We're Rolling Now

After less than two years of existence for Penn State Law School's University Park location, the intellectual life of the school is picking up steam. We are committed to building a tradition of intellectual curiosity and engagement. We recognize that we are starting from scratch but will do whatever it takes to establish a culture that we are proud to pass on to those who will follow. While space has been a challenge, I am proud of the efforts that have been made notwithstanding the challenges of transition.

This is largely thanks to everyone from students to faculty to administrators who are working hard to attract great legal minds to campus. This is only just the beginning but it's a foundation and tradition to establish for the future.

Professor Kahn posted about Prof. Brant Hellwig presenting on March 6, so I want to take a moment and list a few more that are in the days to come:

March 17 - Guest from Maastricht University presenting on International Human Rights [7 - 8 p.m. in 333 Beam and 254 Carlisle]

March 18 - Psychology of Torture: Examining the Ethics & Legal Dilemmas [5:45 - 7:45 p.m. Beam Library and 119 Carlisle]

March 19 - Steroids & Baseball - Where is the Public Interest? featuring pioneering reporters Mark Fainaru-Wada and Lance Williams [1:30 - 2:30 p.m. 319 Beam and 142 Carlisle and again from 7 - 9 p.m. 112 Kern and 119 Carlisle]

March 20 - Prof. Stephanos Bibas of Penn Law on "Orginalism and Formulism: Justice Scalia the Unlikely Friend of Criminal Defendants?" [12 - 1:30 p.m. 254 Carlisle]

March 21 - Prof. Preston Green of Penn State Law on Choice, Desegregation, and Funding: Courts and the Black Struggle with Equal Educational Opportunity [12:30 - 1:30 p.m. 333 Beam and 148 Carlisle]

March 26 - Prof. Brad Smith of Capital University Law School on Broken Windows and Voting Rights [7 - 8 p.m. 208 Ford and 119 Carlisle]

April 16 - Prof. John Baker of the Louisiana State University Law School on Federal v. Local Control of Law Enforcement [330 Beam and 119 Carlisle]

April 22 - Jeffrey Toobin, CNN contributor and author of "The Nine" [7 - 9 p.m. 110 Smeal Business Bldg. preceded by a wine and cheese social in the Smeal atrium]

What's the Deal with Mortgage "Strip Down?"

In a comment yesterday to my post about Henry Paulson's speech, Josh raised some good points about current treatment under the Bankruptcy Code of home mortgage obligations.

Josh, I just report the news. Congress makes the Bankruptcy Code. The justification for shielding principal residence mortgage lenders from strip down in 11 U.S.C. 1322(b)(2)(chapter 13 debtors) and, 11 U.S.C. 1123(b)(5) (individuals in chapter 11 reorg.) is controversial. I've always understood it as a political response to the home mortgage lending industry. Lenders want payment stability to smooth risk and make home mortgage backed asset pools relatively more attractive than other asset backed securities. The asserted political payoff for this special treatment is a relatively lower cost of capital to home mortgage borrowers and ostensibly more Americans with access to home ownership.
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The right to strip down the principal balance on a home mortgage to its market value hasn't been terribly useful for debtors in rising real estate markets. Usually, a home mortgage borrower in bankruptcy wants to maintain his or her contract mortgage payments and cure any default in installments over the life of the plan (called "long term debt treatment" 11 U.S.C. 1322(b)(5)). To take advantage of a strip down, a debtor would have to pay off the stripped down principal balance in the three to five year term of a plan-- which, for 15 or 30 year mortgages would have the effect of jacking up monthly payments way above the cash capability of most debtors in bankruptcy. (I probably don't need to mention that it's only the rare debtor who uses a chapter 13 to strip down a mortgage on a vacation home. Typically, the vacation home is long gone before the debtor seeks relief.) The right to strip down or "modify" a home mortgage suddenly becomes important in times like these where home values are falling, in some places, dramatically.

As for the proposed amendment to the Bankruptcy Code to allow current borrowers to strip down their home mortgages in bankruptcy, I worry that retroactive application to loans already out there could increase instability in securities markets, making the capital crunch even worse. And that would be bad news for borrowers for sure.

Elizabeth Warren (Harvard) has posted a cogent criticism of the Bush Administration's response to the "mortgage crisis" on Credit Slips. And on the same blog, James White (Michigan) offers his view on proposed strip down legislation. Adam Levitin (Georgetown) and Joshua Goodman (Columbia, Econ.) have posted a working paper that purports to debunk the lending industry claim that permitting home mortgage strip down in bankruptcy would injure capital markets. For a detailed explanation of the ban on stripping home mortgages in bankruptcy, including commentary on the specific legislative proposals to reform it, read Mark Scarberry's (Pepperdine) testimony before the Senate last December.

Bernanke Urges "Haircuts" for Lenders

In a speech today to the Independent Community Bankers of America, Federal Reserve Board Chair Ben Bernanke urged banks to consider writing down the principal on troubled home mortgages voluntarily as a way to stave off borrower default and foreclosure. "In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure." In workout jargon, a reduction in the principal balance of an obligation to increase the expected payout is known as a "haircut."
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Bernanke thinks the path out of the housing crisis requires government action. In particular, government-sponsored mortgage finance enterprises, Fannie Mae and Freddie Mac, could do more to address problems in housing and mortgage markets. "New capital-raising by the (government-sponsored enterprises), together with congressional action to strengthen supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they scrutinize," he said. "With few alternative mortgage channels today, such action would be highly beneficial to the economy." Bernanke didn't mention amending the Bankruptcy Code to permit homeowners unilaterally to strip down mortgages. For bankers, a government imposed haircut feels more like a scalping.

Tough Talk from Treasury

Treasury Secretary Henry Paulson had some harsh words for homeowners. If you can afford to make your mortgage payments but default because you owe more than your house is worth, you are a "speculator" who is "not honoring his obligations" and undeserving of government assistance. "Let me be clear," he said. "I oppose any bailout." The Bush administration opposes a taxpayer funded bailout for homeowners caught with high interest rates and flat or falling home value. "I believe our efforts are best focused on helping homeowners who want to stay in their homes."
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The efforts Paulson and the Bush administration support is the voluntary consortium of lenders, the Hope Now Alliance, which has implemented a protocol for assisting borrowers refinance or restructure their home loans. The reports on how the Hope Now Alliance is doing in assisting homeowners facing foreclosure are mixed. In January 2008, Hope Now reported assisting homeowners in 167,000 loan workouts, up 11% from December 2007. During the same period, foreclosure starts increased by 5%. The problem which has Paulson and others stumped is the large number of homeowners (estimated 800,000) in danger of losing their homes to foreclosure that have failed to respond to overtures from Hope Now lenders. Paulson's view-- tough noogies. "If borrowers don't ask for help, they will have to bear the consequences."

Congressional Democrats assert that assistance for homeowners in refinancing their home loans is not enough and have proposed their own plans, including the Foreclosure Prevention Act of 2008 (S. 2636) which, among other things, would amend the Bankruptcy Code to permit homeowners to strip down the principal balance of their home mortgage to its current value in a bankruptcy case. Under current bankruptcy law, a debtor can "strip down" only mortgages for investment properties, vacation homes and farms, not principal residences. Lenders lobbied against the bill arguing that allowing strip down of home mortgages in bankruptcy would cause a rise in home mortgage rates unfairly borne by all mortgage borrowers. Senate Republicans blocked the bill last week. Paulson noted that proposals like these "would do more harm than good."

Home values are falling at record speed. The S&P Case/Shiller Home Price index showed its largest annual drop in its 20-year history, 9.1% in a single year (2007). By comparison, during the 1990-91 recession, home prices fell 2.8%.

Professor Brant Hellwig Visiting Penn State

Brant Hellwig, an associate professor at South Carolina University School of Law, will be visiting Penn State this Thursday, March 6, to present his paper, "Examining the Motivations Behind Nonqualified Deferred Compensation Plans." During his talk, Brant will review briefly what nonqualified plans are (as he notes in his materials, such plans are basically arrangements under which employees perform services for which they receive payment several years later than the year in which the services were performed) and address why employees are willing to accept such (generally unsecured) compensation packages.

Brant is one of the top "mid-level" (he began teaching in the fall of 2002) tax professors in the U.S. His many articles have been published in both tax and general law review journals (such as the Illinois Law Review, Minnesota Law Review, Florida Tax Review, Virginia Tax Review, Tax Notes, etc..)

Although I have not met Brant in person, I have read (and cited in my articles) much of his work and I always find it interesting and well-written. I am very much looking forward to his talk and will report again my thoughts on this particular piece after his presentation.

We're Number Two

The Global Finance Center Index, released February 28, reports that London is the world's most competitive financial center. New York ranked second. Here's the breakdown after that: 3) Hong Kong; 4) Singapore; 5) Zurich; 6) Frankfurt; 7) Geneva; 8) Chicago; 9) Tokyo; and 10) Sydney. The report, commissioned by the City of London, noted that New York dominates all cities as to capitalization of listed companies and trading volume on its exchanges. And bankers rate New York higher than London. New York took it on the chin, though, on the affordability of office space, business confidence, and per some responders, Sarbanes Oxley regulation.

When Rational Thinking Becomes Irrational

When is taking something off your plate the best way to get more done? Almost always, it appears. The New York Times provides this article about Dr. Dan Ariely’s new book, “Predictably Irrational.” The book discusses the idea that most people can’t make difficult choices that will reduce their options, usually at the expense of maximizing their potential.

Dr. Ariely openly admits he is not above making some of the same mistakes. The article notes that when trying to decide between two job offers, it was quickly clear that “he and his family would be more or less equally happy in either place. But he dragged out the process for months because he became so obsessed with weighing the options.”

Personally, I see this all the time in my scholarship (and many other places, for that matter). I have a basic plan for what I want to complete in the next few years, but I have countless ideas for new articles and projects, many of which will never go beyond the initial illegible note to myself on a Target receipt. But those slips of paper pile up on my desk, and I usually resist starting one project before I review all my other ideas. Eventually, I do actually start writing, but the time spent on this endeavor is often time wasted and time lost.

Beyond largely personal decisions, Dr. Ariely’s thesis puts a fine point on a lot of difficult policy questions for educators, as well: Should we change the first-year curriculum? Should pro bono work be required to graduate? How do we better prepare our students for practice?

On a broader scale, too, his concept applies: What do we do next in Iraq? Should we cap greenhouse gas emissions? How do we get health care costs under control?

These are all difficult questions, and it is hard to take any options off the table, lest we miss the best option for solving the problem. However, doing nothing, under the guise of considering everything, is a decision, too. Moving forward, at a minimum, I am going to do my best to keep that in mind.