Consumer Law & Policy Blog

More Bushvilles

The Associated Press issued a new story yesterday on tent cities full of homeless people in Reno and elsewhere.

RTC or HOLC revisited?

Some time ago I blogged about proposals to bring back something like the Homeowners Loan Corporation from the 1930's, to buy bad mortgages from banks and restructure them. It seems this idea is catching on. Today's stock market rose on rumors that the Administration is planning to propose a new RTC or HOLC. Presumably this would require some help from Congress.

Banks in Denial

By Alan White

At a Congressional hearing yesterday the major banks that now control most of the mortgage servicing in the U.S. made it clear that they are very unlikely to write down the mortgage balances of homeowners facing foreclosure. Chairman Barney Frank responded by saying that if the Hope for Homeowners program, taking effect October 1, does not elicit voluntary write-downs by mortgage servicers, Congress will take stronger measures to make it happen. I presented some of my research showing that fewer than 2% of mortgage modifications in the past twelve months have reduced principal balances.

Congress enacted the Hope for Homeowners program in July. It offers homeowners facing foreclosure and owing more on a mortgage than their home is worth the chance to get a new, lower FHA mortgage. The plan depends, among other things, on the willingness of mortgage servicers, acting for investors, to accept less than full payment on existing mortgages. This voluntary write-down (to 90% of the current market value) assumes that servicers will act rationally, given that foreclosed houses are now selling at losses of 40% or more. One should be careful, however, about assuming rationality.

Corey Ciocchetti on E-Commerce and Information Privacy

Corey Ciocchetti has written "E-Commerce and Information Privacy: Privacy Policies as Personal Information Protectors," 44 American Business L.J. --.  Here's the abstract:

This article dives into the contemporary debate surrounding information privacy in the twenty-first century e-commerce environment through the lens of consumers submitting personally identifying information into the vast abyss of cyberspace. I argue that this information must be better protected and that United States law should emphasize electronic privacy policies as privacy-protecting devices. Currently, the United States operates under primarily a self-regulatory environment where the federal and state governments allow industry to regulate the use and content of their privacy policies. This article details [the] current state of the United States legal regime, addresses its inefficiencies in this area and proposes a new federal law designed to remedy this situation. This piece argues that with minimal governmental regulation, electronic privacy policies can become effective tools to protect consumers personally identifying information.

Federal Bailout of Insurance Giant AIG

The Wall Street Journal reports here on the U.S. government's $85 billion bail out of insurance giant AIG.

Lehman Brothers's Bankruptcy Petition

For all you nerds out there, here's Lehman Brothers's bankruptcy petition. Thanks to Credit Slips!

Read All About the Financial Meltdown

It's fashionable to skewer the "main stream media." But that's where I'm finding some of the best day-to-day coverage of the credit crisis, the mortgage meltdown, etc. Highlighted by Lehman Brothers's bankruptcy filing, today's Washington Post has a series of stories:

Lehman Brothers: Massive Shifts on Wall Street

World Stock Markets Sink on Wall Street Crisis

Merrill Lynch: Weekend Merger Struck With Bank of America

System in Crisis: A New Architecture for the Financial World

The Effects at Home After Wall Street's Shake-Up

Special Report: Credit Crisis   

Behavioral Law and Economics, Lenders, and the Subprime Mortgage Meltdown

Behavioral law and economics maintains that people are subject to certain biases that impair their decision-making.  Many consumer law scholars, including me, argue that policy-makers should take these biases into account in formulating consumer protection rules.  But one thing suggested by the subprime mortgage meltdown is that businesses, which are, after all, staffed by people, are also subject to some of these biases.  Thus, one possible explanation for the fact that so many lenders lost so much money betting that housing prices would continue to rise is the optimism bias; that is, the tendency of individuals to be more optimistic than the facts justify (you can find lots of discussion of the optimism bias if you look; I wrote about it in the text accompanying notes 145-150 of my article "Toward a New Model of Consumer Protection: The Problem of Inflated Transaction Costs," 47 Wm. & Mary. L. Rev. 1635 (2006)).  While businesses may be better off when consumers suffer from these biases--because if they understand them, they can take advantage of them--the converse seems unlikely to be true: put another way, the consumers who are losing their homes did not benefit from the tendency of lenders to be unduly optimistic.  When the full story of the mortgage disaster is figured out, we may well find that these biases played a significant part on both sides.  I wonder if we'll discover other biases that contributed to the willingness of lenders to make the loans.  One final point: businesses are unlikely to suffer from all the cognitive limits consumers experience.  For example, businesses can avoid information overload by simply hiring other employees to deal with additional information and help them process it. 

New York Times: Congress Should Enact Credit Cardholders "Bill of Rights"

Today's New York Times editorializes here in favor of the Credit Cardholders "Bill of Rights" pending before Congress. The legislation takes aim at retroactive rate increases, double cycle billing that allows assessment of interest on amounts already paid, multiple over-limit fees, and similar credit card company policies. Rep. Carolyn Maloney (D-NY), a champion of the legislation, has a webpage devoted to the issue, with links to key documents, including the legislation itself.

The Failure to Regulate Fannie and Freddie

This major story in today's Washington Post takes the position that the failure of congressional leaders and the Clinton Administration to curb the uncontrolled growth of Fannie Mae and Freddie Mac -- and to withstand the enormous lobbying pressure from the two mortgage giants -- led to their meltdown.