Consumer Law & Policy Blog

Times Reports on Loan Fraud, Foreclosure Rescue Scams, Financial Advice, and More

Sunday's issue brought Robert J. Shiller's Economic View column, How About a Stimulus for Financial Advice?, suggesting that the government subsidize personal financial counseling and that if it had done so years ago, the housing bubble would have been less severe.  Along the way Shiller cites some recent papers on how many consumers are financially unsophisticated and how lenders take advantage of such consumers. Bob Tedeschi's Mortgages Column the same day, Loan Fraud Seen on the Rise, discussed a report by the Mortgage Asset Research Institute that says mortgage fraud has risen even while mortgage originations have fallen.  An excerpt:

The report, released in early December, found that 36 percent of the fraudulent mortgage activity involved loan professionals’ misrepresenting borrowers’ incomes, while another 20 percent involved misrepresentations of borrowers’ employment.

* * *

Jennifer Butts, the Research Institute’s director of operations, said the survey results surprised her. Some industry executives had believed that the more unscrupulous mortgage brokers and loan officers had fled the industry or lost their jobs in the recent downturn, once lending standards tightened and loan volumes dropped.

“But we have people in the industry who didn’t get weeded out,” Ms. Butts said. “And now they have fewer transactions on which to make a profit, so they’re just a little more desperate.”

Last Thursday, January 15, the Times published Swindlers Find Growing Market in Foreclosures, about foreclosure rescue schemes.  An excerpt:

Carol McClelland, 46, fell into foreclosure on her Chicago home when she lost her job as a waitress in two restaurants. She received a call from a company called Foreclosure Solutions Experts, promising to stop the foreclosure and lower her mortgage payments to around $550 a month, from $1,056, Miss McClelland said.

“She showed me other clients’ files, and they were paying $650 a month,” she said. The charge for the service was $1,300, which Miss McClelland paid in installments, borrowing the money from friends and relatives.

When the loan servicer notified her that the house was still in foreclosure, Miss McClelland said, the representative from Foreclosure Solutions Experts told her that the matter had been taken care of.

“She told me everything was all settled; I don’t have to worry about anything,” Miss McClelland said. “All I had to worry about was getting the rest of the money to her.”

According to a suit brought by the Illinois attorney general in November, Foreclosure Solutions Experts does little or nothing to help consumers, and when it does take action, the result is often a repayment plan unsuited to the borrower’s ability to pay. The suit alleges that the company never contacted Miss McClelland’s lender, HSBC.

On January 11, The Times ran a column by Andrew Martin, Inspecting Our Food: How Many Cooks?, arguing that it doesn't make sense to divide responsibility for food inspections between the Department of Agriculture and the FDA and discussing other problems in the food inspection system.   Here is a report from January 9 about Citibank's willingness to support the stripdown amendment to the bankruptcy law. 

 

 

Nudging Mortgage Borrowers

Now that the Fed is moving closer to a libertarian paternalism Nudge-like approach to credit card statements (we blogged about it here; and there's more on the Nudge web site about it here), perhaps it will consider using a similar approach with closed end lending disclosure statements.  For example, suppose after stating the monthly payments, and especially the maximum payments under an adjustable mortgage, what would happen if the disclosure statement explicitly asked "Are you sure you can make these payments on time?  If you can't, you may lost your home."  Or is that going from a nudge to an annoying nag--and if so, would that be bad?  The late payment fee is already required to be in the "Federal Box" set of disclosures, and so won't be far away from the statement of when payments are due, but the regulations could be amended to require that it be right next to the notice of when payments are due, just as with the credit card statement.  It seems pretty clear that the existing closed end disclosures did not adequately warn subprime borrowers about their payment obligations so something more is called for.  Would a stronger nudge have kept some of the borrowers now being foreclosed upon from taking out their loans in the first place?

Times Article About WaMu's Striking Lending Decisions

The Times has an amazing article today, By Saying Yes, WaMu Built Empire on Shaky Loans, about Washington Mutual's loan decision-making process.  The article describes how one now-jailed supervisor kept drug paraphernalia on his desk, claims by borrowers were rarely confirmed--no matter how outrageous, and loans were made to many unqualified borrowers.  Just to give the flavor, here are some excerpts, but the article has a lot more of this and puts it in a broader context:

* * * The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

* * *

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

* * *

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Times Examines How the Bush Administration Contributed to the Subprime Crisis

Last Sunday, December 21, the Times published White House Philosophy Stoked Mortgage Bonfire, a lengthy study of how the Bush Administration contributed to the subprime bubble.  The article describes how the Bush administration policies of promoting both free enterprise and home ownership led to promoting home ownership by those who could not pay for those homes.  The entire article is worth reading, but here is an excerpt:

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

Foreclosures Ease a Bit

By Alan White

Two new foreclosure reports are out today, one from HOPE Now and one from the federal bank regulators (OCC and OTS).  November foreclosure filings are down in a trend that started in August, and modification numbers overall are increasing.  The number of foreclosure sales also eased off a bit in November, and we will probably end calendar 2008 with a little less than one million completed foreclosure sales.  The combined effect of various state (like Florida) and lender-initiated moratoria (like Citi and Marshall & Ilsley) and the growth in modification agreements seems to be having an impact. 

At the same time, the OCC/OTS report cautions that mortgages modified in the first quarter of this year were redefaulting at high rates.  After three months, 19% were more than 60 days past due, and that rate grew to 37% after six months.  Although the vast majority of mortgages are securitized (about 88% in the OCC/OTS sample) the regulators did find that redefault rates were substantially lower for mortgages held by lenders in their own portfolios.  This could be due to the lenders' greater flexibility to make aggressive modifications, such as reducing principal and forgiving past-due interest rather than capitalizing those amounts.  This hypothesis is consistent with data from Credit Suisse and Merrill Lynch showing that modifications that reduce interest, principal and payments have better performance than modifications that capitalize unpaid amounts and do not reduce interest.  The increasing number of modifications still consists mostly of the wrong kind.

In sum, modifications and moratoria are slowing down foreclosures but are not getting homeowners into sustainable debt repayment, yet.  Many of the failed modifications from 2008 will be back in 2009; the question is whether we will have learned enough, and broken through the legal and other obstacles, in order to start the process of deleveraging homeowners in earnest.   

New Jersey passes Foreclosure Relief Legislation

The New Jersey General Assembly passed legislation on Monday that provides homeowners with a six-month hold on foreclosure action while they seek a workout, and requires mortgage holders to maintain foreclosed properties.  The legislation also appropriates funds for non-amortizing second lien loans to homeowners.  The assistance loans are conditioned on the current lender modifying the existing mortgage to make the payment affordable and aligning the mortgage amount with the property's value.  Governor Corzine is expected to sign the bill into law today.

New Jersey joins New York and California in legislative efforts to slow the foreclosure process and encourage workouts, as well as other jurisdictions that are seeking to hold lenders responsible for the condition of foreclosed homes.  The restructuring loan program, to my knowledge, is unique, and may offer an interesting model to other states considering their options, while awaiting action at the federal level.

Could Truth in Lending Have Saved the World?

I have a theory: had Truth in Lending ("TILA") functioned better, many borrowers would have understood their payment obligations well enough not to take out the loans on which they later defaulted, the foreclosure fiasco would never have happened (or at least would have been less severe), and we would not now be in the midst of the Lesser Depression (though the economy would still be in bad shape).  TILA may help those who learn well by reading documents, but doesn't do much for those who don't.  So I wrote a piece which ran in today's Pittsburgh Post-Gazette, which suggests revisions to TILA to require applicants for credit to watch a video about the pain of foreclosure, work through a budget that takes into account their loan payments, and meet with a credit counselor to talk them through the process.  The essay, which appears below, can also be found at http://www.post-gazette.com/pg/08351/935371-432.stm. The Post-Gazette was kind enough to mention this blog.

Private Sector: 'Truth in Lending' needs to be updated

Tuesday, December 16, 2008

By Jeff Sovern

Imagine that a few years ago, at a time when you were renting your home, a fast-talking lender had approached you and explained how you could afford to buy your first house. The monthly payments seemed affordable.

At the closing, you were swamped with forms, dutifully signing where you were told. Recently you discovered that one of the forms you didn't read at the closing explained how your monthly payments would rise three years after the closing. Now that those years have passed, you can't afford the payments. You have defaulted, and now face the prospect of losing your home.

Now suppose that the process had been completely different. Well before signing the papers, you had to watch a video warning you about the pain foreclosure brings. You were required to work through a budget that took into account the increase in your mortgage payments and helped you understand how much money you would have to meet your other expenses after you made your mortgage payments. A credit counselor explained the consequences of taking out the loan and countered the influence of the fast-talking lender. Might you have decided against taking out the loan? And if millions of other borrowers had had a similar experience, might we now not be in the crisis we are in?

Ideally, policy-makers will adopt new rules that would cause lenders and borrowers to agree only to those loans that will be repaid on time, and indeed the federal government is requiring lenders to consider the ability of borrowers to repay. But that may not be enough. Presumably, those holding the loans now in default also thought that borrowers would be able to make their payments. Policy-makers would do well to remember that the people now losing their homes had believed they would be better off by incurring the loans. Accordingly, policy-makers should also pursue rules that would help consumers understand the risks of such borrowing.

Our current system for informing borrowers of the risks they are taking is based on the Truth in Lending Act ("TILA"), enacted in 1968. The TILA disclosures obviously were of little aid to those caught in the mortgage crisis. The reasons may be many: Some consumers may not learn well from documents, while others may have been confused by the mountain of paperwork. Still others may have been deceived; thus, a predatory lender at a 1998 congressional hearing testified that he "can get around any figure on any loan sheet."

Policy-makers have responded by tinkering with the timing and content of some disclosures. But changing the written disclosures smacks of homeopathic medicine: the cure for written disclosures that failed is more disclosure. We know that some people learn well by reading, but that others learn better in other ways, and we should not ignore those other ways.

Instead, we should update our 40-year-old system for helping borrowers understand what they are doing. Policy-makers should make the risks of default clearer to borrowers by using modern technology like videos and computers. Instead of expecting borrowers to understand their payment obligations from passive reading, Congress should use methods that will force borrowers to understand the consequences of their actions. To be sure, these measures will increase the cost of borrowing, but they are far less costly than bailouts-and doesn't it make sense for consumers to understand the ramifications of what may be the largest payment obligation they ever assume?

While it may seem that memories of the current crisis would make such measures unnecessary, we cannot count on that. It would be just as much a mistake to assume that the current crisis will prevent unwise borrowing as it would have been to expect that the 1987 stock market crash would prevent later stock market bubbles-which of course it did not do. In 10 years or so, today's children will consider taking out mortgages. They deserve the tools to make better choices than their parents did.

Housing Counselors Report – Needless Foreclosures Continue Apace

The most recent housing counselor survey by the California Reinvestment Coalition reveals the continuing frustration homeowners face as they try to actualize the promises of the mortgage servicing industry.  Counselors report, consistent with my research, that servicers are not willing to reduce principal, and tend to favor workouts that increase the borrower’s monthly payment rather than reducing it.  Response times are nowhere near the 45-day guideline adopted by HOPE NOW.  Foreclosures are proceeding while frustrated borrowers and counselors make vain efforts to communicate with loss mitigation staff to craft reasonable long-term solutions.  Servicers still prefer temporary adjustments to payments and interest rates than permanent loan modifications. 

In the absence of clearer and stronger leadership from FHFA, Treasury and FDIC, servicers are still in denial, acting as if the downturn is a problem of a few months’ duration, and that the mortgages made in 2005 and 2006 can be repaid eventually, if we just keep kicking the can down the road.  Here are some counselor comments from the report:

•    “Right now with our current pipeline of foreclosure clients, we are waiting for responses from servicers, which are now at the 4th or 5th month, even with constant follow-up.”

•    “Repayment plans most often do not work because they typically increase the monthly payment; they seem to be done hastily, just so the servicer can report that they have ‘done x # of modifications.’ Foreclosure is the most common outcome, followed by modifications that lower the interest rate. We have only seen one principal reduction on a first mortgage and that just happened at the end of September ‘08.”

•    “LOL! God only knows what these servicers/investors are waiting for! The greater depression of 2008? They are still digging their heels in, but the recent movement by the FDIC-owned IndyMac, Countrywide and FHA H4H is a huge step in the right direction. Let's see if other lenders will follow suit and how many H4H actually get originated...”

•    “Writing down the principal would help all clients stay in the home and would slow down the amount of foreclosures currently taking place. This would be a good step towards halting the high number of foreclosures occurring everyday. It is a much-needed remedy. These homes’ prices should have never reached these levels and because of greed, and deregulation, it created an environment in which we find ourselves today.”

•    “We have noticed write-downs only when a lawsuit is filed.”

•    “Most of our clients have some income and can sustain a mortgage if they reduce principal.”

To hear from frustrated California homeowners themselves, you can watch this video.

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. 

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.