Advocate's view on HOPE NOW hotline

By Alan White

Last week, the Wall Street Journal ran an article about the HOPE NOW foreclosure help hotline. HOPE NOW is an alliance of six large mortgage servicers, mortgage and securities industry trade groups, Neighborworks, the Homeownership Preservation Foundation and other nonprofits. It operates a toll-free number for homeowners, has done some mass mailings, and has issued some reports on workouts and loan modifications by its members. The WSJ reported that HOPE NOW got 176,000 calls in the past two months. It recommended a workout for 9,975, another 12,113 were referred for other counseling services, and 4,410 were told to sell their homes. We don't know what happened to the other 150,000.

My friend Mark Wiseman, who is in the front lines of the foreclosure battle, serving as foreclosure prevention director for Cuyahoga County (Cleveland OH), wrote a letter to the WSJ, portions of which the Journal ran yesterday. Mark was kind enough to send me the full text of his letter (Download) which includes details left out of the edited version and which is highly critical of HOPE NOW and the Administration's foreclosure plan (or lack thereof).

Be Careful in Choosing Internet Providers -- Will They Defend Your Privacy?

by Paul Alan Levy

  Public Citizen jumped into a case where a federal judge in San Francisco tried, albeit without success, to shut down the entire Wikileaks web site, based on a claim by a Swiss bank that among the leaked documents posted on Wikileaks were some highly sensitive documents revealing private customer information.  (Wikileaks "invites people to post leaked materials with the goal of discouraging 'unethical behavior' by corporations and governments."  A New York Times editorial denouncing the order is here).  The case raises very serious issues about the First Amendment and prior restraint, which deeply affects consumers.  It also affects groups like Public Citizen, which depends on access to leaked documents to better advocate for consumer safety and other rights.   A discussion of how leaked information can be used to protect consumers appears in the first few pages of our motion to intervene in the case.  Access to the affidavits described in the brief is here.

In our brief, though, we focused instead on the lack of “complete diversity”  because there are subjects of foreign states on both sides of the case -- the Swiss bank on one side, and on the other side a Swiss former employee who took the documents when he left the company and Wikileaks, many of whose members are abroad. In addition, we point out that the main cause of action on which the bank relied, section 17200 of the California Business and Professions Code, applies only to unfair or unlawful "business practices" and hence does not apply to completely non-commercial web sites like Wikileaks. Others, including the ACLU and EFF, and a coalition of media organizations, have filed briefs addressing the First Amendment issues.

There is another serious consumer issue here that has received too little attention.  The judge entered two separate orders.   Although we have no way of knowing what the judge would have done without a stipulation, the broadest of the orders in the case was entered as a permanent injunction, without any findings of wrongdoing or basis for the order, that was submitted to the judge by the plaintiffs with the agreement of Dynadot, the domain name registrar.  So far as I can tell, Dynadot simply rolled over, apparently to avoid having to defend against the relief that the bank was seeking.  And that, to my mind, poses a significant consumer issue concerning the extent to which Internet providers protect their customers’ rights, and the considerations for consumers in choosing their Internet providers.

Freeze on Fremont Foreclosures (in Massachusetts)

by Alan White

Massachusetts Attorney General Martha Coakley persuaded a judge to order a 90-day statewide halt to foreclosures by Fremont Investment and Loan, so that Fremont could work out some of the defaults with borrowers. The press release includes a link to the 29-page decision. In his February 25 order, Judge Gant wrote: “It is both imprudent and unfair to approve a mortgage loan that the borrower cannot reasonably be expected to repay if housing prices were to fall. Just because we, as a society, failed earlier to recognize that loans with these . . . characteristics were generally unfair does not mean that we should ignore their tragic consequences and fail now to recognize their unfairness.” The order requires Fremont to notify the AG before foreclosing, and allows the court to review foreclosures on a case-by-case basis to determine whether the loan was unfair and whether Fremont has taken reasonable steps to explore alternative payment arrangements. This is the first such statewide foreclosure injunction, albeit against only one servicer, of which I am aware.

Consumer Protection and Law Students

by Jeff Sovern

Here comes a self-serving post.  In my view, legal education raises significant consumer issues for its chief consumers, students (you could argue that the clients that retain the services of law school graduates are also consumers of legal education, but for purposes of this post, their interests are the same and so the distinction is irrelevant). The focus of this blog is usually on issues pertaining to a larger group of consumers than law students, but because many readers of this blog are law professors or lawyers (i.e., former law students), the readers of the blog may be interested in consumer issues involving law students.  In addition, higher education in general may face some of the same consumer issues and so the issues may be of broader concern. Many of these consumer issues are familiar to law professors and lawyers may be aware of some of them as well; they are frequently discussed on Brian Leiter’s Law School Reports blog and by Brian Z. Tamanaha on the Balkinization blog, among other places. 

In any event, in an effort to dramatize these issues and make them more vivid, I put on my playwright hat (I am an extremely minor playwright and have written a few plays, none of which has received a production, though three have been given staged readings), and wrote a fifteen-minute play about consumer protection for law students.  The play has serious flaws, I’m sorry to say, but I think it brings the issues into a clearer focus.  It’s a work in progress, so I’d be interested in comments about the content, and for that matter, the idea of using this format as a way to comment on legal matters.

Curious about what the consumer issues that I keep referring to are?  You can get a hint from the abstract:

Sellers in a competitive market shift resources from attributes buyers don't care about to attributes buyers do care about.  In markets in which buyers rely on imperfect signals for quality, sellers move resources away from improving the quality of their product to enhancing the illusion of quality.  For example, before freshness dating, when consumers tested the freshness of bread by squeezing it, bakers reportedly added chemicals to bread to preserve its softness longer, thereby creating the illusion of freshness.  Similarly, law school rankings encourage schools to shift resources away from improving the quality of the education they provide in favor of investing in improving their standings in the rankings.  Consequently, under the guise of serving the market, rankings which are based on the wrong criteria are likely to subvert the market because they both fail to measure accurately the quality of a school's education and reduce the quality of legal education.

This piece dramatizes some of the ideas discussed in the preceding paragraph.  It takes the form of a fifteen-minute play with three characters: a law school dean, a junior law professor, and a law student.  The play illustrates how the incentives created by a ranking system could affect law schools and their administrators, faculty, and students.  The play format is intended to make the ideas expressed more vivid.

If you want to know more about the consumer issues, you can read the play (which, I emphasize, is short) at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1097602. And if you get the impression that I want people to read it and comment, you’re right. I’m curious to learn whether writing this was useful or a waste of time.

Fitch projects 50% foreclosure rate

By Alan White

     In a new presentation entitled Update on U.S. RMBS, Performance, Expectations, Criteria, Fitch Ratings now projects that 50% of the subprime mortgages from the fourth quarter of 2006 in rated securitizations will end in foreclosure. They also project loss severity of 60%, meaning that investors will recover only 40% of the principal and interest due on the mortgages after foreclosure, resulting in losses of 30%. These numbers are astounding. Fitch makes similar predictions for the other 2006 and 2007 "vintages" of subprime mortgages. Given total subprime mortgage originations for the two years of almost $1 trillion, a loss rate of 30% would represent $300 billion. As Senator Dirksen once said, "a billion here, a billion there. . . ."

Needless to say, this will also means millions of homes lost.

Table of Contents for the Forthcoming Issue of the Journal of Consumer Affairs

  Here is the table of contents for for the forthcoming Spring 2008 issue of Journal of Consumer Affairs (Volume 42, Number 1 ):
2008 Distinguished ACCI Fellows

Editorial Prelude: Remembering Luminary Leaders Stewart M. Lee and E. Scott Maynes
            Brenda J. Cude

No Pain, No Strain: Impact of Health on the Financial Security of Older Americans
            Hyungsoo Kim and Angela C. Lyons

The Effects of Summary Information on Consumer Perceptions of Mutual Fund Characteristics
            John Kozup, Elizabeth Howlett, and Michael Pagano

Recognizing Consumer Issues in DTC Pharmaceutical Advertising
            Marla B. Royne and Susan D. Myers

Bits Briefs & Applications
What Am I Drinking? The Effects of Serving Facts Information on Alcohol Beverage Containers
            My Bui, Scot Burton, Elizabeth Howlett, and John Kozup

Notes & Observations
Use, Misuse, and Abuse of Content Analysis for Research on the Consumer Interest
            Les Carlson

Potential and Pitfalls of Applying Theory to the Practice of Financial Education
            Angela C. Lyons and Urvi Neelakantan

Measuring What Really Matters to Consumers
            Robert N. Mayer
            
Editorial Postlude
            How Do You Know That?
            Herbert Jack Rotfeld

Astroturfing? You Decide

By Alan White

With the avowed purpose of rebutting the policy research of the Center for Responsible Lending, a group calling itself the Consumers Rights League has launched a web site and garnered an article in Forbes critizing the work of CRL (the original one, not the new one.) Interestingly, the new group has consciously adopted the same acronym as its nemesis, who they refer to as a "predatory charity." The new group's web site offers no information about its staff, board or funding. Their mission statement, however, offers some clues as to who might be behind this new .org:

• We will document the benefits consumers receive from the democratization of credit through research and analysis.
• We will quantify the costs consumers will bear if these options are restricted.
• We will leverage the interests of millions of consumers to preserve their rights and expose the self-dealing of many within the “consumer activist” community through public education.
• We will protect consumers’ right to choose given the benefits consumers enjoy through a wide range of options.

In the past year, the Responsible Lending folks have gained considerable credibility for having sounded the alarm about reckless subprime mortgage lending. Their research on foreclosures is widely cited, even by political opponents. (I should note that I recently joined their Research Advisory Council). While the new CRL might be legitimate, one is inclined to suspect astroturfing.

(Click here for another example of astroturfing in the realm of consumer protection)

Times Reports on Federal Bailout for Mortgage Crisis, the Riegel v. Medtronic Medical Device Case, and CPSC

The lead story in today's Times reports that "the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses."  According to the article, "nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater."  Among the ideas being considered are "a federal mortgage guarantee for troubled borrowers . . . [and us[ing] government funds to purchase and refinance billions of dollars in mortgages now in danger of default."`  Meanwhile, on Monday the Times ran a story, "No Lull in Mortgage Pitches," about just that.  The article mentions advertising by Countrywide and the Bank of America, which is in the process of acquiring Countrywide, while today's piece notes that the Bank of America has proposed that a federal agency buy delinquent mortgages at a "deep discount."  Bank of America knows how to make a strong argument.

The Times has devoted a lot of space to the Supreme Court's Riegel v. Medtronic decision on medical devices and preemption.  An editorial in today's paper, "No Recourse for the Injured," criticizes the decision.  Here is an article about the effect of the decision on pending law suits.  Yesterday's issue had a news analysis, "Justices Add Legal Complications to Debate on F.D.A.'s Competence."  An excerpt:

The Institute of Medicine, the Government Accountability Office and the F.D.A.’s own science board have all issued reports concluding that poor management and scientific inadequacies have made the agency incapable of protecting the country against unsafe drugs, medical devices and food.

A result, said David Vladeck, a professor at Georgetown University Law Center, is that the public is facing the worst of both worlds: a government health agency that cannot protect them and rules that block them from winning compensation when injured.

Wednesday's paper included "Sears Case Cited by Critics of Safety Panel," which reported on criticism of the CPSC by Public Citizen.

Short Refis coming?

By Alan White

A big stumbling block to renegotiating mortgages in danger of foreclosure is the reality that many homeowners now owe more than their home is worth. This situation is sometimes referred to as being "underwater." Servicers of securitized mortgages (prime and subprime) are often willing to write down the amount due on the mortgage if the homeowner is selling (and has a buyer.) Servicers are much less willing to write down the principal loan amount to the home value to allow a homeowner to refinance with a cheaper or less risky mortgage that will permit them to save their home: a "short refi." The concept of writing loan balances down to market value is familiar in the commercial real estate sector, but seems for some reason more controversial for consumer and residential loans, despite the fact that in many cases a short refi will yield a better return for the investor than a foreclosure.

Buried in a story in today's Wall Street Journal is a report that some servicers may start getting strong federal agency encouragement to do short refis. John Reich, director of the Office of Thrift Supervision, regulator of federal savings banks (like WaMu) revealed that OTS is working on a short refi plan. The other part of his announcement today was that the thrift industry lost $5.2 billion in the 4th quarter of 2007, and that we should expect to see some thrift failures in the coming year.

Today's Washington Post provides more details (login required). Lenders writing down mortgages would receive negative equity certificates that might have some market value, to mitigate their losses. Not clear how the negative equity interest would retain value yet permit the refinancing lender to get an insurable first mortgage.

OCC's Response to Spitzer's Charge that the Bush Administration Worsened the Mortgage Crisis by Preempting State Laws

Last week, Brian blogged here about Governor Spitzer's claim that the Bush administration contributed to the mortgage crisis by preempting state attempts to bar predatory lending.  Comptroller of the Currency John C. Dugan responded by issuing the following statement last Thursday:

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem.  Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators.

However, comments from today assert that the OCC and national bank preemption have prevented the states from taking action against predatory or abusive lenders.  That’s just plain wrong.

The OCC extensively regulates the activities of national banks, including mortgage lending.  The OCC established strong protections against predatory lending practices years ago, and has applied those standards through examinations of every national bank.  As a result, predatory mortgage lenders have avoided national banks like the plague.  The abuses consumers have complained about most — such as loan flipping and equity stripping — are not tolerated in the national banking system.  And the looser lending practices of the subprime market simply have not gravitated to national banks: They originated just 10% of subprime loans in 2006, when underwriting standards were weakest, and delinquency rates on those loans are well below the national average.

Nothing the OCC has done has prevented the states from regulating and preventing abuses among the lenders that they license – lenders that are the source of most of today’s problems.  The states have ample authority – as well as clear responsibility – to set standards for these lenders and enforce them.  It defies logic to argue that preemption was an impediment.  National banks are bound to obey the strict standards enforced by the OCC everywhere they operate – even in states that had far less rigorous standards.  The states should have applied equally rigorous standards to the non-bank lenders that were responsible for the bulk of the problems.

I'm not sure who Comptroller Dugan means when he refers to "[a]lmost everyone who has paid attention to the subprime lending crisis" since he doesn't cite any sources (not that one would necessarily expect that in a statement of this sort).  Here, by the way, is an excerpt from our casebook, written before the subprime crisis burst, that cites some relevant sources, though they cover an earlier time period than the one Comptroller Dugan is referring to:

One critic claims that national bank operating subsidiaries originated nearly a quarter of total subprime loans in 2003.  See Baher Azmy, Squaring the Predatory Lending Circle: A Case for States as Laboratories of Experimentation, 57 Fla. L. Rev. 295, 359 (2005). See also Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 Ann. Rev. Banking & Fin. L. 225, 314-15 (2004) (“most of the largest subprime mortgage lenders are nonbank affiliates of major bank holding companies. . . . a number of [national bank subsidiaries] have produced serious allegations of abusive lending practices.”).    Preemption of state law as to nonbank subsidiaries is particularly significant because such subsidiaries are not routinely examined by federal regulators.  GAO Report at 49, 51-53