Here is another post prompted in part by Michael's kindly getting us back to the matter of social justice this week...
As some of our readers might know, I moonlight on Fridays and weekends at the New York Fed, an involvement which stems from my academic involvement in monetary and financial law both domestically and globally considered. A large part of that bailiwick, in turn, is occupied these days by attention to the all-important mortgage markets - and, less coldly and bloodlessly, the families that owe mortgage debt in those still troubled markets.
In the wake of the bubble and burst that culminated in 2008, as we know, many American families have been left with mortgages that are 'under water.' That is to say that their debts, denominated as they are at fixed rates, have not plummetted as have the variable rates of their market-valued homes. This in turn means that many families will be faced with near-bankruptcy and possible foreclosure unless and until some form of mortgage-restructuring, probably involving principal write-downs accompanied by shared-appreciation agreements and capital-regulatory forbearance, can be done on a larger scale than HARP, HAMP, and other initiatives thus far have proved able to do in the face of creditor collective action problems.
Such is one upshot of Dan Alpert's, Nouriel Roubini's and my Way Forward white paper to which Rick Garnett kindly drew Mirror of Justice readers' attention last October when Joe Nocera discussed it in his NYT column. And so, much of what I do these days concerns how we might set about that large, formidable task as described in The Way Forward.
As it happens, however, there also are many mortgages faced with possible foreclosure that has little to do with 'underwater' status or any other difficulty other than temporary un- or under-employment of the sort that we often experience in times of macroeconomic slump. Because all it takes is 60 days' delinquency to trigger default and foreclosure on many mortgage contracts, mortgagors who are temporarily laid off or partly laid off can, with their families, find themselves suddenly faced with loss of a home through little if any fault of their own notwithstanding their general creditworthiness.
The harms that these innocent people face, moreover, ultimately redound to the harm of their lenders, their neighborhoods, the home and mortgage markets and the broader macro-economy as well. Rigidities introduced by the lending contracts, moreover - particularly those that are securitized - typically prevent even value-maximizing forbearance or adjustment on the part of servicers. We are accordingly faced with a classic market failure that harms all concerned parties.
Against this backdrop, a colleague - Michael Campbell - and I have drafted legislation inspired by a highly successful Pennsylvania program that comes down to us from back in the great Robert Casey days. We call ours the Home Mortgage Bridge Loan Assistance Act (HMBLAA).
Pennsylvania's Home Emergency Mortgage Assistance Program (HEMAP), upon which HMBLAA is loosely patterned with the benefit of hindsight, has a near 30-year track record of keeping lenders paid, families in their homes, and the public fisc almost entirely unaffected. It has managed this simply by extending temporary bridge loan assistance to families whose breadwinners are temporarily unemployed or underemployed through no fault of their own, which loans are repaid in full once employment resumes. It is made to order for times of temporary slump like the present.
Michael's and my plan incorporates many administrative lessons learned from the HEMAP experience. The New York City Bar Association - on whose Banking Law Committee we both sit, Michael as Chair - and now the New York State Bar and the New York State Bankers Association all now have come down in support. Our hope, as well as our now increasingly reasonable-looking belief, is that not only New York, but other states too, as well as Congress, will soon pass HMBLAA and/or counterpart legislation much like it. It could work very well in states like Ohio, Indiana, and others disproportionately hit by the nation's current economic woes.
Michael and I have received much in the way of helpful suggestion from private and public sector lawyers and financiers alike in the process of developing this proposal, but can always do with more. I hope, then, that interested readers might click on the links below and let me know what they think. The first link is (once again) to the statute itself. The second is to a white paper we've drafted in support of the statute, complete with a regulatory impact analysis conducted by colleagues at the Fed. Please let us know what you think!
Thanks again to all.
(Cross-posted in part at Mirror of Justice)