Consumer Law & Policy Blog

New Study - Foreclosures' Impact on Families

The National Council of La Raza and the Center for Community Capital at UNC have published The Foreclosure Generation: The Long-Term Impact of the Housing Crisis on Latino Children and Families.   This unique study draws on interviews of families who lost homes to foreclosure to provide detailed descriptions of the financial, physical and emotional toll suffered by foreclosed homeowners.  This research will provide a vital missing piece in any discussion of the costs and benefits of policy responses to the foreclosure crisis.

Are Bankers Buying Opposition to the CFPA?

by Jeff Sovern

Today's Times reports that banks and bankers that formerly donated to Democrats are instead contributing to Republicans.  The article lists the Consumer Financial Protection Agency as one of the Democratic proposals that has bankers riled up.  Indeed, the article notes that CFPA opponent Richard Shelby has received one bank PAC's largest contribution, $10,000, along with four other Republican opponents of the adminstration's regulatory agenda.  Opposing the CFPA won't help the country but it seemingly helps generate campaign contributions from banks.

Mortgage Bankers Association walks away

In today's can-you-top-this-for-irony story, the Wall Street Journal reports today that the trade group representing America's mortgage lenders sold its severely underwater Washington DC headquarters for $41.3 million, but did not disclose how the $75 million debt on the building was settled.  PNC, the lead lender, also declined to divulge how MBAA resolved its contractual obligations to its lenders.  Given MBAA's exhortations to homeowners not to shirk their debts, one can only assume (?) that the association paid its lenders the $30+ million difference. 

Here's a humorous take on the MBAA's mortgage troubles.

Debt Collection via Text Messages?

by Jeff Sovern

A company claims to make it possible.  But what about the FDCPA's required disclosures?  Some of them, like the validation message required under section 1692g, are only required within five days of the initial communication, and so can be sent in other ways, but under section 1692(e)(11), all communications must disclose that the communication is from a debt collector.  Given the character constraints in texting, that won't leave much room for dunning the consumer. I wonder how effective such texts will be.  Many billing plans charge the recipients of texts so I imagine consumers won't be happy not only to receive such texts but also to pay for them.  That also brings up section 1692f, which prohibits unfair practices, and in subsection (5) specifically bars:

Causing charges to be made to any person for communications by concealment of the true purpose of the communication.  Such charges include, but are not limited to, collect telephone calls and telegram fees. 

That doesn't sound so different from texts for which consumers are charged, and of course was written in an era before texts were invented (do we even have telegrams anymore?).  But would such texts conceal their true purpose, and if not, does that render that provision inapplicable?  (HT to Gina Calabrese). 

How the Fed's Disclosures Misled the Subprime Borrowers About Their Monthly Payments

by Jeff Sovern

Yesterday the Pittsburgh Post-Gazette ran a piece I wrote about how the Fed's TILA disclosures misled the subprime borrowers.  Because of space constraints, the Post- Gazette had to cut the piece; I've posted it below in its original form:

Only part of the story of how the Fed contributed to the economic crisis has been told.  The part that has not received attention involves the Fed's failure to enable subprime borrowers to tell what their monthly payments would be.  Obviously, borrowers who cannot predict their monthly payments cannot predict whether they will be able to make those payments,

The story starts more than forty years ago, when Congress passed the Truth in Lending Act (TILA).  TILA requires that key loan terms be boiled down to a single comprehensible page, so borrowers can make the right loan decisions.  Congress also directed the Federal Reserve to create rules to make that happen.

Fast-forward to the eighties, when adjustable-rate loans became common.  It is impossible to know at the time the borrower takes out such loans what future payments will be, because by definition with such loans payments change from time to time.  So regulators adopted a two-prong strategy. First, soon after the borrower applied for the loan, the lender would provide the borrower with some disclosures.  Later, at the closing, the borrower would see the final loan terms.  The problem for the many subprime borrowers who took out adjustable-rate loans is that the first of these disclosures was of only limited value, while the second was actually misleading.

Take the early disclosures.  The Fed's model form gives borrowers a historical example of how payments shift over time.  But the form notes that the rates it assumes may be different from the borrower's actual rates. That means borrowers cannot tell from the form what their payments will be.  In addition, the form is based not on the borrower's actual loan amount, but on a $10,000 loan.  Not many subprime loans were for $10,000.

The final loan disclosures are even worse.  To see why, imagine that you took out one common form of subprime loan, in which you received a low "teaser" rate for the first two years, after which the rate would adjust every six months, typically to a higher rate.  The Fed's arcane Commentary directs lenders to assume that interest rates at the time of the future adjustments will be whatever they were at the time of the loan closing.  So the TILA form might show a low monthly payment for the first two years--the teaser rate--followed by 28 years of a somewhat higher monthly payment which never changes again.  This is misleading in two ways.  First, if interest rates were generally low at the time of the closing but higher at the time of the adjustments after the two years expired, the actual payments could be much higher than the TILA form showed.  Second, while the TILA form might show that payments would be unchanged for 28 years, in fact they could change every six months, wreaking more budgetary havoc.  And unlike the early disclosures, this form did not indicate that the actual numbers might be different from those shown.  No wonder so many borrowers defaulted.

Perhaps some borrowers turned to the loan agreements to figure out what their payments would be.  But these contracts are even more bewildering, with references to LIBOR and change dates and long complicated clauses. Some agreements spell out in one place how the payments are determined, and then carry an "adjustable rate rider" with another formula for calculating the payments.

Maybe other borrowers turned to their mortgage brokers.  Now many loan originators are honest, but not all are, which may explain why one study found that the overwhelming majority of borrowers with adjustable loans in one part of Chicago thought their rates were fixed: according to the study the originators "neglected to mention that the terms for which the rate was 'fixed' was limited to 12 to 36 months."

What is the solution?  The Fed should not be in the consumer protection business.  It makes about as much sense for an agency tasked with managing monetary policy to protect consumers as it does for it to protect the environment.  Just as we have a separate Environmental Protection Agency, we need a separate Consumer Financial Protection Agency, something the House of Representatives has now voted for.  Tellingly, it was Congress, not the Fed, that last year changed the law to require lenders to tell borrowers what their highest monthly payments might be.  But Congress, preoccupied with other matters, cannot micro-manage consumer protection laws. Neither, apparently, can the Fed.

The Post-Gazette's version can be found here, under the headline "Adjustable mortgage a pig in a poke."  I've elaborated on this in my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers.  I plan to post more on this subject in the coming days. 

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.

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.

Colbert Explains

the financial crisis, foreclosures, securitization...

Carol Necole Brown Paper on Reverse Redlining Issues

Carol Necole Brown of North Carolina has written Intent and Empirics: Race to the Subprime.  Here's the abstract:

The United States’ history of racially discriminatory banking, housing, and property policies created a community of black Americans accustomed to exploitative financial services and vulnerable to victimization by subprime lenders. My thesis is that black borrowers are experiencing a new iteration of intentional housing discrimination in the twentieth and twenty-first centuries; lenders identified a vulnerable 'emerging market' of black homeowners and borrowers and knowingly targeted them to receive subprime or predatory loan products when equally situated white borrowers were given superior, prime mortgage products. This Article explores how disparate lending practices coupled with banking deregulation undermined the Congressional push for increased minority homeownership and widened the already burgeoning wealth divide. Millions of borrowers who accepted subprime loans between 1998 and 2006 already have or will lose their homes to foreclosure, resulting in a net loss in homeownership for nearly one million families. Blacks are disproportionately represented among the subprime victims, especially black women. The lending and financial services structure that caused this crisis is complicated by evidence of redlining and of steering blacks into subprime loans, all of which contributed to the present foreclosure crisis. This subprime dilemma merely adds new terminology to a long history of racial discrimination in housing in America. In the end, this Article argues that the search for an understanding of the cumulative events that facilitated the exploitation of blacks by subprime lenders illuminates the institutional and national impediments to reversing the present and future harm of the subprime crisis and to ensuring blacks equal access to one of the benefits of full citizenship - property. First, in Part II, I contend that the disparities in subprime lending experienced by black borrowers and especially by black women result from intentional reverse-redlining and steering by lending institutions, their loan officers, and brokers. Next, in Part III, I consider why blacks and black women are disproportionately victims of subprime mortgages and of predatory lending. Finally, Part IV concludes by discussing the after-effects of subprime and predatory lending and offers possible solutions for rethinking how blacks are to overcome this deeply profound experience with housing discrimination which I suggest made blacks prime subprime victims. It focuses on the property dilemma or rather the dilemma of the landless.

Obama Foreclosure Plan Still Falling Short

Treasury has issued its report on mortgage modifications under HAMP for December.  The total number of permanent HAMP mods rose from 31,000 at the end of November to 66,000 at the end of December.  In other words, HAMP is resulting in 33,000 permanent modifications per month.  A year ago, the industry was voluntarily and permanently modifying more than 100,000 mortgages per month.  In November and December, about 420,000 new foreclosures were started and about 170,000 foreclosure sales were completed.  HAMP is just not working.

 

Despite Treasury’s fanfare about its drive to convert temporary modifications to permanent modifications, the pace of conversion did not increase significantly in December.  Treasury tries to mask the sad reality by reporting only cumulative numbers each month, rather than giving a more honest report of month-by-month numbers, requiring those of us who care about what is actually happening to do some arithmetic to get at the truth.