Interesting Explanation for the Lesser Depression

Here's an interesting explanation for the current plight of our economy--which I've come to think of as the Lesser Depression--gleaned from the MP3 version of the ALI/ABA program The Subprime Mortgage Crisis: From A to Z.  One of the speakers in the panel titled "Class Actions and Shareholder Derivative Lawsuits Brought by Investors," after first suggesting that some lenders were overinsured for losses through credit default swaps, analogized to the situation in which the owner of a million dollar home insures it for five million.  The speaker then observed that it's not surprising when a fire breaks out at the home. The theory does explain why so many decisions that have since appeared to be self-destructive were made.  I suspect that it will ultimately not stand up to scrutiny, but that scrutiny may be coming in the form of litigation. 

Tranche Warfare Declared

HousingWire reports that investors are suing Countrywide [complaint here] in its role as mortgage servicer, objecting to Countrywide's settlement with state regulators whereby it will modify home mortgages to reduce interest and principal.  While the modifications can be justified in many cases on the basis of net present value calculations and the best interest of investors (foreclosures being a losing proposition in the current market), the investors claim is that Countrywide is foisting the losses attributable to Countrywide's misdeeds in making the loans onto them.  While investors, originators and servicers battle over who has to bear the inevitable losses, other servicers will see this as another reason not to modify mortgages.

It is undoubtedly true that many mortgages are subject to fraud, deceptive practice and other claims and defenses, in addition to having lost value due to home price declines.  Parsing out losses is always a problem in a debt crisis, and Congress may need to act to allocate losses wholesale, rather than waiting for the case-by-case allocation of losses for every mortgage through a series of similar lawsuits.   

The Economic Team and the Foreclosure Crisis

By Alan White  

So far President-Elect Obama's economic team, while perhaps full of bright people, reflects very little diversity in viewpoint, coming mostly from the mainstream, centrist, a-little-Keynsianism-is-OK-but-not-too-much school of thought.  Notably missing are any economists one might regard as leftist, or even genuinely liberal in the American sense.  None of the announced advisers to date concern themselves primarily, or even very much at all, with issues of poverty, labor, housing, or the unequal distribution of wealth and income.  None could be characterized as a fan of regulation of markets, as a matter of principle.  

A brief search for their writings on the the foreclosure crisis produces very little.

Larry Summers wrote a a reasonable column for Financial Times earlier this year, in which he advocated bankruptcy reform to allow homeowners to reduce mortgage debt to property values, and to swap debt for equity.  Austan Goolsbee, on the other hand, wrote a wretched piece in March 2007 warning against regulation of subprime mortgages, based on the erroneous factual assumption that subprime mortgages expanded homeownership for minorities (who are in fact losing billions in home wealth as a result of subprime foreclosures, which are approaching 50% of subprime loans.)  Thankfully the Federal Reserve and other regulators have not heeded this advice.  If anyone knows of anything Christina Romer, Paul Volcker, or Tim Geithner have written on the subject, let me know.

While some of these economists may be pragmatists, their deeply held biases favor the unregulated market that has brought the present catastrophe.  Thus far, I don't hold much hope for a transformative administration, on the foreclosure crisis front, or for that matter on the new regulatory architecture for financial services generally.   

U.S. PIRG's 23rd Annual "Trouble in Toyland" Report

U.S. PIRG has issued its 23rd annual "Trouble in Toyland" report just in time for the holidays. This report alerts consumers to the hazards of some children's toys. Read PIRG's press release and "Tips for Toy Safety" as well.

Carrillo on Consumer Challenges to Adjustable Rate Mortgages

Jo J. Carrillo of Hastings has written Dangerous Loans: Consumer Challenges to Adjustable Rate Mortgages, 5 Berkeley Bus. L. J. 1 (2008).  This article has the distinction of having two abstracts.  Here's the SSRN abstract:

This article analyzes the relationship between innovative mortgage products, like adjustable-rate mortgages, and the first wave of consumer legal challenges brought against those products under the Truth in Lending Act (TILA), 15 U.S.C. section 1601, et seq. (TILA).

And here's the more-detailed abstract at the beginning of the article:

As recently as the first quarter of 2007, home ownership rates were up across the board, including in low-income, fixed-income, and minority communities. By the fourth quarter of 2007, sales volume had flattened, housing prices had peaked or dropped, interest rates for consumers were uncertain, and mortgage lenders had tightened access to credit. Additionally, notices of default rose, as did forced (equity) sales, and completed foreclosures as measured by trustee deeds of sale filed.

This article analyzes the relationship between innovative mortgage products, like adjustable-rate mortgages, and the first wave of consumer legal challenges brought against those products under the Truth in Lending Act (TILA), 15 U.S.C. section 1601, et seq. (TILA). Legislation has been introduced to address the rise in mortgage distress among consumers, but much of that legislation is limited in application. Hence, by default, courts will continue to play an important role in resolving consumer claims against lenders, and many of the lawsuits will be brought as class actions. TILA explicitly allows class action lawsuits for damages under section 1640, but section 1635, which covers rescissions, is silent on the question of whether class-wide rescission claims are permissible. On the legal side, the answer will depend upon how courts interpret section 1635 in light of TILA’s overall consumer protection purpose. On the economic side, the answer will depend upon how access-to credit issues get framed in light of the expanding mortgage crisis.

Worst yet to come?

The New York Times published a gloomy anonymous email from a banker castigating his own industry yesterday.  The banker predicts further bank collapses as more credit card receivables go into default. The banker makes the point that credit card divisions in banks rely on stated income and assets in much the same way that the mortgage industry relied on "liar" loans and are continuing to aggressively market high cost debt to those that cannot repay it.

In general, my impression has been that credit card lenders have been more sophisticated in managing default risk because they lacked the cushion of collateral. Moreover, unlike mortgages, credit card portfolios were not so obviously exposed to an asset bubble.  Still, as the recession spreads and Congress continues to sharpen moral hazard with financial institution give-aways (irrespective past consumer abuse) one cant help but wonder.

A few answers to Tom Willging's questions

A few days ago on this blog, the ever-brilliant Tom Willging (at the Federal Judicial Center) posted a thoughtful set of comments about CAFA.

At the end of his post, Tom posed some interesting questions. Always at the ready with opinions, I thought I’d give him some (arguably) interesting answers.

I start with two caveats: (1) excepting the good work Tom and his cohorts do at FJC, most all knowledge about details of class actions is anecdotal; and (2) my own knowledge is largely limited to financial class actions, not civil or employee rights cases. That said, I've gotten enough anecdotes to feel comfortable in making sweeping statements.

So, here are my answers and thoughts on some of Tom’s questions:

Question:
Why did plaintiffs drop the class claims in so many cases?

Answer:

This one's easy: Because they've settled. For better or for worse. That is, they are either: (1) perfectly good settlements with classwide relief that the defendant did not want to run through an agreed approval process, or (2) complete and utter whore-outs by the plaintiff lawyers (I won’t call them “class counsel” because they are not acting in the interests of class members or anyone else except their firm's bottom line).

Let me illustrate both kinds:

The good kind

Before I came to CSPI, I handled a number of relatively small (500-2000 class member) classes for debt collection abuses, working with the fine Houston lawyer John Ventura (recently lost to cancer). The violations were quite clear--threatening garnishment where it was not possible, threatening criminal prosecution, threatening civil suit when none would occur, etc. Quite often, since we had the violations nailed down, the defendant would quickly seek settlement. Usually the defendant did not want to go through agreed certification and the fairness hearing, either to avoid copycat cases or to save attorneys' fees. The settlement would (1) require injunctive-type relief to stop the practice on which our suit was based and (2) disgorging all amounts collected in response to the offending form collection letter (either in refunds to class members or as cy pres). Because we got all the relief we sought, we were willing to dismiss without certification. We didn't need it and felt it would only be a form of taking coup--good for our egos but no benefit to the class. When we did this, we always filed a motion to dismiss (or notice of dismissal), explaining the settlement and getting the judge to approve the dismissal. We did this because we wanted our class actions cases to be transparent to the court, class members, and the public.

The bad kind:

A shakedown. The lawyers file the case, and quickly make it clear to the defendant that they can be bought off. Defendant, acting in its own interests and quite ethically, decides it's cheaper to pay off the lawyers than to fight the case. Plaintiff lawyers get paid; class gets nothing; no motion to dismiss filed; settlement remains a secret. In one of our pending lawsuits, two copycat cases were settled and dismissed without any fanfare (or notice to us, the lead case). The settlement is sealed, so I can only speculate that money changed hands.

A dismissal at an early stage is almost certain to be one or the other of these. It's impossible to tell which with any certainty, but a secret settlement augurs heavily in favor of a sell-out.

Question:
Why did three-quarters of the cases in our sample not show any motions for class certification?

Answer (really, mostly surmise):

This strikes me as a very high number, but it would largely be explained by my prior comment. One minor reason for early dismissal is if the defense counsel convinces class counsel that the case lacks some component of factual merit (e.g., the client actually got the notice the complaint says was not received). But this is very rare.

Another possibility is the result of a Rule 68 offer of judgment, which the plaintiff takes, often against advice of counsel. This certainly occurs, despite the best efforts and intentions of class counsel.

Question:
Is the litigation class on a path toward extinction?

From what I've seen, just the opposite. Cases that survive motions to dismiss and other dispositive motions seem to be going to trial more than before--at least I sure see many more of them that are tried, and I keep on top of class action developments.

Question:
Is the rate of termination by dispositive motion (29% of the non-remanded cases) typical of class action litigation in state courts?

Probably so. State courts are generally more willing to trust juries than too many federal judges are, so more are likely to survive a dispositive motion. Except, of course in Texas, where the Texas Supreme Court has abolished class actions but hasn't admitted it.

Question:
Why is it that about half of the removed cases were remanded to state courts? Data suggest that defendants do not remove all or even most state court class actions: What if any patterns describe the removed cases?

Answer:

Removal is a knee-jerk reaction by many defense counsel, and is often based on factually weak bases. In other words, a lot of cases are remanded because they were improperly removed. Possibly there is some room for docket management desires on the part of the federal judge as well, so that borderline cases go back, but the simple truth is that CAFA has created a whole new set of class action abuses, but by defendants in the form of time-wasting meritless removals.

Amended RESPA Regulations for Good Faith Estimates

On November 17, HUD issued amended regulations intended to simplify and provide more timely notice of mortgage settlement notices under RESPA.  Here's the summary of the amendments from the HUD Federal Register Notices:

The changes made by this final rule are designed to protect consumers from unnecessarily high settlement costs by taking steps to: improve and standardize the Good Faith Estimate (GFE) form to make it easier to use for shopping among settlement service providers; ensure that page 1 of the GFE provides a clear summary of the loan terms and total settlement charges so that borrowers will be able to use the GFE to identify a particular loan product and comparison shop among loan originators; provide more accurate estimates of costs of settlement services shown on the GFE; improve disclosure of yield spread premiums (YSPs) to help borrowers understand how YSPs can affect borrowers’ settlement charges; facilitate comparison of the GFE and the HUD–1/HUD–1A Settlement Statements; ensure that at settlement borrowers are aware of final costs as they relate to their particular mortgage loan and settlement transaction; clarify HUD–1 instructions; expressly state that RESPA permits the listing of an average charge on the HUD–1; and strengthen the prohibition against requiring the use of affiliated businesses.

In many respects the new form is a huge improvement.  It will disclose not only settlement costs but also loan terms, like the interest rate and whether the rate is fixed or adjustable, and if it is adjustable, what the ceiling is for monthly payments.  The form comes closer to enabling consumers to understand whether there is a yield-spread-premium by requiring disclosure whether there is a charge for the selected interest rate.  If I understand the new rule correctly, based on my quick look, lenders may not charge more at closing than the GFE provides for as to some items, and as to others, the charge must be within 10% of the GFE.  It sounds like the new GFE will be much more useful to consumers who shop around for credit. (HT to Ralph Rohner). 

New Federal Judicial Center Study on the Class Action Fairness Act: One of the Authors Speaks

by Tom Willging

[Ed. note: The following post was written by Tom Willging, a senior researcher at the Federal Judicial Center, the research arm of the federal judiciary. Tom knows as much about the inner workings of the federal judicial docket than anyone. This post on the FJC's recent study on the Class Action Fairness Act is worth reading.]

    Here are some thoughts on the Federal Judicial Center's ongoing CAFA study as we shift gears from Phase One's count of cases into Phase Two's examination of what happens in those cases.

    Phase One concentrated on identifying class actions (not as simple a task as it might seem) and measuring the impact of CAFA on the number of cases filed in and removed to the federal courts. As Brian Wolfman noted in his post on Saturday, CAFA generally has had its intended effect in the sense that more cases are being filed in or removed to the federal courts since CAFA went into effect. Yet, as Brian's post suggests, the question lingers as to how many cases are really being shifted to the federal dockets. Recall that early predictions were that all or most class actions would end up in the federal courts. The Congressional Budget Office predicted that "most" class actions would go that way. Others forecast an "epic reallocation" of class action adjudication resulting from the "wholesale removal" of cases from state to federal courts. Emery Lee and I detailed some of these predictions in our recent article, part of a CAFA symposium in the University of Pennsylvania Law Review.

Who Is the Obama Administration Seeking Advice From on Consumer Issues?

Nan Hunter of Georgetown is compiling on her blog a list of law professors in the Obama administration (If you know of others involved in consumer matters in the Obama administration--law professors or not--please post it in the comments).  In the consumer arena, she lists Peter Swire of Ohio State as being on the FTC Review Team.  You can find Peter's home page here; he's a very talented commentator on privacy issues and served as the Chief Counselor for Privacy in the Clinton administration.  He is also a Senior Fellow at the Center for American Progress. Though he is undoubtedly best known for his writings on privacy, he has also published or testified on other consumer law issues, including the CRA, FCRA,  and lending discrimination.  He recently gave a talk titled The FTC @ 100 and the Future of Consumer Protection (the written statement is here) in which he said the FTC "is, and should remain, the preeminent consumer protection agency in the world" and made the following recommendations on online commerce:

1. Appoint a chief technology officer for the FTC. A chief technology officer at the commission would provide vision and leadership for IT issues affecting consumers’ online activities.

2. Assess policy initiatives by functional area, not geography. For online harms, local and state consumer protection agencies will face major challenges in playing their historical role in enforcement. The FTC should step forward with initiatives defined by function, such as fighting spam, protecting against identity theft, and combating spyware and other malware.

3. Use technology to implement an effective mix of federal and federated enforcement. The Consumer Sentinel program is a promising step toward using new technologies to share information and link enforcement agencies both nationally and internationally.

4. Use new technologies effectively in consumer education. The commission should increase its use of multimedia and other emerging technologies to conduct consumer education. In addition, participating in emerging technologies will provide insights to improve the commission’s policy and enforcement activities for new media as they evolve.

5. Create and implement a research agenda for consumer protection online. An important part of being the leading consumer protection agency for online activities is to create a research agenda on issues of major concern to consumers and consumer protection. Topics for research include how to provide notice about online activities, the growing role of behavioral and experimental economics, and a special role the commission can play in computer security research to protect consumers.