Consumer Law & Policy Blog

Foreclosure update: HOPE NOW report

By Alan White

The HOPE NOW alliance has released a 35-page report with a wealth of useful data from mortgage servicers about foreclosures started, sales completed, workouts and loan modifications during 2007. The data are based on a survey covering about 60% of outstanding mortgages (prime and subprime.) Some highlights: although the press release says that only one-third of foreclosures started led to a completed foreclosure sale, this is a bit misleading. The foreclosure starts increased dramatically from the first quarter of 2007 to the 4th quarter. If you compare foreclosures started in the first quarter to sales completed in the third quarter, about half of foreclosures started resulted in a foreclosure sale (assuming a six-month time lag.) Nevertheless, the total of completed sales for the year, estimated at 509,000, is far less than the foreclosure filings total, 1,504,000. In contrast, 336,000 loan modifications were concluded.

Completed sales are obviously the worst outcome (for homeowner and investor.) The other possible outcomes can range from lingering in default or bankruptcy for months or years to reinstatement by payment to a successful sale or refinancing. Some outcomes are clearly successes, while others, like repayment plans (over 1.1 million concluded in 2007) are ambiguous. On the loan modification front, the good news is that while foreclosure starts and sales went up roughly 50% from the first to the fourth quarter, loan mods tripled. For subprime loans, modifications went from 29,000 in the first quarter to 104,000 in the fourth quarter. While servicers are still offering repayment plans much more frequently than loan modifications, the ratio went from 1:6 in Q1 to 1:3 in Q4.

The report also provides state-by-state data. There are stark contrasts between the "bubble" states like California and Florida, and the "weak growth" states like Michigan and Ohio. Loan modifications have increased much more rapidly in the bubble states, perhaps because there is more homeowner income to work with. After I have digested this report a bit more I may post some additional highlights.

Ninth Circuit: Private Debt Collectors Under Contract With Prosecutors Are Not Shielded by Sovereign Immunity

by Deepak Gupta

Yesterday, the U.S. Court of Appeals for the Ninth Circuit, in an opinion by Judge Marsha Berzon, ruled that American Corrective Counseling Services (ACCS), the nation's largest operator of "check diversion" programs, may not shield itself from a consumer class action over its aggresive debt-collection practices by invoking the doctrine of state sovereign immunity.  (Information about the case, including the briefs and opinion, is available here.)

I've blogged here before about so-called check diversion companies -- private debt collectors that use their contracts with prosecutors to gin out collection demands, on official prosecutor stationary, threatening consumers who have written bad checks with criminal prosecution or jail unless they pay exorbitant collection fees.  Passing a bad check is only a crime where there's knowing and intentional fraud, but these companies demand fees regardless of whether a crime has been committed. It's a lucrative and shady business that essentially criminalizes civil debt collection.

Judge Berzon's opinion is the most thorough and scholarly treatment to date on the question of private entities and sovereign immunity.  In a sweeping rejection of ACCS's arguments, the Ninth Circuit characterized sovereign immunity as “strong medicine” that should be carefully limited, especially in the case of for-profit corporations that are not democratically accountable to the public. Quoting the philosopher Gilbert Ryle, the court called the argument that a private company could enjoy sovereign immunity a “category error,” like “inquiring into the gender of a rock or into which day of the week is reptilian.”

Consumer Groups Sue Justice Department Over Auto Database

by Deepak Gupta

1992, Congress required the federal government to set up a comprehensive national database covering the title-, theft-, and damage- history of used cars, based on data from insurance companies, junk and salvage yards, and all 50 states.  A consumer thinking about buying a used car would be able to instantly check the validity of the car's title and odometer reading and learn whether it had been stolen or severely damaged in the past.  Making that kind of information widely available would dramatically reduce the amount of auto fraud and save consumers from economic loss and physical injury.

But more than fifteen years since Congress first required the federal government to implement the database, the government still hasn't done it!

Yesterday, we filed a lawsuit against the U.S. Department of Justice, asking the federal district court in San Francisco to force the government to do what Congress required it to do. Public Citizen was joined in the suit by two other national consumer groups -- Consumers for Auto Reliability and Safety (CARS) and Consumer Action. You can read our complaint here and find additional information about the case here, here, and here.

Here's what Senator Chuck Schumer (D-NY), the lead sponsor of the original 1992 legislation, said in a statement released yesterday:

"We all know that you can't always judge a book by its cover and the same is true with many used cars that end up at junk and salvage yards. Consumers deserve to know the true origin and condition of the vehicles they are purchasing, including whether that car was once stolen.

It is simple: for sixteen years, the Department of Justice and junk yards have been eschewing their responsibility to consumers, law enforcement, and the public by ignoring their mandate to routinely file the required reports. It is about time that all parties were forced to comply with what I believe is a common sense measure to fight auto theft and to protect the public from fraud. I am encouraged by Public Citizen's efforts on this case, and I hope that this important law will finally be enforced as it should have been from day one."

Fifth Circuit Disapproves of Secret Class Action Fees

by Greg Beck

The Decision of the Day covers an interesting Fifth Circuit decision about secret fees in class action settlements. In In re High Sulfer Content Gasoline Products Liability Litigation, Shell Oil had agreed to pay $3.7 million to class members and almost double that as attorneys' fees. To divide up the fees among the 32 firms and 72 lawyers involved in the case, the district court appointed a five-member fee committee, which proceeded to award more than half the fees to its own members. The fee committee also recommended that the district court seal all records related to the disbursement and require all recipients to keep their fee awards confidential.

The Fifth Circuit vacated the award, writing:

On a broad public level, fee disputes, like other litigation with
millions at stake, ought to be litigated openly. Attorneys’ fees, after
all, are not state secrets that will jeopardize national security if
they are released to the public. . . . From the perspective of class
welfare, publicizing the process leading to attorneys’ fee allocation
may discourage favoritism and unsavory dealings among attorneys even as
it enables the court better to conduct oversight of the fees. If the
attorneys are inclined to squabble over the generous fee award, they
are well positioned to comment—publicly —on each other’s relative
contribution to the litigation.

Gang Rape Case Against Haliburton/KBR Sent to Arbitration

According to this ABC News story, a Texas trial judge has sent to arbitration the case of a woman who alleges that she was gang raped by Haliburton/KBR employees while working in Iraq. The judge appears to have reluctantly sent the case to arbitration because he felt bound to honor a mandatory pre-dispute arbitration clause.  As discussed earlier here, this case was the subject of testimony at a December 20, 2007 House Judiciary Committee hearing considering legislation to curb mandatory arbitration. We also discussed the case here.

The "New Redlining"

The Washington Post reported this weekend on mortgage lenders imposing loan restrictions on entire counties or zip codes considered to be "soft markets."

[via Consumerist]

Paper on the Effect of State and Local Anti-Predatory Lending Laws

Raphael W. Bostic of the University of Southern California - School of Policy Planning and Development, Kathleen C. Engel of the Cleveland State University - Cleveland-Marshall College of Law, Patricia A. McCoy of Connecticut, and Anthony Pennington-Cross of the Marquette University - Department of Economics, have co-authored State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms, available at http://ssrn.com/abstract=1005423.  Here's the abstract:

Subprime mortgage lending has grown rapidly in recent years and with it, so have concerns about predatory lending. In response to evidence of predatory lending, most states have enacted new laws or expanded existing laws to address abuses in the subprime home loan market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. Our results are consistent with the view that anti-predatory lending laws influence subprime lending markets and that disaggregating the details of the overall legal framework into its component parts is essential for understanding subprime market dynamics. The restrictions, coverage, and enforcement components all have significant relationships with subprime market outcomes, with the coverage relationship found to be broadly consistent with the reverse lemons hypothesis put forward by Ho and Pennington-Cross (2007). The results also suggest that the newer mini-HOEPA laws have had an impact on the subprime market above and beyond the older preexisting laws, particularly for subprime originations. Broader coverage through these new laws is associated with higher origination likelihoods, while increased restrictions through the mini-HOEPA laws are associated with lower origination propensities.

How the candidates stand on the subprime meltdown

by Sam Glover

Bankrate.com highlights the major-party presidential candidates' stances on the subprime meltdown. Romney, Huckabee, and McCain favor a light touch, perhaps freezing interest rates or offering some aid to borrowers. But they are vague as to what, if anything, they would do. Paul favors a return the gold standard and the abolition of the Federal Reserve.

Democrats Clinton and Obama, by contrast, each have a plan to address the problem and prevent a recurrence.

Clinton's four-point plan is to (1) crack down on unscrupulous mortgage brokers; (2) crack down on mortgage lending abuses; (3) help reduce foreclosures; and (4) expand affordable housing.

Obama's also has four points to his approach, and would (1) combat mortgage fraud and subprime loans; (2) mandate accurate loan disclosure; (3) create a fund to help homeowners avoid foreclosure; and (4) close the bankruptcy loophole for mortgage companies.

So there you have it. The Democrats seem to have given the subprime meltdown more thought than the Republicans, with the possible exception of Ron Paul, whose solution involves a fundamental change to the market.

[Caveat Emptor crosspost]

Becker and Posner on the Suprime Mortgage Meltdown

by Jeff Sovern

The Becker-Posner Blog, written by Law and Economics Guru Richard Posner and the Nobel Prize-winning economist Gary Becker, always offers interesting commentary.  In December they took on the suprime mortgage crisis (you can find their posts here, though you have to scroll down a bit).  The posts are worth reading in full, but here are some excerpts.  Becker offers this assessment about the Fed's proposal to prevent recurrences of the crisis:

Given the low interest rate lending atmosphere of the past few years, it is highly unlikely that borrowers would have turned down the mortgages they received if they had much better information about terms, or that lenders would have been more reluctant to originate or hold these mortgage assets if they had better information about the credit and other circumstances of borrowers. This is why I doubt that the rules proposed * * * by the Federal Reserve to require lenders to get more information about borrowers, and to provide more information to borrowers about the terms of mortgage loans, would have been effective in warding off this crisis, or will be effective in preventing future crises.

I'm not sure what the basis for his assumptions is, but it does make you think.  He also comments:

* * * it is ironic that only a few years ago, banks were being investigated for "redlining"; that is, for avoiding lending to blacks and other residents of poor neighborhoods. The Fair Housing Act of 1968 prohibits discrimination in lending, and The Community Reinvestment Act of 1977 requires banks to use the same lending criteria in all communities, regardless of the living standards of residents. As a result of the present crisis, however, banks and other lenders are being criticized for equal opportunity lenient lending to all, including black residents of depressed neighborhoods.

That isn't precisely how I interpret the CRA, and I would have mentioned ECOA's prohibition on discrimination in lending, and my own understanding of the criticism for lenders is not that they provided equal opportunity lending to all, but that they made some loans on terms unsuited to their borrowers, but perhaps he's seen some criticism that I haven't.  In any event, the perspective is interesting.  Here's an excerpt from Posner's post:

It has been argued that the people who took out subprime mortgages with adjustable interest rates did not understand the risks they were assuming, and that the banks that bought mortgage-backed securities did not understand the risks they were assuming. I am skeptical. Suppose you have a low income, you'd like to own a house, and a mortgage broker offers to arrange a mortgage that will cover 100 percent of the price of the house. What do you have to lose by accepting such a deal? Since you haven't put up any capital, you have no capital to lose if you lose the house because you cannot make your monthly mortgage payments. As for the banks, they rode the bubble for too long; but, to repeat, had they got out too early, they would have left a lot of money on the table.

If there's any evidence floating around that borrowers did understand the risks they were assuming, I'd love to hear it. 

Rent to Own in the News

From time to time, articles appear in the media bemoaning the high cost of rent to own transactions.  Here is another, from yesterday's Times.  This one is a bit unusual in that it contains a suggestion that placing rent-to-own stores in neighborhoods largely poplulated by people of color may violate the ECOA.  Some excerpts from the article about the prices:

* * *  40-inch Bravia [TV], with payments of $47.51 a week. In 117 weeks, the customer would own the set outright, for $5,558. * * *

* * *

* * * They wanted $4,000 for a Sony laptop,” Ms. Navarro said. “I could pay $1,500 honest cash and get it.”