Tag Archives: financial crisis

Challenging Wrongful Foreclosures

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photo by Oparvez

The California Supreme Court issued an opinion a few days ago that has been getting a lot of attention, Yvanova v. New Century Mortgage Corp., S218973 (Feb. 18, 2016). The opinion opens by noting that

The collapse in 2008 of the housing bubble and its accompanying system of home loan securitization led, among other consequences, to a great national wave of loan defaults and foreclosures. One key legal issue arising out of the collapse was whether and how defaulting homeowners could challenge the validity of the chain of assignments involved in securitization of their loans. (1)

The Court concludes that

a home loan borrower has standing to claim a nonjudicial foreclosure was wrongful because an assignment by which the foreclosing party purportedly took a beneficial interest in the deed of trust was not merely voidable but void, depriving the foreclosing party of any legitimate authority to order a trustee’s sale. (30)

First, let us be clear what it is NOT saying: “We do not hold or suggest that a borrower may attempt to preempt a threatened nonjudicial foreclosure by a suit questioning the foreclosing party’s right to proceed.” (2) This is an important distinction between challenging a nonjudicial foreclosure and having standing to bring a wrongful foreclosure tort action.

And let us be clear as to what it is saying: if a homeowner argues that that an assignment of a deed of trust is void, that can provide the basis for a wrongful foreclosure action because it “is no mere ‘procedural nicety,’ from a contractual point of view, to insist that only those with authority to foreclose on a borrower be permitted to do so.” (22) Quoting Adam Levitin, the Court finds that

“Such a view fundamentally misunderstands the mortgage contract. The mortgage contract is not simply an agreement that the home may be sold upon a default on the loan. Instead, it is an agreement that if the homeowner defaults on the loan, the mortgagee may sell the property pursuant to the requisite legal procedure.” (23, italics changed)

Sounds like common sense to me.

 

Borrowing Constraints and The Homeownership Rate

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photo by Victor

Arthur Acolin, Jess Bricker, Paul Calem and Susan Wachter have posted a short paper on Borrowing Constraints and Homeownership to SSRN. The abstract reads,

This paper identifies the impact of borrowing constraints on home ownership in the U.S. in the aftermath of the 2008 financial crisis. The existence of credit rationing in the U.S. mortgage market means that some households for whom it would be optimal to choose to be homeowners may not be able to do so. Borrowers with certain wealth, income and credit characteristics are unable to obtain a loan even if they are willing to pay a higher cost of credit (Linneman and Wachter 1989). The Stiglitz and Weiss (1981) canonical model sets up the rationale for this credit rationing. Using data from the 2001, 2004-2007 and 2010-2013 Surveys of Consumer Finance (SCF), this paper measures the impact of changes in the income, wealth and credit constraints on the probability of home ownership. Credit supply eased and then became considerably more restricted in the wake of the Great Recession. The loosening of borrowing constraints was accompanied by an increase in home ownership from the late 1990s until the start of the housing crisis. In this paper we estimate the role the tightening of credit has had on the probability of individual households to become homeowners and the decline in the aggregate home ownership rate following the crisis. The home ownership rate in 2010-2013 is predicted to be 5.2 percentage points lower than it would be if the constraints were at the 2004-2007 level and 2.3 percentage points lower than if the constraints were set at the 2001 level.

This paper builds on some of the other work of the authors (see here for instance) on the homeownership rate. The paper makes a valuable contribution by estimating the impact of credit rationing on the homeownership rate. To the extent we can identify an optimal amount of credit supply, it should help us to determine a target homeownership rate to guide policymakers.

Economic Factors That Affect Housing Prices

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photo by TaxRebate.org.uk

S&P has posted a paper on Economic Factors That Affect Housing Prices. This is, of course, an important topic, albeit one that is an art as well as a science. While S&P undertook this analysis more for mortgage-backed securities investors than for anyone else, it certainly is of use to the rest of us. The paper opens,

The U.S. domestic housing market has experienced a 23% price increase since the beginning of the housing recovery in 2011. Many local housing markets are now close to or above their peak levels of 2006, which leads us to investigate whether the pace of home price appreciation (HPA) can continue at its current pace. In this paper, we (1) examine the economic factors that influence HPA and (2) forecast HPA for numerous geographic regions assuming various economic conditions over the next five years. While the aggregate national pattern in housing prices is an important reference, we need to examine housing prices at a more granular geographic level in order to understand regional housing market dynamics and learn how these are affected by local macroeconomic factors. This paper demonstrates that several economic variables are needed to predict average home price movements for each of 48 different U.S. metropolitan statistical areas (MSAs).

*     *      *

Factors that influence HPA can be difficult to predict. Therefore, residential mortgage backed securities (RMBS) investors frequently use a range of HPA projections to estimate their potential bond returns. With that in mind, for each MSA, we considered five separate hypothetical economic scenarios, ranging from an “Upside” forecast to an extreme “Stress 3” case. Interestingly, our Stress 3 case forecasts a 28% decline in HPI at the national level over the next five years, which corresponds roughly to the decline experienced in the last recession. Our “base case” scenario leads to forecasts at the national level of a 26% increase in HPI over five years. This represents what we believe to be the most likely economic forecast. (1-2)

S&P’s key findings include:

  • Movement in HPA is primarily influenced by up to five variables, depending on the MSA: housing affordability, changes in shadow inventory, the unemployment rate, the TED spread [a measure of distress in the credit markets], and population growth.
  • HPA in many MSAs has momentum, meaning that it depends on its level in the previous quarter of observation.
  • The mortgage rate generally appears to have little predictive power in connection with home prices.
  • Chicago, Houston, Boston, and San Francisco are projected to appreciate at a greater pace (45%, 40%, 27%, and 36%, respectively) than the 26% forecast for the nation as a whole over the next five years, and New York at a slower pace (21%). Columbus led all MSAs with a projected five-year HPA of 50%.
  • Under our most pessimistic (Stress 3) scenario, Chicago is forecast to experience a greater decline in HPI (34%) over the next five years than the nation as a whole (29%), while New York, Boston, Houston, and San Francisco are projected to experience declines that are less severe than that of the nation (19%, 3%, 17%, and 16%, respectively). Markets that have been vulnerable in the past (Las Vegas, Phoenix, and Riverside) are projected to experience the greatest five-year declines under our Stress 3 scenario (66%, 68%, and 68%). The markets that show the greatest movements are the most sensitive to the five factors and frequently show the greatest upside and downside. (2-3, emphasis in the original)

I found the first and third bullet points to be the most interesting, as many pundits weigh in on the factors that affect housing prices. It will be interesting to see if further research confirms S&P’s findings.

Rigged Justice

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photo by Toby Hudson

The Office of Senator Elizabeth Warren has released Rigged Justice: 2016 How Weak Enforcement Lets Corporate Offenders Off Easy. The Executive Summary states,

When government regulators and prosecutors fail to pursue big corporations or their executives who violate the law, or when the government lets them off with a slap on the wrist, corporate criminals have free rein to operate outside the law. They can game the system, cheat families, rip off taxpayers, and even take actions that result in the death of innocent victims—all with no serious consequences.

The failure to punish big corporations or their executives when they break the law undermines the foundations of this great country: If justice means a prison sentence for a teenager who steals a car, but it means nothing more than a sideways glance at a CEO who quietly engineers the theft of billions of dollars, then the promise of equal justice under the law has turned into a lie. The failure to prosecute big, visible crimes has a corrosive effect on the fabric of democracy and our shared belief that we are all equal in the eyes of the law.

Under the current approach to enforcement, corporate criminals routinely escape meaningful prosecution for their misconduct. This is so despite the fact that the law is unambiguous: if a corporation has violated the law, individuals within the corporation must also have violated the law. If the corporation is subject to charges of wrongdoing, so are those in the corporation who planned, authorized or took the actions. But even in cases of flagrant corporate law breaking, federal law enforcement agencies – and particularly the Department of Justice (DOJ) – rarely seek prosecution of individuals. In fact, federal agencies rarely pursue convictions of either large corporations or their executives in a court of law. Instead, they agree to criminal and civil settlements with corporations that rarely require any admission of wrongdoing and they let the executives go free without any individual accountability. (1)

I think the report’s central point is that the “contrast between the treatment of highly paid executives and everyone else couldn’t be sharper.” (1)

The report does not address some of the key issues that stand in the way of achieving substantive justice for financial wrongdoing. First, many of those accused of wrongdoing were well-represented by counsel who ensured that they did not violate any criminal laws, even if they engaged in rampant bad behavior. Second, contemporary jurisprudence of corporate criminal liability presents serious roadblocks to prosecutors who seek to pursue such wrongdoing. Third, many of these cases are incredibly resource heavy, even for federal prosecutors. This can incentivize them to go after other types of financial wrongdoing instead, such as insider trading.

It seems like it is too late to address much of the wrongdoing that arose from our most recent financial crisis. But if this report achieves one thing, I would hope that it gets Congress to focus on how corporations and their high-level executives could be held criminally accountable the next time around.

Wall Street Naughty List

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Damian Gadal

Law360 quoted me in Checks Needed For Naughty List To Improve Wall Street’s Rep. It reads, in part, 

Wall Street banks may back a push to create a central registry of employees who misbehave in a bid to improve internal culture at the country’s biggest banks, but worries about the accuracy of any potential list and other due process concerns have given some observers pause.

Federal Reserve Bank of New York President William F. Dudley has been advocating for the creation of such a central registry that can be used by banks when recruiting new talent as a way to make sure that serial rulebreakers are kept out of the biggest banks. And a readout of a meeting on bank culture with Wall Street bigwigs in November appear to show that the banks are getting behind the idea.

While creating such a central registry could go a long way toward preventing bad actors from engaging in future frauds and improving the internal workings of banks, there are risks that people could be wrongly included on the list and shut out from jobs, or that individuals could be made scapegoats for larger, institutional failures at the big banks.

In order to prevent that from happening, any formal registry of wrongdoers set up by the banks must have strict rules for when a person is added and how they can appeal their placement on the list, said Ellen Zimiles, a managing director at Navigant Consulting.

*     *     *

Still, despite her concerns, Zimiles said that having a registry of bad actors could increase the amount of individual accountability for Wall Street’s misdeeds, something that has been lacking.

But some say it does not go far enough.

The Dodd-Frank Act mandated new compensation rules, and more than five years after the law’s passage, they have still not been completed. Without compensation reforms, including clawbacks for violations, a central registry will not be enough to truly reform Wall Street’s internal culture, said David Reiss, a Brooklyn Law School professor.

“Together, perhaps the registry and clawbacks could have a positive effect on firm behavior if they are implemented thoughtfully and are designed to work together,” he said.

And even with the addition of compensation reforms to the central registry forming a “belt and suspenders” approach to reform bank culture, the fiercest of Wall Street critics say that changes will not come unless bankers are brought before courts for alleged violations and sent to jail if found guilty.

“And, of course, along with the belt and suspenders, there should be prison bars as well,” Bart Naylor of Public Citizen said.

That’s something that critics say was missing after the financial crisis.

The registry, however, could be a start to bringing about much-needed accountability, they said.

Feds Financing Multifamily

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Brett VA

The Congressional Budget Office has released The Federal Role in the Financing of Multifamily Rental Properties. The report opens,

Multifamily properties—those with five or more units— provide shelter for approximately one-third of the more than 100 million renters in the United States and account for about 14 percent of all housing units. Mortgages carrying an actual or implied federal guarantee have been an important source of financing for acquiring, developing, and rehabilitating multifamily properties, particularly after the collapse in house prices and credit availability that accompanied the 2008–2009 recession. According to the Federal Reserve, the share of outstanding multifamily mortgages carrying such a guarantee increased by 10 percentage points, from 33 percent at the beginning of 2005 to 43 percent at the end of the third quarter of 2014. (A slightly larger increase of about 16 percentage points occurred in the federal government’s market share of the much larger single-family market.) Such guarantees are made by a variety of entities, and some policymakers are looking for ways to make the federal government’s involvement more effective. Other policymakers have expressed concern about that expanded federal role and are looking at ways to reduce it. (1)

This debate is, of course, key to housing policy more generally: to what extent should the government be involved in the provision of credit in that sector?

This report does a nice job of summarizing the state of the multifamily housing sector, particularly since the financial crisis. It provides an overview of federal mortgage guarantees for multifamily projects and reviews the choices that Congress faces when it decides to determine Fannie and Freddie’s fate. That is, should we have a federal agency guarantee multifamily mortgages; take a hybrid public/private approach; authorize a federal guarantor of last resort; or take a largely private approach?

We should start by asking if there is a market failure in the housing finance sector and then ask how the government should intercede to correct that market failure. My own sense is that we intercede too much and we should move toward a federal guarantor of last resort with additional support for the low- and moderate-income subsector of the market.

 

 

 

Home Buyers & Home Sellers

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Jkirriemuir

The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that

Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)

This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.

I was particularly intrigued by one finding about sellers,

Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)

This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.

The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.