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