Consumer Law & Policy Blog

New Deal Foreclosure Solution

The Center for American Progress is calling for an updated version of the Homeowners Loan Corporation, the New Deal agency that rescued thousands of Americans from foreclosure, and was the predecessor to FNMA and securitization. In the Depression, most home mortgages were interest-only loans for five years with balloon payments. This required homeowners to refinance frequently and left them at the mercy of lenders. Sound familiar? The situation is not unlike that of homeowners with subprime teaser-rate ARMs, who borrowed on the premise that they could refinance before the payment increase. The HOLC stepped in, buying mortgages from lenders and issuing bonds to finance the purchases. In the process, HOLC created the amortizing, monthly payment, long-term mortgage, the true affordability product of the mortgage industry (and you thought the private market was the source of financial innovation!) In the words of FDR: " to protect home owners from inequitable enforced liquidation, in a time of general distress, is a proper concern of the Government." For more on the history of HOLC, including its role in inventing racial redlining, go here.

The Center's proposal calls for a new HOLC, that would purchase delinquent or at-risk mortgages that cannot be refinanced because they exceed the current property value. The current holder would be offered an amount equal to the property value. Although the holder would lose money, the loss would not be as great as if the holder foreclosed, and had to incur more expenses and delay. The new HOLC would issue bonds, in other words, securitize the purchased loans, and then service them or contract out servicing until they were paid off. Expect to hear more about this proposal in the coming months.

BMA Proponents: Consumers Don't Know What's Good For Them; the Businesses That Write the Contracts Do

by Richard Alderman

  Last Wednesday, I testified before the Senate Judiciary Committee regarding the Arbitration Fairness Act of 2007. In simple terms, the bill prohibits pre-dispute arbitration in employment and consumer contracts.  Paul Bland also testified and did a great job. Here is his testimony.

In my testimony,  I discussed the "big-picture" effect of eliminating the courts from consumer disputes. My argument was similar to the one in my recent article, The Future of Consumer Law in the United States - Hello Arbitration, Bye-Bye Courts, So-Long Consumer Protection.  I thought it went well.  Even Senator Brownback, who stated his opposition to the bill, noted that I raised an interesting point that he would have to think about.

What surprised me, however, was the approach of those opposing the bill.  All of those testifying in opposition, mostly employees of arbitration associations and big law firms that defend arbitration of disputes, echoed the same sentiment: "We can't eliminate pre-dispute arbitration because forcing consumers to arbitrate is in their best interest." I heard statistic after statistic about how much more money consumers receive and how much quicker they receive it, in arbitration. Listening to this testimony, you would have thought I was hired by big business to testify, and the others were doing the Lord's work helping consumers.  I began to question whether I should have even been testifying in support of the bill. Was I anti-consumer?

Supercrunching and Consumers

by Jeff Sovern

   I’ve been listening to an audio version of Yale law professor Ian Ayres’s terrific new book, Super Crunchers, during my commute.  Super Crunchers is about the use of statistical data in decision-making.  The book provides a fascinating account of how data-based decision-making is replacing the use of intuition in many realms of life, including consumer issues.  For example, Ayres used statistical techniques to establish that car dealers charged higher prices to women and people of color, as discussed in his earlier article, Fair Driving: Gender and Race Discrimination in Retail Car Negotiations, 104 Harv. L. Rev. 817 (1991).  He also used similar methods to prove that car dealers impose higher markups in car loans to people of color than to whites, which inspired numerous settlements a few years back.  Industry also uses the techniques Ayres discusses in marketing to consumers.  Thus, Ayres discusses how Capital One sends two groups of consumers identical solicitations, except that one group receives an envelope with one legend on the cover (e.g., 2.9% rate) and the other group receives a different envelope, so that Cap One can determine which envelope generates a higher response rate.  Or businesses might use different web page designs to see which produces more sales.  Of course the replacement of the traditional intuitive decisions by loan officers with data-driven credit scoring is well known.  Ayres also explores the combining of data from multiple sources about consumers.  I suspect that in the future consumer litigators and policy-makers will find the tools Ayres describes invaluable.

Another Ohio Judge Halts Foreclosures

By Alan White

A state court judge in Cincinnati has dismissed a foreclosure action because the securitization trust filing the suit was not the holder of the mortgage at the time it sued the homeowner. The judge then took the unusual step of ordering the law firm filing the foreclosure to file proof of mortgage ownership before filing any new foreclosure actions for any clients. The mortgage at issue was a teaser rate ARM, and the couple involved say they had made a payment agreement with the servicer before the foreclosure was filed.

The Ohio Attorney General Marc Dann has already filed motions in several Ohio counties to stop foreclosures until their legal ownership is properly established.

In many cases, the securitization trust that owns the loan will be able to obtain the necessary mortgage assignment and a properly endorsed Note, but careful compliance with court rules will put off foreclosure for 30 to 60 days. In other cases, however, especially when the original lender has gone bankrupt or otherwise imploded, it may be difficult or impossible to get the necessary signatures, and the necessary documents, to complete a legal transfer of the mortgage that was not completed before the foreclosure. There is no reliable way to estimate the percentage of cases where ownership paperwork will be unavailable, but it will be significant. Hopefully, while the servicers search frantically for the missing paperwork, they can focus more time and attention on making reasonable modifications of loan principal and interest to allow homeowners to stay in their homes, and mitigate losses to investors. The significance of these cases may also go beyond the "real party in interest" issue, as state and federal court judges may decide to flex their muscles and become less and less inclined to rubber stamp the rising flood of foreclosure filings.

A note to law professors: the Cincinnati Enquirer story cites the study of mortgage servicer errors by Katie Porter, the same study that was also cited by one of the Ohio federal court judges. Good scholarship makes a difference.

Kurt Eggert on Abuses by Mortgage Servicers

Kurt Eggert's article "Limiting Abuse and Opportunism by Mortgage Servicers" in 15 Housing Policy Debate No. 3 (2007) can be found at http://ssrn.com/abstract=992095.  Here's the abstract:

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

The causes of such practices and the market forces that can rein them in are discussed. A case study of one mortgage servicer describes its unfair treatment of borrowers and the reforms imposed by federal regulators and other market participants. Both regulatory agencies and rating agencies appear to have increased their scrutiny of servicers' behavior, and states have passed new legislation to limit abuse. This article concludes with a discussion of proposals for further reform should these steps prove inadequate.

Trying to Understand the Mortgage Meltdown

by Jeff Sovern

As a teacher of consumer law, and the co-author of a consumer law casebook, I've been trying to figure out what to do about course coverage of the subprime mortgage meltdown.  Our casebook includes a chapter on predatory lending, and some discussion of subprime lending, but so much has happened since the book went to press, and even since we issued our supplement last summer, that perhaps more is called for.  Just organizing the problem is daunting.  For purposes of pedagogy, it seems helpful to divide affected consumers into three classes (discussion of the other victims--investors and lenders--is probably beyond the scope of a basic consumer law course).  The classes are: (1) borrowers who have already defaulted (and possibly been foreclosed upon); (2) existing borrowers who are likely to default when their interest rates rise; and (3) future subprime borrowers.  The Bush mortgage plan (see here) is largely addressed to the second group.  The bills pending in Congress (see here and here) seem chiefly focused on the third group.  Depending on their particular situations, members of all three groups can take advantage of existing laws (which are already covered in the casebook), such as common law fraud, UDAP statutes, TILA, HOEPA, ECOA, FDCPA. the unconscionability doctrine, and, to the extent that they're not preempted, state predatory lending statutes and usury laws.  Does that sound right?  Am I missing some new theory of liability or something else?

Senate Judiciary Committee Hearing on the Arbitration Fairness Act

Right now, the Senate Judiciary Committee is holding an important hearing on the Arbitration Fairness Act -- legislation that would ban mandatory, binding arbitration clauses in consumer and employment agreements. (Click here to watch a live webcast of the hearing).  The witnesses include CL&P bloggers and arbitration experts Paul Bland and Richard M. Alderman and as well as Mark A. de Bernardo (a management-side employment lawyer at union-buster Jackson Lewis); Richard Naimark of the American Arbitration Association; pro-mandatory-binding-arbitration professor Peter Rutledge of Catholic University and Tanya Solov of the Illinois Secretary of State's Securities Department.  Our previous coverage of the Arbitration Fairness Act, and the battle over mandatory binding arbitration more generally, is available here.

Haliburton Maintains That Gang-Rape Case Should Go To Arbitration

U.S. PIRG's Consumer Blog has this report on Haliburton's efforts to force into arbitration a suit brought by a former employee who claims that she was gang-raped by her co-workers in Baghdad.  Read it and decide for yourself whether this is the kind of case that should be handled in private, where the allegations of corporate and governmental misconduct will never see the light of day.

Reports on Senator Dodd's Mortgage Bill and Ask.Com's Privacy Protections

Here is the report in today's Times on Senate Banking Committee Chair Dodd's mortgage bill.  The story compares the Dodd bill to the House bill.  An excerpt:

Like the House measure . . . Mr. Dodd’s bill requires lenders to make only those loans that benefit borrowers and that they can repay. But Mr. Dodd’s proposal would also require brokers to act in the interest of borrowers, and that Wall Street firms could be sued.

Investment banks that securitize mortgages could also be sued under Mr. Frank’s measure, but state authorities would be prohibited from pursuing certain claims against Wall Street.

In an interview last week, [Congressman Barney] Frank [who authored the House bill] said he planned to toughen his bill’s enforcement provisions as it relates to investment banks, but he added that the demand for home loans would dry up if investors in mortgage securities were subject to lawsuits brought by state officials.

Unlike the Frank bill, Mr. Dodd’s proposal would bar specific practices in subprime lending like prepayment penalties, which borrowers have to pay if they try to refinance or pay off their loans early within a few years, and yield spread premiums, which are commissions lenders pay to brokers for gettingpersuading borrowers to take out a higher-cost loan than they could qualify for. But Mr. Dodd’s bill would not create a national registry of brokers and loan officers as the House measure would.

The Times also reports here on Ask.com's program to discard information gathered from consumer searches.  Consumers wishing to keep Ask.com from retaining their information wil have to use "AskEraser," which is to be conspicuously displayed on Ask.com's main search page.  Ask.com contrasts with other search engines, like Google, which retain consumer information for 18 months or so.  This promises to be an interesting privacy experiment.  Ask.com is betting that enough consumers care about their privacy to switch to their service from competitors; it will be interesting to see whether Ask.com's market share, currently under 5%, increases.  It's not clear to me, though, how much privacy protection consumers will get.  Ask.com will still provide query information to Google (!) which supplies many of Ask.com's ads. 

More Criticism of the Bush Subprime Mortgage Plan

The Times, echoing to some extent earlier criticisms of the Bush subprime mortgage plan (referred to here and here), published an editorial titled "Show Us the Mortgage Relief," in yesterday's edition and Paul Krugman's column, "Henry Paulson's Priorities," today.  Here's an excerpt from the editorial:

The plan is too little, too late and too voluntary. Mr. Paulson and his boss, President Bush, have left it to the private sector — the mortgage industry — to protect the public interest, without any negative consequences if it does not. That is not the way the private sector works. And it is not how government is supposed to work at a time when Americans are facing mass foreclosures that threaten entire communities, financial markets and the wider economy.

Many mortgage servicers . . . fear being sued by mortgage investors. For some investors, letting a troubled borrower default would actually be better business, for others not. It all depends on how their particular security is set to pay out.

* * * [L]lenders that stick to the government-brokered guidelines have no guarantee that they cannot be sued.

And here's some of what Krugman (drawing on Elizabeth Warren of Harvard Law School and the Credit Slips blog, has to say:

[T]here’s a growing consensus among financial observers that the Paulson plan isn’t mainly intended to achieve real results. The point is, instead, to create the appearance of action, thereby undercutting political support for actual attempts to help families in trouble.

* * *

* * * Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house’s value — which means that in many, perhaps most, cases those who get debt relief will be borrowers who owe more than their house is worth. These people would be nearly as well off in financial terms if they simply walked away.

And what about people with good credit who were misled into bad mortgage deals, who should have been steered to loans with better terms? They get nothing: the Paulson plan specifically excludes borrowers with good credit scores.