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Marianne M. Jennings.  The Mortgages  The Foreclosures  The Bankruptcies  The Conflicts Galore  The Crimes  Corporate Governance  The Litigation.

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Presentation on theme: "Marianne M. Jennings.  The Mortgages  The Foreclosures  The Bankruptcies  The Conflicts Galore  The Crimes  Corporate Governance  The Litigation."— Presentation transcript:

1 Marianne M. Jennings

2  The Mortgages  The Foreclosures  The Bankruptcies  The Conflicts Galore  The Crimes  Corporate Governance  The Litigation  Constitutional Issues

3 The Basics of Residential Mortgages

4  Mortgages are liens  Deeds-of-trust also covered by state law, but folks still refer to it as “My mortgage”  Overall concept is the same: The mortgagee/lender has the property as security for repayment and therefore has the right to get the property back in a special type of process: Foreclosure

5  Conventional mortgages  FHA and VA mortgages (guaranteed by Fannie and Freddie)  Fixed-rate mortgages: 40, 30, and 15 years  ARMs  Balloons  Jumbo loans – mortgages above a certain amount carried higher interest rates  Title loans  Pay-day loans

6  State laws on interest: usury  State laws on subprime:  Disclosures  Waiting periods  Classes  Federal laws: Truth in Lending  APR  Payments  Variable rate loans  Federal laws: Who gets loans?  Equal Credit Opportunity Act  Redlining prohibited  Federal regulations on both applications and lending  Federal laws: Collections  Techniques for collection  Contact with debtors

7  Misrepresentation on credit worthiness: State  Federal crimes on FHA and VA loans in attesting to income  The Flippers: misleading lender on intentions about property  Fraudulent appraisals

8  A holder in due course is someone who purchases a negotiable instrument (i.e., a mortgage note) for value in good faith without notice that it is dishonored or overdue  A holder in due course is not subject to formation defenses (i.e., misrepresentation and silent misrepresentation)  Holder in due course takes free of lender’s defense that mortgagor misrepresented income or use of property  HDC does take subject to insolvency; there is never a guarantee that an instrument will always be paid; HDC is still subject to risk of debtor’s insolvency

9 How did Wall Street get intertwined with Main Street?

10  You have 10 mortgages that borrowers/mortgagors will pay off over 15-30 years  You’d like the cash up front!  Investment firm Bear agrees to buy those 10 mortgages, present value of $3,000,000 over the 15-30 years  To get the $3,000,000 cash, Bear sells mortgage- backed securities (collateralized debt obligations) to folks looking for a safe long-term investment

11  The Supply of Mortgages: Public Policy of More Home Ownership  The Community Reinvestment Act of 1977  Boston Federal Reserve Bank Study of 1992 on lender discrimination: Federal regulation  Civil Rights Act enforcement  Fannie Mae and its ability to package guaranteed mortgages

12 When Mortgagors Fall Behind: Back to Main Street, Again

13  All state laws  Default  Notice  Required waiting periods  Sale (auctions)  Buyer is given certificate of sale  Right of redemption (mortgagor has the right to pay up full amount and expenses and redeem the property  Deficiency judgments

14  Courts handle judgments: local laws  Difference between the amount due and the amount the sale brought  Not available in non-recourse states  In an upside down market (underwater mortgages), there are deficiencies in almost every foreclosure  Deficiency means you must have sold the property – this crisis has found the inventory mounting  Second mortgage lenders – Nothing!

15  Walking away: Credit Reports and federal law  Deed in lieu of foreclosure: State law and credit reports  Stripping the property: State law; criminal law  The problem of blight in neighborhoods with high rates of foreclosure: Zoning; local law  Eminent domain by cities of properties lenders have taken back but cannot sell, rent, or repair: constitutional law

16  Lender programs: Private law  Reduce payments (Citi is reducing payments to $500 per month for 3 months for folks who have lost their jobs): Contract law  Federal funding for mortgage refinancing  New loan terms ▪ Lower interest rates: contract law, private law ▪ Permanent interest rates ▪ Longer loan periods ▪ The proposal to allow bankruptcy judges to restructure the mortgage loans: federal law

17  Loan modification: Federal law preempts state contract and real property law  Have payments that total 31% or more of monthly income  Single-family home  Primary residence  Loan amount is $729,750 or less  Mortgage originated on or before Jan. 1, 2009

18  Would you accept an approved mortgage loan that you knew was stretching your budget?  What are the moral hazards of mortgage bail-outs? Re-default rates are 55% six months after restructuring  What are the risks of bankruptcy court restructuring?  Review the notion of consideration on all of these restructures.  What is the difference between a refinancing and a loan modification?  What are the risks in highly leveraged personal finance?  Who are the stakeholders in mortgages?

19 Federal law and federal court system

20  Bear Stearns (purchased by JP Morgan Chase)  Lehman (bankruptcy)(role of trustee and calls for officer compensation to be returned)  Countrywide (purchased by Bank of America)  Merrill (purchased by Bank of America) (intentional interference with contracts)  Citigroup (struggling)

21 Prosecutions?

22  Firms were operating in a largely unregulated area with little oversight  There was compliance with the disclosure requirements under the 1933 Securities Act: Federal - USC

23  Sales of securities by officers of companies before announcements of subprime losses and effects  10B and insider trading by insiders: USC and CFR  Overly optimistic information released by company constitutes a corporate violation of 10b: USC and CFR

24  Bernie Madoff and his $50-billion Ponzi scheme  Former chairman and co-founder of NASDAQ  Well know for his philanthropy and generosity  Consistent 12% return over the years  Warnings to the SEC were ignored  That confirmation of facts syndrome  Just plain securities fraud: USC and CFR

25 That “Tone at the Top” Thing: State Laws on Corporations

26  Area Rug $87,784  Mahogany Pedestal Table $25,713  19th Century Credenza $68,179  Pendant Light Furniture $19,751  4 Pairs of Curtains $28,091  Pair of Guest Chairs $87,784  George IV Chair $18,468  6 Wall Sconces $2,741  Parchment Waste Can $1,405  Roman Shade Fabric $10,967  Roman Shades $7,315  Coffee Table $5,852  Commode on Legs $35,115

27  Corporate governance: Who establishes pay? State law on corporations  SOX and the compensation committee; USC and CFR  Shareholder rights: state law on corporations  Proxy season 2009 and the proposals for shareholder approval of compensation packages as well as halt to all off-site meetings: state law and SEC regulations on proxy solicitation

28 Who’s Suing Whom for What?

29 “We are on the right track to put these last two quarters behind us.”

30  Countrywide shareholders vs. Mozilo  Merrill shareholders vs. O’Neal and Board  Bank of America and misleading shareholders about merger  State and federal law

31 State vs. Federal vs. Property Owners

32  Federal restructuring plan  Bankruptcy judges  State contract law  State property law

33  Maintenance ordinances and statutes for lenders on abandoned property  Eminent domain on foreclosed, vacant properties  Public health, safety, and welfare  The crime rates

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