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    National Consumer Law Center

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« September 2008 | Main | November 2008 »

Friday, October 31, 2008

Rate Freeze Mods - Not so much

By Alan White

Looking at the October mortgage modifications (actually 9/25 to 10/25) I noticed that 40% of them were adjustable rate loans with reset dates in the next six months (November to April).  Thinking these might be rate freezes, where the servicer agrees to keep the interest rate and payment the same by delaying or cancelling a rate adjustment, I checked the before and after monthly payments.  Strangely, only 10% remained the same.  About 40% of the mods with imminent rate resets resulted in lower monthly payments, while 50% resulted in current payments being higher than the initial payment. 

Two things seem to be happening.  One is that servicers are concentrating some efforts on working with homeowners whose rates are about to adjust, but then are tailoring modifications according to some unknown set of rules.  Second, some servicers apparently still prefer to make a bad situation worse by increasing borrowers' monthly payments to recover past arrears. 

Meanwhile, JPMorganChase announced today that it will open 24 regional homeowner counseling centers and modify up to 400,000 mortgages in the next two years.  JPMorgan is now the owner of not only Chase Mortgage but also Washington Mutual's portfolio of subprime and option-ARMs, as well as Bear Sterns/EMC Mortgage.

Posted by Alan White on Friday, October 31, 2008 at 04:06 PM in Foreclosure Crisis | Permalink | Comments (0) | TrackBack (0)

Thursday, October 30, 2008

FDA Preemption Policy Driven By Politics, Not Science

Rep. Henry Waxman's Oversight and Government Reform Committee, using internal FDA documents, issued a devastating report yesterday demonstrating that the FDA was driven by political considerations, not science, in seeking preemption of state-law personal-injury claims involving defective and inadequately labeled prescription drugs. More on this important development later . . . .

Posted by Brian Wolfman on Thursday, October 30, 2008 at 08:51 AM in Preemption | Permalink | Comments (1) | TrackBack (0)

Wednesday, October 29, 2008

Research on the Cognitive Deficits of Low-Income Low-Literacy Consumers

On October 20. the Wall Street Journal published "Emerging Lessons: For multinational companies, understanding the needs of poorer consumers can be profitable and socially responsible."  In addition to discussing  consumers in foreign countries, the piece notes that 14% of US consumers are functionally illiterate and describes how low-literacy low-income consumers make purchase decisions differently from most consumers.  The entire piece is worth reading, but here are some excerpts.

Being anchored in the perceptual "here and now" also interferes with the ability of low-literacy consumers to perform mathematical computations, especially those framed in abstract terms. For example, when we asked low-literacy shoppers in the U.S. to estimate whether they had enough cash to pay for the groceries in their cart, many needed to physically handle cash and envision additional piles of currency or coins to accurately estimate the cost of goods in their cart; when the sensorial experience of counting cash was taken away, they often were at a loss.

* * *

* * * They tend to choose products based solely on the lowest posted price or smallest package size, even when they have sufficient resources for a larger purchase, because they have difficulty estimating the longevity and savings that come from buying in larger volumes. Some base purchase decisions on physical package size, instead of reported volume content, or on the quantity of a particular ingredient -- such as fat, sodium or sugar -- but without allowing for the fact that acceptable levels of an ingredient can vary across product categories or package size.

* * *

When shopping in unfamiliar stores, some low-literacy consumers will choose products at random, buying the first brand they see once they locate a desired product category or aisle. Others simply walk through the store, choosing items that look attractive based on factors such as packaging colors or label illustrations, without regard to whether they even need the product.

These data have a variety of implications for consumer protection laws.  For one thing, they raise questions about the efficacy of the FTC and UDAP standards for protecting these consumers.  Standards such as "likely to deceive the consumer acting reasonably in the circumstances" do little to aid consumers who don't act reasonably in the circumstances.  Similarly, it would hardly be surprising if some of these consumers were trapped by predatory loans, and obviously the Truth in Lending Act won't help them.  Consumer law always raises a broad question about how much responsibility the consumer has to protect herself, and how much the law should do to protect the consumer.  But when we know that some consumers are not able to protect themselves, arguments that the law should not protect them means that others will be able to take advantage of them, a troubling outcome.  On the other hand, it's not clear that we even understand enough at this point to know what such consumers need to make decisions.

(HT to Chris Hoofnagle whose own comment on the article can be found on the denialism blog at http://scienceblogs.com/denialism/2008/10/selling_to_the_poors.php).

Posted by Jeff Sovern on Wednesday, October 29, 2008 at 08:54 PM | Permalink | Comments (0) | TrackBack (0)

Latest Foreclosure Numbers

Picture_1_2By Alan White

New foreclosure filings declined a bit from about 200,000 iPicture_1_4n July to about 180,000 for September, according to HOPE NOW's latest data.  Completed foreclosure sales likewise leveled off at around 90,000 monthly.  While HOPE NOW reports a continuing increase in monthly modifications, to a high of 98,000 in September, servicers are still filing almost twice as many foreclosures as loan modifications.  HOPE NOW also is combining all forms of loan modifications in its numbers, including term extensions and recasting of arrears that result in higher monthly payments and mortgage balances.  Nevertheless, the significant increase in September mods is welcome news, and may reflect in part some of the FDIC's efforts with the IndyMac portfolio, and/or the implementation of the state attorneys general settlement with Countrywide/BankofAmerica.

Meanwhile, RealtyTrac is reporting a dip in foreclosure starts for September compared with August, running at a level of about 250,000 monthly (their sample and counting method are different than HOPE NOW's).  The credit for this, however, does not go to any Federal initiative, but to the states.  California saw a 50% drop in foreclosures from August to September, because of a new state law effective in September that requires lenders to contact homeowners 30 days before starting foreclosure.  Similar laws have also been implemented in New York and North Carolina, among others.  On the other hand, the various state initiatives provide only temporary relief, and numbers will probably climb again after the initial wave of foreclosure postponements passes.  The state measures can provide homeowners and servicers breathing room to negotiate more restructurings, but all evidence is that it will take far more than 30-day or even 90-day delays to insure that preventable foreclosures are prevented.

The number of seriously delinquent mortgages, meanwhile, is still growing, and stands at more than 2.2 million, not counting foreclosures in process, bankruptcies and REO.  The pipeline of future foreclosures continues to grow at the rate of 150,000 or more per month.

 

A final note - the HOPE NOW press releases include repayment plans in their total of foreclosures prevented.  Short term repayment plans are frequently not successful, and many homeowners have entered into more than one such plan, or have a repayment plan before they get a modification agreement, so in my view the grand total of "foreclosures prevented" reported by HOPE NOW is probably misleading.

Posted by Alan White on Wednesday, October 29, 2008 at 06:46 PM in Foreclosure Crisis | Permalink | Comments (4) | TrackBack (0)

Thursday, October 23, 2008

FDIC's Foreclosure Prevention

BairThe FDIC, as conservator for IndyMac, has suspended all foreclosures and is aiming to modify 40,000 out of 60,000 currently delinquent IndyMac mortgages.  In the six weeks since the takeover FDIC has mailed out 15,000 loan modification proposals, and has already received signed agreements from 3,500 homeowners.  On average payments are being reduced by $350 monthly.  Details are in Chairman Sheila Bair's testimony today before the Senate Banking Committee. 

In contrast, August and September loan modifications by subprime and alt-A servicers generally are still wildly inconsistent and falling short.  Nearly a third of modifications are still increasing, rather than decreasing, monthly payments.  Some servicers are aggressively modifying loans while others show virtually no modification activity.  I will post a more detailed report when I have the October numbers.

Posted by Alan White on Thursday, October 23, 2008 at 06:20 PM in Foreclosure Crisis | Permalink | Comments (2) | TrackBack (0)

Tuesday, October 21, 2008

Another Call for Reform of the Copyright Code to Prevent Censorship

by Paul Alan Levy

In an op-ed published today, Larry Lessig calls for reform of the Copyright Code to prevent the sort of political censorship that I discussed a few days ago here. Lessig suggests not only reform of the DMCA, but a broader approach to cutting back copyright law  to "bring... focus to the contexts in which its important economic incentives are needed, and remov[e] it from contexts where it isn’t."  His sounds themes similar to his new book, Remix, on which Brian Wolfman commented here a few days ago.

Lessig is right to suggest that the midst of a political campaign is the wrong time to try to craft such changes, but we should certainly strive to ensure that the public recalls the censorship lessons that have been taught during this election, and redouble our commitment to fix the law when Congress resumes session in January.   Both parties now have reason to support these changes.

Posted by Paul Levy on Tuesday, October 21, 2008 at 10:49 AM in Free Speech, Intellectual Property & Consumer Issues | Permalink | Comments (0) | TrackBack (0)

Monday, October 20, 2008

Who Are the Subprime Borrowers and How Many of Them Would Have Been Better Off If No One Had Lent to Subprime Borrowers?

Reports on the subprime crisis appear to divide subprime borrowers into three groups.  You hear anecdotes about how borrowers fit into one group or the other, but it's not clear how many people belong to each group, or the extent to which the groups overlap.  The first group is made up of victims of predatory lenders.  These borrowers were persuaded to take out loans that they could not possibly pay back or at least were unlikely to pay back unless housing prices increased sharply.  The anecdotal reports create the impression that members of this group did not understand their payment obligations, especially when they entered into adjustable rate mortgages with initial low teaser rates, and many have now defaulted or are struggling to avoid default.  That group seemingly was not helped by the expansion of subprime lending.  I say "seemingly" in part because of the article in yesterday's Times, "Building Flawed American Dreams," about the role of Henry G. Cisneros, HUD secretary in the Clinton administration, which contains the following:

Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”

The majority of buyers in Lago Vista “were duped into believing it was easier than it was,” Mr. Ramirez says. “The attitude was, ‘Sign here, sign here, don’t read the fine print.’ ” He added that some fault lay with buyers: “We were definitely willing victims.” (The Ramirez family veered close to foreclosure, but the couple now have good jobs and can make their payments.)

The second group consists of speculators who expected that housing prices would rise and they would flip their houses for a profit large enough to cover their mortgage obligations and transaction costs and still make a profit.  Many of them planned to sell before the rates on their adjustable mortgages rose but found it impossible to do so at a price that would cover their mortgage obligations when housing prices went down, and so they walked away from their investments.  That group too was not helped by the expansion of subprime lending, but it seems fair to say that the fact that the loans were subprime was not the key factor here in that prime borrowers who bought on the assumption that they would be able to flip their investments suffered from the same outcome when prices fell. 

The third group comprises borrowers who could not have obtained a mortgage without the expansion of lenders into the subprime market and who are current on and able to make their payments for the foreseeable future, like the Ramirezes.  it's harder to figure out whether this third group benefited from the expansion into subprime lending or not. The decline in housing prices has hurt that group because their homes are worth less than they paid for them and perhaps even less than they owe on them (though again, it is fairer to lay that at the feet of the decline in home values rather than the expansion into subprime lending).  If they want to sell their homes, they will be in trouble because they may not get enough to cover their mortgage obligations and also because the credit crunch will make it harder for would-be buyers to obtain financing.  But as long as they're willing to stay put, there's an argument that subprime lending has helped them on balance because they now own a house.  But if their home is underwater, they probably would have been better off staying in rental housing, and even if their home is not underwater, they might have been better off staying in rental housing--though to repeat it yet again, that seems attributable more to the fall in housing prices than the mortgage meltdown.

This division is a bit simplistic, but it leaves me with several questions. First, how large are these various groups?  (I haven't gone looking to see if others have answered that question)  Second, what policy implications does all this have?  For example, if many borrowers did not understand their payment obligations (the first group), that suggests that the Truth in Lending Act disclosures failed and need revision.  If, on the other hand, most borrowers did understand their payment obligations, and went ahead anyway, that indicates that the failure was less attributable to TILA, though perhaps credit counseling might have helped.  Ian Ayres, for example, has suggested that information remedies would not have made a difference and that the real problem was that borrowers "simply underestimated the likelihood of a fall in real estate prices."   Another policy implication:  while subprime lending has dried up for the moment (as has a lot of lending, though today's news reports suggest that the credit crunch is easing for some), eventually the credit crunch will end and lenders will once more be willing to extend loans.  The relative sizes of these various groups raise questions about whether subprime lending ought to be encouraged when that happens, or discouraged, or perhaps regulated in new ways so that only those whose lives are enhanced by taking out such loans have access to them.  And that in turn has implications for the Community Reinvestment Act.  My own opinion is that subprime lending is not the culprit per se; that is to say, society is better off if people, whether subprime or prime borrowers, can obtain mortgages that they can afford, understand the terms of, and can handle the risks of incurring, and that the problem is not so much the fact that some borrowers were subprime. But I would be interested in the opinions of observers who are better informed than I. 

Posted by Jeff Sovern on Monday, October 20, 2008 at 05:09 PM in Foreclosure Crisis | Permalink | Comments (1) | TrackBack (0)

Sunday, October 19, 2008

Fannie and Freddie by the Numbers

By Alan White

     I’m coming back to a theme here, but the myth that Fannie and Freddie caused the crisis keeps being repeated.  The subprime crisis was in no way caused by Fannie Mae and Freddie Mac, nor by Congressional regulation or nonregulation of them.  To put some numbers behind the facts, I turned to my two-volume Mortgage Market Statistical Annual for 2008, published by Inside Mortgage Finance.  I take it as a given that the current crisis was caused by the rapid and unexpected increase in defaults and foreclosures on subprime mortgages.  Subprime losses led to subprime-backed securities losing value, which led to big losses for banks and investment banks, small towns in Norway, the collapse of Lehman Bros, etc. etc.  There were of course, other problems, such as excess leverage in investment banks and hedge funds, the opacity of the credit default swap market, etc., but I don’t think anyone is blaming Fannie and Freddie for those systemic problems.  When you look at the numbers, it is easy to see that Fannie and Freddie were bit players in the subprime crisis.

Continue reading "Fannie and Freddie by the Numbers" »

Posted by Alan White on Sunday, October 19, 2008 at 05:13 PM in Foreclosure Crisis | Permalink | Comments (10) | TrackBack (0)

Saturday, October 18, 2008

How Does the Current Credit Crisis Parallel the Situation in the 1930's?

Over at Credit Slips, Adam Levitin talks about "some curious parallels with the 1930's."

Posted by Brian Wolfman on Saturday, October 18, 2008 at 10:06 AM | Permalink | Comments (0) | TrackBack (0)

Prof. Larry Lessig Releases New Book on the Internet Called "Remix"

Remix_cover_small Stanford law prof and Internet philosopher Larry Lessig has released his latest book on the Internet and the folly and danger of using 20th century constructs such as copyright to regulate it. Lessig's website on the book says this:

For more than a decade, we’ve been waging a war on our kids in the name of the 20th Century’s model of “copyright law.” In this, the last of his books about copyright, Lawrence Lessig maps both a way back to the 19th century, and to the promise of the 21st. Our past teaches us about the value in “remix.” We need to relearn the lesson. The present teaches us about the potential in a new “hybrid economy” — one where commercial entities leverage value from sharing economies. That future will benefit both commerce and community. If the lawyers could get out of the way, it could be a future we could celebrate.

U.S. PIRG's consumer blog has this nice write-up.

Posted by Brian Wolfman on Saturday, October 18, 2008 at 09:24 AM in Internet Issues | Permalink | Comments (0) | TrackBack (0)

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