Consumer Law & Policy Blog

More on Cash for Clunkers

Here's another critique of the CARS program by Derek Thompson at theatlantic.com.

HAMP: Is It Helping?

By Alan White

         

Today the Administration released its first report on the number of homeowners helped by its Home Affordable mortgage modification program (HAMP).  While the numbers of trial modifications in the first three months of the program (250,000) may sound impressive, it is much less so when compared with what the industry was doing voluntarily before the HAMP program.  Mortgage servicers modified roughly 370,000 mortgages in the first quarter of 2009, before HAMP was implemented.  Thus, if servicers have substituted HAMP trial modifications for the permanent modifications they did previously, the number of homeowners helped each month has gone down, not up. 

            In reality, it is likely that May, June and July saw some combination of pre-HAMP voluntary modifications that were already in the pipeline, as well as the new 3-month trial mods under HAMP.  Nevertheless, the Administration’s goal to help 3 million homeowners sounds less impressive in light of the three-year timetable, which translates to fewer than 100,000 homeowners helped per month.  In contrast, there are about 250,000 homeowners whose mortgages are being referred for foreclosure each month now, and about 90,000 completed foreclosure sales each month.  Neither of these numbers is showing any signs of peaking or declining, sadly.  The true measure of HAMP’s success will be when we see foreclosure filings and sales begin to return to pre-crisis levels.

            On the other hand, the HAMP program has improved the quality of modifications significantly.  According the Administration press release, 100% of HAMP modifications will reduce the borrower’s monthly payment.  Voluntary modifications previously were reducing payments in only about 50% to 60% of cases. The HAMP report also highlights the fact that some mortgage servicers are doing far more than others.  The HAMP program and reporting will, hopefully, stimulate the underperforming servicers to do better.

            The other bad news is that HAMP does nothing to address the necessary reduction in principal mortgage debt that is a precondition to long-term recovery of the housing market, and the economy.  Modifications that reduce principal have been shown to result in more reliable repayment by borrowers, but so far the Administration and the mortgage industry have vigorously resisted addressing principal reduction.  At this point, the only hope for a permanent solution is bankruptcy reform.

The Fed's Failure to Act and the Proposed CFPA

by Jeff Sovern

Opponents of a new Consumer Financial Protection Agency sometimes argue that the power to be given to the proposed CFPAs can be exercised by existing agencies, and so it's not necessary to create a new agency.  But, as others (e.g., Travis Plunkett and Edmund Mierzwinski) have pointed out, the Fed had considerable power to prevent the issuance of toxic mortgages, and chose not to exercise that power.  It's worth reviewing the statute giving the Fed that power.  15 U.S.C. § 1639(l)(2), enacted as part of HOEPA in 1994, provides:

The Board, by regulation or order, shall prohibit acts or practices in connection with--

(A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and

(B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.

The phrase "otherwise not in the interest of the borrower" is really quite breathtaking, and the use of the word "shall" suggests that Congress wanted the Fed to use that power.  Nevertheless, the Fed did not use that power until last year, far too late to prevent borrowers from entering into loans on which they would later default.  Even worse, during much of the time that it could have used that authority, states were enacting anti-predatory lending statutes and other federal agencies were preempting application of the state statutes to national financial institutions.  North Carolina passed the first such statute in 1999, and many other states followed.  So the Fed must have been on notice that some states thought action was called for and were frustrated in taking that action, and yet it didn't act.

We'll never know if the Fed could have prevented or ameliorated the foreclosure flood and the ensuing economic meltdown by using its broad authority.  History doesn't often permit reruns.  What we do know is that the Fed didn't use its power, and the consequences have been dreadful.  We'll also never know if the CFPA would have done better if it had been in existence.  But we do know that such an agency would not have multiple missions, as the Fed did and does, and so we can infer that it would have been more likely to focus on consumer protection than macroeconomics.  Those arguing that existing agencies are enough to protect consumers have a heavy burden of showing why that is so when the Fed failed to act.