Consumer Law & Policy Blog

Times Reports on Responses to the Subprime Crisis, Student Loan Issues, Unauthorized Bank Account Transfers, and More

Bob Tedeschi's Mortgages column in today's Times, "Shying Away From N.Y. Loans," reports on a consequence of the new New York subprime law: making it even harder for subprime borrowers to obtain loans.  An excerpt:

Among other things, borrowers with high-cost loans can block being foreclosed on if they can prove they should not have been offered the loans in the first place.

Fannie Mae and Freddie Mac, the two government-sponsored companies that back most of the nation’s mortgages, have said that as of September they would not buy subprime loans from New York because the new law exposes them to too much risk and cost. “We’re simply not in position to monitor and enforce compliance with all these requirements,” said Brad German, a Freddie Mac spokesman.

Freddie Mac and Fannie Mae back few subprime loans anyway, mortgage industry executives and regulators said, but the announcement left mortgage brokers wondering whether any lenders would touch such mortgages — even community banks that tend to keep loans on their books, rather than sell them to Fannie or Freddie.

On the other hand, Ginnie Mae said it would continue to support such loans. 

Yesterday's Times included "Counseling Students on Loans," about the Education Department requirement for counseling of students when they first apply for a federal loan and what such counseling should entail.  It only we'd had a similar requirement for subprime lending.  It also contained an interview with Asheesh Advani, the president and CEO of Virgin Money, in "Making a Business of Family Loans."  Virgin has originated $350 million in loans since 2001--among family, friends, and business associates.  If a parent, say, wants to lend money to a child as a mortgage, Virgin, for a fee, sets up and administers the loan.  They do the same thing with reverse mortgages so that families can keep the home within the family and avoid paying bank fees.

Friday brought "New York Plans to Sue Student Loan Company."    An excerpt:

The attorney general of New York is preparing a lawsuit against a student loan company, Goal Financial, charging that the lender broke state and federal laws by luring borrowers with iPods, cash and other gifts and that it misled consumers about loan terms and benefits, The New York Times’s Jonathan D. Glater reported, citing a senior official in the office.

Last Saturday, August 30, the Times published "The Bank Account That Sprang a Leak," about $300,000 in unauthorized withdrawals from the JPMorgan Chase elite private banking operation account of Wall Street activist investor Guy Wyser-Pratte.  An accompanying article, "Making Automated Bill Payments is a Cinch (Wait, Not So Fast)," discusses the downside of such automated payments.  An excerpt about the frequency of errors in such payments:

* * * Nacha — the Electronic Payments Association, a nonprofit association that oversees the network that automated payments travel on, says the error rate is 38 for every 100,000 bill payments. This figure counts mistakes that banks report but doesn’t include problems that consumers solve directly through the billers.

And another excerpt about identity theft risks:

Are you risking identity theft or other problems by giving so many companies access to your credit card numbers or bank accounts each month? Some people still think so.

But Bruce Cundiff, director of payments research and consulting for Javelin Strategy and Research, says the nonautomated approach is more problematic. If you’re paying bills one by one each month via your bank’s Web site, you need to worry about whether anyone has installed software on your computer that would capture user names and passwords. And not having paper statements and checks floating around that could be stolen from the mail is a plus as well.

On August 26, the Times reported on another solution to the subprime crisis in "Hoping to Prevent Decay, Communities Are Becoming Home Buyers."  August 24 included a depressing article, Ruins of an American Dream," about Merced, California, which has one of the highest foreclosure rates in the country.  The article explores some of the consequences of the crisis:

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

* * *

Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July.

* * *

Another article published the same day, "That Student Loan, So Hard to Shake," covers some of the consequences of rules making it difficult to discharge student loans in bankruptcy.   Some excerpts:

Without a court order, lenders — or, more likely, collection agents — can garnish up to 15 percent of wages of borrowers who have defaulted on federally guaranteed loans, said Deanne Loonin, a lawyer at the National Consumer Law Center in Boston. Lenders and collection agents can also intercept tax refunds, Social Security payments and even this year’s stimulus checks from the government.

“It’s really unbelievable,” Ms. Loonin said.

DEBTORS can shed credit card debt and other unsecured obligations through bankruptcy but can get out of student loans only if they can show “undue hardship.” That term is not defined by the bankruptcy code and, lawyers said, judges often take a narrow view of its meaning.

* * *

There are some compelling reasons to make it difficult for student borrowers to get out of their debts. Lenders have no collateral, like a house or car, to seize. That makes them riskier.

* * *

“At the time that people graduate from school, almost everybody is technically eligible for bankruptcy because they have debts that exceed their assets,” said Shelly Repp, general counsel at the National Council for Higher Education Loan Programs, whose members include lenders, collection agencies and guarantors. “Why would anyone lend you money if you had the option to walk away?”

But even Sallie Mae, a major source of private loans, is not opposed to modifying the bankruptcy code’s treatment of them, said Mr. Joyce, perhaps by making it possible for students to dump debts in bankruptcy after trying for a specified number of years to pay them off.

The Bail Out of Freddie and Fannie

Following up on yesterday's Post, here's a detailed Washington Post article on the planned federal government bail out of Freddie Mac and Fannie Mae. The plan includes dismissal of the companies' top executives and their board members. Shareholders will be wiped out. Here's the most recent New York Times story on the subject.

Foreclosure Crisis - Bad and Getting Worse

By Alan White

Foreclosures in the United States have reached their highest level since the Great Depression. One of every eleven mortgages is now in default or foreclosure. That's more than five million American homes in trouble. Just in April, May and June, 600,000 foreclosures were started, and by June 30, 1.7 million mortgages were in foreclosure. Subprime adjustable-rate mortgages are a catastrophe: new foreclosures in that category are running at nearly 30% annually. Friday's MBA press release with the 2nd quarter numbers doesn't even disclose the total inventory of subprime ARMs in foreclosure. Delinquencies and foreclosures for "prime" adjustable-rate mortgages, which include option ARMs and other alt-A products, are rapidly deteriorating.

The Mortgage Bankers Association survey does not report on completed foreclosure sales, just foreclosure starts and total foreclosures in process. Completed foreclosure numbers are available from the HOPE NOW data releases. In 2007 they estimated there were roughly 1.5 million foreclosures started and 500,000 foreclosure sales completed. (The remaining million are on payment plans, caught up, or are working their way through the foreclosure process.) In the first half of 2008 there were 450,000 completed foreclosure sales, i.e. nearly as many in six months as in all of last year.

If you think of the foreclosure crisis as a hurricane, the eye has not hit the coast yet. We are now getting the hurricane-force winds of the first bands, i.e. the appallingly-underwritten subprime ARMs that defaulted before their rate resets. The full effect of this year's resets on subprime ARMs will come in the next few months, while 2009 will feature the breakdown of the option ARMs, with their resets that typically double the monthly payment. The continuing decline in home prices, as well as the lack of available refinancing options, mean that all the loans that are now in the delinquency categories will continue their way through the foreclosure process, adding to the numbers.

The imminent nationalization of Fannie Mae and Freddie Mac (NYTimes story) while perhaps restoring some confidence in the short-run, cannot resolve the underlying debt crisis. The GSE's are being hit by both the decline in home values and the losses on subprime mortgage-backed securities they hold. Without government intervention to stop the tide of foreclosures and their attendant loss and waste, taxpayers will have to absorb continuing losses after the GSE shareholders are wiped out. As the taxpayers become the mortgage investors of last resort, it seems all the more reasonable for taxpayers to demand action to broadly restructure existing mortgages to align them with home values, instead of allowing foreclosures at 50% loss rates to continue.

A note on numbers - the MBA reports 4 million mortgages in default or foreclosure, but that number is from their survey sample which covers 80% of all mortgages (45 out of 60 million residential mortgages). I extrapolate MBA's numbers to the entire mortgage market.

Government to Seize Fannie Mae and Freddie Mac?

The New York Times just reported that senior officials from the Bush Administration and the Fed say the government is preparing a plan to seize Fannie Mae and Freddie Mac and place them in a conservatorship. 

New Study on Mortgage Modifications

By Alan White

I have just posted a paper on SSRN reporting on loan-level mortgage modification data from subprime mortgage servicer monthly reports. The gist is that voluntary mortgage modifications are not reducing principal debt, and are in fact increasing it, and that many modifications are not even reducing monthly payments. In addition, whether a homeowner gets a modification, and what kind they get, depends a great deal on who their servicer is.

The data in the report covers about 100,000 subprime mortgages, about 4,000 of which were modified in the last twelve months. The most common modifications are interest rate reductions to reduce the payment, interest rate freezes on ARMs, and recasting of arrears and reamortization, which increases principal debt and monthly payments.

From July 2007 to June 2008 losses on foreclosure sales have steadily increased, month after month, while the number of mortgages paid in full through refinancing and sale have dwindled to the point that foreclosure sales exceed the number of prepayments. The combined effect of all this is that subprime mortgages, which used to last only 3 to 5 years, will now take many more years before they are foreclosed or paid off, leaving homeowners with debt in excess of home values and payments in excess of their repayment ability, and needlessly prolonging the crisis.

The abstract is in the continuation of the post.

Times Reports on Home Equity Loans, Countrywide Litigation, Subprime Borrowers, and More

Another roundup of article in recent issues of the Times: Friday's Times brought another important installment in "The Debt Trap" series, this one headlined "Home Equity Frenzy Was a Bank Ad Come True," about how banks reframed second mortgages--once seen as a product for those experiencing dire financial problems--as home equity loans.  These loans were presented as ways to use the home as a source of funds for "living richly," and thereby vastly increased consumer indebtedness and reduced the amount of equity Americans have in their homes. 

Today's Times includes Bob Tedeschi's Mortgages column, "Finding Cash in a Home," about an alternative to reverse mortgages which cuts down on the normally high closing costs for reverse mortgages--but because the lender takes out a life insurance policy on the owner, only owners eligible for life insurance can take advantage of it.  In an August 3 column titled "Subprime Loans' Wide Reach," Tedeschi reported on a study by Compliance Technologies that contradicted standard wisdom about subprime loans:

WHILE subprime loans deeply penetrated low-income and minority groups, a new study suggests that more upper-income borrowers and more whites took out such loans than any other groups.

* * * [R]oughly 56 percent [of subprime loans originated in 2006] went to non-Hispanic whites. Affluent borrowers, those with annual income at least 120 percent of their given area’s median income, meanwhile, took out more than 39 percent of the loans.

That seems like a rather low definition of affluent.

Yesterday's Times reported "Judge Rejects Countrywide Settlement" about how a bankruptcy judge rejected the settlement between Countrywide and nearly 300 of its borrowers, saying he wasn't convinced it was fair to the borrowers.  The complaint charges Countrywide with making inaccurate claims, and demanding improper fees, among other things.  Meanwhile, back on August 7, the Times noted that "Connecticut Joins Other States in Suing Countrywide."

On Wednesday, the Times published a short but ominous-sounding piece, "Some New York Loans Shunned," at the tail of a longer article.  Here's an excerpt:

Freddie Mac said Tuesday that it would stop buying subprime loans issued in New York State as a new law takes effect that holds investors accountable for mortgage fraud.

Freddie will not buy loans dated on or after Sept. 1 that meet the state’s subprime definition, the government-chartered company said in a lender bulletin on its Web site. Gov. David A. Paterson of New York signed new foreclosure and lending laws last week that tighten legal protections for borrowers.

The legislation holds mortgage buyers like Freddie liable in ways that “we have no way of monitoring and preventing,” Brad German, a company spokesman, said.

It's not clear how many such loans would be made even if Freddie Mac was willing to buy them: the state law will almost certainly be preempted as to federal lenders, and in the past, lenders have tended to avoid loans labeled as high-interest loans, thus making mini-HOEPA laws effectively usury statutes. 

On Monday the Times ran "Web Privacy on the Radar in Congress," about behavioral marketing.  An excerpt:

On Aug. 1, four top members of the House Committee on Energy and Commerce sent letters ordering 33 cable and Internet companies, including Google, Microsoft, Comcast and Cox Communications, to provide details about their privacy standards. That followed House and Senate hearings last month about privacy and behavioral targeting, in which advertisers show ads to consumers based on their travels around the Web. * * *

As advertisers become more sophisticated about behavioral targeting, and online privacy standards become increasingly varied, regulators and privacy advocates are becoming concerned. A few companies have taken precautionary measures to try to fend off criticism; in the last few days, for instance, both Yahoo and Google have made it easier for people to opt out of targeted ads on their sites. But that may not be enough.

“Some type of omnibus electronic privacy legislation is needed,” said Representative Edward J. Markey, Democrat of Massachusetts, chairman of the House Subcommittee on Telecommunications and the Internet, “regardless of the particular technologies or companies involved.”

Back on August 6, the Times ran an editorial,"Listen to the 56,000," about the response to the Fed's call for comments on its proposed rules on credit cards.  Excerpts:

This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.

For too long, members of Congress have shirked the responsibility to ensure fair lending to credit card customers and have listened more intently to the banking lobbyists. A low point came in 2005, when Congress passed a bankruptcy law that was badly tilted against borrowers. * * *

Ronald Mann, a Columbia Law School professor, has argued that the law creates a “sweat box of credit card debt.” 

The editorial also noted that the House Financial Services Committee had voted for a cardholder's bill of rights, but that banks oppose it.

Moving right along, here is an article about deceptive advertising of "free" credit reports that end up costing money.  And finally, an article that may scare some, "If You Run a Red Light, Will Everyone Know?" reports on a web site, www.CriminalSearches.com that enables people to conduct free searches to see who has a criminal record.

Amendments to TILA

Most of our posts on the federal housing act signed into law last month, which can be found at Pub. L No. 110-289, 122 Stat. 2654, have focused on the Hope for Homeowners Act of 2008.  But the statute also contained other consumer law provisions aimed at the subprime mortgage meltdown.  It included the Mortgage Disclosure Improvement Act of 2008, which amended 128(b)(2) [§ 1638] and 130(a) [§ 1640] of TILA.  When the amendments become effective, which might not be for thirty months, they wlll change the disclosures for adjustable rate loans.  Lenders making such loans will have to provide examples of how shifts in interest rates would affect the monthly payments; one such example must present the highest possible payment the consumer would be required to make. Before the Fed publishes rules implementing the new provision, it is to conduct consumer testing to determine the appropriate format for providing the disclosures “so that such disclosures can be easily understood, including the fact that the initial regular payments are for a specific time period that will end on a certain date, that payments will adjust afterwards potentially to a higher amount, and that there is no guarantee that the borrower will be able to refinance to a lower amount.”  Other amendments, which become effective next year, provide that good faith estimates of disclosures are to be made at least seven business days before consummation of the loan, except when the consumer is experiencing a bona fide personal financial emergency. Congress also increased the amount of statutory damages for TILA violations in closed end credit loans secured by real property.  The housing statute also provided for registration of mortgage originators in the S.A.F.E. Mortgage Licensing Act of 2008.

Foreclosures Affect Renters Not Just Homeowners

We tend to think only of homeowners when we think of foreclosures. But what about people who rent homes that go into foreclosure? This Washington Post article discusses the issue.

An Argument Against Legislation to Help Those Facing Foreclosure?

Each year the Business Lawyer provides a valuable service by publishing a survey on consumer financial services law.  In the introduction to this year's survey, Donald C. Lampe, Fred H. Miller, and Alvin C. Harrell, Introduction to the 2008 Annual Survey of Consumer Financial Services Law, 63 Bus. Lawyer 561, 568 (2008) (footnotes omitted): write as follows:

Solutions designed to prevent future problems by reducing the availability of credit to marginal borrowers may (in addition to affecting adversely those future borrowers) worsen the current plight of existing marginal borrowers who need to refinance their homes.  Direct relief for troubled borrowers, e.g., a foreclosure moratorium or expanded bankruptcy relief, may have the same effect.  To some extent this has already happened.  The tightening of mortgage law requirements and regulatory restrictions over the past few years in response to allegations of predatory lending have probably contributed to the dramatic increase in foreclosures by making it more difficult for troubled borrowers to refinance.  A significant further tightening of these restraints—we have heard the further tightening referred to as “more robust regulation”—may worsen the problem and increase the number of consumers facing foreclosure as a result.

My comment:  It is fair to say that measures that make it harder for lenders to collect when borrowers default are likely to increase the cost of future borrowing or even make it impossible for some to borrow in the future (which may or may not be a good thing), and that's an argument against such measures.  But I'm skeptical that adoption of such measures will make life harder for those already facing financial difficulties.  My understanding is that credit for those in such circumstances has already dried up and indeed, many in better circumstances are reportedly facing problems obtaining credit.  Consequently, legal restraints on unwise lending, limits on foreclosures and expansions of bankruptcy relief are unlikely to worsen the short-term problems of those in financial distress.  Such rule changes may be unwise for different reasons, but not because they will make the lives of those facing foreclosure worse in the short-term.

Times Reports on Housing Bill, Identity Theft, and Student Loans

Here is the Time's report in today's edition on the Senate passage of the housing bill; it now goes to the President for signature.  On Friday the Times ran "A Housing Bill That Has Something for Nearly Everyone" which summarized the features of the bill.  An excerpt from the part of the article about the foreclosure issues:

Part of the bill is devoted to the creation of a program that may allow some people to cancel their old mortgage loans and replace them with new fixed-rate loans lasting at least 30 years. The amount of the new loans would be no more than 90 percent of what their property is actually worth now.

So who is eligible? You need to have originated your troubled loan or loans on or before Jan. 1, 2008. The loans in question must be on your primary residence. Vacation homes and investment properties are ineligible. You will also need to verify your income, which many borrowers did not have to do in recent years.

Also, as of March 1, 2008, your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and insurance) has to have been at least 31 percent of your monthly household income. So if you were earning $5,000 a month and had housing payments of $3,000, you are eligible. But if you had payments of just $1,400, you would not be, presumably because that loan is affordable given the size of your income.

Lenders, however, are not required to give you a better deal under the new law, even if you do meet the qualifications. They may not be willing to negotiate unless they think you are truly on the cusp of foreclosure.

The bill contains other restrictions.  Some critics think that few borrowers will end up taking advantage of it.  Other aspects of the bill change the rules for reverse mortgages, redefine jumbo loans for purchases by Fannie Mae and Freddie Mac, and change tax rules.

Bob Tedeschi's Mortgages column in today's Times reports that "Thieves Tap Into Home Equity" about a report from the Identity Theft Assistance Center that identity thieves are targeting consumers with good credit records "because such people often have substantial untapped home equity."  The article also notes the effect of the subprime crisis on identity theft:

Now that lenders have vastly tightened their lending criteria, criminals who specialize in mortgage fraud have little choice but to move upstream and seek out victims with good credit.

A particularly troubling article yesterday titled "How Shopping Around Can Cost You" reports on how students shopping around for student loans can end up paying higher interest rates. That's because when student apply to different student loan companies, the companies obtain the students' credit reports, and the repeated inquiries can lower credit scores.  Fair Isaac does not drop credit scores when consumers shop around, and therefore trigger multiple inquiries, for mortgages and car loans, but Fair Isaac does not have the same arrangement for student loan applicants.   Fair Isaac doubts that the repeated inquiries actually damage credit scores.  Personally, I'm constantly amazed at how little regulation we have of credit scores.