Tucson Land Use Law Blog

Tucson Land Use Law Blog

Insight & commentary on local land use and real estate issues

Student Loan Debt is Crushing the Housing Market

Posted in Uncategorized

Debt Image

Here are some sobering figures from John Burns Real Estate Consulting on how the meteoric rise in student loan debt is having a very appreciable effect on the housing market.

  • Student debt has ballooned from $241 billion to $1.1 trillion in just 11 years.
  • 29 million of the 86 million people aged 20–39 have some student debt.
  • Those 29 million individuals translate to 16.8 million households.
  • Of the 16.8 million households, 5.9 million (or 35%) pay more than $250 per month in student loans, which inhibits at least $44,000 per year in mortgage capability for each of them.
  • About 8% of the 20–39 age cohort usually buys a home each year, which would be 1.35 million transactions per year.

John Burns Real Estate Consulting estimates that student debt will cost the housing industry approximately $83 billion in sales in 2014.  What is particularly troubling is that households that pay $750 or more for college loan debt each month are priced out of the housing market entirely.  This is consistent with what is seen in mortgage application approvals.  Anthony Hsieh, the chief executive of LoanDepot.com has stated: “Between the approved universe and the denied universe, the [borrower’s] credit is the same. The fundamental difference is a few hundred dollars in student loan debt that pushed the debt-to-income above the approved threshold.”

This trend does not seem likely to abate either.  With college debt increasing by about 6% every year, there is every reason to believe this trend will continue, and probably worsen, John Burns Real Estate Consulting reports.  For this year alone, the John Burns Real Estate Consulting report estimates that heavy college debt will reduce real estate sales by 8% for this year.

Increasingly, the chances of younger generations living better than their parents (at least materially speaking) is no longer very promising.

Progressive Housing Policy – Laying the Blame for the Housing Bubble on “Affirmative Credit”

Posted in Uncategorized

A recent article by Michael Booth in the admittedly conservative online magazine American Thinker posits that the much of the blame for the housing crisis can be traced to the Democrat’s “affirmative credit” policies.  Booth argues that the naming of Michael Raines as the CEO of Fannie Mae turned Fannie Mae into a Democratic “campaign machine,” and helped reshape Fannie Mae by lowering credit standards and allowing for no documentation loans and “liar loans.”  There is simply no simple way to explain the housing crisis.  While Booth’s argument attempts to lay the blame on “progressive” housing policies, clearly, there was much more at play.  Securitization, huckster mortgage lending, low interest rates, greed, fear, wanting more than you should have all played a role in this, and trying to pin it on the lenders, bankers, Barney Frank, Countrywide, undeserving homeonwers does not help explain the complexity.

What is clear is that the pendulum swing in lending has been severe.  Home ownership is at the lowest point it has been in forty years.  Rob Couch, a commissioner for the Bipartisan Policy Center’s housing commission argues that “all the laws set up to protect low-income, moderate-income and first-time buyers are protecting them out of a chance to buy a home. And consider the difference it makes on the community to have homeowners, to take chances on people on the margins and have them grow into responsibility.”  So many of the laws that have been implemented since the crash have impacted mortgage lending to the point that many lenders just cannot make any money making loans to these groups.  All of these vacillations in lending standards seems to argue for a more localized lending process through banks where individuals can make decisions based on knowing people, their needs, the strengths and weaknesses.  Securitization certainly created great incentives for lenders and banks and played a huge role in the crash.  A return to local lending decisions based on practical guidelines would help create a stable housing market.

Mortgage Settlements and Tax Liability

Posted in Foreclosure Topics

It is interesting that some attribute the phrase “Monkey on my back” to an older phrase: “Monkey on the roof,” which referred to one’s mortgage.  Well, call it a monkey or a 900-pound gorilla – either way – Bank of America just loosed some kind of opposable-thumb animal from its back.  One troubling aspect of the major post-housing boom bank settlements (among many others for certain) is that much of the settlement payouts will come in the form of “consumer relief,” which includes: loan modification for distressed borrowers, including FHA-insured borrowers, new loans to credit worthy borrowers struggling to get a loan in the nation’s hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers, reductions in mortgage principal and monthly payments for consumers struggling to hold onto their homes, funds to take over and tear down derelict housing, and assistance for building or refurbishing affordable rental properties.  For instance, in the recently-announced Bank of America settlement, of the $16.65 billion, Bank of America will shell out $7 billion in “consumer relief.”  While this is certainly welcome news, for many, this kind of relief is no longer even an issue, as so many people lost their homes to foreclosure.

I am convinced that if the major banks could have simply written down principal, reset interest rates, or made it easier to short sale a house, much of the initial pain of the financial crisis might have been averted.  However, the securitization of so many of the loans that Countrywide, Washington Mutual, and other mortgage mills were packaging and sending the secondary markets made it systemically impossible for many of the mortgage servicers to really do anything to help homeowners facing nasty rate resets or unforeseen circumstances.  Securitization has made decision making nearly impossible, as trusts with many, many investors simply cannot make the day-to-day decisions on individual mortgage cases.

Now, I am not all cozy on the side of many housing advocates and others who simply want to take every opportunity to lay the blame on the banks, thought there is much to point at indeed.  The housing bubble, its subsequent burst, and the attendant pain to follow was a complex web of communal bad decision making, greed, and stupidity.  Let’s be honest here.  Fortunately, the settlements seem to be getting more focused and addressing past deficiencies, such as the consequential tax hit that some may face when receiving relief, especially since the expiration of the Mortgage Debt Relief Act of 2007.  Indeed, as part of the Bank of America settlement, it may pay up to $490 million to cover taxes distressed homeowners may owe when some of their mortgage debt is forgiven.  In coming months, Bank of America will be responsible for scouring its mortgage portfolios, identifying eligible homeowners and contacting them for relief or homeowners can contact 877-488-7814 for more information as to whether they may be eligible.

No easy answers in all this, but at least the government has continue to wage battle against the top financial firms, even if they will never exact the amount of flesh necessary to really make these banks think twice about pursuing greed in the same fashion as they did in the last run up.  Sadly, there is little evidence in history to suggest it will not happen again – the only difference being the asset.

The $16.65 billion Bank of America Settlement

Posted in Real Estate, Uncategorized

The Securities and Exchange Commission today announced a massive global settlement between Bank of America and the US Justice Department, other federal agencies (including the Securities and Exchange Commission, the Federal Housing Administration, and Ginnie Mae), and six states, to resolve claims connected to toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans.  At issue are $245 billion in soured home loans, only $10 billion of which were from Bank of America. The rest were sold, packaged in bonds, by three firms BofA acquired in 2008 — the giant Calabasas high-risk lender Countrywide Financial Corp., Wall Street fixture Merrill Lynch & Co., and First Franklin Financial Corp., a big San Jose subprime specialist that Merrill had purchased in 2006.

In settling the various claims, Bank of America admitted that it failed to inform investors during the financial crisis about known uncertainties to future income from its exposure to repurchase claims on mortgage loans.  Additionally, Bank of America also is resolving a securities fraud lawsuit that the SEC filed last year related to residential mortgage-backed securities (RMBS) offerings.  The SEC reports that Bank of America has agreed to settle the two cases by paying $245 million as part of a major global settlement in which Bank of America will pay $16.65 billion to resolve various investigations involving violations of laws regulated by other federal agencies ($9.65 billion in cash and approximately $7 billion worth of consumer relief).

According to the SEC’s order, Regulation S-K requires public companies like Bank of America failed to disclose in the Management’s Discussion & Analysis (MD&A) section of its periodic financial reports any known uncertainties that it reasonably expects will have a material impact on income from continuing operations.  Bank of America failed to adhere to these requirements by not disclosing known uncertainties about the future costs of mortgage repurchase claims when filing its financial reports for the second and third quarters of 2009.  These uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.

Bank of America, as part of the settlement, admitted that “it failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” according to Rhea Kemble Dignam, regional director of the SEC’s Atlanta office.  This admission of wrongdoing, it has been stated by the SEC “provides an additional level of accountability for its violation of the federal securities laws.”

In the SEC’s original case against Bank of America filed in August 2013, the agency alleged that Bank of America knew that its wholesale channel loans – described internally as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.  The global settlement has Bank of America paying disgorgement of $109.22 million, prejudgment interest of $6.62 million, and a penalty of $109.22 million while consenting to permanent injunctions against certain violations of the Securities Act.  The settlement is subject to court approval.  To settle the new case, Bank of America agreed to pay a $20 million penalty while admitting to facts set out in the SEC’s order, which requires Bank of America to cease and desist from causing any violations and any future violations of of the Securities Exchange Act.  Although Countrywide Financial no longer exists, co-founder Angelo Mozilo is not in the clear, as prosecutors attempt to still hold him responsible for his company’s role in the U.S. housing bubble.

Bank of America already has settled its liability for Fannie and Freddie claims for more than $5.8 billion. Adding that to its proposed settlement with the Justice Department would bring its settlements to well over $22 billion — the largest settlement by a single entity in American history, according to the Justice Department.  The settlement doesn’t release the bank from criminal charges and the Justice Department reserved the right to file both criminal and civil charges against individuals.  Follow this link to a great graphic showing the various bank settlements since 2008.  http://graphics.wsj.com/documents/legaltab/

Today’s settlement with the U.S. Justice Department will cut Bank of America’s third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, Bank of America has reported.  Nonetheless, Bank of America shares rose 3.1 percent to $16 in earlier trading today.  It has been estimated that Bank of America’s net income will surge past $17 billion next year, the most since 2006 and up from $11.4 billion in 2013, according to the average of 15 analysts’ estimates in a Bloomberg survey.

Well, looks like everything is back on track for the banks.  Pretty sure we can say that the fallout from the financial crisis is not “settled” with the public, as the effects continue to materialize.

When Does a Tax Lien Expire in Arizona?

Posted in Tax Lien Foreclosure

When an owner of real property in Arizona fails to pay her real property taxes, the County Treasurer will offer to investors the opportunity to purchase a tax lien against the real property in the form of a Certificate of Purchase.  The successful bidder for the tax lien pays the delinquent taxes, fees, and penalties, and then begins to earn interest on the tax lien at the interest rate bid at the auction or over the counter.  Under Arizona law, at any time beginning three years after the sale of a tax lien, the tax lien holder may bring an action to foreclose the right to redeem.

A recent Arizona Court of Appeals Memorandum Decision (Span v. Maricopa County Treasurer) deals squarely with the issue of when a tax lien expires.  However, this Decision is not binding and did not create legal precedent, as the Court of Appeals did not issue a formal written opinion.  While not creating any legal precedent, the Decision does provide a potential glimpse into how a future court might rule on the issue of when a tax lien expires.

Span, the owner of the subject real property, argued that the tax lien against his property, which was purchased in 1995, had expired because the tax lien holder did not file a tax lien foreclosure action until 2007.  Maricopa County argued that the tax lien had not expired, because the purchase of later delinquent taxes (“subtaxes”) tolled the ten-year expiration period.  Span argued that the tax lien expired because the statute at issue in this case (Arizona Revised Statute Section 42-18208(A)) does not explicitly provide for tolling based on the purchase of subtaxes.

The only question before the Court of Appeals was when does a property tax lien expire under A.R.S. Section 42-18208(A).  The Court of Appeals held that a tax lien expires ten years after its purchase regardless of whether a buyer later purchases the subsequent taxes on the same property, and the expiration date is not tolled accordingly.

Interestingly, prior to 2002, there was no time limit for a tax lien holder to foreclose on his tax lien.  This resulted in a backlog of old tax liens on each of the fifteen Arizona counties’ tax rolls, and also created issues with income tax filings for tax lien holders.  Consequently, the Arizona legislature later amended the law to include a ten-year statutory lifetime for tax liens purchased on or before August 31, 2002.  The Court reasoned that it is clear from the legislative history and another statute that sets a ten-year expiration period (A.R.S. Section 42-18127) that the Legislature intended tax liens to expire after ten years, unless the purchaser begins a tax lien foreclosure action before that date.

The take away is pretty straightforward – if you do not begin a tax lien foreclosure action within ten years from the date the tax lien was purchased – your tax lien will expire.  However, what is not so clear is whether a tax lien that is purchased over-the-counter (at an automatic 16% rate), but was offered for sale years earlier expires ten years from when it was first offered for sale or first purchased.  The Pima County Treasurer, Beth Ford, takes the position that a tax lien expires ten years from when it is actually purchased.  A future legislative amendment is in the works to clarify this very point.  Who in their right mind would purchase a tax lien that was offered fifteen years ago knowing that the second they purchased it, it had expired?

Seniors are Struggling with Student Loan Debt

Posted in Uncategorized

Bloomberg Businessweek recently reported that a growing number of Americans aged 50 and older still have not paid off their student loans.  While people aged 50 and older hold only 17% of all student loan debt in the United States, this group has nearly three times as much debt as it did in 2005, according to recent New York Fed data.  By comparison, student debt for people under age 40 is about one and a half times as high as it was in 2005.  Interestingly though, this data does not distinguish  between older Americans who took out loans to finance their education and those who did so to put their children through college.  Either way, this group is clearly carrying more debt than ever before, and it appears that the government is using every tool it has to get its money back.  Indeed, collectors of federal student loan debt have the power to garnish income, block benefits, and withhold tax rebates.  Student debt also cannot be discharged in bankruptcy, so the debt remains until paid.  For older Americans that are already struggling with carrying debt and having no solid safety net to draw from, having their Social Security payments seized must be devastating.

According to the Federal Reserve, of the roughly $300 billion in U.S. Department of Education “Direct Loans” that are in repayment, one in six, or about 17.2 percent, are at least 31 days delinquent.  By comparison, just 3.3 percent of all loans and leases held by U.S. banks are at least 30 days late.  This latest information, which has been largely undisclosed in the past, comes as Washington policymakers and Wall Street analysts debate whether the nation’s $1.3 trillion in unpaid student debt poses a risk to U.S. economic growth and to the federal government’s budget.  Given the dismal prospects for younger Americans to repay their crushing educational debt and the fact that older Americans are also struggling, one has to wonder whether we are gearing up for another financial crisis that the government will foot the bill for.

Rising Housing Prices + Stagnant Economic Picture = Hard to Buy (or Rent)

Posted in Real Estate

While median home prices are clearly beginning to find some traction, having risen 6.6% from the first quarter of 2013 to the first quarter of 2014 (and just 12% of the national 2006 peak), national wages and income have remained stagnant.  The below graph highlights that real median household income in the United States has slipped significantly since 2006, when it peaked at the height of the housing bubble.


Nationally, asking prices (year-over-year in June 2014) rose faster than wages per worker (year-over-year in 2013) in 95 of the 100 largest metro areas.  Translated – it is getting increasingly more difficult for people to afford to buy a home.  This problem has been most pronounced in those areas most impacted by the housing bubble, namely California and the Southwest.  In Phoenix, Las Vegas, Sacramento, and Orange County, price gains have slowed significantly in recent months after rising nearly 20% year over year in 2013 due to the latest investor speculation wave.

Not only are potential home buyers finding it difficult to purchase a home, renters are increasingly finding the market much more expensive.  According to Mark Takano, a California Representative, “Rental costs are getting further and further out of reach for working families. Wall Street’s purchasing of hundreds of thousands of foreclosed homes for the purpose of converting the properties into rentals and securitizing them into bonds, is troubling.”

While private equity firms are snapping up houses as unprecedented rates, the average worker is finding it harder and harder to rent or own a house.  Indeed, companies like the Blackstone Group, American Homes4Rent, Colony Financial, Silver Bay, Starwood Waypoint, and American Residential have spent approximately $20 billion purchasing nearly 150,000 single family homes nationwide, and converted them into rental properties.  Housing advocates say that the after effect of the housing bubble has been the institutionalization of the single-family rental market, leading Wall Street to take a more direct role at playing landlord, while transforming a rental industry that was once dominated by mom-and-pop owners into one where Wall Street is a major player, once again transforming the housing market in ways never seen.  The below infographic shows how private equity has transformed the rental market since the housing bust.


Don’t Fall Asleep at the Wheel

Posted in Tax Lien Foreclosure

David Funkhouser and Benjamin Nielsen, attorneys with Quarles & Brady LLP, recently warned in their Commercial Litigation Law Update that Arizona tax lien foreclosures are wreaking havoc on lenders and borrowers.  Quarles & Brady represents many large banks and lenders, so it should come as little surprise that they are concerned about the impact of tax lien foreclosures on their lender clients.  Lenders should be concerned, as real property tax liens have lien priority over just about everything, including lenders’ deeds of trust.  Funkhouse and Nielsen claim that “lenders are losing millions of dollars, and homeowners are losing their homes.”  They go on to pose the question of why are lenders allowing it to happen?  They provide three possibilities:

1. Financial institutions — particularly large financial institutions that operate nationally — may simply be unaware of the tax lien process in Arizona.

If this is true, then these institutions would be well advised to seek legal counsel, lest indeed, they lose their collateral.

2. The tax lien foreclose action does not timely reach the hands of the appropriate person within a financial institution and/or their outside counsel; thus, no one responds and judgment is entered.

Having handled upwards of 1,600 tax lien foreclosure actions on behalf of tax lien investors, I see it time and again that large financial institutions fail to act in these cases or fail to act timely.  When they do act, it is often after a default application is about to become effective.  I even had a case where a major bank wired in funds to the Pima County Treasurer as I was walking from the parking garage on my way to obtain a Final Judgment foreclosing the rights of all parties to redeem the subject tax lien – the final step in a foreclosure action.  The foreclosure crisis exposed many of the systemic weaknesses in the large financial institutions.  They are often too large to handle the onslaught of demands placed upon them.  Most institutions use corporate statutory agents, and by the time a lawsuit is filed and forwarded to the institution, it simply takes too long for those institutions to dole out the work to their appointed outside counsels.  Sometimes, they fail to act and lose their collateral in the process.

3. Some financial institutions may be hesitant to redeem tax liens on properties with upside-down loans.

It is true that some banks simply do not want to pony up the money to secure their deed of trust position.  Why spend more money to secure an underwater property?  Even when the math adds up, as Funkhouser and Nielsen point out, it simply makes no sense why a bank is willing to let a property go so as to avoid paying the real property taxes.  Rational explanations are not always available.

Funkhouser and Nielsen cast this warning: “Falling asleep at the wheel can cost lenders their security interests and borrowers their homes — all while the tax lien holder, who purchased the tax lien for a few thousand dollars, enjoys a windfall.”  While it remains very rare for any tax lien investor to achieve such a windfall, lenders (and those attorneys representing them), should grab a Monster or a large cup of coffee, and be very aware of what is going on with their portfolios and lawsuits, as yes, a tax lien is a very powerful instrument indeed.

The Next Default Tidal Wave

Posted in Foreclosure Topics

While most reports show an improving housing market, it seems that the fallout from the housing borrowing binge has yet to fully materialize.  According to Reuter’s Peter Rudegeair, “U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks.”

According to Steve Cook of Real Estate Economy Watch, “Nearly half of the nation’s outstanding second lien home equity lines of credit (HELOC) will amortize over the next several years, raising monthly payments and increasing the risk of a rash of new delinquencies that could result in new defaults and foreclosures.”  The reason is that borrowers will now be required to start paying down the principal on these loans, as opposed to just paying the interest.  Peter Rudegeair reports that this “shift can translate to their monthly payment more than tripling.”

Lender Processing Services and Equifax are now warning that aging HELOC loans written in the final years of the housing boom could result in a huge number of defaults, creating a “wave of disaster.”  Indeed, some forty-eight percent of outstanding second lien HELOC loan that were originated between 2004 and 2006 will begin amortizing over the next couple of years.  While the home equity market is experiencing lower delinquencies overall, according to LPS Senior Vice President Herb Blecher, many borrowers will see their monthly payments increase substantially, likely leading to a wave of new delinquencies.  Indeed, only fourteen percent of these second lien HELOCs have passed the 10-year reset mark, leaving a very large segment of the market at risk.  The biggest banks are carrying over $10 billion of HELOCs on their books.

Amy Crews Cutts, chief economist at Equifax, recently told mortgage bankers that the coming increases to homeowners’ monthly payments on these home equity lines is a pending “wave of disaster.  Peter Rudegair reported that more than $221 billion of HELOCs at the largest banks will amortize over the next four years, about 40 percent of the home equity lines of credit now outstanding.  According to Rudegair’s Reuter’s article, in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.

Equifax’s Crews Cuts believes that in terms of loan losses, “What we’ve seen so far is the tip of the iceberg. It’s relatively low in relation to what’s coming.”  By all accounts, absent a rapid improvement in home equity levels, 2015-2017 may well usher in a substantial wave of new defaults, causing notable pain to the largest banks’ balance sheets.


MERS Exodus

Posted in Foreclosure Topics, Tax Lien Foreclosure

The Mortgage Electronic Registration System (MERS) was created by the mortgage industry to fast-track the loan assignment process and helped bypass the burden of having to record every assignment.  MERS was a perfect solution during the mortgage securitization frenzy. 

When the housing bubble imploded and foreclosure activity went through the roof, MERS found itself the target of many lawsuits.  Homeowner after homeowner challenged MERS’ legal authority to foreclose, as it was supposed to simply serve as an electronic registry, though it was often the named beneficiary under deeds of trust, though a "nominal" beneficiary.  MERS made it through the foreclosure crisis pretty well, all things considered.  Most legal challenges failed, as the courts likely couldn’t open up that kind of systemic Pandora’s box.  

Well, according to Bloomberg, MERS’ chief legal officers, its national litigation coordinator, its corporate counsel, and its chief internal auditor have all now left the company.  Hard to say why the exodus, but it may signal another closed chapter in the foreclosure crisis.  Job done, time to move on.