Economics

25
Aug

This chart shows the unemployment rate in Fresno County (on a monthly basis) from 2006 to 2016.  It is based on the official data compiled by the California Economic Development Department. (click to enlarge)

Fresno real estate lawyer

Some points of interest:

● The highest monthly unemployment rate was 18.4% in February 2010.

● The lowest monthly unemployment rate was 6.4% in September 2006.

●The President of the Federal Reserve Bank of San Francisco says that his goal is an unemployment rate of 4.9%, so we have a long ways to go in Fresno County.

● The unemployment rate touches its lowest level on an annual basis each September (not surprisingly corresponding with harvest season).

● I read a report stating that Fresno County had experienced 59 consecutive months of a decrease in the unemployment rate.  That report is not supported by the data.

● How does the decrease in migrant farm labor affect the Fresno County numbers?  Hard to tell.  Many reports say that the number of migrant farm workers has decreased in the past decade.  Yet Fresno County’s unemployment rate in 2016 is much higher than it was in 2006.  Fewer migrant workers but higher unemployment?  Does not make intrinsic sense.

Here is the link for the source data.

 

 

Category : Economics | Blog
5
Nov

The federal bankruptcy courts publish detailed statistics on bankruptcy filings. California has four federal judicial districts, with Fresno located in the Eastern District.

The 2011-2015 bankruptcy filings for the Eastern District of California continue to show a substantial decline, as shown in this table:

 E.D. Cal. total filingsChapter 7 casesChapter 11 casesChapter 12 casesChapter 13 cases
201517,68113,98382143,601
201424,03019,634109184,269
201332,63525,930187306,487
201242,85033,761201378,846
201153,88842,9572343810,659
Decrease from 201426%29%25%22%16%

Truly, the overall decline from 2011 to 2015 is astonishing, and suggests that our economy is improving.

Category : Developments | Economics | Blog
31
Aug

A recent study published by the U. C. Giannini Foundation of Agricultural Economics reports an increase in the number of agricultural employees in California.  Using data from the Employment Development Department, the authors conclude “since 1990, average employment in [California] agriculture rose 10%.”

To support their conclusion, the authors “extracted all SSNs reported by agricultural employers to EDD in 2007 and 2012, and tabulated their farm and nonfarm jobs in California.”

Fresno lawyer

The report states:

●    “Hired workers do most of the work in labor-intensive FVH agriculture.  According to the National Agricultural Workers Survey, over 85% of the state’s farm workers were born in Mexico.”

●    “Since 2010, average employment by crop support establishments has been rising by 10,000 a year.”

●    “Over 60% of crop workers employed on the state’s crop farms have been unauthorized for the past decade – 10 percentage points higher than the U.S. average of 50%.”

fresno attorney

Here’s the part that reminds you why we have persistent poverty in communities with an agricultural-based economy, such as Fresno County:

●    “Four counties – Kern, Fresno, Monterey, and Tulare – had over 40% of all primary farm workers”

●    “Average earnings for all workers with at least one farm employer were $18,000 in 2012,

●    “while average earnings for primary farm workers, defined as those who had their maximum earnings in agriculture, were $15,000.”

Brandon Hooker, Philip Martin, and Andy Wong, “California Farm Labor: Jobs and Workers,” in Agricultural and Resource Economics Update, July 2015 (U. C. Giannini Foundation of Agricultural Economics)

Category : Developments | Economics | Blog
29
Sep

The federal bankruptcy courts publish detailed statistics on bankruptcy filings.  California has four federal judicial districts, with Fresno located in the Eastern District.

The 2011-2014 bankruptcy filings for the Eastern District of California show a substantial decline, as shown in this table:

  E.D. Cal. total filings Chapter 7 cases
Chapter 11 cases
Chapter 12 cases
Chapter 13 cases
2014 24,030   19,634   109   18   4,269  
2013 32,635   25,930   187   30   6,487  
2012 42,850   33,761   201   37   8,846  
2011 53,888   42,957   234   38   10,659  
 Decrease 55%   54%   53%   53%   60%  

 

What does this mean for the future?  Hard to tell, as the Central Valley remains in the grip of a years-long drought.  Agricultural revenues will remain depressed, which will not help the local economy.

Category : Developments | Economics | Blog
9
Dec

Prof. Larry E. Ribstein from the University of Illinois School of Law, a leading scholar on business entities, has given considerable thought to the concept of fiduciary duties.  When this author thinks of fiduciary duties, he thinks of three broad obligations – care, confidentiality, and impartiality.

Prof. Ribstein, in a recent article, seeks a unified fiduciary standard centered in the entrustment of property by one person to another.  More precisely, Prof. Ribstein’s “definition [of a fiduciary relationship] focuses on the particular type of entrustment that arises from a property owner’s delegation to a manager of open-ended management power over property without corresponding economic rights.”

In this way, “a fiduciary relationship differs from the broader category of agency relationships.”  Prof. Ribstein finds the existence of a fiduciary relationship when “the resulting separation of ownership and control means the agent might manage the property so as to realize benefits without incurring the full costs of her conduct.”

As a corollary, Prof. Ribstein adds that his “view of the fiduciary relationship is necessarily contractual in the sense that one becomes a fiduciary only by contract, including by contracting for a relationship in which the law says fiduciary duties arise.”

This interpretation makes a great deal of sense, because it focuses on the situations in which a fiduciary relationship may be said to arise.  We look a transfer of control or management to a third party, in which the third-party is not subject to contractual restraints on misconduct.  In this way, the law of fiduciary duties seeks to restrain misconduct by managers who otherwise may not be held accountable.

While I applaud Prof. Ribstein’s coherent frame to determine when fiduciary relationships may be said to exist (more on this below), this author does not fully endorse his definition of fiduciary duties as consisting solely of “the strict fiduciary duty of selflessness.”  Prof. Ribstein adds that,

  • “Fiduciaries commonly have a duty of care. However, this is not a fiduciary duty, which as described above is a duty of unselfishness.”
  • “The duty not to misappropriate information, business opportunities or other property is not a fiduciary duty. It simply reflects the limits on business owners’ and agents’ rights to property owned by the firm.”

Fall in New HampshireYet this author disagrees with the conclusion that, “The fiduciary duty of unselfishness should be distinguished from duties that can exist outside the fiduciary setting, including the duties of care, good faith and fair dealing, and to refrain from misappropriation.”  The fact that these duties can be said to overlap with other obligations at law does not mean that we should exclude them from the list of duties found applicable once a fiduciary relationship is established.

Returning to issues of management and control, Prof. Ribstein argues that, “Although partners, majority shareholders and creditors may control the firms in which they invest, this control is not necessarily open-ended enough to warrant fiduciary treatment. The control exercised by ownership factions often is carefully negotiated and limited to the power to approve major transactions and, in corporations, to elect directors …

“It follows from this analysis that partners do not have fiduciary duties merely as such …Even a partner who contributed most of the funding may be outvoted by two service-only partners under the one-partner-one-vote partnership default rule.”

This is a well-reasoned point, and explains why fiduciary obligations are (or should be) imposed only in limited situations: “Managers’ and directors’ wide discretion to control this residual justifies their strong fiduciary duty of unselfishness to shareholders.”

Continuing this theme, Prof. Ribstein articulately argues that a person who provides advice, but who does not hold management powers, should not be bound by fiduciary standard.  “One who is only an advisor or professional sells advice, not management … The client purchases the advice… Applying fiduciary duties to all advisors and professionals therefore would be unrealistic and would dilute the concept of fiduciary duties.”

“Contrast this situation with the fiduciary context. One who decides not only to obtain advice from an expert but to entrust her property to the expert’s management ceases to make her own decisions concerning whether and how much to rely on each of the fiduciary’s judgments. This open-ended delegation of control to the fiduciary calls for more than just disclosure of material facts.”

This is a thoughtful piece, with its sage recommendation that “The usefulness of the fiduciary duty depends on its being kept in a corral rather than set loose to roam broadly among commercial relationships where it does not belong.”

Prof. Larry E. Ribstein, Fencing Fiduciary Duties (Illinois Public Law and Legal Theory Research Paper No. 10-20)

Category : Economics | Law Reviews | Blog
10
Dec

Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis.  His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The second six are as follows (the first six are discussed in part 1).

7. Irresponsible Behavior and Fraud by Wall Street Professionals. Investment abdicated their traditional roles as financiers for the business world, and instead decided to make money using new models, which profited from their good names.

“In creating and profiting from new types of derivatives securities, such as CDO’s and CDS’s, Wall Street professionals were taking full advantage of a permissive and inadequately policed system that encouraged sharp practices and provided large rewards for excessive greed.  Of course, fraudulent activity also played a part: for example, Goldman Sachs, perhaps the most respected name on Wall Street, has accepted a civil fine of $550 million (about two weeks worth of profits) to settle a fraud case brought by the SEC accusing the firm of selling derivative investments to customers that were secretly designed to fail.”

8. Confused and Inconsistent Accounting Standards.  A 2000 statue was supposed to establish the Public Company Accounting Oversight Board, whose job is to regulate the accounting industry.

Says Prof. Schoenbaum, “Regretfully, this Board has been very slow to act, prevented from getting off the mark by alleged conflicts of interest and litigation begun with the intent to destroy it all together . . . For whatever reason, the Board has not done its job and accounting miscues and inconsistences contributed to the Global Financial Crisis.  For example Lehman Brothers was able to use accounting rules to remove tens of billions of dollars from its balance sheet according to an examiner’s report.”

We’ve been hearing about this for years.  The investment banks were permitted to restate income and to circumvent the accounting rules with a wink and a nod from the government.  You can’t have a level playing field unless the rules are uniformly enforced.

India

9. The U.S. Federal Reserve’s Botched Monetary Policy.  “After the bursting of the high-tech bubble in 2001, the Greenspan-led Federal Reserve lowered interest rates to levels not seen in a generation.  These low rates persisted too long [, ] contributing to the asset bubble that sparked the Crisis.  Then, too late, the Fed rapidly raised rates.  Making up for lost time to kill the asset bubble.   Both polices were badly mistaken.”

In the early 200s, the Fed wanted to propel a recovery from the dot-com bust.  Low interest rates encouraged the growth in mortgage-backed securities; lack of oversight allowed the mortgage-backed securities to flourish in an atmosphere free from realistic oversight.  The economy overheated, and the conductor failed to apply the brakes before the train crashed.

10. U.S. Government Housing Policy.  “The U.S. government is far too involved in private housing market.  In a misguided effort to make every citizen a property owner, the U.S. government has skewed the housing and mortgage markets as well as the prices for homes in the United States.  There is simply too much government interference in housing.”

The author cites the Community Reinvestment Act as a contributor to bad lending decisions, stating “this is not the appropriate role for government, which should enforce anti-discrimination laws but should not pressure banks to make loans to certain groups of people.”

11. Repeal of the Glass-Steagall Act.  “The Glass-Steagall Act, which was enacted during the Great Depression, functioned to insulate banks from the risks inherit investment banking.  This law was repealed [in 1999], which permitted consolidation of commercial banking, investment banking, and insurance companies . . . The repeal of Glass-Steagall was a reason why the Crisis infected the whole U.S. financial system, not just investment banks.”

Many warned against the repeal of Glass-Steagall, but the warnings were ignored.  Hey, if we haven’t had a banking crisis in 70 years, we must have eradicated the problem, right?  Wrong.  Glass-Steagall served an admirable purpose, and must be reinstated.

12. Global Current Account Imbalances.  A final global factor is that, “during the period leading up to the Crisis the U.S. experienced record trade in current account deficits.  In 2006 the U.S. current account deficits was $811 billion; in 2007 it was $738 billion.  In 2008 the deficit declined slightly to $706 billion, and because of recession a further decline was recorded in 2009 to $409 billion”

Such deficits cannot be sustained.  “During the boom years before the Crisis, record U.S. trade deficits were equal to approximately 2/3rds of the trade surpluses of the rest of the world.   While trade and current account deficits are not inherently bad, when they become chronic and balloon out of proportion they are a sign of structural problems that should be corrected.”

“In the case of the U.S. the current account deficits represents inadequate savings and over-consumption.  In the case of China, the growing and chronic surpluses represent lack of adequate domestic demand and too much saving . . . This imbalance cannot continue without threatening the stability of the international monetary system.”

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

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Category : Economics | Blog
4
Dec

Professor Thomas Schoenbaum from George Washington University has written a paper discussing the worldwide financial crisis.  His paper entitled “Saving the Global Financial System: International Financial Reforms and United States Financial Reform, Will They Do the Job?”, identifies 12 factors as triggering the financial crisis.

The first six are as follows (the second six are discussed in part 2).

1. The diminished authority of the United States Securities Exchange Commission.  This constituted a regulatory failure.  States Prof. Schoenbaum,  “beginning in the 1980’s, the once-feared SEC became largely toothless due to rule-revisions, exceptions, and leaders that discouraged fraud investigations and enforcement actions.”

Such failure continued for two decades, but not without warning.  “One of the most egregious of SEC failure occurred on April 28, 2004, when the SEC voted to exempt investment companies from the SCC’s net capital rule . . . During this meeting, Harvey Goldschmid, one of the Commissioners, remarked, ‘If anything goes wrong, its going to be awfully big mess.’”

2. Failure to Regulate the Derivatives Market.  Another regulatory failure.  The derivative market is enormous, yet it operated for years without effective oversight.   Again, there were warnings.  The Commodities Futures Modernization Act of 2000 specify exempted derivatives and swaps from supervisory oversight by the Commodity Futures Trading Commission, “despite warning from its chairman that unregulated derivatives “could threaten our regulated markets or, indeed, our economy without any Federal agency knowing about it.”

3. Lax Regulation of Financial Institutions.  Here, the author cites the Federal Reserve and the Comptroller of the Currency as failing to exercise proper oversight of the U.S. banking industry.  Thus, “the persons in charge of bank regulations were totally obvious to the dangers of the extensive use of derivatives such as MBS’s.  Accordingly, the use of MBS’s allowed financial institutions to profit from transactions that involved unreasonably low capital requirements.”

This point could be stated in slightly different terms.  The players in the financial markets, especially in derivatives, were permitted to gamble with other people’s money.  The oversight in the banking industry was absent in the derivatives market.  Such easy access to such excessive leveraging encouraged Wall Street to take unreasonable and dangerous – desperately dangerous – risks.

abandoned house in the Eastern Sierras

4. Financial Institutions That Took on Too Much Leverage.  The authors cites this factor as a private sector abuse,  stating “a key cause of the Crisis was the fact that key financial institutions, especially the investment banks, took on far too much leverage, risking vast qualifies of borrowed capital so that they were unable to withstand a down turn in asset prices.”

What kind of leveraging was going on?   “After the SCC exempted investment banks from the ‘net capital’ rule in April 2004, leverage increased dramatically to levels in excess of 40 to 1.”  This meant the investment banks could make a $40 bet with only $1 in actual assets.  Is this a recipe for disaster?  You bet it is.

5. Mismanagement by Bond and Securities Ratings Agencies.  As explained by Prof. Schoenbaum, “hearings in the Congress and the European Union have established a sloppy and misleading ratings practices that causes most of the now ‘toxic’ derivatives to be given triple A ratings.  Only after the Crisis began did the ratings agencies downgrade these securities.  The credit ratings agencies were among the enablers of the Crisis.“

See, the vast tradings in the investment banking world were really a shadow financial system, running parallel to the banking industry.  The banks were heavily regulated and were backed by the FDIC.  The investment banking world had no such official guarantees, so they invested the insurance provided by companies such as AIG.  At present, “AIG has benefitted for governmental largesse amounting to a total of $182.5 billion.  None of this funding has been repaid.”

That means that the U.S. taxpayers bailed out the bets that were made by Goldman Sachs and other investment banks to the tune of $182 billion that has never been repaid.  It’s one thing to take risks with your own money; it’s entirely different when the government steps in to save private industry in the amount of $182 billion.  Oversight and accountability must be established, otherwise the taxpayers just gave away $182 billion to the bankers.

6. Low Saving Rates and High Borrowing by American Consumers.  This is a social factor.  Explains the author, “as of 2007, the U.S. savings rate touched zero, which means that as a group Americans were spending every penny of income.  Moreover, many Americans were deeply in debt, now only for home mortgages but on credit cards and other consumer loans.  The American economy was overheated and riding for a fall.”

Part 2 follows next week.

Uniform Commercial Code Law Journal, Vol. 43, No.1 (October 2010) page 479.

Category : Economics | Blog
23
Aug

Wading hip deep into the debate over the standard of conduct applicable to investment advisors, author Kristina A. Fausti brings helpful insight in A Fiduciary Duty for All?

Ms. Fausti is the Director of Legal and Regulatory Affairs for Fiduciary360, and is knowledgeable about the investment world.

What she demonstrates is that the investment world is not equally knowledgeable about fiduciary standards, even at the highest levels of the Securities and Exchange Commission, which shows bone-headed ignorance regarding fiduciary obligations.

Ms. Fausti shows her expertise when she notes that “Broker-dealers [ ] often have competing interests with their customers that they neither must avoid nor disclose in most cases.  For example, as Professor Mercer Bullard noted, an investment adviser would be required under the fiduciary standard to disclose any differential compensation it receives as the result of recommending different products to its client because of the conflict of interest such differential compensation creates.  Broker-dealers, however, generally have no such obligation to disclose differential compensation to their clients.”

Now that is what the fiduciary standard really means – full, complete, and candid disclosure.  And that scares the heck out of Wall Street.

Ms. Fausti notes that “the Obama Administration’s plan called for legislators and regulators to ‘harmonize’ the investment adviser and broker-dealer regulatory regimes.”  The investment community has thrived in the confusion of a post Glass-Steagall era. “The Administration’s recommendations were based on the widespread recognition that retail investors are often confused about the differences between investment advisers and broker-dealers.”

That statement is as right as rain.  “The RAND Report issued by the SEC in January 2008 [ ] concluded that investors did not understand key distinctions between investment advisers and broker-dealers, including their duties, the titles they use, and the services they offer.  Also contributing to investor confusion is the ambiguity and inconsistency in titles used across the financial services industry.”

What, then, is the delay in establishing such harmony?  The desire of the financial services industry to maintain confusion.  “In practice many financial professionals use varying titles to describe themselves including: financial advisor, financial consultant, advisor, financial planner, and stockbroker.”

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Author Fausti sees the ball clearly.  “In its most basic form, to act as a ‘fiduciary’ is to serve under an already defined standard based on a relationship of trust that carries with it duties of loyalty, due care, and utmost good faith.”

Yes, but don’t forget that those are aspects of the fiduciary obligation, in other words, the duties and consequences that flow from a finding that the parties occupy a fiduciary relationship.

Sadly, SEC Commissioner Luis A. Aguilar lacks similar clarity of thought, having “passionately emphasized” that “there is only one fiduciary standard and it means that a fiduciary has an affirmative obligation to put a client’s interests above his or her own.”

Wrong, wrong, wrong.  That is simply sloppy thinking.  By an SEC Commissioner.

In contrast, these guys get it right.  Says the author, “A group of advisory and investor advocates, dubbed the Committee for the Fiduciary Standard, recently articulated a set of five core fiduciary principles: (1) put client’s interest first, (2) act with prudence, (3) do not mislead clients, (4) avoid conflicts of interest, and (5) fully disclose and fairly manage unavoidable conflicts.”

OK, now we are back on track.  “What these principles illustrate is a basic relationship based on trust that demands that loyalty and due care always remain at the foundation of the fiduciary standard.”

SEC Commissioner Elisse B. Walter “has noted that what is required under the fiduciary duty depends on the scope of the engagement as well as the sophistication of the investor.”

Wrong again.  If someone is in a fiduciary relationship, then the expertise or knowledge of the beneficiary matters not one whit.  The beneficiary gets to put complete trust in his or her fiduciary, and never has to defend his own interests because he is a “big boy” (the so-called “big boy” defense).

It’s simply gobbly-gook for the investment community to claim differing duties “where a financial professional is a ‘dual hatter,’ [which] is meant to refer to a professional who is registered both as a broker-dealer and an investment adviser representative and who, therefore, switches professional hats for different services and products.”

According to Wall Street, “the professional would be a fiduciary and subject to Adviser Act and the fiduciary duty when providing investment advice, but subject to Exchange Act and FINRA rules when executing recommended transactions; thus, switching back and forth between acting as a fiduciary.”

That is just impossible.  A mainstay of the fiduciary standard is the duty of care.  The fiduciary looks out for his or her beneficiary, not the other way around.  Wall Street’s proposal (which proposal is not backed by Ms. Fausti, may I add) is voodoo.

One standard for all financial advisers.  One set of obligations, anchored in duties of care and disclosure.  That’s not so hard.  But it scares the hell out of Wall Street.

Kristina A. Fausti, A Fiduciary Duty for All?, in 12 Duquesne Bus. Law Rev. 183 (Summer 2010)

Category : Economics | Law Reviews | Blog
18
Jun

Professor Brent T. White from The University of Arizona Law School has followed up his report issued last fall regarding troubled loans.  Prof. White personally communicated with more than 350 individuals regarding their mortgage problems.

His new report raises a number of troubling issues, but none more so than the dissembling tactics of lenders.

Writes Prof. White, “The reason that many strategic defaulters struggle so long before deciding to default is that fear and anxiety are not typically enough in isolation to cause them to stop making payments.  Rather such anxiety more frequently serves as a call to action, driving homeowners to try to do something about their situation – such as contacting their lender to try to work out a loan modification or a short sale.

“In fact, not a single strategic defaulter in the 356 accounts reviewed for this article reported having stopped paying their mortgages without first contacting their lender . . . Many underwater homeowners who seek help from their lenders, however, are turned away at the door. As one homeowner explains, ‘I called my lender and ask if I could discuss a loan modification and they said absolutely not.’  Lenders give numerous reasons for this, most commonly that homeowners are current on their mortgages.”

If you are current on your loan, regardless of the financial struggles to maintain the loan, you will never get your loan modified.  “The fact being a ‘responsible’ borrower is the surest way not to get a loan modification can be a rude awakening for many homeowners.”

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Prof White continues.  “This is because most lenders don’t modify mortgages or agree to short sales for homeowners who might continue making their payments absent such accommodation. The best predictor that a homeowner will continue making payments is a good credit score and a past history of making their payments.  Homeowners with such characteristics thus have little chance of getting help unless they first miss some payments, and they are frequently told this by the loan servicing personnel who take their calls.”

Worse yet, “The loan modification process turns out, however, to be immensely frustrating[.]   Homeowners are frequently unable to reach anyone to discuss their applications’ status[.]  Their paperwork is ‘lost’ repeatedly[.]  They are treated rudely and lied to[.]  Worse, after months of frustration, most homeowners learn that their lender is not willing to work with them after all.”

Prof. White is not exaggerating.  I have yet to meet a borrower with anything positive to say about the loan modification process.  As a society, we are not serious about helping borrowers with troubled home loans.

Brent T. White, Take this House and Shove it: The Emotional Drivers of Strategic Default (May 2010)

Category : Economics | Law Reviews | Real Property | Blog
14
Jun

This is an updated report on the status the foreclosure crisis in Fresno County as of June 2010, based on anecdotal evidence.  In a word, it’s brutal for troubled borrowers.

Foreclosures Are Continuing:  There does not seem to be any slowdown in foreclosures.  Lenders buy in for the amount of the unpaid debt, then sell at a slight markup.  The buyer then markets the property for a greater profit.

Example:  A house might sell at foreclosure to the lender for $120,000.  The lender resells the property for $150,000.  The buyer in turn markets and sell the house for $200,000.  All of this takes place within six months.  The original owner takes nothing on the mark up.

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Cash is King: Lenders have little risk on foreclosure sales because houses re-sell quickly on all-cash offers.  Evictions follow rapidly after the foreclosure sale, and are sometimes started on the day of the sale.

Securitization Creates Murky Ownership:  Because of the securitization of mortgages, it is extremely difficult to determine who is calling the shots for the lender.  It seems that mortgages have been sold off piecemeal, and the third-party mortgage holders are conducting the foreclosures.  The owner is greatly distanced from the lender, and it is almost impossible to identify the entity that is in control of the mortgage and the foreclosure process.

The Home Affordable Modification Program is a Failure:  This writer has yet to see one mortgage that was modified as a result of the federal Home Affordable Modification Program.  The external evidence on the HAMP program is damning.

Professor Jean Braucher from The University of Arizona Law School explains that “HAMP provided for modification of first-lien mortgage loans originated on or before January 1, 2009, where the loan was secured by a one- to four-unit property, one unit of which was the borrower‘s principal residence.”

In order to qualify for a HAMP modification, “the debtor‘s gross monthly mortgage payment had to exceed 31 percent of gross income [and] the borrower had to document a financial hardship and be delinquent on the loan.”

That would cover a lot of troubled mortgages.  Explains Prof. Braucher, “The goal of HAMP is to create a partnership between the government and private institutions in order to reduce borrowers‘ gross monthly payments to an affordable level. The level has been set at 31 percent of the borrowers‘ gross monthly income.”

However, the rules have never been explained.  “The HAMP [ ] formula was not made public, in part out of concern that doing so would have allowed borrowers to game the calculation, but making it difficult for borrowers and their mortgage counselors to know whether to apply for a modification and to assess denial of an offer.”

Further, the lender bears the costs.  “HAMP made investors responsible in full for the cost of bringing the debtor‘s gross monthly mortgage payment down to 38 percent of gross monthly income.  HAMP also provided for the government to then share equally with investors the further cost of bringing the mortgage payment down to 31 percent of income.”

So, in order for HAMP to work, the lender has to admit it made a bad lending decision, and has to agree to eat part of the loss.  Sadly, given the availability of cash in the housing market, it’s easier for the lender to precipitate a foreclosure sale, then sell the property for the full amount of the loan and all delinquency charges, meaning that the lender is made whole, and the owner absorbs the entire loss.

Notes Prof Braucher, “through September 1, 2009, the Congressional Oversight Panel reported that HAMP, with a goal of avoiding three to four million foreclosures in three years, had achieved only 362,348 three-month trial modifications.  Even more disappointing, the Congressional Oversight Panel reported that the program had achieved only 1,711 permanent modifications through September 1, 2009.”

Thus, the federal loan modification program has been a profound failure.  This writer’s experiences with troubled borrowers have been similar.

Jean Braucher, Humpty Dumpty and the Foreclosure Crisis: Lessons from the Lackluster First Year of the Home Affordable Modification Program (May 2010).

Category : Developments | Economics | Blog