Paper Arguing Against Privacy

Thomas M. Lenard of the Technology Policy Institute and Paul H. Rubin of Emory University - Department of Economics have written In Defense of Data: Information and the Costs of Privacy.  Here's the abstract:

The commercial use of information on the Internet has produced substantial benefits for consumers. But, as the use of information online has increased, so have concerns about privacy. In this paper we argue that acting on those concerns would be counterproductive. Far from a 'free lunch,' more privacy implies less information available for producing benefits for consumers, including targeted advertising and the valuable web services it supports, e.g. search engines, email, and social networks. Concerns about privacy may also be misguided. Most data collected about individuals is anonymous, and reducing legitimate uses of online information is not likely to reduce identity theft. Firms appear to be responsive to consumers’ privacy preferences, which also points to a properly functioning market. Our analysis suggests that proposals to restrict the amount of information available would not yield net benefits for consumers.

Vision Media TV Tries to Evade Section 230 Immunity to Squelch Criticism

by Paul Alan Levy

In several posts on this blog, Greg Beck and I have written about the crucial role played by section 230 of the Communications Decency Act in fostering free speech online — and consumer commentary and criticism in particular —  by protecting Internet Service Providers against liability for content posted by their users. A new lawsuit by Vision Media Television Group seeks to evade that protection.

Over the years, various publications have reported claims about deceptive sales techniques used by a Florida company named Vision Media Television.  Vision Media denies these reports and indeed claims that they are defamatory, but didn't sue the New York Times, Consumers Union or other publications that have carried the reports. Instead, it has apparently been trying to sanitize its reputation by trying to intimidate bloggers who, it hopes, can't afford to defend themselves.

Search engine competition on user privacy?

by Paul Alan Levy

In the wake of Google's bold move toward the possibility of closing down its China operations over the Chinese government's demands for censorship coupled with its support for hacking, Microsoft has opened up a new front in the competition with Google by promising to delete the entire IP address for search queries after six months.

Google's move.  Nice to see this sort of competition.

The Fight for the CFPA Continues

The Times reports that President Obama met with Senator Dodd yesterday to push for the CFPA.  Over the weekend, Times columnist Gretchen Morgenson wrote a piece, Credit Cards and Reluctant Regulators, about how credit card companies are doing an end run around the Credit CARD Act restraints and how it falls to the OCC, rather than a CFPA to protect consumers.  The entire column is worth a read, but here's an excerpt:

[S]uch attempts by card issuers [should] be met with an aggressive regulatory response.

That, however, would be a lot to ask, given that the Office of the Comptroller of the Currency is tasked with enforcing the new rules at most card issuers. This institution not only failed in its oversight of risky practices at Citigroup, to cite just one case — it more recently objected to one of the sound credit card rules the Fed is putting into effect.

“The O.C.C. to the end fought the rules and tried to get huge exceptions, carrying water again for the large banks they were regulating,” said Travis B. Plunkett, legislative director for the Consumer Federation of America. “Now they have to enforce this law that they disagreed with.”

* * *

For years, consumer protection has been of little interest to the major financial regulatory agencies, with the exception of the F.D.I.C.

THERE is no reason to believe that this mind-set will change, given that the same folks who failed to rein in abusive practices years ago are still in place at these shops. And it is just plain boneheaded to entrust consumer protection to agencies run by people who seem to care more about the interests of the financial institutions they regulate.

Opponents of the Consumer Financial Protection Agency, which is part of the financial reform working its way through Congress, say that such a thing smacks of “the nanny state.” But isn’t that preferable to “the pirate state” that brought this economy to its knees?

FHA Issues New Standards for Home Loans

Last December, we blogged here that the Federal Housing Administration was proposing tougher standards for home loans. The New York Times reports here that the FDA will today finalize those rules, which include higher premiums for mortgage insurance and tougher limits on the amount that the seller can contribute to the buyer's closing costs.

More on Consumer Financial Protection Agency's Prospects in the Senate

Following up on Jeff's post from yesterday, PIRG's consumer blog has this post on the fight in the U.S. Senate to save the legislation that would establish a Consumer Financial Protection Agency, with links to additional materials.

Consumer Financial Protection Agency Proposal Said to be in Trouble in Senate

by Jeff Sovern

The Wall Street Journal story is here.  Senator Dodd is said to be willing to settle for a beefed-up consumer protection agency within another federal agency, perhaps the Treasury.  Of course, the Office of the Comptroller of the Currency is such an agency, and it has been more of a hindrance to consumer protection than a help.  Settling for such a half-step--and maybe it's not even that--would be a huge disappointment.  The Huffington Post has Elizabeth Warren's take on this proposal and Reuters has this story on her reaction.

The Second Mortgage Problem – Banks Holding Out

by Alan White

The biggest obstacle to reducing principal and effectively working out home mortgages in trouble is the fact that half the homes in foreclosure may have second mortgages or home equity lines of credit.  The investors holding first mortgages understandably object to any debt reduction scheme that would not require the junior lien holders to take the hit first.  The junior mortgage holders are unwilling to recognize the reality that many of their loans are worthless.

Why are second mortgage holders in denial?  Because unlike first mortgages, which are mostly held by investors in mortgage-backed securities, second mortgages are still held by banks on their own balance sheets.  If the major banks were honest about the value of their home equity debt, their capital would take a huge hit.  At a time when the banks are repaying Treasury’s equity investments, they do not want to expose this fundamental weakness in their balance sheets.  Bloomberg reports that the four big banks, who are also the largest servicers of investor-owned first mortgages, have a combined total of $450 billion in home equity debt on their own books.

Bank of America, for example, has $150 billion in home equity debt, and 50% of it is underwater, or nearly, although most borrowers are still making payments, so far.  BofA estimates that half of the home equity debt is on homes with total first and second mortgage debt exceeding 90% of the home value. This at a point when its tier I capital was $191 billion.  Total loss provisioning for this portfolio was 6.4%, or about $10 billion, a figure that is clearly inadequate.   Large write-offs of BofA’s $150 billion home equity assets would take a big bite out of its capital base.

Thus, the essential first step in deleveraging American homeowners, namely big write-downs in second mortgage debt, is stalled by banks in denial.  As a result, the $1 trillion home equity tail is wagging the $10 trillion first mortgage dog.  Treasury is working on a plan to entice second mortgage holders to accept 15 cents on the dollar voluntarily, but banks are unlikely to play ball.   

Ironically, the present Bankruptcy Code allows homeowners to get rid of underwater second mortgages and home equity debt, if the first mortgage eats up all the equity.  Apparently, few homeowners who could benefit from stripping off second mortgages are using bankruptcy, perhaps because of the high costs to hire a lawyer and file a case.  In the absence of better use of bankruptcy stripdowns, or an alternative means to compel write-downs of second mortgage debt, the present stalemate, and the foreclosure crisis, will continue.

Stephen P. King Paper on Tort Law Reform's Effect on Consumers

Stephen P. King of the Faculty of Business and Economics, Monash University has written Does Tort Law Reform Help or Hurt Consumers?.  Here's the abstract:

Legal limits on insurance damages claims have been introduced in Australia, the United States and other jurisdictions. In this paper I construct a simple competitive model to analyze the effect of tort law reforms on consumers. The model shows that reforms to limit non-economic losses make consumers unambiguously worse off ex ante. Although insurance premiums fall and these reductions are passed on to consumers in full, this gain is more than offset by the increased risk that consumers are forced to bear. In contrast, reforms for income related (i.e. economic) losses lead to ambiguous outcomes. The potential benefits from limits to economic loss arise due to the inability of insurers to price discriminate on the basis of income or expected loss. Because of this there is an implicit cross-subsidy from low-income to high-income consumers that is embedded in the insurance premium and relevant product price. Tort law reforms partially unwind this cross subsidy.

The results presented in this paper show that tort law reforms may achieve their stated goal, such as lowering monetary prices, but can still make consumers worse off by introducing an uninsurable risk. There is also an important difference between reforms that limit claims for economic and non-economic losses. Insurance for economic loss will generally include an implicit cross-subsidy and, as a consequence, reforms can alter the ex ante utility for different groups of consumers in different ways.

Exploding Mortgages

By Alan White

Of all the subprime mortgages ever made from 2000 through 2007, 14% have been foreclosed already, another 4% are in foreclosure now, and another 9% are now delinquent, for a total of a 27% failure rate.  In fact, the true failure rate is probably worse.  About 58% of all subprime mortgages were prepaid at some point when homeowners refinanced or sold their houses.  Some of the loans used to refinance prior loans ended up in the default and foreclosure categories, and some of the sales were distressed. Only one third of outstanding subprime mortgages are still being paid on time.

These numbers are from a recently announced GAO report which compiles comprehensive outcomes data on alt-A and subprime mortgages from the Loan Performance database, and will provide an invaluable resource for scholars.

The 27% failure rate is not just for ARMs, or just for 2007 subprime loans, or just for no-doc subprime loans, it is for all subprime mortgages made since 2000.  I argued in a paper two years ago (The Case for Bannig Subprime Mortgages) that on balance the harm caused by subprime mortgage lending considerably outweighed any benefits it provided.  It is hard to imagine now what benefits could have outweighed a 27% lifetime foreclosure rate, and the resulting loss of nearly 2.5 million homes.