At large mortgage fraudsters across the nation are breathing easier today as the latest national mortgage fraud "crackdown" is officially over as of yesterday, meaning, presumably, that law enforcement is pursuing mortgage fraud less vigorously today than yesterday.

I just got through reading First American's 41 page answer and counter-claim to Bank of America's 43 page, $535 million lawsuit against them (whew!). 

To summarize the filing very briefly, there seems to be little dispute about the number of claims or the nature of the title defects alleged, but First American says that the roughly 2,000 claims that have been denied were denied for good reason, i.e. the claim was due to some circumstance not covered under the policy or there was no loss suffered because of the title defect.  The few thousand additional claims that have neither been denied nor paid are unresolved because, according to First American, B of A has failed to provide the necessary documentation to show the nature of its claim and/or the amount of its loss due to the title defect which caused the claim.  First American states that it believes that Bank of America cannot provide this documentation in many cases because of poor underwriting which failed to adhere to standards required by the insurance contracts-- a circumstance which First American believes should relieve itself of its obligation to pay claims in these cases.

In addition to answering B of A's complaint, First American also filed a counter claim, seeking to cancel insurance policies in cases where B of A allegedly failed to hold up its end of the bargain by adhering to underwriting standards set forth in the insurance contracts.  Any remaining liability, First American seeks to shift onto its agents.

There were several details in the answer which I found very interesting.

I have no fundamental problem with efficiency, economies of scale, offshoring, or any of that.  People are in business to make money.  Somebody has to do the work of foreclosing on properties when payments are not made, and I don't expect a vow of poverty or an overabundance of sentimentality for those who choose that unglamorous but necessary line of work.  If the work can be done inexpensively and efficiently in assembly-line fashion using overseas labor, so be it. 

But the fact is, when I read about some of the strange, sloppy, and possibly fraudulent nature of some of the documentation that is coming out of the operations of so-called "foreclosure mills", it doesn't inspire confidence that the job is necessarily being done well.

As I wrote about in my last post, "Debate over New York title insurance public option seems to miss the point", a group of New York state legislators have proposed legislation to create a "public option" for title insurance.  These legislators have pointed to Iowa's Title Guaranty Program, a system of public land title insurance established by Iowa state law.

Unfortunately, there seems to be some confusion on the part of the New York legislators as to the nature of Iowa's land title laws.  In short, it appears that they have leaned too heavily on the vast online encyclopedia Wikipedia in their research of the issue.

New York State Assemblyman Richard Brodsky and State Senator Eric Adams have recently proposed a "public option" for title insurance in New York, based on a similar system that has been in place in Iowa for decades. 

But proponents and detractors alike don't really seem to be getting to the heart of the issue in many cases.

The first odd arguments occur in the legislators' press release, courtesy of Senator Adams:

Title insurance costs in New York State are excessive, and title insurance is a significant part of title closing costs," said Senator Eric Adams. "There is a single rate schedule for all title insurers, eliminating pricing competition and making it impossible for a home buyer to shop for less expensive coverage. As a result, annual industry premiums exceed $1 billion, while annual claims payments are a mere $55 million (less than 5% of premiums). Immediate and fundamental reform is needed to make title insurance more affordable for New York families. The legislation Assemblyman Brodsky and I are introducing is designed to accomplish that goal and provide financing for infrastructure development and affordable housing."

If, as he says,  title insurance rates are so high in New York "as a result" of the single rate schedule that insurers are allowed to submit jointly through a rating bureau, why not make the simple reform of changing the regulations regarding how title insurers are permitted to set rates in the state?  New York is one of only a few states that allow title insurers to submit a common rate through a ratings bureau.  The state could simply prohibit title insurers from collaborating in setting rates, if the current method of setting rates were truly the problem.

And when someone uses the low claims-to-premiums ratio of the title insurance industry compared to other types of insurance to bash the industry, it's a red flag that they either are demagoguing the issue or they don't understand it very well.  Many have pointed out the error in considering the claims rate on title insurance to the exclusion of the value to the consumer created by all the work that goes into assuring a low rate of claims.   In fact, the closer the title insurance claims rate is to 0%, the better the public is served, all else being equal.

Below is a blog entry that I posted on the partisan progressive blog DailyKos last night under my pseudonym "skymutt", which Robert encouraged me to cross-post here.  It concerns the Gramm Leach Bliley Act, otherwise known as the Financial Services Modernization Act of 1999-- an ambitious regime of bank deregulation passed by Congress and signed by Bill Clinton.  For those who are not familiar, Gramm Leach Bliley's central purpose was to repeal a large part of the Glass-Steagall Act of 1933, which prohibited banks from engaging in riskier financial pursuits such as securities underwriting and insurance.  The law has had profound impacts not only on our economy, but our industry.  

This is Senator Byron Dorgan (D-ND), giving an amazingly prescient speech on the eve of the passage of the Gramm Leach Bliley Act on November 4th, 1999.  

No senator who was in the chamber that day can claim they were not warned of the financial crisis that is upon us today, because Dorgan laid out what would happen in stark language and near-eerie detail.

PART I

Part II

Remember the big housing rescue bill that Congress passed and Bush signed int law in July?  That bill, The Housing and Economic Recovery Act of 2008, contained a program called Hope for Homeowners that was supposed to keep 400,000 families out of foreclosure by allowing homeowners on the brink to refinance into a 30 year fixed rate FHA-insured loan for 90% of the current appraised value of the home. 

A brief review of the program:  Homeowners only qualify if they can prove they can't afford their existing payment based on their income and meet certain other requirements.  Also, homeowners agree to forfeit to the government 50% or more of any profits realized when the home is sold or the mortgage is refinanced in the future.  The program is voluntary for lenders-- the existing lienholder must agree to accept the proceeds of the new loan as payment in full-- almost certainly a loss for them, but perhaps more than they would get from a foreclosure sale after their expenses.

Congress authorized the FHA to insure up to $300 billion in mortgages under this program.  This was supposed to make a significant dent in the foreclosure crisis.  The author of this measure, Chris Dodd (D-CT), said on the Senate floor on June 24th that this would "put a tourniquet on the hemorrhaging of foreclosures". 

Well, since the program started on October 1st, there's been a grand total of 79 loan applications under the Hope for Homeowners program.  If every one of those applications is approved, then it appears that leaves us short of our goal by 399,921 prevented foreclosures. 

Why isn't the program working?

Leave it to the geniuses in Congress-- they already want to undo the smartest move they've made all year.

As part of The Housing and Economic Recovery Act of 2008, signed into law by President Bush in June, Congress correctly banned all forms of seller-financed down payment assistance for FHA-insured mortgages:

SEC. 2113. CASH INVESTMENT REQUIREMENT AND PROHIBITION OF SELLER-FUNDED DOWN PAYMENT ASSISTANCE

 

...

(A) IN GENERAL- A mortgage insured under this section shall be executed by a mortgagor who shall have paid, in cash or its equivalent, on account of the property an amount equal to not less than 3.5 percent of the appraised value of the property or such larger amount as the Secretary may determine.
 
...
 
(C) PROHIBITED SOURCES- In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:
(i) The seller or any other person or entity that financially benefits from the transaction.
(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).
 

This part of the law went into effect October 1st, discontinuing the use of these sham down payments that have already cost taxpayers $4.6 billion in unexpected losses due to excess defaults on FHA-insured mortgages this year alone, according to HUD Secretary Brian Montgomery.

But to the surprise of approximately nobody, there is already a movement underway in Congress to abolish this common-sense return to a true 3% down payment requirement for FHA-insured loans.  Representative Al Green (not the R&B singer, but the Democrat from Texas whose largest campaign donor is the National Association of Realtors) has introduced a bill that would once again make seller-financed down payment assistance legal for FHA loans.  In a legislative environment where Democrats and Republicans can't agree on the color of the sky, no less than 26 sponsors from both sides of the aisle are eager for the taxpayers to once again back mortgages with fake down payments.

In my previous entry, I focused on the flawed GSE reform bill which passed the House in 2005. 

As it turns out, there was a much stronger bill coming out of the Senate Banking Committee at about the same time.  That bill, authored by Chuck Hagel (R-Nebraska), would have addressed many of the problems which eventually contributed to the downfall of Fannie Mae and Freddie Mac.

Ohio Congressman Michael Oxley (R-Mansfield) has an axe to grind with critics who blame Congress for failing to pass reforms that may have averted the need for this week's government takeover of mortgage giants Fannie Mae and Freddie Mac.  As Oxley sees it, he did his part by crafting a reform bill in 2005 and getting it passed by the House of Representatives. 

From the Financial Times:

[Oxley] fumes about the criticism of his House colleagues. “All the handwringing and bedwetting is going on without remembering how the House stepped up on this,” he says. “What did we get from the White House? We got a one-finger salute.”

The House bill, the 2005 Federal Housing Finance Reform Act, would have created a stronger regulator with new powers to increase capital at Fannie and Freddie, to limit their portfolios and to deal with the possibility of receivership.

...

“We missed a golden opportunity that would have avoided a lot of the problems we’re facing now, if we hadn’t had such a firm ideological position at the White House and the Treasury and the Fed,” Mr Oxley says.

But a look back at the efforts to pass that bill calls into question Oxley's version of events.