In case anyone was wondering why Greece is having a crisis in the first place:
Why is Greece in trouble?
Greece was living beyond its means even before it joined the euro. After it adopted the single currency, public spending soared.
Public sector wages, for example, rose 50% between 1999 and 2007 - far faster than in most other eurozone countries. The government also ran up big debts paying for the 2004 Athens Olympics.
And while money flowed out of the government’s coffers, its income was hit by widespread tax evasion. So, after years of overspending, its budget deficit - the difference between spending and income - spiraled out of control.
Moreover, much of the borrowing was concealed, as successive Greek governments sought to meet the 3%-of-GDP cap on borrowing that is required of members of the euro.
When the global financial downturn hit - and Greece’s hidden borrowings came to light - the country was ill-prepared to cope.
Debt levels reached the point where the country was no longer able to repay its loans, and was forced to ask for help from its European partners and the IMF in the form of massive loans.
In the short term, however, the conditions attached to these loans have compounded Greece’s woes.
And for a more in-depth look, read Michael Lewis’s book Boomerang. Or just his article in Vanity Fair that provided the backbone of that book. His bottom line:
As it turned out, what the Greeks wanted to do, once the lights went out and they were alone in the dark with a pile of borrowed money, was turn their government into a piñata stuffed with fantastic sums and give as many citizens as possible a whack at it.
The Statute of Limitations in Foreclosure Actions, its Impact on the Economy, and Why You Should Care. (Or, “OMG, Not Again!”)
Last week the New York Times ran this article, titled "Foreclosure to Home Free, as 5-Year Clock Expires." Focusing primarily on the legal system in Florida, it discussed the 5-year statute of limitations on foreclosure cases. And the article profiled one Miami woman for whom the clock had run on her foreclosure action -- in effect, nullifying the mortgage on her property. This happened because the bank lost its foreclosure action and more than five years had passed since the homeowner had defaulted, thus the bank lost its ability, under the statute of limitations, to enforce its mortgage.
The article took the tone of a human interest piece that hinted at broader implications. Let's unpack that article and examine those broader implications. (And on the issue of whether “getting a house for free” is fair, I’ll say that no one is blameless in the credit crunch crisis, and leave it at that. I refer you to Michael Lewis’s book, The Big Short)
How the Statute of Limitations Works
First, the eye-blearying legal stuff. Bear with me, it's important. (Although, if you lose focus along the way, or just want to take my word for it, scroll down to the "TL;DR" summary.)
The statute of limitations, generally, works like this: you accrue a cause of action (usually at the time of the event, say, a car accident in a personal injury negligence case) and then you have a set amount of time within which to bring that action. The legislature sets the time limit by statute (hence "statute" of limitations). If you bring your action within the time limit, you're good, you've satisfied the statute. You don't have to complete your action within the time prescribed, just bring it. Once you lock in your action, you can complete it outside the statute of limitations.
But what happens if you have your action dismissed after the statute of limitations has run? Well, then you are barred by the SOL ("statute of limitations"...although it's also an apt acronym to describe your predicament at that point). You cannot re-file the cause of action. Now keep that in mind as I jump into the specifics of foreclosure actions.
A foreclosure action accrues once the homeowner has defaulted. That's the triggering event. Under a mortgage, there are any number of ways that you, as the borrower, can default, but the most common default is failure to fully pay your monthly installment. And because a mortgage is an installment contract, there are continuing, recurring, obligations. Meaning a bank can accrue a new cause of action for every month of default.
Once you default, under the standard mortgage, there is a notice provision. The bank has to let you know and give you time to cure your default (usually 30 days), i.e. pay your monthly installment plus some late fees, etc.
If you fail to cure the default, there is another, key, provision of the mortgage that facilitates the foreclosure action as we know it. That provision gives the bank the option to "accelerate" the debt, meaning the bank declares the entire amount of the loan immediate due. And that provision also allows the bank to foreclosure the mortgage and take possession (or sell) the property in satisfaction of that debt. Usually the notice telling you to cure your default also serves as your notice that the bank will accelerate your debt.
If acceleration seems unfair, remember that you agreed to it at the closing when you bought your house. And it's totally legal. The flip-side is that after the bank accelerates your debt, you no longer have a continuing, monthly obligation to pay. That means, after a bank accelerates based on your failure to pay September's payment, you can't default again by not paying October's. The mortgage is no longer an installment contract, just a contract for one big lump sum.
Now, let's put it all together. Borrower defaults and doesn't cure. Bank accelerates and initiates foreclosure action. Five years elapse. Bank loses on the merits; fails to prove its case. At that point, under Florida law as it seems to stand now, that adjudication on the merits acts as a deceleration of the debt. Essentially, the bank is found to have improperly accelerated, and so the parties are put back to the status quo ante: The mortgage is still in place, and installments are once again due every month. (But borrower does get attorneys fees from the bank for winning.) At that point, after the conclusion of the case, if the borrower misses another installment payment, the bank gets a brand new, shiny foreclosure action. But, the bank loses those five years of payments that would have accrued during litigation, had the bank not accelerated. It had a cause of action for them by accelerating, but lost.
Remember I said "Florida law as it seems to stand now"? Pending in the Florida Supreme Court is this very issue. Does a bank get to pick another subsequent default to accelerate if it lost one foreclosure action? Or is the mortgage dead? At the heart of that question is the SOL. One lower appellate court in Miami, the Third District Court of Appeal, has determined that when a bank's foreclosure action is dismissed without prejudice, not on the merits, then no deceleration occurs. Meaning the bank can't sue on a new default because there is no new default. the debt is still accelerated and due in its entirety. As Judge Emas succinctly put it: "Without a new payment due, there could be no new default, and therefore no new cause of action." And if the SOL has run in the meantime, the bank's SOL. No new cause of action, nor original cause of action. That's the worst case scenario for a bank, best for the borrower. The open question is what happens with the mortgage? Presumably the bank can decelerate and then wait for another default, but it's lost out on all the payments and interest that would have been due during litigation. The Florida Supreme Court is positione to sort all of this out.
TL;DR: The Florida Supreme Court will decide whether the foreclosure statute of limitations entirely nullifies a mortgage once it runs.
The SoL Could Lead to Big Losses
But, as the NYTimes article points out, Florida is not the only state that will face this statute of limitations issue. New York and New Jersey, two of the states among those hit hardest by the foreclosure crisis, have 6-year statutes of limitations that could have the same effect of wiping out entire swaths of so-called "legacy" mortgages (a fancy way of saying old, pre-crisis, subprime mortgages). Reuters ran an article in January titled "Growing Threat Hangs over Legacy Mortgage Bonds," in which a New York attorney is quoted saying, "[i]f the court says the mortgage is gone because too much time has passed, it's gone. The loss, if it occurs, is catastrophic because it is complete."
And the scary part: No one knows how big the losses could be.
According to Reuters, Fannie Mae held a conference call at the end of last year with all its law firms to assess the risk that the SoL posed to its portfolio. Fannie posed the all-important question: how bad? The answer: "We can't even begin to tell you - there are so many loans."
So if Fannie Mae doesn't even know how bad its losses could be, who does? What will the total losses be to the financial industry as a whole if the SOL wipes out a significant portion of legacy mortgages? As Reuters reported, analysts are struggling to come up with a number , and "investors are just waking up to how big a problem it could become."
Well, let's do some rudimentary math to get a crude idea. In Florida as of March 2015, there were 116,692 pending foreclosure actions. Of that number, 30%, or 35,015, had been pending over 730 days.
(Full report here.)
Let's assume, conservatively, that of those 35,015 mature cases, only 11,669 (10% of the total) are nearing or beyond the 5-year SoL (which would be an age of 1,826 days). The median foreclosure sales price, according to RealtyTrac, is $112,500. If foreclosure plaintiffs were to lose all of those cases to the SoL, the losses would equal $1,312,762,500 (11,669 x $112,500). That's billion with a capital B. Even a quarter of that number, $328,190,625, would be significant. That's in Florida alone. Nationwide, those losses would surely be in the billions.
And it’s not just the banks holding the bag. It might surprise you to learn that subprime Residential Mortgage Backed Securities (the bonds that sparked the Great Recession) are experiencing a resurgence. Last October, a $1 billion package of “subprime vintage” debt, created back in 2006 and 2007, was gobbled up by investors. The seller? All signs pointed to a Government Sponsored Entity, e.g., Fannie Mae.
Fannie Mae might not know the extent of its potential losses, but it sure as hell seems to be trying to mitigate them. Or, Fannie could just be shedding subprime now that the market appears to have resumed its unhealthy appetite.
Either way, it’s not just the banks that are exposed to potential losses from the SoL. Should the SoL wipe out legacy mortgages, those bonds comprised of such mortgages would be rendered worthless. And everyone holding a piece would suffer. Once again, mortgage backed securities have spread the risk far and wide throughout the economy. Whether or not that risk manifests is entirely up to the courts.
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