The case for banning subprime mortgages

University of Cincinnati Law Review

Volumn 77, Issue 2, 2008, Pages 617-644

  White, Alan M ^a  

^a VALPARAISO UNIVERSITY   (United States)

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EID: 67249163950     PISSN: 00096881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (143)

1. Behavioral science research suggests that borrowers will consistently overestimate their ability to repay loans, underestimate the probability of life events that would prevent repayment, and discount future payment obligations hyperbolically. See Lauren E. Willis, Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price, 65 MD. L. REV. 707 (2006).
2. Damian Paletta and James R. Hagerty, Fed's New Rules on Mortgages Draw Hostility, WALL ST. J., Dec. 19, 2007, at A1, available at http://www.realestatejournal.com/buysell/mortgages/20071 220-hagerty.html?mod=RSS-Real-Estate-Journal&rejrss=frontpage.
3. See Id.; Subprime Rebound Not Expected Any Time Soon, 12 INSIDE B&C LENDING (Inside Mortgage Fin. Publ'ns, Bethesda, Md.) (Dec. 15, 2007).
4. Truth in Lending, 73 Fed. Reg. 1672 (proposed Jan. 9, 2008) (to be codified at 12 C. F. R. pt. 226).
5. ELLEN SCHLOEMER et al., CTR. for RESPONSIBLE LENDING, LOSING GROUND: FORECLOSURES in THE SUBPRIME MARKET and THEIR COST to HOMEOWNERS 7 (2006), available at http://www.responsiblelending.org/pdfs/foreclosure-paper-report-2-17.pdf.
6. MORTGAGE BANKERS ASS'N of AM., NATIONAL DELINQUENCY SURVEY Q307 (2007). Delinquencies and foreclosures are reported separately by MBA, and neither category includes the loans in the other. Thus, to say that 19.59% of subprime ARMs were delinquent on September 30, 2007 is a half-truth because it does not include the additional 10.38% that were in foreclosure (and therefore also delinquent).
7. MONICA PERELMUTER, STANDARD and POOR'S, STANDARD and POOR'S REEXAMINES RISKS of EARLY PAYMENT DEFAULTS IN U. S. RMBS 1 (2007), http://www2.standardandpoors.com/spf/pdf/event s/SPRexaminesRisksofEarlyPaymentDefaults.pdf.
8. SIFMA RESEARCH and POLICY DEP'T, SEC. INDUSTRY and FIN. MARKETING ASS'N, RESEARCH Q. (Nov. 29, 2007), at 5-6, available at http://www.sifma.org/research/pdf/Research-Quarterly-11 07.pdf. Note that SIFMA defines subprime mortgage-backed securities as home equity loan asset- backed securities (ABS), and includes only jumbo and Alt-A securitizations in its definition of RMBS (residential mortgage-backed securities). Id. Not all reports categorize agency RMBS, jumbo (i.e., prime mortgages whose amounts exceed the Fannie and Freddie limits), Alt-A and subprime in the same manner, resulting in discrepancies in the reported numbers for volume and market share of each sector in any given year or quarter. Another industry newsletter reported that subprime securitization volume declined from $24 billion in June 2007 to $7 billion in October 2007. See MBS Market Continues Tilling More Toward Fixed-Rate Mortgages as ARM Lending Slows, 45 INSIDE MBS and ABS 2 (Inside Mortgage Fin. Publ'ns, Bethesda, Md.) (2007).
9. Countrywide, the largest originator of subprime loans in 2006, announced that its subprime loan originations for October 2007 were $42 million, compared to $3 billion in October 2006. Countrywide Reports Fewer Loans for October, N. Y. TIMES, Nov. 14, 2007, at C1.
10. See EDWARD M. GRAMLICH, SUBPRIME MORTGAGES: AMERICA'S LATEST BOOM and BUST (2007);
11. John Kiff and Paul Mills, Money for Nothing and Checks for Free: Recent Developments in U. S. Subprime Mortgage Markets (Int'l Monetary Fund, Working Paper No. 07-188, 2007), available at http://ssrn. com/abstract=1006316.
12. Cathy Lesser Mansfield, The Road to Subprime "HEL" Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market, 51 S. C. L. REV. 473 (2000).
13. Yuliya Demyanyk and Otto Van Hemert, Understanding the Subprime Mortgage Crisis (Aug. 19, 2008) (unpublished manuscript), available at http://ssrn. com/abstract= 1020396.
14. Cf. Geetesh Bhardwajy and Rajdeep Sengupta, Did Prepayments Sustain the Subprime Market? 2 (Fed. Res. Bank of St. Louis, Working Paper No. 2008-039A, 2008), available at http://ssrn. com/abstract=1290716 (finding that "For all subprime originations and across all product types, at least half of all loans were prepaid within the first five years after origination. ").
15. SCHLOEMER, supra note 5, at 11.
16. Alan M. White, Risk-Based Pricing: Present and Future Research, 15 HOUSING POL'Y DEBATE 503, 507-08 (2004).
17. GRAMLICH, supra note 10, at 17.
18. Glenn Costello, Drivers of 2006 Subprime Vintage Performance, FITCH RATINGS, Oct. 2007, at 7, available at http://www.fitchratings.com/corporate/reports/report-framecfm?rpt-id=353344.
19. ARIEL WEIL and ARNITA SHRIVASTAVA, MOODY'S INVESTORS SERVICE, U. S. SUBPRIME MORTGAGE MARKET UPDATE: SEPTEMBER 2007 (Oct. 3, 2007), available at http://www.moodys.c om/moodys/cust/research/ mdcdocs/03/2007000000444240.pdf?frameofref=structured.
20. Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures: Hearing Before the H. Comm. on Fin. Servs., 110th Cong. 1 (2007) (statement of Ben S. Bernanke, Chairman, Fed. Reserve Bd.) ("The resulting increase in the supply of mortgage credit likely contributed to the rise in the homeownership rate from 64 percent in 1994 to about 68 percent now-with minority households and households from lower-income census tracts recording some of the largest gains in percentage terms."). A few months earlier, the Chairman was less equivocal: "The expansion of subprime mortgage lending has made homeownership possible for households that in the past might not have qualified for a mortgage and has thereby contributed to the rise in the homeownership rate since the mid-1990s." Ben S. Bernanke, Chairman, Fed. Reserve Bd., Speech at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition: The Subprime Mortgage Market (May 17, 2007), available at http://www.federalreserve.gov/ newsevents/speech/bemanke20070 517a.htm.
21. GRAMLICH, supra note 10, at 2-3.
22. See, e.g., Predatory Lending Practices: Hearing Before the H Comm. on Banking and Fin. Servs., 106th Cong. 25 (2000) (testimony of William Apgar, Assistant Secretary for Housing and Federal Housing Commissioner).
23. Alan Mallach, Lower Income Homeownership, the Subprime Lending Industry, and the Public Good: A Conceptual Inquiry, 19 HOUSING POL'Y DEBATE (forthcoming 2008).
24. Id.
25. The joint report on predatory mortgage lending issued by HUD and the Treasury Department in 2000 found that: Generally, subprime mortgages serve as a source of home-collateralized consumer credit, and thus can also be thought of as part of the subprime consumer credit market. The primary purpose of over 50 percent of first lien subprime mortgages and up to 75 percent of second lien subprime mortgages is debt consolidation and/or general consumer credit, not home purchase, home improvement or refinancing the rates and terms of a mortgage. U. S. DEP'T of HOUS. and URBAN DEV. and U. S. DEP'T of TREASURY, CURBING PREDATORY HOME MORTGAGE LENDING: A JOINT REPORT 26 (2000) [hereinafter HUD/Treasury Report]. In most years no more than one-third of subprime mortgages have been purchase loans, while two-thirds have been refinances. Souphala Chomsisengphet and Anthony Pennington-Cross, The Evolution of the Subprime Mortgage Market, 88 FED. RES. BANK OF ST. LOUIS REV. 31, 41-43, (2006).
26. See discussion infra Part I. C.
27. CTR. for RESPONSIBLE LENDING, SUBPRIME LENDING: A NET DRAIN on HOMEOWNERSHIP 2 (2007) [hereinafter NET DRAIN], http://www.responsiblelending.org/pdfs/Net-Drain-in-Home-Ow nership. pdf.
28. Id. at 2-3.
29. U. S. CENSUS BUREAU, HOUSING VACANCY SURVEY, HOMEOWNERSHIP RATES for the U. S. AND REGIONS: 1965 TO PRESENT tbl.14, available at http://www.census.gov/hhes/www/housing/hv s/historic/histtl4.html (last visited July 19, 2008).
30. Id.
31. U. S. CENSUS BUREAU, HOUSING VACANCY SURVEY, HOMEOWNER VACANCY RATES by UNITS in STRUCTURE, by QUARTER 1968 to PRESENT tb1.4, available at http://www.census.g ov/hhes/www/housing/hvs/historic/histtab4.html (last visited July 19, 2008).
32. GRAMLICH, supra note 10, at 6.
33. Id.; Alan Greenspan and James Kennedy, Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences 23 (Fed. Reserve Bd. Fin. and Econ. Discussion Series, Working Paper No. 2005-41, 2005), available at http://www.federalreserve.gOv/P ubs/feds/2005/200541/200541.pap. pdf. The estimates in this paper are somewhat higher than the MBA's origination figures.
34. U. S. GOV. ACCOUNTABILITY OFFICE, FED. HOUS. ADMIN.: DECLINE in THE AGENCY'S MARKET SHARE WAS ASSOCIATED WITH PRODUCT and PROCESS DEVELOPMENTS of OTHER MORTGAGE MARKET PARTICIPANTS (June 2007) [hereinafter GAO Study], available at http://www.gao.gov/highlights/d07645high.pdf.
35. Id.
36. NET DRAIN, supra note 26, at 3.
37. See GAO Study, supra note 33; HUD HANDBOOK 4155.1, MORTGAGE CREDIT ANALYSIS: CREDIT REPORT REQUIREMENTS § 2-4B (Oct. 2003), available at http://www.hud.gov/offices/adm/hu dclips/handbooks/hsgh/4155.1/ 41551HBHSGH.pdf.
38. CONGRESSIONAL BUDGET OFFICE, COST ESTIMATE, FHA MODERNIZATION ACT of 2007 4-5 (2007), available at http://www.cbo.gov/ftpdocs/87xx/doc8700/sFHAbill.pdf.
39. U. S. C. § 1709 (c) (1) (2006);
40. see Expanding American Homeownership Act of 2007, H. R. 1852, 110th Cong. §§6-8 (2007) (pending FHA reform legislation would increase the FHA risk premium to permit risk-based pricing).
41. Gretchen Morgenstem, Inside the Countrywide Lending Spree, N. Y. TIMES, Aug. 26, 2007, at C1 (citing one borrower who received a 9.75% rate subprime loan with a 3% origination fee, instead of a 7% FHA mortgage with 0.125% in fees, resulting in a monthly payment of $2387 instead of $1829).
42. OFFICE of POLICY DEV. and RESEARCH, U. S. DEP'T of HOUS. and URBAN DEV, FHA's IMPACT on INCREASING HOMEOWNERSHIP OPPORTUNITIES FOR LOW-INCOME and MINORITY FAMILIES DURING THE 1990S 3 (2000), available at http://www.huduser.org/Publications/PDF/fha.pdf (noting that in 1996, 25% of FHA borrowers had FICO scores below 620).
43. Rick Brooks and Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy, as Housing Boomed, Industry Pushed Loans to a Broader Market, WALL ST. J., Dec. 3, 2007, at A1.
44. NET DRAIN, supra note 26, at 2.
45. U. S. DEP'T OF HOUS. and URBAN DEV, supra note 40, at 3.
46. See Richard K. Green and Susan M. Wachter, The American Mortgage in Historical and International Context, 19 J. OF ECON. PERSP. 93, 97 (2005);
47. Kerry D. Vandell, FHA Restructuring Proposals: Alternatives and Implications, 6 HOUSING POL'Y DEBATE 299 (1995).
48. Robert B. Avery et al., Survey of Consumer Finances, 1983, 70 FED. RES. BULL. 679, 682 (1984).
49. FED. RESERVE BD, 2004 SURVEY of CONSUMER FINANCES, SUMMARY TABLES 1989 to 2004 (2004), available at http://www.federalreserve.gOv/pubs/oss/oss2/ 2004/scf2004home.html.tables. The data from the Census Bureau's housing survey are similar.
50. CHRISTOPHER E. HERBERT and ERIC S. BELSKY, OFFICE of POL'Y DEV. and RES, U. S. DEP'T of HOUS. and URBAN DEV, THE HOMEOWNERSHIP EXPERIENCE of LOW-INCOME and MINORITY FAMILIES: A REVIEW and SYNTHESIS of the LITERATURE 33 (2006), available at http://www.huduser.org/Pub lications/PDF/hisphomeo wn9.pdf.
51. Id. at 33-36.
52. Id. at 36. See William C. Apgar and Mark Duda, The Twenty-Fifth Anniversary of the Community Reinvestment Act: Past Accomplishments and Future Regulatory Challenges, 9 FED. RES. BANK OF N. Y. ECON. POL'Y REV. 169 (2003), available at http://www.newyorkfed.org/research/epr/03 v09n2/0306apga.pdf.
53. Albert Monroe, How the Federal Housing Administration Affects Homeownership 5 (Harvard Joint Ctr. for Hous. Studies, Working Paper No. W02-4, 2001), available at http://www.jc hs.harvard.edu/publications/ governmentprograms/monroe-w02-4.pdf.
54. George S. Masnick, Home Ownership Trends and Racial Inequality in the United States in the 20th Century 8-9 (Harvard Joint Ctr. for Hous. Studies, Working Paper No. W01-4, 2001), available at http://www.jchs.harvard.edu/ publications/homeownership/masnick-w01-4.pdf.
55. Id. at 19.
56. Donald R. Haurin et al., Homeownership Gaps Among Low-Income and Minority Households, 9 CITYSCAPE 5, 16-17 (2007).
57. See Vikas Bajaj and Ron Nixon, For Minorities, Signs of Trouble in Foreclosures, N. Y. TIMES, Feb. 22, 2006, at A1; SCHLOEMER, supra note 5, at 4; GEOFF SMITH, WOODSTOCK INST., KEY TRENDS in CHICAGO AREA MORTGAGE LENDING: ANALYSIS of DATA FROM THE 2004 CHICAGO Area COMMUNITY LENDING FACT BOOK (2006);
58. NEIGHBORHOOD ECON. DEV. ADVOCACY PROJECT, HOME MORTGAGE LENDING AND FORECLOSURES IN THREE NEW YORK CITY NEIGHBORHOODS: BEDFORD- STUYVESANT, BROOKLYN, CYPRESS HILLS, BROOKLYN, JAMAICA, QUEENS (2002), available at http://www.nedap.org/resources/documents/finalNYMCnarrative.pdf.
59. Alan Greenspan, Chairman, Fed. Reserve Bd., Remarks at the Economic Development Conference of the Greenlining Institute, San Francisco, California: Consumer Credit and Financial Modernization (Oct. 11, 1997), available at http://www.federalreserve.gov/boarddocs/speeches/1997/19 971011.htm.
60. See TERESA A. SULLIVAN ET AL., THE FRAGILE MIDDLE CLASS: AMERICANS IN DEBT (2001).
61. See, e.g., Jonathan Karp, Mortgage-Relief Plan Divides Neighbors, WALL ST. J., Dec. 17, 2007, at A1 (citing one family that refinanced three times between 2004 and 2006, increasing the mortgage debt from $500, 000 to $835, 000 before walking away);
62. see also Ren S. Essene and William Apgar, Understanding Mortgage Market Behavior: Creating Good Mortgage Options for all Americans (Harvard Joint Ctr. for Hous. Studies, Working Paper No. MM07-1, 2007), available at http://www.jchs.harvard.edu/publications/finance/mm07-l- mortgage-market-behavior.pdf.
63. Mark W. Olson, Governor, Fed. Reserve Bd., Remarks at the America's Community Bankers 2003 National Compliance and Attorney's Conference and Marketplace: Increased Availability of Financial Products and the Need for Improved Financial Literacy (September 22, 2003), available at http://www.federalreserve.gov/boarddocs/speeches/2003/20030922/default.htm.
64. See infra Table 1 accompanying note 61
65. Brian K. Bucks et al., Recent Changes in U. S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances, 92 FED. RES. BULL. A1, A31 (2006), available at http://www.fed eralreserve.gov/pubs/bulletin/2006/financesurvey.pdf. It should be noted that the SCF is a consumer survey, and consumers underreport their credit card balances by a factor of two, i.e. they owe twice as much as they say they do when surveyed. Where Is the Missing Credit Card Debt? Clues and Implications, PAYMENT CARDS CTR. UPDATE, (Fed. Reserve Bank of Philadelphia, Pa.) Winter 2007, at 10-12, available at http://www.philadelphiafed.org/pcc/papers/2007sept-zinman-missing-credit- card-de bt.pdf.
66. See Avery et al., supra note 45, at 857; Bucks et al., supra note 60, at A31; FED. RESERVE BD., supra note 46, at tb1.11.
67. SCHLOEMER, supra note 5, at 16 (statistics available in Table 6).
68. MORTGAGE BANKERS ASS'N of AMERICA, supra note 6, at 4. The MBA sample represents 80% of the total market. To calculate the numbers in foreclosure, the reported rate of 6.89% was applied to the sample size of 5.99 million, and then divided by 80% to extrapolate to the total mortgage market.
69. BILL LONGBRAKE, HOPE NOW ALLIANCE SERVICERS, PRIME and SUBPRIME RESIDENTIAL MORTGAGES: 2007 LOSS MITIGATION ACTIVITY 7 (Feb. 2008), available at http://www.fsround.or g/media/pdfs/ NationaldataFeb.pdf.
70. SCHLOEMER, supra note 5, at 2.
71. CTR. for RESPONSIBLE LENDING, SUBPRIME SPILLOVER: FORECLOSURES COST NEIGHBORS $202 BILLION; 40.6 MILLION HOMES LOSE $5, 000 on AVERAGE (2008), available at http://www.resp onsiblelending.org/pdfs/subprime-spillover. pdf; see also Dan Immergluck and Geoff Smith, The External Costs of Foreclosure: The Impact of Single-Family Mortgage Foreclosures on Property Values, 17 HOUSING POL'Y DEBATE 57 (2006).
72. See IRA J. GOLDSTEIN, THE REINVESTMENT FUND, LOST VALUES: a STUDY of PREDATORY LENDING in PHILADELPHIA (2007), http://www.trfund.com/resource/downloads/policypubs/Lost-valu es.pdf; Immergluck and Smith, supra note 66, at 57.
73. See Kathleen C. Engel, Do Cities Have Standing? Redressing the Externalities of Predatory Lending, 38 CONN. L. REV. 355 (2006);
74. Daniel Immergluck and Geoff Smith, The Impact of Single- Family Mortgage Foreclosures on Neighborhood Crime, 21 HOUSING STUD. 851 (2006).
75. John Leland, As Owners Feel Mortgage Pain, so do Renters, N. Y. TIMES, Nov. 18, 2007, at A1.
76. Vikas Bajaj, A Cross-Country Blame Game, N. Y. TIMES, May 8, 2007, at C1.
77. Brooks and Simon, supra note 41, at A1.
78. White, supra note 15, at 516-17.
79. JIM CAMPEN et al., WOODSTOCK INST., PAYING MORE for the AMERICAN DREAM: a MULTI-STATE ANALYSIS of HIGHER COST HOME PURCHASE LENDING 4 tb1.2 (2007), available at http://www.issuelab.org/research/paying-more-for-the-american-dream-a- multi-state-analysis-of-hi gher-cos t-home-purchase-lending (follow "Download now" hyperlink).
80. See JIM CAMPEN, MASS. CMTY. and BANKING COUNCIL, BORROWING TROUBLE? V: SUBPRIME MORTGAGE LENDING in GREATER BOSTON, 2000-2003 (2005), available at http://www.ma sscommunityandbanking.org/PDFs/BorrowingTrouble5.pdf;
81. NAT'L CMTY. REIN VESTMENT COAL., THE BROKEN CREDIT SYSTEM: DISCRIMINATION AND UNEQUAL ACCESS to AFFORDABLE LOANS by RACE AND AGE (2003), available at http://www.omm.com/omm-distribution/newsletters/client- alert-fin anciat-services/pdf/ncrcdiscrimstudy.pdf;
82. OFFICE of POLICY DEV. and RESEARCH, DEP'T of HOUS. and URBAN DEV, UNEQUAL BURDEN in CHICAGO: INCOME and RACIAL DISPARITIES in SUBPRIME LENDING (2000), available at http://www.huduser.org/publications/pdf/chicago.pdf;
83. Paul S. Calem et al., Neighborhood Patterns of Subprime Lending: Evidence from Disparate Cities, 15 HOUSING POL'Y DEBATE 603 (2004);
84. Marsha J. Courchane et al., Subprime Borrowers: Mortgage Transitions and Outcomes, 29 J. REAL EST. FIN. and ECON. 365 (2004);
85. Manny Fernandez, Racial Disparity Found Among New Yorkers with High-Rate Mortgages, N. Y. TIMES, Oct. 15, 2007, at B1.
86. Robert B. Avery et al., Higher-Priced Home Lending and the 2005 HMDA Data, 92 FED. RES. BULL. A123 (2006);
87. Robert B. Avery et al., New Information Reported under HMDA and Its Application in Fair Lending Enforcement, 91 FED. RES. BULL. 344 (2005).
88. DEBBIE GRUNSTEIN BOCIAN et al., CTR. for RESPONSIBLE LENDING, UNFAIR LENDING: THE EFFECT of RACE and ETHNICITY on THE PRICE of SUBPRIME MORTGAGES, 11 tbl.2 (2006), available at http://www.chicagofed.org/cedric/2007-res-con- papers/car-26-bocian-emst-wei-li-the-e ffect-of-race.pdf.
89. See HUD/Treasury Report, supra note 24, at 1-3; Kathleen C. Engel and Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 TEX. L. REV. 1255 (2002).v
90. Engel and McCoy, supra note 77, at 1260-61.
91. See GOLDSTEIN, supra note 67, at 5-7; Willis, supra note 1, 721-25.
92. Michael Corkery, Fraud Seen as a Driver in Wave of Foreclosures, WALL ST. J., Dec. 21, 2007, at A1.
93. M. Diane Pendley et al., The Impact of Poor Underwriting Practices and Fraud in Subprime RMBS Performance, FITCH RATINGS, Nov. 13, 2007, http://www.securitization. net/pdf/Fitch/FraudRep ort-28Nov07.pdf.
94. See John Leland, Officials Say They are Falling Behind on Mortgage Fraud Cases, N. Y. TIMES, Dec. 25, 2007, at A18; Bob Ivry, Subprime 'Liar Loans' Fuel Bust With S1 Billion Fraud, BLOOMBERG. COM, Apr. 25, 2007, http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid= aonxuz30YwLg.
95. Ivry, supra note 82.
96. By "private securitization" I mean securitization that does not rely on the government- sponsored enterprises ("GSE's").
97. See The Role of Credit Rating Agencies in the Structured Finance Market: Hearing Before the Subcomm. on Capital Mkts., Ins. and Gov't Sponsored Enterprises of the H. Comm. on Fin. Servs., 11 Oth Cong. (2007) [hereinafter The Role of Credit Rating Agencies] (testimony of J. Kyle Bass, Managing Partner, Hayman Advisors L. P.), available at http://www.house.gov/apps/ list/hearing/fin ancialsvcs-dem/bass.pdf; CDOs and Subprime Debt, FIN. TIMES, July 1, 2007, available at http://www.ft.eom/cms/s/l/098854da-2802-lldc-80da-000b5dfl0621.html; Joseph R. Mason and Joshua Rosner, Where did the Risk Go? How Misapplied Bond Ratings Caused Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions (May 14, 2007) (unpublished manuscript), available at http://ssrn. com/abstract=1027475. Mr. Bass' testimony is one of the clearest explanations of the role of rating agencies and mezzanine CDOs in masking subprime mortgage risk, particularly for foreign investors, and making the 2004-2007 boom in subprime lending possible.
98. See The Role of Credit Rating Agencies, supra note 85, at 6-8;
99. Richard Beales et al., Failing Grades?, FIN. TIMES, May 16, 2007, available at http://www.ft.eom/cms/s/0/ 4cfb5b30-0413-1 ldc-a931-000b5df10621.html;
100. Floyd Norris, Market Shock: AAA Rating May be Junk, N. Y. TIMES, July 20, 2007, at C1; Mark Pittman, Moody's Downgrades $33.4 Billion of Subprime Bonds, BLOOMBERG. COM, Oct. 11, 2007, http://www.bloombergtv. com/apps/news?pid=20601087&refer=home&sid= aH3v9Fjptv4s.
101. See Gretchen Morgenstern, Inside the Countrywide Lending Spree, N. Y. TIMES, Aug. 26, 2007, at C1 (noting that Countrywide Mortgage earned double to triple the profits on subprime mortgages as on prime mortgages);
102. Jack Guttentag, Another View of Predatory Lending (Wharton Fin. Insts. Ctr., University of Pa., Working Paper No. 01-23-B, 2000), available at http://fic.wharton. upenn. e du/fic/papers/01/0123.pdf (providing data on mortgage broker profits).
103. Cracks In The Facade: America's Riskiest Mortgages Are Crumbling. How Far Will The Damage Spread?, ECONOMIST, Mar. 22, 2007, at 79 (noting the regulatory failure, but cautioning against over-regulating).
104. See Citigroup Mortgage Loan Trust, Prospectus Supplement (Form 424B5) (Oct. 22, 2007) [hereinafter Prospectus Supplement]. The loans appear to have been originated, for the most part, in May and June of 2007, but sold to investors in October, well after the general collapse of the subprime securitization market.
105. Prospectus Supplement, supra note 89.
106. MOODY'S INVESTOR SERVICES, PRESALE REPORT: CITIGROUP MORTGAGE LOAN TRUST 2007-WFHE4 (Oct. 2007).
107. Prospectus Supplement, supra note 89.
108. See Statement on Subprime Mortgage Lending, 72 Fed. Reg. 37, 569 (July 10, 2007);
109. Costello, supra note 17, at 6-8.
110. See infra notes 104-07 and accompanying text.
111. Jack M. Guttentag and Richard J. Herring, Disaster Myopia in International Banking, in ESSAYS IN INTERNATIONAL FINANCE NO. 164, at 1 (Princeton Univ. 1986).
112. Green and Wachter, supra note 44, at 94.
113. Id.
114. Id. at 95; MONROE, supra note 50, at 6.
115. See Press Release, Mortgage Bankers Ass'n, Statement by Regina Lowrie in response to Federal Guidelines on Nontraditional Mortgage Products (Sept. 29, 2006), available at http://www.mortgagebankers.org/ NewsandMedia/PressCenter/45371.htm ("Innovative, nontraditional mortgage products have allowed more people than ever to explore the possibility of homeownership, contributing to the nearly 70 percent rate of homeownership. The guidelines propose a one-size-fits-all underwriting standard that will unnecessarily choke industry innovation and diminish consumer choice.").
116. The "option-ARM, " for example, is a mortgage where the borrower pays LESS than the monthly interest each month, at first. The unpaid interest is added to the principal, and then after five years or so, the larger loan balance is amortized over the remaining loan life, leading to dramatic payment increases. See Interagency Guidance on Nontraditional Mortgage Product Risk, 71 Fed. Reg. 58, 609 (Oct. 4, 2006);
117. U. S. GOV'T ACCOUNTABILITY OFFICE, ALTERNATIVE MORTGAGE PRODUCTS: IMPACT on DEFAULTS REMAINS UNCLEAR, BUT DISCLOSURE to BORROWERS COULD be IMPROVED, HIGHLIGHTS of GAO 06-1112T (2006).
118. See, e.g., 15 U. S. C. § 1635 (a), (e) (2006) (providing a three-day rescission period for non- purchase mortgages but not purchase mortgages).
119. See supra note 38 and accompanying text.
120. MORTGAGE BANKERS ASS'N of AMERICA, supra note 6, at 5.
121. CHRISTOPHER HERBERT et al., ABT ASSOCS., INC., AN A
122. SSESSMENT of FHA'S SINGLE-FAMILY MORTGAGE INSURANCE LOSS MITIGATION PROGRAM 18-22 (2000), available at http://ww w.abtassoc.com/reports/20007197399621.pdf.
123. See e.g., Kate Berry, New Lawyer Incentives to Encourage Workouts, 172 Am. BANKER 17 (2007).
124. Kurt Eggert, Comment on Michael A. Stegman et al. 's "Preventive Servicing Is Good for Business and Affordable Homeownership Policy": What Prevents Loan Modifications, 18 HOUSING POL'Y DEBATE 279 (2007).
125. Edmund L. Andrews, Mortgage Aid, Within Limits, N. Y. TIMES, Dec. 7, 2007, at A1.
126. See HUD HANDBOOK, supra note 36, § 2-4B.
127. Pub. L. 110-289, 122 Stat. 2654.
128. Id. §2113.
129. Id. §2112.
130. Id. §2114.
131. Peter G. Miller, November Originations Up, Up and Away, Says HUD, FHA MORTGAGE GUIDE, Dec. 13, 2007, http://www.fhaloanpros.com/2007/12/fha- mortgages-november-originations-up- up-away-says-hud/; Bob Tedeschi, F. H. A. Loans Stage a Comeback, N. Y. TIMES, Apr. 22, 2007, at K13.
132. Mansfield, supra note 11, at 476.
133. C. F. R. § 203.4 (a) (12) (2008).
134. Engel and McCoy, supra note 77, at 1259.
135. Willis, supra note 1, at 820-21.
136. Kathleen C. Engel and Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039 (2007).
137. Id.; Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 2185 (2007).
138. Preserving the American Dream: Predatory Lending Practices and Home Foreclosures: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 110th Cong. 1 (2007) (testimony of Martin Eakes, CEO, Ctr. for Responsible Lending and Ctr. for Cmty. and Self-Help), available at http://banking.senate.gov/-files/ACF250E.pdf; Apgar and Duda, supra note 49, at 169-71.
139. See Andrews, supra note 107, at A1; Barry Wides, 'No Credit? No Problem!': Taking the Nontraditional Route to Bring Borrowers into the Prime Mortgage Market, CMTY. DEVS. ONLINE (2005), http://www.occ.treas.gov/Cdd/newsletters/summer05/cd/nocredit.htm.
140. The Effect of Current Credit Card Industry Practices on Consumers: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 110th Cong. 4 (2007) (testimony of Travis B. Plunkett, Legislative Director, The Consumer Fed'n of Am., Consumer Action and Consumers Union), available at http://www.consumerfed.org/pdfs/Credit-Card-Senate-Testimony-01-07.pdf.
141. Katherine Porter, Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending, 93 IOWA L. REV. 1369 (2008) (noting that most consumers just emerging from bankruptcy are offered credit cards, as well as other forms of secured and unsecured debt).
142. FED. RESERVE BD., FED. RESERVE STATISTICAL RELEASE G.19: CONSUMER CREDIT (Dec. 7, 2007).
143. Home equity lines of credit and junior lien mortgages outstanding reached $1 trillion in 2006. FED. RESERVE BD., FED. RESERVE STATISTICAL RELEASE Z. 1: FLOW of FUNDS ACCOUNTS of THE U. S. (Mar. 8, 2007).