The myth of home ownership and why home ownership is not always a good thing

Indiana Law Journal

Volumn 84, Issue 1, 2009, Pages 189-238

  Dickerson, A Mechele ^a  

^a UNIVERSITY OF TEXAS SCHOOL OF LAW   (United States)

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EID: 62349088710     PISSN: 00196665     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (310)

1. See Tim Iglesias, Our Pluralist Housing Ethics and the Struggle for Affordability, 42 WAKE FOREST L. REV. 511, 511-14 (2007) (discussing the American obsession with and love of the concept of "home");
2. Donald A. Krueckeberg, The Grapes of Rent: A History of Renting in a Country of Owners, 10 HOUSING POL'Y DEBATE 9 (2002);
3. Trina Williams, The Homestead Act: A Major Asset-Building Policy in American History 3 (Washington Univ. in St. Louis Ctr. for Soc. Dev., Working Paper No. 00-9, 2000).
4. See Recognizing National Homeownership Month and the Importance of Homeownership in the United States, H.R. Res. 477, 110th Cong. (2007) [hereinafter National Homeownership Month].
5. Press Release, The White House, National Homeownership Month, 2005 (May 25, 2005), http://www.whitehouse.gov/news/releases/2005/05/20050525-14.html [hereinafter Press Release]; Preserving the American Dream: Predatory Lending Practices and Home Foreclosures: Hearing before the Subcomm. on Banking, Housing, and Urban Affairs, 110th Cong. 10 (2007), available at http://bankmg.senate.gov/public/index.cfm?Fuseaction=Hearings. Detail&HearingID=2053fdd2-9832-4731-802d-fa9c18772267 [hereinafter Preserving the American Dream] (statement of Harry H. Dinham on behalf of the National Association of Mortgage Brokers) ("No merchant, no government and no company should superimpose their own moral judgments on what is a basic American privilege of homeownership.").
6. Press Release, supra note 3; National Homeownership Month, supra note 2.
7. See PRESIDENT GEORGE W. BUSH, A HOME OF YOUR OWN: EXPANDING OPPORTUNITIES FOR ALL AMERICANS (2002), available at http://www.whitehouse.gov/infocus/homeownership/ homeownership-policy-book-whole.pdf [hereinafter EXPANDING OPPORTUNITIES] (naming the financial benefits of home ownership, including building families' wealth and equity and giving families borrowing power to finance important needs).
8. See ERIC BELSKY & JOEL PRAKKEN, HOUSING WEALTH EFFECTS: HOUSING'S IMPACT ON WEALTH ACCUMULATION, WEALTH DISTRIBUTION AND CONSUMER SPENDING 8 (2004), available at http://www.realtor.org/libweb.nsf/pages/fg302 (follow second hyperlink under "Wealth Effect" heading) (describing how home ownership is an attractive investment because of home price appreciation and because mortgage payments act as a forced savings plan).
9. George S. Masnick, Home Ownership Trends and Racial Inequality in the United States in the 20th Century 20-22 (Joint Ctr. for Hous. Studies of Harvard Univ., Working Paper No. 01-4, 2001), available at http://www.jchs.harvard.edu/publications/homeownership/masnick-w01-4.pdf; U.S. DEP'T Hous. AND URBAN DEV., URBAN POLICY BRIEF NO. 2: HOMEOWNERSHIP AND ITS BENEFITS (1995), available at http://www.huduser.org/publications/txt/hdbrf2.txt [hereinafter HOMEOWNERSHIP AND ITS BENEFITS]; see also BELSKY & PRAKKEN, supra note 6, at 4-5 (finding that the growth of residential real estate wealth is historically faster and more stable than growth of corporate equities and stock wealth).
10. Krueckeberg, supra note 1, at 10 (discussing studies that find no social differences between renters and homeowners).
11. HOMEOWNERSHIP AND ITS BENEFITS, supra note 7, at 1.
12. Donald R. Haurin, Toby L. Parcel & Jean Haurin, The Impact of Homeownership on Child Outcomes 10 (Joint Ctr. for Hous. Studies of Harvard Univ., Working Paper No. LIHO-01.14 2001), available at http://www.jchs.harvard.edu/publications/homeownership/liho01-14.pdf.
13. Donald R. Haurin, Christopher E. Herbert & Stuart S. Rosenthal, Homeownership Gaps Among Low-Income and Minority Households, 9 CITYSCAPE: J. POL'Y DEV. & RES., No. 2, at 5 (2007);
14. Press Release, supra note 3; see also Subprime and Predatory Lending: New Regulatory Guidance, Current Market Conditions, and Effects on Regulated Financial Institutions: Hearing Before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Servs., 110th Cong. 394 (2007) [hereinafter Subprime and Predatory Lending] (statement of Harry H. Dinham on behalf of the National Association of Mortgage Brokers).
15. Clive Crook, Housebound: Why Homeownership May Be Bad for America, 300 ATLANTIC MONTHLY 21 (2007);
16. Press Release, supra note 3; National Homeownership Month, supra note 2; Subprime and Predatory Lending, supra note 11, at 69 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation).
17. Crook, supra note 12, at 21. For example, the housing meltdown appears to have harmed colleges-especially those who rely heavily on tuition-because of the credit squeeze caused by the subprime meltdown. Similarly, college students are finding it harder to finance their education because of the number of lenders who have withdrawn from student loan programs. Paul Basken & Goldie Blumenstyk, The Housing Market's Credit Crisis Raises Worries in Higher Education, CHRON. HIGHER EDUC. (Wash., D.C.), Dec. 14, 2007, at 17; Jonathan D. Glater, Government Seeks to Buy Loans Made to Students, N.Y. TIMES, Apr. 23, 2008, at All.
18. Press Release, supra note 3.
19. Peter S. Goodman, Homeowners Feel the Pinch of Lost Equity, N.Y. TIMES, NOV. 8, 2007, at Al. FANNIE MAE, THE GROWING DEMAND FOR HOUSING: 2002 FANNIE MAE NATIONAL HOUSING SURVEY (2002), http://www.fanniemae.com/global/pdf/media/survey/ survey2002.pdf. Because higher home prices increase household wealth, housing price appreciation stimulates consumer spending. See also David Leonhardt, Debt and Spending May Slow as Housing Falters, Fed Suggests, N.Y. TIMES, Aug. 20, 2007, at C3; Governor Frederic S. Mishkin, Speech at the Forecaster's Club of New York: Enterprise Risk Management and Mortgage Lending (Jan. 17, 2007), http://www.federalreserve.gov/newsevents/speech/ Mishkin20070117a.htm.
20. Courtney Schlisserman & Joe Richter, U.S. Metropolitan Home Values Drop Most in Six Years, BLOOMBERG.COM, June 26, 2007, http://www.bloomberg.com/apps/news?pid=20601087&sid=aDPbZ0uuxP6E&refer= home;5ee also BELSKY & PRAKKEN, supra note 6, at 4 (noting that in recent years, housing consumption and related expenditures have accounted for nearly one quarter of the gross domestic product; over the past fifty years, housing has accounted for between one fifth and one quarter of the gross domestic product).
21. Iglesias, supra note 1, at 521-23; HOMEOWNERSHIP AND ITS BENEFITS, supra note 7.
22. HOMEOWNERSHIP AND ITS BENEFITS, supra note 7.
23. See Adam Gordon, Note, The Creation of Homeownership: How New Deal Changes in Banking Regulation Simultaneously Made Homeownership Accessible to Whites and Out of Reach for Blacks, 115 YALE L.J. 186, 188-89 (2005) (describing the creation and functions of the FHA).
24. Federal Home Loan Mortgage Corporation Act, 12 U.S.C. § 1451 (2006);
25. Eric Dash, Fannie Mae's Offer to Help Ease Credit Squeeze is Rejected, as Critics Complain of Opportunism, N. Y. TIMES, Aug. 11, 2007, at Cl. For an overview of the role the FHA played historically in shaping the secondary mortgage market, see Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 2185, 2194-98 (2007).
26. Press Release, supra note 3. See generally EXPANDING OPPORTUNITIES, supra note 5 (detailing Bush agenda);
27. The Budget for Fiscal Year 2007, Department of Housing and Urban Development, at 146-47 (discussing American Dream Downpayment Initiative, Neighborhood Reinvestment Corporation, HOME Investment Partnerships program).
28. EXPANDING OPPORTUNITIES, supra note 5, at 15.
29. quot;America's Homeownership Challenge" called on the real estate and financial sectors to find innovative ways to help increase minority home ownership. Id. at 4.
30. Press Release, President George W. Bush, Executive Order: Establishing the President's Advisory Council on Financial Literacy (Jan. 22, 2008), http://www.whitehouse.gOv/news/releases/2008/01/20080122-1 .html.
31. See Roberta F. Mann, The (Not So) Little House on the Prairie: The Hidden Costs of the Home Mortgage Interest Deduction, 32 ARIZ. ST. L.J. 1347, 1358-66 (2000) (analyzing how the tax deduction for home mortgages favors wealthy home owners and discriminates against minorities).
32. Internal Revenue Serv. Frequently Asked Questions: 3.6 Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses), http://www.irs.gov/faqs/faq3-6.html. This limitation currently is capped at $1.1 million: home owners may deduct up to $1 million of home acquisition debt and up to $100,000 of home equity debt. Internal Revenue Serv. Publication 936 (2007), Limits on Home Mortgage Interest Deduction, http://www.irs.gOv/publications/p936/ar02.html#d0e1887.
33. Internal Revenue Serv. Tax Topics-Topic 503 Deductible Taxes, http://www.irs.gov/taxtopics/tc503.html.
34. See Internal Revenue Serv. Statistics of Income Division, Individual Income Tax Returns 2005, IRS Publication 1304, http://www.irs.gov/ pub/irs-soi/05in13ms.xls; Internal Revenue Serv. Statistics of Income Division, Individual Income Tax Returns with Deductions 2005, IRS Publication 1304, http://www.irs.gov/pub/irs-soi/05in03id.xls [hereinafter IRS Publication 1304]. Taxpayers also paid mortgage interest to private individuals and also paid points on the real estate loans. See CONSUMERS UNION, RICH HOUSE, POOR HOUSE: THE TWO FACES OF HOME EQUITY LENDING 3 (1997), http://www.consumersunion.org/finance/home-tx2.htm (noting that, in Texas, only 18.2% of Texas filers overall take tax deductions and that only 3.4% of the lowest income filers deduct interest compared to 29% of all taxpayers nationally and 6.5% of the lowest income taxpayers nationally).
35. IRS Publication 1304, supra note 28. The lost tax revenue for employer-provided pension plans represents the largest tax benefit available for individuals. THOMAS L. HUNGERFORD, CONG. RESEARCH SERV., TAX EXPENDITURES: TRENDS AND CRITIQUES (2006). By way of contrast, 84,841,222 taxpayers (sixty-four percent) took the standard deduction, but the total value of that deduction was only $564,186,053. Thus, the housing interest deduction ($383,733,110) is proportionately more valuable to the thirty-six percent of taxpayers who take this deduction than the standard deduction is for the remaining taxpayers, since the value of the standard deduction that the majority of taxpayers take should, proportionately, be $599,582,984.
36. IRS Publication 1304, supra note 28.
37. Ibid
38. STAFF OF THE JOINT COMMITTEE ON TAXATION, 1 10TH CONG., ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 2007-2011, 27-28 (Joint Comm. Print 2007). The Committee estimates that, in 2007, the mortgage interest deduction will cost the federal budget $73.7 billion, property tax deductions will cost $ 16.8 billion, and the exclusion of capital gains on the sales of homes will cost $28.5 billion. Id at Al; Eduardo Porter & Vikas Bajaj, Rising Trouble with Mortgages Clouds Dream of Owning Home, N. Y. TIMES, Mar. 12, 2007, A1; see also Kenya Covington & Rodney Harrell, From Renting to Homeownership: Using Tax Incentives to Encourage Homeownership Among Renters, 44 HARV. J. ON LEGIS. 97, 105, tbl. 1 (2007).
39. A. Mechele Dickerson, Race Matters in Bankruptcy, WASH. & LEE L. REV. 1725,1736 (2004).
40. See Iglesias, supra note 1, at 540 (discussing "dark side" of focus on the home, including segregation, homelessness, and the Not in My Back Yard (NIMBY) syndrome).
41. Creola Johnson, Welfare Reform and Asset Accumulation: First We Need a Bed and a Car, 2000 Wise. L. REV. 1221, 1223-38 (2000);
42. Susan A. Williams, Individual Development Accounts in North Carolina, 11 N.C. BANKING INST. 343 (2007).
43. Kevin D'Albert & Nicholas Rossetti, 2006 Global Structured Finance Outlook: Economic and Sector-by-Sector Analysis, Fitch Ratings, FlTCH RATINGS, Jan. 17, 2006; Karen Sibayan, Home Sales Remain Robust All Around, ASSET SECURITIZATION REP., Oct. 17, 2005.
44. ALLEN J. FISHBEIN & PATRICK WOODALL, CONSUMER FED'N OF AM., EXOTIC OR TOXIC? AN EXAMINATION OF THE NON-TRADTDIONAL MORTGAGE MARKET FOR CONSUMERS AND LENDERS 28 (2006), available at http://www.consumerfed.org/pdfs/exotic-toxic-mortgage- report0506.pdf.
45. See Hang Nguyen, Will Their Kids Ever Be Able to Buy a House?, CHI. TRIB., Jan. 8, 2005, at 12 (describing how homeowners in Orange County, California benefit from the rise in home prices, but are concerned because their children can't afford homes in the same area).
46. The Mortgage Bankers Association defines "nontraditional mortgage products" as "financing options which have been developed to increase flexibility and affordability and otherwise meet the needs of homebuyers who have been purchasing homes in an environment where real estate prices have increased faster than borrowers' incomes." Preserving the American Dream, supra note 3, at 7 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association).
47. In general, prime loans are offered to borrowers who have strong credit histories. Borrowers with weak or limited credit histories or who have high debt ratios generally are forced into the higher cost, subprime market because they are viewed as posing a higher risk of default. Subprime and Predatory Lending, supra note 11, at 71 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation); id., at 123 (statement of JoAnn M. Johnson on behalf of the National Credit Union Administration). Borrowers who had uneven cash flow, worked on commission, were self-employed, anticipated a significant income increase, received significant lump sum payments or bonuses, or moved frequently historically would have a hard time obtaining mortgage loans but could be approved for a nontraditional loan product. FISHBEIN & WOODALL, supra note 37, at 5. For example, a third year law student who had no income, but who had a job offer from a large private law firm, would be an ideal candidate for an alternative mortgage product. See INTEREST-ONLY MORTGAGE, infra note 45.
48. Improving Credit Card Consumer Protection: Recent Industry and Regulatory Initiatives: Hearing before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Services., 110th Cong. 88 (2007) (statement ofSheila C.Bair on behalf of the Federal Deposit Insurance Corporation) (discussing use of cash-out refinancing proceeds to pay off credit card debt);
49. CHRISTIAN E. WELLER, CTR. FOR AM. PROGRESS, DROWNING IN DEBT: AMERICA' S MIDDLE CLASS FALLS DEEPER IN DEBT AS INCOME GROWTH SLOWS AND COSTS CLIMB 3 (2006).
50. See Federal Housing Administration, Common Questions About an FHA Loan, http://portal.hud.gov/portal/page?-pageid=33,717077&-dad=portal&- schema=PORTAL (comparing FHA and conventional loans).
51. Mortgage originators calculate the interest rate for an ARM by referring to a published index rate then adding a few percentage points ("the margin") to that rate. The adjusted rate, generally referred to as the "fully-indexed" rate, for an ARM is the margin plus the index rate. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, CONSUMER HANDBOOK ON ADJUSTABLE-RATE MORTGAGES 8-9 (2006) [hereinafter BOARD OF GOVERNORS].
52. The flip side of a balloon payment is a product marketed as an extended maturity mortgage loan that has terms for longer than thirty years.
53. After the initial period, monthly payments "reset" and borrowers are required to pay down (amortize) the mortgage at a faster rate. BD. OF GOVERNORS OF THE FED. RESERVE SYS., INTEREST-ONLY MORTGAGE PAYMENTS AND PAYMENT-O PTION ARMS-ARE THEY FOR YOU? 2 (2006) [hereinafter INTEREST-ONLY MORTGAGE]. IO loans comprised almost one-third of total mortgage originations in 2004 and 2005 and were especially prevalent in high real estate markets.
54. Typically, borrowers could miss up to two payments annually (or a total of ten over the loan term). Payment option loan amounts can include: a fully amortizing payment similar to a conventional fifteen or thirty year fixed loan; interest plus some principal; interest-only; or, an amount that is less than IO payment. Id. at 3. Option ARMs have been compared to an exploding neutron bomb: when they come due, they kill all the people, but leave the houses standing. See Mara Der Hovanesian, Nightmare Mortgages: They Promise the American Dream: A Home of Your Own-with Ultra-Low Rates and Payments Anyone Can Afford, BUSINESSWEEK, Sept. 11, 2006. The mortgage crisis has caused at least one major lender to stop offering these mortgages. Wachovia Quits Offering Risky Loan Option, CNN.COM, June 30, 2008, http://money.cnn.com/2008/06/30/real-estate/wachovia-mortgages.ap/index. htm.
55. A borrower who chooses a payment amount that is lower than the fully-indexed accrual interest rate and that does not cover the accrued interest will have a loan that negatively amortizes because the required payment does not cover interest and, as a result, causes the principal balance of the loan to increase. INTEREST-ONLY MORTGAGE, supra note 45, at 3. Option ARMs generally require borrowers to make a specified minimum payment if the loan negatively amortizes beyond a pre-determined limit. Id. at 4; Preserving the American Dream, supra note 3, at 8 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association).
56. Until recently, hybrid ARMs dominated the ARM market. FISHBEIN & WOODALL, supra note 37, at 10; John C. Dugan, Comptroller of the Currency, Nat'l Foundation for Credit Counseling (Washington, D.C.), Apr. 24, 2007, at 2, available at http://www.occ.treas.gov/ftp/release/2007- 44a.pdf.
57. FISHBEIN & WOODALL, supra note 37, at 10.
58. While all ARMs adjust upward, not all of them adjust downward. See BOARD OF GOVERNORS, supra note 43.
59. Id. at 6.
60. The lending industry also refers to a payment shock as "reset sensitivity." See CHRISTOPHER L. CAGAN, FIRST AM. REAL ESTATE SOLUTIONS, MORTGAGE PAYMENT RESET: THE RUMOR AND THE REALITY 20 (2006), available at http://www.loanperformance.com/infocenter/whitepaper/FARES-rests-whitpaper- 021406.pdf.
61. See Subprime and Predatory Lending, supra note 11, at 70 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation);
62. Les Christie, Subprime Bailouts: How They Work, CNNMONEY.COM, Apr. 24, 2007, http://money.cnn.com/2007/04/24/ real-estate/bailout-plans-how-they-work/index.htm.
63. Preserving the American Dream, supra note 3, at 7 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association); see also Structured Finance Option ARM Risks and Criteria, FITCH RATINGS, Oct. 4, 2006, at 1-2 (noting suitability of option ARMs for borrowers who have solid credit histories and low LTV ratios). A relatively new product, called Mortgage Plus, was recently introduced but only offered to prime borrowers with solid credit scores. This product lets the borrower convert their mortgage from an ARM to a fixed rate yet avoid the costs associated with a traditional refinancing. With an interest rate higher than comparable fixed rate mortgages, the product does not have a negative amortization option, is marketed only to people who can repay the loan at its fully indexed level, and lets homeowners tap into their equity only if the LTV ratio is less than ninety percent. See Les Christie, Mortgages That Put You in Charge, CNNMONEY.COM, Apr., 26, 2007, http://money.cnn.com/2007/04/26/ real-estate/flexible-mortgages/index.htm.
64. INTEREST-ONLY MORTGAGE, supra note 45, at 7; see also FISHBEIN & WOODALL, supra note 37, at 4.
65. The Mortgage Lending Market: An Insiders' Guide to Legislation and Litigation, BANKING L. J., Nov.-Dec., 2007, at 867, 872.
66. D'Albert & Rossetti, supra note 36; Gretchen Morgenson, Home Loans: A Nightmare Grows Darker, N.Y. TIMES, Apr. 8, 2007, at Cl; Holden Lewis, 50-Year Mortgage Debuts in California, BANKRATE.COM, Apr. 27, 2008, http://www.bankrate.com/brm/news/ mortgages/20060427a2.asp. These loans produce a product that looks substantially similar to a long-term monthly rental payment. As noted earlier, the flip side of these extended maturity mortgage loans is the "balloon payment."
67. Waiving this requirement might be justified for high income workers (who might prefer not to disclose their income, but can afford the monthly payments) and self-employed or seasonal workers (who might have high income, but are unable to verify that income).
68. Frenzy of Risky Mortgages Leaves Path of Destruction, REUTERS, May 8, 2007; see also Preserving the American Dream, supra note 3 (statement of Jean Constantine-Davis on behalf of the AARP Foundation) (describing perils to consumers of "stated income" loans). Variations of stated income loans are no income, no asset (NINA) loans. With these loans, the borrower is not required to disclose income or assets. See No Doc Home Loans, http://www.bestnodocloans.com/content/nina-loan.htm; http://www.loanshoppers.net/no-doc.htm. These loans would be approved based on the borrower's employment, credit history, the property value, and the down payment (if any). Another variation, a NINANE (no income, no asset, no employment) loan, did not require the borrower to disclose income, assets, or employment. See Wisconsinmortgageservices.com, http://www.wisconsinmortgageservices.com/nina-loan-748.htm; Mortgage Professor's WebSite, What Are Mortgage Documentation Requirements, http://www.mtgprofessor. com/A%20-%20Qualifying/what-are-documentation-requirements .htm.
69. Because those scoring devices have never been used to verify income (and, indeed, do not consider income at all), lenders protected themselves from the increased risk of default by charging borrowers higher interest rates for these loans. See Kenneth R. Harney, The Lowdown on Low-Doc Loans, WASH. POST, NOV. 25, 2006, at F01 (describing how lo-doc and no-doc loans work). Of course, using credit scores to approve liar loans increases the risk that borrowers cannot afford to repay the loans and likely will default because those scores are not designed to predict whether a borrower will face a payment shock and be unable to make payments on a ARM mortgage loan after the interest rate resets, nor can they anticipate whether economic conditions will permit the borrower to refinance the ARM loan to a more affordable product.
70. William E. Nelson & Norman R. Williams, Suburbanization and Market Failure: An Analysis of Government Policies Promoting Suburban Growth and Ethnic Assimilation, 27 FORDHAM URB. L. J. 197, 226-31 (1999) (tracing the history of government intervention in the housing markets to expand home ownership by loosening financial requirements);
71. Williams, supra note 1, at 4.
72. FISHBEIN & WOODALL, supra note 37, at 12.
73. Since 2006, the United States has had a negative savings rate, that is, Americans save less than they spend on goods or services. See News Release: Personal Income and Outlays, Bureau of Economic Analysis, United States Department of Commerce, Personal Income and Outlays: Sept. 2007 (Nov. 1, 2007), available at http://www.bea.gov/newsreleases/national/pi/2006/pi1106. htm; News Release, Bureau of Economic Analysis, United States Department of Commerce, Personal Income and Outlays: Nov. 2006 (Dec. 22, 2006), available at http://www.bea.gov/newsreleases/national/pi/2007/pi0907.htm. The negative U.S. savings rate has made the United States increasingly dependent on non-U.S. funds. Indeed, just as the United States routinely imports goods (because we are no longer a manufacturing economy) the United States also is forced to import savings from other countries just to finance domestic business investments. Martin Feldstein, The Return of Saving, 85 FOREIGN AFF. 89 (2006).
74. See Calculated Risk: Assessing Non-Traditional Mortgage Products: Hearing Before the Subcomm. on Housing and Transportation and the Subcomm. on Economic Policy of the S. Comm. on Banking, Housing, and Urban Affairs, 109th Cong. (2006), available at http://banking.senate.gov/public/mdex. cfm?Fuseaction=Hearings.Detail&HearingID=f70279b0-1372-4075-a740- 9alaeb7bdc3e [hereinafter Calculated Risk] (statement ofWilliam A. Simpson on behalf of the Mortgage Insurance Companies of America);
75. FISHBEIN & WOODALL, supra note 37, at 12.
76. John Leland, Facing Default, Some Walk Out on New Homes, N.Y. TIMES, Feb. 29, 2008, at Al.
77. Borrowers often put no money down, though some borrowed eighty percent with a traditional mortgage, ten percent as a second loan, and put ten percent down, which is why these loans often are called 80-10-10 loans. Robert A. Avery, Kenneth P. Brevoort & Glenn B. Canner, Higher-Priced Home Lending and the 2005 HMDA Data, 92 FED. RES. BULL. A123, at Al 35 (2006);
78. FISHBEIN & WOODALL, supra note 37, at 3.
79. See Subprime and Predatory Lending, supra note 11, at 78-79 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation);
80. FISHBEIN & WOODALL, supra note 37, at 3.
81. The Role of the Secondary Market in Subprime Lending: Hearing before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Servs., 110th Cong. 105 (2007) [hereinafter The Role of the Secondary Market] (statement of Warren Kornfeld on behalf of Moody's Investors Service).
82. Consumer advocates argue that some lenders and mortgage brokers use these loans to avoid having to alter or otherwise fabricate income or asset information on the loan application. See Preserving the American Dream, supra note 3 (statement of Jean Constantine-Davis on behalf of the AARP Foundation).
83. Industry experts agree that loans with very low teaser rates increase the risk that the borrower will face a payment shock. See CAGAN, supra note 52, at 25.
84. For example, more than twenty percent of the ARMs made starting in 2004 that had low initial interest rates have negative equity. Id. at 22.
85. Even with this assumption, refinancing a loan to get a more affordable product could potentially harm the homeowner because a loan refinance reduces the borrower's equity in the home due to the transaction costs for a new loan. Loan refinancings are especially likely to strip equity if the borrower made no down payment when he bought the home. Borrowers who put no money down on their homes and then refinance to get a lower interest rate virtually ensure that they will have no equity in their homes even if they make monthly payments during the first few years of the loan. See Calculated Risk, supra note 64, at 11-12 (testimony of Michael D. Calhoun, President of Center for Responsible Lending).
86. Kelly Gullo, Nearly One in Five Recent Homebuyers Purchased a Home That Exceeded Their Price Range, WALL ST. J. ONLINE, Sept. 16, 2005, www. hamsinteractìve.com/news/ newsletters/WSJfinance/HI-WSJ-PersFinPoll-2005-voll-iss03.pdf
87. Jennifer Cummings, More U.S. Adults Than Last Year Say They Utilize Creative or Payment Option Mortgages to Finance the Purchase of Their Homes, WALL ST. J. ONLINE, Oct. 12,2006, http://www.harrisinteractíve.com/news/newsletters/WSJfinance/ TII-WSJ-PersFinPoll- 2006-vo12-iss08.pdf.
88. Potentially $650 billion in U.S. mortgages-or eight percent of total outstanding mortgage loans-are due to reset between 2006 and 2008. John W. Schoen, The Mortgage Mess: Fraud, Abusive Lending Crushes Dreams For Millions of Home Owners, MSNBC.COM, Apr. 10, 2007, http://www.msnbc.msn.com/id/17929461/. Approximately two million ARMs will reset to a higher rate in 2007 and 2008. Major Lenders Move to Offer Subprime Help: Freddie Mac, Washington Mutual Will Help Refinance Billions in Mortgages, MSNBC.COM, Apr. 18, 2007, http://www.msnbc.msn.com/id/l 8184371/. While these resets contributed to the increased foreclosure rates, a leading bond rating agency concluded that mortgages that were originated in 2006 are performing even worse than loans originated between 2002 and 2005, and that more borrowers are delinquent on 2006 loans than earlier loans. The Role of the Secondary Market, supra note 68, at 109 (statement of Warren Kornfeld on behalf of Moody's Investors Service); see also Edmund L. Andrews, Accord Seen on Revising Loan Rules, N.Y. TIMES, Sept. 21, 2007, at C1 (stating that the percentage of subprime loans which are seriously delinquent in 2007 is triple that of 2005).
89. See Subprime and Predatory Lending, supra note 11, at 75 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation); Id. at 348 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America).
90. Costs associated with predatory mortgage lending of subprime loans include prepayment penalties, which are imposed when a borrower makes a whole or partial payment on the loan earlier than scheduled. In addition, subprime borrowers often pay a yield spread premium, which simply rewards the broker for placing the borrowers in higher cost and interest loans. Id. (statement of Allen J. Fishbein on behalf of the Consumer Federation of America).
91. D'Albert & Rossetti, supra note 36, at 12. From 2003 to 2005, nontradίtional mortgage product originations increased from less than ten percent of residential mortgages to over thirty percent of all mortgages. U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-06-1112T, ALTERNATIVE MORTGAGE PRODUCTS: IMPACT ON DEFAULTS REMAINS UNCLEAR, BUT DISCLOSURE OF RISKS TO BORROWERS COULD BE IMPROVED 6 (2006); see also Subprime and Predatory Lending, supra note 11, at 348 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America); Calculated Risk, supra note 64 (statement of William A. Simpson on behalf of the Mortgage Insurance Companies of America);
92. JOINT CTR. FOR HOUSING STUDIES OF HARVARD UNN V., THE STATE OF THE NAή ON'S HOUSING: 2007, at 16 (2007), available at http://www.jchs.harvard.edu/publications/markets/son2007/son2007.pdf.
93. See Subprime and Predatory Lending, supra note 11, at 69 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation). Other reports indicate that the number of subprime loans increased more than 6.5 times between 2001 and 2006. Preserving the American Dream, supra note 3, at 5 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association). Subprime originations in 1994 totaled $35 billion but increased to $665 billion in 2005. Possible Responses to Rising Mortgage Foreclosures: Hearing before the H. Comm. on Financial Servs., 110th Cong. 161 (2007) [hereinafter Possible Responses] (statement of George P. Miller on behalf of the American Securitization Forum and the Securities Industry and Financial Markets Association).
94. Preserving the American Dream, supra note 3, at 5 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association); Calculated Risk, supra note 64, at 2 (statement of Michael D. Calhoun on behalf of the Center for Responsible Lending);
95. Editorial, Mortgage Insecurities, N.Y. TTMES, Feb. 22, 2007, at A22; Jonathan R. Laing, Coming Home to Roost, BARRON'S, Feb. 13, 2006, at 26.
96. JOINT CTR. FOR HOUSING STUDIES OF HARVARD UNIV., supra note 78, at 16-17.
97. Subprime and Predatory Lending, supra note 11, at 351 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America);
98. Avery et al., supra note 66, at A137.
99. Subprime and Predatory Lending, supra note 11, at 350 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America).
100. See JOINT CTR. FOR HOUSING STUDIES OF HARVARD UNIV., supra note 78, at 16-17; FISHBEIN & WOODALL, supra note 37, at 15.
101. Preserving the American Dream, supra note 3, at 2 (statement of Martin Eakes on behalf of the Center for Responsible Lending and Center for Community Self-Help); see also Foreclosure, Predatory Mortgage and Payday Lending in America's Cities: Hearing before the H. Comm. on Oversight and Government Reform 110th Cong. 53-54 (2007) [hereinafter Foreclosure, Predatory and Payday Lending] (statement of Josh Nassar on behalf of the Center for Responsible Lending);
102. Vikas Bajaj & Christine Haughney, Tremors at the Door-More People with Weak Credit Are Defaulting on Mortgages, N. Y. TIMES, Jan. 26, 2007, at C1.
103. The cash flows from the loans are then layered into "tranches," that is, investor classes, and parties purchase specified interests in the loan payments (i.e., right to principal or interest repayment in a particular year of the loan). Subprime Mortgage Market Turmoil: Examining the Role of Securitization: Hearing before the Subcomm. on Securities, Insurance, and Investment of the S. Comm. on Banking, Housing, and Urban Affairs, 110th Cong. (2007), available at http://banking.senate.gov/public/index.cfm? Fuseaction=Hearmgs.Detail&HearingID=a14998f7-0b7d-4deb-8e2b-cel 1 fa95d79f [hereinafter Subprime Mortgage Market Turmoil] (statement of Gyan Sinha on behalf of Bear, Steams & Co. Inc.); Possible Responses, supra note 79, at 158 (statement of George P. Miller on behalf of the American Securitization Forum and the Securities Industry and Financial Markets Association).
104. Avery et al., supra note 66, at A139-41.
105. Historically, GSEs have been limited in the amount of mortgages they can purchase. Fannie Mae, The Industry, http://www.fanniemae.com/index.jhtrnl (follow "About Fannie Mae" hyperlink; then follow "The Industry" hyperlink). See generally Irwin M. Stelzer, Why They Call It the Dismal Science: Everything You Need To Know About the Mortgage Crisis in Three Economics Buzzwords, WKLY. STANDARD, NOV. 26, 2007, at 26 (discussing externalities associated with refusing to permit GSEs to expand their lending activities).
106. Ginnie Mae, About Ginnie Mae, http://www.ginniemae.gov/about/about.asp? Section=About.
107. See Subprime Mortgage Market Turmoil, supra note 86 (statement of David Sherr on behalf of Lehman Brothers, Inc.); Id. at 9 (testimony of Warren Kornfeld on behalf of Moody's Investors Service); Subprime and Predatory Lending, supra note 11, at 395 (statement of Harry H. Dinham on behalf of the National Association of Mortgage Brokers). Hedge funds tend to invest in more speculative tranches while pension funds tend to invest in less risky, higher-rated tranches. Ironically, while conservative investors were not willing to buy individual mortgage loans, they happily invested in MBSs because of the perception that these loans were high yield but low risk.
108. Avery et al., supra note 66, at Al 39.
109. Possible Responses, supra note 79, at 165 (statement of George P. Miller on behalf of the American Securitization Forum and the Securities Industry and Financial Markets Association).
110. Id. at 159-60.
111. See Subprime and Predatory Lending, supra note 11, at 80 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation);
112. Bajaj & Haughney, supra note 85; Justin Lahart, Ahead of the Tape, WALL ST. J., Feb. 20, 2007, at C1.
113. FISHBEIN & WOODALL, supra note 37, at 14; Lahart, supra note 94.
114. See Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039, 2048-50 (2007) (discussing "lemons" problem and how securitization lets lenders shin the risk of default onto the investor); see also Bajaj & Haughney, supra note 85; Vikas Bajaj & Ron Nixon, Minority Buyers Especially Hurt As Interest Rates Adjust Higher, N. Y. TIMES, Dec. 6, 2006, at C1; Lawmakers Debate Necessity of Lending Reforms, MSNBC.COM, May 8, 2007, http://www.msnbc.msn. com/id/18560483/.
115. John Leland, Housing Costs Consumed More of Paycheck in 2006, N. Y. TIMES, Sept. 12, 2007, at A14; U.S. Dept. of Housing and Urban Development, Affordable Housing, http://www.hud. gov/offices /cpd /affordablehousing/index.cfm.
116. John Leland, supra note 97; Porter & Bajaj, supra note 32.
117. Dan Levy, Foreclosures Doubled in September as Loan Rates Rise, BLOOMBERG.COM, Oct. 11, 2007, http://www.bloomberg.com/apps/ news?pid=newsazrchive&sid=aWHIgddHc.zk.
118. Calculated Risk, supra note 64, at 11 (statement of Allen J. Fishbein on behalf of Consumer Federation of America and National Consumer Law Center).
119. Telis Demos, Leading Indicators, FORTUNE, Sept. 17, 2007, at 30.
120. Straightening Out the Mortgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress?: Hearing before the Subcomm. on Commercial and Administrative Law of the H. Comm. on Judiciary, 110th Cong. 2 (2007), available at http://judiciary.house.gov/hearmgs/ hear-103007-2.html [hereinafter Straightening Out, Part II] (statement of Mark Zandi on behalf of Moody's Economy.com);
121. Damian Paletta, Study Warns of Decline in Value of Homes, WALL ST. J., Nov. 27, 2007; Levy, supra note 99.
122. Levy, supra note 99; see Nationwide Foreclosures Jumped 75% in 2007, CREDIT & COLLECTIONS WORLD, http://www. creditcollectionsworld.com/article.html?id=20080129S4FTCWQT.
123. Levy, supra note 99. Subprime loans have higher defaults than prime loans, and ARMs have higher default rates and are at a significantly greater risk of foreclosure than fixed rate mortgages. Loans with high LTV rates have greater defaults than those with low LTV.
124. Subprime and Predatory Lending, supra note 11, at 292 (statement of Michael D. Calhoun on behalf of the Center for Responsible Lending).
125. Bob Tedeschi, Ripples From the Subprime Storm, N. Y. TIMES, Mar. 25, 2007, § 11, at 13.
126. Subprime and Predatory Lending, supra note 11, at 85 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation); Calculated Risk, supra note 64, at 348-49 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America); THE FEDERAL RESERVE BOARD, CONSUMER HANDBOOK ON ADJUSTABLE-RATE MORTGAGES 24 (2006) (discussing prepayment penalties);
127. Levy, supra note 99. Some reports suggest that housing prices have not dropped this steeply since the Great Depression. Bob Ivry & Brian Louis, U.S. Home Construction Bust May Last Until 2011, BLOOMBERG.COM, May 29, 2007, http://www.bloomberg.com/apps/ news?pid=20601087&sid=aKQoeHblMraI&refer=home.Not even the wealthiest communities in the country have avoided the wave of foreclosures. Christine Haughney, Pain of Foreclosures Spreads to the Affluent, N.Y. TIMES, Apr. 25, 2008, at Cl; see JOHN RAO, NAT'L CONSUMER LAW CTR., HENRY J. SOMMER, NAT'L ASSOC, OF CONSUMER BANKR. ATTORNEYS, TRAVIS PLUNKETT, CONSUMER FED'N OF AM., ELLEN HARNICK & ERIC STEIN, CTR. FOR RESPONSIBLE LENDING, JOINT MEMORANDUM FOR PROPOSED BANKRUPTCY LAW REFORM: SOLUή ONS TO PRESERVE HOMEOWNERSHIP (2007), available at http://www.consumerfed.org/ pdfs/Bankruptcy-Law-Reform-Memo041207.pdf [hereinafter JOINT MEMORANDUM].
128. The Role of the Secondary Market, supra note 68, at 106 (statement of Warren Kornfeld on behalf of Moody's Investors Service) (discussing "flippers" who rely on rising home prices to trade out of a new home or repay an otherwise unaffordable mortgage).
129. Karen E. Dynan & Donald L. Kohn, The Rise in U.S. Indebtedness: Causes and Consequences 18 (Fed. Reserve Bd., Working Paper No. 37, 2007).
130. Subprime and Predatory Lending, supra note 11, at 300 (reporting data that revealed that only eleven percent of subprime loans went to first-time buyers).
131. CENTER FOR RESPONSIBLE LENDING, SUBPRIME LENDING: A NET DRAIN ON HOMEOWNERSHIP 2 (2007).
132. Id.
133. FISHBEIN & WOODALL, supra note 37, at 20; Editorial, Losing Homes and Neighborhoods, N.Y. TIMES, Apr. 10, 2007, at A20.
134. For a description of margin trading, see Investing with Borrowed Funds: No "Margin" for Error, Financial Industry Regulatory Authority, http://www.finra.org/InvestorInforrnation/InvestorAlerts/MarginandBorrowing/ Investingwith BorrowedFundsNoMarginforError/index.htm.
135. Cf. David Bauerlein, Florida Senator Sponsors Bill to Let Homeowners Tap 401 (k)s to Pay Mortgages, FLA. TIMES- UNION, NOV. 24, 2007.
136. See Cara Baruzzi, Time Bomb, NEW HAVEN REG., Dec. 10, 2006 (describing how higher mortgage payments will force homeowners to reduce consumer spending).
137. Stelzer, supra note 88.
138. Possible Responses, supra note 79, at 158 (statement of George P. Miller on behalf of the American Securitization Forum and the Securities Industry and Financial Markets Association);
139. Jeannine Aversa, Fed Worries About Upcoming Credit Market, ST. LOUIS POST-DISPATCH, Jan. 2, 2008, at C2; Vikas Bajaj, Top Lender Sees Mortgage Woes for 'Good' Risks, N.Y. TIMES, July 25, 2007, at Al.
140. See Jeff Benjamin, More Problems Ahead from the Credit Crisis; Subprime Woes May Spread to Bonds Backed by Higher-Quality Mortgages, INVESTMENT NEWS, NOV. 5, 2007, at 2; Julie Creswell & Vikas Bajaj, $3.2 Billion Move by Bear Stearns to Rescue Fund, N.Y. TIMES, June 23, 2007, at Al; Editorial, Pensions and the Mortgage Mess, N.Y. TIMES, Aug. 7,2007, at A18 (quoting Federal Reserve Chairman Bemanke's concern about risks that mortgage-related securities pose to pension funds).
141. Paul Krugman, It's a Miserable Life, N.Y. TIMES, Aug. 20, 2007, at A19; Julia Werdigier, Nervous Customers Withdraw Billions from Troubled Lender, N.Y. TIMES, Sept. 18, 2007, at C3.
142. Jenny Anderson & Vikas Bajaj, Wary of Risk, Bankers Sold Shaky Mortgage Debt, N.Y. TIMES, Dec. 6, 2007, at Al; Stelzer, supra note 88, at 4 (discussing demise of Merrill Lynch's Stanley O'Neal and Citigroup's Charles Prince).
143. Binyamin Appelbaum, Mortgage Giants' Rescue Imperils Some Banks, WASH. POST, Sept. 9,2008, at Al.
144. See Peter S. Goodman, Worried Banks Sharply Reduce Business Loans, N.Y. TIMES, July 28, 2008, at Al.
145. Les Christie, The Ugly Face of Foreclosure, CNNMONEY. COM, May 7, 2007, http://money.cnn.com/2007/05/02/real-estate/face-of- foreclosure/index.htm; Losing Homes and Neighborhoods, supra note 113.
146. Calculated Risk, supra note 64, at 10 (statement of William A. Simpson on behalf of the Mortgage Insurance Companies of America);
147. Stelzer, supra note 88 (discussing externalities caused by mortgage crisis and the presence of homes with uncut grass);
148. Ian Urbina, Foreclosures Prompt Cities to Make Plea for U.S. Aid, N.Y. TIMES, Jan. 24, 2008, at A15.
149. See Press Release, U.S. Office of the Comptroller of the Currency, Comptroller Dugan Expresses Concern over Subprime Mortgage Foreclosures; Receives "Making-the-Difference" Award from Credit Counseling Foundation (Apr. 24, 2007), http://www.occ.treas.gov/ftp/release/2007-44.htm.
150. See Stelzer, supra note 88 (discussing how homes are stripped of sinks and aluminum siding during the eviction process);
151. Jon Birger, Will Foreclosures Spark an Arson Boom?, CNNMONEY.COM, Jan. 10, 2008, http://money.cnn.conV2008/01/09/ news/economy/birger-arson.fortune/index.htm?postvers.See generally Dan Immergluck & Geoff Smith, The Impact of Single-Family Mortgage Foreclosures on Neighborhood Crime, 21 HOUSING STUD. 851 (2006).
152. See Urbina, supra note 125 (discussing costs to board up properties, cut grass, demolish abandoned structures, collect trash, and protect from vandals). Cities also may find it more difficult to borrow cheaply because of the decreased value of the collateral for loans (i.e., the assessed value of their property base). Monica Davey, Housing Downturn Takes Big Toll on Cities' Revenue, N.Y. TIMES, Oct. 18, 2007, at A20.
153. For example, Chicago's Mayer Daley recently requested a fifteen percent increase in property taxes and another city official called for increases in sales, gasoline, and parking taxes to compensate for the lost revenue caused by flattening property assessments and rising mortgage foreclosures. Davey, supra note 128.
154. Jennifer Steinhauer, Taxes Reassessed in Housing Slump as Prices Decline, N.Y. TIMES, Dec. 23, 2007, at Al (discussing homeowners' requests for a downward tax assessment in declining housing markets).
155. Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, N.Y. TIMES, Sept. 2, 2007, §3, at 1.
156. William Yardley, Foreclosure Aid Rising Locally, As Is Dissent, N.Y. TIMES, Feb. 26, 2008, at Al.
157. Mortgage Lending Discrimination: Field Hearing Before the Comm. on Financial Services, 110th Cong. 52 (2007) (statement of Lynn E. Browne on behalf of the Federal Reserve Bank of Boston);
158. John Leland, As Owners Feel Mortgage Pain, So Do Renters, N.Y. TIMES, Nov. 18, 2007, at 11.
159. Preserving the American Dream, supra note 3, at 14-15 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association) (citing unemployment, illness/death, and marital difficulties as factors that caused increased delinquency rates); Calculated Risk, supra note 64, at 5 (statement of Robert D. Broeksmit on behalf of Mortgage Bankers Association) (stating that unemployment was historically the chief cause of borrower delinquency);
160. Editorial, The American Dream in Reverse, N.Y. TIMES, Oct. 8, 2007, at Al 8.
161. GretaR. Krippner, The Financialization of'the American Economy, 3 SOCIO-ECON.REV. 173 (2005).
162. See The American Dream in Reverse, supra note 134; Patrice Hill, Blame Abounds for Housing Bust, WASH. TIMES, Dec. 26, 2007, at Al.
163. Jessica Holzer, Major Bailout Is Unlikely on Sub-Prime Mortgages, THE HILL (Wash. D.C.), Sept. 4, 2007, at 13 (reporting quote of President Bush, "It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford");
164. Kathleen Pender, Why We Shouldn 7 Be Bailing Out Subprime Lenders or Borrowers, S.F. CHRON., Apr. 22, 2007, at D1 (arguing against government bailouts of borrowers and lenders).
165. Gretchen Morgenson, Crisis Looms in Mortgages, N.Y. TIMES, Mar. 11, 2007, § 1, at 11. (reporting that liar loans were forty percent of the subprime mortgage issuance in 2006). Members of the mortgage industry suggest that some borrowers took out a mortgage to buy a home with the intent only of living in the home rent-free until they are evicted. See Justin Lahart, After Subprime: Lax Lending Lurks Elsewhere, WALL ST. J., Feb. 20, 2007, at Cl. Of course, the increased practice of approving low documentation subprime loans increases the likelihood of buyer misrepresentation.
166. Julie Creswell, Fake Pay Stubs Online, and Other Mortgage Fraud, N. Y. TIMES, June 16, 2007, at Al; see The Role of the Secondary Market, supra note 68, at 131 (statement of Larry B. Litton, Jr., on behalf of Litton Loan Servicing LP) (stating that defaults were the result of lax underwriting standards, improper documentation, or borrower fraud); see also Merle Sharick, Jennifer Butts, Michelle Donahue, Nick Larson & D. James Croft, MORTGAGE ASSET RESEARCH INSTITUTE, LLC, NINTH PERIODIC MORTGAGE FRAUD CASE REPORT TO MORTGAGE BANKERS ASSOCIATION 11 (2007).
167. See Press Release, Nat'l Ass'n of Realtors, NAR Survey Shows Americans Believe Buying a Home Still a Good Financial Decision (Nov. 14, 2007), available at Error! Hyperlink reference not valid.(reporting that despite recent turbulence in the housing markets and concerns over having enough money for a down payment, nearly nine out of ten respondents believe buying a home is a good financial decision).
168. Ironically, these homeowners often viewed their "home" as a debt and many are electing to abandon their houses and cede them to lenders in foreclosure. Leland, supra note 65.
169. Subprime and Predatory Lending, supra note 11, at 396-97 (statement of Harry H. Dinham on behalf of the National Association of Mortgage Brokers) (speculating on the cause of the increase);
170. Vikas Bajaj & Julie Creswell, Home Lenders Hit by Higher Default Rates, N.Y. TIMES, Feb. 22, 2007, at Cl; FISHBEIN WOODALL, supra note 37, at 2, 6, 11. Consumers, in general, suffer from an overconfidence bias that leads them to believe that they will not overuse credit and that, if they do, they will somehow find money to repay their debts. Oren Bar-Gill, Bundling and Consumer Misperception, 73 U. CHI. L. REV. 33, 45 (2006);
171. Oren Bar-Gill, Seduction by Plastic, 98 Nw. U. L. REV. 1373, 1395-1401 (2004).
172. See Subprime and Predatory Lending, supra note 11, at 76 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation); id. at 351 (statement of Allen Fishbein on behalf of the Consumer Federation of America);
173. BRIAN BUCKS & KAREN PENCE, DO HOMEOWNERS KNOW THEIR HOUSE VALUES AND MORTGAGE TERMS (2006), available at http://www.federalreserve.gov/Pubs/feds/2006/200603/ 200603pap.pdf; FANNIE MAE, THE GROWING DEMAND FOR HOUSING: 2002 FANNIE MAE NATIONAL HOUSING SURVEY (2002), available at http://www.fanniemae.com/global/pdf/media/survey/survey2002.pdf.
174. BUCKS & PENCE, supra note 143, at 22.
175. See Stephen Gandel, Amanda Gengler & Paul Keegan, For Sale: Scenes from a Bubble, MONEY, May 2007, at 114; Schoen, supra note 75.
176. The Role of the Secondary Market, supra note 68, at 133 (statement of Larry B. Litton, Jr. on behalf of Litton Loan Servicing LP) (recommending that subprime borrowers establish an escrow account to pay taxes and insurance); Foreclosure, Predatory and Payday Lending, supra note 85, at 40 (statement of Josh Nassar on behalf of the Center for Responsible Lending) (discussing failure of subprime lenders to escrow for taxes and insurance).
177. Subprime and Predatory Lending, supra note 11, at 351 (statement of Allen Fishbein on behalf of the Consumer Federation of America); see also id. at 68 (statement of Sheila C. Bair on behalf of the Federal Deposit Insurance Corporation);
178. BUCKS & PENCE, supra note 143, at 15-25.
179. REN S. ESSENE & WILLIAM APGAR, JOINT CTR. FOR HOUS. STUDIES OF HARVARD UNIV., UNDERSTANDING MORTGAGE MARKET BEHAVIOR: CREATING GOOD MORTGAGE OPTIONS FOR AIX AMERICANS 11 (2007). See generally Elizabeth Renuart & Diane E. Thompson, The Truth, The Whole Truth, and Nothing but the Truth: Fulfilling the Promise of Truth in Lending, 25 YALE J. ON REG. 181, 215-16 (discussing problems consumers have when weighing multiple credit options).
180. BUCKS & PENCE, supra note 143, at 20-21.
181. CONSUMERS UNION SWRO, CONSUMERS UNION, HOME EQUITY REFORM FOR TEXAS 2 (2002) (discussing couple who paid unexpected origination fee because they needed the loan proceeds to pay other creditors); see also Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 TEX. L. REV. 1255, 1283 (2002) (describing how predatory lenders market their services to low- and moderate-income borrowers).
182. ESSENE & APGAR, supra note 148, at 11-12, 18, 20; see also Patricia A. McCoy, A Behavioral Analysis of Predatory Lending, 38 AKRON L. REV. 725, 729-33 (2005) (explaining how predatory lenders emphasize borrower's immediate financial crisis and downplay the future threat of foreclosure);
183. Schwartz, supra note 131 (discussing homeowner who focused only on the monthly payment, not the interest rate);
184. BUCKS & PENCE, supra note 143, at 2 (noting that borrowers underestimate the amount by which their interest rates can increase).
185. Bar-Gill, Seduction by Plastic, supra note 142, at 1401-07; Max H. Bazerman, Consumer Research for Consumers, J. CONSUMER RES. 499, 502 (2001);
186. Lauren E. Willis, Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price, 65 MD. L. REV. 707, 809 (2006) (discussing lender marketing practices designed to target vulnerable borrowers who are more likely to accept expensive loans).
187. Kenneth R. Harney, Refinancing Homeowners Cut Back on Cashing Out, WASH. POST, Nov. 8, 2003, at F1.
188. Countrywide Financial sent "complimentary loan reviews" to its customers one year after they obtained their mortgages to encourage these borrowers to remove equity from their homes. Gretchen Morgenson, Illinois Suit Set Against Countrywide, N. Y. TIMES, June 25, 2008, at C1.
189. Subprime and Predatory Lending, supra note 11, at 187-88 (statement of Emory W. Rushton on behalf of the Office of the Comptroller of the Currency);
190. FANNIE MAE, supra note 143, at 2.
191. FANNIE MAE, supra note 143, at 2; Alan Greenspan & James Kennedy, Sources and Uses of Equity Extracted from Homes 8-11 (Fed. Reserve Bd., Working Paper No. 2007-20, 2007).
192. CAGAN, supra note 52, at 3 (suggesting that homeowners reasonably extracted equity from their homes to pay for college tuition, purchase consumer durables, or pay higher interest non-tax deductible obligations, like credit card debt); cf. Greenspan & Kennedy, supra note 156, at 5 (discussing use of home equity to maintain wealth by investing in other types of assets).
193. Greenspan & Kennedy, supra note 156, at 3-5.
194. Costs include origination fee, discount points, title insurance, survey fee, attorneys' fees, and taxes (mortgage, recording, and transfer). Id. at 30-31. Costs for refinance loans and home equity loans (HEL) are estimated to be lower, at approximately 1.25% of the total loan amount for refinance loans and less than 0.5% for HELs. Id. at 32.
195. Feldstein, supra note 63, at 88-89. See generally Martha M. Hamilton, Could the Market Fall Down and Go Boom?, WASH. POST, Feb. 4, 2007, at F3.
196. See KAREN E. DYNAN & DONALD L. KOHN, FED. RESERVE BD., THE RISE IN U.S. HOUSEHOLD INDEBTEDNESS: CAUSES AND CONSEQUENCES 6-7, 28-29 (2007) (discussing why consumers may not behave rationally when increasing their mortgage debt).
197. Preserving the American Dream, supra note 3, at 2 (statement of Martin Eakes on behalf of the Center for Responsible Lending and Center for Community Self-Help) ("Subprime lenders have virtually guaranteed rampant foreclosures by approving risky loans for families while knowing that these families will not be able to pay the loans back.");
198. Gandel et al., supra note 145.
199. See Preserving the American Dream, supra note 3 (statement of Jean Constatine-Davís on behalf of the AARP Foundation) (describing loan officer and broker fraudulent practices); id. (statement of Delores King) (describing loan officer's conduct and misrepresentations); id. (statement of Amy Womble) (describing loan officer's conduct and misrepresentations); Frauds Compound Pain of Foreclosures, MSNBC.COM, Apr. 17, 2007, http://www.msnbc.msn.com/id/18158015/; Schoen, supra note 75.
200. Amir Efrati & Kara Scannell, Countrywide Draws Ire of Judges, WALL ST. J., Jan. 14, 2008, at A3; Mara Der Hovanesian & Brian Grow, Did Big Lenders Cross the Line?, Bus. WK., Aug. 20, 2007, at 33; Jonathan Karp & Miriam Jordan, House of Cards: How the Subprime Mess Hit Poor Immigrant Groups, WALL ST. J., Dec. 6, 2007, at Al; Morgenson, supra note 154.
201. Preserving the American Dream, supra note 3, at 7 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association); Calculated Risk, supra note 64, at 4-5 (statement of Allen J. Fishbein on behalf of the Consumer Federation of America and National Consumer Law Center);
202. FISHBEIN & WOODALL, supra note 37, at 4-5. See generally Subprime Mortgage Market Turmoil, supra note 86 (statement of Susan Barnes on behalf of Standard & Poor's Ratings Services).
203. Subprime and Predatory Lending, supra note 11, at 293-95 (statement of Michael D. Calhoun on behalf of the Center for Responsible Lending); Foreclosure, Predatory and Payday Lending, supra note 85, at 50-51 (statement of Josh Nassar on behalf of the Center for Responsible Lending) (discussing failure of subprime lenders to escrow for taxes and insurance).
204. Edmund L. Andrews, Most Homeowners Not Overly in Debt, Fed Chief Says, N.Y. TIMES, Sept. 27, 2005, at C1; Jeannine Aversa, Greenspan Concerned About Risky Mortgages, BUFFALO NEWS, Oct. 10, 2005, at B8.
205. Gail Liberman & Alan Lavine, FDIC Warns on Home-Equity Lines, CBSMARKETWATCH.COM, Jan. 10, 2005, http://www.marketwatch.com (search for FDIC Warns on Home-Equity Lines).
206. Martin Crutsinger, White House Opposes Homeowner Rescue Plan; Greenspan Suggestion Draws a Cool Response, THE TORONTO STAR, Dec. 18, 2007 (quoting Treasury Secretary Henry Paulson, "I don't think what we need is a big government bailout right now. I think what we need is to help the markets work the way they're intended to work and avoid those foreclosures that are preventable.").
207. See Eric Dash, Mortgage Lender Says It Will Close, N.Y. TIMES, Aug. 3, 2007, at Cl (discussing companies in the mortgage industry that were closing or facing bankruptcy);
208. Morgenson, supra note 138. New Century Financial, the second-largest subprime lender, stopped making subprime loans then filed for bankruptcy, eventually being forced to sell off substantial assets. See Ben Fidler, New Century Assets Sale Continues, DAILY DEAL, Feb. 14, 2008.
209. Bajaj, supra note 118 ("Just a couple of months ago, some executives were predicting a relatively quick recovery and saying that most home loans would be fine with the exception of those made to borrowers with weak credit who stretched too far financially.").
210. For example, Countrywide Financial-the lender most associated with the subprime mortgage crisis and the largest servicer of subprime loans-was acquired by Bank of America in July 2008. Eric Dash, Bank Beats Forecasts, N.Y. TIMES, July 22, 2008, at C4.
211. The Federal Reserve has cut the federal funds rate and the discount rate multiple times to try to stabilize the financial markets and central banks in Europe and Canada and also infused additional cash into their banks in response to the liquidity crisis. Greg Ip & Joellen Perry, Central Banks Launch Effort to Free Up Credit, WALL ST. J., Dec. 13, 2007, at A1. Indeed, the liquidity crisis that resulted from the subprime meltdown caused a collapse of major U.S. hedge funds and one of the largest U.S. investment banks, caused a run on at least one bank in Great Britain, caused the largest bank in France to freeze funds, and generally continues to wreak havoc with the global financial markets. Vikas Bajaj & Mark Landler, Mortgage Losses Echo in Europe and on Wall Street, N.Y. TIMES, Aug. 10, 2007, at A1; Mark Landler & Julia Werdigier, In Europe, Weathering Credit Storm From U. S., N. Y. TIMES, Nov. 24, 2007, at C1; Adam Shell, Subprime Troubles Send Stocks Into Swoon, USA TODAY, Mar. 14, 2007, at 1B; Stelzer, supra note 88; Werdigier, supra note 120; see also Anthony Lin, Thacher Proffitt Warns Associates of Looming Layoffs, LAW.COM, NOV. 28, 2007, http://www.law.com/jsp/article.jsp?id=l 196181559274 (reporting that law firm associates might be terminated because of the mortgage-backed securities fallout).
212. See Subprime and Predatory Lending, supra note 11, at 262-81 (statement of Steven L. Antonakes on behalf of the Conference of State Bank Supervisors) (listing actions individual states have taken to supervise and regulate the mortgage industry).
213. New York, Ohio, Connecticut, Maryland, Minnesota, and North Carolina have all enacted legislation designed to respond to the housing crisis. See S. 8143-A, 2008 Leg., Reg. Sess. (N.Y. 2008).
214. Systemic Risk: Examining Regulators' Ability to Respond to Threats to the Financial System: Hearing Before the H. Comm. on Fin. Servs., 110th Cong. (2007); Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures: Hearing Before the H Comm. on Fin. Servs., 110th Cong. (2007); Evolution of an Economic Crisis ?: The Subprime Lending Disaster and the Threat to the Broader Economy: S. Hearing Before the Joint Economic Comm., 110th Cong. (2007); A Local Look at the National Foreclosure Crisis: Cleveland Families, Neighborhoods, Economy Under Siege from the Subprime Mortgage Fallout: S. Hearing Before the Joint Economic Comm., 110th Cong., (2007); The National Affordable Housing Trust Fund Act of 2007: Hearing on H.R. 2895 Before the H. Comm. on Fin. Servs., 110th Cong. (2007); Reauthorization of the Hope VI Program: Hearing Before the Subcomm. on Housing and Community Opportunity of the H. Comm. on Fin. Servs., 110th Cong. (2007); The Role of the Secondary Market, supra note 68; The Expanding American Homeownership Act of 2007: H.R. 1852 and Related FHA Modernization Issues: Hearing Before the Subcomm. on Housing and Community Opportunity of the H. Comm. on Fin. Servs., 110th Cong. (2007); Possible Responses, supra note 79; Household Incomes and Housing Costs: A New Squeeze for American Families: Field Hearing Before the H Comm. on Fin. Servs., 110th Cong. (2007); Subprime and Predatory Lending, supra note 11; Foreclosure, Predatory and Payday Lending, supra note 85; U.S. Department of Housing and Urban Development's Fiscal Year 2008 Budget: Hearing Before the H Comm. on Fin. Servs., 110th Cong. (2007).
215. U.S. SENATE COMM. ON BANKING, HOUS. & URBAN AFFAIRS, HOMEOWNERSHIP PRESERVATION SUMMIT STATEMENT OF PRINCIPLES (2007), http://dodd.senate.gov/multimedia/2007/050207- Principles.pdf.
216. The Leadership Conference on Civil Rights, the NAACP, the National Fair Housing Alliance, the National Council of La Raza, and the Center for Responsible Lending called for a six-month moratorium on subprime home foreclosures and asked lenders to put homeowners in more affordable loan products to help them keep their homes. National Civil Rights Groups Call for Immediate Moratorium on Foreclosures Resultingfrom Risky Subprime Loans, Bus. WIRE, Apr. 4, 2007, available at http://www.busmesswire. com/portal/site/google/?ndmViewId=news-view&newsId=20070404005162& newsLang=en; see also Possible Responses, supra note 79, at 112 (statement of David Berenbaum on behalf of the National Community Reinvestment Coalition).
217. Housing and National Recovery Act of2008, Pub. L. No. 110-289, §§1401-1404, 122 Stat. 2654 (2008), (Title IV of the Act contains §§1401-1404 and discusses the "Hope for Homeowners" program).
218. Id.
219. Id.
220. Helping Families Save Their Homes in Bankruptcy Act of 2008, S. 2136, 110th Cong. (2007).
221. Home Owners' Mortgage and Equity Savings Act, H.R. 3778, 110th Cong. (2007);
222. S. 2136; Home Owners' Mortgage and Equity Savings Act, S. 2133, 110th Cong. (2007);
223. Emergency Home Ownership and Mortgage Equity Protection Act of 2007, H.R. 3609, 110th Cong. (2007).
224. S. 2133; H.R. 3609.
225. Subprime and Predatory Lending, supra note 11, at 354-56 (statement of Allen Fishbein on behalf of the Consumer Federation of America); Regulators Take First Step in Tougher Oversight of Underwriting, NAT'L MORTGAGE NEWS, Aug. 3, 2007, at 2 (noting that, in response to pressure from consumer groups and politicians, federal banking regulators are issuing tighter standards).
226. See Subprime and Predatory Lending, supra note 11, at 318-20 (statement of Josh Silver on behalf of the National Community Reinvestment Coalition); Foreclosure, Predatory and Payday Lending in America's Cities Before the H. Comm. on Oversight and Government Reform, 110th Cong. 41 (2007) (statement of Josh Nassar on behalf of the Center for Responsible Lending).
227. See Subprime and Predatory Lending, supra note 11, at 401 (statement of Harry H. Dinham, on behalf of the National Association of Mortgage Brokers) ("No merchant, no government and no company should superimpose their own moral judgments on what is a basic American privilege of homeownership.").
228. Id.; see Possible Responses, supra note 79, at 49-50 (statement of George P. Miller on behalf of the American Securitization Forum and the Securities Industry and Financial Markets Association); Preserving the American Dream, supra note 3, at 13-14 (statement of Douglas G. Duncan, on behalf of the Mortgage Bankers Association).
229. Calculated Risk, supra note 64 (statement of George Hanzimanolis on behalf of the National Association of Mortgage Brokers) ("[U]nwarranted tightening of underwriting guidelines could hurt the robust housing industry and deny deserving consumers the chance at homeownership."); see also MORTGAGE BANKERS ASS'N, MBA POLICY PAPER SERIES, POLICY PAPER 2007-1, SUITABILITY-DON'T TURN BACK THE CLOCK ON FAIR LENDING AND HOMEOWNERSHIP GAINS 21 (2007) [hereinafter SUITABILITY], The industry, and some economists, argue that imposing a suitability standard would force lenders to satisfy an "ability to repay" test similar to the restrictions federal securities regulations impose on securities dealers. This, they stress, will have unintended negative consequences because the standard will force lenders to further restrict the availability of credit and increase the likelihood that they would deem a mortgage product unsuitable for a member of a protected class. Stelzer, supra note 88 (discussing potential harm to young couples if they can obtain only a fixed rate mortgage).
230. But cf. SUITABILITY supra note 189, at 22-23 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association). Finally, lenders suggest that foreclosure programs may create negative tax consequences for borrowers because any decision to write-down part of the loan is a taxable event because the amount of the forgiven debt would be viewed as ordinary (taxable) income. Id. at 23 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association).
231. The difference between the loan value of the home and the market value would be treated as an unsecured claim in the bankruptcy case. In most consumer cases, unsecured claims are paid little (often nothing).
232. See Straightening Out the Mortgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress? Hearing Before the Subcomm. on Commercial and Administrative Law of the H. Comm. on the Judiciary, 110th Cong. 6(2007), available at http://judiciary.house. gov/hearings/hear-092507.html [hereinafter Straightening Out, Part I]. But cf. Straightening Out, Part II, supra note 102, at 2 (statement of Mark Zandi on behalf of Moody's Economy.com) (arguing that the legislation is needed and will not significantly increase the cost of mortgage credit). Lenders also appear to fear that amending this aspect of the 2005 changes to the Code would encourage the opponents of that legislation to attempt to undo other changes made in 2005. Marcia Coyle, Will Subprime Crisis Be Impetus for Bankruptcy Reform by Congress, NAT'L L.J., Nov. 15, 2007, available at http://www.law.com/jsp/article.jsp?id=900005558519#.
233. See A. Mechele Dickerson, Bankruptcy and Mortgage Lending: The Homeowner Dilemma, 38 JOHN MARSHALL L. REV. 19, 54-59 (2007). I argue in this earlier work that mortgages should receive favored treatment only if they actually helped the debtor acquire or remain in the
234. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the FDIC, the Office of Thrift Supervision, the National Credit Union Administration, and other federal banking entities had proposed guidelines in 2006 that also were designed to ensure that the terms of nontraditional lending products are consistent with prudent lending practices and that these standards help prevent borrowers from experiencing a payment shock. See Interagency Guidance on Nontraditional Mortgage Product Risks, 71 Fed. Reg. 58,609 (Oct. 4, 2006).
235. See 12 C.F.R. §§ 7.4008(b), 34.3(b);
236. Guidelines Establishing Standards for Residential Mortgage Lending Practices, 12 C.F.R. pt. 30, app. C, at 370; Statement on Subprime Mortgage Lending, 72 Fed. Reg. 37,569 (July 10, 2007); 71 Fed. Reg. 58,609 (Oct. 4, 2006);
237. Interagency Guidance on Nontraditional Mortgage Products, 70 Fed. Reg. 77,249 (Dec. 29, 2005).
238. See Statement on Subprime Mortgage Lending, 72 Fed. Reg. 37,569 (July 10, 2007).
239. Michael R. Crittenden, New Agreement Could Mean More Help for Homeowners, WALL ST. J., June 16, 2008.
240. See Borrower's Protection Act of 2007, S. 1299, 110th Cong. (2007).
241. See Subprime and Predatory Lending, supra note 11, at 55-57 (statement of Harry H. Dinham on behalf of the National Association of Mortgage Brokers) (urging Congress to modernize outdated disclosures and provide additional funds for consumer financial literacy programs);
242. U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 78, at 10 (noting that borrowers may be confused by confusing advertising and not understand the potential risks of exotic loan products). See generally Calculated Risk, supra note 64 (statement of Kathryn E. Dick on behalf of the Office of the Comptroller of the Currency).
243. Strengthening Our Economy: Foreclosure Prevention and Neighborhood Preservation: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 110th Cong. (2008), available at http://banking.senate.gov/ public/index.cfm?Fuseaction=Hearings.Detail&HearingID=728c6e4b-deld-4f02- b91f-a5c7a76aelc7 (statement of Robert K. Steel, Under Secretary for Domestic Finance, United States Treasury Department) (discussing Administration's support for HOPE NOW and NeighborWorks counseling services).
244. See, e.g., S.B. 987, 80th Leg., Reg. Sess. (Tex. 2007) (requiring counseling from approved housing counseling agency before closing on high cost loans);
245. H.B. 2274, 80th Leg., Reg. Sess. (Tex. 2007);
246. Interagency Statement on Subprime Mortgage Lending, 72 Fed. Reg. 10,533 (Mar. 8, 2007);
247. Illustrations of Consumer Information for Nontraditional Mortgage Products, 73 Fed. Reg. 30,997 (May 29, 2008);
248. Advisory Letter 97-7 from Leann G. Britton, Senior Deputy Comptroller for Bank Supervision Operations, Office of the Comptroller of the Currency to Chief Executive Officers of all Nat'l Banks, Dep't and Div. Heads, and all Examining Personnel, available at http://www.occ.treas.gov/ftp/advisory/97-7.txt.
249. OFFICE OF MGMT. & BUDGET, EXECUTIVE OFFICE OF THE PRESIDENT, THE BUDGET FOR FISCAL YEAR 2007 147 (2006).
250. See Gandel et al., supra note 145; Preserving the American Dream, supra note 3 (statement of Hilary Shelton on behalf of the NAACP); Calculated Risk, supra note 64 (statement of Sandra F. Braunstein on behalf of the Board of Governors of the Federal Reserve System);
251. Stelzer, supra note 88.
252. See JAMES M. LACKO & JANIS K. PAPPALARDO, FED. TRADE COMM'N, IMPROVING CONSUMER MORTGAGE DISCLOSURES- AN EMPIRICAL ASSESSMENT OF CURRENT AND PROTOTYPE DISCLOSURE FORMS (2007); see also Kathy M. Kristof, Loan Data Proves Baffling to Many, FTC Says, L. A. TIMES, June 14, 2007, at Cl (discussing view that most consumers are contused by mortgage documents).
253. Improving Credit Card Consumer Protection: Recent Industry and Regulatory Initiatives: Hearing Before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on Financial Servs., 110th Cong. 46-47 (2007) (testimony of John P. Carey on behalf of Citi Cards) (supporting proposed changes to credit card disclosures because they would move "towards the successful model of food labeling, where consumers can get all the information they need in simple, uniform terms"); Preserving the American Dream, supra note 3, at 13 (statement of Douglas G. Duncan on behalf of the Mortgage Bankers Association) ("Sadly, every new layer of disclosure simply increases the likelihood that the consumer will merely initial all of them without even a cursory reading.");
254. U.S. GOV'T ACCOUNTABILITY OFFICE, supra note 78.
255. See Renuart & Thompson, supra note 148, at 191; Craig R. Fox & Amos Tversky, Ambiguity Aversion and Comparative Ignorance, in CHOICES, VALUES, AND FRAMES, 528, 539-42 (Daniel Kahneman & Amos Tversky eds., 2000) (suggesting mat people will obtain additional information only if they have reason to believe the information will be helpful).
256. See generally Sandra Braunstein & Carolyn Welch, Financial Literacy: An Overview of Practice, Research, and Policy, 88 FED. RES. BULL. 445, 446 (2002). Cf. MARK WIRANOWSKI, NEIGHBORHOOD REINVESTMENT CORPORATION, SUSTAINING HOME OWNERSHIP THROUGH EDUCATION AND COUNSELING 25 (2003) (discussing successful home ownership counseling programs).
257. See 11 U.S.C § 109(h)(1) (2006) (mandating that "debtors" are ineligible for bankruptcy relief unless they receive a "briefing" from a credit counseling agency approved by the Office of the United States Trustee within 180 days before they file for bankruptcy); 11 U.S.C. § 1328(g)(1) (2006) (requiring all consumers to participate in mandatory credit counseling before they file their bankruptcy petition and mandating that Chapter 13 debtors receive financial management training from an approved financial education provider before they can receive a discharge).
258. CONG. REC. 3737 (2001) (statement of Sen. Sessions) "[T]his is fundamentally what the lawyer tells them. He says: Now, when you get your paycheck, you save that money, and you bring it straight to me-all that money-and maybe your second check. As soon as I have $ 1,500 or $ 1,000,1 will file your bankruptcy. Don't pay any of your other debts Use your credit card. Run up everything you want to on your credit card.... They are told this is the right thing to do."
259. See H.R. Rep. No. 109-31, pt. 1, at 2 (2005).
260. NAT'L FOUND, FOR CREDIT COUNSELING, MEETING THE MANDATE: CONSUMER COUNSELING AND EDUCATION UNDER THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT 9 (2006), available at http://www.nfcc. org/Newsroom/ NFCC%206%20month%20report%20FVNAL.pdf; see also INST, FOR FIN. LITERACY, FIRST DEMOGRAPHIC ANALYSIS OF POST-BAPCPA DEBTORS 4 (2006), available at http://www.financiallit.org/ news/white/2006-04-16%20First%20Demograρhic% 20Analysis%20of%20Post%20v.2. pdf.
261. S.C § 109(h)(1) (2006) (providing that counseling can occur either in person, over the phone, or over the Internet). Most counseling has taken place over the Internet even though most counseling experts agree that that is the least effective way to provide counseling. Even an ostensibly effective counseling program may be subject to criticism if it is perceived as having negative, unintended effects. For example, one state-sponsored counseling program was suspended shortly after it began because of criticisms that the program amounted to "state-sanctioned redlining" that detrimentally harmed black and Hispanic borrowers by discouraging them from taking out new or additional mortgages. Illinois suspended the program in January 2007-only three months after it started to operate-after mortgage brokers (who, with lenders, were required to pay for the counseling programs), real estate agents, and some members of the minority community complained that it amounted to racial redlining and that it encouraged the government to unnecessarily interfere with the potential borrowers choice to take out a loan. See Vikas Bajaj, Efforts to Advise on Risky Loans Runs Into Snag, N.Y. TIMES, June 12, 2007, at A1.
262. S.C. § 111(c)(2)(B) (2006) (mandating that if a fee is charged for counseling services, the nonprofit budget and credit counseling must charge a "reasonable" fee).
263. See Leslie E. Linfield, Credit Counseling: BAPCPA 's Grendel, AM. BANKR. INST. J., Oct. 2005, at 28; Kathleen Day, Credit Counseling Agencies Dealt Setback; Banks Reduce Funding as Bankruptcies Rise; Consumer Groups Hit Move, WASH. POST, July 16, 1999, at E1 (quoting Craig Streem, spokesman for creditor Household International). Consumers also tend to prefer telephone or Internet counseling, largely because it is the most efficient way to satisfy the counseling requirement. See also YVONNE D. JONES, BANKRUPTCY REFORM: VALUE OF CREDIT COUNSELING REQUIREMENT IS NOT CLEAR 13-15 (2007);
264. NAT'L FOUND, FOR CREDIT COUNSELING, supra note 211, at 3.
265. Possible Responses, supra note 79,47-48 (statement of John H. Dalton on behalf of the Housing Policy Council of the Financial Services Roundtable) (discussing loan modification programs and other efforts to assist distressed subprime borrowers); id. at 2,42-43 (statement of Kenneth D. Wade on behalf of the Neighborhood Reinvestment Corporation);
266. WIRANOWSKI, supra note 207, at 21. The Comptroller of the Currency developed public service announcements aimed at encouraging homeowners to contact their lenders for help avoiding foreclosure. Press Release, Comptroller of the Currency, Admin, of Nat'l Banks, Comptroller Dugan Unveils Pub. Serv. Announcements Encouraging Delinquent Borrowers to Contact Lenders for Help to Avoid Foreclosure (Jun. 25, 2007), available at http://www.occ.treas.gov/ftp/release/2007-61.htm.
267. Possible Responses, supra note 79, at 50-52 (statement of Douglas A. Garver on behalf of the Ohio Housing Finance Agency) (discussing Opportunity Loan Refinance Program that offers mortgage products designed to help borrowers avoid foreclosure);
268. Dina Elboghdady, Alarms Sound on Dangerous Loans; Counseling, Advertising Aim to Keep Borrowers Out of Foreclosure, WASH. POST June 30, 2007, at F1; Press Release, Comptroller of the Currency, supra note 215 (discussing new public service announcements designed to encourage borrowers to contact lender or housing counselor);
269. Les Christie, Subprime Bailouts: How They Work: There's Some State-Sponsored Help On the Way For Subprime Borrowers, CNNMONEY.COM, Apr. 24, 2007, http://www.money.crm.com/2007/04/24/real-estate/bailoutjlans-how-they- work/index.htm.
270. Dina Elboghdady & Nell Henderson, $1 Billion Pledged to Help Fend off Foreclosures, WASH. POST, Apr. 12, 2007, at D1; Borrowers in Trouble May Get Some Relief, MSNBC.COM, May 2, 2007, http://msnbc.msn.com/id/18445587/%5D.
271. Major Lenders Move to Offer Subprime Help: Freddie Mac, Washington Mutual Will Help Refinance Billions in Mortgages, MSNBC.COM, Apr. 18, 2007, http://www.msnbc.msn.com/id/l 8184371/.
272. See Straightening Out, Part II, supra note 102, at 2 (statement of Mark Zandi on behalf of Moody's Economy.com).
273. Vikas Bajaj, Equity Loans as Next Round in Credit Crisis, N.Y. TIMES, Mar. 27, 2008, at A1.
274. Compare Engel & McCoy, supra note 96, at 207 8 (suggesting that most securitization contracts prohibit servicers from modifying mortgage loans), with Subprime Mortgage Market Turmoil, supra note 86 (statement of Susan Barnes on behalf of Standard & Poor's Ratings Services) (suggesting that most securitization contracts allow servicers to modify mortgage loans).
275. Subprime Mortgage Market Turmoil, supra note 86 (discussing "tranche warfare" that occurs when a trustee of a security attempts to modify a loan and divert payments from one investor class to another); see JOINT MEMORANDUM, supra note 107, at 2 (discussing risks of loan modification, workout, or loss-mitigation programs). If a loan has been pooled and securitized into tranches (sets of investors) that hold different interests-that is, right to principal or interest repayment in a particular year of the loan term-allowing the borrower to modify the payment stream necessarily would transfer part of the income stream from the loan between the tranches.
276. Subprime Mortgage Market Turmoil, supra note 86 (statement of Susan Barnes on behalf of Standard & Poor's Ratings Services); Possible Responses, supra note 79, at 42 (statement of Kenneth D. Wade on behalf of the Neighborhood Reinvestment Corporation);
277. Donna Sheline, Sustaining Homeownership and Communities, COMMUNITY DEV. ONLINE, Spring 2006, http://www.occ.treas.gov/CDD/spring06b/cd/sustaininghomeownership.htm (discussing Chicago Home Ownership Preservation Initiative).
278. Straightening Out, Part I, supra note 192 (statement of Eric Stein, on behalf of Center for Responsible Lending and Center for Community Self-Help) (describing difficulties of modifying loans with servicers, servicers' fears of litigation of their modified loans, and inability of services to respond because of the sheer volume of demand). Hedge funds who invested in mortgage-backed securities often resist loan modification efforts because they invested short, that is, they profit when the value of the securities decrease as a result of increased homeowner default. See James Surowiecki, Performance-Pay Perplexes, THE NEW YORKER, NOV. 12, 2007, at 34 (describing how hedge funds contributed to subprime crisis).
279. See Stelzer, supra note 88 (discussing reasons why lenders needed little prodding to support loan modification).
280. See Straightening Out, Part II, supra note 102, at 2 (statement of Mark Zandi on behalf of Moody's Economy.com).
281. But cf. Preserving the American Dream, supra note 3, at 18 (statement of Douglas G. Duncan, on behalf of the Mortgage Bankers Association) ("[L]ong-standing claims that lenders purposely put borrowers into products they cannot afford in order to take the property through foreclosure is simply unfounded.").
282. Christopher Maag, Cleveland Sues 21 Lenders Over Subprime Mortgages, N.Y. TIMES, Jan. 12, 2008, at A9. The States of California, New York, Massachusetts, and Illinois and the Cities of Baltimore and Cleveland have sued or are contemplating whether to sue various financial institutions that packaged subprime loans. Kate Kelly, Amir Efrati, & Ruth Simon, State Subprime Probe Takes a New Tack, WALL ST. J., Jan. 31, 2008, at A3; Greg Morcroft, Massachusetts Charges Merrill with Fraud, Misrepresentation, WALL ST. J., Feb. 1, 2008; Morgenson, supra note 154, at Cl.
283. Evan Perez, FBI Begins Subprime Inquiry, WALL ST. J., Jan. 30, 2008, at A3; Gretchen Morgenson, supra note 154, at Cl; Gretchen Morgenson, Lenders Who Sold and Left, N.Y. TIMES, Feb. 3, 2008, § BU, at 1.
284. Vikas Bajaj & Miguel Helft, The Loan That Keeps on Taking, N.Y. TIMES, Sept. 25, 2008, at C1; Jonathan D. Glater, Wave of Lawsuits Over Losses Could Hit a Wall, N.Y. TIMES, May 8, 2008, at C1; David Streitfeld, Feeling Misled on Home Price, Buyers Are Suing Their Agent, N.Y. TIMES, Jan. 22, 2008, at A1.
285. Michael M. Phillips, He's Taking Law into His Own Hands to Help Broke Homeowners, WALL ST. J., Jun. 6, 2008, at A1.
286. Id.
287. THE WHITE HOUSE, HOMEOWNERSHIP: PRESIDENT' S AGENDA TO EXPAND OPPORTUNITIES TO HOMEOWNERSHIP (2007), available at http://www.whitehouse.gov/ask/20070906.html (statement of Alphonso Jackson, Secretary of Housing and Urban Development) (discussing long-term benefit of home ownership).
288. Covington & Harrell, supra note 32, at 108.
289. See U.S. Department of Housing and Urban Development, Homes and Communities, Housing Choice Vouchers Fact Sheet, available at http://www.hud.gov/offices/pih/programs/hcv/about/fact-sheet.cfhi.
290. See DANILO PELLETTERE, NAT'L LOW INCOME HOUS. COAL., THE RENTAL HOUSING AFFORDABILITY; GAP: COMPARISON OF 2001 AND 2003 AMERICAN HOUSING SURVEYS 8 (2006).
291. JOINT CTR. FOR HOUS. STUDIES OF HARVARD UNIV., AMERICA'S RENTAL HOUSING: HOMES FOR A DIVERSE NATION 2 (2006); LARRY KEATING, ATLANTA: RACE, CLASS AND URBAN EXPANSION 51-53 (2001) (describing how zoning is used to perpetuate racial and economic exclusion);
292. PELLETIERE, supra note 236, at 9.
293. CONG. REC. H11, 416 (2007); see also Editorial, A New Approach to Housing, N.Y. TIMES, Oct, 15, 2007, at A20. That fund would have been financed by contributions from the GSEs (Fannie Mae, Freddie Mac, and the FHA), Fannie Mae and Freddie Mac have now been bailed out by the United States because of the mortgage meltdown.
294. I.R.C. § 42 (2000). To be eligible for this tax benefit, the rental units must be rent-restricted and either twenty percent of the renters in a multi-unit residential unit must have incomes that are less than fifty percent of the state median gross income or forty percent of the renters must have incomes less than sixty percent of the median income. Hearing on Tax Incentives for Affordable Housing: Before Subcomm. on Select Revenue Measures of the H. Comm. on Ways & Means, 110th Cong. (2007), available at http://waysandmeans.house.gov/hearings.asp?formmode=detail&hearing=563. While this tax credit was designed to make rental housing more affordable, it has become controversial because of claims that it is an inefficient way to provide housing for moderate income households and because some suggest that private investors (not builders or moderate income homeowners) disproportionately benefit because they can exchange equity investments in the housing for the tax credits. Iglesias, supra note 1, at 528 (discussing the commodification of the Low Income Housing Tax Credit program).
295. See, e.g., Gwen Florio, Nearly a Month Later, Evicted Tenants Still Lack Housing: Fund Established, Consulate Helping Mexican Immigrants, DENVER POST, Aug. 30, 2001, at B7 (discussing difficulty of raising security deposits for immigrants);
296. Robert Landauer, Poverty's Berlin Wall, THE OREGONIAN, May 9, 1998, at D11 (discussing difficulty of raising security deposits for low-income women);
297. Nancy Parello, Rent Vouchers Open Few Doors; Section 8 Law Not Master Key, THE RECORD (Bergen County, N. J.), May 6, 2001, at A1 (suggesting that government pay security deposits for Section 8 tenants);
298. Rich Shopes, Farm Hands Need Help: Studies Delve into Living Conditions of Migrant Workers, SARASOTA HERALD- TRIBUNE (Fla.), Jul. 3, 1999, at A1 (discussing difficulty of finding housing for migrant workers).
299. See Julie Creswell & Michael J. de 1a Merced, Even Nonhousing Markets Feel Mortgage Fallout, N.Y. TIMES, Aug. 7, 2007, at C1 (describing how the mortgage meltdown created a financial crisis that made it harder for corporate borrowers outside the housing sector to raise money);
300. Telis Demos, Leading Indicators, FORTUNE, Sept. 17, 2007, at 30 (discussing lower predicted earnings for Wal-Mart, Target, and Staples);
301. Press Release, supra note 3.
302. See U.S. DEP'T OF LABOR, U.S. BUREAU OF LABOR STATISTICS, A PROFILE OF THE WORKING POOR, 2004 2 (2006).
303. Id.; Greg Ip, American Men Lagging Behind Their Fathers in Pay, ALB. TIMES UNION, May 26, 2007, at A1.
304. S.B. 220, 95th General Assem., Reg. Sess. (Ill. 2007) (setting the goal of increasing funding for affordable or multi-family housing).
305. See ROBERT H. FRANK, FALLING BEHIND: HOW RISING INEQUALITY HARMS THE MIDDLE CLASS 44-45 (2007) (discussing relationship between housing size, socioeconomic status, and public schools).
306. See Roslyn Arlin Mickelson, Achieving Equality of Educational Opportunity in the Wake of Judicial Retreat from Race Sensitive Remedies: Lessons from North Carolina, 52 AM. U. L. REV. 1477, 1484-85 (2003) (describing the resource-poor schools that low-income students often attend);
307. Andrew Benson, Rich or Poor, Family Income Is Prime Predictor of How Well a Student will Perform in School, CLEV. PLAIN DEALER, Oct. 8, 1995, at Cl (describing results of a study showing performance differentials between low- and high-income students).
308. This is the goal of the Illinois Teacher Homebuyer Assistance Act, S.B. 1224, 95th General Assem., Reg. Sess. (Ill. 2007) (setting the goal of payment assistance for housing for public school teachers who work in hard to staff schools or hard to staff positions).
309. See, e.g., Green Building Initiative, Green Building Factsheet, http://www.thegbi.org/assets/pdfs/GBFactSheet.pdf; NAT'L ASSOC, OF HOMEBUILDERS, NAHB MODEL GREEN HOME BUILDING GUIDELINES (2006), http://www.nahb.org/fileUρload-details.asρx?contentTypeID= 7&contentID=1994.
310. Green building materials include renewable plant materials (like bamboo and straw), recycled stone, recycled metal, and other products that are non-toxic, reusable, renewable, and/or recyclable. See Green Building Initiative, supra note 248.