Understanding Ohio’s land bank legislation

The effects of sustained high rates of foreclosure on numerous areas of Cuyahoga County have thrust land banking to the forefront of recent public policy discussions in Ohio. This Policy Discussion Paper seeks to inform those discussions by explaining the state’s current land banking system and by illustrating how the proposed system under Senate Bill 353/House Bill 602 (the Land Bank Bill) would work.Banking law - Ohio

An end to too big to let fail? The Dodd-Frank Act's orderly liquidation authority

One of the changes introduced by the sweeping new financial market legislation of the Dodd–Frank Act is the provision of a formal process for liquidating large financial firms—something that would have been useful in 2008, when troubles at Lehman Brothers, AIG, and Merrill Lynch threatened to damage the entire U.S. financial system. While it may not be the end of the too-big-to-fail problem, the orderly liquidation authority is an important new tool in the regulatory toolkit. It will enable regulators to safely close and wind up the affairs of those distressed financial firms whose failure could destabilize the financial system.Bank failures ; Financial Regulatory Reform (Dodd-Frank Act)

The impact of vacant, tax-delinquent, and foreclosed property on sales prices of neighboring homes

In this empirical analysis, we estimate the impact of vacancy, neglect associated with property-tax delinquency, and foreclosures on the value of neighboring homes using parcel-level observations. Numerous studies have estimated the impact of foreclosures on neighboring properties, and these papers theorize that the foreclosure impact works partially through creating vacant and neglected homes. To our knowledge, this is only the second attempt to estimate the impact of vacancy itself and the first to estimate the impact of tax-delinquent properties on neighboring home sales. We link vacancy observations from Postal Service data with property-tax delinquency and sales data from Cuyahoga County (the county encompassing Cleveland, Ohio). We estimate hedonic price models with corrections for spatial autocorrelation. We find that an additional property within 500 feet that is vacant, delinquent, or both reduces the home’s selling price by at least 1.3 percent. In low-poverty areas, tax-current foreclosed homes have large negative impacts of 4.6 percent. In high-poverty areas, we observe positive correlations of sale prices with tax-current foreclosures and negative correlations with tax-delinquent foreclosures. This may reflect selective foreclosing on better-maintained properties or better maintenance by tax-paying foreclosure auction winners. The marginal medium-poverty census tracts display the largest negative responses to vacancy and delinquency in nearby nonforeclosed homes.Foreclosure ; Housing - Prices

Stripdowns and bankruptcy: lessons from agricultural bankruptcy reform

One type of financial reform being proposed to deal with the aftermath of the housing crisis is allowing bankruptcy judges the authority to modify residential mortgages in a way referred to as a stripdown. The reform is seen by some as a partial solution to the rise in foreclosures and as a Pandora’s box by others. But the debate is not new one. The 1980s farm foreclosure crisis sparked similar proposals and concerns. Congress decided to enact legislation that contained a stripdown provision, resulting in the creation of Chapter 12 in the bankruptcy code. The effects of Chapter 12 stripdown authority after its enactment shed light on the efficacy of allowing bankruptcy judges similar authority for housing loans.Foreclosure ; Bankruptcy ; Agricultural credit ; Mortgage loans

How well does bankruptcy work when large financial frms fail? Some lessons from Lehman Brothers

There is disagreement about whether large and complex financial institutions should be allowed to use U.S. bankruptcy law to reorganize when they get into financial difficulty. We look at the Lehman example for lessons about whether bankruptcy law might be a better alternative to bailouts or to resolution under the Dodd-Frank Act’s orderly liquidation authority. We find that there is no clear evidence that bankruptcy law is insufficient to handle the resolution of large complex financial firms.Bankruptcy ; Financial risk management

Reconsidering the application of the holder in due course rule to home mortgage notes

In this paper we investigate the history of negotiable instruments and the holder in due course rule and contrast their function and consequences in the 1700s with their function and consequences today. We explain how the holder in due course rule works and identify ways in which the rule’s application is limited in some consumer transactions. In particular, we focus on laws limiting application of the rule to some home mortgage loans. We investigate Lord Mansfield’s original justification for the rule as a money substitute, the lack of explicit justification of the rule by the drafters of the Uniform Commercial Code in the 1950s, the contemporary justification of the rule as a means of increasing the availability and decreasing the cost of credit, and the concerns of legislators and regulators about lack of consumer knowledge, bargaining power, and financial resources which caused them to limit the application of the holder in due course rule to some consumer transactions. We conclude that changes in policy justification, parties to negotiable instruments and the structure of the home mortgage market call for a reconsideration of the continuing appropriateness of holder in due course protection for assignees of home mortgage notes. We suggest further analysis based on economic theory and review of empirical research in order to formulate policy recommendations.Mortgage loans ; Holder in due course

Making financial markets safer for consumers: lessons from consumer goods markets and beyond

In the wake of the mortgage meltdown, policymakers are discussing how best to protect consumers in financial product markets.Consumer protection ; Financial markets

Resolving large, complex financial firms

How to best manage the failure of systemically important financial firms was the theme of a recent conference at which the latest research on the issue was presented. Here we summarize that research, the discussions that it sparked, and the areas where considerable work remains.Banks and banking ; Bank supervision ; Systemic risk ; Financial risk management ; Financial crises - United States

Faith-Based Financial Regulation: A Primer on Oversight of Credit Rating Organizations

In light of the present economic crisis and their role in it, the world seems suddenly keen to know more about the handful of private corporations--variously known as bond rating agencies, credit rating agencies, credit rating organizations (CROs), or the like--that rate the creditworthiness of corporate and government debt securities. By most accounts, these companies hold extensive sway in public capital markets, and for about thirty years, a few of them have enjoyed literally de jure delegation of federal regulatory oversight over much of the U.S. financial sector. With that power their ratings have value regardless of their accuracy, and they have used this power to earn substantial profits. The regulatory use of credit ratings is particularly troubling because the CROs have been implicated in some of that sector\u27s worst problems and, by most accounts, were intimately tied up in the present mess. The purpose of this Article is not to argue, as others have done and will do in the future, that the CROs have lacked oversight for too long or that their behavior has been suboptimal. This Article also does not urge any particular policy tweak to solve the industry\u27s problems, although it is clear that a necessary (but not sufficient) step is removing regulatory reliance on the CROs. The Article will instead assert two more-general propositions. First, the industry in its current posture cannot be meaningfully regulated, despite the near-universal agreement that if it is to persist in its current quasi-governmental role, it must be regulated. Second, the industry\u27s performance is likely to remain seriously disappointing under any conceivable change in policy or in an industry structure that still contemplates a major private role in formal assessment of credit risk. This will be shown in several ways. This Article will suggest reasons not to be too sanguine about any of the short-term regulatory solutions available at the moment, including legal and voluntary constraints currently in place and those that are currently pending before policymakers. The regulatory efforts that have recently been brought to bear on CROs are mainly structural tweaks and disclosure requirements meant to curtail conflicts of interest and increase CRO competition, which will not work. Controls were already in place to control conflicts and provide disclosure prior to the current economic catastrophe, and they have been shown to have been of no use. Likewise, while increased competition conceivably could improve the price competitiveness of ratings services, we will argue that it is unlikely to improve their quality. Indeed, all proposals so far suggested by academics and others, as well as a few developed in this Article, are fairly problematic, especially those that countenance some important continuing regulatory role for private, profit-making risk raters

Who’s Afraid of Good Governance? State Fiscal Crises, Public Pension Underfunding, and the Resistance to Governance Reform

Much attention has been paid to the significant underfunding of many state and local employee pension plans, as well as to efforts by states and cities to alleviate that underfunding by modifying the benefits provided to workers. Yet relatively little attention has been paid to the systemic causes of such financial distress—such as chronic underfunding that shifts financial burdens to future taxpayers, and governance rules that may reduce the likelihood that a plan’s trustees will make optimal investment decisions. This Article presents the results of a qualitative study of the funding and governance provisions of twelve public pension plans that are a mix of state and local plans of various funding levels. We find that none of the plans in our study satisfy the best practices that expert panels have established, and that the strength of a plan’s governance provisions does not appear correlated with a plan’s financial health. Our most important finding is that, regardless of the content of a plan’s governance provisions, such provisions are almost never effectively enforced. This lack of enforcement, we theorize, has a significant, detrimental impact on plan funding and governance. If neither plan participants nor state taxpayers are able to effectively monitor and challenge a state’s inadequate funding or improper investment decisions, public plans are very likely to remain underfunded. This Article concludes by offering several possible reform options to address the monitoring and enforcement problems made clear by our study: automatic benefit reductions, automatic tax increases, a low-risk investment requirement, and market monitoring through the use of modified pension obligation bonds