Wednesday, September 30, 2009

Mortgage Crisis and Payday Lending

Presenters at a Federal Reserve Bank of Philadelphia conference held on Sept. 25 unveiled studies examining such issues as the current mortgage crisis, payday lending, identity theft and global retail lending. Leading economists and scholars at the conference, titled “Recent Developments in Consumer Credit and Payments,” presented studies on each of the subject areas, in which mortgage lending and the current mortgage crisis dominated the discussions. Here is a summary of the presentations:

• In her forthcoming study, “Did Bankruptcy Reform Contribute to the Mortgage Crisis?,” Michelle J. White of the University of California, San Diego argued that the reforms and filing expenses brought about by BAPCPA, especially the homestead exemption cap for homeowners who purchased their homes within 1,215 days prior to filing, helped exacerbate the mortgage downturn. Examining defaults prior to and after the implementation of BAPCPA, White's study found that mortgage defaults for both prime and subprime mortgages increased after the reforms were implemented. The completed study is forthcoming later this year.

• Tomasz Piskorski of Columbia University in his study, “Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis,” concluded that delinquent mortgage loans are foreclosed at a higher rate if they are securitized as compared to loans that are held directly by bank lenders. Piskorski's study found that the bias toward foreclosure of securitized loans is due in large part to coordination, incentive and legal constraints involved in the servicing of securitized loans. Click here to read the study.

• After analyzing data from a major national mortgage bank containing loan-origination information from 2004-08, Ashlyn Nelson of Indiana University found that brokered mortgage loans were more than 50 percent more likely to be delinquent than bank-originated loans. The study, “Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency,” found that differences in delinquencies between brokered and bank-originated loans could be largely attributable to lower borrower/loan quality and that borrower information falsification was high among brokered low-doc loans.

• Adair Morse of the University of Chicago concluded in her preliminary study, “Information Disclosure, Cognitive Biases, and Payday Borrowing,” that disclosing additional information, such as the full cost of a payday loan, at the time the loan is being made would help reduce the amount and risk of payday borrowing.

• Simon Gervais of Duke University concluded in his study, “Legal Protection in Retail Financial Markets,” that protecting consumers in financial markets who are “unable to fend for themselves” is not only an important duty of the law, but also an important driver of participation in the market and economic growth.

Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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