Monday, February 28, 2011

New Pirate List

The US Trade Representative has released a new list of "piracy" websites.  These are some of the most popular sites on the planet.  Maybe the problem is that copyright holders aren't suing enough people.

When does coke become crack?

The Supreme Court was asked this question today in DePierre v. United States.  The First Circuit found that the federal sentencing guidelines providing greater punishments for crack, or as it is called in the law "cocaine base" refers to all forms of cocaine base, not limited to crack.  The Plaintiff is arguing that the term cocaine base refers only to crack, because that is what Congress sought to penalize when it passed the law.  The US Government's position is that cocaine base is any cocaine you can smoke.

Sunday, February 27, 2011

Home Affordable Foreclosure Alternatives Program

The Obama administration and Congress have largely failed the American people in providing relief from the ongoing mortgage crisis.  The Obama administration's first response to the affects of the mortgage crisis on consumers was to create the Home Affordable Modification Program (HAMP).  This program has been, by most accounts, an abysmal failure.    There are many reasons for this.

From a purely economic perspective, many people with homes in foreclosure simply have no incentive to attempt to salvage the loan, because the value of their home is less than their mortgage.  Secondly, the banks have simply opted to not meaningfully participate in the program.  There is no private right of action if you are damaged by a bank's failure to adhere to its obligations under HAMP, although several lawsuits, like this one, have been filed in various jurisdictions alleging that the contract between Fannie Mae and the banks for TARP Money creates rights which can be enforced for individuals in court.

It is clear that HAMP is broken, but it isn't clear that it is worth fixing.  To that end, the Obama administration has proposed HAFA, the Home Affordable Foreclosure Alternatives program.  This program is specifically geared towards facilitating short sales and deed in lieu of foreclosures.  A short sale is when the bank agrees to take less than it is owed to satisfy a mortgage in exchange for the homeowner actually selling the property.  A deed in lieu is similar, except that the bank simply agrees to accept the house and cancel the debt.

This is most likely going to fall victim to the same problems as the HAMP programs.  First of all, a deed in lieu of foreclosure is extremely disadvantageous to the banks at this point, because they already have foreclosed on too much property, and don't want any more, and so they will try to avoid doing this, regardless of a federal mandate.  Along those same lines, it is basically HAMP redux insofar as it does not create any incentive for participating banks and servicers to actually adhere to the rules of the program.  Finally, consumers have much better options for strategic default on their mortgage than the government can offer.

If the government wants the banks to actually help consumers with underwater loans, they will need to actually force the banks to do so.  There is no political will for this, though.  Therefore, it is incumbent upon the consumers themselves to fix the problem.

Student Loan Defaults

Student loans are an intriguing part of the American consumer debt landscape.  They are at the same time very American and very Un-American.  They are American because they are at the center of social mobility.  Without government backed student loans many people who could not otherwise afford higher education can afford it, and education is central to class mobility.  However, they are also non-dischargeable in bankruptcy and not subject to a statute of limitations.  Congress was granted the ability to create bankruptcy laws in the Constitution, and it is an important part of the legal regime which protects debtors in this country.

Therefore, it is very difficult to avoid ambivalence towards student loans.  There is nearly a trillion dollars currently in student loan debt, more than the total amount of consumer credit card debt.  Thus, more and more people are attempting more and more different theories to convince bankruptcy courts that, for one reason or another, their student loan debt is dischargeable.  This has mixed results.  Last week, a Wisconsin bankruptcy judge sanctioned a debtor and attorney $30,000.00 for arguing that a student loan was dischargeable under the court's equitable powers.  Last year, the US Supreme Court, on the other hand, found that student loans were dischargeable when the creditor did not affirmatively object to their discharge.

The legal aspects of dischargeability of student loans, which are certainly restrictive for debtors, are wholly divorced from the economic realities of student loans.  The student loan industry argues that one reason why student loans can be offered at generous terms for the debtor is because the risk of default is much lower as a result of the loan's protections against bankruptcy.  The counter-veiling argument is that student loans are a credit transaction like any other, and, as such, bankruptcy is a necessary tool for apportioning the risk of default between the debtor and creditor.

This issue looks poised to move to the forefront of American discourse on consumer credit.  There is undoubtedly a push underway to increase the amount of money lent for student loans.  This is occurring at the same time as a push to decrease other types of unsecured consumer debts.  Add in to the mix an increase in the amount of federally backed student loans for students in for-profit higher education, and a decrease in the earning power conferred by higher education and the difficulty in the current treatment of student loans in bankruptcy becomes clear.

Friday, February 25, 2011

Why Record Trust Deeds?

There has been a certain amount of press about the Mortgage Electronic Registration System (MERS) lately.  Much like the robo-signing issue which received a lot of press last fall, several states are finding that systems created by banks to stream line the mortgage process, from loan creation to securitization to foreclosure do not comply with the requirements of state laws governing the foreclosure process.

Oregon is no different.  MERS is a corporation which is essentially a database of mortgage information.  MERS assigns each mortgage in its system a mortgage identification number which follows the loan through its whole life.  This indexing system is hugely important for the logistics of the mortgage securities industry, for which it is necessary to rapidly bundle and unbundle groups of loans.

It is also a cost saving measure.  MERS is often the named beneficiary of a trust deed.  A trust deed is the recorded document which gives information about a mortgage.  Counties generally charge between $35-$70 to record a trust deed.  With MERS as the named beneficiary in a trust deed, the mortgage can be bought and sold an infinite number of times without re-recording a trust deed, thus saving millions, if not billions, in fees.

However, this does not comply with Oregon laws.  Oregon laws require that any change in the beneficiary of trust deed must be recorded prior to a foreclosure.  MERS is not a beneficiary of a trust deed under Oregon law.  This issue is a potential game changer in the Oregon housing market as many, if not the majority, of trust deeds in this state are recorded with MERS as the beneficiary.

The California Appeals Court just found that recording a mortgage for the benefit of MERS does not prevent a foreclosure from happening under California law.  This is a similar, but not identical, issue to the one presented in Oregon.  Thus far there is very little case law interpreting the Oregon statutes as they relate to this issue.

Some argue that foreclosures need to happen, and this type of technical impediment to a foreclosure has no economic benefit.  However, with banks not playing fair with loans mods, the programs created by the federal government to encourage banks to modify loans are failing.