MN Mortgage Foreclosure Prevention Association

July 10, 2007

Prentiss Cox

Associate Professor of Clinical Law

University of Minnesota Law School

Foreclosure and Subprime Lending1. Foreclosure Rates2. Causes and Concerns

A. Mortgage PracticesB. Subprime LendingC. Alt-A LendingD. Non-Owner-Occupied Lending

3. ConsequencesA. IndividualsB. Communities

1. Geographic Concentration2. Foreclosure and Vacancy

C. Financial Markets

1. Foreclosure Rates

Data Source: Hennepin County Sheriff’s Office

Hennepin County Foreclosures, 1988-2006

0

500

1000

1500

2000

2500

3000

3500

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

# of

For

elos

ure

Sal

es

Data Source: Hennepin County Sheriff’s Office2007 is estimate based on Jan-Jun data

Number of Hennepin County Sheriff Foreclosure Sales

0

1000

2000

3000

4000

5000

6000

7000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007e

Metro Area Foreclosure Sales

0

2000

4000

6000

8000

10000

12000

14000

2001 2002 2003 2004 2005 2006 2007(est)

Data Source: St. Paul Pioneer Press

Foreclosure Sales

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003 2004 2005 2006 2007(est)

(2007 Est. Based on Jan-May)

Hennepin

Ramsey

Dakota

Scott

Washington

Anoka

Carver

Source: Saint Paul Pioneer Press

Data Source: Special Report of U S Senate Joint Economic Committee; First American Loan Performance

Percent of Subprime Loans Delinquent >60 Days

05

101520

Metropolitan Area

Per

cent

Del

inqu

ent >

60

Day

s

"Feb 2007"

"Feb 2006"

"Feb 2005"

2. Causes and Concerns

A. Mortgage Practices Are Driving ForeclosuresB. Subprime Lending

1. Relation between foreclosure and subprime 2. Growth in subprime lending3. Housing price boom delayed, magnified problem 4. Specific unfair subprime lending practices have

grown and are related to foreclosure5. Acceleration of Most Risky Practices6. Non-Owner-Occupied Subprime Lending7. Myth of Subprime Promoting Home Ownership

C. Alt-A Lending

Hennepin County Foreclosures and Unemployment, 1988-2006

0

500

1000

1500

2000

2500

3000

3500

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

# o

f F

ore

clo

su

re S

ale

s

0

2

4

6

8

10

12

Un

em

plo

ym

en

t R

ate

Foreclosure Sales

Annual Average Unemployment(Hennepin Co.)

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

Hennepin County Foreclosures and U.S. Interest Rates, 1988-2006

0

500

1000

1500

2000

2500

3000

3500

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

# o

f F

ore

clo

sure

Sal

es

0

2

4

6

8

10

12

14

16

18

20

U.S

. In

tere

st R

ate

s

Foreclosure Sales

Short Term Rates (1yr Treasury)

Long Term Rates (Conventional Mortgages)

Data Sources: Data from Hennepin County Sheriff’s Office and Federal Reserve BoardChart 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

Source: Center for Responsible Lending

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

Hennepin County Foreclosures and Minnesota Housing Price Index, 1988 - 2006

0

1000

2000

3000

4000

5000

6000

7000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

# o

f Fo

recl

osu

re S

ales

0

50

100

150

200

250

300

350

400

Ho

usi

ng

Pri

ce In

dex

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

Source: Center for Responsible Lending

Percent Increase in Foreclosure Risk with Certain Loan Features Source: Center for Responsible Lending

Source: Center for Responsible Lending

City of St. Paul Single Family Residential Homes in Foreclosure by Type of PossessionFor Period Jan 2005-September 2006

Data Source: Saint Paul Council Research Center

66%

24%

10%

Homestead Non-Homestead Rental Registered

Source: Center for Responsible Lending

‘Alternatives’ Go MainstreamIndustry origination market share by product type

*First quarter only. Source: Amer. Banker and Inside Mortgage Finance

2006*

Conforming34.3%

Home equity12.2%

Alt-A14.2%

Subprime21.6%

Jumbo & Other17.6%

2003Jumbo &

Other23%

Subprime8%

Home equity

5%

Alt-A2%

Conforming62%

Generic Option ARM Payment Shock Example

Flat Interest Rate Environment, Originated on 1/1/05

0

500

1000

1500

2000

2500

3000

3500

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69

38.64% payment shock after year 5($830 increase)

7.5%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

7.5%

Detour to Securitization Issues?

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.

3. Consequences of Foreclosure

A. Individuals/Families

B. Communities1.Geographic Concentration

2. 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

Source: Saint Paul Council Research Center

Source: Saint Paul Council Research Center

0

100

200

300

400

500

600

700

800

900

Quarter

Num

ber

of V

acan

cies

Category 3

Category 2

Category 1

Source: Saint Paul Council Research Center: Citywide Outcomes, 1995-2006

Rehabbed&Occupied53%

Razed13%

Unknown14%

Open20%