Third Quarter 2009 "Mortgage Metrics"

The Office of the Comptroller of the Currency and Office of Thrift Supervision just released its "Mortgage Metrics Report for Third Quarter 2009" which provides "performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts." It reports that

• the percentage of current and performing mortgages dropped for the sixth consecutive quarter to 87% of the servicing portfolio
• only 67.7% of "option ARM" mortgages were current and performing
• serious delinquencies (more than 60 days past due) rose to 6.2%
• 3.2% of the servicing portfolios were in the process of foreclosure
• deterioration among prime mortgages of which 3.6% were in serious delinquency
• only 781 or less than 1% of HAMP trial period plans have been converted to permanent HAMP modifications

Mortgage Bankruptcy Amendment Defeated

On Friday, the House of Representatives rejected an amendment to the "Wall Street Reform and Consumer Protection Act of 2009" that would have added provisions to allow bankruptcy judges to modify home mortgages in chapter 13. The amendment was similar to that previously passed by the House on March 5, 2009 in H.R. 1106, the "Helping Families Save Their Homes Act of 2009" but was rejected by the Senate.

Under present law, mortgages that are secured only by a principal residence may not be modified, but mortgages on investment property may be modified.

It should be noted that some homeowners may be able to obtain a mortgage modification under present chapter 13 or chapter 11 bankruptcy law by changing the use of their home from being their principal residence to investment property. A modification in chapter 13 or chapter 11 bankruptcy may involve a reduction in principal balance and changes in interest rate, monthly payment and term.

Proposed Bankruptcy Reform and Mortgage Modification

It was reported yesterday that Congressman John Conyers (D-Mich.) has submitted Amendment 201 to the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 1473) that would allow the modification of home mortgages in bankruptcy. This modification would include a principal reduction and interest rate changes.

The House Rules Committee was to meet today regarding this measure and debate on the legislation may start this week. The House passed similar bankruptcy measures earlier this year but they were defeated in the Senate.

House Hearings on Mortgage Crisis

Today the House Financial Services Committee held a hearing on "The Private Sector and Government Response to the Mortgage Foreclosure Crisis".

Rent Out Your House and Get the Ability to Modify Your Mortgages in Chapter 13 or 11 ??

Contrary to some logic, owners of investment properties have more rights to modify their mortgages in a chapter 13 and 11 bankruptcy reorganization case than do homeowners.

Due to the economic crisis, some Florida homeowners have begun to move out of their homes and rent them out to reduce expenses. The renting out of one's principal residence may have a significant benefit under chapter 13 or 11 bankruptcy -- the much sought ability to "cram down" one's mortgages.

Mortgages secured only by a principal residences are protected from modification in chapter 13 and 11 (wholly unsecured second mortgages though may be avoided), but mortgages on investment property may be modified by reducing their principal down to the present value of the real estate. The interest rate and term of the mortgages may also be modified. In short, once the property is no longer a "principal residence" -- the mortgages may be "modified."

The renting out of one's home before filing for bankruptcy may be sufficient to constitute a change in status from "principal residence" to non-principal residence. There may be arguments though that this is not sufficient. The change in status would certainly have to be in "good faith" and not a sham to be accepted by a bankruptcy court.

It would seem, though, that homeowners have a strong argument that they have the right to rent out their homes and convert them into a status of non-principal residence as most standard mortgages contain a provision that requires homeowners to maintain the property as their principal residence only for a certain short period of time. Paragraph six of a typical Fannie Mae mortgage only provides that the homeowner shall "continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy..." Indeed even this one year period may be waived by the mortgage company's consent or if there are extenuating circumstances. In short, the ability to convert from usage as a principal residence to to a non-principal residence was contemplated and provided for in the original mortgage agreement.

The ability to modify a mortgage under chapter 13 gives one broad powers -- the mortgage payoff may be "bi-furcated" into "secured" and "unsecured" portions. The unsecured portion would be provided for with the other unsecured claims such as credit cards. Unsecured claims typically receive only a small percentage dividend in a chapter 13 plan. For example, if the payoff on the mortgage is $400,000.00 and the value is $150,000.00, the mortgage company would have a $150,000.00 secured claim and a $250,000.00 unsecured claim.

One issue would be how to provide for the portion that is secured claim. Some mortgage companies simply agree to a reduction in monthly principal and interest payments based on the reamortization over the original term based on the reduced secured claim. Others may insist on the "maintenance" of the originally monthly payment which was computed on the full payoff. This would result in the now reduced mortgage being paid off in a shorter period of time.

The media continues to report that "Florida Still Leads in Foreclosures" and that few homeowners are receiving trial modification under the administration's HAMP program and even fewer permanent modifications. Perhaps, the rental of one's property and change in status to non-principal residence may be of use to obtain mortgage modifications and help save homes.

Florida Mortgage Foreclosure and Liability

A topic of much concern is liability in a residential mortgage foreclosure in Florida.

In the origination of a typical residential mortgage transaction, there are two instruments - the promissory note and the mortgage. The promissory note documents the actual terms of borrowing and the mortgage provides for a lien on the real property to secure the debt of the promissory note.

In a typical residential mortgage foreclosure action in this part of Florida, the foreclosure case initially usually only seeks a judgment setting a foreclosure sale of the involved real estate. This judgment of foreclosure seeks the setting of a foreclosure auction sale by the Clerk of the Court. A typical judgment of foreclosure is not a "money" judgment upon which the mortgage company can seek "execution" or collection of the sum due other than via the proceeds of the foreclosure auction. It should be noted though, that some residential mortgage foreclosure cases contain an additional count for a judgment on the promissory note which would be a "money" judgment and allow the mortgage company to seek "execution" or collection from any non-exempt assets

After the foreclosure sale, the mortgage company may be able to seek a "deficiency" judgment or otherwise sue for the balance due on the promissory note that was not paid from proceeds of the foreclosure sale. In recent times in South Florida, most mortgage companies have not pursued deficiency judgments for a variety of reasons. This policy though could change.

In a situation of a first and second mortgage on a property in today's market, often the second mortgagee will not pursue a foreclosure but will sue on the promissory note to obtain a "money" judgment upon which it may seek collection.

Where a husband and a wife own a property, it needs to be clarified if both parties actually signed the promissory note. Often one of the spouses only signed the mortgage and not the promissory note and such spouse would not generally face liability for a deficiency or on the promissory note. The spouse would have signed the mortgage but not the promissory note if he or she was a title holder or even if not on title, due to the Florida homestead provisions.

Senator Reed Introduces Bill to Strengthen Mortgage Modification Efforts

On September 30, 2009, Senator Jack Reed (D-RI) issued a press release that he introduced "Preserving Homes and Communities Act of 2009" (S. 1731) which is a bill to help "keep families in their homes and prevent communities from deteriorating as a result of skyrocketing mortgage defaults." The bill is cosponsored by Senators Dick Durbin (D-IL), Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR).

One aspect of the bill will require that "qualified homeowners are evaluated for and offered loan modifications." The bill will apparently prohibit foreclosure while the homeowner waits for loan modification analysis and provide legal relief where lenders fail to follow the mortgage modification program rules. The bill will apparently "force lenders to modify qualified mortgages."

On September 30, 2009, the bill was referred to Senate Committee on Banking, Housing, and Urban Affairs.

Update on Proposed Bankruptcy Cramdown

At a House subcommittee meeting this week, Congressman Barney Frank stated that if the mortgage servicers do not act to stem the foreclosure crisis by modifying more mortgages, there would be an increased chance that Congress will enact bankruptcy laws allowing certain mortgage modifications. Frank stated that “the best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified.”

Frank reportedly told the Wall Street Journal that he intends to eventually include a mortgage modification provision in legislation that will overhaul the financial system. He also stated that legislation should address the problem of mortgage service's claiming lack of authority due to securitization. Frank also argued that proposed bankruptcy mortgage modification will not affect the flow of credit as it will be limited to mortgages already in existence.

It is also reported this week that Michigan Congressman John Conyers told a House panel that it is time to reconsider the proposed bankruptcy mortgage modification bill - the Helping Families Save Their Homes in Bankruptcy Act.

HAMP Hearing by House Subcomittee

The House Subcommittee on Housing and Community Opportunity held a hearing yesterday on the "Progress of the Making Home Affordable Program: What are the Outcomes for Homeowners and What Are the Obstacles to Success?"

Assistant Treasury Secretary Michael Barr's written testimony outlined the steps being taken by the Administration to strengthen the housing sector and help homeowners. He referenced the new home buyers tax credit and the Making Home Affordable Program, including the Home Affordable Modification Plan ("HAMP") which is a "$75 billion program to lower mortgage payments for at risk borrowers" for up to 3 to 4 million borrowers. He stated that forty-five servicers have sign up for HAMP, that offers have been extended on over 570,000 trial modifications, and that over 360,000 trial modifications are already underway. But the Wall Street Journal reports that these figures amount to only 12% of eligible borrowers having started trial loan modifications under HAMP according to a Treasury report and that there are increasing concerns about the number of borrowers who will actually receive a permanent modification after receiving three month trial period modification.

Assistant Secretary Barr stated that HAMP's guidelines require servicers "to service all loan in their portfolio according to HAMP guidelines, unless explicitly prohibited by pooling and servicing agreements, and further must make reasonable efforts to obtain waivers of any limits on participation."

He also that that the parties are working on "establishing denial codes that will require servicers to report the reason for modification denials, both to Treasury and to borrowers." He expects the denial codes to become operational on October 1.

Alys Cohen of the National Consumer Law Center also offered written testimony. She testified that the HAMP program is not providing a sufficient number of loan modifications and that the offered modifications often do not meet the HAMP guidelines. She also stated that the implementation of HAMP has been slow and sporadic. She advocates that Congres should mandate a stronger approach to loan modification, including allowing bankruptcy judges to modify appropriate mortgage loans. She suggested the following improvements: 1. the Net Present Value model for qualifying homeowners should be made public, 2. the HAMP guidelines and directives should be consolidated and clarified, 3. institution of an independent review process upon denial, and 4. access to an ombudsman for complaints.

Congressman Barney Frank argued that proposed bankruptcy mortgage modification will not affect the flow of credit as it will be limited to mortgages already in existence. He stated that if the mortgage servicers do not act to stem the foreclosure crisis by modifying more mortgages, there would be an increased chance that Congress will enact bankruptcy laws allowing certain mortgage modifications. Frank stated that “the best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified.” Frank reportedly told the Wall Street Journal that he intends to eventually include a mortgage modification provision in legislation that will overhaul the financial system. He also stated that legislation should address the problem of mortgage service's claiming lack of authority due to securitization.

Divorce Attorneys Fees and Bankruptcy

In a recent decision in the case of In re Maria D. Lopez, Case No. 08-18101-BKC-LMI (Bankr. S.D.Fla. April 17, 2009)(Isicoff, J.), the Bankruptcy Court held that the involved attorney fees were not entitled to priority status as a "domestic support obligation".

The debtor's ex-husband was awarded his attorney fees in their dissolution of marriage proceeding and sought priority status for the claim in the debtor's chapter 13 case. Priority status would require full payment and the lack thereof would subject to claim to status as a general unsecured creditor and typically only a small dividend.

The Court explained that the Bankruptcy Code provides that a domestic support obligation ("DSO") owed to a former spouse is entitled to priority status and that while an award of attorney fees in some instances may be considered a DSO, not every award of attorney fees in a dissolution of marriage case are entitled to DSO status.

The Court states that for a claim to be considered as a DSO, it must meet all the requirements of section 101(14A) of the Bankruptcy Code. Generally, the claim must be

1. owed to a spouse, former spouse, or child of the debtor, or such child's parent or guardian
2. be in the nature of alimony, maintenance or support
3. established or subject to establishment by reason of a separation agreement, divorce decree, or property settlement agreement or by court order
4. not assigned to a nongovernmental entity unless voluntarily assigned for purposes of collection

At issue in this case was whether the attorney fees are "in the nature of alimony, maintenance, or support." The Court noted that the 2005 BAPCPA amendments to the Bankruptcy Code amended certain provisions relating to claims arising from "alimony, maintenance, or support" and renamed these obligations "domestic support obligations," but that the pre-BAPCPA case law does to a certain extent continue to have applicability post-BAPCPA.

The Court rejected the claimant's argument that the attorney fees met the requirement of being "in the nature of alimony, maintenance or support" as they related to custody, parentage, or visitation. The Court noted that the determination of what constitutes "support" is a matter of federal law. The Court further noted that in determining whether an award of state court attorneys' fees constitutes "support", the Bankruptcy Court may "only undertake a simple inquiry as to whether the debt can be characterized as 'support'" and that it may look to state law for guidance on whether the obligation should be considered in the nature of "support". The Court noted that the state court judgment awarded claimant attorney fees based on the debtor's litigation misconduct and not based on their respective wages or ability to pay.

Dragnet Clauses

Dragnet clauses are agreements in lending documents that the collateral will secure in addition to the involved debt, other pre-existing and after after acquired debt.

Some courts in Florida have held that "dragnet clauses" are generally enforceable so long as the language of the clause is clear and unambiguous as to the parties intent to secure pre-existing and after acquired debt. Robert C. Roy Agency, Inc. v. Sun First National Bank of Palm Beach, 468 So.2d 399 (Fla. 4th DCA 1985). But the 4th District Court of Appeals has held that the dragnet clause would not be enforced against someone other than the borrower unless it specifically includes within its terms or unless it can be shown that the third party otherwise had notice that the specific pre-existing debt was to be included within the grasp of the dragnet clause. Starlines International Corp. v. Union Planters Bank, N.A., 976 So. 2d 1172 (2008).

Other Florida courts though hold that dragnet clauses are unenforceable to secure pre-existing debt unless the pre-existing debt is specifically identified in the dragnet clause of the mortgage and possibly also in the note. United National Bank v. Tellam, 644 So. 2d 97 (Fla. 3d DCA 1994).

Senator Durbin Gives Banks Mortgage Cramdown "Ultimatum"

The media reports that Senator Durbin has "put the banks and mortgage servicers on notice" that Congress will renew efforts in three months for bankruptcy reform to allow residential mortgage cramdown unless the banks become aggressive in modifying mortgages to prevent foreclosure. It is reported that Senator Durbin want to see 500,000 mortgage modifications by November. Recently House Financial Services Committee Chairman Barney Frank made a similar threat.

This is amid recent revelations that the Administration's foreclosure mitigation efforts, of which the $75 billion Home Affordable Mortgage Program ("HAMP") is the centerpiece, have failed to slow the foreclosure crisis and stabilize the nation's housing market. The Administration initially estimated that HAMP would prevent 3 to 4 million foreclosures, but yet only about 200,000 modifications have been accepted and most of these are merely three month trial period agreements. This amounts to only 9% of delinquent borrowers.

The Treasury Department reports that approximately 85% of mortgages are covered by HAMP participating servicers, that 38 servicers have signed servicer participation agreement to modify loans under HAMP and that approximately 2,300 others automatically participate in HAMP as they service loans owned or guaranteed by Fannie Mae or Freddie Mac.

The banking industry reportedly spent $42 million on lobbyists to defeat bankruptcy reform efforts earlier this year when it failed to pass the Senate by 15 votes.

It is reported that mortgage companies are reluctant to modify mortgages as they collective lucrative fees on mortgages in default.

Options for the Distressed Florida Homeowner

Summary
In recent days, some distressed homeowner have started to receive offers for mortgage modifications from their mortgage companies. These appear to be prompted by the new guidelines under the Treasury Department's "Making Home Affordable Program." The proposed modifications appear to reduce the monthly payment on a first mortgage to about 37% of the family's gross monthly income. The proposed modifications do not appear to propose to reduce the principal balance which usually greatly exceed the value of the home. A further amount may also be due on a second mortgage. Distressed homeowners may contact their mortgage servicer if they desire to review options for refinancing or modification.

One approach which may be considered where appropriate, is to "piggy-back" or combine a first mortgage modification with avoidance of a wholly "underwater" second mortgage while in a chapter 13 bankruptcy reorganization. The goal would be to avoid a wholly underwater second mortgage and modify a first mortgage. The modification of the first mortgage would either under the Treasury Department's "Making Home Affordable Program" or possibly a even better modification terms upon any appropriate review of "defects" of the first mortgage (such as a "lost note", unfair terms, etc.) during the chapter 13 case. Proposed changes to the chapter 13 laws are pending in Congress and may be adopted in the near futures. These changes are expected to be retroactive to pending chapter 13 cases and may offer modification of first mortgages by reducing the principal balance down to the present value and a reduction in interest rate.


1. Present Real Estate Crisis
Many homeowners owe more on their home mortgages than their present value (are “underwater”) and many are unable to pay their monthly payments. Many South Florida homeowners are in a situation where the amounts owed on their first and second mortgages substantially exceed the value of his or her home. Many of the comparable sales are short sales or sales of foreclosed homes. Many first mortgages may be adjustable rate mortgages. Property taxes may be high as they are based on pre-decline assessments. Condominium and association fees may have risen dramatically due to the default of other unit owner’s default.

2. Non-Bankruptcy Refinancing or Modification - the Treasury Department's New Guidelines for the “Making Home Affordable Program”
Most distressed homeowners should immediately contact their mortgage servicers or lenders to attempt refinancing or modifications. Patience may be required as the new provisions of the “Making Home Affordable Program” are now being implemented. Efforts should be made even if you were previously turned down.

Last week the federal government announced updated information on its “Making Home Affordable Program.” This program provides for the refinancing or modification of a mortgage on owner occupied principal residences (1-4 units) under certain circumstances. More information is available from the federal government’s “Homeowner’s HOPE Hotline” at (888) 995-HOPE. Borrowers in bankruptcy are not apparently excluded from consideration for modification. There is "no requirement to use principal reduction" under this program but "servicers may forgive principal to achieve" a certain monthly debt service to gross monthly income target.


3. Participate in Florida Circuit Court Foreclosure Actions
A person who has been served with a mortgage foreclosure action should appropriately address foreclosure actions filed in the the Circuit Court. There may be opportunities to mediate a modification with the mortgage company. The participation should begin by “answering” the foreclosure complaint within the time period set forth in the summons attached to the foreclosure complaint.

4. Chapter 13 Bankruptcy for Mortgages on Principal Residences
In the past (before the general decrease in South Florida real estate prices), Chapter 13 bankruptcy plans typically provided to reinstate first and second mortgages on a principal residence over a five year plan while at the same time paying the ongoing regular monthly mortgage payments. This was due to the fact that mortgages secured only by a principal residence are generally not “modifiable” under chapter 13 bankruptcy laws. Second mortgages though that are wholly “underwater” may be avoided and deemed as “unsecured” claims and put in the same category as credit cards.

5. Negotiation of First Mortgage Modification in Chapter 13 for Principal Residences
Although under the present provisions of chapter 13, a debtor cannot force the modification of his or her first mortgage on his or her principal residence, he or she may be able to obtain an agreed modification while under chapter 13. The debtor may pursue modification under President Obama's “Making Home Affordable Program” or on any other voluntary basis. As mortgage companies usually appoint a bankruptcy attorney to represent their claim in the chapter 13 process, there is usually an increased ability to communicate with the mortgage company. While in chapter 13, the debtor is able to explore any defenses to or defects in the mortgage which may provide more leverage to negotiate a mortgage modification.

Furthermore, the homeowner may yet be able to obtain modification of his or her first mortgage if the proposed changes to chapter 13 bankruptcy are passed as in their present form, they are retroactive to pending cases. The proposed bill allows certain mortgage modification by way of reduction of the principal balance down to the value of the home and a change in interest rate. Adjustable rate mortgages may be modified to be fixed.

6. Chapter 13 Bankruptcy for Investment Property
The rules as to modification of mortgages on non-principal residences in chapter 13 bankruptcy are actually be more liberal although prior to the recent steep declines in property values, modifications of mortgages on non-principal residences was not very common. Modification may include reduction in principal amount and interest rate. The ability to modify may be limited by a need to payoff or refinance the reduced principal amount during the five year chapter 13 plan. There may be arguments available or an ability to negotiate a payoff that continues after the chapter 13 plan is over. Since the recent declines in property values, many mortgage companies have agreed to reduce the principal balance upon the filing of a motion to value during the chapter 13 process.

7. Chapter 12 Bankruptcy for Family Farmers
Chapter 12 also provides for more extensive mortgage modification for family farmers.

8. Proposed Changes to Chapter 13
The proposed changes to chapter 13 include a provision allowing in some circumstances the modification of a first mortgage (as well as junior mortgages) on a principal residences by reducing (“cramming-down”) the principal balance down to the value of the home as well as a possible reduction in interest rate. The proposed changes to chapter 13 bankruptcy may require an attempt by the homeowner to refinance or modify under the federal government’s new “Making Home Affordable Program” prior to attempting to modify the mortgage under chapter 13 bankruptcy. Changes to chapter 13 bankruptcy laws have not yet been enacted by Congress (as of March 13, 2009). Although a bill was passed by the House of Representatives on March 6, 2009, the bill has not yet been passed by the Senate.

9. Other Chapter 13 Considerations
a. Automatic Stay – With certain exceptions, the filing of a chapter 13 bankruptcy stays or stops much creditor collection actions, including mortgage foreclosure. The automatic stay provides a homeowner a “breathing spell” in order to allow him or her an opportunity to reorganize their debt while under the protection of the U.S. Bankruptcy Court.

b. Timing – Generally, a chapter 13 bankruptcy must be filed before a foreclosure sale if a person desires to attempt to save their home under a chapter 13 bankruptcy plan. A foreclosure sale is normally set by the Florida Circuit Court a number of weeks after the entry of the final judgment of foreclosure.

Hearing Set for HAMP Constitutional Claim for Preliminary Injunction

A hearing on the motion for a preliminary injunction in the case of Nichole Williams et al. vs. Timothy F. Geithner, et al., case 09-CV 1959 (DC Minn.) has been set for September 28, 2009 in the Federal District Court of Minnesota. The Plaintiffs seek the injunction of all foreclosures by the involved defendants in the State of Minnesota until the HAMP program is procedurally sound. The lawsuit alleges the the homeowners' Constitutional right to procedural due process was violated, including by way of lack of notice of the basis of the decision and lack of an opportunity to appeal. The HAMP application of one of the plaintiffs was denied and he was not give any reason or an opportunity to appeal. The HAMP application of another plaintiff was ignored.

The memorandum of law in support of the motion for a preliminary injunction detailed the background of HAMP. The Emergency Economic Stabilization Act of 2008 (the "Act") was signed on October 3, 2008. 12 U.S.C. Section 5201. The Act allocated $700 billion to the Treasury Department and granted the Treasury Secretary the authority to establish the Troubled Asset Relief Program or "TARP." 12 U.S.C. Sections 5211, 5225. Section 109 of the Act provides for the Treasury Secretary to implement a plan to "maximize assistance for homeowners." 12 U.S.C. Section 5219(a). The Act also requires the Treasury Secretary to consent to any loan modification offer. Section 110 requires the Federal Housing Finance Agency, as conservator of Fannie Mae and Freddie Mae, to create and implement a plan to prevent foreclosures.

Pursuant to this authority, the Department of Treasury, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac created and announced the Making Home Affordable Program, which consists of two sub-programs, on February 18, 2009. The first provides for certain mortgage refinancing and was called Home Affordable Refinance Program or HARP. The second provides for the implementation of a uniform loan modification protocol and was call Home Affordable Modification Program or HAMP. Approximately 3 to 4 million homeowners are potentially eligible for HAMP and the Treasury Department allocated $75 billion of TARP and non-TARP funds to fund HARP and HAMP. Beginning with March 4, 2009, a series of directives as to HAMP were issued to mortgage servicers.

The memorandum argues that as HAMP is being presently implemented, there are no requirements that homeowners be told the specific reasons for the denial of a HAMP modification and there is no uniform procedure to provide for the ability to appeal. The Plaintiffs argue that approximately 40-60% of the foreclosures conducted in Minnesota are by mortgage servicers bound by HAMP requirements. It is also points out that the General Accountability Office (the "GAO") just last week confirmed that procedural safeguards were not yet in place to protect homeowners.

Plaintiffs seek a preliminary injunction to preserve the status quo. They note the similarity to cases related to the government's loss mitigation and foreclosure prevention programs during the farm foreclosure crisis in the early 1980's. In these cases, the courts issued preliminary injunction of foreclosure proceedings until the government promulgated proper procedures making its foreclosure prevention program constitutionally sound. In the case of Allison v. Block 723 F.2d 631 (8th Cir. 1983), the Court ruled that "[n]otice to the borrower is therefore indispensable...the Secretary is required to give notice to defaulting CFRDA borrowers and to create a procedure for asserting section 1981a claims." The Allison Court also held that [a]gainst this backdrop of statutory language and legislative history, we cannot accept the Secretary's assertion that Congress left the implementation of section 1981a a matter of unfettered administrative discretion." The Court enjoined the farm foreclosure until "the intent of Congress becomes the action of the Secretary."

The Plaintiff also cited the case of Johnson v. U.S. Dep't of Agric., 734 F.2d 774 (11th Cir. 1984) where the 11th Circuit Court of Appeals held that the District Court abused its discretion by denying a motion for preliminary injunction in view of the fact that there was a substantial likelihood that the mortgagors would prevail, at least in part, on due process and equal protection claims. The Court found that the farm loans involved a statutory entitlement and a property interest protected by the due process clause of the Fifth Amendment and that, at a minimum, due process assures notice and a meaningful opportunity to be heard before a right or interest is forfeited.

The memorandum argues that HAMP is a government program authorized by Congress and jointly created by the Department of Treasury, Fannie Mae, and Freddie Mac. 12 U.S.C. Section 5201. The memorandum further argues that there is government action by the Department of Treasury and the Federal Housing Finance Agency (as conservator for Fannie Mae and Freddie Mac), the program creates an entitlement, and that the administration of Sections 109 and 110 of the Act are at issue. In short, the plaintiffs argue that the case involves government actors implementing a federal law with federal funds, that is not an issue of private actors making private decisions and that it satisfies the "government action" requirement for bringing a constitutional claim.

In summary, the memorandum argues that the Plaintiffs are entitled to due process in the administration of HAMP - a $50 to $75 billion federal entitlement program. The Fifth Amendment of the Constitution requires "due process of Law" before any person can be "deprived of life, liberty, or property" and the concept of property includes statutory entitlements derived from an independent source as well as government-fostered expectations. "Once a property interest in a statutory entitlement is identified, a person is entitled to notice, an opportunity to be heard, and reasonably accurate process for determining eligibility." The Plaintiffs also argued that the lack of the right to appeal to a neutral party is also a violation of their procedural due process rights.

HAMP Class Action Lawsuit

The Housing Preservation Project, a public interest law firm in St. Paul Minnesota, filed a class action lawsuit in Minnesota federal district court today alleging that the federal government's loan modification program violates Constitutional procedural due process requirements. Pursuant to its press release, the " lawsuit alleges that the program fails to provide homeowners with proper notice and a right to appeal decisions by loan servicers administering the program." The lawsuit seeks to enjoin Minnesota mortgage foreclosures until the government promulgates the necessary procedures to ensure HAMP fair administration.

The lawsuit is reportedly "modeled after similar lawsuits filed in the early 1980s, which sought and successfully stopped all farm foreclosures until the government ensured that the farmers’ procedural due process rights were not violated when administering a similar foreclosure prevention program." Count one of the complaint alleges that the failure to promulgate rules requiring servicers to provide notice of denial under HAMP is a violation of the fifth amendment's protection of procedural due process and alleges that there has been a lack of promulgated regulations, guidelines, and rules for servicers. Count two alleges that the failure to promulgate rules requiring servicers to provide a right to appeal is a violation of procedural due process. A memorandum in support of the motion for a preliminary injunction was filed.

Hearings on Foreclosures Before Joint Economic Committee

The Congressional Joint Economic Committe held a hearing today entitled "Current Trends in Foreclosures and What More Can be Done to Prevent Them" to investigate the ongoing foreclosure crisis in the residential housing market. It is reported that the Committee "will review past federal regulatory failures" and efforts by the current Administration and Congress to address the situation.

Congresswoman Carolyn Maloney remarked that the foreclosure crisis is not striking evenly across the U.S. and that there are heavy pockets of concentration in certain areas such as California, Florida, Illinois, Massachusetts, Nevada, and New Jersey.

Professor Joseph R. Mason explained that the following factors are among those why mortgage servicers are having difficulties dealing with distressed mortgages: 1. mortgage modification is expensive to service, 2. mortgage arrearages hurt servicer's profits as they have to advance the mortgage payments to the investors, 3. mortgage servicing fees cease upon default, 4. increased fees to do not cover typical increased costs, and 5. difficulties in retaining staff. He also noted that mortgage investors, such as Aaa-class investors and senior bondholders, are weary that the current policy may be gamed by the servicers to protect its interests, such as maintaining the value of the servicer's residual or interest-only strip or to allow the release of overcollateralization to the servicer.

Dr. Susan M. Wachter noted that foreclosure rates are presently four time the historical average and the highest since the Great Depression. She stated that the residential foreclosure crisis began with a wave of subprime mortgages and that the next wave will be payment option mortgages. She also explained that the crisis will abate when home prices stop falling as "level of prices determines whether it is possible to repay the mortgage upon sale." Dr. Wachter further stated that mortgage servicers may lack the incentive and capacity to provide mortgage modifications, that loan modifications with principal write-down are necessary, and that regulatory supervision is necessary to avoid a failure of regulatory and market structure such as the present which triggered a crisis and brought down the system.

GAO Report to Congress: HAMP Needs to be More Transparent and Accountable

The U.S. Government Accountability Office (the "GAO) released its report dated July 23, 2009 to Congressional Committees entitled: "Troubled Asset Relief Program - Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable."

The GAO reports that the first-lien mortgage modification effort under HAMP "may not fully meet Treasury's goals." The GAO further states that Treasury's estimate of the number of borrowers who would likely be helped under its HAMP loan modification program "may be overstated" as it may reflect data gaps and faulty assumptions, including rates of borrower response and servicer participation. The reports also notes that Treasury has not finalized all of the processes for the implementation of HAMP and is not systematically evaluating servicers' capacity.

The report states that as of July 20, 2009, only about 180,000 borrowers have started trial modifications.

Chapter 13 and "HAMP" Mortgage Modification

Chapter 13 bankruptcy may present a platform to obtain modification of first mortgages under the U.S. Treasury Department's "Home Affordable Modification Program" (HAMP).

As most people are aware, Congress did not yet pass the "cram-down" provision for principal residential mortgages. Despite this, the legal landscape does seem to indicate that the HAMP program will be of substantial assistance to homeowners - perhaps in many instances - more than the much sought after "cram-down".

The chapter 13 plan may be a good platform to obtain relief under HAMP. As part of the chapter 13 plan, modification of the first mortgage may be sought under HAMP. Usually the mortgage company retains an attorney to represent their interests and this lawyer will serve as a contact person to insure review for HAMP relief. A substantial portion of first mortgage are eligible for HAMP relief either as Fannie Mae or Freddie Mac related mortgages (GSE Loans) or as the mortgage servicer has agreed to participate in HAMP (non-GSE Loans).

Some homeowners have trouble communicating with their mortgage company to obtain HAMP relief. But as most mortgage company usually retain an attorney to represent their interests, this mortgage company attorney will serve as a contact person to insure review for HAMP relief.

Upon filing of the chapter 13 case, most foreclosure actions are stayed until further order of the court. This automatic stay allows for pursuance of approval of the chapter 13 plan, HAMP modification of the first mortgage, avoidance of wholly underwater junior mortgages, and substantial discharge of unsecured debt.

Fannie Mae Guidance for Lenders and Appraisers

Efanniemae.com sets forth "Guidance for Lenders and Appraisers" dated April, 2009.

"HAMP" Mortgage Modification

The Home Affordable Modification Program (HAMP) was established by the U.S. Department of the Treasury pursuant to section 101 and 109 of the Emergency Economic Stabilization Act of 2008 (EESA)(section 109 of the EESA has been amended by section 7002 of the American Recovery and Reinvestment Act of 2009). HAMP includes loan modification and other foreclosure prevention measures.


Application of HAMP as to GSE Loans, Fannie Mae Announcment 09-05R

All Fannie Mae and Freddie Mac approved servicers are being directed through their servicing guides and bulletins to implement HAMP with respect to "mortgage loans owned, securitized, or guaranteed by Fannie Mae or Freddie Mac (the “GSE Loans”).

Fannie Mae provides Announcement. 09-05R (posted May 15, 2009) "Introduction of the Home Affordable Modification Program, HomeSaver Forbearance™ and Frequently Asked Questions thereunder, and New Workout Hierarchy."


Application of HAMP to Non-GSE Loans

Fannie Mae and Freddie Mac approved servicers as well as all other servicers may agree to participate in HAMP by agreement as to non-GSE Loans.


Role of Fannie Mae and Freddie Mac

Fannie Mae was designated by the Treasury as financial agent of the United States in connection with the implementation of HAMP to fulfill the roles of administrator, record keeper, paying agent, creation of certain standardized mortgage modification and foreclosure prevention practice consistent with EESA and in accordance with the directives of and guidance of Treasury. Freddie Mac was also designated as a financial agent to fulfill a compliance role for the program.


Key Information and Documents under HAMP

Fannie Mae as administrator of HAMP makes available on Hmpadmin.com key information and documents, including, a sample servicer participation agreement, supplemental directive 09-01 guidelines, the supplemental directive 09-02 dated April 21, 2009, the Servicer Reporting Requirements, data dictionary, net present value model overview, and borrower solicitation material. A self-guided training presentation is also provided.

Another Fannie Mae self-guided presentation is provided as to "Bankruptcy Filings on Loan Servicing", "Loss Mitigation in Today's Market", and "The New 2009 MBS Trust Agreement: An Introduction."


Net Present Value Model

Fannie Mae provides a "standardized guidance and a base net present value (NPV) model" for HAMP participating servicers. Such a servicer "must modify any loan "if the modification test for NPV is positive as "it is in the best interest of the lenders, servicers, investors, and borrowers." If the NPV is negative, modification is in the discretion of the servicer.

NPV refers to the "value today of a cash-generating investment." In the context of a distressed mortgage borrower, the choice is between modifying the mortgage or leaving as-is with each choice to generate expected cash flows with different net present values. If the NPV of the modified loan is higher than the NPV of the mortgage as-is, a modification is said to be "NPV positive." The Program is structured to "produce modifications that are more likely to test NPV positive... by lowering the probability that borrowers will default by making borrower payments more affordable and, second, by providing incentive payments that are added to cash flows received by lenders (or investors)."


NPV Assuming Non-Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is not modified based on a. the probability that the mortgage defaults, b. the projection of the future cash flows of the mortgage if it defaults and the present value of these cash flows, c. the projection of the future expected cash flows of the mortgage if it does not default and the present value of these cash flows, and d. the probability weighed average of the two present values.

NPV Assuming Modification

The NPV calculation is to determine the net present value of the mortgage assuming it is modified based on the same manner with the incorporation of the effects on cash flows and performance of the modification terms and subsidies under the Program.

HAMP Modification

"The Making Home Affordable Program is structured to produce modifications that are more likely to test NPV positive, increasing the number of modifications that will be done and keeping more Americans in their homes." If eligibility criteria for HAMP are met, the servicer will adjust the terms of the mortgage to reduce the borrower's payment to HAMP's target front-end debt-to-income (DTI) ratio of 31 percent. Servicers are required to "reduce payment in the precise manner specified" by HAMP (the "Standard Waterfall") starting with reducing the interest rate on the mortgage. Once the modified loan terms are known, the NPV model calculation is run.


Principal Factors in the NPV Model

The NPV model was especially designed by an expert group for HAMP and takes into account the principal factors that can influence cash flows including the following:

1. Value of the home relative to the size of the mortgage.

2. Likelihood that the loan will be foreclosed on.

3. Trends in home prices.

4. Cost of foreclosure including:
a. legal expenses,
b. lost interest during the time required to complete the foreclosure action,
c. property maintenance costs, and
d. expenses involved in reselling the property.

5. Cost of conducting a modification including:
a. a lower monthly payment from the borrower,
b. likelihood a borrower will default even after the loan is modified,
c. financial incentives provided by the government, and
d. likelihood that a loan will be paid off before its term expires (prepayment probability).

Fannie Mae states that due to customization allowed within certain constraints and guidelines, servicer NPV results and resulting modification decisions may vary.

Discount Rate

In the base NPV model servicers are permitted "limited discretion to adjust the discount rate by up to 250 basis points because different investors may place different values on future payments versus payments received today." The discount rate may be as low as Freddie Mac's Primary Mortgage Market Survey rate ("PMMS") for 30-year fixed-rate conforming loans and as high as the PMMS rate plus 250 basis points. The PMMS are available on Freddie Mac's website. A rule is provided as to loans not owned or guaranteed by Fannie Mae or Freddie Mac. The servicer must apply the rate specified in Fannie Mae and Freddie Mac guidelines as to loans owned or guaranteed by Fannie Mae and Freddie Mac.

Default Rates

The probability of default if the loan is modified and if not modified depends on a number of variables particular to the loan and in general is assumed to vary based on the credit quality of the borrower, his debt burden, and the loan-to-value (LTV) of the home, and "whether the loan is modified early or later in the delinquency cycle."

The default rates are "generated by a model based on the performance of GSE and non-GSE loans" and the base model is to be updated as performance data under the Program becomes available to reflect actual program experience. Large servicers with a book exceeding $40 billion are allowed to customize the model to reflect their own portfolio experience, which customization must be empirically validated, commercially reasonable, and subject to review and oversight.

Home Prices

"Future increases or decreases in home prices impact a borrower’s willingness to stay in a house and potential financial loss in the event of foreclosure. A servicer must use the home price projection provided in the base NPV model. A servicer does not have discretion to substitute a different projection. The home price projection for the program has been made available by FHFA exclusively for this program, is based on data from a broad cross section of mortgage transactions, and will be updated quarterly. The projection is not based on the FHFA House Price Index and does not represent an official forecast of FHFA or any other government agency."

REO "Stigma"

"The REO stigma values used in the base NPV model are based on an analysis of sale prices of foreclosed homes sold by Fannie Mae and Freddie Mac. REO stigma values vary by state and home price. Servicers are not permitted to change the REO assumptions in the base NPV model."

Mortgage Servicers Participating under President Obama's Home Affordable Modification Program

Makinghomeaffordable.gov lists that the following mortgage servicers have contracted with the government under the "Home Affordable Modification Program" as of May 22, 2009:

• Aurora Loan Services LLC
• Bank of America, NA
• Carrington Mortgage Services, LLC
  
• Chase Home Finance
• CitiMortgage, Inc.
• Countrywide
  
• GMAC Mortgage LLC
• Green Tree Servicing LLC
  
• Home Loan Services, Inc.
• Ocwen - see press release
  
• Saxon Mortgage Services, Inc.
  
• Select Portfolio Servicing
• Wells Fargo Bank
  
• Wilshire Credit Corporation

Financialstability.gov provides a link to the agreements with the participating servicers.

Hope Now's website contains a directory of links to mortgage companies.

Massachusetts Subprime Mortgage Settlement with Goldman Sachs

Attorney General Martha Coakley of Massachusetts held a press conference in Boston and issued a press release on May 11, 2009 announcing her settlement agreement dated May 7, 2009 with Goldman Sachs & Co. "on behalf of itself and its affiliates Goldman Sachs Mortgage Company and GS Mortgage Securities Corp." regarding certain subprime mortgage lending issues. The agreement is reported to be the first of its kind in its pursuance of an investment bank facilitating the origination of unfair loans. The AG alleged that many of the loans were unfair and "destined to fail."

Investigation

The agreement states that the AG's investigation concerned:

1. whether securitizers may have facilitated the origination of "unfair loans" under Massachusetts law


2. whether securitizers may failed to ascertain whether the loans purchased from originators complied with the originators' stated underwriting guidelines


3. whether securitizers may failed to take sufficient steps to avoid placing problem loans in securitization pools


4. whether securitizers may have been aware of allegedly unfair or problem loans

The investigation reportedly concerned whether there were failures to correct inaccurate information in securitization trustee reports concerning repurchases of loans and whether there were failures to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan diligence and the pre-securitization process, as well as information concerning their practices in making repurchase claims relating to loans both in and out of securitizations.

Settlement Terms

The settlement agreement is set report to be valued at about $50 million for about 700 Massachusetts subprime borrowers and for $10 million to the Commonwealth of Massachusetts. The AG is to continue with its investigation of subprime mortgage securitization practices.

The deal allows for the provision as to certain "performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on certain Massachusetts real property of certain incentives (the smaller of 25% of unpaid principal balance or such amount as sufficient to bring the LTF to 96.5%) for refinancing with FHA and similar lending programs and for similar loan forgiveness in connection with arm's lenth shores sales. Goldman Sachs is to use its "best efforts" to facilitate principal forgivenss by any second lien lender to assist in such refinancing or short sale.

As to certain "non-performing" (as of April 1, 2009) first mortgages owned by Goldman Sachs on Massachusetts real property, Goldman Sachs is to offer to forgive up to 35% of the unpaid principal balance to facilitate a refinancing or arm's length short sale. Its mortgage servicer is to instruct it loan servicer to forgo from foreclosure for six months to allow a good faith effort for refinancing or short sale.

Certain "performing" second mortgage liens on Massachusetts real property are to be forgiven up to 50% in exchange for the payoff of the remainder. The listed "non-performing" second mortgages are to be written off.

It is noted that certain of these offers are only "open until November 30, 2009." Goldman Sach's servicers are to use their best efforts to communicate the offers to the borrowers.



Goldman's Mortgage Servicing Affiliate Litton Loan Servicing LLP

Pursuant to the settlement, Goldman Sach's mortgage servicer affiliate Litton Loan Servicing, LLP is also to modify various mortgages. Litton is to hold certain sessions with borrower to help them understand and take advantage of the offers or to "develop other loss mitigation alternatives."

It is reported that settlements with other investment bankers in Massachusetts may be to come. It is also speculated that Attorneys Generals of other States will follow suit in a similar manner.

Bloomberg reported that Goldman Sach's mortgage business (part of its fixed-income, currencies and commodities unit) produced a "record $16.2 billion in revenue in 2007 and helped the securities firm set a Wall Street pay record." Bloomberg further reports that the $60 million settlement was about one and one-third day's revenue for 2007 for its fixed income, currencies and commodities unit which was the largest source of revenue for the firm.



Short Positions - Goldman Sachs as an Empty Creditor

According to Bloomberg, Goldman Sachs, which was the "world's largest securities firm before it became a bank holding company last year, used the ABX Index and credit default swaps to hedge its subprime holding." According to an October 30, 2007 letter to the Securities and Exchange Commission made public on January 14, 2008, the chief Goldman Sachs accounting officer wrote that "During most of 2007 we maintained a net short subprime position with the use of derivaties and therefore stood to benefit from decling prices in the mortgage market."
Bloomberg writes that the collapse of the subprime mortgage market in 2007 caused "at least $1.4 trillion of asset writedowns and credit losses" at various companies.

City of Cleveland "Public Nuisance" Case

Goldman Sachs was named as one of the 21 financial institution defendants in a class action suit brought in the Northern District of Ohio by the City of Cleveland alleging that the defendants' activities in securitizing subprime mortgage constituted a "public nuisance" under Ohio law. The case is reported to have been dismissed as a matter of law in a May 15, 2009 decision. City of Cleveland v.Ameriquest Mortgage Securities, Inc. et al., No. 1:08 cv 139 (N. D. Ohio, May 15,2009)The Ohio Court's rejection of the "public nuisance" claim is reported to have "far-reaching ramifications."


Fremont Investment & Loan Action

The AG's press release referred to her office's previous suit against Fremont Investment & Loan (reviewed here) which was filed on October 4, 2007 in Superior Court civil action number 07-4373-BLS1. The court issued a preliminary injunction enjoining Fremont from foreclosing on any any "structurally unfair" loan without further prior court approval and a final hearing on the merits. The lower court's preliminary injunction was subsequently upheld by the Supreme Judicial Court of Massachusetts ruling on December 9, 2008 on a direct appellate review. Commonwealth v. Fremont Investment & another, 452 Mass. 733 (2008)(Botsford, J.) The lower court's ruling February 25, 2008 was reportedly the first of its kind in the nation that restricted a subprime lender's ability to foreclose based on unfair or deceptive loan origination misconduct. The four characteristics found by the Freemont court as establishing unfairness were

1. the loans were ARM loans with an introductory rate period of three years or less


2. an introductory rate for the initial period that was at least three per cent below the fully indexed rate


3. made to borrowers for whom the debt-to-income ratio would have exceeded fifty percent measured on the fully indexed rate


4. the loan-to-value ratios was 100% or the loan featured a substantial prepayment penalty.

The AG's office also previously sued also sued Option One and its parent H&R Block alleging unfair, deceptive and predatory lending practices.

Status of the Mortgage Rescue

According to Cnn and New York Times articles, mortgage rescue efforts face several hurdles.

Loan servicers are "overwhelmed by a flood of applications" according to the Cnn article. The administration's guidelines were issued on March 4, but it has taken servicers many weeks to implement their programs. "Many did not even start accepting applications until early-to mid-April..." Servicers may take many weeks to process an request for modification.

Investors in mortgage backed securities are angry about congressional bills providing loan servicers a certain "safe harbor" from suit based on mortgage modifications. Mortgage servicers may be otherwise limited in their ability to modify mortgages due to their contracts with the investors. Investors argue that servicers already have some flexibility to modify mortgages.

Administration Announces Progress Under "Making Home Affordable Program", New Programs

Today Treasury Secretary Tim Geither and HUD Secretary Shaun Donovan announced details of the implementation of the Making Home Affordable ("MHA") program. It is about two months since the program guidelines have been released.

Some data has been published as the the number of homeowners that have obtained relief under the U.S. Treasury Department's Making Home Affordable Program ("MHA") since it was and initiated in early March, having been first announced by the Administration on February 18, 2009.

The Secretaries report that "thousands of underwater borrowers" have refinanced under the Home Affordable Refinance Program. The program is expected to provide access to refinancing for up to 4 to 5 million homeowners. Apparently "more than one million" other Americans have been otherwise able to refinance since the implementation of the Home Affordable Refinance Program due to historically lower interest rates with FNMA seeing 233,000 eligible refinancing application.

It was also announced that more than 55,000 loan modification offers "have been extended to qualifying borrowers" under the Home Affordable Modification Program. This program is expected to assist up to 3 to 4 million troubled homeowners.


Home Price Decline Protection Incentives

Secretary Geithner also announced the new $10 billion "Home Price Protection Incentives("HPD P") program. This program is designed to provide an additional incentive to lenders for modification where "home price declines have been most severe and lenders fear these declines may persist... " Under HPD P, an "innovative payment" will be made to "provide[ ] compensation based on recent home price declines." This additional incentive together with the already provided incentive payments for all modified home is meant to "help cover the incremental collateral loss on those modifications that do not succeed." The HPD P payments are to be "linked to the rate of recent home price decline in a local housing market, as well as the average cost of a home in that market."


Foreclosure Alternatives - Short Sales and Deeds-in-Lieu

Another new program provides incentives to servicers and borrowers to pursue "short sales" and "deeds-in-lieu" where modification is not possible. This program is for situations where "the borrower is generally eligible for a MHA modification but does not qualify or is unable to complete the process". The program is meant to "simply and streamline the process of pursuing short sales and deeds-in-lieu by standardizing the process flow and documentation and offering financial incentives to the servicer and borrower.


Servicer Contracts and Coverage Otherwise for GSE Loans

The Secretaries reported that fourteen servicers, including the five largest, have signed contracts under the program and have begun modifications. It is reported that between the loans covered by these servicers (non-GSE loans) and loans serviced by Fannie Mae or Freddie Mac (GSE loans), more than 75% of all mortgage loans are accounted for.

The refinancing program is set to end in June, 2010 while the loan modification program is set to end December 31, 2012. Reportedly fourteen servicers, including the five largest, have already executed contracts under the program.

U.S. Senate Fails to Pass Bankruptcy Mortgage Modification Bill

The S. Amdt. 1014 to S. 896, the "Helping Families Save Their Homes Act of 2009", failed to pass in the Senate today by a vote of 45 to 51 with 3 not voting.


Despite the lack of passage of these amendments to the bankruptcy code, there remain various measures that may be of assistance to a struggling South Florida homeowner, including the following.

1. A second mortgage on a principal residence that is wholly "underwater" is generally avoidable in chapter 13 or chapter 11 bankruptcy

2. Voluntary mortgage modification may be available under President Obama's "Making Home Affordable Program"

3. Modification of mortgages on non-principal residences is presently allowed under chapter 13 or chapter 11 bankruptcy

4. Chapter 12 allows certain modification for mortgages for "Family Farmers"

5. Mandatory mediation of homestead mortgage foreclosures as of May 1, 2009 in Miami-Dade County, Florida

Vote Expected in Senate on Bankruptcy Mortgage Modification Bill

The Washington Post reports that a vote is expected tomorrow in the Senate on S. 896, the "Helping Families Save Their Homes Act of 2009". Senator Richard Durbin's amendments to S. 896 includes provisions for bankruptcy reform to allow certain modification of mortgages on primary residences.

The Wall Street Journal reports that a defeat it expected unless there is a last minute compromise. Senator Richard Durbin (D, Ill.) is reportedly continuing efforts to reach an agreement with banking leaders.

Miami-Dade Circuit Court Mandates Mediation of Homestead Mortgage Foreclosures

As reported in the media, on April 9, 2009, Judge Joseph P. Farina, Chief Judge of the the Circuit Court of 11th Judicial Circuit in Miami-Dade County, Florida signed Administrative Order No. 09-08 establishing the "11th Circuit Homestead Access to Mediation Program ("Champ") and generally requiring mediation of residential homestead mortgage foreclosure cases filed on or after May 1, 2009. The mediation services though are available to mortgage foreclosures filed prior to May 1, 2009 on a case by case basis.

Pursuant to the administrative order and unless otherwise agreed, parties will be deemed to have agreed to referral of the foreclosure mediation to the "Collins Center for Public Policy" for mediation and assignment of a certified circuit civil mediator. No action will be taken by the Court to set a final hearing or enter summary judgment until certain requirements are met. The Collins Center's website provides and overview of the program, frequently asked questions, as well as a link to a video as to the establishment of its foreclosure mediation program.

Under the plan, the plaintiff mortgage lender is required to pay the fee of the Collins Center. Under the plan, the Collins Center is to contact the homeowner within 30 days and advise of the availability of financial counseling and mediation. The Collins Center may refer the homeowner to a HUD or National Foreclosure Mitigation Counseling Program agency which is to contact the homeowner within 21 days for counseling and to assist with the completion of financial documentation for use in renegotiating the loan. The lender and homeowner may register at the Collins Center's website and retrieve forms for financial documentation. Upon completion of the financial documentation, a mediation session is to be scheduled with the Collins Center to pay the certified mediators who have received additional training in foreclosure mediation. The mortgage holder's attorney and the homeowners are required to be physically present at the mediation with the mortgage lender's representative available with full authority to settle.

If the homeowner fails to appear at the mediation session or an impasse is reached, the mortgage foreclosure case may proceed to a final hearing. Within 10 days after completion of the mediation, the mediator is to file a report with the Court as to the lack of agreement or a signed written agreement. This mediation is available only once per case.

It is noted that Form "A" which includes the "Certificate of Plaintiff Regarding Status of Residential Property" and "Certificate of Plaintiff Regarding Representative at Mediation" requires that a copy of certain pooling or servicing agreements with investors (ie. as to securitized mortgages) are to filed with the foreclosure complaint and brought to the mediation session.

Chase Opens Loan Modification Centers

Default Servicing reports today that Chase has opened several "loan modification centers across the country." Chase's website reports that these are for Chase, WaMU, and EMC customers in need. In person meeting are available. Chase's toll free number is set forth as (866) 550-5705 from 8:00 a.m. to 11:00 p.m. Monday through Friday and other hours on the weekends.

Offices in are set for Miami (South Dade) at 10301 S. Dixie Highway (Tel. 305 669-8025) and in Aventura (North Dade) at 20803 Biscayne Blvd. (Tel. 305 682-3018). Other offices in Florida are set for Orlando, Tampa, and Ft. Myers.

The website indicates that a homeowner should prepare by gathering

• loan number
• two recent pay stubs (self-employed persons should provide 4 months of bank statements and the most recent tax return and income statements for corporations/LLCs)
• hardship letter
• monthly budget outlined

Chase indicates that the information will be reviewed and sometimes further information as to an appraisal or mortgage insurance pursued. After a review, Chase will send a letter to advise if a person qualifies for any loan modification and its terms.

A video presentation by JPMorgan Chase's President/CEO Jamie Dimon before the U.S. Chamber of Chamber is available.

Connecting the Dots - AIG's United Guaranty Mortgage Co., Countrywide, and Pool Insurance

An AIG unit - United Guaranty Mortgage Indemnity Co.., which is based in Greensboro, North Carolina, filed a suit in federal court in Los Angeles in case number 09-1888 (another suit was apparently also filed ins California state court per Reuters) , against Countrywide Financial Corp. alleging misrepresentation as to $1 billion of mortgage loans upon which it issued mortgage insurance. The Bank of New York Trust Co. (part of Bank of New York Mellon Corp.) , a trustee for the mortgage-backed securities issued by Countrywide was also named as a defendant. The media styles this a paradoxical situation in which two bailed out entities are suing each other - "two kingpins of the crisis are now suing each other for misrepresentations" according to Paul Kedrosky. AIG/United Guaranty Corporation is partially owned by (80%) and was bailed out ($173 billion) by the federal government and Countrywide and Bank of America were also bailed out by the federal government. The complaint alleges that Countrywide misrepresented the underwriting standards upon which it obtained private mortgage insurance from United Guaranty Mortgage. The allegations include assertions that mortgages were underwritten in violation of Countrywide's own guidelines, were missing documents, misrepresented credit scores or contained false social security numbers.

According to Reuters, the involved mortgage insurance was purchased by Countrywide "to increase the credit ratings of its mortgage-backed securities offerings" ("pool insurance") as distinct from "private mortgage insurance." Apparently United Guaranty faces huges losses due to the downturn in real estate and is seeking to deny coverage on assertions of Countrywide misconduct.

The United Guaranty Corporation is in the business of issuing "private mortgage insurance." United Guaranty's website explains that private mortgage insurance "protects lenders against increased risk of borrower default related to high loan-to-value (LTV) mortgages" and that it "lets you [mortgage companies] lend more money to more people and sell those loans more easily in secondary markets" and that "your customers can get the home they want, with as little as zero down" and so that "new homeowners can reasonably count on an equity line of credit later for home improvement, unexpected expenses, education, or other purchases." United Guaranty also explains that "mortgage insurance is a partnership - a cooperative arrangement between the mortgage and insurance industries - that enable the largest, most diverse population possible to obtain a mortgage and realize the dream of home ownership." There are two types of "private mortgage insurance" - "borrower-paid" and "lender paid." The amount of the premium is dependent on the nature of the mortgage loan as fixed or adjustable, the loan to value ratio, coverage, and exposure. The rates appear to range from about .24% to 1.25%.

United Guaranty also provides "pool insurance" for mortgage-backed securities. Fannie Mae and Freddie Mac purchase mortgage loans in the secondary market and set there own guidelines. Loans within these guidelines are called "conforming" and those that do not are called "nonconforming or jumbo loans." As nonconforming or jumbo loans are "considered more risky" they are sold to "someone other than Fannie Mae or Freddie Mac" -- "Wall Street firms, private conduits, and other issuers of jumbo mortgage-backed securities - in other words, the 'private-label marketplace.'" United Guaranty explains that "when these large loans are packaged together, pool insurance comes into play." United Guaranty further explains that "with pool insurance, the loans are more attractive to the investors in the secondary market, where mortgages are bought from lenders. Also called a form of credit enhancement, pool insurance protects the purchasers of these jumbo loans against borrower default."


United Guaranty's website explains that "Coverage" is "the portion of the mortgage risk assumed by the mortgage insurance company." "Delegated Mortgage Insurance" is "an agreement between a mortgage lender and mortgage insurer to forgo mortgage loan underwriting by the mortgage insurer and to assign MI [mortgage insurance] coverage based on the lender's underwriting acceptance of the loan." A "Master Policy" is an agreement whereby "instead of each loan receiving an individual policy, the mortgages are insured under the lenders' master policy, then a commitment and certificate of insurance are issued for each individual loan." "Loss Mitigation" "involves step to decrease the amount of a [mortgage default or foreclosure] claim, through (1) bringing the homeowner up to date in the payments (and avoiding foreclosure), (2) taking title to the property and maximizing the final sales price, or (3) other means."

Aig/United Guaranty issued its "declining market list and policy changes" effective January 30, 2009. The new "market classifications" are "moderately", "standard" and "severely." The entire states of Florida, Arizona, California, Michigan, and Nevada "are considered to be Severely Declining Market States." Apparently the "additional underwriting restrictions" for "severely" declining markets includes:

• minimum 720 credit score


• maximum loan amount of $417,000.


• maximum debt to income ratios (DTI) of 45% for certain borrowers

Pursuant to the website, in Florida, certain housing is "ineligible" such as "condos, co-ops, townhomes, etc."

IndyMac Federal Bank FSB acquired by OneWest Bank, FSB

The FDIC announced today that it has completed the sale of IndyMac Federal Bank, FSB to OneWest Bank, FSB which is a newly formed federal savings bank organized by IMB HoldCo LLC. All deposits of IndyMac Federal Bank, FSB were transferred to OneWest Bank, FSB.

On July 11, 2008, IndyMac Bank, FSB (prior to the establishment of IndyMac Federal Bank, FSB) was closed by the Office of Thrift Supervision ("OTS") and the FDIC was named Conservator. "All non-brokered insured deposit accounts and substantially all of the assets of IndyMac Bank, FSB" were transferred to the newly created IndyMac Federal Bank, FSB" as the "assuming institution."

The FDIC further announced thath it entered into a "loss share transaction on the single family residential portfolio" and that pursuant to the agreement, OneWest will "continue the FDIC's existing loan modification program."

A "loss share" agreement typically provides that nonperforming assets are managed and collected by an acquiring bank and the FDIC agrees to absorb a significant portion of the loss - "typically 80 percent" as well as further loss protection.

IndyMac Mortgage Services mortgage modification - download financial packet.

Mortgage Terms in the Post-Bubble Era

Automated Valuation Model ("AVM") - a method of using mathematical modeling and databases to obtain property valuations. A servicer under the new guidelines of the U.S. Treasury Department's "Making Home Affordable Program" may use a Fannie Mae or Freddie Mac's or its own internal AVM among other methods for rendering a valuation.

Credit-Default Swap - an insurance-like policy against default.

Counterparty - the party on the other side of a financial transaction.

Debt to Income ("DTI") - the percentage of a person's gross monthly income that goes to paying certain debt.

Government Sponsored Entity ("GSE") - a type of quasi-governmental organization, such as Fannie Mae or Freddie Mac, that falls in between the categories of the private sector and governmental entities. Congress defined the term GSE in the Omnibus Reconciliation Act of 1990.

Median Family Income ("MFI") - used by HUD program as basis for income limits in various HUD programs.

Troubled Asset Relief Program ("TARP") - a federal program including efforts to purchase assets or equity from financial institutions to strengthen the financial sector.

Mortgage Refinancing and Modification (Non-Bankruptcy) - President Obama's "Making Home Affordable Program"

Updated information for homeowners is available on President Obama's "Making Home Affordable Program" including refinancing and modification options. Fannie Mae and Freddie Mac have also released further information. The following summary of the information would appear to reflect some of the features of the programs, but further inquiry should be made directly with these federal websites as well as with the appropriate mortgage servicer, lender, or governmental agencies.

Refinancing - Fannie Mae/Freddie Mac Owned or Controlled Mortgages

Homeowners (owner-occupants, 1 to 4 unit property) may be eligible for refinancing. Under this program Fannie Mae and Freddie Mac may refinance certain mortgages loans that they own or control.

Eligibility Criteria:

• Borrower current on mortgage (or not more than 30-days late during the last 12 months)
• Balance owed on first mortgage is about equal (up to 105%) to the current value of the home (value determined after application)(agreement of any second mortgage holder may be required)
  
• Homeowner has stable income to support the new mortgage payment

Refinancing Terms:

• Interest rate per market rate (may vary by lender and over time)
• 30 to 15 year fixed rate loans
• No prepayment penalty
• No balloon
  
• No reduction in principal amount
• Transaction costs, such as appraisal or title report may be included in refinancing
  

Application Process:

• Apply through mortgage servicer or lender
  
• Determine Fannie Mae/Freddie Mac Ownership or Control per inquiry with mortgage servicer or confirmation with Fannie Mae (800) 7FANNIE or Freddie Mac (800) FREDDIE
• Gather paycheck stubs, recent tax return, information on second mortgage, information on monthly payments for credit cards, student loans, and car loans
  
• Streamlined processing by lenders/brokers using Fannie Mae platform
• Fannie Mae "expanded refinance flexibility ends in June 2010"
  

Modification - "Most Conventional Mortgages" (Excluding Second Mortgages)

Homeowners (owner-occupants, 1 to 4 unit property) who are already behind or are struggling with a mortgage may be eligible for modification.

Eligibility Criteria::

• May be current, delinquent or struggling with present mortgage
  
• Unpaid principal balance is equal to/less than $729,750.00 (higher for 2 -4 unit property)
• Loan originated before 1/1/09
• Present mortgage payment (including taxes/insurance/association dues) is more than 31% of gross (pre-tax) monthly income
• Present mortgage payment no longer affordable
  

Eligible Mortgages:

Include "most conventional loans" (except second mortgages) held by private lenders or owned or controlled by Fannie Mae or Freddie Mac or held by a mortgage backed security including

• prime mortgages
  
• subprime mortgages
  
• adjustable mortgages
• FHA, VA, and USDA mortgage not yet eligible (but may be soon, but presently may be modifiable under other programs)
  

Other aspects of the modification program are:

• Participating servicers/mortgage holders to be posted at www.financial stability.gov
• Patience requested as Treasury just published program requirements on 3/4/09
• Mortgage servicer to evaluate eligibility if behind more than two or more payments
  
• Mortgage servicer participation is voluntary, but there are incentives to servicer
• No cost to borrower for "Home Affordable Modification"
• No charge for assistance from HUD-approved housing counseling agency (888) 995-HOPE
  
• HUD-approved housing counseling required if mortgage payment as modified together with second mortgage, car loan, credit car, and child support exceed 55% of gross monthly income
• Servicer to determine if cost of modification (including government incentive) less costly than foreclosure
  

Modification Terms (to Payment of 31% of Gross Monthly Income):

• Trial modification - 3 months at new rate as low as 2% to reach payment of 31% of gross monthly income
• Permanent modification thereafter if current after 3 months
• If modified interest rate is below market rate -fixed for first 5 years and then may increase not more than 1% per year until reaches cap based on prevailing interest rate as of date of modification
• If modified interest rate is at or above market rate, modified rate is fixed for life of loan
• Modification payment to include escrow for taxes and insurance
• Successful borrowers on modified mortgage may receive success incentive by U.S. Treasury over 5 years up to $5,000.00

Other Types of Modification May Be Considered by Servicer: (If a 2% interest rate will not result in an affordable payments of 31% of gross monthly income):

• Extension of mortgage term up to 40 years
• Deferring of payment on portion of amount with later balloon payment ("principal forbearance")
• Forgiveness of portion of debt may be done but is not required ("principal forgiveness")
  

Borrower Q&A's is also set forth regarding refinancing and modification.

The federal government's "Homeowner's HOPE Hotline" is (888) 995-HOPE.

House of Representatives Passes H.R. 1106

The U.S. House of Representatives today voted to pass H.R. 1106, the "Helping Families Save Their Homes Act of 2009" by a vote of 234 to 191. This bill allows Bankruptcy Judges to modify principal residence mortgages in certain respects under certain circumstances.

A companion bill will next need to be considered and approved by the Senate. Any differences in a Senate approved bill will need to be reconciled between the House and the Senate in a conference committee.

U.S. Treasury Deptment Announces Mortgage Modification Guidelines

The Treasury Department today announced new guidelines "to begin modifications of eligible mortgages under the Administration's Homeowner Affordability and Stability Plan." The press release states that the "guidelines will implements financial incentives for mortgage lenders to modify existing first mortgages and set standard industry practice for modifications." A summary of the guidelines was also released by the Treasury Department.

Further information including as to eligibility for refinancing or modification is available at http://www.financialstability.gov/makinghomeaffordable/.

House Democrats Reportedly Reach Agreement on H.R. 1106, House Rules Committee Set to Reconvene Tomorrow

The Washington Post reports the House Democrats have reached on agreement on H.R. 1106, the "Helping Families Save Their Homes Act of 2009" with changes to "narrow" some of the bill's provisons.

H.R. 1106 has apparently been sent back to the House of Representative's Rule Committee which is reconvene on the bill tomorrow March 4 at 2:00 p.m. Congressman John Conyers, Jr. (D. Mich.) offered a "proposed revision to Amendment #1 printed in House Report 111-21."

The House of Representative meeting as a "Committee of the Whole House on the state of the Union" considered H.R. 1106 on February 26, 2009, but left is as "unfinished business."

Provisions in the proposed revisions include a new defined term "qualified loan modification" (as section 101 (43A)) and a change in the "clawback" for the mortgage holder on a subsequent sale at an appreciation to 90% for the first year, 70% for the second year, 50% for the third year, 30% for the fourth year and 10% for the fifth year. The clawback would give the mortgage holder a share of the increase in value for five years. "Lack of good faith" would exist if the debtor "can pay all of his or her debts and any future payment increases ...without difficulty for the foreseeable future, including positive amortization of mortgage debt." There is also a provision providing for a reduction in mortgage interest rate to achieve an affordable monthly payment as a percentage of monthly income as an apparent second choice in addition to mortgage principal reduction.

House Majority Leader Reports Agreement Likely on Bankruptcy Mortgage Modification

Bloomberg and the Wall Street Journal report today that House Majority Leader Steny Hoyer (D. Md.) states that a compromise agreement may be reached today on the bankruptcy mortgage modification proposals pending in Congress in H.R. 1106. Bloomberg also reports the House of Representatives may vote as early as Thursday on the bill. The bill provides that Bankruptcy Judges may modify mortgages on principal residences under certain circumstances.

Talk to Your Congressmen about H.R. 1106

NACBA (The National Association of Consumer Bankruptcy Attorneys) has set up a toll free number to enable the public to speak to their Congressmen about the proposed bill H.R. 1106, which would authorize judicial modification of residential mortgages in Chapter 13 bankruptcy. The vote on H.R. 1106 was postponed until later this week.

By calling 1-877-354-4958 between 9 a.m. and 6 p.m. (Eastern Standard Time) you will be routed to the office of your Congressman, Senator, or the White House.

House Consideration of H.R. 1106

The House of Representatives met as a "Committee of the Whole on the State of the Union" on Thursday to consider H.R. 1106, the "Helping Families Save Their Homes Act of 2009." H.R. 1106 includes provisions that will allow Bankruptcy Judges to modify certain mortgages on principal residence in Chapter 13 bankruptcy. After the Committee's consider of H.R. 1106, the full House did not vote on the bill. A vote may be set next week.

A Committee of the Whole is a committee consisting of all members of the House of Representatives and is used to expedite House action. The Committee of the Whole cannot pass a bill, but after it is done with its debate and amendments to the bill, "the committee rises" and its Chair reports the bill back to the full House of Representatives, where it is voted on or sent back to a legislative committee from which it was reported.

The comments of the various Congressmen can be found on the House's website.

C-Span Live Proceedings on Floor of House of Representatives

C-Span live debate on the floor of the House of Representatives on H.R. 1106 the "Helping Families Save Their Homes Act of 2009".

Although last evening the Washington Post reported the expectation that H.R. 1106 would pass today, C-Span reports this afternoon that a vote on passage of H.R. 1106 has been postponed until next week.

Action by House Rules Committee on H.R. 1106

The House Rules Committee's website indicates that today at 12:00 p.m. was the deadline for amendments to H.R. 1106 the "Helping Families Save Their Homes Act of 2009" to be submitted. H.R. 1106 includes provisions that will allow certain principal residence mortgage modification in Chapter 13 bankruptcy. The Committee's website lists the numerous proposed amendments that were submitted by the various Congressmen. The Rules Committee was set to meet today at 4:00 p.m.

One interesting proposed amendment by Congress John Conyers of Michigan would require the Bankruptcy Court to use FHA appraisal guidelines for property analysis where the fair market value of a home is in dispute.

Bankruptcy Mortgage Modification Bill Expected on House Floor on Thursday

It is reported that H.R. 1106, the "Helping Families Save Their Homes Act of 2009" will be on the floor of the House of Representatives on Thursday as part of a major housing package. H.R. 1106 includes provisions that will allow modification of mortgages on principal residence in a Chapter 13 bankruptcy case.

Report that Congress to Vote on Bankruptcy Mortgage Bill this Week

House Speaker Nancy Pelosi stated today that she expects H.R. 200, "The Helping Families Save Their Homes in Bankruptcy Act", to reach the floor of the House of Representatives this week on Thursday. Reportedly it will be packaged with other bills already approved by the House Financial Services Committee relating to FDIC insurance, Hope for Homeowners, and other issues. Apparently, the Senate will vote on its version of the bankruptcy bill, S. 61, after the House's action.

The Helping Families Save Their Homes in Bankruptcy Act would allow bankruptcy judges to modify mortgages on principal residences by reduction of the principal to market value, modification of interest rate, and extension of term of payments.

Homeowner Affordability and Stability Plan

Today's remarks by President Obama on the mortgage crisis.

The U.S. Department of Treasury has published questions and answers for borrowers about the Homeowner Affordability and Stability Plan. It is divided into q & a's for borrowers who are current with their mortgage and those who are at the risk of foreclosure.

The U.S. Department of Housing and Urban Development's website has various links to further information.

Fannie Mae's website and the Treasury Department's financialstability.gov also have further information.

Former Secretary of Labor Robert Reich wrote a blog post on the proposal stating that the two most important aspects of the proposal are its support for bankruptcy modification of mortgage and the administration's support for Fannie Mae and Freddie Mac.

New York Times editorial supporting bankruptcy reform allowing principal residence mortgage modification.

Obama to Endorse Bankruptcy Mortgage Modification

The media reports today that President Obama will endorse legislation to allow for modification of mortgages in chapter 13 bankruptcy as part of his housing and foreclosure plan (the Homeowner Affordability and Stability Plan) in his press conference today in Arizona.

Report that Bankruptcy Mortgage Bill to be part of Obama's Housing Plan

The Washington Post reports today that the bankruptcy mortgage modification bill will be part of President Obama's housing plan to be announced this Wednesday in Arizona. This plan would pull together into one plan the various housing measures presently before Congress.

The proposed bankruptcy legislation will allow bankruptcy judges to modify mortgages on principal residences by reducing their principal down to the property present fair market value and by changing the interest rate.

The Effective Date of the Proposed Bankruptcy Bill

Section 8 of the proposed H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009" (which has not yet been enacted by Congress) provides that its effective date is the date of its enactment, but that its provisions apply to bankruptcy cases filed "before, on, or after" the date of its enactment.

Congressional leaders announced in January that the bill would be moved quickly and it has been approved by the House Judiciary Committee. There has not been much public information during the past week about movement of the bill except that there was a desire for the bankruptcy bill not to be part of the economic stimulus bill.

Bankruptcy Mortgage Modification Bill Expected on House Floor Next Week

Democratic leaders are reported to be preparing to wrap the amended version of H.R. 200 (the "Helping Families Save their Homes in Bankruptcy Act of 2009") into the omnibus spending package set to come to the House floor next week.The House Judiciary Committee approved the amended bill on Tuesday.

"The Origins of the Financial Crisis"

The article "The Origins of the Financial Crisis" was released today by the Brookings Institution. The authors explain that the present financial crisis has its origins in an asset price bubble that interacted with financial innovations that hid risks, with companies that failed to follow their own risk management procedures, and with regulators who failed to restrain excessiveness. The housing market asset bubble developed as prices increased yearly from the mid-1990's to 2006 out of line with fundamentals such as household income and with an unrealistic expectation of future price increases. The financial innovations with rapidly increasing subprime lending, masked the inherent risk included Adjustable Rate Mortgages with low "teaser rates", no down-payments, and negative amortization predicated on the expectation of future increases of housing prices.

The development of private sector mortgage-backed securities backed by "non-conforming" loans with other means of "credit enhancements" allowed the growth in subprime lending. This technique of "securitizing" mortgages was developed in the 1970's by the government-sponsored entities Fannie Mae and Freddie Mac for "conforming" loans or loans below a certain dollar amount and for borrowers with good credit scores. The private sector mortgage-backed securities market remained small until the late 1990's until the investment banks developed new ways of securitizing subprime mortgages, including dividing cash flows from the mortgage-backed securities into various "tranches" with different levels of risk, high credit rating agency ratings for the highest "tranches", and "monoline" bond insurance that would pay off in the event of loan defaults. The increase in homeownership due to the availability of subprime lending increased housing demand and inflated home prices.

The article notes that during this period of new mortgage financial innovations there was an environment of easy monetary policy by the Federal Reserve and poor regulatory oversight. Financial institutions borrowed to finance their increased purchases of mortgage-related securities and created "off-balance sheet" entities that were not subject to regulatory capital requirements. The authors relate taht financial institutions turned to and relied on short-term collateralized borrowing such as repurchase agreements, so much that by 2006 investment banks were rolling over a quarter of their balance sheets every night. Once panic hit in 2007, the uncertainty over asset values caused lenders to abruptly refuse to rollover their debts and overleveraged banks found themselves undercapitalized and with assets with falling values.

The authors are shocked to find that institutions along the mortgage securitization chain grossly failed to perform adequate risk assessment with respect to the mortgage-related assets they held and traded. These institutions along the chain include the mortgage originator, the loan servicer, the mortgage-backed security issuer, and the credit rating agencies. There was a lack of due diligence in each link in the securitization chain and instead there was a reliance on computer models.

The article finds that due to the nature of the securitization model, financial institutions had little concern about the risks in the mortgage-related assets as they were able to pass the risk down the chain -- the so called "originate to sell" model. The authors question why the ultimate buyers of the mortgage-backed securities failed to understand the involved risk. They suggest that factors were that the ultimate buyers were caught up in the "bubble mentality" as were the others, the complexity of the securitization system, reliance on rating agencies, and complex flawed computer models.