Consumer Law & Policy Blog

Melissa Jacoby on Mortgage Delinquency Management

Melissa B. Jacoby of North Carolina has written "Home Ownership Risk Beyond a Subprime Crisis: The Role of Delinquency Management," 76 Fordham L. Rev. (2008). Here's the abstract:

Public investment in and promotion of homeownership and the home mortgage market often relies on three justifications to supplement shelter goals: to build household wealth and economic self-sufficiency, to generate positive social-psychological states, and to develop stable neighborhoods and communities. Homeownership and mortgage obligations do not inherently further these objectives, however, and sometimes undermine them. The most visible triggers of the recent surge in subprime delinquency have produced calls for emergency foreclosure avoidance interventions (as well as front-end regulatory fixes). Whatever their merit, I contend that a system of mortgage delinquency management should be an enduring component of housing policy. Furtherance of housing and household policy objectives hinges in part on the conditions under which homeownership is obtained, maintained, leveraged, and - in some situations - exited. Given that high leverage or trigger events such as job loss and medical problems play significant roles in mortgage delinquency independent of loan terms, better origination practices cannot eliminate the need for delinquency management.

One function of this brief essay is to identify an existing rough framework for managing delinquency. Legal scholarship should no longer discuss mortgage enforcement primarily in terms of foreclosure law and instead should include other debtor-creditor laws such as bankruptcy, industry loss mitigation efforts, and third-party interventions such as delinquency housing counseling. In terms of analyzing this framework, it is tempting to focus on its impact on mortgage credit cost and access or on the absolute number of homes temporarily saved, but my proposed analysis is based on whether the system honors and furthers the goals of wealth building, positive social psychological states, and community development. Because those ends are not inexorably linked to ownership generally or owning a particular home, a system of delinquency management that honors these objectives should strive to provide fair, transparent, humane, and predictable strategies for home exit as well as for home retention. Although more empirical research is needed, this essay starts the process of analyzing mortgage delinquency management tools in the proposed fashion.

U.S. House Committee on Oversight and Government Reform Holds Hearing on Federal Preemption of State Tort Claims Involving Drugs and Medical Devices

The Committee on Oversight and Government Reform of the U.S. House of Representatives held a hearing today entitled “Should FDA Drug and Medical Device Regulation Bar State Liability Claims?”  The Committee described the hearing as follows:

FDA approval of drugs and high-risk medical devices before they are marketed does not necessarily guarantee safety. Patients harmed by medical products have traditionally sought compensation under state law for damages, such as medical expense incurred, and lost wages. The hearing will examine the implications of “preemption” of state liability laws in the FDA context and whether FDA regulation of drugs and medical devices should bar injured patients from seeking compensation under state law.

Among the witnesses at today's hearing were actor Dennis Quaid, whose new born twins were injected with a near-fatal overdose of the drug Heparin because of faulty drug labeling; former FDA Commissioner Dr. David Kessler; Georgetown law professor David Vladeck; and Dr. Gregory Curfman, Editor, New England Journal of Medicine.

The Committee's website provides links to the written testimony of all 10 witnesses.

Times Pieces on Foreclosure Crisis, Predatory Lending, and Wachovia Telemarketing Case

Yesterday the Times published an editorial on the Bush administration response to the foreclosure crisis, with the noteworthy headline, "Saying No to Everything."  An excerpt:

Even before the House passed a new plan last week to prevent foreclosures, President Bush threatened to veto the bill, calling it “overly burdensome.” The bill is not burdensome enough.

* * *

When Mr. Bush hasn’t been busy saying no to worthy efforts, he has been endorsing Orwellian-named programs that have failed to address the problem effectively. Hope Now, the mortgage industry alliance that pledged a big effort five months ago to modify subprime loans, has barely made a dent. Project Lifeline, announced last February, has yet to release any results. The Times reported last month that another program much touted by Mr. Bush, FHA Secure, has helped fewer than 2,000 homeowners at risk of foreclosure.

The Times has also published a number of other articles in recent weeks that we haven't yet linked to on the blog.  For example, on May 6, the Times reported on a speech by Fed Chair Bernanke in an article headlined "Bernanke Urges Flexibility in Mortgage Regulation."  Some excerpts:

The variety of factors leading to foreclosures makes it more difficult for mortgage lenders to help ailing homeowners, Mr. Bernanke said, noting that “lenders and services will have to develop new and flexible strategies to deal with this issue.”

In response, Mr. Bernanke recommended that government agencies take a more innovative approach to ensure that only qualified buyers take out loans. He urged Congress to provide the Federal Housing Administration, which insures mortgage loans, with “greater latitude” in setting appropriate standards for owners seeking to refinance their mortgages, and to adjust interest rates according to the level of risk of the applicants.

In "Countrywide Admit Errors at Hearing," published May 7, Countrywide acknowledged that its loan officers made mistakes "from time to time" but disputed other charges.  Countrywide promised to hire an outside auditor to review its actions.  Professor Katherine Porter of Iowa testifed:

that mortgage companies and servicers had improperly sought payments without fully disclosing or documenting fees.

In some cases, she said, companies have sought to foreclose on homes even after borrowers discharged their debts through the Chapter 13 bankruptcy process, which allows debtors to keep their homes while working out payment plans.

“The upsetting reality is that the current bankruptcy system routinely forces borrowers to pay bloated amounts and permits mortgage servicers to misbehave without serious consequence,” she told the Senate Judiciary subcommittee on administration oversight and the courts.

Federal law preempts state predatory lending statutes as to federal institutions, but what about when state institutions lend in other states?  Here is an article about a pact New York, New Jersey, and Pennsylvania signed last month providing that state institutions are subject to the predatory lending statutes of their home states when lending in one of the other states that is a party to the compact. 

We  previously blogged here about the case involving Wachovia's allegedly allowing telemarketers to use its accounts to steal millions from depositors. Wachovia and the OCC have now settled the case.  The report is here; Wachovia, while neither admitting nor denying wrongdoing, will pay as much as $144 million.  A case brought by alleged victims of the fraud is still pending.  The settlement's terms have drawn criticism, as reflected in the following excerpt:

Some critics of the settlement’s structure — including Representative Edward J. Markey, a Massachusetts Democrat and a senior member of the House Energy and Commerce Committee — complained that the agreement contained no guarantee that victims would be paid.

Under the terms of the settlement, victims will not automatically receive compensation from Wachovia. Instead, they will have to submit claims through a complicated bureaucracy. Because many of the victims are elderly or poorly educated, it is likely many of them will stymied by these obstacles, Mr. Markey said.

Credit Card Profits Safe, for Now

Fitch Ratings, the people who were so wrong about subprime mortgages, remain guardedly optimistic about credit card profits, and the performance of securitized credit card receivables, expecting credit card yield spread to remain “robust.”

Prime credit card issuers are paying less for their funds, by about 2.5%, as a result of Fed rate cuts. Meanwhile, their yield from credit card customers has gone down only by 36 basis points, i.e. 0.36%. This was accomplished, according to Fitch, because “card issuers have proven adept at managing their yield through pricing initiatives and dynamic strategies implemented to reflect changes in card usage over time. . . . Yield consists of collected finance charges, fees and interchange revenue.” In other words, card issuers are adept at NOT passing cost savings along to consumers.

Charge-offs for unpaid credit card bills are just now returning to the pre-bankruptcy-reform levels of 2005, but are projected to rise rapidly in the coming months. Fitch remains confident that securities rated BBB and above have plenty of built-in loss protection. Even so, I won’t be buying any credit card ABS securities just now.

U.S. District Court Holds That Rape and Assault Claims Against Haliburton Are Not Subject to Arbitration, but Court Case Stayed While Other Claims Are Arbitrated

by Brian Wolfman

Last December, we blogged here about Haliburton's efforts to force into arbitration a suit brought by a former employee who maintains that she was gang-raped by her Haliburton co-workers in Baghdad. The plaintiff also filed a Title VII sexual harassment claim as to which the EEOC had found cause against Haliburton. Now, in an opinion dated May 9, 2008 in Jones v. Halliburton Company, No. 4:07-cv-2719, the U.S. District Court in Houston has held that the plaintiff's claims related to the rape and assault may be litigated in court, while the Title VII claims must be arbitrated. The court "reluctantly" stayed the case to allow the arbitration to be completed. The court rejected the plaintiff's claims of unconscionability under general state-law contract principles, but held that the arbitration clause requiring arbitration of any claim "related to" the plaintiff's employment with Haliburton did not encompass the claims concerning the rape and assault.

Deborah Thorne and Katherine Porter Paper on Financial Education for Bankrupt Families

Deborah Thorne of Ohio University's Department of Sociology and Katherine Porter of Iowa have co-authored Financial Education for Bankrupt Families: Attitudes and Needs, 24 Journal of Consumer Education 15 (2007).  Here's the abstract:

This paper examines bankrupt families' attitudes toward, and need for, financial education. The data are derived from a longitudinal study of families who filed for personal bankruptcy. We examine the implications of bankrupt debtors' attitudes and experiences for the content and delivery of bankruptcy financial education, which in 2005 was made a prerequisite to consumer debtors' eligibility for discharge of their debts. We report the degree to which bankrupt families believed a financial education course would have helped them avoid bankruptcy and describe how these attitudes vary by demographic characteristics. We examine key financial difficulties that families face after bankruptcy and highlight ways in which bankruptcy financial education could be responsive to the realities of families' lives after they file bankruptcy.

You can download the paper at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1032968.

Times Reports on Prospects for the Housing Bailout Bill, Jingle Mail, and Cell Phone Spam

Yesterday's Times had several articles on consumer law.  First, "Housing Bailout Bill Seems on Shaky Ground" reports on the prospects for the bill the House passed on Thursday.  An excerpt:

The Bush administration on Friday said it would only support legislation that did not require taxpayer funds. The Congressional Budget Office estimates that the House-passed measure would refinance as many as 500,000 homes over the next five years, at a cost to taxpayers of about $2.7 billion. * * *

The measure now goes to the Senate, where it faces opposition among Republicans who have tapped into a broad wave of bailout resentment in states less affected by the crisis. And the failure of the House to adopt it by a veto-proof margin is likely to further embolden recalcitrant Republicans in the Senate who have so far managed to block action, Democratic supporters of the measure said on Friday.

Senator Christopher J. Dodd, the Connecticut Democrat who heads the Banking Committee, said Friday that he was hoping to quickly complete negotiations with the ranking Republican on the committee, Senator Richard C. Shelby of Alabama, and have the committee vote on a measure next week.

A second article, "Mortgage Holders Find it Hard to Walk Away From Their Homes," states that few homeowners who owe more on their homes than the homes are worth have used "jingle mail" and abandoned their homes, contrary to some anecdotal reports (the phrase "jingle mail" refers to the sound keys make when they are mailed to the mortgagee).

A third piece, "Spam Plague is Migrating From Computers to Cellphones" notes that Ferris Research estimates that Americans will receive 1.5 bilion unsolicited text messages this year.  So much for CAN-SPAM.  The many consumers who pay a charge for each text they receive find this particularly annoying.  Many demand refunds from their carrier. Some excerpts on how it is possible and how to stop it:

Most phone spam is actually e-mail that comes through gateways linking the Internet and cellphone networks, industry executives said.

Most wireless phones have a dedicated e-mail address. At AT&T, for example, it is a customer’s cellphone number followed by @text.att.net. Using computers, spammers create millions of possible number combinations, then send messages to those addresses.

* * *

All major communications companies give consumers the ability to thwart spam by changing the easily guessed e-mail addresses for their phones, or completely blocking messages coming from the Internet. They can do this by logging onto the company’s Web site and changing their preferences.

 

Ninth Circuit Allows Claims of Deceptive Food Marketing to Go Forward

by Brian Wolfman

In Williams v. Gerber Products Company, No. 06-55921 (Apr. 21, 2008), the plaintiff class pleaded common-law misrepresentation and breach of warranty claims, as well as claims under California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., and California’s Consumer Legal Remedies Act, Cal. Civil Code § 1750 et seq.  The class challenged five features of the packaging used by Gerber to sell its Fruit Juice Snacks, including use of the words “Fruit Juice” alongside pictures of oranges, peaches, strawberries, and cherries. The plaintiffs claimed that this advertising was deceptive because the product contained no fruit juice from any of the fruits pictured on the packaging. The plaintiffs’ other claims were similar — such as their challenge to Gerber’s claim that its product is made “with real fruit juice and other all natural ingredients,” even though the two biggest ingredients are corn syrup and sugar. The district court granted Gerber’s motion to dismiss on the ground that its statements were not likely to deceive a reasonable consumer and that at least one of the statements was non-actionable puffery. The Ninth Circuit reversed. Here’s a key part of the Ninth Circuit’s reasoning:

Did Lenders Anticipate a Bailout if Loans Soured?

Before policymakers undertake more bailouts arising out the subprime mortgage crisis, policymakers should ask the classic question: what did subprime lenders know and when did they know it?

While much remains unclear about the crisis, considerable evidence suggests that at least some subprime lenders have unclean hands. For example, a year ago, a Countrywide Financial official testifying before Congress about loans, called hybrid ARMs, that carried an initial low rate but would later switch to an adjustable rate, estimated that "about 60 percent of the people who do qualify for the hybrid ARMs would not be able to qualify at the fully indexed rate." Put another way, it appeared that Countrywide expected that many borrowers would not be able to make their payments once the temporary teaser rates expired, unless the borrowers' financial circumstances improved dramatically or interest rates were to fall substantially. Both of those events seem implausible.

Lenders, unlike borrowers, have access to oceans of information about consumer defaults. The credit scoring and credit reporting industries are premised on the assumption that defaults can be predicted. Thus, it seems probable that lenders anticipated the possibility that many consumers would find it impossible to make loan payments. A cynical explanation for Countrywide's lending practices but one that is hard to avoid is that Countrywide expected that borrowers, faced with payments they couldn't make, would refinance their loans, generating more fees for Countrywide and further imprisoning the borrowers in debt.

Indeed, some loans seemed virtually to invite default. A Countrywide manual approved the making of loans that left consumers as little as $550 a month to live on, or $1,000 for a family of four. Aggressive marketing appeared designed to overcome resistance by reluctant borrowers, thus eliminating another check on the making of loans likely to end in foreclosure. While federal disclosure laws are designed to inform borrowers of their payment obligations, some borrowers seem not to have understood those obligations and perhaps that was deliberate. As a predatory lender testified at a 1998 Congressional hearing, "I can get around any figure on any loan sheet." And, he added, "[o]ur entire sale is built on confusion." The confusion is exacerbated by the fact that many subprime borrowers are less well-equipped to understand their financial obligations than prime borrowers. If borrowers do not comprehend what they are getting into, they lose the ability to recognize a commitment they cannot meet.

If lenders expected that borrowers could not meet their payment obligations and so would need to refinance, lenders surely also considered the possibility that borrowers already at the cusp of creditworthiness would find themselves unable to qualify for refinancing. And that leads to questions about what lenders thought would happen in such a case.

Is it possible that lenders foresaw that if circumstances prevented borrowers from refinancing, the prospect of numerous borrowers facing foreclosure, thus devastating entire communities and financial markets, would generate calls for a bailout, thereby insulating lenders from the folly of their own lending practices? If not, what did they expect? Perhaps it is only a coincidence that the Bank of America, which is in the process of acquiring Countrywide, has put forth a bailout plan.

Bailouts may indeed be the least bad solution to the problem. It is one thing to say that lenders should not benefit from a bailout, but something else to say that financial markets, neighborhoods, and confused consumers should be left to suffer. But unlike many subprime borrowers, policymakers should at least deal with the crisis while understanding what lenders contemplated. We are not there yet.

NPR: Countrywide Loan Officer Coaching Loan Applicants to Lie

by Christopher Peterson

National Public Radio ran a story this morning reporting on a Washington, D.C. family's experiences applying for a loan with Countrywide. The customer says that Countrywide's loan officer aggressively coached her to lie about her and her husband's income. The story, which also quotes Ira Rheingold of the National Association of Consumer Advocates, sheds light on whether the mortgage brokers and loan officers have actually changed their practices following the foreclosure crisis.