A Massachusetts court has delivered a ruling that mortgage lenders all over the country have feared. The Supreme Judicial Court (SJC), the state’s highest court, invalidated two foreclosures, finding that the lenders involved - Wells Fargo and US Bancorp - had not proven that they held the mortgages when the foreclosures were initiated.
The ruling replaces the jabs plaintiffs’ attorneys have been landing on mortgage lenders and servicers with a square-on body blow to industry efforts to deflect challenges that some analysts say could undo thousands of foreclosures. The Congressional Oversight Panel overseeing the $700 billion federal bank bailout has warned that the problem “could potentially threaten financial stability” if lenders are required to buy back billions of dollars in loans backing securities sold to investors.
The SJC decision (U.S. Bank v. Ibanez) upheld a ruling by the state Land Court holding that the lenders had no standing to foreclose because the documents establishing their ownership of the mortgages were transferred several months after the foreclosure sales were completed.
“We agree with the [Land Court] that the [lenders], who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Associate Justice Ralph Gants wrote for the SJC majority.
The key legal issue here is the conflict between common securitization practice (in which mortgages in securitized pools are often transferred without naming a recipient) and real estate laws in Massachusetts and many other states holding that foreclosing entities must be the mortgage holders of record – that is, they must be named in the documents.
The SJC ruling makes it clear that the assignment of the loan does not necessarily have to be recorded in order to be valid, “although recording is likely the better practice….However, there must be proof that the assignment was made by a party that itself held the mortgage.”
The financial industry argues that documentation shortcuts are justified to ensure securitization efficiency and have no substantive effect on the ownership of the loans or the legitimacy of the foreclosures. Plaintiffs’ attorneys, consumer advocates and many real estate law experts counter that documentation accuracy is a cornerstone of real property law and essential to the trust required to transfer ownership of real property.
A concurring SJC opinion noted the “utter carelessness with which the plaintiff banks documented the titles to their assets. … There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure," Associate Justice Robert Cordy wrote. "Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order."
Evidence of sloppy and in some cases misleading and possibly fraudulent foreclosure practices have spurred calls for regulators or lawmakers to adopt national standards governing foreclosures and loan servicing generally.
Reflecting growing Congressional concern about the issue, 16 Democratic Senators signed a letter urging Treasury Secretary Timothy Geithner and federal regulators to move quickly to correct foreclosure flaws that have produced widespread challenges by homeowners and triggered a 50-state investigation that is expected to result in millions of dollars in penalties levied against the nation’s leading mortgage lenders.
“Mortgage market issues point to an emerging threat to financial stability that should be forcefully addressed now,” the letter, signed by Senators Jack Reed(D-RI), Bernie Sanders (I-VT), John Kerry (D-MA) and Dick Durbin (D-IL), among others, asserts. The Financial Stability Oversight Council, charged with preventing future financial crises, “should determine whether there is a need for some independent referee, whether it is a bankruptcy court or other institution, in finally addressing these foreclosure processing and loan modification issues,” the senators suggested. The bankruptcy courts, they added, have been “creatively and proactively” addressing foreclosure issues.
That reference to the bankruptcy courts has led some industry analysts to speculate that lawmakers may again propose legislation giving bankruptcy judges the authority to rewrite the terms of mortgage loans. The House of Representatives passed a bankruptcy “cramdown” measure in 2009, but the Senate version, sponsored by Sen. Durbin, among others, failed to win approval.
Winners and Losers
Every financial crisis, no matter how severe, has winners as well as losers, and the current one is no different. While the housing market as a whole continues to struggle, the rental market is showing signs of strength.
National apartment vacancy rates declined to 6.6 percent in the fourth quarter from 8 percent in the same period a year ago, according to Reis, which measures rental rates in major metropolitan areas. Meanwhile a recent survey by Apartment.com found that prospective renters now include many former homeowners for whom renting is a lifestyle choice, not a financial necessity.
Of the 2,700 visitors to the Apartment.com Web site who responded to the survey, 60 percent said they prefer to rent. Among former homeowners who are renting for the first time, 65 percent said they now view renting as a more affordable option and homeownership as a less appealing investment because of uncertain price trends and high maintenance costs.
Providing some academic support for this presumed shift in the rent vs. buy calculation, a recent study has concluded that the benefits of homeownership have been oversold. The study, “American Dream or American Obsession,” published by the Philadelphia Federal Reserve Bank, suggests that the two traditional arguments for ownership – as an enforced savings strategy and a solid long-term investment – “are no longer valid.”
While the savings argument has had merit in the past, “the changing economic environment has rendered it flawed,” the study’s authors, Wenli Li, an economist at the Philadelphia Fed and Fang Yang, an assistant professor at the University of Albany, contend.
The investment value of ownership has similarly been eroded both by economic trends and by government policy, they suggest, noting: “Even after households have accumulated some equity…. [they] are now so easily able to tap their home equity to pay pressing bills that they simply do not accumulate wealth.” Moreover, the study notes, the recent financial crisis has demonstrated that home prices can decline as well as rise, making home ownership no safer an investment option than equities.
“The high volatility in local housing markets implies that, like owning individual stocks, households can lose big as well as win big when buying and selling houses,” the study says.
Credit Card Surprise
Credit card issuers were generally expected to boost fees and slash reward programs in response to the expanded consumer protections Congress enacted with the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, and many have done precisely that. But a few have moved in the opposite direction, eliminating fees they are allowed to impose and promoting their reward programs rather than slashing or eliminating them.
Issuers adopting this contrarian strategy say they are trying to make their products more transparent to consumers and more responsive to their needs. But some analysts see less altruistic motives. Some institutions, they suggest, have decided that it is less costly to eliminate fees and some penalty rates than to comply with the disclosure and notice procedures the CARD Act mandates.
Among other changes in credit card policies, the law requires 45 days’ notice of changes in rates and fees and bars any rate increases until an account has been open at least 12 months, unless payments are 60 days or more past due. Additionally, the Federal Reserve’s implementing regulations have capped penalty fees at $25 unless issuers can justify amounts above that.
“Firms are doing their best to take the things that they have to do and put a positive spin on them in terms of how they’re promoting these changes and promoting themselves to existing and new cardholders,” Doug Miller, a senior analyst at Corporate Insight, told American Banker.
Competition is also making many issuers think twice about hiking fees or limiting reward programs, Andrew Davidson, senior vice president of Mintel Compermedia, suggests. “We’ve got a significant increase in competition in the mailbox,” he told American Banker, “so issuers are really needing to stand out in any which way they can.”
Bankruptcy Trends
Although the economy appears to be strengthening, consumer bankruptcies, something of a lagging indicator, continue to rise. The rate of increase has slowed, but the trend line continues to reflect the damage inflicted by an unemployment rate that remains stubbornly high and an economic recovery that hasn’t yet been strong enough to make much of a dent in it.
More than 1.5 million consumers filed for bankruptcy protection in 2010, an 8 percent increase over the 2009 total, but a significant year-over-year improvement compared with annual increases of 32 percent and 33 percent in 2008 and 2007.
Still, the 2010 filing volume equaled that in 2004, the highest level recorded before the implementation of bankruptcy reform legislation in 2005. The reforms, which made it more difficult for consumers to erase their debts, were supposed to reduce bankruptcy filings significantly. In fact, consumer bankruptcies have increased every year since the law was enacted, according to the American Bankruptcy Institute (ABI).
“Families continue to turn to bankruptcy as a result of high debt burdens and stagnant growth,” Samuel Gerdano, executive director of the ABI. Gerdano predicts that filings will continue to rise this year as unemployment remains high and income growth continues to lag.
Tax Toil Tallied
Few would dispute that the annual tax-filing ritual is a time-consuming – not to mention frustrating, painful, infuriating and a lot of other adjectives we shouldn’t use here – exercise. The emotional strain is hard to quantify, but the Taxpayer Advocacy Service), which monitors the Internal Revenue Service, has calculated that individuals and businesses collectively spend 6.1 billion hours annually complying with the tax code. Translated into labor terms, TAS estimates that tax compliance and filing efforts would keep 3 million workers occupied full time, which makes tax compliance “one of the largest industries in the U.S.,” the agency states in its annual report to Congress.
The length and complexity of the tax code create problems for both taxpayers and the IRS, the report notes, driving an estimated 60 percent of filers to purchase tax preparation software and 30 percent to hire professionals to do the work for them. But even with that level of outside assistance, the report notes, the IRS received 110 million calls from perplexed filers in each of the past two years, “a staggering number,” TAS says, exceeding the capacity of the IRS, which responded to less than 25 percent of them.
The solution, according to National Taxpayer Advocate Nina Olson, who heads the TAS, is comprehensive, revenue-neutral tax reform – simplifying the tax code for filers without significantly altering their tax bills.
Congress should s address tax reform and government spending separately, Olson suggests. Otherwise, she warns, “the debate over revenue levels could overshadow and derail meaningful…reform.”
The report also suggests sending a “taxpayer receipt” to filers, itemizing how tax revenues are spent. “Better public awareness of the connection between taxes and government,” the report says, “may improve civic morale, improve tax compliance, and make more productive the national dialogue over looming fiscal policy choices.”
