Consumer Law & Policy Blog

February and March Foreclosure Trends

By Alan White

The numbers are not good for foreclosure trends in February and March.  HOPE NOW's February data release shows a 12 % increase in foreclosure starts over January.  Declines in October and November in new foreclosure filings were followed by big increases in December, January and February, reflecting perhaps some temporary moratorium activity.  Similarly, completed foreclosure sales were up 25% from January to February, and back to their levels of last summer after a notable dip in November and December.  My own tabulations of subprime and alt-A investor reports (download here) confirm that the delinquent mortgage and foreclosure inventories continue to grow. 

Modification numbers were up in February (but down in March) as servicers continue to increase efforts to salvage delinquent mortgages.  Principal and interest forgiveness is being used a bit more frequently, up from 10% in November to 15% in March.  Modifications with payment reductions (as opposed to payment increase or no change) inched up from 50% to 55% between November and March.  Meanwhile, the loss severities on completed foreclosures continue to worsen, climbing form 56% to 64% in the same period.  In contrast, loans that were modified with some amount written off averaged a write-off of about 13% of the balance.

Bill on Spam Text Messages

by Jeff Sovern

PC World reports here on a bill aimed at spam sent as text messages to cell phones.  The article quotes from sponsoring Senator Olympia Snowe's press release: "Mobile users in the U.S received about 1.1 million spam text messages in 2007, up 38 percent from 2006, Snowe said in a news release."  Personally, I'm not sure that changing the law will do much to prevent text message spam; existing law already prohibits the use of autodialers to send texts, see Joffe v. Acacia Mortg. Corp., 211 Ariz. 325, 121 P.3d 831 (Ariz. App. 2005), interpreting 47 U.S.C. § 227(b)(1)(A)(iii), and sending texts is a pretty slow process if you're not using an autodialer.  See also 47 C.F.R. § 64.3100 (barring the sending of most unwanted mobile service commercial messages to cell phones with internet domain name on FCC's list of wireless domain names).  So there's a good chance that the spam texts already violate the law.  But maybe there's some exception I'm not aware of, or maybe the bill would enhance enforcement, particularly since the article observes that the bill would "strengthen the [FCC's and FTC's] powers" to stop spam texts.  (Hat tip to my co-author, Dee Pridgen)

Oren Bar-Gill on The Law, Economics and Psychology of Subprime Mortgage Contracts

Oren Bar-Gill of NYU has written The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 Cornell Law Review (2009).  Here's the abstract:

Over 4 million subprime loans were originated in 2006, bringing the total value of outstanding subprime loans over a trillion dollars. A few months later the subprime crisis began, with soaring foreclosure rates and hundreds of billions, perhaps trillions, of dollars in losses to borrowers, lenders, neighborhoods and cities, not to mention broader effects on the US and world economy. In this Article, I focus on the subprime mortgage contract and its central design features. I argue that these contractual design features can be explained as a rational market response to the imperfect rationality of borrowers. Accordingly, for many subprime borrowers loan contracts were not welfare maximizing. And to the extent that the design of subprime mortgage contracts contributed to the subprime crisis, the welfare loss to borrowers, substantial in itself, is compounded by much broader social costs. Finally, I argue that a better understanding of the market failure that produced these inefficient contracts should inform the ongoing efforts to reform the regulations governing the subprime market.

Report on FTC Proposed Revisions to Endorsement Guidelines and Discrimination in Housing Sales in Chicago in the Fifties

One of the many nice things about teaching is that your students help you learn about your subject.  One of my students, William Schleifer, brought to my attention this article in the Financial Times about the FTC's proposed revisions to its guidelines on endorsements and testimonials. According to the article, the proposed guidelines,

would hold companies liable for untruthful statements made by bloggers and users of social networking sites who receive samples of their products.

The guidelines would also hold bloggers liable for the statements they make about products.

If a blogger received a free sample of skin lotion and then incorrectly claimed the product cured eczema, the FTC could sue the company for making false or unsubstantiated statements. The blogger could be sued for making false representations.

So I guess we have to be careful with the blog!  Another student, Alison Hendele, gave me this link to an interview Rutgers history professor Beryl Slatter did with Leonard Lopate's show on WNYC radio on her book, Family Properties, about the role of her father, lawyer Mark Satter in exposing a scheme in which African-Americans were sold overpriced homes in Chicago with high interest rate loans fifty years ago.

Airline Consumer Rights Organization Negotiates Consumer-Friendly Deal With TSA

See the deal here. Thanks to the US PIRG's Consumer Blog for bringing this to our attention.

American Enterprise Institute's Michael Greve on Wyeth v. Levine

by Brian Wolfman

Writing in National Review Online, American Enterprise Institute scholar Michael Greve has explained why he thinks the Supreme Court's recent no-preemption decision in Wyeth v. Levine fundamentally misunderstands principles of federalism and is a disaster for the economy. I thought it would be useful to post a view of preemption different from what is typically seen on these pages. The first paragraph of Greve's essay is set out below, followed by a link to the entire piece:

Not so long ago, the Roberts Court drew a torrent of commentary — most of it critical — about its supposed pro-business orientation. “Supreme Court, Inc.” was the title of an article by law professor Jeffrey Rosen in the New York Times Magazine. This year, with a heavily Democratic Congress relieving its pent-up demand for regulation, as well as a financial disaster supposedly caused by “deregulation” and a new administration with a declared intention to reconstruct the American economy, many expected a confrontation between populist politics and the Supreme Court’s insistence on a modicum of government restraint and reason. But the justices’ recent decision in Wyeth v. Levine suggests just the opposite. The Court’s doctrines on the once-arcane subject of “federal preemption” extend an open invitation to juries, state officials, and tort lawyers to help themselves to even more of the diminishing proceeds of America’s productive economy.

[continue reading here]

94% of All Email is Spam

An online Times report, titled Spam Back to 94% of All E-Mail, is based on a report from Postini, a division of Google.  So much for the federal statute, CAN-SPAM, as a spam preventative!

The Need to Protect Whistleblowers in Light of Newspaper Layoffs

by Paul Alan Levy

There is an interesting discussion about the impact of the Internet (and the economic downturn) on the ability of the press to conduct in-depth investigations, and hence of the need to protect whistleblowers, in today’s Fourth Circuit ruling  about whether the First Amendment protects a police official’s leaking to the Baltimore Sun of an internal memo addressing at a coverup of complaint wrongdoing in connection with a shooting of a citizen by the police department’s tactical squad.  Public Citizen had argued as amicus curiae in the case. A statement by my colleague Bonnie Robin-Vergeer on the ruling is here.

The case was about whether the so-called Garcetti rule, which took away First Amendment protection for speech by public employees expressed in the course of their job responsibilities, extended to the public leaking of a memo send within the Department.  Judge J. Harvie Wilkinson, in a three page concurring opinion, addressed the issue in the context of cutbacks in the staffs of newsgathering organizations, and speculates about “whether the Internet and the online ventures of traditional journalistic enterprises” can fill this void; “whether the web — or other forms of modern media – can replicate the deep sourcing and accumulated insights of the seasoned beat reporter,” and :whether niche publications and proliferating siters and outlets cam provide the community focus on governmental shortcomings that professional and independent metropolitan dailies have historically brought to bear.  Judge Wilkinson  – himself a former newspaper editor – obviously has his doubts, and argues that there is, therefore, an especial need to protect whistleblowers against retaliation.  "It seems inimical to First Amendment principles to treat too summarily those who bring, often at some personal risk, the operations of the state] into public view." 

Judicial Hellholes, Debunked

by Deepak Gupta

Those of us who regularly read amicus briefs by the likes of the U.S. Chamber of Commerce and other self-styled tort reform groups are used to seeing references to "judicial hellholes" -- jurisdictions that supposedly embody a "lawsuit climate" hostile to corporate defendants accused of cheating or injuring consumers.  For many years, the American Tort Reform Association has compiled a pseudoscientic annual ranking of these jurisdictions, with perennial favorite West Virginia topping the list. The lists are used not only in amicus briefs--which often suggest that the decision below is suspect because it came from such a jurisdiction--but also to help influence legislative policy.

In 2005, Public Citizen's Congress Watch released a short report, Class Action "Judicial Hellholes": Empirical Evidence Is Lacking, showing that the hellholes rankings were not backed by any actual evidence and therefore provided no justification for proposed class-action legislation. More recently, Professor Elizabeth Thornburgh (SMU Law) has published an interesting new law review article, Judicial Hellholes, Lawsuit Climates, and Bad Social Science: Lessons from West Virginia, offering a more detailed account of ATRA's "hellholes" campaign, focusing on West Virginia. My favorite part is the section that starts on page 26, "Smoke and Mirrors: The Marketing of Anecdotes," in which Thornburgh colorfully illustrates four different deceptive strategies that ATRA has used to support its "hellhole" designation of that state: treating opinions as facts; grossly distorting quotations by former West Virginia Supreme Court Justice Richard Neely; misstating the issues; and leaving out bad facts entirely. It's worth a read.

House Financial Services Committee Mark-up of Predatory Lending Bill

Here's the Committee's press release:

Rep. Brad Miller (D-NC), along with Rep. Mel Watt (D-NC) and House Financial Services Committee Chairman Barney Frank, today introduced H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, aimed at curbing predatory lending, which has been a major factor in the highest home foreclosure rate in the nation in 25 years.  The measure introduced today was also co-sponsored by Reps. Kanjorski, Gutierrez, Bean and Minnick.

The bill is a tougher version of a measure that Rep. Miller sponsored in the previous Congress that would have overhauled mortgage regulations in an effort to prevent another subprime mortgage meltdown. Rep. Miller’s previous bill passed the House in 2007 with bipartisan support, but was never considered in the Senate. H.R. 1728 will be “marked-up” in the House Financial Services Committee on Tuesday, March 31, 2009, beginning at 10:00 a.m.  

“The political climate has changed,” said Rep. Miller. “The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole. The industry’s arguments for watering the bill down are not at all convincing.”

<>Specifically, the new measure will strengthen restrictions on compensation paid to mortgage loan originators and brokers that is based on a loan’s interest rate and terms, often called yield-spread premiums. Lenders sometimes pay brokers an extra fee for making loans at a higher interest rate than the borrower otherwise could have received. The Congressman says those payment arrangement are an indefensible conflict of interest.

The 2009 measure also includes stronger language on so-called assignee liability. That language would make mortgage securitizers, who package home loans into securities, more liable for fraudulent loans. P>

A key element of the legislation prohibits lenders from underwriting loans that consumers do not have a reasonable ability to repay and prohibits practices that increase the risk of foreclosure for consumers. The bill also encourages the market to move toward making 30-year fixed-rate, fully documented loans, the norm again in mortgage lending. The growth of exotic, non-traditional mortgages was a major factor in the current housing and foreclosure crisis.

<>This bill represents an important step toward preventing the predatory and questionable practices that took hold in the mortgage lending industry in the past several years and undoubtedly contributed to our current housing crisis,” said Rep. Watt.  “Mortgage lending reform is a vital piece of the Congressional effort to prevent a future financial services disaster of this scale.” 

The legislation also protects consumers from being steered into loans that aren’t in their best interest, and if they refinance there must be a tangible net benefit to the consumer.

According to the Center for Responsible Lending, 2.4 million Americans risk foreclosure in 2009. That number could rise to 8.1 million over the next 4 years. The foreclosure epidemic is being caused primarily by families borrowing against their homes to pay their bills when something has gone wrong, not because they are buying more house than they can afford. Families are borrowing against their homes because of job loss, serious illness, divorce and major home repairs. Approximately 72 percent of subprime mortgages from 1998 to 2006 are refinances, not loans to purchase homes.

The bill will also create greater transparency by ensuring lenders make full disclosure of the terms of the loan at the time of signing.

"Americans who lose their home to foreclosure fall out of the middle class and into poverty, probably forever,” said Rep. Miller. “And, middle-class homeowners are seeing their life’s savings disappear with the collapse of home values.”

The Miller-Watt-Frank bill is modeled after North Carolina’s predatory lending statute, which is considered the model state statute for preventing abusive lending practices, while preserving consumer access to credit.

The Committee's summary of the bill appears after the jump.