Martin D. Eakes Subprime Contract Advances Dispossessions and Arrangement Switching the Retreat on Social liberties Gath.


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home loan credits that the Board observes to be out of line, misleading, or intended to ... renegotiating of home loan credits that the Board observes to be connected with damaging ...
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Martin D. Eakes Subprime Mortgage Loans Foreclosures and Policy Reversing the Retreat on Civil Rights Conference October 19, 2007

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About CRL Nonprofit, objective exploration and arrangement association devoted to ensuring homeownership and family riches by attempting to take out harsh budgetary practices. Subsidiary with Self-Help, one of the country\'s biggest group advancement budgetary organizations.

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Overview Subprime and Foreclosure Data Existing Subprime Borrower Problem Federal Regulations and Legislation North Carolina enactment 1999 and 2007

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Subprime Growth Source: IMF Publications

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Subprime Share of All Mortgages (by start year) Source: IMF Publications

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Key Subprime Facts 7.5 million borrowers; $1.4 trillion advances extraordinary 3 million subprime advances every year in 2005 and 2006 1 in 5 subprime credits from 2005 and 2006 will end in lost home. 57% of 2005 subprime credits not bank-associated 72% of subprime as blasting ARMs (Lehman,2004) Rates hop from 8% to 12% Monthly installments up 30% or more in 3 rd year $600 billion rate reset in next two years 70% need escrows, which prompts "flipping" 70% of subprime have prepay punishments; just 2% in prime half use expressed pay for "capacity to reimburse" half of 2006 subprime were "80/20" LTV with piggyback 2 nd liens

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Neighborhood Loss > Direct Loan Loss 1.5% lost quality for neighborhood overflow impact inside 1/8 mile of abandoned home. $3,000 misfortune per neighbor x 50 neighbors = $150k of lost neighborhood esteem. $3,000 lost property charge incomes every year for schools at 2% rate. For 2 million lost homes, $300B neighborhood riches & $6B nearby expenses lost.

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Higher cost 1 st lien absolute advances 2005 HMDA # Higher cost % of aggregate African American 388,471 52% Latino 375,889 40% White 1,214,003 19%

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Cumulative Final Foreclosures for Subprime Loans Made in 2000 Cumulative Foreclosures (as of May 2005)

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Final Foreclosures by Annual Loan Cohort (May 2005)

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Subprime Foreclosure Starts Now Drive MBA Overall Foreclosure Starts Source: MBA

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Subprime Proportion of MBA Conventional Foreclosure Starts Source: MBA

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State Housing Prices versus Dispossessions

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Helping Borrowers Keep Their Homes 40% Refinance existing advances to prime, settled rate credits (GSEs, FHA). 20% Loan changes by amplifying beginning rate. 20% Loan changes by diminishing rate or adjust by up to half, the est. liquidation misfortune. 10% Speculative or financial specialist credits. 10% Borrowers where plausible help won\'t be sufficient.

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"Tackled" Legal Issues for Loan Mods Pooling and adjusting assentions (PSA) for the most part allow credit changes. REMIC rules for go through expense treatment license alterations of credits in default or where default is sensibly predictable. FAS 140 for QSPE treatment grants credit adjustment for home advances that are reprobate or where default is sensibly predictable.

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Remaining Legal Issue: 2 nd liens 20% LTV second home loan for 50%+ of 2006 advances half adjusted by various servicer. Borrowers can\'t deal with transactions with two distinctive servicers. first bank won\'t adjust credit if generous advantage streams to second. 2 nd bank won\'t adjust if 100% misfortune. Abandonment cuts off second, yet borrower loses home. Need government change to adjust home credit in chapter 11

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Remaining Legal Issue: Servicer Liability Servicer obligation for clashing financial specialist requests Example: Mod conceding misfortune favors lingering holder if abundance yield account discharged, yet harms senior bondholders. New PSAs incorporate safe-harbor dialect that advance servicers serve the best advantages of boldholders as a gathering. Will be more prominent issue in 2008 when adjustments could achieve 30% of extraordinary securitization pools. Separation obligation conceivable if servicer change rules are optional, and non-objective. Abandonment is legitimately the most effortless servicer activity.

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Foreclosure Solutions Need government liquidation alteration to permit legal mod of home credits, with respect to all other individual resources, including 2 nd homes, ranches, land, business land, water crafts, and furniture. Computerized, institutionalized credit alterations by advance servicers. 1% right now is unfortunate. (Moodys) Funding for lawful representation of borrowers. Lease-buy system to redeploy REOs.

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Bankruptcy Tweak area 1322 of the Bankruptcy Code ought to be corrected as takes after: 1322 Contents of arrangement . . . . (b) Subject to subsections (an) and (c) of this area, the arrangement may – (2) adjust the privileges of holders of secured cases, other than a case secured just by a security enthusiasm for genuine property that is the borrower\'s key living arrangement, or of holders of unsecured claims, or leave unaffected the privileges of holders of any class of cases;

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Three Different Policy Problems 1. Future subprime borrowers and credits Joint keeping money direction for "Nontraditional Mortgage" advances – October 2006 Joint managing an account direction for Subprime contract advances –July 2007. Central bank rules under HOEPA – Fall 2007. Government enactment (Watt-Miller-Frank, Bachus, Schumer) 2. Dispossession of existing subprime borrowers. 3. Liquidity and financial specialist markets melt-down.

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FRB Authority since 1994 15 USC 1639(l)(2) (l) DISCRETIONARY REGULATORY AUTHORITY OF BOARD.- - (2) PROHIBITIONS.- - The Board, by direction or request, should preclude acts or practices regarding - contract advances that the Board observes to be uncalled for, beguiling, or intended to sidestep the arrangements of this area; and renegotiating of home loan advances that the Board observes to be connected with injurious loaning hones, or that are generally not in light of a legitimate concern for the borrower.

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FRB Action Needed for Subprime Prohibit prepayment punishments Prohibit yield spread premiums to specialists Require escrows for assessments and protection Require capacity to reimburse at completely filed rate Prohibit "expressed salary" advances Require moneylender due perseverance of dealers such that bank in charge of agent acts or distortions for advances conveyed to moneylender

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North Carolina – 1999 Legislation For every single home advance Prohibited single-premium credit protection Prohibited prepay punishments for advances up to $150k Prohibited "flipping" where net unmistakable advantage of renegotiating not as much as expenses charged "High cost" advance characterized as 5% focuses and charges Prohibits financing of in advance charges Counseling required

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North Carolina – 2007 Legislation Definition of Subprime as "rate spread" advances Consensus by Banks, credit unions, contract banks, account organizations, purchaser and social equality bunches HMDA trigger of Treasury + 300 bps for 1 st liens OR Freddie study rate + 175 bps (fixes "flight to quality" issue and transformed yield bend ARM issue) Prohibits subprime prepay punishments Prohibits subprime expressed wage advances Requires capacity to reimburse at completely ordered rate Includes yield spreads in 5% "high cost" definition as in Georgia, New Jersey, New Mexico, Mass, and different states

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Addendum Slides

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Subprime Foreclosure Over Time (20% Cohort FC Rate; 70% SP Refi Rate)

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Sensitivity to Refi Rate to Another Subprime Loan

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Loan Features Carry Risk Among subprime advances began in 2000, subsequent to controlling for FICO rating: ARMs had 72% more serious danger of abandonment than FRM. Inflatables had 36% more serious danger than FRM. Prepayment punishments connected with 52% more serious danger. Low/no doc credits with 29% more serious danger. Buy cash with 29% more serious danger than renegotiate.

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Example of 2-28, $200,000 ARM, No Change in Rates Source: CRL Calculations

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Ever Foreclosed, by Annual Loan Cohort

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