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MN Mortgage Foreclosure Prevention Association July 10, 2007. Prentiss Cox Associate Professor of Clinical Law University of Minnesota Law School. Foreclosure and Subprime Lending. Foreclosure Rates Causes and Concerns Mortgage Practices Subprime Lending Alt-A Lending
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MN Mortgage Foreclosure Prevention AssociationJuly 10, 2007 Prentiss Cox Associate Professor of Clinical Law University of Minnesota Law School
Foreclosure and Subprime Lending • Foreclosure Rates • Causes and Concerns • Mortgage Practices • Subprime Lending • Alt-A Lending • Non-Owner-Occupied Lending • Consequences • Individuals • Communities • Geographic Concentration • Foreclosure and Vacancy • Financial Markets
Data Source: Hennepin County Sheriff’s Office2007 is estimate based on Jan-Jun data
Data Source: Special Report of U S Senate Joint Economic Committee; First American Loan Performance
2. Causes and Concerns • Mortgage Practices Are Driving Foreclosures • Subprime Lending • Relation between foreclosure and subprime • Growth in subprime lending • Housing price boom delayed, magnified problem • Specific unfair subprime lending practices have grown and are related to foreclosure • Acceleration of Most Risky Practices • Non-Owner-Occupied Subprime Lending • Myth of Subprime Promoting Home Ownership • Alt-A Lending
Data Sources: Data from Hennepin County Sheriff’s Office, US Bureau of Labor Statistics and Minnesota Department of Employment and Economic Development.Chart by Institute on Race and Poverty, U of Minnesota Law School
Data Sources: Data from Hennepin County Sheriff’s Office and Federal Reserve Board Chart by Institute on Race and Poverty, U of Minnesota Law School
Source of Graph: Jeff Crump, Subprime Lending and Foreclosure in Hennepin and Ramsey Counties: An Empirical Analysiswww.cura.umn.edu/reporter/05-Spr/Crump.pdf
Data Source: Hennepin Cty Sheriff’s Office; Office of Fedl Housing Enterprise Oversight Chart by Institute on Race and Poverty, U of Minnesota Law School
Source: Center for Responsible Lending Housing Appreciation and Foreclosure Rate
Deceptive, Imprudent and Unfair Lending • Above Market Costs • Yield Spread Premiums • High Fees By Originator • Rates in Excess of Risk • Deceptive Monthly Payment Quotes • PI (apples) and PITI (oranges)– escrow issues • Dischargeable debt versus debt secured by home
Inflated Appraisals • Stated Income (and Low- Document) Loans • Adjustable Rate Products Predominate • 2/28 Loans (often with prepay penalty) • Teaser Rates • Interest only and negative amortization • Prepayment Penalties
Percent Increase in Foreclosure Risk with Certain Loan Features Source: Center for Responsible Lending
City of St. Paul Single Family Residential Homes in Foreclosure by Type of PossessionFor Period Jan 2005-September 2006Data Source: Saint Paul Council Research Center
‘Alternatives’ Go Mainstream Industry origination market share by product type *First quarter only. Source: Amer. Banker and Inside Mortgage Finance
Generic Option ARM Payment Shock ExampleFlat Interest Rate Environment, Originated on 1/1/05 7.5% 7.5% 38.64% payment shock after year 5 ($830 increase) 7.5% 7.5% Assumptions: Constant use of minimum payment option, $500,000 loan, 1% start rate, fully indexed accrual rate with 3.00 % margin, no changes in interest rates (rate as of 1/1/05). Source: Conference of State Bank Supervisors
The Soup of Seconds Res Mtg Backed Securities (RMBS) Special Purpose Vehicles (2 levels) Investment Bank Carves Into Tranches With Cascading Risk Collaterized Debt Obligations (CDOs) Role of MERS What it Means For FPC Where’s my Tranche? Who services the loan? What are the limits on loan servicing? Amer. Securitization Forum Problem of Assignee Liability. Detour to Securitization Issues?
3. Consequences of Foreclosure A. Individuals/Families • Communities • Geographic Concentration • Foreclosure and Vacancy C. Broader Market
Homes Currently in Foreclosure As Of December 2006 in North MinneapolisSource: Community Planning and Economic Development, City of Minneapolis
Source: Saint Paul Council Research Center: Citywide Outcomes, 1995-2006