CSPI Seeks FDA Ban on 8 Food Dyes

The Center for Science in the Public Interest (CSPI) has petitioned the Food and Drug Administration to ban eight food dyes that the group claims cause behavioral problems in some children and serve to enhance the appeal of unhealthy foods. A Washington Post story on CSPI's petition is here. For much more information, read CSPI's press release. The petition itself can be found here. The petition includes a long list of popular foods containing the dyes that CSPI wants to ban: Yellow 5, Red 40, Blue 1, Blue 2, Green 3, Orange B, Red 3, and Yellow 6.

Minnesota Foreclosure Freeze Vetoed

Minnesota governor Tim Pawlenty vetoed a bill that would have delayed residential foreclosures on subprime and negative amortization loans. The bill would have allowed owner-occupants to delay foreclosure by up to one year, by paying at least 65% of their current monthly payment. This was the first state legislative attempt to enact a moratorium in the current crisis. It will be interesting to see whether Senator Obama, speaking in Minnesota tonight, has any comment. Pawlenty has apparently been mentioned as a possible running mate for Senator McCain.

Attack on Behavioral Law and Economics

I just finished listening to the audio version of economist Tim Harford's book The Logic of Life during my commutes.  The thesis of the book is that people are rational and so respond to incentives.  This clashes to some extent with the arguments of behavioral law and economics ("BLE") consumer law scholars, in which group I number myself, who claim that people sometimes act irrationally in systematic ways and that businesses take advantage of consumer irrationalities. Those of us who take this position generally argue for rules that provide consumers greater protection than current law supplies.  BLE scholars rely on laboratory experiments, in the main, to prove their point. One of the chapters in Harford's book, by contrast, focuses on a number of experiments that seem to rebut the existence of the endowment effect; that is, the idea that once consumers have possessed something for even a brief period, it seems more valuable to them and they are reluctant to give it up for something that they would have valued equally before they possessed the item (hence the eagerness of some sellers to get consumers to try goods under a money-back guarantee that few consumers will take advantage of).  The difference is that the experiments he discusses took place outside of the lab and in more realistic transactions; they demonstrate that while neophytes are subject to the endowment effect, more experienced traders tend to be immune to it.  I'm afraid I can't yet cite to the papers on which the experiments are based; it's hard to take notes while you're driving and I haven't yet obtained a copy of the print version.  Though I still very much believe that BLE has valuable lessons for consumer protection, the chapter raises questions about some of the work on which we depend and is worth a read (or a listen) if you use BLE.  Harford, I should note, does not take on most of the systematic irrationalities on which much BLE work is based.  I found the remaining chapters quite interesting as well, even the ones that range far beyond consumer protection.

Tokyo Drift

By Alan White

From 1992 to 1998, Japan’s economy drifted in what became known as the Heisei depression, as banks and regulators stubbornly refused to recognize losses on overvalued loan and real estate assets. The prolonged crisis in Japan had been preceded by a bubble in real estate and stock prices, leading to a huge debt overhang based on inflated values. Sound familiar?

HOPE NOW April numbers and spin

By Alan White

On Friday HOPE NOW, the mortgage servicer coalition, released its April numbers for foreclosures and loan workouts. Unlike its prior reports, the April tally does not include new foreclosures started in April. Instead of showing both the number of new foreclosure starts and completed foreclosure sales, they only report the completed sales. New starts have been running at about three times the number of foreclosure sales, and perhaps the number was just getting too big. The press release touts April's increase in repayment plans and loan modifications, not surprisingly. While these increases are good news, they are not very meaningful without knowing if they are keeping pace with the rise in delinquencies and new foreclosures. In the last report (for the quarter ending in March) workouts were not keeping up with the rise in foreclosure filings.

I think HousingWire's analysis is correct: loan modifications are just not keeping pace with the growth in foreclosure sales. It's hard to know without the number of new starts, but I suspect that the pace of workouts is also continuing to fall behind the rising foreclosure inventory. Although HOPE NOW's headline says "Workouts Reach Record Level", they could just as well have said "Home Losses Reach Record Level", or "Foreclosure Starts outpacing Workouts."

The other continuing difficulty with the HOPE NOW reports is the inclusion of the undefined Repayment Plans in the category of workouts. We know from the MBA report that nearly 30% of foreclosure sales involve failed payment plans. Repayment plans can include something as limited as obtaining a promise from the homeowner to bring their loan current within the next 90 days. In my view, the main thing that the Repayment Plan category tells us is how many delinquent homeowners have recently been in contact with their servicer; it is not very good evidence of much else.

BK Court: Lender Can't Rely on Liar Loan App

A California couple with income of about $65,000 recently lost their home to foreclosure after having refinanced their mortgage debt up to about $680,000. How did they manage to borrow that much? Stated income (no-doc) mortgages, of course. After they lost their home, the lender took the rather aggressive tack of objecting to the couple's Chapter 7 discharge of the deficiency (the $250,000 alleged difference between the foreclosure proceeds and the mortgage debt.) The bank claimed that the couple had procured their mortgages by fraud, namely by lying about their income, and therefore were barred from discharging the debt under Section 523 of the Bankruptcy Code.

The couple claimed that they knew nothing of the false statements in their application, but the Bankruptcy Court's decision (Download) did not find their testimony credible on this point. However, the judge went on to find that the inflated income was so obviously implausible, given the borrowers' occupations, that the bank could not reasonably have relied on their stated income. The result was a finding against the bank, and a discharge of the unpaid debt.

HT to April Charney.

Loan Modifications and PSA contract limits

One of the obstacles to preventing foreclosures through loan modifications has been the restrictions in securitization contracts. The pooling and servicing agreements ("PSAs") that create securitization trusts usually limit the servicer's authority to rewrite mortgage terms on behalf of the investors, even when the modification will prevent a foreclosure and produce a higher return than foreclosure. PSA provisions vary, but it is not uncommon for the servicer's discretion to be limited by a percent-of-pool cap on modifications.

Residential Funding Corp., an affiliate of GMAC and securitizer of subprime mortgages, recently requested and obtained approval from bond rating agency Moody's (Download) to increase the 5% cap on loan modifications in seven loan pools.

The particular contract term in one of the RFC-sponsored trust agreements (Download) is interesting because although it contains a 5% modification cap, it permits the cap to be increased, with the consent of the rating agencies and the insurer (and without the need for consent of the investors). This farsighted PSA contract term solves at least one of the problems that has prevented mutually beneficial mortgage modifications by other servicers. Kudos to whoever drafted this contract! The pool in question has reached a 20% foreclosure rate and cumulative net losses of 2.38%.

HT to Kevin Byers for spotting this on HousingWire.

House and Senate Vote to Amend FCRA to Block Credit Card Truncation Suits

Congressional Quarterly's Weekly Report reports that the Senate has passed a bill, H.R. 4008, that would block credit card slip truncation suits--that is, the many suits that have been filed for violation of the FCRA provision added by FACTA barring retailers from printing on credit card receipts the full credit card number or credit card expiration date.  Because the House had already passed the bill, it now goes to the President for signature.  Blocking such suits makes sense, but if Congress was going to amend the FCRA, wouldn't it also have made sense to fix some of the other problems with the FCRA? (hat tip to Ira Rheingold)

Justice Department Forces Traditional Realtors To Give Up Stranglehold on Internet Home Listings

This article in yesterday's Washington Post discusses the National Association of Realtors' agreement with the U.S. Justice Department that will facilitation the listing of home sales by Internet-based realtors - - properties that were sometimes listed only by traditional brokers. The agreement may ultimately foster competition about realtors that will bring down real estate commissions.  Here's a taste of the article:

The National Association of Realtors has agreed to change its policies on Internet home-sale listings to settle a long legal battle with federal regulators who have accused the group of anti-competitive behavior that harms consumers.  The settlement, which awaits court approval, would resolve a 2005 Justice Department [antitrust] lawsuit that accused the association of undermining newer, lower-priced rivals by hampering their ability to post home-sale listings online. The Realtors association, which did not admit liability or wrongdoing and faces no fines, agreed not to treat Internet-based brokerages differently than traditional ones.

Upcoming Journal of Consumer Affairs Issue on Financial Literacy

Here is the table of contents for the upcoming Summer 2008 issue of the Journal of Consumer Affairs, Volume 42, Number 2 :

Special Issue on Financial Literacy: Public Policy and Consumers’ Self-Protection

Editorial Prelude: Financial Literacy, Public Policy, and Consumers’ Self-Protection—More Questions, Fewer Answers by John Kozup and Jeanne M. Hogarth

A Framework for Promoting Retirement Savings by Josh Wiener and Tabitha Doescher

Toward a General Model of Consumer Empowerment and Welfare in Financial Markets with an Application to Mortgage Servicers by Paula Fitzgerald Bone

Is Ignorance Bliss? Consumer Accuracy in Judgments about Credit Ratings by Vanessa Gail Perry

Saving for Retirement: The Effects of Fund Assortment Size and Investor Knowledge on Asset Allocation Strategies by Maureen Morrin, Susan Broniarczyk, J. Jeffrey Inman, and John Broussard

The Role of Self-Regulation, Future Orientation, and Financial Knowledge in Long-Term Financial Decisions by Elizabeth Howlett, Jeremy Kees, and Elyria Kemp

The Financial Rationality of Consumer Loan Choices: Revealed Preferences Concerning Interest Rates, Down Payments, Contract Length, and Rebates by Nicholas Wonder, Wendy Wilhelm, and David Fewings

Consumer Financial Literacy and the Impact of Online Banking on the Financial Behavior of Lower-Income Bank Customers by Lisa J. Servon and Robert Kaestner

Editorial Postlude: Financial literacy by Herbert Jack Rotfeld