Bill Falik Presents “Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally” on 9/6/12

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

On Thursday, September 6th, Berkeley Law Adjunct Professor Bill Falik will give a presentation on his work with Mortgage Resolution Partners (MRP), an organization advocating and seeking to fund local governments’ use of eminent domain to purchase underwater mortgages. The presentation is titled: Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally. The event will be held in Room 110 of UC Berkeley School of Law at 12:45 and is sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal. CLE credit is available and lunch will be provided.

Various cities across the country are considering the use of eminent domain to purchase underwater mortgages. Under the proposal, cities would use eminent domain to condemn the underwater mortgages (not the underlying property), at which point the city would purchase the loans for market value and refinance the loans to the homeowner at a principle balance equal to the current market value of the home.

This proposal has spawned predictions of dire consequences from members of the mortgage finance industry. Critics of the proposal argue that it is unconstitutional and would harm the mortgage market. Criticism has been so fierce as to prompt Lt. Governor of California Gavin Newsom to call on the Securities Industry and Financial Markets Association to stop threatening local officials in San Bernardino, a city considering the proposal.

Adjunct Professor Falik’s presentation will focus on MRP’s primary goal—to reduce the devastating health, safety, and welfare costs of underwater mortgages, foreclosures, and abandoned properties, leading to crime and blight, as well as depressed economic activity. He will argue that principal reduction is the most effective way to break the mortgage logjam that evicts families, decimates communities, paralyzes the banking system, and holds back economic recovery.

If you would like to attend the presentation, please RSVP to BCLBE@law.berkeley.edu

Facebook’s Woes Continue

By Vibhooti Malhotra, LL.M. Candidate 2012, UC Berkeley School of Law | Posted on

Since being the first American company to makes its debut (albeit a rocky one) on the NASDAQ stock exchange with a $100 million valuation, Facebook’s stock has lost more than half of its value. As of August 23, 2012, Facebook’s value was $41.95 billion.

In its earnings report a few weeks ago, the Facebook team—CEO, Mark Zuckerberg and CFO, David Ebersman—tried to restore market faith in the stock by emphasizing the growing subscriber base, especially among mobile users. Analysts, however, are concerned that Facebook may not be able to exploit the growing mobile use of its platform. While the number of Facebook users has continued toward one billion, Facebook has yet to find a way to monetize increased mobile access through advertising. While Facebook has experimented with various options, none appears to satisfy investor skepticism.

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Financial Services Providers Race (Cautiously) to Conquer Social Media

By Juan O. Perla, J.D. Candidate ’12, UC Berkeley School of Law | Posted on

The first of this month Goldman Sachs announced that it would be hiring a new “social media community manager.” This report comes on the heels of Morgan Stanley’s announcement in March that it was launching a new social media program designed to enable its nearly 17,800 financial advisers to use Twitter and LinkedIn to disseminate investment information and insights. The moves by these two giants are sure to trigger a race in Wall Street to conquer the social media landscape for financial and investment services.

But why has the financial services industry been so slow to join the social media frenzy? For one, it worries about the legal pitfalls of letting their legions of advisers loose into unchartered territory. And their unease is not totally unfounded. As posted previously on The Network, the Financial Regulatory Authority (FINRA) brought an action last year to suspend and fine a California-based broker $10,000 for promoting certain investments in “a series of ‘misrepresentative and unbalanced’ messages” to her 1,400 Twitter followers. And as recently as a few months ago, the Securities and Exchange Commission (SEC) charged an Illinois-based investment adviser with securities fraud for offering to sell “more than $500 billion in fictitious securities through various social media websites.” These regulatory actions precede a set of notable guidance letters from both the SEC and FINRA, briefly discussed in the prior post, but reviewed in more depth below.

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@Wall Street Is Tweeting #SecuritiesLaws

By Juno Hautekiet, L.L.M Candidate 2012, UC Berkeley School of Law | Posted on

There is no denying the prominent role that social media has taken in our lives. We are confronted daily with phenomena such as Twitter, LinkedIn and Facebook. Their member totals have grown exponentially and their IPO’s are valued at billions of dollars. Thus, it is no wonder that social media websites are attracting the attention of the business world: They offer an easy and free communication platform to connect, inform and interact with customers.

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The SEC’s Limit Up – Limit Down Rule Can Help Markets, But Does It Go Far Enough To Address High-Frequency Trading?

By Andrew Siosin, J.D. Candidate 2013, UC Berkeley School of Law | Posted on

The BATS IPO was an ironic disaster. BATS, a stock exchange that billed itself as the future of stock trading, botched the IPO of its own stock, which was supposed to be listed on the BATS exchange beginning March 23rd. According to the company, the failure was caused by a software bug, and not by high-frequency trading algorithms, as some have speculated. Not only did the failure cause BATS to abandon its own IPO, it also rattled shares of Apple, mirroring the events of the 2010 Flash Crash.

While the IPO was an embarrassment for BATS, it put the SEC’s regulatory response to the Flash Crash on display. The 2010 Flash Crash was a series of events that caused the Dow Jones Industrial Average to plummet more than 700 points in a matter of minutes, only to recover within a half hour. In response to the Flash Crash, single stock circuit breakers were established to curb the effects of extreme market volatility. By most accounts, single stock circuit breakers have been effective in restoring order to markets after numerous test runs during other “mini flash crashes,” hitting a high of 51 in December of 2011.

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Trans-Pacific Partnership Seeks New Global Standard in Free Trade and Intellectual Property

By Michael S. Young, J.D. Candidate 2012, UC Berkeley School of Law | Posted on

As we discussed in our recent pieces about the Stop Online Piracy Act (SOPA) and the Anti-Counterfeit Trade Agreement (ACTA), online communities have grown increasingly agitated by efforts to globalize the U.S. intellectual property regime.    But the Trans-Pacific Partnership Agreement (TPP), a free trade agreement that liberalizes far more than intellectual property protection, has so far not sparked the type of viral outrage that halted SOPA and ACTA.

The TPP seeks to establish an entirely new free trade zone among Pacific Rim nations.  The agreement originated in 2006 between Chile, New Zealand, and Singapore but participants now include Australia, Brunei Darussalam, Malaysia, Peru, the United States and Vietnam.  Canada, Japan, and Mexico have expressed an interest in joining talks, but membership could require significant changes to domestic laws – for example, Canada may be required to cease its protectionist dairy supply management regime.

TPP responds not only to the breakdown of world trade talks within the framework of the WTO, but also specifically to the emergence of China, whose exclusion from talks is no accident.  As much a successor to NAFTA as to ACTA, the TPP seeks to eliminate all tariffs on a broad range of goods and services (including intellectual property) between members, to establish new rules for determining an import’s country of origin, and to create a new regime of legal remedies available to foreign businesses against national governments.  According to Ron Kirk, the U.S. Trade Representative, the agreement “sets modern trade standards, including ensuring worker rights and protecting the environment.”

One of the means the TPP employs in reaching these stated aims is to prohibit nations from using capital controls (regulation of the flow of speculative capital).  Capital controls remain popular in Asia, where they are sometimes credited with shielding India, China, and Malaysia from the effects of the 1997 Asian Financial Crisis.

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The Impact of the JOBS Act on Silicon Valley: Engine of Growth or License for Scam Artists?

By Sunita Advani, L.L.M. Candidate 2012, UC Berkeley School of Law | Posted on

On March 27, 2012, Congress passed the final version of the Jumpstart Our Business Startups Act (‘JOBS Act’), aimed at increasing American job creation and economic growth by making it easier for startup companies to raise funds. As a Kauffman Foundation report posits, “Startups aren’t everything when it comes to job growth. They’re the only thing.”

The package of measures in the JOBS Act are intended to promote more initial public offerings (‘IPOs’) through provisions permitting crowdfunding, redefining the divide between “public” and “private” firms, creating a special IPO “on-ramp” for ‘emerging growth companies’, reducing restrictions on advertising of new securities offerings and permitting more analyst reports of companies undergoing an IPO. However, how much of a help are these measures to the tech entreprenuers of Silicon Valley?

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Live Blogging at the Foreclosure Crisis Symposium: Q&A Session

By Anne-Marie Weber, LL.M. Candidate 2012, UC Berkeley School of Law | Posted on

Q: What do the panelist think of moral hazard question? Are borrowers likely to default in order to qualify for a loan modification?

David Moskowitz: The moral hazard issue has always been a hot topic behind scenes. I personally think that the threat of strategic default is not substantial. I believe that at the end of the day people tend to do the right thing.

Paul Leonard: The moral hazard question often leads to the distinction of responsible and irresponsible borrowers. I think the borrower’s responsibility is not the key to determine the foreclosure crisis’ primary causes. Bad underwriting standards and lending on future appreciation have to be regarded as the starting point of malfunction. Therefore the evaluation of responsibility of borrowers alone is misdirected. Most loan modification programs are too concerned about moral hazard. The basic question is how far are people willing to go – are they going to quit their jobs in order to meet the requirements for a modification? I believe it is possible to construct the programs in a way that mitigates the risk of moral hazard.

James Rhyne: Borrowers can be broken down in the group of people that have knowledge and can scam the system and those that make decisions out of ignorance that results either from cultural norms or simple imitation. This ignorance of  the system works and what may happen if they default on paying their loans made them believe that they can afford to buy a house and made them trust the people that offered the loans. I think we should find a middle ground between putting too many restrictions on people and precluding them from owning a home ever and letting them make their imprudent decisions.

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Live Blogging at The Foreclosure Crisis Symposium: Q&A Session

By Juno Hautekiet, LL.M. Candidate 2012, UC Berkeley School of Law | Posted on

Q: What percentage in dollar volume of loans can be modified in a way that benefits both borrower and lender/owner?

David L. Moskowitz: I don’t have a percentage, but I know a lot of this is driven by employment and life claims. With these denominators, there is a higher percentage of win-win loans, as we have learned.

Q: Is it unethical or immoral for a borrower to walk away from an underwater home borrowing loan? There was recently a news section about somewhere in Cleveland where many people, even though they knew they were way under water, said that they really believed in the sanctity of their contract and that they were going to continue to pay and not go in default. Why would this be?

David L. Moskowitz: I saw that piece, it was quite compelling. In fact, 60% of underwater customers have never missed a payment. It is just not something that people want to do. I do not really have the psychology on this. People have seen the housing market go up and down and don’t know how they will behave at a high or low point. In the end, it all comes down to affordability: if you can afford to pay, you will.

Nancy E. Wallace: I mostly look at subprime pools, and even in there people are making very steady payments. The loans are 3-400% over the value, and yet they carry on making periodic payments. And we are talking about by far the majority of people in these pools. The large majority of borrowers are making steady payments on interest rates that are so high they cannot refinance. This speaks to the point of people’s willingness to hang on no matter what.

Paul Leonard: I am continuingly amazed by the phenomenon described here: homeownership as a sociological phenomenon rather than just a financial investment. Homes are where people live, where their kids go to school, etc. There is a sense of morality that comes with making your mortgage payment. On the other hands it surprises me that we haven’t seen more people say that they are subject to a foreclosure proceedings when they cannot make their payments anymore. From the people that are underwater, I have been surprised that there haven’t been more who have decided: this is not a situation that is financially good for me.

Laurence Platt: As a lawyer, I think it is interesting that if a borrower was to do that voluntarily, it is very hard for them to get to that next task. Rental housing is scarce and going up in price. There is a bit of a cost-calculus of what is going to happen next.

James Rhyne: That cost-calculus is driven by a lot of ignorance. The current legal system is not giving them a lot of security.
As a footnote, there is a subdiscipline in economics called behavioral economics, which has discovered a lot of non-rational economic behavior. I strongly recommend a book Daniel Kahneman, Nobel Prize winner in economics, called Thinking, Fast and Slow.

David L. Moskowitz: Don’t underestimate the economic calculus that goes into the impact on your family. People want to preserve the stability of their families. This is why co-ownership is so important. This is why people might continue to pay loans even if they are underwater, just because they can. People will rather opt for that.

Paul Leonard: From what limited evidence exists about strategic default, there have been some studies that the most likely strategic defaulters are people with higher incomes. It is not the average Joe, it is those who are most sophisticated about it. I would suggest that if you are counting on being able to qualify for a loan modification on the basis of defaulting, you would be taking a huge risk that you will not get the modification and loose your house. This is another mitigating factor for this behavior.

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Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

By Vibhooti Malhotra, LL.M. Candidate 2012, UC Berkeley School of Law | Posted on

James Rhyne, gave very valuable insights on constructing a 21st century information processing system for recording titles. In context of National Registry the most significant issue is transparency. Transparency in the mortgage marketplace is valuable for two reasons: a) valuation of the instrument and b) seizure of the underlying asset can be difficult if the legal standards are not followed.

Any future design must cater to improved access to records. Today, in order to trace a record one has to visit the county where the real property is situated in, while instruments are sold worldwide. Also the prospective design should retain compliance with statute and judicial pronouncements.

Recording, as it exists today, is an incomplete view of what actually happened in the transaction. These voids severely effect the pricing of the instruments. It is interesting today’s records, largely paper documents are manufactured from computer software, making the software very vital for the purposes of analysis. Mr. Rhyne added that, software also enables the production of two forms a) physical and electronic, but the system must work towards ensuring consistency. He stressed on taking practical and pragmatic step to build systems, which allow access to documents instead of waiting for a legislative change.

Requirements of title records vary across jurisdiction. Hence a national registry shall require an economical form of representation of information. Since, in the United States, State real estate law cannot be sidelined by a federal fiat – he suggested creation of some third form of reporting to a national agency. A similar harmonization exercise shall also have to be undertaken for transfer of notes.

Though creation of a future national registry would be an expensive proposition, associated economic benefits justify the exercise. For instance, a uniform identifier shall also contain a large variety of secondary sources of information about the property – reducing the cost of title insurance, reduce risk in real estate transactions and increase efficiency.