Tag Archives: mortgages

Subprime Mortgage Conundrums

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Joseph Singer has posted Foreclosure and the Failures of Formality, or Subprime Mortgage Conundrums and How to Fix Them (also on SSRN). Singer writes,

One of the striking features of the subprime era is that banks acted without adequate regard for state property law. They were intent on serving the national and international financial markets with new and more profitable products, and they treated state property law as an obstacle to get around rather than a foundation on which to build. Rather than sell mortgages to families that could afford them, they hoodwinked the vulnerable by picking their pockets. Rather than honestly disclose the high risks associated with subprime loans, they paid rating agencies to give them AAA ratings, inducing investors to take risks they neither were prepared for nor understood. The banks made huge amounts of money marketing mortgages to people who could not afford to pay them back while offloading the risks of such deals onto hapless third parties. And rather than observe longstanding laws and customs designed to clarify property titles, banks evaded requirements of publicity and formality that traditionally governed real estate transactions. In short, the banks misled both borrowers and investors while undermining property titles. This was both a clever and a profitable way to engage in  business, but it was neither honorable nor responsible. (501, footnotes omitted)

Brad Borden and I have made a similar point in our debate with Joshua Stein, but Singer’s article plays it out in far greater depth. The article is a property prof’s cri de coeur over the near death of real property law principles during the early 2000s subprime boom, but it is also a very thorough inquest. The article concludes with a review of tools that are available to respond to failures in the mortgage market. All in all, it provides a nice overview of what led to the crisis as well as potential policy tools that are available to prevent future ones.

 

Shadowed by the Shadow Inventory

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My former colleague at Seton Hall, Linda Fisher, has posted Shadowed by the Shadow Inventory:  A Newark, New Jersey Case Study of Stalled Foreclosures & Their Consequences on SSRN. The paper presents the findings of a small, but interesting empirical study.  The study “tests the extent to which bank stalling has contributed to foreclosure delays and property vacancies in” one neighborhood in  Newark, New Jersey. (6) Fisher states that this “is the first study to trace the disposition of each property in the sample through both public and private sources, allowing highly accurate conclusions to be drawn.” (6)

Fisher reaches “a similar conclusion to the previous studies with respect to stalling: without legal excuse or ongoing workout efforts, banks frequently cease prosecuting foreclosures.” (7) Fisher also finds that the stalled foreclosures in her study “do not strongly correlate with property vacancies.”(7)  Fisher claims that her findings “are generalizable to similar urban areas in judicial foreclosure states,” but I would like to have seen more support for that claim in the paper. (45)

As a side note, I found her description of foreclosure in New Jersey interesting:

The New Jersey foreclosure system provides a representative example of a judicial foreclosure regime, albeit one with heightened procedural protections for borrowers enacted into the state’s Fair Foreclosure Act. For instance, lenders must file a notice of intention to foreclose containing information about, inter  alia, the lender, servicer and amount required to cure, before filing a foreclosure complaint in court. Once borrowers are served with process, they may file a contesting answer and litigate the matter, as with any civil case. Because ninety-­‐four percent of New Jersey foreclosures in a typical year are not contested, the process is largely administrative and handled through a statewide Office of Foreclosure. Court personnel scrutinize bank evidence in support of default judgments. Borrowers may file late answers, and are responsible only for curing arrears and paying foreclosure fees up until the time of judgment. (14-15, emphasis added, citations omitted)

Because this blog has as one of its main focuses downstream litigation judicial opinions, it is important to remember how few cases actually reach a court room, let alone result in a written opinion by a judge.

 

The Future of Foreclosure

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Professor Roger Bernhardt  (Golden Gate University School of Law) has posted The Future of Foreclosure to SSRN.  This short article is ostensibly about a few recent California foreclosure decisions but I was more intrigued by its “case for going back to the courthouses”  and its rejection of nonjudicial foreclosure. (2) Bernhardt makes the common argument that for debtors, “judicial foreclosure would give them the opportunity to have their defenses heard before their property is taken away by foreclosure . . ..” (3)  But he also argues that lenders would benefit from a judicial-foreclosure-only regime because it could “effectively eliminate the risks and consequences that a challenged conduct will later be determined to have amounted to a fatal error.” (3)

Bernhardt does note that

National reform movements have always gone in the opposite direction: attempting to improve the nonjudicial foreclosure procedure in ways to eliminate its deficiencies (e.g., the Uniform Land Transactions Act, the Uniform Land Security Interests Act, the Uniform Nonjudicial Foreclosure Act, and now the (draft) Residential Real Estate Mortgage Foreclosure and Protections Act). But those approaches all concede a premise that may no longer be tenable—that the foreclosure process can be safely or efficiently run without contemporaneous judicial supervision. After-the-fact oversight is too time consuming and too late. (3)

I have not heard any lenders advocate for such a solution and would be curious to hear what they would have to say.  My sense is that they would not agree that they would benefit from such a regime, but it would be interesting to know if I am wrong.