Consumer Law & Policy Blog

Becker and Posner on the Suprime Mortgage Meltdown

by Jeff Sovern

The Becker-Posner Blog, written by Law and Economics Guru Richard Posner and the Nobel Prize-winning economist Gary Becker, always offers interesting commentary.  In December they took on the suprime mortgage crisis (you can find their posts here, though you have to scroll down a bit).  The posts are worth reading in full, but here are some excerpts.  Becker offers this assessment about the Fed's proposal to prevent recurrences of the crisis:

Given the low interest rate lending atmosphere of the past few years, it is highly unlikely that borrowers would have turned down the mortgages they received if they had much better information about terms, or that lenders would have been more reluctant to originate or hold these mortgage assets if they had better information about the credit and other circumstances of borrowers. This is why I doubt that the rules proposed * * * by the Federal Reserve to require lenders to get more information about borrowers, and to provide more information to borrowers about the terms of mortgage loans, would have been effective in warding off this crisis, or will be effective in preventing future crises.

I'm not sure what the basis for his assumptions is, but it does make you think.  He also comments:

* * * it is ironic that only a few years ago, banks were being investigated for "redlining"; that is, for avoiding lending to blacks and other residents of poor neighborhoods. The Fair Housing Act of 1968 prohibits discrimination in lending, and The Community Reinvestment Act of 1977 requires banks to use the same lending criteria in all communities, regardless of the living standards of residents. As a result of the present crisis, however, banks and other lenders are being criticized for equal opportunity lenient lending to all, including black residents of depressed neighborhoods.

That isn't precisely how I interpret the CRA, and I would have mentioned ECOA's prohibition on discrimination in lending, and my own understanding of the criticism for lenders is not that they provided equal opportunity lending to all, but that they made some loans on terms unsuited to their borrowers, but perhaps he's seen some criticism that I haven't.  In any event, the perspective is interesting.  Here's an excerpt from Posner's post:

It has been argued that the people who took out subprime mortgages with adjustable interest rates did not understand the risks they were assuming, and that the banks that bought mortgage-backed securities did not understand the risks they were assuming. I am skeptical. Suppose you have a low income, you'd like to own a house, and a mortgage broker offers to arrange a mortgage that will cover 100 percent of the price of the house. What do you have to lose by accepting such a deal? Since you haven't put up any capital, you have no capital to lose if you lose the house because you cannot make your monthly mortgage payments. As for the banks, they rode the bubble for too long; but, to repeat, had they got out too early, they would have left a lot of money on the table.

If there's any evidence floating around that borrowers did understand the risks they were assuming, I'd love to hear it. 

Rent to Own in the News

From time to time, articles appear in the media bemoaning the high cost of rent to own transactions.  Here is another, from yesterday's Times.  This one is a bit unusual in that it contains a suggestion that placing rent-to-own stores in neighborhoods largely poplulated by people of color may violate the ECOA.  Some excerpts from the article about the prices:

* * *  40-inch Bravia [TV], with payments of $47.51 a week. In 117 weeks, the customer would own the set outright, for $5,558. * * *

* * *

* * * They wanted $4,000 for a Sony laptop,” Ms. Navarro said. “I could pay $1,500 honest cash and get it.”

Attention homeowners: your lender can help you avoid foreclosure

According to a Freddie Mac study, 57% of homeowners are unaware of the workout options that could help them avoid foreclosure. And this is an improvement, up from 61% in 2005. Will the lender actually work something out? It's worth a try, and lenders do know that allowing a house to go into foreclosure is bad for everyone, lenders included.

[via Consumerist]

Edit: Phuong Cat Lee from Consumer Smarts linked to a number of helpful resources for consumers looking to get help from their lenders.

P2P Lending

Check out this article about P2P (person-to-person) lending in today's Washington Post.

Social Security Moving to Debit Cards

Over at Credit Slips, Adam Levitin has this excellent post on the Social Security Administration's decision to begin to distribute some social security benefits in the form of debit cards rather than by traditional check. The move has the potential to save recipients money, but it also has the potential to hurt recipients if the private entities that issue the cards (or the merchants that accept them) charge fees.

Kurt Eggert on Abuses by Mortgage Servicers

Kurt Eggert's article "Limiting Abuse and Opportunism by Mortgage Servicers" in 15 Housing Policy Debate No. 3 (2007) can be found at http://ssrn.com/abstract=992095.  Here's the abstract:

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

The causes of such practices and the market forces that can rein them in are discussed. A case study of one mortgage servicer describes its unfair treatment of borrowers and the reforms imposed by federal regulators and other market participants. Both regulatory agencies and rating agencies appear to have increased their scrutiny of servicers' behavior, and states have passed new legislation to limit abuse. This article concludes with a discussion of proposals for further reform should these steps prove inadequate.

Trying to Understand the Mortgage Meltdown

by Jeff Sovern

As a teacher of consumer law, and the co-author of a consumer law casebook, I've been trying to figure out what to do about course coverage of the subprime mortgage meltdown.  Our casebook includes a chapter on predatory lending, and some discussion of subprime lending, but so much has happened since the book went to press, and even since we issued our supplement last summer, that perhaps more is called for.  Just organizing the problem is daunting.  For purposes of pedagogy, it seems helpful to divide affected consumers into three classes (discussion of the other victims--investors and lenders--is probably beyond the scope of a basic consumer law course).  The classes are: (1) borrowers who have already defaulted (and possibly been foreclosed upon); (2) existing borrowers who are likely to default when their interest rates rise; and (3) future subprime borrowers.  The Bush mortgage plan (see here) is largely addressed to the second group.  The bills pending in Congress (see here and here) seem chiefly focused on the third group.  Depending on their particular situations, members of all three groups can take advantage of existing laws (which are already covered in the casebook), such as common law fraud, UDAP statutes, TILA, HOEPA, ECOA, FDCPA. the unconscionability doctrine, and, to the extent that they're not preempted, state predatory lending statutes and usury laws.  Does that sound right?  Am I missing some new theory of liability or something else?

More Important Information on The Subprime Mortgage Deal - - And A Snafu In Announcing It

Several CL&P bloggers have been posting about the deal between the White House and major mortgage lenders and servicers that purports to provide some relief to some homeowners facing foreclosure in the subprime mortgage meltdown. If you are following the issue, you should check out the following:

First, how about reading the the actual deal?! As you will see, it's long and complex -- the executive summary is itself 5 dense pages long.

Second, check out three posts over at Credit Slips, where Elizabeth Warren and Bob Lawless argue that the deal is essentially worthless: Slick Deal On Subprimes; Show Us The Fine Print!; The Sandbag Plan! In the latter, Prof. Warren maintains that the deal may be worse than nothing at all because it is part of a political calculus designed to beat back bankruptcy legislation that would provide meaningful relief to homeowners.

Third, and finally, as you may have heard, President Bush caused chaos when, at his press conference announcing the agreement, he gave out the wrong toll-free number for homeowners who might benefit from the deal. See reports here, here, and here.  Watch the President give out the wrong number below.

More On The Bush Admnistrations's Mortgage "Freeze" Deal

Here's a Washington Post story on the deal the Bush Administration has apparently struck with major mortgage lenders "to freeze interest rates for five years for financially troubled homeowners -- a plan advocates say will help forestall a major foreclosure crisis but some conservatives say amounts to a bailout of people who made bad financial decisions."  The story describes the deal -- which will be announced formally by the White House this afternoon -- and discusses conservatives' complaints that the plan is at odds with their free-market principles and Hillary Clinton's complaint that it does not do enough for homeowners at risk of foreclosure.

Washington Post Articles on Proposed Legislation to Curb Credit Card Fees and a Possible Deal to Address Subprime Lending Mess

Today's Washington Post has two articles that are worth a look.

Here's one on planned legislative and regulatory efforts regarding credit card fees.  The first couple sentences of the article provides a flavor: "Senior Democrats on Capitol Hill want to ban excessive credit card fees. Bank regulators are on the verge of forcing companies to give more notice before raising interest rates. And New York's attorney general, whose investigations transformed the student loan industry, now has his eye on conflicts of interest in the credit card sector."  On the latter, the NY AG is looking into "arrangements in which companies that supply electronic cards used to pay for purchases at bookstores and cafeterias are granted exclusive access to market their card products to students."

And here's an article describing an almost-consummated agreement "between top Bush administration officials and a broad alliance of Wall Street's biggest banks, mortgage investors, nonprofits and consumer groups," under which "mortgage rates for homeowners with spotty credit histories would be temporarily frozen . . .."