Georgetown Law Faculty Blog

Restoring the Human Connection in Mortgage Lending

Emma Jordan has a Viewpoint piece in the American Banker today discussing the mortgage crisis.  The full text of the article, Finding a Way Out of the Lending Crisis, is reprinted below:

Wall Street financial wizards have conducted their businesses as though the complex financial products that generated billion-dollar compensation packages also created a protective moat beyond public accountability.

In the interdependent world of global finance that is now collapsing, home mortgages were abstractions. During this decade the basic human connection between lender and borrower in consumer finance was cut and thrown away as a quaint, easily discarded vestige of a bygone era.

In 1981, at the beginning of the era of retail banking deregulation, I wrote the first state consumer protection law for California to stop the practice of “playing the float” — holding customer deposits to earn money by delaying credits to the customer’s account. This abuse crept into retail banking because the full market effects of lifting the previous interest rate ceilings were poorly understood. Follow-up regulation was necessary to close a window of market failure.

Just as in the current crisis with subprime loans, competition could not and did not do the job after deregulation.

Getting out of this mess will require four things: public recognition of the scope and scale of the backlog of mortgage-related defaults, a return to basic human connections in mortgage lending, aggressive consumer protection, and insistence on generous capital cushions (rainy day funds to buffer unexpected losses).

Bring all the bad loans out of the dark recesses of investment and commercial bank balance sheets and into the light of public review. We cannot fix it until we see it.

Next, back to basics. Remember that houses are homes, not abstract transactions that can be made profitable with unreasonable levels of leverage/borrowing. I am not advocating a return to the horse-and-buggy days of lending. There is still a role for more conservative securitization, in which packages of home mortgages are sold to the restructured Fannie Mae and Freddie Mac, and a well-regulated private market. However, preserving the connection between originator and borrower is more likely to reduce fraud and consumer abuse.

This will require political and economic leadership to encourage Americans to return to the tough, unpleasant discipline of saving. At the heart of the current meltdown is a stark reality: America is the world’s biggest debtor in both the public sector (budget deficits) and the private sector (financial institutions and corporations). The U.S. financial system is now at the mercy of foreign sovereigns and institutions sitting on enormous piles of cash, much of it from the sale of oil and other products to us.

Shifting the bad loans, and the financial instruments based on these loans, on to the balance sheets of commercial banks will not solve the problems we face.

In the new pea and shell game, Bank of America has become the new private shell of choice. B of A, the nation’s largest bank, holds 10% of all deposits. It first absorbed Countrywide Financial, the biggest and most problematic subprime mortgage lender, with a loan from the Fed; this week it absorbed Merrill Lynch, with benefit of a waiver of a Fed rule designed to prevent the bank holding companies with FDIC-insured banks from lending to investment bank subsidiaries.

Bank of America, its depositors, and the FDIC are not the long-term solution to the accumulated pile of loans in default.

In August, the inventory of unsold foreclosed houses reached 750,000. With the takeover of Fannie and Freddie, the federal government will be the owner of some of these properties. These unsold foreclosures are depressing the home equity of the rest of us. RealtyTrac, a real estate value-tracking firm, estimates that one out of every six houses for sale in America is a bank-owned foreclosure.

Federal Deposit Insurance Corp. Chairman Sheila Bair testified Wednesday to the House Financial Services Committee: “The backlog of foreclosures and the credit crunch have combined to depress housing prices and homeowners’ equity dramatically. Steep home price declines are an important dynamic that drives up foreclosure rates. Falling home prices reduce homeowner equity, which then makes it more difficult to refinance or sell a home, leading to lower sales and higher delinquencies.”

Zillow.com estimates that 29% of homes are worth less than their outstanding mortgage balance. These owners have little incentive to keep making mortgage payments. Why not walk away and return the key? Short-sales will only add to the glut of unsold homes, driving prices down even further.

The relationship between the house as collateral for a loan and the many layers of complex new financial products grew ever more strained as the regulatory ground rules became a passive backdrop to a rapidly changing environment that featured three factors that converged to turn routine home loans into an international financial crisis: unregulated brokers, complex financial instruments, and international financial integration. I know that it is not fashionable to talk about human values in the same sentence as global money, but maybe that is the real problem. Where are Frank Capra and Jimmy Stewart when we need them?

Modern financial titans, like Sherman McCoy, the central character of “The Bonfire of the Vanities,” have unwound with a single wrong turn, carrying them from the heights of money, power, and privilege on Wall Street to the anger and rage of the ordinary folks in the South Bronx. Tom Wolfe’s metaphor of the fateful mistake helps us to see how connected we are, even though some may deny that connection.

Last weekend the bonfire raged out of control on Wall Street. This time the wrong turn took place more than 10 years ago, when the first experiments with bad loans were pushed on poor and unsophisticated borrowers who lived in communities that had previously been starved, through redlining, from receiving any loans at all. Target practice in poor communities proved the viability of the abusive terms: no exit fees, pay-what-you-want ARMs, liars loans, low teaser rates, and balloon payments. These same terms were then quickly adapted to middle- and upper-middle-class borrowers in search of a vacation home, or home equity for college tuition.

Within five years, Wall Street hedge funds perfected the lending techniques first used in poor communities. In the new financial structure for housing finance, unregulated, independent brokers sold loans by misrepresentations. Houses that people depend on for shelter became poker chips in a high-stakes game of liar’s poker. The late Gov. Edward Gramlich of the Federal Reserve warned that the introduction of “huge new sources of capital and financing of largely unsupervised subprime mortgage lenders” had caused problems with subprime loans.

He argued for re-establishing the connection between the lender and the borrower through banning the most objectionable provisions and through a mandatory “suitability rule” which would require lenders to make loans that are matched to borrowers’ economic profile and “in the borrower’s best interest.” The link between the borrower and the ultimate holder of the loan could be further strengthened by expanding existing rules to impose on the holder liability for fraud or other problems with the process.

The current crisis has been driven by the lack of adequate levels of cash to absorb the losses from defaults. Sovereign wealth funds have filled this cash gap, becoming the lender of last resort for cash-strapped commercial and investment banking companies like Citigroup and Merrill Lynch only nine months ago. The sovereign funds of Abu Dhabi , Singapore , and China were among a collection of funds that came to the rescue of these companies., China’s four biggest listed banks decided to scale back drastically their purchase of Fannie Freddie securities, triggering the government takeover of Fannie and Freddie just five days later.

Describing the mortgage meltdown is easy, but proposing a solution is less so.

For all the talk of “moral hazard” and “market discipline,” these after-the-fact buzzwords are a Rorschach test of whether you believe the government should play an active, aggressive role in controlling the risk-taking and profit-seeking party, just as the guests have started to arrive and loosen their ties.

Gostin: A Theory and Definition of Public Health Law

The revised and expanded second edition of Larry Gostin's book, Public Health Law: Power, Duty, Restraint, has just been released by the University of California Press.

The first chapter of this book, "A Theory and Definition of Public Health Law", has been posted to SSRN and BePress. 

Abstract:

The literature, both academic and judicial, on the intersection of law and health is pervasive. The subject of law and health is widely taught, practiced, and analyzed. The fields that characterize these branches of study are called health law, health care law, law and medicine, forensic medicine, and public health law. Do these names imply different disciplines, each with a coherent theory, structure, and method that sets it apart? Notably absent from the extant literature is a theory of the discipline of public health law, an exploration of its doctrinal boundaries, and an assessment of its analytical methodology.

Public health law can be defined, its boundaries circumscribed, and its analytical methods detailed in ways that distinguish it as a discrete discipline—just as the disciplines of medicine and public health can be demarcated. With this book I hope to provide a fuller understanding of the varied roles of law in advancing the public’s health. The core idea I propose is that law can be an essential tool for creating conditions to enable people to lead healthier and safer lives.

In this opening chapter, I offer a theory and definition of public health law, an examination of its core values, an assessment of state statutes in establishing the legal foundations of public health agencies, a categorization of the various models through which law acts as a tool to advance the public's health, and, finally, a description of the current debate over the legitimate scope of public health. These are the questions I will pursue: What is public health law and what are its doctrinal boundaries? Why should population health be a salient public value? What are the legal foundations of governmental public health? How can law be effective in reducing illness and premature death? And what are the political conflicts faced by public health in the early twenty-first century?

My definition of public health law follows, and the remainder of this chapter offers a justification as well as an expansion of the ideas presented:

Public health law is the study of the legal powers and duties of the state, in collaboration with its partners (e.g., health care, business, the community, the media, and academe), to assure the conditions for people to be healthy (to identify, prevent, and ameliorate risks to health in the population) and the limitations on the power of the state to constrain the autonomy, privacy, liberty, proprietary, or other legally protected interests of individuals for the common good. The prime objective of public health law is to pursue the highest possible level of physical and mental health in the population, consistent with the values of social justice.

Several themes emerge from this definition: (1) government power and duty, (2) coercion and limits on state power, (3) government’s partners in the "public health system," (4) the population focus, (5) communities and civic participation, (6) the prevention orientation, and (7) social justice.

            

New Articles Posted by West, Taylor and Gostin

Robin West's University of Pennsylvania Journal Constitutional Law article, Unenumerated Duties, has been posted to BePress.

Abstract:

The article aims to make problematic the relative absence of questions about the affirmative duties of legislators to pass laws to achieve various welfarist ends in liberal constitutional theory. The duty to legislate for the public good is a bedrock of both classical and modern liberal theory, yet there is almost nothing in liberal constitutional theory about the possible constitutional grounding of the moral duties, whether enumerated or unenumerated, of legislators. The full explanation for this absence rests on a set of jurisprudential assumptions that lead moral questions about governance to be understood solely as adjudicative questions of law. Yet it has become quite clear that governmental officials can on occasion be in profound breach of their non-justiciable duty to provide "protection of the laws." If that matters, then constitutional lawyers and scholars ought not wall themselves off from the ensuing dialogue regarding the nature of that duty and its breach.

A JAMA article co-authored by Allyn Taylor, Larry Gostin and Katrina Pagonis, Ensuring Effective Pain Treatment: A National and Global Perspective, has been posted to SSRN and BePress.

Abstract:   

Medical availability of effective pain medication is vitally important domestically and globally. Medical advances have substantially improved the technical capacity to control pain and diminish its consequences. Worldwide, millions of persons with chronic, acute, and terminal conditions have found relief from excruciating pain through medical intervention. However, richer countries have disproportionately benefited from improvements in access to and use of pain medication. The tragedy is that for most of the world's population, particularly persons in poorer countries, effective pain control is entirely unavailable.

Larry Gostin's JAMA article, The International Migration and Recruitment of Nurses: Human Rights and Global Justice, has also been posted to SSRN and BePress.

Abstract:

The international migration of health workers - physicians, nurses, midwives, and pharmacists - leaves the world's poorest countries with severe human resource shortages, seriously jeopardizing the achievement of the U.N. health Millennium Development Goals (MDGs). Advocates for global health call active recruitment in low-income countries a crime. Despite the pronounced international concern, there is little research and few solutions. This commentary focuses on the international recruitment of internationally educated nurses (IENs) from the perspective of human rights and global justice. It explains the complex reasons for nurse shortages in rich and poor countries; the duties of source and host countries; the human rights of health workers; and offers principles for responsible recruiting, focusing on national and global solutions.

Thinking Like a Professional

[The following is the text of my remarks earlier today to members of the first-year class at the session "Understanding the Law School Classroom: Preparation, Note Taking and Class Participation."]

    My colleague Naomi Mezey has a talk for first-year students that she calls “The Seven Stages of the First Year.”  The first stage--the one you’re in now--is “Total Confusion.”  I’d like to try to explain why the first weeks of law school are so confusing and what you can do to advance to Professor Mezey’s next stage, “Provisional Understanding.”

    Let’s start with the sources of confusion.  I think they fall under three headings, which I’ll state as questions.  First, what is it that we study when we study law?  Second, how do we study when we study law?  Third, where are the rules?

    So, what is it that we study when we study law?  It turns out that the “law” in law school is not one thing but many things.  Here are five possible meanings of the word.  First, law is a language, with its own vocabulary and grammar.  Second, it is a body--really, a galaxy--of legal rules.  Third, it is a set of institutions--courts, of course, but also legislatures, administrative agencies, private or quasi-public systems of arbitration and mediation.  Fourth, law is a profession, with its own organizations, norms, and conventions.  Fifth, it is a scholarly discipline, jurisprudence, which has been influenced by other scholarly disciplines, like history, sociology, economics, literature, and psychology.

    Now you might think that it would make sense to have professors take up the law in each of these various meanings in its own class or series of classes.  We could break up each field of law into its constituent parts and methodically guide you from the most basic to the most sophisticated in a linear and cumulative way.  We wouldn’t double back, and what you learned in one class would be the foundation you built upon in the next.

    But that’s where the “how do we study when we study law” question comes in.  I don’t want to argue that the law-school curriculum isn’t cumulative in any sense of the word.  That was true, once.  For a large part of the nineteenth century, classes were not segregated into first and subsequent years; law school was a merry-go-round that student could jump on or off at any point.  After 1870, however, under the influence of Harvard’s law dean Christopher Columbus Langdell a required first-year curriculum was established.  This included the common-law trilogy of property, contract and tort, in which students learned the default rules of a legal system, rules that, as they learned in their upper-level classes, might sometimes be changed or supplemented in various by statute to deal with particular social or economic problems.  It also had courses in civil and criminal procedure and legal research and writing to prepare students for more trial practice and clinics.

    But the first-year curriculum is not cumulative or linear when you consider the five meanings of law.  In any class, at any minute, the professor might make a point about one of them, then drop it and move on to another.  To make matters worse, particularly in these first weeks of classes you don’t yet have the experience to know which is which--to know when the professor is making a point about the reach of legal rule, for example, or when she’s talking about its social significance.

    So how we study law is not a methodical, linear and cumulative process.  It’s an immersion experience.  We chuck you in the water, which turns out to be less like a swimming pool than the raging ocean at the start of “The Bourne Identity.”  (Okay, maybe that's overly dramatic.)  You start splashing around, and as you do fragments of law, in its various guises, float past.  My suggestion is that you grab hold of the pieces you think you understand and lash them together to form a raft that keeps you afloat.  Don’t worry that your raft doesn’t look exactly like your neighbor’s raft, because we’ve purposely selected a first-year class with people with different backgrounds in it.  These different experiences and talents mean that you won’t all recognize the same bits of flotsam and jetsam at the same time.

    Well, I suggested that the question, “Where are the rules?” as the third source of confusion in the first weeks of law school.  Many of you are in law school because you’ve observed that lawyers have a great deal of power in our society, that they make people do things or not do things by the exercise of their authority.  You’re here to get what they had, which you imagine is some fixed body of knowledge, some book of spells.  You’ve put down your money and showed up, and now your professors won’t show you the book of spells, and it’s very frustrating.

    Most of us will expect you to be able to say the right incantations on the final exam, and we’ll grade you on how well you do that.  But for many of us, I think, performance on the exam is only a proxy, and not always a very accurate one, for your progress in a more general transformation in the first year.

    You’ve probably all heard that the first year of law school is not about learning blackletter law; it’s about learning to think like a lawyer.  I think it would be better to say, it’s about learning to think like a professional.  Because it turns out that society grants professionals autonomy and authority not just because they understand a body of knowledge but because they have made an informed commitment to take responsibility for how they use it.  They know that their clients can go to jail or be financially or emotionally ruined because of what they advise, and they realize that what they advise is not, or not just, what they think is right, but that it is likely to be what the relevant decisionmaker thinks is the law.

    I think most of your professors assume that classrooms have been fairly passive places for you, where your job has been to write down what you’ve been told so that you can reproduce it accurately later.  If we conducted the law-school classroom that way, we’d fail at our most important job as first-year teachers, which is to instill in you a professional mindset, an understanding that you’re responsible not just for what you think and believe, but for the consequences that follow for others as a result of your advice.  At the most fundamental level, then, what we’re about is the inculcation of a habit, and not conveying information, and this means we want to make the classroom a very active place, where you practice making claims about the law and consider their consequences, a dry run for your career as a professional.

    Well, if that is the most important thing that happens in law school, what should you be doing or not doing for class?  Three things come to mind.  First, you should not be alarmed if you go through a whole class without ever hearing something that you think you should write down. Chances are, you’ve just had a class that was devoted to “thinking like a professional”; there will be other ones when the professor finally opens the book of spells and gives you something you’ll need on the exam.

    Second, you should be prepared.  Most of your professors prefer to spend as little time as possible verifying that you know what we think you should know from the reading.  Especially after the first weeks, I’m afraid many of us--I include myself--tend to slight having students state aloud what they should know to get on to the much more interesting activity of seeing what you can do with what you know.  To prepare for that kind of a classroom experience, it’s not enough to do the reading, which might have sufficed when you were an undergraduate.  You have to go further and think about the implications and possible contradictions in your reading.

    Third, you have to attend.  By attend I don’t just mean showing up, although I know sometimes even that can be a challenge.  I mean attend in the sense of “to give attention to” or “to apply or direct oneself."  I’m saying you should to pay attention--observe very closely--what transpires in class.

    Here I think the most obvious and controversial issue to discuss is computers in the classroom.  Not too long ago that issue provoked a very sharp exchange among the members of the faculty, so I know I can’t present you with anything like a consensual view.  The issue is also hard for me because like most members of the faculty my own experience of the law-school classroom was very much a matter a pen and paper; even personal desktop computers were still a year or two in the future when I graduated.  Because you’ve used computers in class for some time, you may experience it very differently than I did, and in ways I don’t understand.

    So rather than be dogmatic, I think I’ll just give you a caveat.  If the law-school classroom was simply a matter of readings from the book of spells, then perhaps it would be possible to take notes and surf the web at the same time.  But if it’s about acquiring a habit of thought, it requires your undivided attention.

    So good luck with the remaining weeks of Total Confusion.  May you all proceed to Provisional Understanding as quickly as possible.

New Articles by Don Langevoort and Jill Hasday

Don Langevoort's paper, The SEC, Retail Investors, and the Institutionalization of the Securities Markets, and Jill Hasday's forthcoming Minnesota Law Review article, Fighting Women: The Military, Sex, and Extrajudicial Constitutional Change, have just been posted to SSRN and BePress.

Abstract for The SEC, Retail Investors, and the Institutionalization of the Securities Markets [BePress] [SSRN]:

The last thirty years or so have brought a rapid shift toward institutionalization in the financial markets in the U.S., i.e., investment by mutual funds, pension funds, insurance companies, bank trust departments and the like. This paper focuses on the institutional role of the SEC as a seventy-five year old agency in a capital marketplace far different from that of the 1930’s. A baseline question about the future of financial regulation in the U.S. is whether the SEC, with such a long and weighty legacy of law-making from a time when public markets were retail markets, is competitively fit to act as a regulator in a capital marketplace that is now so institutional and global. Part I asks whether there is a coherent theory or approach to retail investor protection in today’s marketplace, either in terms of enforcement intensity or rule-making. This Part considers two very different contemporary challenges to SEC’s orthodoxy: the emergence of the British “light touch” to securities industry regulation, which favors informal suasion to heavy-handed enforcement, and the expansion of knowledge about consumer and investor behavior from research in behavioral economics. Neither, it argues, maps well onto the SEC’s mission. Part II then moves to the institutional marketplace for issuer securities and engages in a thought experiment about whether, as many assume, markets that have no appreciable retail participation should properly be governed as “antifraud only.” This Part considers what antifraud-only means, and again expresses some skepticism about whether we can expect to see the development of private markets, largely free of regulation, that substitute for the public ones we observe today. Finally Part III takes up whether the SEC’s regulatory orthodoxy is stable enough as markets become not only institutional but global. It suggests, contrary to what many believe, that globalization leads to increasingly territorial (rather than listings) based exercise of regulatory jurisdiction over issuer disclosure. It also places the SEC’s recent initiatives toward mutual recognition in this context. The unifying theme in all three Parts stems from a long-standing interest in studying the behavior of the SEC: why it acts as and when it does and (often more importantly) what limits it imposes on itself or has imposed from outside.

Abstract for Fighting Women: The Military, Sex, and Extrajudicial Constitutional Change [BePress] [SSRN]:

The Supreme Court in Rostker v. Goldberg (1981) upheld male-only military registration, and endorsed male-only conscription and combat positions. Few cases have challenged restrictions on women's military service since Rostker, and none have reached the Supreme Court. Federal statutes continue to exclude women from military registration and draft eligibility, and military regulations still ban women from some combat positions. Yet many aspects of women's legal status in the military have changed in striking respects over the past quarter century while academic attention has focused elsewhere. Congress has eliminated statutory combat exclusions, the military has opened many combat positions to women, and the public has become more enthusiastic about women's military service, including in combat.

This Article brings long overdue attention to the record of women's legal status in the military in order to make three broad theoretical and historical points. First, women's continued exclusion from registration, draft eligibility, and some combat positions undermines the common assumption that legalized sex inequality has faded into history. Second, the record of women's legal status in the military helps illuminate how extrajudicial events can shape the Supreme Court's constitutional interpretation and then render that interpretation much less plausible over time. Rostker reflected contemporaneous understandings of sex equality. The extrajudicial transformation in women's military role since Rostker has undercut the factual premises and cultural assumptions behind Rostker's interpretation of constitutional equal protection, making clear that Rostker is inconsistent with the rest of the Court's sex discrimination jurisprudence. Third, and most strikingly, the record of women's legal status in the military illustrates how extrajudicial actors can develop and enforce their own evolving understanding of sex equality norms, sometimes becoming a more important source of those norms than courts. The extrajudicial transformation in women's military role has shifted the foundational normative commitments that shape the evolving meaning of constitutional equal protection. This transformation makes limits on women's military service that seemed just and reasonable in the 1970s and 1980s, even to many proponents of sex equality in constitutional and statutory law, now appear increasingly wrong, inequitable, and invidious. Over time, that shift in perspective is likely to affect demands for further change and judgments that both courts and extrajudicial decisionmakers reach about how the Constitution's open-textured language of equal protection applies to specific questions about women's military role. The Article concludes by exploring some of the practical consequences of the extrajudicial shift in perspective on women's military service.