the subprime issues, the global economic crisis and sources of law
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Marianne M. Jennings. The Subprime Issues, the Global Economic Crisis and Sources of Law. Building an Understanding From the Roots Up. The Mortgages The Foreclosures The Bankruptcies The Conflicts Galore The Crimes Corporate Governance The Litigation Constitutional Issues. - PowerPoint PPT PresentationTRANSCRIPT
Marianne M. Jennings
The MortgagesThe ForeclosuresThe BankruptciesThe Conflicts GaloreThe CrimesCorporate GovernanceThe LitigationConstitutional Issues
The Basics of Residential Mortgages
Mortgages are liens Deeds-of-trust also covered by state
law, but folks still refer to it as “My mortgage”
Overall concept is the same: The mortgagee/lender has the property as security for repayment and therefore has the right to get the property back in a special type of process: Foreclosure
Conventional mortgages FHA and VA mortgages (guaranteed by
Fannie and Freddie) Fixed-rate mortgages: 40, 30, and 15
years ARMs Balloons Jumbo loans – mortgages above a certain
amount carried higher interest rates Title loans Pay-day loans
State laws on interest: usury State laws on subprime:
Disclosures Waiting periods Classes
Federal laws: Truth in Lending APR Payments Variable rate loans
Federal laws: Who gets loans? Equal Credit Opportunity Act Redlining prohibited
Federal regulations on both applications and lending Federal laws: Collections
Techniques for collection Contact with debtors
Misrepresentation on credit worthiness: State Federal crimes on FHA and VA loans in
attesting to income The Flippers: misleading lender on
intentions about property Fraudulent appraisals
A holder in due course is someone who purchases a negotiable instrument (i.e., a mortgage note) for value in good faith without notice that it is dishonored or overdue
A holder in due course is not subject to formation defenses (i.e., misrepresentation and silent misrepresentation)
Holder in due course takes free of lender’s defense that mortgagor misrepresented income or use of property
HDC does take subject to insolvency; there is never a guarantee that an instrument will always be paid; HDC is still subject to risk of debtor’s insolvency
How did Wall Street get intertwined with Main Street?
You have 10 mortgages that borrowers/mortgagors will pay off over 15-30 years
You’d like the cash up front! Investment firm Bear agrees to buy
those 10 mortgages, present value of $3,000,000 over the 15-30 years
To get the $3,000,000 cash, Bear sells mortgage-backed securities (collateralized debt obligations) to folks looking for a safe long-term investment
The Supply of Mortgages: Public Policy of More Home Ownership The Community Reinvestment Act of
1977 Boston Federal Reserve Bank Study of
1992 on lender discrimination: Federal regulation
Civil Rights Act enforcement Fannie Mae and its ability to package
guaranteed mortgages
When Mortgagors Fall Behind: Back to Main Street, Again
All state lawsDefaultNoticeRequired waiting periodsSale (auctions)Buyer is given certificate of saleRight of redemption (mortgagor has
the right to pay up full amount and expenses and redeem the property
Deficiency judgments
Courts handle judgments: local laws Difference between the amount due
and the amount the sale brought Not available in non-recourse states In an upside down market (underwater
mortgages), there are deficiencies in almost every foreclosure
Deficiency means you must have sold the property – this crisis has found the inventory mounting
Second mortgage lenders – Nothing!
Walking away: Credit Reports and federal law
Deed in lieu of foreclosure: State law and credit reports
Stripping the property: State law; criminal law
The problem of blight in neighborhoods with high rates of foreclosure: Zoning; local law
Eminent domain by cities of properties lenders have taken back but cannot sell, rent, or repair: constitutional law
Lender programs: Private law Reduce payments (Citi is reducing payments
to $500 per month for 3 months for folks who have lost their jobs): Contract law
Federal funding for mortgage refinancing New loan terms
▪ Lower interest rates: contract law, private law▪ Permanent interest rates▪ Longer loan periods▪ The proposal to allow bankruptcy judges to
restructure the mortgage loans: federal law
Loan modification: Federal law preempts state contract and real property law Have payments that total 31% or more of
monthly income Single-family home Primary residence Loan amount is $729,750 or less Mortgage originated on or before Jan. 1,
2009
Would you accept an approved mortgage loan that you knew was stretching your budget?
What are the moral hazards of mortgage bail-outs? Re-default rates are 55% six months after restructuring
What are the risks of bankruptcy court restructuring?
Review the notion of consideration on all of these restructures.
What is the difference between a refinancing and a loan modification?
What are the risks in highly leveraged personal finance?
Who are the stakeholders in mortgages?
Federal law and federal court system
Bear Stearns (purchased by JP Morgan Chase)
Lehman (bankruptcy)(role of trustee and calls for officer compensation to be returned)
Countrywide (purchased by Bank of America)
Merrill (purchased by Bank of America) (intentional interference with contracts)
Citigroup (struggling)
Prosecutions?
Firms were operating in a largely unregulated area with little oversight
There was compliance with the disclosure requirements under the 1933 Securities Act: Federal - USC
Sales of securities by officers of companies before announcements of subprime losses and effects
10B and insider trading by insiders: USC and CFR
Overly optimistic information released by company constitutes a corporate violation of 10b: USC and CFR
Bernie Madoff and his $50-billion Ponzi scheme Former chairman and co-founder of
NASDAQ Well know for his philanthropy and
generosity Consistent 12% return over the years Warnings to the SEC were ignored That confirmation of facts syndrome Just plain securities fraud: USC and CFR
That “Tone at the Top” Thing: State Laws on Corporations
Area Rug $87,784 Mahogany Pedestal Table $25,713 19th Century Credenza $68,179 Pendant Light Furniture $19,751 4 Pairs of Curtains $28,091 Pair of Guest Chairs $87,784 George IV Chair $18,468 6 Wall Sconces $2,741 Parchment Waste Can $1,405 Roman Shade Fabric $10,967 Roman Shades $7,315 Coffee Table $5,852 Commode on Legs $35,115
Corporate governance: Who establishes pay? State law on corporations
SOX and the compensation committee; USC and CFR
Shareholder rights: state law on corporations
Proxy season 2009 and the proposals for shareholder approval of compensation packages as well as halt to all off-site meetings: state law and SEC regulations on proxy solicitation
Who’s Suing Whom for What?
“We are on the right track to put these last two quarters behind us.”
Countrywide shareholders vs. MoziloMerrill shareholders vs. O’Neal and
BoardBank of America and misleading
shareholders about mergerState and federal law
State vs. Federal vs. Property Owners
Federal restructuring planBankruptcy judgesState contract lawState property law
Maintenance ordinances and statutes for lenders on abandoned property
Eminent domain on foreclosed, vacant properties
Public health, safety, and welfareThe crime rates