But it is still worth noting how different this approach is from the Bush years when large swaths of state consumer protection regimes were preempted by federal regulators. As the mortgage industry takes its post-Bust shape, states may begin to flex their muscles to address servicing practices that concern their residents. It will be interesting to see how this all plays out in the long game.
April 29, 2013 | Permalink | No Comments
April 26, 2013
Empire State of IPO
Bloomberg interviewed me and others about the litigation over the proposed IPO for the Empire State Realty Trust Inc. (which would include the Empire State Building and a few other properties):
A 15-month effort to take New York’s Empire State Building public is approaching a crucial ruling in a legal challenge by investors who oppose the deal put together by the family that controls the iconic skyscraper.
On April 29, New York State Supreme Court Justice O. Peter Sherwood may decide whether unit-holders who object to the transaction can be bought out for $100 a share, as proposed in the plan. He previously said he could throw out the votes the Malkin family has already received approving the plan if he determines the provision is illegal. Sherwood is also set to hold a hearing on a $55 million class-action settlement that is opposed by some of the tower’s more than 2,800-plus investors.
“This represents a kind of watershed moment for the case,” David Reiss, a professor of real estate finance law at Brooklyn Law School, said in an interview.
The rest of the story is here.
April 26, 2013 | Permalink | No Comments
