October 26, 2010

Two Thoughts on the Mortgage Meltdown:A Plague o' Both Your Houses

I won't for a moment pretend to have read everything written on the topic but here are a couple of thoughts on mortgage meltdown that i haven't seen elsewhere.

One: the banks are going ballistic hanging tough over the question whether they should rewrite some of these deals so that buyers can stay in their homes. They've pretty well sandbagged HAMP and they talk about a possible Chapter 13 writedown amendment as if it were the End of Western Civilization as we Know it.

What this loses sight of is the question of what will happen if the banks don't get writedowns. For borrowers, this is a huge issue, of course. Either they get to stay in their homes or they do not. For banks, I suspect it is not a big deal. The point is: they are never going to see this money anyway.

Consider the debtor with a $400,000 loan on property worth $280,000. He's out of work and can't pay. He walks away, leaving a deficiency claim of $120,000. What then? In a nonrecourse state, the bank eats it as a matter of law: the bank is debarred from pursuing the debtor for the shortfall.

In a recourse state, the bank can sue the debtor for the shortfall, but I suspect in most cases it won't be worth the bother. The debtor either (a) goes bankrupt and discharges the shortfall claim; or (b) does not go bankrupt and just limps along judgdment-proof, i.e., with no assets to play the game.

The point is that in all three cases, the bank is no worse off than if it took a modification. Indeed I can think of only one way that modification changes things and that is it may allow the bank to get more. How can this be? The answer is that if it plays its cards right, the bank may be able to position the debtor where he is obliged (and willing) to pay a bit more than the bare minimum--in our case, say $290,000. If these are the right numbers, than the bank is better off taking a carefully-done rewrite than otherwise.

That's point one. Now onto point two. We hear a steady drumbeat of argument that the debtors ought to get relief because the subprime fandango was full of "massive fraud." Correct, the subprime fandango was full of massive fraud, but look as little closer. From what I hear, the main fraud claim is that the banks (or brokers for banks) structured deals based on grotesquely inflated estimates of the borrowers' ability to pay--faked data about income and employment,l for example. Sounds like fraud to me, but who is defrauded here? Maybe the buyers of this caca, who took it on the bank's recommendations. Maybe the shareholders, entering into the delusion that their agents the managers were spinning straw into gold and thus deserved massive bonuses.

But the borrower? Maybe he was lied to--e.g., when he was told that it was perfectly all right to declare his income at eight times its actual number. Yet for the life of me I can't understand why a grownup loose on the streets could be misled into believing that he could pay, say, a $3,600 monthly mortgage payment from his takehome down at the car wash. 

Sure, there are cases and cases. That's why we have courts and lawyers (and that is why, inter alia, it is so bogus for the banks to say that they ought to be able to foreclose without paperwork). I might add that I'd feel differently if we were dealing with people 26 years into a 30-year mortgage who got whipsawed by some unseen society-wide calamity. But people take chances; it is okay with me that they take chances, but if you take chances, there is a chance that you will loses.

So, a plague o' both your houses.   I don't think the banks are ever going to get their money back on this one and I don't think they deserve to.  On the other hand, I'm not losing much sleep over debtors who so eagerly bought into such a lunatic fandango.

Cross-posted at Underbelly.

October 18, 2010

A return to the "culture of poverty," with nary a mention of the rural variety

A headline in today's NYT proclaims, "'Culture of Poverty,' Once an Academic Slur, Makes a Comeback." Journalist Patricia Cohen writes of a new (or renewed) academic turn to discussions of poverty in relation to culture, and she recalls a time when such discussions became politically incorrect.

The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a “culture of poverty” to the public in a startling 1965 report. Although Moynihan didn’t coin the phrase (that distinction belongs to the anthropologist Oscar Lewis), his description of the urban black family as caught in an inescapable “tangle of pathology” of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune.

Cohen then goes on to report recent events (e.g., the 2010 meeting of the American Sociological Association and a special issue of The Annals, the journal of the American Academy of Political and Social Science) which suggest an academic turn back to thinking about poverty in relation to culture.

Cohen quotes Robert Sampson, a Harvard sociologist who explains that culture in this context means "shared understandings." He continues:

“I study inequality, and the dominant focus is on structures of poverty” ... But he added that the reason a neighborhood turns into a “poverty trap” is also related to a common perception of the way people in a community act and think. When people see graffiti and garbage, do they find it acceptable or see serious disorder? Do they respect the legal system or have a high level of “moral cynicism,” believing that “laws were made to be broken”?

I find it interesting (albeit not terribly surprising) that Cohen's story focuses entirely on urban poverty. The photos and textual illustrations--like that of Sampson--are all drawn from urban contexts. Cohen does not use the words "rural" and "nonmetropolitan" even once.  She uses the phrase "persistent poverty" several times, yet among counties that the federal government designates as "persistent poverty" (meaning 20 percent or more of their populations were living in poverty over the last 30 years, as measured by the 1970, 1980, 1990, and 2000 decennial censuses), 340 of 386 such counties are nonmetro (with populations under 100,000 and the single largest urban cluster with fewer than 50,000).  Surely these, too, are places where poverty and culture are intertwined.

Dean Joliffe of USDA Economic Research Service wrote in a 2004 issue of the agency's Amber Waves publication:

Persistent poverty is also more pervasive in the most rural areas, as seen in the share of counties that were persistently poor—4 percent of metro counties, 13 percent of micropolitan counties (the more urbanized nonmetro counties), and 18 percent of noncore, nonmetro counties (the most rural of nonmetro counties). (For more information on these classifications, see “Behind the Data” in Amber Waves, September 2003.)

A strong regional pattern of poverty and persistent poverty also emerges. No persistent-poverty counties are found in the Northeast, and only 60 of the nonmetro persistent-poverty counties are in the Midwest and West. The remaining 280 nonmetro persistent-poverty counties are in the South, comprising 25 percent of the total nonmetro population there. Furthermore, the nonmetro South, with over 40 percent of the U.S. nonmetro population, has a significantly higher incidence of poverty. Poverty estimates for 2002 indicate that, in the South, 17.5 percent of nonmetro residents were poor compared with 14.2 percent of all nonmetro residents. Understanding differences in poverty between nonmetro and metro areas of the U.S. is important to understanding differences in well-being across these areas and can help inform the policy dialogue on poverty reduction strategies.

If sociologists and policy makers are re-thinking the role of culture in relation to poverty, they should consider how rural sub-cultures--and not only urban ones--evolve in the context of and in response to entrenched, inter-generational poverty.

Dr. Jennifer Sherman's, Those Who Work, Those Who Don't: Poverty, Morality and Family in Rural America (2009) is a book that does just that. Sherman's book is an ethnography of a small logging community in northern California in the wake of economic restructuring associated with the northern spotted owl's designation as an endangered species. While Sherman does not endorse a "culture of poverty" in the sense of suggesting that poverty persists because poor people are lazy (quite the contrary--see pp. 185-86), she does describe a rural culture that is shaped by entrenched economic distress across a community. One aspect of the relationship between poverty and culture in some rural contexts is the turn to morality and the focus on family values as a way of differentiating among people in the context of a largely homogeneous community, where few other bases for distinction exist. We need more work like Sherman's--work that attends to rural difference and observes it with compassion--to inform policymakers' responses to entrenched poverty and its relationship to place and culture.

Cross posted to Legal Ruralism and SALT Law Blog.

October 11, 2010

Pam Samuelson to Give Law in the Information Age lecture on Thursday

October 2, 2010

The Bankruptcy Squeegee Guys

Kudos to Katy Porter for dropping a dime on the Justice Department for its indefensible decision to chime in on the side of the creditors before the Supreme Court in the MBNA case. Katy's post offers a crisp summary of the issue—it's a dispute over a fine point of interpretation in a bankruptcy statute. But the real point is the meta-issue, on which let me cut to the chase: the government has no dog in his fight, and so no good motivation spending its limited resources trying to to work the ref.

Except one—speculative, but I'm sure she's right: the US Trustee (an arm of Justice) wants it. For the past five years, the US Trustee has taken as its mission the task of policing debtors (and their attorneys) in bankruptcy cases. Making a Supreme Court argument that creditors could perfectly well make themselves—and at their expense—is fully in consistent with the role the US Trustee has assigned to itself.

A bit of background. For a long time, the US Trustee was an agency in search of a mission. Congress created the US Trustee in 1978 as a compromise on the issue of how to supervise bankruptcy cases. The deal was to leave case management in the hands of private parties with the US Trustee as a kind of supervisor.

Except from day one, it was clear that nobody knew quite what the US Trustee was supposed to supervise, and how. For years, they satisfied themselves with a lot of glorified paper-shuffling, helping to weed the dormant cases out of sclerotic dockets, for example. They did play a small role in policing attorney's fees and blowing the whistle on some of the more egregious instances of attorney misbehavior. They'd weigh in on the bigger, more visible, public company cases—but these were typically the cases where their participation was least needed, the relevant interests being so well protected

Along came the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Urk!). For those who haven't been keeping score—BAPCPA was a miscellaneous grab-bag of amendments to the Bankruptcy Code mostly designed to make life more difficult or expensive for individual debtors trying to get the protection of bankruptcy. It was shambolically drafted and only semi-coherent but just in passing I'd have to note that a lot of the substance made good sense: for a generation, bankruptcy had indeed functioned as kind of a debtor's playground and a bit more balance in the system was not the End of Western Civilization as we Knew It.

But some time during this process, behind some Steelcase desk on Mass. Avenue, the light dawned: beat up on debtors and you will not offend the powerful in Congress. Nor, of course, the creditors who might have supposed they would have to do their own work, and on their own dime. Anyway, coming out of the box, the newly transmogrified US Trustee presented itself—more or less unasked—not in a striped shirt with a whistle, but as the boy in blue with the badge. In some respects they make me think of the squeegee men who used to pop up unasked in Manhattan to clean your car windows. Okay, the comparison is not exact: in this case the customer is perfectly happy to have his window cleaned, especially since it is not he who will have to pay for it.

Again, before I get carried away—there is nothing intrinsically wrong with the goal of policing debtor misbehavior. Laws are laws and deals are deals. And as I've already said, I'm somewhat more tolerant than many of my bomb-throwing pals of some of the substantive innovations of the 2005 Act. But I'm remembering what Woodrow Wilson once said about Congress: Congress may do the right thing but never because it is the right thing. Something similar may be said of the bureaucracy. The US Trustee's campaign against debtors has far less to do with any question of substantive right than it does with institutional survival. The Justice Department should stop being the enabler here. It should abandon its position in the MBNA case and devote its resources to a more worthwhile or product—like, perhaps, the abolition or at least the severe scaling-back of the US Trustee.

Cross-posted at Underbelly.