Resolving the foreclosure crisis: Modification of mortgages in bankruptcy

Wisconsin Law Review

Volumn 2009, Issue 3, 2009, Pages 565-655

  Levitin, Adam J ^a  

^a HARVARD UNIVERSITY   (United States)

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EID: 64749109113     PISSN: 0043650X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (447)

1. HOPE Now, Mortgage Loss Mitigation Statistics: Industry Extrapolations (Quarterly for 2007 and 2008) (2009), available at http://www.hopenow.com/ upload/data/fiIes/HOPE%20NOW%20Loss%20Mitigation% 20National%20Data%20July07%20to%20February09.pdf;
2. see also Press Release, RealtyTrac, Inc., U. S. Foreclosure Activity Increases 75 Percent in 2007 (Jan. 29, 2008), available at http://www. realtytrac.com/ContentManagement/pressrelease.aspx? ChannelID=9&ItemID= 3988&accnt=64847 (providing a lower number).
3. HOPE Now, supra note 1;
4. see also Chris Mayer et al., The Rise in Mortgage Defaults, 23 J. Econ. Persp. (forthcoming 2009) (noting 1.2 million foreclosure starts in first half of 2008).
5. HOPE Now, supra note 1;
6. see also E-mail from Daren Blomquist, Realty Trac, Inc., to author (Mar. 7, 2008) (on file with author).
7. HOPE Now, supra note 1.
8. See Press Release, Mortgage Bankers Ass'n, Delinquencies Continue to Climb in Latest MBA National Delinquency Survey (Mar. 5, 2009), available at http://www.mbaa.org/NewsandMedia/PressCenter/68008.htm. Approximately 3.30 percent of all one-to-four-family residential mortgages outstanding were in the foreclosure process in the first quarter of 2008, and 7.88 percent were delinquent. Id.;
9. see also Vikas Bajaj & Michael Grynbaum, A Rising Tide of Mortgage Defaults, Not All on Risky Loans, N. Y. Times, June 6, 2008, at C1. Because of the steadily increasing level of homeownership in the United States
10. see U. S. Census Bureau, Housing Vacancies and Homeownership (CPS/HVS), at tbl. 14 (2008), available at http://www.census.gov/hhes/www/housing/hvs/ historic/histtl4.html, higher percentages of past-due and foreclosed mortgages mean that an even greater percentage of Americans are directly affected by higher delinquency and foreclosure rates.
11. Credit Suisse Fixed Income Research, Foreclosure Update: Over & Million Foreclosures Expected 1 (Dec. 4, 2008), available at http://www.chapa.org/pdf/ForeclosureUpdateCreditSuisse.pdf. Even Credit Suisse's best-case scenario still involves 6.3 million foreclosures. Id. at 7.
12. Mortgage Bankers Ass'n, National Delinquency Surveys (on file with author).
13. Anthony Pennington-Cross, The Value of Foreclosed Property, 28 J. Real Estate Res. 194-95 (2006) (surveying estimates of deadweight loss on foreclosure).
14. See id.; see also Gretchen Morgenson, Cruel Jokes, and No One Is Laughing, N. Y. Times, Jan. 13, 2008 (citing historical foreclosure-loss rates of 20 to 40 percent); Posting of Treasury Secretary Henry Paulson to http://www.etrunk.kiev. ua/ask/20071207.html (Dec. 7, 2007). Actual foreclosure losses are difficult to measure consistently because loss reporting may or may not include loss of "junk fees" and "matured interest," rather than a more consistent baseline of unpaid principal. Because most mortgages are held by securitization trusts, the losses to holders of trust securities will vary by tranche. See generally Credit Suisse Equity Research, Mortgage Liquidity du Jour: Underestimated No More (Mar. 12, 2007), available at http://billcara.com/CS%20Mar%2012%202007%20 Mortgage%20and%20Housing.pdf. Some tranches may experience no losses, while other tranches may have complete losses. See generally id.
15. Fitch Ratings, Residential Mortgage Criteria Report: Revised Loss Expectations for 2006 and 2007 Subprime Vintage Collateral 1 (Mar. 25, 2008), available at http://billcara.com/CS%20Mar%2012%202007%20Mortgage%20and% 20Housing.pdf.
16. See, e.g., Mindy Thompson Fullilove, Root Shock 11-20 (2005) (noting emotional harms from urban renewal);
17. Lorna Fox, Re-Possessing Home: A Reanalysis of Gender, Homeownership and Debtor Default for Feminist Legal Theory, 14 Wm. & Mary J. Women & L. 423, 434 (2008) ("The impact of losing one's home on an individual occupier's quality of life, social and identity status, personal and family relationships, and for his or her emotional, psychological and physical health and wellbeing have been well established in housing and health literature.");
18. Eric S. Nguyen, Parents in Financial Crisis: Fighting to Keep the Family Home, 82 Am. Bankr. L. J. 229 (2008);
19. Margaret Jane Radin, Property and Personhood, 34 Stan. L. Rev. 957, 958-59 (1982) (observing that control over property like homes that are "bound up" with one's self is essential for psychological well-being). For a critical review of the literature on homes and psychology see Stephanie Stern, Residential Protectionism and the Legal Mythology of Home, 107 Mich. L. Rev. (forthcoming 2009);
20. see also Michael Levenson, The Anguish of Foreclosure: Fearing Sale of House, Woman Kills Herself Before the Auction, Boston Globe, July 24, 2008, at B1;
21. Ohio Woman, 90, Attempts Suicide After Foreclosure, Reuters, Oct. 3, 2008.
22. See Phillip Lovell & Julia Isaacs, The Impact of the Mortgage Crisis on Children, First Focus, May 2008, at 1, 1, available at http://www.firstfocus. net/Download/HousingandChildrenFINAL.pdf (estimating two million children will be impacted by foreclosures, based on a projection of 2.26 million foreclosures).
23. Dan Immergluck & Geoff Smith, The External Costs of Foreclosure: The Impact of Single-Family Mortgage Foreclosures on Property Values, 17 Hous. Pol'y Debate 57, 58 (2006);
24. see also Mark Duda & William C. Apgar, Mortgage Foreclosures in Atlanta: Patterns and Policy Issues, at ii (Dec. 15, 2005), available at http://www.nw.org/network/neighborworksProgs/foreclosuresolutions OLD/documents/foreclosure1205.pdf.
25. City-data.com, Chicago, IL (Illinois) Housing and Residents, www.citydata.com/housing/houses-Chicago-Illinois.html (last visited Mar. 24, 2009).
26. Laura Johnston, Foreclosure Study Says Vacant Properties Cost Cleveland $35+Million, Blog.cleveland.com, Feb. 19, 2008, http://blog.cleveland. com/metro/2008/02/foreclosure-study-says-vacant.html;
27. see also Global Insight, The Mortgage Crisis: Economic and Fiscal Implications for Metro Areas 2 (Nov. 26, 2007), available at http://www.vacantproperties.org/resources/documents/USCMmortgagereport.pdf.
28. Christine Haughney, Collateral Foreclosure Damage, N. Y. Times, May 15, 2008, at C1.
29. William C. Apgar & Mark Duda, Collateral Damage: The Municipal Impact of Today's Mortgage Foreclosure Boom (2005), available at http://www.995hope. org/content/pdf/Apgar-Duda-Study-Short-Version.pdf;
30. Dan Immergluck & Geoff Smith, The Impact of Single-Family Mortgage Foreclosures on Neighborhood Crime, 21 Hous. Stud. 851, 851-54 (2006).
31. Apgar & Duda, supra note 17, at 4.
32. Melvin L. Oliver & Thomas M. Shapiro, Black Wealth/White Wealth: A New Perspective on Racial Inequality 66 (2006) (noting that housing equity accounted for 62.5 percent of all black assets in 1988, but only 43.3 percent of white assets, even though black homeownership rates were 43 percent and white homeownership rates were 65 percent);
33. see also Brian K. Bucks et al., Recent Changes in U. S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, Fed. Res. Bull., at Al, A8, A12, A23 (2006) (noting that while there was only a $35, 000 difference in median home equity between whites and nonwhites/Hispanics in 2004, there was a $115, 900 difference in median net worth and a $33, 700 difference in median financial assets; this suggests that for minority homeowners, wealth is disproportionately invested in the home);
34. Kai Wright, The Subprime Swindle, NATION, July 14, 2008, at 11, 11-12.
35. Mary Kane, Race and the Housing Crisis, WASH. INDEP., July 25, 2008;
36. Bob Tedeschi, Subprime Loans' Wide Reach, N. Y. Times, Aug. 3, 2008.
37. 11 U. S. C. § 1322 (b) (2) (2006); cf. id. § 1123 (b) (5) (parallel residential mortgage antimodification provision for Chapter 11). Section 1123 (b) (5) provides that a plan of reorganization may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence." Id. § 1123 (b) (5). Since 2005, section 101 (13A) of the Bankruptcy Code has defined debtor's principal residence as "a residential structure, including incidental property, without regard to whether that structure is attached to real property... and... includes an individual condominium or cooperative unit, a mobile or manufactured home, or trailer." Id. § 101 (13A). State law, however, still determines what real property is.
38. Modification of a principal residence is even permitted per 11 U. S. C. § 1322 c) (2) in cases where the last payment on the contractual payment schedule is due before the final payment on the plan. Am. Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203 (11th Cir. 2002);
39. First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B. R. 468 (B. A. P. 6th Cir. 1998). But see Witt v. United Cos. Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997) (holding that 11 U. S. C. § 1322 (c) (2) does not permit bifurcation of claims despite its enactment subsequent to the Supreme Court of the United States's Nobelman decision). It is unclear whether the antimodification provision prevents an undersecured mortgagee from receiving postpetition interest and fees under 11 U. S. C. § 506 (b). Compare Campbell v. Countrywide Home Loans, Inc. (In re Campbell), 361 B. R. 831, 850 (Bankr. S. D. Tex. 2007) (noting that section 1322 (b) (2) trumps section 506 (b)), with Citicorp Mortgage, Inc. v. Hunt, No. 5:92CV56 (JAC), 1994 U. S. Dist. LEXIS 13146, at 8-9 (D. Conn. 1994) (noting that section 1322 (b) (2) does not vitiate section 506 (b)). It would seem, however, that the legal fiction engendered by Nobelman v. American Savings Bank's interpretation of section 1322 (b) (2) does not require anything beyond treating a principal-home mortgage as fully secured; it need not be treated as oversecured, and if fully secured to the exact amount, postpetition interest and fees could not accrue. 508 U. S. 324 (1993).
40. See 11 U. S. C. § 362 (d) (1) (authorizing the lifting of an automatic stay for cause if adequate protection cannot be provided). Bankruptcy allows the homeowner to unwind any acceleration on the loan, however. Id. § 1322 (c). Therefore, if the homeowner's problems stem not from a generally unaffordable mortgage payment, but from a temporary loss of income or unexpected one-time expense, bankruptcy can still provide the homeowner with the breathing space to straighten out her finances, deaccelerate, cure, and reinstate the mortgage.
41. See, e.g., Donald C. Lampe et al., Introduction to the 2008 Annual Survey of Consumer Financial Services Law, 63 Bus. Law. 561, 568 (2008) ("Solutions designed to prevent future problems by reducing the availability of credit to marginal borrowers may (in addition to affecting adversely those future borrowers) worsen the current plight of existing marginal borrowers who need to refinance their homes. Direct relief for troubled borrowers, e.g., a foreclosure moratorium or expanded bankruptcy relief, may have the same effect. To some extent this has already happened. The tightening of mortgage law requirements and regulatory restrictions over the past few years in response to allegations of predatory lending have probably contributed to the dramatic increase in foreclosures by making it more difficult for troubled borrowers to refinance. A significant further tightening of these restraints-we have heard this further tightening referred to as 'more robust regulation'-may worsen the problem and increase the number of consumers facing foreclosure as a result.").
42. See, e.g., Consumer Issues in Bankruptcy: Hearing Before the Subcomm. on Economic and Commercial Law of the H. Comm. on the Judiciary, 102d Cong. 56-57 (1992) (statement of Willard Gourley, Jr., BarclaysAmerican Mortgage Corp., on behalf of the Mortgage Bankers Association of America);
43. Douglas G. Baird, Technology, Information, and Bankruptcy, 2007 U. ILL. L. REV. 305, 307 (2007);
44. J. Peter Byrne & Michael Diamond, Affordable Housing, Land Tenure, and Urban Policy: The Matrix Revealed, 34 Fordham Urb. L. J. 527, 542 (2007);
45. Kenya Covington & Rodney Harrell, From Renting to Homeownership: Using Tax Incentives to Encourage Homeownership Among Renters, 44 Harv. J. on Legis. 97, 99 (2007).
46. Nobelman, 508 U. S. at 332 (Stevens, J., concurring).
47. The legislative history that Justice Stevens relied on in his Nobelman concurrence was roughly outlined in Grubbs v. Houston First American Savings Ass'n, 730 F.2d 236, 245-46 (5th Cir. 1984). The legislative history of 11 U. S. C. § 1322 (b) (2) is scant. The Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549, was a compromise between House and Senate bills. The House bill, H. R. 8200, permitted modification of all secured claims, while the Senate bill, S. B. 2266, contained a provision barring any modification of claims secured by real estate. Grubbs, 730 F.2d at 245. The bills were reconciled through a series of floor amendments, id. at 246, which resulted in a ban on modification of loans secured solely by the debtor's principal residence.
48. There was no discussion on the issue in the Congressional Record. It was, however, raised in Senate hearings, most notably in a dialogue amongst Edward J. Kulik, Senior Vice President, Real Estate Division, Massachusetts Mutual Life Insurance Co.;
49. his counsel, Robert E. O'Malley, of Covington & Burling; and Senator Dennis DiConcini (D-Ariz.). The dialogue is worth reproducing because it is virtually the only evidence of congressional intent and is less than overwhelming:
50. Hearings on S. 2266 and H. R. 8200 Before the Subcomm. on Improvements in JudicialMach. of the S. Comm. on the Judiciary, 95th Cong. 714-15 (1977) (testimony of Edward J. Kulik, Senior Vice President, Real Estate Division, Massachusetts Mutual Life Insurance Co., accompanied by Robert E. O'Malley, Attorney, Covington and Burling).
51. See also Hearings Before the Subcomm. on Improvements of the Judicial Mach. of the S. Comm. on Judiciary, 94th Cong. 127-28, 130, 132-34, 137-38 (1975) (statement of Walter Vaughan, American Bankers Association);
52. id. at 141-42, 167-68, 176-80 (statement of Alvin Wiese, National Consumer Finance Association);
53. id. at 64 (written testimony of Conrad Cyr, a bankruptcy judge in Maine (now a federal appeals court judge)) (arguing that modification of real-property mortgages should be permitted in Chapter 13). Despite Senator DeConcini's apparent incredulity, based on his unfortunately intimate knowledge of the savings and loan industry, this dialogue appears to be the basis for assuming a particular policy basis for the antimodification provision. As Grubbs noted, "This limited bar [on modification] was apparently in response to perceptions, or to suggestions advanced in the legislative hearings... that, homemortgagor lenders, performing a valuable social service through their loans, needed special protection against modification thereof...." 730 F.2d at 246. The evidence for a deliberate policy preference by Congress is very limited. The relationship of section 1322 (b) (2) to pre-1978 bankruptcy law is consistent with either an interpretation of it as an explicit and deliberate policy preference by Congress or a special-interest provision. Section 1322 (b) (2) appears, at first blush, to continue pre-1978 bankruptcy law, which functionally forbade any modification of a mortgage. But an examination of the details of pre-1978 law shows that the story is more complex. Chapter XIII of the Bankruptcy Act of 1898 was the predecessor of the modern Chapter 13. (Chapter XIII was enacted as part of the Chandler Act on June 22, 1938. Ch. 575, 52 Stat. 840). In a Chapter XIII wage earner's plan, there were no statutory limitations on the ability to modify a secured debt, including a mortgage. 11 U. S. C. § 646 (1976) (repealed 1978). However, a wage earner's plan that affected a secured debt could not be confirmed without the consent of the affected secured creditor. Id. § 1052 (1) (repealed in 1978). Therefore, it was impossible to modify a mortgage or any other secured debt without the consent of the impaired creditor. In both the House and Senate versions of the Bankruptcy Reform Act, there was no blanket prohibition on the modification of secured debt. In the House version, all secured debts could be modified, just as in Chapter XIII, H. R. 8200, 95th Cong. §§ 1322-23 (1978), while the Senate version generally permitted the modification for secured debts, but with an exclusion for mortgages. S. 2266, 95th Cong. §§ 1322-23 (2d Sess. 1978). In both versions, the impaired secured creditor's veto was eliminated. Instead, under the final version of Chapter 13, the plan is confirmable if it meets certain statutory requirements for the treatment of secured debts, regardless of the affected secured creditor's consent. This history shows that the mortgage antimodification provision is not a continuation of pre-Code bankruptcy law. Pre-Code law permitted modification, subject to a creditor veto, but that was for all secured debts. 11 U. S. C. §§ 1046, 1052 (1) (repealed 1978). The Bankruptcy Code instead permits modification without any creditor veto, but carves out one particular class of debts that cannot be modified under a plan, regardless of creditor consent. 11 U. S. C. § 1322 (b) (2) (2006). Had Congress wished to continue pre-Code law just for mortgages, it could have retained a veto for mortgage creditors. It did not. The history of the antimodification provision and the change from the 1898 Act's veto to the Code's prohibition indicates that section 1322 (b) (2) is actually something new, not a continuation of prior practice. While Grubbs assumes otherwise, there is no conclusive evidence in the legislative history that section 1322 (b) (2) was intended to lower the cost of mortgage credit or increase its availability. At best, we can say that it was the result of a legislative compromise that gave a subset of mortgage creditors a more favorable position relative to other creditors than they had under the 1898 Act.
54. See, e.g., Comptroller of the Currency, OCC Mortgage Metrics Report: Analysis and Disclosure of National Bank Mortgage Loan Data 1, 8 (2008), available at http://www.occ.treas.gov/ftp/release/2008-65b.pdf;
55. see also infra Charts 6 and 7.
56. See generally Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers, 15 Hous. Pol'y Debate 753 (2004).
57. See generally Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: The Workout Prohibition in Residential Mortgage-Backed Securities, 82 S. Cal. L. Rev. (forthcoming 2009), available at http://papers.ssrn.com/sol3/ papers.cfm?absabstr-id=1323546.
58. See generally Cong. Oversight Panel, The Foreclosure Crisis: Working Toward a Solution 37-48 (2009) (discussing reasons for failure of private modification efforts).
59. See Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis 18 (Nat'l Bureau Econ. Research, Working Paper No. 14549, 2008), available at http://www.nber.org/papers/wl4549. In 2005, there were 2, 078, 415 total bankruptcy filings, the highest level on record. USCourts.gov, Bankruptcy Statistics, http://www.uscourts.gOv/bnkrpctystats/statistics.htm#june (last visited Mar. 24, 2009). Most of these filings came in a spike before the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23. BAPCPA added twenty-eight new bankruptcy judgeships to the existing 296. Id. § 1223. In 2005, the courts were able to handle a significant increase in case filings with fewer judges. The increase in the number of bankruptcy judges means that the courts are better equipped today to handle another surge in filings.
60. 11 U. S. C. § 362 (a).
61. Consumers are also eligible for Chapter 11, but few who are eligible for Chapter 13, see id. § 109 (e), use Chapter 11 because of greater creditor control in Chapter 11 through creditor voting rights on plans of reorganization.
62. Id. §§ 522 (b), 541.
63. Id. § 1325 (b).
64. A debtor may enter into a court-approved reaffirmation agreement with a creditor and retain nonexempt property in exchange for continuing to make payments to the lender. Id. § 524 (c). Alternatively, a debtor may redeem collateral in bankruptcy by paying the lender the value of the property. Id. § 722;
65. cf. UCC § 9-623 (2008) (illustrating that redemption at state law requires paying the full amount outstanding on the loan plus reasonable lender expenses).
66. 11 U. S. C. § 1322 (b) (2).
67. See id. § 506. Strip-down is synonymous with lien-stripping and cramdown. Because cramdown has a distinct meaning in the context of Chapter 11 reorganizations-the confirmation of a plan of reorganization absent approval of all impaired classes of creditors and equity-holders under the provisions of 11 U. S. C. § 1129 (b)-I use the term strip-down.
68. A loan is undersecured if the amount owned on the loan is more than the value of the collateral securing the loan. If there is no collateral securing the loan, the loan is unsecured. Undersecured lenders and loans are also referred to as "upsidedown" or "underwater." The homeowner in such a situation has negative equity. If there are multiple mortgages on the property, it is possible for the homeowner to have negative equity even though the senior mortgage is still oversecured.
69. Id. § 1325 (a) (5) (B). Section 1325 (a) (5) only applies to "allowed secured claims provided for by the plan." Therefore, it is possible for a debtor to deal with a secured claim outside of a plan and not subject to 1325 (a) (5) 's requirement. It is also important to note that courts have split regarding whether section 1325 (a) (5) requires that a debt be paid off under a plan. For non-principal-residence mortgages, debtors will sometimes propose to modify the mortgage through strip-down and then maintain payments on it pursuant to the original term of the loan (reamortized or not). Compare Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165, 1172 (9th Cir. 2004) (holding that a modified mortgage on rental property must be paid off during a plan), with In re McGregor, 172 B. R. 718, 721 (Bankr. D. Mass. 1994) (suggesting that a debtor might amend a plan to provide for payments on stripped-down principal at the original contract interest rate in the amount called for by the mortgage contract until the total principal payments equaled the allowed amount of the secured claim). An argument that courts do not appear to have considered is that section 1325 (a) (5) (B) (ii) merely requires distribution of value equal to the allowed amount of a secured claim, and that this value could be in the form of a note with a term longer than the duration of the plan. As Justice Thomas observed in his plurality concurrence in Till v. SCS Credit Corporation, 541 U. S. 465 (2004), an auto-loan-strip-down case, "nothing in § 1325 suggests that 'property' is limited to cash. Rather, 'property' can be cash, notes, stock, personal property or real property;
70. in short, anything of value." Id. at 488 (Thomas, J., concurring). The payment of a secured debt with a new note is frequently done in Chapter 11 under the parallel provision for distributions to secured creditors, section 1129 (a) (7) (A) (ii). Perhaps the best evidence that cash is not required is that the Bankruptcy Code specifically calls for cash distributions in other circumstances, such as requiring cash payments for administrative expense claims.
71. See 11 U. S. C. §§ 1129 (a) (9), 1322 (a) (2). If cash payment is not required, then distributions could be made during the plan that would essentially transform the old debt into a new one with a duration longer than the plan.
72. Id. § 1325 (a) (4).
73. See Wesley Phoa, A Practical Guide to Relative Value for Mortgages, in Managing Fixed Income Portfolios 357, 363 (Frank J. Fabozzi ed., 1997).
74. 11 U. S. C. § 1322 (b) (2). For the history of this provision, see Veryl Victoria Miles, The Bifurcation of Undersecured Residential Mortgages Under § 1322 (b) (2) of the Bankruptcy Code: The Final Resolution, 67 Am. Bankr. L. J. 207 (1993).
75. 11 U. S. C. § 1322 (b) (2). Sections 1322 (b) (2) and 1325 (a) (5) place limitations on the modification of all mortgages. It is important to note that the protections given mortgage holders depend on owner-occupancy status, so mortgage holders' protections are dependent upon debtor cooperation, a factor upon which mortgage holders cannot justifiably rely.
76. See, e.g., Scarborough v. Chase Manhattan Mortgage Corp. (In re Scarborough), 461 F.3d 406, 408, 412-13 (3d Cir. 2006) (permitting strip-down on a two-unit property in which the debtor resided);
77. Chase Manhattan Mortgage Corp. v. Thompson (In re Thompson), 77 Fed. Appx. 57, 58 (2d Cir. 2003) (permitting stripdown on a three-unit property in which the debtor resided);
78. Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 7 (1st Cir. 1996) (permitting strip-down on a three-unit property in which the debtor resided);
79. *11-13 (D. Conn. Apr. 12, 2000) (permitting modification of a two-unit property in which the debtor resided);
80. In re Stivender, 301 B. R. 498, 500 n. 2 (Bankr. S. D. Ohio 2003) (permitting bifurcation on a two-unit property containing the debtor's residence);
81. Enewally v. Wash. Mut. Bank (In re Enewally), 276 B. R. 643, 652 (Bankr. CD. Cal. 2002) (holding a mortgage on a rental property that is not the debtor's residence may be modified);
82. In re Kimbell, 247 B. R. 35, 38 (Bankr. W. D. N. Y 2000) (permitting bifurcation on a twounit property containing the debtor's residence);
83. Ford Consumer Fin. Co. v. Maddaloni (In re Maddaloni), 225 B. R. 277, 278 (D. Conn. 1998) (permitting bifurcation on a two-unit property containing the debtor's residence);
84. In re Del Valle, 186 B. R. 347, 348-50 (Bankr. D. Conn. 1995) (permitting modification of a two-unit property, where the debtor lived in one unit and rented the other);
85. Adebanjo v. Dime Say. Bank, FSB (In re Adebanjo), 165 B. R. 98, 100 (Bankr. D. Conn. 1994) (permitting bifurcation on a three-unit property containing the debtor's residence);
86. In re McGregor, 172 B. R. 718, 721 (Bankr. D. Mass. 1994) (permitting modification of a mortgage of a four-unit apartment building in which the debtor resided);
87. Zablonski v. Sears Mortgage Corp. (In re Zablonski), 153 B. R. 604, 606 (Bankr. D. Mass. 1993) (holding that a mortgage encumbering a two-family home was not protected from modification);
88. In re McVay, 150 B. R. 254, 256-57 (Bankr. D. Or. 1993) (failing to protect a mortgage encumbering a bed and breakfast, which was the debtor's principal residence but which had "inherent income producing power," from modification).
89. Every federal circuit court of appeals addressing the issue has held that modification, including strip-down, of wholly unsecured second mortgages on principal residences is permitted. See, e.g., Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663, 669 (6th Cir. 2002);
90. Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220, 1227 (9th Cir. 2002);
91. Pond v. Farm Specialist Realty (In re Pond), 252 F.3d 122, 126 (2d Cir. 2001);
92. Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277, 288 (5th Cir. 2000);
93. McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606, 608 (3d Cir. 2000);
94. Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357, 1360 (11th Cir. 2000);
95. Lam v. Investors Thrift (In re Lam), 211 B. R. 36, 41 (B. A. P. 9th Cir. 1997). These are known as the "Son of Strip-down" cases.
96. 11 U. S. C. § 1322 (b) (2). Until 2005, loans secured by all vehicles could be stripped down. Since October 17, 2005, purchase money loans secured by motor vehicles may not be stripped down in their first two-and-a-half years, and other purchase money secured loans may not be stripped down in their first year. Id. § 1325 (a).
97. See supra note 21.
98. See 11 U. S. C. § 362 (d). Bankruptcy allows the homeowner to unwind any acceleration on the loan, however. Id. § 1322 (c). Therefore, if the homeowner's problems stem not from a generally unaffordable mortgage payment, but from a temporary loss of income or unexpected one-time expense, bankruptcy can still provide the homeowner with the breathing space to straighten out her finances, deaccelerate, and reinstate the mortgage.
99. RKO Radio Pictures 1946.
100. Id. Before 1994, there was no interstate branch banking, so most lending was local. See Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub. L. No. 103-328, § 109 (c), 108 Stat. 2338, 2338 (codified at 12 U. S. C. § 1835 (a)).
101. It's a Wonderful Life (RKO Radio Pictures 1946).
102. Id.
103. Id.
104. See id.
105. See infra Chart 2.
106. Fannie Mae and Freddie Mac, the government-sponsored entities that dominate the secondary mortgage market, will not purchase standard mortgages with LTVs of more than 80 percent without mortgage-insurance coverage. Fannie Mae, Single Family 2007 Selling Guide, at pt. V, § 101.01 (2007), available at https://www.efanniemae.com/sf/guides/ssg (under "Online Access" click "Access AllRegs" and choose the appropriate part and section);
107. Freddie Mac, Single-Family Seller/Servicer Guide, at § 27.1, (2009), available at http://www.freddiemac.com/sell/guide/# (under "Access the Guide" click "AllRegs" and choose the appropriate chapter).
108. See Fed. Reserve Bank, Statistical Release, No. Z.1, Flow of Funds Accounts of the United States, at tbl. L.217 (Dec. 11, 2008), available at http://www.federalreserve.gov/releases/zl/Current/accessible/1217.htm.
109. VINOD KOTHARI, securitization: the financial instrument of the Future 11 (2006).
110. Id.
111. Id. at 328-29.
112. Id. at 413-14.
113. See Credit Suisse Equity Research, supra note 9, at 28.
114. Kothari, supra note 59, at 57, 211.
115. Id. at 208.
116. Id. at 211-30 (discussing various credit-enhancement techniques).
117. Id. at 209. Typically securitization originators retain the last-out "equity" tranche of the trust, which allows them to retain any excess spread over the trust's payout.
118. Id. at 289.
119. Id. at 209.
120. See supra text accompanying notes 43-46.
121. It is possible that there is simply less available credit for modifiable properties. I was unable to test this possibility, however.
122. The reliability of online quotes was confirmed in interviews with veteran mortgage brokers. E.g., Telephone interview with Dom Sutera, The Sutera Group (Jan. 23, 2008). In response to my congressional testimony based on a draft of this Article, David M. Kittle, the President of the Mortgage Bankers Association, declared that online rate quotes were unreliable. Helping Families Save Their Homes: The Role of Bankruptcy Law, Hearing Before the S. Judiciary Comm., 110th Cong. (1998) (testimony of David Kittle). Mr. Kittle's surprising admission of mortgage industry bait-and-switch tactics aside, the rate-quote generators' results are consistent with other, more reliable data sources, see infra Sections II. B., C, as well as with quotes produced by the Mortgage Bankers Association in Mr. Kittle's own testimony.
123. Chase's online rate-quote generators can be found at http://mortgage.cha se.com/pages/purchase/crq-p-landing.jsp. Since the time I gathered the rate quotes, IndyMac and Wachovia both failed, so their quote generators are no longer available, and eLoan has outsourced its rate quotes to Lending Tree.
124. IndyMac was placed in an FDIC conservatorship on July 11, 2008. Louise Story, Regulators Seize IndyMac After a Run on the Bank, N. Y. Times, July 12, 2008, at C5.
125. See, e.g., Scarborough v. Chase Manhattan Mortgage Corp. (In re Scarborough), 461 F.3d 406, 413 (3d Cir. 2006);
126. Lomas Mortgage, Inc. v. Louis, 82 F.3d 1, 7 (lst Cir. 1996).
127. Kevin Yamamura, Schwarzenegger Vetoes Mortgage Broker Restrictions, Sacramento Bee (Cal.), Sept. 26, 2009, at A3 ("California is the epicenter of the national foreclosure crisis.") (quoting Paul Leonard, California Office Director, Center for Responsible Lending).
128. Federal law limits the size of loans that GSEs may purchase. 12 U. S. C. § 1454 (a) (2) (C) (2006). Loans above the conforming limit are known as "jumbos." Bob Tedeschi, The Race Is to the Swift, N. Y. Times, Aug. 10, 2008. The limits are adjusted annually. 12 U. S. C. § 1454 (a) (2) (C). For 2007, the limit was $417,000. Press Release, Office of Federal Housing Enterprise Oversight, 2007 Conforming Loan Limit to Remain at $417,000 (Nov. 28, 2006), available at www.ofheo.gov/media/pdf/ PRConfLoan07.pdf;
129. OFHEO.gov, Supervision & Regulations: Conforming Loan Limits, http://www.ofheo.gov/Regulations.aspx?Nav=128 (last visited Jan. 27, 2009). In 2007, the limit was temporarily raised for selected metropolitan statistical areas by different amounts. See Office of Federal Housing Enterprise Oversight, Metropolitan Statistical Areas, Micropolitan Statistical Areas and Rural Counties with New Loan Limits (2008), available at http://www.ofheo.gov/media/ hpi/AREA-LIST-5-2008.pdf. As of July 30, 2008, OFHEO was replaced by the Federal Housing Finance Agency (FHFA). Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, §§ 1101, 1301-04, 122 Stat. 2654.
130. By testing just above the conforming limit for three-family residences, all of the four-family-residence quotes ended up being for conforming properties because of the higher conforming loan limit for four-family residences. I tested just above the three-family limit out of concern that the loan amount necessary for a four-family jumbo might be so large as to distort the results for single- and two-family properties. Since there is no difference in legal treatment of three-family and four-family residences, I do not believe that the absence of four-family jumbos from our sampling is significant.
131. There is no standard definition of subprime credit score, cutoffs of 600, 620, or even 650 are commonly used. There is also no standard definition of Alt-A;
132. it can range between 620 to 800+. See Jody Shenn, Subprime Meltdown Snares Borrowers with Better Credit, Bloomberg.com, Mar. 22, 2009, http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a8ilcv. eOx Mc.
133. Chase permits specification of credit by characterization (excellent, good, fair, etc.), but not by score. See Mortgage.chase.com, Check Rates, http://mortgage.chase.com/pages/refinance/crq-r-landing.jsp (last visited Mar. 25, 2009). I used "excellent" as the assumption.
134. Chase rate quotes for conforming 20-percent-down mortgages presented a variation on this pattern. Single-family principal residences, vacation homes, and fourfamily residences had identical quotes, but two- and three-family residences were priced around twenty-five basis points higher, and 30-year-fixed quotes were unavailable for investor properties.
135. 11 U. S. C. §§ 1321, 1322 (b).
136. Id. § 362 (d).
137. See id. § 362 (d) (1).
138. See id. § 362 (d) (2).
139. In theory, the lack of the differential could be explained by the market anticipating bankruptcy-reform legislation, which would impose the same basic modification risk on all properties, even if the risk would actually be less for investor properties and vacation homes because of the greater likelihood that the stay would be lifted on those properties.
140. A basis point is l/100th of a percent (0.01 percent).
141. Again, Chase rate quotes were different. At 10 percent down, rate quotes were still unavailable for investor properties for 30-year-fixed mortgages. Rates for vacation-home mortgages were actually slightly lower (five basis points) than for single-family principal residences. Notably, interest rates and points for two-family residences were the same as for single-family principal residences, but APRs were higher by thirty-eight basis points. I was unable to ascertain the source of the APR variation.
142. On a $500, 000, 30-year, 6-percent fixed mortgage, this translates into an additional $25.97-$38.89 per month.
143. Chase's outlier pricing for four-family conforming loans is puzzling in this regard.
144. Fannie Mae and Freddie Mac, the GSEs that dominate the secondary mortgage market, will not purchase standard mortgages with LTVs of more than 80 percent without mortgage-insurance coverage. See Fannie Mae, supra note 57, pt. V, §101.01;
145. Freddie Mac, supra 57, § 27.1. As a result, most mortgage originators require some form of mortgage-insurance coverage, typically from a private mortgage insurer, in order to access the full secondary market. See Freddie Mac, Mortgage Insurance Coverage Options Matrix (2008), available at http://www.freddiemac.com/learn/pdfs/us/flexmi.pdf. Lender PMI-coverage requirements are required to terminate when the LTV ratio reaches 78 percent. 12 U. S. C. §§ 4901 (18), 4902 (b) (2006). For a detailed examination of private mortgage insurance, see Quintin Johnstone, Private Mortgage Insurance, 39 Wake Forest L. Rev. 783 (2004).
146. ANDREW LI[TON & SHIV RAO, Moody's Investor Serv., Valuing Lender-Paid Mortgage Insurance in MBS and ABS Transactions 5 (Feb. 9, 2001), available at http://www.natlaw.com/seminar/doc34.pdf. Notably, Radian Guaranty Co. does not exclude bankruptcy losses from its coverage and specifically covers losses from strip-down. Radian Guaranty Inc., Master Policy 16 (2006), available at http://www.radian. biz/pdf/master-policy.pdf. Professor Scarberry has observed that lenders are uniquely vulnerable because of the PMI exclusion. The Looming Foreclosure Crisis: How To Help Families Save Their Homes, 110th Cong. (Dec. 5, 2007) (Statement of Mark S. Scarberry), available at http://judiciary.senate. gov/hearings/testimony.cfm?id=3046&wit-id=6808. Some private mortgage insurers, however, do not exclude bankruptcy strip-down from their master policies.
147. See, e.g., Radian Guaranty Inc., supra, at 16;
148. State of New York Mortgage Agency, Primary Mortgage Insurance Master Policy 24 (2003), available at http://nyhomes.org/docs/pmigenc3pol.pdf. Thus lack of PMI coverage for strip-down from major private mortgage insurers seems to be attributable to lack of lender demand, as indicated in the lender's own pricing. Even when there is an exclusion for bankruptcy strip-down, however, the exclusion applies not just to currently nonmodifiable mortgages, but to all types of mortgages, and a lender can never be sure that what is an owner-occupied principal residence at the time a mortgage loan is made will be so in the future (and PMI coverage always excludes fraud); it is as easy as moving in a tenant the day before filing for bankruptcy.
149. See Lipton & Rao, supra, at 5. Thus, lenders have been assuming the risk of strip-down all along and not relying on PMI. Prospectively, though, if stripdown risk grows, it is reasonable to expect markets to adjust, as lenders will demand modification coverage from private mortgage insurers or find equivalent coverage through swap and derivative products.
150. Johnstone, supra note 90, at 789.
151. Straightening Out the Mortgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress? - Part II: Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the Judiciary, 110th Cong. 3 (2007) [hereinafter Kittle Testimony] (statement of David G. Kittle, Chairman-Elect, Mortgage Bankers Association), available at http://judiciary. house.gov/media/pdfs/Kittle 071030.pdf.
152. The explanation for this additional premium is that most second-home purchasers put down at least 20 percent of the purchase price so they are not required to have PMI coverage. See supra note 90. Therefore, the additional PMI premium for second homes likely reflects the smaller (and riskier) coverage pool of second-home buyers who do not put down at least 20 percent of the purchase price.
153. AIG United Guar., Rates Effective Feb. 1, 2007 (2007), available at https://www.ugcorp.com/rates/Monthly.pdf;
154. CMG Mortgage Ins. Co., Monthly Premium Rates, Nationwide Effective 12.15.08 (2008), available at http://www.cmgmi.com/ca-19.aspx;
155. GENWTH FIN., National Rate Plans (July 14, 2008), available at http://mortgageinsurance.genworth.com/pdfs/Rates/National Rates.pdf;
156. MGIC, National Rate Card: January 2008 (2008), available at http://www.mgic.com/pdfs/71-6704-Natl-ratesJan08.pdf;
157. Radian Guar. Inc., Industry Rates, Effective Date: February 1, 2008 (2008), available at http://www.radian. biz/pdf/RAR167IndustryBPMI-1-11-08.pdf;
158. Republic Mortgage Ins. Co., Premium Rates (Nov. 24, 2008), available at http://www.rmic.com/ratesguides/premiumrates/ratecards/Documents/PremiumRates-3. 08.pdf;
159. Triad Guar. Ins. Co., Monthly Rates: December 2007 (2007), available at http://www.tgic.com/pdf/TGRC.0116.1207RefundableMonthly.pdf. Since the quotes were collected, Triad Guaranty ceased underwriting new policies. Triad Guaranty to Go into Run-Off, Int'l Bus. Times, June 19, 2008, available at http://www.ibtimes.com/articles/20080619/triad-guaranty-to-go-into-run-off.htm.
160. The range of rates for vacation homes and investor properties is dependent on credit scores.
161. It is not clear how competitive the PMI industry is on the consumer level. If PMI insurers have quasicaptive relationships with lenders or mortgage brokers, it would provide an explanation for the variation in rate quotes for three- and four-family properties.
162. Notable too, Radian Guaranty Inc., the sole insurer that I have been able to verify, does not exclude bankruptcy losses (including strip-down) from its coverage, and does not price two-family properties differently than single-family properties. See Radian Guar. Inc., supra note 91, at Condition 11, B.l (c) (2008), available at http://www.radian. biz/pdf/Master-Policy-2008.pdf.
163. Securitized mortgage pools often have pool-level, stop-loss bond insurance to enhance their credit ratings. See KOTHRI, supra note 59, at 211-30. The existence of pool-level insurance may weaken the conclusions that can be drawn from PMI pricing. Nevertheless, not all mortgages are securitized and there can also be a presecuritization exposure period for those that are.
164. David Reiss, Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 Fla. St. U. L. Rev. 985, 1055 (2006).
165. See, e.g., Freddie Mac, Bulletin No. 2009-5, at exh. 19 (Mar. 9, 2008), available at http://www.freddiemac.com/singlefamily/pdf/ex19.pdf.
166. Id.
167. FANNIE MAE, Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge (AMDC) Information 3-4 (Dec. 29, 2008), available at www.efanniernae.corn/sf/refrnaterials/llpa/pdf/llpamatrix.pdf;
168. FREDDIE MAC, November 24, 2008 Bulletin, at E19-9 to E19-10 (2008), available at http://www.freddiemac.com/singlefamily/pdf/ex19.pdf.
169. Credit Suisse Equity Research, supra note 9, at 28 (estimating that 75 percent of outstanding first-lien residential mortgages are held by securitization trusts, and that two-thirds are in GSE MBS). Freddie and Fannie MBS alone comprise over 44 percent of residential first-lien mortgage debt outstanding. Id.
170. Likewise, there has been no problem securitizing mortgage debts that are modifiable, such as family-farm mortgages and vacation-home, multiunit, and investor properties. Indeed, the largest securitization market is in bankruptcy-modifiable, nonmortgage debts, such as credit cards and car loans. See Fed. Reserve Bank, Statistical Release, No. G.19, Consumer Credit (Jan. 8, 2009), available at http://www.federalreserve.gov/releases/g19/Current/g19.pdf.
171. 508 U. S. 324 (1993).
172. E.g., compare In re Nobelman, 968 F.2d 483 (5th Cir. 1992), with In re Bellamy, 962 F.2d 176, 180 (2d Cir. 1992), and In re Hougland, 886 F.2d 1182, 1184 (9th Cir. 1989).
173. See Joshua Goodman & Adam J. Levitin, Mortgage Market Cramdown Sensitivity (2008) (unpublished manuscript on file with author).
174. Id.
175. Id.
176. Id.
177. Id.
178. Id.
179. Id.
180. Karen M. Pence, Foreclosing on Opportunity: State Laws and Mortgage Credit, 88 Rev. of Econ. & Stat. 177, 180 (2006), available at www.mitpresjournal.org/doi/pdf/10.1162/rest.2006.88.1.177?cookieSet=1. Nonjudicial foreclosure is generally faster than judicial foreclosure. See infra text accompanying notes 132-33. To the extent that speed is a proxy for costs for a lender, Pence's article shows that mortgagees prefer faster (and therefore cheaper) lossmitigation procedures.
181. Mark Meador, The Effects of Mortgage Laws on Home Mortgage Rates, 34 J. Econ. & Bus. 143, 146 (1982) (estimating a 13.87 basis-point increase in interest rates on new homes as a result of antideficiency laws).
182. Claudia Wood, The Impact of Mortgage Foreclosure Laws on Secondary Market Loan Losses (1997) (unpublished PhD dissertation, Cornell University, on file with author).
183. Reint Gropp et al., Personal Bankruptcy and Credit Supply and Demand, 112 Q. J. Econ. 217, 245 (1997).
184. Jeremy Berkowitz & Richard Hynes, Bankruptcy Exemptions and the Market for Mortgage Loans, 42 J. L. & ECON. 809, 825-26 (1999).
185. Lawrence D. Jones, Deficiency Judgments and the Exercise of the Default Option in Home Mortgage Loans, 36 J. L. & ECON. 115, 126-27 (1993).
186. Robert N. Collender, An Estimate of the Efficiency Effects of Chapter 12 Bankruptcy, 53 Agric. Fin. Rev. 65, 78 (1993).
187. Lee J. Alston, Farm Foreclosure Moratorium Legislation: A Lesson from the Past, 74 Am. Econ. Rev. 445, 456 (1984).
188. Pub. L. No. 109-8, 119 Stat. 23 (2005).
189. Dragos Ailoae, The Auto Loan Market Post BAPCPA 1 (May 2008) (unpublished manuscript, on file with author) (noting a fifteen basis-point drop in highexemption states above low-exemption states). When strip-down is permitted, a secured lender is more likely to end up with an unsecured deficiency claim, which will be paid only after the debtor's property exemptions are taken. 11 U. S. C. § 522 (c) (2) (2006);
190. see also id. § 1325 (a) (limiting strip-down for automobile loans).
191. Nadia Massoud et al., The Cost of Being Late: The Case of Credit Card Penalty Fees 2007 unpublished AFA 2007 Chicago Meetings Paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=890826.
192. Frederick Link, The Economics of Personal Bankruptcy 139-50 (2004) (unpublished PhD dissertation, Mass. Inst. Tech.), available at http://dspace.mit.edu/handle/1721.l/29428.
193. Berkowitz & Hynes, supra note 118, at 826.
194. Michael Simkovic, The Effect of BAPCPA on Credit Card Industry Profits and Prices, 83 Am. Bankr. L. J. 22, 22-23 (2009).
195. MARK KANTROWITZ, Impact of the Bankruptcy Exception for Private Student Loans on Private Student Loan Availability 5 (2007), available at http://www.finaid.org/educators/20070814pslFICOdistribution.pdf.
196. 11 U. S. C. § 1325 (a) (5) (2006).
197. Id. § 361. Bankruptcy modification also allows the lender to avoid the expenses of foreclosure, particularly the expenses of maintaining the property as real estate owned by the lender and undertaking a private sale after the foreclosure, often involving a broker. Bankruptcy modification also provides lenders with insurance against interest-rate risk; if a lender forecloses, the lender will have to redeploy the capital it has recovered, just as if there were a prepayment If interest rates have fallen, the lender will be worse off, as it will have traded a higher-interest-rate investment for a lower-interest-rate one. Even for property types where modification is permitted, bankruptcy protects the lender against such a down side; the lender is guaranteed to get the risk-free rate plus an appropriate risk-premium. See Till v. SCS Credit Corp., 541 U. S. 465, 479-80 (2004).
198. Cf. Berkowitz & Hynes, supra note 118, at 809 ("[I]t is default and not necessarily bankruptcy that creates losses for creditors.").
199. See Pence, supra note 114, at 177.
200. Id.
201. Id. at 177-78.
202. See id. at 177 (listing estimates).
203. Sheriffguadagno.com, Monmouth County Foreclosures, http://www. sheriffguadagno.com/Foreclosures.html (last visited Jan. 30, 2009).
204. N. J. Stat. Ann. § 2A:50-19 (West 2009) (requiring the sale to be conducted by a sheriff).
205. Sheriffguadagno.com, supra note 136. I selected Monmouth County because of the high level of detail and easy accessibility of its sheriffs sale data via the Internet.
206. See id.
207. See id.
208. Id. Monmouth County's requirement that the foreclosing creditor begin the auction with a $100 bid, see Sheriffguadagno.com, supra note 136, might inflate the overall loss number, as there is no reason for the foreclosing creditor to place a credit bid for the full amount of its claim unless another party shows up at the auction and starts placing bids. Otherwise, the sensible move for a foreclosing creditor is to bid the required $100 and maximize the size of the deficiency judgment. Unfortunately, the number of third-party auction winners in Monmouth County is so small as to frustrate more detailed analysis. The foreclosing plaintiff won the auction 66 percent of the time; only 6 percent of the winning bids were identified as third parties'. Id. The remaining 28 percent were not identified in the data. Id.
209. Indiana data comes from SRI, Inc., which administers the sheriffs' sales for Blackford, Boone, Crawford, Fayette, Kosciusko, Marshall, Monroe, Orange, Parke, Scott, Steuben, Tipton, Union, Vigo, Warrick, and Washington counties. See SRI-sheriffsale.com, SRI, Inc. Sheriffs Sale System, http://sri-sheriffsale. com/SaleResults.aspx last visited Jan. 31, 2009.
210. Id.
211. See generally LYNN LOPUCKI & ELIZABETH WARREN, SECURED CREDIT, A Systems Approach 55-68 (5th ed. 2006).
212. Id. at 62-63.
213. Id. 1at 63-64.
214. Id.
215. Id. at 67.
216. Id. at 70-71.
217. Id. at 68.
218. seeSRI-sheriffsale.com, supra note 142.
219. See Craig Focardi, Servicing Default Management: An Overview of the Process and Underlying Technology 12 (2002).
220. Fitch Ratings, Revised Loss Expectations for 2006 and 2007 Subprime Vintage Collateral 2 (2008) (on file with author).
221. See infra text accompanying notes 254-65.
222. The 2001 CBP has data from the Central District of California, Northern District of Illinois, the Eastern District of Pennsylvania, the Middle District of Tennessee, and the Northern District of Texas. For a detailed description of the 2001 CBP and its methodology
223. see Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap 181-82 (2003).
224. 11 U. S. C. § 1325 (a) (5) (2006).
225. Id. § 1325 (a) (4).
226. Id. § 506 (a).
227. See supra text accompanying notes 39-42.
228. Till v. SCS Credit Corp., 541 U. S. 465, 479 (2004). There is reason to believe that the prime rate would not be the relevant interest-rate benchmark for mortgages. Till dealt with a subprime auto loan with a 21 percent contract rate of interest. Id. at 470. As the prime rate has frequently been above the rate of 30-yearfixed mortgages, using the prime rate as a floor could result in an inequitable windfall for creditors.
229. See Fed. Reserve Bank, Statistical Release, No. H.15, Selected Interest Rates (2009), available at http://federalreserve.gov/releases/hl5/data.htm. Arguably for a mortgage loan, the appropriate baseline would be either the average 30-year-fixedmortgage rate or the 10-year-Treasury-bond rate.
230. Mortgage Bankers Ass'n, National Delinquency Survey (Feb. 2008), available at http://www.mbaa.org/ResearchandForecasts/ProductsandSurveys/ NationalDelinquencySurvey.htm. This average includes the recent historically high foreclosure rates. From 1993 to 2006, the average foreclosure rate was 1.12 percent, with a high of 1.51 percent. Id.
231. See Sherifguadagno.com, supra note 136.
232. See id. The Indiana data does not indicate the cause of cancelled foreclosure sales. New Jersey has an equity of redemption, but homeowners redeemed their homes in less than 2 percent of completed foreclose sales in Monmouth County. See id.
233. 2007 Consumer Bankruptcy Project Database. The 2007 CBP Database is a proprietary database unavailable to the public. For a description of the 2007 CBP
234. see Robert M. Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am, Bankr. L. J. 349, 353-56 (2008).
235. See, e.g., Gordon Bermant et al., Thoughts on the "Local Legal Culture": The Case of Consumer Chapter Choice, 21 Am. Bankr. Inst. J. 24, 24 (2002);
236. Chrystin Ondersma, Are Debtors Rational Actors? An Experiment, 13 Lewis & Clark L. Rev. 279, 295-303 (2009);
237. Teresa Sullivan et al., The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 Harv. J. L. & Pub. Pol'y 801, 828 (1994).
238. The amounts scheduled by debtors do not necessarily match up with those listed in creditors' claims.
239. See Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Tex. L. Rev. 121, 163 (2008) ("Among all loans, the median claim exceeded its corresponding scheduled debt by $1, 366. The average difference between a claim and its scheduled debt was $3, 533.").
240. See supra note 156.
241. 2001 Consumer Bankruptcy Project Database.
242. Id.
243. Press Release, RealtyTrac, Stockton, Detroit, Riverside-San Bernardino Post Top Metro Foreclosure Rates in Q3 Nov. 14, 2007, available at http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID= 9&Item ID=3609.
244. Press Release, RealtyTrac, Riverside-San Bernardino Foreclosures Increase 52 Percent in August (Sept. 24, 2006) (on file with author) (noting that 1 in 437 houses was in foreclosure).
245. See Press Release, RealtyTrac, supra note 171.
246. See Pacer.psc.uscourts.gov, PACER Service Center, http://www.pacer.psc. uscourts.gov (last visited Mar. 26, 2009) (displaying all Schedules A and D in Chapter 13 bankruptcy filings in the United States Bankruptcy Court, Central District of California:
247. Riverside Division, between September 1, 2007 and December 31, 2007).
248. My initial sampling from other districts indicates that there is a strong correlation between average home prices and average amount undersecured. Id.
249. See Pacer.psc.uscourts.gov, supra note 174.
250. Id.; 2001 Consumer Bankruptcy Project.
251. See Pacer.psc.uscourts.gov, supra note 174;
252. Consumer Bankruptcy Project. This chart omits extreme outlier data points for scaling purposes.
253. See Inside Mortgage Fin., Mortgage Statistical Annual (2008).
254. See Jack Guttentag, Piggyback Loans vs. Insurance, Wash. Post, Mar. 15, 2008, at G2.
255. See supra text accompanying notes 9-10.
256. A random sampling of the Indiana data was used in order to have datasets of roughly comparable size for Chart 5.
257. See Pacer.psc.uscourts.gov, supra note 174;
258. Consumer Bankruptcy Project; see also Sheriffguadagno.com, supra note 136;
259. SRI-sheriffsale.com, supra note 142. The Indiana counties' sheriffs' sale data plotted represent a random sampling designed to result in the same number of observations as the CBP datasets. The graph omits extreme outlier data points for scaling purposes.
260. It is possible that the apparent market indifference is actually the result of cross-subsidization between mortgages that can be modified in bankruptcy and those that cannot. I do not believe that this is likely, however. First, it would require crosssubsidization to occur in several different segments of the market-originations, secondary market, and insurance. Insurers in particular are unlikely to have crosssubsidized price structures, as they are not subject to the same political pressure as the GSEs. Second, competition in these markets is a major force against crosssubsidization. If lender A has a cross-subsidized pricing structure that inflates the prices of mortgage loans on single-family, owner-occupied houses in order to hold down the prices of mortgage loans on multifamily and vacation homes, lender B will gladly come along and offer lower prices on single-family, owner-occupied, home-mortgage loans because they are a much larger segment of me market. And third, if there is crosssubsidization, we must ask why it would not also occur with rental properties. Accordingly, although cross-subsidization cannot entirely be ruled out, I believe it is not the likely explanation.
261. To the extent that bankruptcy judges' valuations would sometimes be lower, it will be offset by higher returns on modified loans for creditors in some cases. As long as losses in bankruptcy are no greater than those in foreclosure, there should not be any effect on mortgage credit from allowing bankruptcy modification.
262. See supra text accompanying notes 162-65. Another explanation might be possible, namely that even though foreclosure may be a worse outcome for lenders for any particular mortgage, it benefits lenders' portfolios overall by creating a general deterrence against borrowers both entering into overly burdensome mortgages and not keeping their financial affairs in order after they have a mortgage. There is no empirical evidence to support such an explanation, however, and it is not clear that the deterrent effect would be less costly than more diligent initial underwriting. Moreover, the fact that lenders rarely pursue deficiency claims on mortgages, even when permitted, cuts against a deterrent function to foreclosure instead of workouts.
263. 11 U. S. C. § 1325 (b) (l) - (4) (2006).
264. See Lynnley Browning, Distressed Owners Are Frustrated by Aid Group, N. Y. Times, Apr. 2, 2008, at C1.
265. See infra Chart 7.
266. Id.
267. Jay Brinkmann, An Examination of Mortgage Foreclosures, Modifications, Repayment Plans, and Other Loss Mitigation Activities in the Third Quarter of 2007, at 10 (2008), available at http://www.mortgagebankers.org/files/News/ InternalResource/59454-LoanModificationsSurvey.pdf.
268. See infra text accompanying note 228.
269. See HOPE NOW, supra note 1
270. Id.
271. See Alan White, Rewriting Contracts, Wholesale: Data on Voluntary Mortgage Modifications from 2007 and 2008 Remittance Reports, 36 Fordham Urban L. J. (forthcoming 2009), available at http://papers.ssrn.com/sol3/papers.cfm? abstract-id=1259538.
272. Office of the Comptroller of the Currency & Office of Thrift Supervision Mortgage Metrics Report: Fourth Quarter 2008, at 7 (2009) [hereinafter OCC & OTS Mortgage Metrics Report], available at http://www.occ.treas.gov/ftp/release/2009-37a.pdf;
273. see also infra Chart 8.
274. Id.
275. Id. at 35-37.
276. Id. at 7.
277. Id.
278. Id. at 35.
279. See Eggert, supra note 28, at 757.
280. See Hearing on H. R. 200 and H. R. 225:
281. Hearing Before H Comm. on the Judiciary, 110th Cong. 23 (Jan. 22, 2008) (written testimony of Adam J. Levitin) [hereinafter Levitin Testimony], available at http://judiciary.house.gov/hearings/pdf/Levitin090122.pdf. When people get deeply in debt, they frequently stop answering phone calls and opening mail because they do not want to face dunning calls and collection letters. Id. Mortgagors are also often mistrustful of servicers' workout overtures because they follow months of dunning.
282. Cong. Oversight Panel, supra note 30, at 37-38.
283. See Morgenson, supra note 9.
284. See Credit Suisse Fixed Income Research, The Day After Tomorrow: Payment Shock and Loan Modifications 4-6 (2007), available at http://www.credit-suisse. com/researchandanalytics (finding prohibitions or restrictions on modification in fourteen out of thirty-one securitization deals surveyed). Sometimes servicers are forbidden from engaging in any sort of modification, other times they are limited to modifying only a small percentage of loans in a pool, other times they are forbidden from writing down principal, and other times they are required to purchase any modified loans at par.
285. See Gelpern & Levitin, supra note 29.
286. See generally Eggert, supra note 28. Redefault rates have been higher for modifications of securitized loans than loans held directly by lenders.
287. OCC & OTS Mortgage Metrics Report, supra note 196, at 23.
288. Until the 2007 tax year, the federal income-tax system created a strong disincentive for homeowners to engage in voluntary workouts, as any debt voluntarily forgiven by the lender would be imputed to the homeowner as taxable income. 26 U. S. C. § 61 (a) (12) (2006) (including income from discharge of indebtedness in gross income, except as otherwise provided);
289. id. § 108 (a) (1) (A) (excluding discharge of debt in a bankruptcy case from the definition of gross income);
290. see also United States v. Kirby Lumber Co., 284 U. S. 1, 3 (1931);
291. Stephen B. Cohen, Mortgage Double Whammy: First You Default; Second, You're Taxed, 117 Tax Notes 169 (Oct. 8, 2007) (arguing that tax case-law doctrine might have provided a solution to the voluntary-workout disincentive). The Mortgage Forgiveness Debt Relief Act of 2007 has removed this disincentive for homeowners with less than $2 million in principalresidence mortgage debt, but only for debt discharge that occurs before 2010, after which the Internal Revenue Code will again create a disincentive for all voluntary workouts. Pub. L. No. 110-142, 121 Stat. 1803, 1803-04 (codified as amended in scattered sections of 26 U. S. C).
292. See Levitin Testimony, supra note 203, at 13-14.
293. Id.
294. Joe Adler, FDIC Offers an IndyMac Loan Mod Plan, Am. Banker, Aug. 21, 2008, at 1.
295. 15 U. S. C. § 77ppp (a) (l) (B) (providing that, unless specified in the indenture, holders of at least a simple majority of the principal amount of a bond issue must consent to waivers of past defaults);
296. id. § 77ppp (b) (providing individual bondholders with a right to refuse modification of the payment of principal and interest on their bond as due).
297. See Mark J. Roe, The Voting Prohibition in Bond Workouts, 97 Yale L. J. 232, 278 1987.
298. Bond workouts typically involve an exchange offer, in which the old bonds are exchanged for new bonds with a lower interest rate (or principal amount), but individual bondholders may refuse to participate in the exchange offer. 15 U. S. C. § 77ppp (b). This creates a potential holdout problem, as the bondholders who do not participate in the exchange benefit from the debtor's increased ability to service their bonds because of the decreased debt-service demands from those bondholders who participated in the exchange. This situation creates an incentive for bondholders to try to be the holdout and unfairly benefit from those who will participate in the exchange, and the collective-action problem the holdout engenders can frustrate voluntary workouts.
299. SeeRoe, supra, at 236.
300. See Roe, supra note 212, at 236 (explaining that public debt creates a holdup problem). Companies without public debt, mass tort liabilities, or complicated collective-bargaining or pension/benefit liabilities are often able to restructure their debts voluntarily outside of Chapter 11. When Chapter 11 is used, it is typically to take advantage of bankruptcy-court blessings of asset sales or to engage in a liquidation absent a trustee (and with favorable provisions for the debtor's attorneys' fees).
301. Indeed, even the threat of bankruptcy-modification legislation can shift the dynamics of voluntary workouts. The HOPE Now Alliance was formed in part to diffuse political pressure for changing bankruptcy law to permit modification on all property types. Hopenow.com, About Us, http://www.hopenow.com/hopenow- aboutus.html (last visited Feb. 11, 2009).
302. See Michelle White & Ning Zhu, Saving Your Home in Chapter 13 Bankruptcy (Nat'l Bureau of Econ. Research Working Paper No. W14179, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1165507 (modeling lower Chapter 13 default rates if strip-down were permitted).
303. See generally Gelpern & Levitin, supra note 29.
304. Cong. Oversight Panel, supra note 30, at 3.
305. See, e.g., Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, H. R. 5679, 110th Cong. § 6A (d) (2008).
306. Philadelphia's Residential Mortgage Foreclosure Diversion Pilot Program, a program in which the city brokers loan modifications between homeowners and lenders, appears to be successful.
307. See Jon Hurdle, Success Seen in Program to Save Homes, N. Y. Times, Sept. 28, 2008, at A22.
308. D. P. K., Comment, Constitutional Law-Mortgage Foreclosure Moratorium Statutes, 32 Mich. L. Rev. 71, 71 (1933) (noting that, in 1933, twenty-one states enacted legislation that functioned as foreclosure moratoria). Depression-era foreclosure-moratorium statutes seem to have either extended the period of redemption postforeclosure, prohibited foreclosures unless the sale price was at some minimum percentage of property appraisal, or granted state courts the power to stay foreclosures. Id.
309. See, e.g., Home Retention and Economic Stabilization Act of 2008, H. R. 6076, 110th Cong. § 128A (a) (2) (2008) (providing for deferral of foreclosure up to 270 days if, inter alia, minimum payments were made);
310. Md. Code Ann., Real Prop. §§ 3-104.1, 7-105.1 (LexisNexis 2008) (requiring post-default delay and a specific form of service for foreclosure actions);
311. Minnesota Subprime Foreclosure Deferment Act of 2008, H. F. 3612, 2008 Leg., 85th Sess. (Minn. 2008), available at https://www.revisor.leg.state.mn. us/bin/getbill.php?number=HF3612&session=ls85&version= list&session-number=08session-year0 (providing for foreclosure deferral up to one year if, inter alia, minimum payments were made).
312. Ofelia Casillas & Azam Ahmed, Sheriff: I will stop enforcing evictions, Chi. Trib., Oct. 9, 2008, at C1.
313. Jeff Blumenthal, Moratorium on Sheriff's Foreclosure Sales Draws Debate, Phila. Bus. J., Apr. 4, 2008, available at http://philadelphia.bizjournals.com/ philadelphia/stories/2008/04/07/storylO.html.
314. Press Release, Senator Hillary Clinton, Details on Senator Clinton's Plan to Protect American Homeowners (Mar. 24, 2008), available at http://2008central.net/2008/03/24/clinton-press-release-clinton-calls-for-bold- action-tohalt-housing-crisis.
315. U. S. Const, amend. V (applying to the states via section 1 of the Fourteenth Amendment).
316. U. S. Const, art. I, § 10, cl. 1.
317. But see Home Bldg. and Loan Ass'n v. Blaisdell, 290 U. S. 398, 437 (1934) (upholding a Depression-era Minnesota foreclosure moratorium in the face of a contracts-clause challenge, and noting that the economic conditions of the Depression "may justify the exercise of its continuing and dominant protective power notwitfistanding interference with contracts").
318. Blaisdell has been heavily criticized. See, e.g., Richard A. Epstein, Toward a Revitalization of die Contract Clause, 51 U. Chi. L. Rev. 703, 737 (1984).
319. U. S. Const, art I, § 8, cl. 4.
320. See, e.g., Cal. Civ. Code §§ 2923.5-.6 (West 2008) (imposing a delay and a NPV-maximization requirement);
321. Md. Code Ann., Real Prop. §7-105.1 (LexisNexis 2008);
322. Mass. Gen. Laws ch. 244, § 35A (a) (2008) (imposing a ninetyday-pre-foreclosure cure period).
323. Howell E. Jackson, Build a Better Bailout, Christian Sci. Monitor, Sept. 25, 2008, at Op. 9;
324. Lauren E. Willis, Stabilize Home Mortgage Borrowers, and the Financial System Will Follow (Loyola-L. A. Legal Studies Paper No. 2008-28, 2008), available at http://papers.ssrn. corn/sol3/papers.cfm?abstract-id=1273268.
325. See, e.g., Kelo v. City of New London, 545 U. S. 469, 489 (2005).
326. United States v. Reynolds, 397 U. S. 14, 19 (1970);
327. Fed. R. Civ. P. 71.1 (h) (1). Congress may create a special tribunal in lieu of a jury to determine just compensation. Id.
328. There is also a pair of programs proposed by FDIC that have not been adopted, but which merit consideration. Some features of these programs have been incorporated into HASP. While the FDIC proposals are by no means the only existing proposals, they present detailed, comprehensive proposals for government refinancing and/or guarantee of mortgages and merit discussion. One of the FDIC proposals calls for direct federal refinancing of distressed mortgages, or Home Ownership Preservation Loans. The FDIC plan calls for Congress to authorize the Treasury Department to refinance up to 20 percent of the outstanding principal on eligible unaffordable mortgages in exchange for the lenders' agreement to restructure the mortgages into fully-amortized, fixed-rated loans for the balance of the original loan term. FDIC.gov, FDIC Home Ownership Preservation Loans: Questions and Answers, http://www.fdic.gov/ consumers/loans/hop/qa.html (last visited Jan. 31, 2009) ("The program could be limited to mortgages for owner-occupied residences that are unaffordable-defined by front-end [debt-to-income ratios] exceeding 40 percent at origination. In addition the loan could be required to be below the FHA conforming loan limit. Finally, the loans eligible for the program could be limited to those originated between January 1, 2003 and June 30, 2007."). Additionally, the plan caps interest rates at the Freddie Mac 30-year-fixed rate and imposes a superpriority lien on the property for the Treasury Department, meaning that the Treasury would get paid first in any refinancing or foreclosure sale before any existing mortgagees. FDIC.gov, FDIC Home Ownership Preservation Loans, http://www.fdic.gov/consumers/loans/hop (last visited Jan. 31, 2009). Homeowners would be required to pay off the restructured mortgage, including the Treasury-refinanced component, but the payments on the Treasury-refinanced component would be delayed for five years and then amortized over the rest of the mortgage's tenor.
329. See FDIC.gov, FDIC Home Ownership Preservation Loans: Questions and Answers, supra. Lenders would have to pay the first five years of interest (the government's "cost of carry") on the Treasuryrefinanced component upon closing. Id.
330. There are many good qualities to the FDIC plan. It avoids the second-mortgageeholdup problem by simply not addressing the issue; because there is no refinancing, the second mortgagee remains subordinated and has no holdup power. Second mortgages are not a concern for the FDIC plan because it does not aim to address negative-equity problems. The FDIC plan would also avoid the HOPE for Homeowners program's lemon problem, and, assuming that properties maintain at least 25 percent or so of their value (which seems reasonable even in the worst-case housing market) and that the government's superpriority lien is properly perfected, it ensures that the government will eventually be paid back in full. (The Treasury loan would be 20 percent of the outstanding principal. Id. As there is no mention of a LTV requirement for refinancing, the Treasury loan could be for 20 percent of 110 percent or 125 percent or the property's current value. That is, the Treasury LTV ratio could be closer to 22-25 percent in extreme cases.) It would be much simpler administratively, and available much quicker than HOPE for Homeowners.
331. But the FDIC plan suffers from some of the same critical flaws of HOPE for Homeowners and HASP program. It would still leave an unresolved moral-hazard issue for borrowers, who would find themselves bailed out by the government. Likewise, it would create moral hazard for lenders, as they would be placed in a more favorable mortgage at no cost. And more crucially, the FDIC Homeownership Preservation Loan plan also fails to address the contractual and agency problems that exist because of securitization. The FDIC plan would place the onus on lenders-that is servicers-for applying for Treasury refinancing and undertaking the restructuring. These servicers would receive no benefit from the refinancing and would potentially incur both the large cost of fronting the five years of interest payments and the costs of restructuring the mortgage. The Homeownership Preservation Loan program lacks the servicer incentive payments featured in HASP. Moreover, the FDIC plan could create additional problems for securitized mortgages because it would alter the securitization trusts' cash flows without buying out the mortgages in whole. Securitization trusts have timely-payment obligations to investors, which require a certain schedule of cash inflows that the FDIC plan would interrupt.
332. Critically, as proposed and unlike HASP, the FDIC program would only help those borrowers who received loans that were unaffordable when made. It would not help homeowners whose incomes declined since taking out the mortgages, since it would look to affordability at time of origination. Nor would it address the sizeable problem created by negative equity. The FDIC's proposed government refinancing program would undoubtedly help many homeowners, but it would fail to resolve many distressed-mortgage situations or to create long-term housing market stability.
333. The FDIC has also proposed a loan-modification program that is designed to promote systematic modifications of delinquent owner-occupied-property mortgages by offering incentives to servicers and investors. FDIC.gov, FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications, http://www.fdic.gov/ consumers/loans/loanmod/index.html (last visited Jan. 31, 2009). The core of the FDIC program is an eight-year government guarantee of up to 50 percent of losses on redefaults of qualifying modified loans, with the guarantee being phased out as the LTV ratio rises from 100 percent to 150 percent. Id.
334. The guarantee would kick in after six months of successful payments on modified loans. Id.
335. In order to qualify for the government guarantee, the FDIC proposal would require servicers to undertake a systematic review of their entire servicing portfolios, and subject each loan to a standardized NPV calculation to determine if it is suitable for modification based on a 31 percent front-end (housing debt only) debt-to-income (DTI) ratio. Id. Servicers would be required to modify all qualifying loans in order to qualify for the government redefault guarantee. Id.
336. The FDIC also proposes paying servicers a $1, 000 bounty per modification. Id.
337. There are two major questions about the FDIC plan. First is whether it will induce mass modifications. Its all-or-nothing approach could easily backfire if the incentives are not properly calibrated overall. There are many reasons to think that they are not. While this FDIC plan recognizes servicers' incentives as an issue, it only proposes paying a modification bounty that is a rough proxy for servicers' modification costs. Modification costs are but one piece of servicer incentives. There are also issues like the cost of making advances on nonperforming loans to the securitization trust and litigation risks, which the FDIC plan does not address. The FDIC plan would require servicers to breach their servicing contract in many cases. Absent a litigation safe harbor, servicers will be reluctant to do so. Likewise, the plan is intended to shift servicers' NPV calculation through the guarantee against redefaults. But this fails to account for PMI cancellation's impact on NPV. Loan modification can often result in the termination of PMI. PMI is typically first-loss-position insurance, capped at 30 percent of the mortgage.
338. See Johnstone, supra note 90, at 786. Loss of 30 percent first-loss-position insurance is not compensated for by the maximum 50 percent pari-passu government guarantee that would only kick in after six months of successful payments. To wit, assuming a 45 percent loss in foreclosure, investors would do better by foreclosing and taking the PMI coverage (net loss of 15 percent after the 30 percent PMI first-loss position) than if die loan redefaulted, even after ten months of payments and the government guarantee kicked in (net loss of 22.5 percent-half of a 45 percent loss-minus some payments made). Thus, the FDIC guarantee might not tilt NPV calculations toward modification.
339. Second, even if the FDIC plan were successful at producing mass modifications, it is far from clear that these would be sustainable. The plan does not require principal write-downs, so it cannot address the negative-equity problem. Nor does it attempt to deal with second liens, which contribute to the negative-equity problem. And its reliance on a front-end DTI target, rather than an examination of the homeowners' entire finances, raises redefault risk. Finally, even if the FDIC plan would produce mass sustainable modifications, it would do so at taxpayer expense.
340. The FDIC Wholesale Modification Plan creates moral-hazard problems for homeowners and lenders and fails to convincingly address restrictive PSAs, servicer incentives, negative equity, and second liens. Moreover, without exacting affordability standards, the FDIC plan cannot guarantee a good return for taxpayers. While the Plan is also more promising than HOPE for Homeowners, it suffers from many of the same problems.
341. Portal.hud.gov, FHASecure Fact Sheet-Refinance Options, http://portal.hud.gov/portal/page?-pageid=73, 1824154&-dad=portal&- schema=POR TAL (last visited Mar. 26, 2009) ("FHASecure is a refinancing option that gives homeowners with non-FHA adjustable rate mortgages (ARMs), current or delinquent and regardless of reset status, the ability to refinance into a FHA-insured mortgage.").
342. See, e.g., Press Release, U. S. Dep't of Hous. & Urban Dev., Bush Administration to Help Nearly One-Quarter of a Million Homeowners Refinance (Aug. 31, 2007), available at http://www.hud.gov/news/release.cfm?content=pr07- 123.cfm;
343. Press Release, U. S. Dep't of Hous. & Urban Dev., FHA Helps 400, 000 Families Find Mortgage Relief (Oct. 24, 2008), available at http://www.hud.gov/ news/release.cfm?content=pr08-167.cfm.
344. Michael Corkery, Mortgage 'Cram-Downs' Loom as Foreclosures Mount, Wall St. J., Dec. 31, 2008, at C1.
345. HOPE for Homeowners Act of 2008, § 1402 (a), (e) (2) (B), Pub. L. No. 110-289, 122 Stat. 2654, 2801.
346. Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure, Wash. Post, Dec. 17, 2008, at A1.
347. All Things Considered: Despite Program, No Hope for Homeowners (NPR broadcast, Dec. 17, 2008), available at http://www.npr.org/templates/story/ story.php?storyId=98409330.
348. Adam J. Levitin, Flaws in the FHA Housing Bill, Wall St. J., July 11, 2008, at A15.
349. The HOPE for Homeowners Act of 2008 requires a maximum 90 percent LTV ratio for FHA refinancing. § 1402 (e) (2) (B), 122 Stat, at 2801. This means that if the lender is perfectly secured, the lender will have to write down the principal by 10 percent. If the lender is undersecured, the lender will have to write down the principal by a greater amount. Additionally, all lenders are required to pay insurance premiums on the mortgage of 3 percent of the principal initially, and 1.5 percent of the principal remaining on an annual basis. Id. § 1402 (i) (2). The LTV requirement has been reduced to 96.5 percent in some cases, where debt-to-income ratios are close to traditional underwriting guidelines. Press Release, U. S. Dep't of Hous. & Urban Dev., Bush Administration Announces Flexibility for Hope for Homeowners Program (Nov. 19, 2008), available at http://www.hud.gov/news/release.cfm?content=pr08-178. cfm.
350. Kate Berry, Red-Program Previewers Raise Issues, Am. Banker, Aug. 19, 2008 ("If a bank owns the loan outright, it's fine because they're basically swapping a semi-nonperforming asset for one that is now insured by the government.") (quoting Dan Cutaia, president of Fairway Independent Mortgage Corp);
351. id. ("A Wall Street firm may say that a loan is worth only 80 cents on the dollar if they try to sell it, but if FHA can refinance it at 90 cents, this is a viable way to do it.") (quoting Ronald Faris, president of Ocwen Financial Corp., a leading mortgage servicer).
352. The Hope for Homeowners Act of 2008, § 1402 (a), (i), 122 Stat, at 2801.
353. Id. § 1402 (h), 122 Stat. 2654, 2804 ("Standards To Protect Against Adverse Selection-(1) IN GENERAL-The Board shall, by rule or order, establish standards and policies to require the underwriter of the insured loan to provide such representations and warranties as the Board considers necessary or appropriate to enforce compliance with all underwriting and appraisal standards of the HOPE for Homeowners Program.").
354. See U. S. Dep't of the Treasury, Homeowner Affordability and Stability Plan Fact Sheet 2 (2009), available at http://www.treasury.gov/initiatives/eesa/ homeowner-affordability-plan/FactSheet.pdf;
355. Press Release, U. S. Dep't of the Treasury, Home Affordable Modification Program Guidelines 2 (Mar. 4, 2009), a vailable at http://www.ustreas.gov/press/ releases/reports/modification-program-guidelines.pdf.
356. U. S. Dep't of the Treasury, Homeowner Stability and Affordability Plan: Executive Summary (Feb. 18, 2008), available at http://www.ustreas.gov/press/ releases/tg33.htm.
357. U. S. Dep't of the Treasury, Home Affordable Modification Program Guidelines 1 (Mar. 4, 2009), available at http://www.ustreas.gov/press/releases/ reports/modification-program-guidelines.pdf.
358. Id. at 8-9.
359. Id. at 1, 11.
360. Id. at 1, 11-13.
361. Id. at 1.
362. Id. at 1, 11-13.
363. Id. at 14.
364. Id. at 9-10.
365. See Cong. Oversight Panel, supra note 30, at 26-28.
366. David Streitfeld, Coming Up Short, N. Y. Times, Sept. 19, 2008, at C1.
367. First Am. CoreLogic, Negative Equity Data Report (Sept. 30, 2008), a variable at w ww.facorelogic.com/newsroom/marketstudies/negative-equity-report. jsp. (stating that over 7.5 million (or 18 percent of all) mortgages were in a negative-equity position as of September 30, 2008);
368. see also J. W. Elphinstone, Homeowner Equity Hits All-Time Low, Fed Says, N. Y. Sun.com, Mar. 6, 2008, http://www.nysun.com/business/homeowner-equity- hits-all-time-low-fed-says/72453.
369. Christopher L. Foote et al., Negative Equity and Foreclosure: Theory and Evidence (Federal Reserve Bank of Boston, Public Policy Discussion Papers No. 08-3, 2008), available at www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf.
370. U. S. Census Bureau, Geographical Mobility: 2002 to 2003, at 2 (Mar. 2004), available at www.census.gov/prod/2004pubs/p20-549.pdf (noting an increasing occurrence of long-distance moves).
371. See generally Radin, supra note 11;
372. Stern, supra note 11.
373. See Cong. Oversight Panel, supra note 30, at 26.
374. Id. at 26.
375. Id. at 26-28.
376. Id. at 27.
377. See, e.g., Vikas Bajaj, Mortgage Holders Find It Hard to Walk Away from Their Home, N. Y. Times, May 10, 2008, at C1. Even if the mortgage is recourse, lenders frequently do not pursue deficiency judgments after foreclosure. Id.
378. See, e.g., David Streitfeld, Ruins of an American Dream, N. Y. Times, Aug. 24, 2008 (describing a family that abandoned a house and $3, 400 monthly mortgage payment to foreclosure and began renting a brand new house two miles away for $1, 200 per month).
379. The credit-report hit from a foreclosure can generally last no longer than seven years. 15 U. S. C. § 1681c (a) (2) (2006). This means that if a homeowner abandoned a negative-equity property to foreclosure, the homeowner would be able to go back in the home-buying market in seven years without a diminished credit score. If me homeowner would be functionally renting for at least that long by remaining in a negative-equity property, then the credit-score hit would likely be outweighed by cheaper rental opportunities if the homeowner abandoned the property.
380. See U. S. Dep't of the Treasury, supra note 246, at 2.
381. See U. S. Dep't of the Teasury, supra note 244, at 5.
382. See U. S. Dep't of the Treasury, supra note 246, at 15.
383. See U. S. Dep't of the Treasury, supra note 245.
384. Ben S. Bernanke, Chairman, Fed. Reserve Bank, Reducing Preventable Mortgage Foreclosures, Speech at the Independent Community Bankers of America Annual Convention (Mar. 4, 2008), available at http://www.federalreserve.gov/ newsevents/speech/bernanke20080304a.htm.
385. See Cong. Oversight Panel, supra note 30, at 18-23.
386. Nick Ravo, The Trials of Ownership in a Recession, N. Y. Times, Aug. 8, 1993, at 110;
387. see also Holden Lewis, Some Lenders Blocking Refinances if Second Mortgage Isn't Paid Off, Seattle Post-Intelligencer, Feb. 27, 2009, available at http://seattlepi.nwsource.com/money/401802-real28.html.
388. Larry Summers, Beware Moral Hazard Fundamentalists, Fin. Times (London), Sept. 23, 2007.
389. See id.
390. It is also important to note that bankruptcy modification reducing loan principal does not produce a windfall for a debtor, even if the property later appreciates. The debtor cannot benefit from the appreciation during the course of the plan. If the mortgage appreciates in the three to five years of a plan, the debtor can only benefit upon a sale or disposition of the house. If the debtor sells the house at an appreciated value during the term of the plan, the debtor's income from the sale will be available to satisfy unsecured claims, including any unsecured mortgage claim that results from bifurcation under section 506 (a). 11 U. S. C. § 1325 (b) (2006) (requiring debtors to commit all disposable income to unsecured creditors);
391. id. § 1329 (permitting modification of a plan to account for increases in debtor's income). Thus, there is no windfall possible for the debtor in the short term. If the property appreciates in the long term, that appreciation would belong to the debtor, but the debtor has a better claim to it than the mortgagee. Seen from a perspective of the original loan, letting the debtor keep future appreciation looks like a windfall. But this is the wrong perspective. The original loan was unable to perform, and insisting on its terms would have resulted in foreclosure. When a property is sold in foreclosure, the foreclosing creditor does not receive the future appreciation on the property; that belongs to the foreclosure-sale purchaser. Giving the creditor more in bankruptcy than the creditor would have received in a foreclosure is a windfall to the creditor, not the debtor. The creditor has already been rewarded in bankruptcy by getting a loan modification that will provide at least the value the creditor would have received in foreclosure. If the creditor were able to claw back future appreciation, me bankruptcy modification would be equivalent to a temporary loan modification, and temporary modifications are less likely to succeed than life-of-the-loan modifications. In the case of securitized loans, permitting an appreciation claw-back would also reward precisely the parties whose irresponsible behavior created the foreclosure crisis. Securitization trusts are often short-lived entities. When the outstanding principal balance reaches a certain threshold, often 10 percent, the servicer will exercise a "clean-up call" and purchase out the remaining balance from the trust; it is not economical for the servicer to service small balances.
392. Kothari, supra note 59, at 43. Most trusts reach this clean-up-call threshold in their first seven years, as loans are refinanced out of the trust or default.
393. See Phoa, supra note 42, at 363. Thus, the trust that owned the mortgage at the time of bankruptcy may well not exist to receive the shared appreciation. Instead, the clawed-back appreciation would accrue to the party who held the residual rights in the mortgages-often the servicer/originator.
394. This is particularly troubling because, in many cases, principal reductions are necessary because the original lender condoned or even encouraged inflated property appraisals in order to make larger loans that it could then securitize for more money. See Homeowners Sue KB Home and Countrywide over Appraisals, Reuters.com, Feb. 7, 2008, http://www.reuters.com/article/ domesticNews/idUSN07417124200 80208. Thus, rather than being a windfall to debtors, an appreciation claw-back would reward the very entities that fueled the mortgage bubble through irresponsible lending. Finally, it is important to emphasize that appreciation claw-backs do not exist for any other sort of lien-stripping in bankruptcy. Likewise, unsecured creditors do not get to claim future income or assets after the debtor is discharged. Even if me debtor wins the lottery the next day, the core bankruptcy policy of the fresh start emphasizes that prepetition creditors have no claim on postdischarge assets. 11 U. S. C. §§ 727 (b), 1328 (a).
395. 11 U. S. C. § 1325 (b).
396. Id. §§ 1322 (a), 1325 (a) (5).
397. See id. § 1328 (f) (2). Section 1328 prohibits a Chapter 13 discharge if a Chapter 13 discharge was granted within the two preceding years, but for debtors who do not repay creditors in full, a Chapter 13 plan must last at least three or five years, depending on whether the debtor is below or above the applicable state's median income. Id. § 1325 (b) (1), (4). Thus, it is the length of the plan, not the time between discharges, that controls for debtors who have to repay less than 100 percent of their debts.
398. Robert M. Lawless et al., Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors, 82 Am. Bankr. L. J. 349, 376, 381 (2008) (suggesting that those who file for bankruptcy are seriously in debt and wait until it is absolutely necessary to file before doing so).
399. 11 U. S. C. § 1325 (a) (3), (7).
400. Lawless, supra nots 279, at 361.
401. Id. at 360 fig.2.
402. 11 U. S. C. § 109 (e) (2006 & Supp. 2008).
403. 11 U. S. C. § 1129 (2006);
404. see also id. § 1111 (b).
405. Id. §1325 (b) (l) (B).
406. See Mortgagebankers.org, Stop the Bankruptcy Cram Down Resource Center, http://www.mortgagebankers.org/StopTheCramDown (last visited Jan. 27, 2009).
407. 11 U. S. C. § 1322 (b).
408. Id. § 362 (d). The Bankruptcy Code provides that the automatic stay shall be lifted for cause, including either lack of adequate protection of a secured creditor's interest in the property-that is payments to compensate the secured creditor for depreciation in its collateral during the bankruptcy-or if the debtor does not have equity in the property and the property is not necessary for an effective reorganization. Id. Thus, debtors with positive equity who could not handle mortgage payments prepetition would be unlikely to be able to make the adequate-protection payments necessary to prevent the lifting of the stay. Id. § 362 (d) (1).
409. Debtors with negative equity would find the stay lifted because investment properties and second homes are not essential to their reorganizations. Id. § 362 (d) (2).
410. Id. § 362 (d) (2).
411. Id. § 362 (d) (1).
412. See Cong. Oversight Panel, supra note 30, at 21-23.
413. 11 U. S. C. § 362 (d).
414. Id. §§ 1321, 1325 (2006 & Supp. 2008);
415. U. S. C. § 1322 (b) (2006).
416. Id. § 1325 (a) (3), (7).
417. Id. § 1325 (b).
418. 1Id. § 1325 (a) (7) (describing the good-faith requirement);
419. id. § 1325 (b) (1) (B) (describing the disposable-income requirement). Most courts, however, permit debtors to continue making contributions to 401 (k) and 403 (b) plans.
420. See, e.g., In re Mad, 390 B. R. 11 (Bankr. D. Mass. 2008). On the other hand, this can be differentiated on tax-benefit grounds; whereas there is a tax-benefit from the 401 (k) or 403 (b) contribution that would otherwise be lost, there is no tax deduction available for an investment-property-mortgage interest payment (although there is for second homes). Chapter 13 does seem to recognize tax-benefits as an issue in at least some situations; small-business owners are able to deduct business expenses from their disposable income as part of the disposable income test. Id. § 1325 (b) (2) (B).
421. Adam J. Levitin, Helping Homeowners: Modification of Mortgages in Bankruptcy, 3 Harv. L. and Pol'y Rev. Online 1, 7-9 (2009), available at http://www.hlpronline.com/Levitin-HLPR-011909.pdf.
422. Arguably, states might hold the key to bankruptcy relief. The Bankruptcy Code prohibits the modification of "a claim secured only by a security interest in real property that is the debtor's principal residence." 11 U. S. C. § 1322 (b) (2). As several courts of appeals have held, this means that if the security interest includes anything other than the debtor's principal residence, then the mortgage can be modified. See supra note 41 (listing examples).
423. Bankruptcy law looks to state law to determine property rights. Butner v. United States, 440 U. S. 48, 49, 56-57 (1979). So, if the security interest covers a rental unit on the property or connected farmland or fixtures, then modification is possible. States could redefine property rights to clarify that a mortgage secured by a debtor's principal residence is not secured solely by the debtor's principal residence if it includes a security interest in land (not just the house), fixtures, rents, profits, etc. Thus, states might be able to make it possible for a large number of homeowners to file for Chapter 13 bankruptcy and modify the mortgage on their homes simply by fine-tuning state property law.
424. See, e.g., Kantrowitz, supra note 128;
425. Link, supra note 125;
426. Ronald J. Mann, Bankruptcy Reform and the "Sweatbox" of Credit Card Debt, 2007 U. ILL. L. Rev. 375 (2007);
427. Simkovic, supra note 127.
428. H. R. 1106, 111th Cong (2009).
429. S. 61, 111th Cong. (2009).
430. The Homeowner Affordability and Stability Program calls for modification of mortgages in bankruptcy as a backstop to voluntary modifications; the Obama administration has limited its call for bankruptcy modification to mortgages witiiin the Fannie Mae/Freddie Mac conforming loan limit, "so that millionaire homes don't clog the bankruptcy courts."
431. See U. S. Dep't of the Treasury, supra note 244, at 6. It is unclear if this proposed limitation is for loans that were conforming at the time of origination or at the time of the bankruptcy filing; the former would effectively bar many Californians and New Yorkers from bankruptcy relief given the high percentage of "jumbos" in those states. Despite the administration's statement that the proposed limitation is meant to prevent bankruptcy abuse by millionaires, a more likely explanation is a concern about bankruptcy-loss allocations in jumbo-mortgage securitizations that could further threaten the solvency of financial institutions. Many jumbo-mortgage securitizations have a pari passu, rather than senior/subordinate loss allocation for "excess bankruptcy losses," diat is losses due to bankruptcy that are over and above a de minimis amount for the entire trust. Maurna Desmond & Daniel Fisher, The Mortgage Investors Protection Act of 2009, Forbes.com, Mar. 19, 2009, http://www.forbes.com/2009/03/17/congress- foreclosures-bankruptcy-cramdowns-business-wall-streetcramdowns.html. A pari passu loss allocation would impose losses even on the senior most MBS in a jumbo securitization, which would cause the senior bonds to lose their AAA rating. Id. Financial institutions holding the AAA bonds would have to carry the bonds as assets at a lower value and/or sell them immediately, at a reduced value. Id. In either case, it would result in losses to already strained financial institutions.
432. Id. The bankruptcy-modification legislation that passed the House of Representatives (H. R. 1106, the Helping Families Save Their Homes Act of 2009) has a provision specifically designed to address this concern. Helping Families Save Their Homes in Bankruptcy Act of 2009, H. R. 1106, 111th Cong. The provision provides that contractual lossallocation provisions for "excess bankruptcy losses" apply, as a matter of public policy, only to bankruptcy losses of the type that could have occurred before the passage of the bill. Id. § 124.
433. This legislation was the Helping Families Save Their Homes in Bankruptcy Act of 2008, S. 2136, 110th Cong. (2008).
434. See Kittle Testimony, supra note 93. Notably, in response to a request from U. S. Representative Brad Miller (D-N. C), for clarification in later communications with members of Congress, the MBA changed its explanation of the 150-basis-point-increased-cost-of-mortgages claim, arguing (without providing any evidence or methodology for the derivation of its numbers) that seventy to eighty-five basis points would be due to higher default-incidence rates, twenty to twenty-five basis points would be due to higher loss-severity rates, ten basis points would be due to the administrative costs imposed by bankruptcy, and fifty to sixty basis points would be due to market uncertainty and increased political risk. Letter from Stephen A. O'Connor, Senior Vice President of Gov't Affairs, Mortgage Bankers Ass'n, to Representative Brad Miller (Apr. 18, 2008) (on file with author).
435. See Letter from Stephen A. O'Connor, supra note 304.
436. Id.
437. Press Release, Mortgage Bankers Association, MBA's "Stop the Cram Down Resource Center" Puts a Price Tag on Bankruptcy Reform (Jan. 15, 2008), available at http://www.mortgagebankers.org/NewsandMedia/PressCenter/593 43.htm.
438. Id.
439. David Kittle, the president-elect of the MBA, claimed that prior to the enactment of the Bankruptcy Code there was no difference in interest rates for singlefamily, owner-occupied principal residences and investor properties. Growing Mortgage Foreclosure Crisis: Identifying Solutions and Dispelling Myths: Hearing on H. R. 3609 Before the Subcomm. on Commercial and Admin. Law of the H. Convn. on the Judiciary, 110th Cong. (2007) (statement of David G. Kittle, Mortgage Bankers Association), available at http://judiciary.house.gov/hearings/ pdf/Kittle080129.pdf. The MBA has produced no data or other source to support this assertion, including in response to inquiries from major media outlets, and I know of no data source on interest rates that both goes back to 1978 with rates broken down by property type. Indeed, the idea that investor properties and owner-occupied properties would ever be priced the same, even if there were no bankruptcy system whatsoever, ignores the significant default risk entailed in lending against investor properties caused by various tenancy risks.
440. See supra App. A;
441. see also supra Part II. A.2.
442. See supra App. A;
443. see also supra Part H. A.2.
444. See supra App. A;
445. see also supra Part II. A.2.
446. Additionally, the MBA's amortization of the higher down payments typically required on investor properties is debatable. Lenders bear no risk on down payments, unlike on interest payments. Down payments receive different tax treatment than interest payments for borrowers, and down payments create equity in a house, unlike interest. By amortizing down payments-turning mem into interest dollar-fordollar adjusted for present value-the MBA is equating two very different types of payments that should not be treated as dollar-for-dollar equivalents.
447. Regardless, even if the MBA were correct that higher down payments and/or points will be required, and that it will be harder to make high-LTV loans, this is not necessarily a bad thing, as it might compel more prudent lending practices and would inherently protect lenders from ending up with undersecured loans that could be stripped down by creating an instant equity cushion.