Consumer Law & Policy Blog

Foreclosure Counseling Controversy

by Alan White

The National Foundation for Credit Counseling, which represents many of the established non-profit debt advice agencies, dispatched a strongly-worded letter on Wednesday to the HOPE NOW foreclosure prevention alliance. In it, NFCC protests the refusal of the HOPE NOW hotline to include NFCC counseling agencies on its referral list for the national foreclosure hotline (888 995 HOPE). The letter asserts that because so few agencies are connected to the hotline, homeowners calling the hotline are not being referred to counselors, but often simply told to call their lenders (i.e. servicers.) This is the hotline number that President Bush misread on TV in December. HOPE NOW is an alliance of mortgage servicers and industry trade groups working with four housing groups to reach out to homeowners.

NFCC has its own hotline, 866 557-2227, foreclosure help web site, and referral network of housing counselors. Hopefully these groups, who all share the same goals, can work out their differences.

Paper on the Effect of State and Local Anti-Predatory Lending Laws

Raphael W. Bostic of the University of Southern California - School of Policy Planning and Development, Kathleen C. Engel of the Cleveland State University - Cleveland-Marshall College of Law, Patricia A. McCoy of Connecticut, and Anthony Pennington-Cross of the Marquette University - Department of Economics, have co-authored State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanisms, available at http://ssrn.com/abstract=1005423.  Here's the abstract:

Subprime mortgage lending has grown rapidly in recent years and with it, so have concerns about predatory lending. In response to evidence of predatory lending, most states have enacted new laws or expanded existing laws to address abuses in the subprime home loan market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. Our results are consistent with the view that anti-predatory lending laws influence subprime lending markets and that disaggregating the details of the overall legal framework into its component parts is essential for understanding subprime market dynamics. The restrictions, coverage, and enforcement components all have significant relationships with subprime market outcomes, with the coverage relationship found to be broadly consistent with the reverse lemons hypothesis put forward by Ho and Pennington-Cross (2007). The results also suggest that the newer mini-HOEPA laws have had an impact on the subprime market above and beyond the older preexisting laws, particularly for subprime originations. Broader coverage through these new laws is associated with higher origination likelihoods, while increased restrictions through the mini-HOEPA laws are associated with lower origination propensities.

How the candidates stand on the subprime meltdown

by Sam Glover

Bankrate.com highlights the major-party presidential candidates' stances on the subprime meltdown. Romney, Huckabee, and McCain favor a light touch, perhaps freezing interest rates or offering some aid to borrowers. But they are vague as to what, if anything, they would do. Paul favors a return the gold standard and the abolition of the Federal Reserve.

Democrats Clinton and Obama, by contrast, each have a plan to address the problem and prevent a recurrence.

Clinton's four-point plan is to (1) crack down on unscrupulous mortgage brokers; (2) crack down on mortgage lending abuses; (3) help reduce foreclosures; and (4) expand affordable housing.

Obama's also has four points to his approach, and would (1) combat mortgage fraud and subprime loans; (2) mandate accurate loan disclosure; (3) create a fund to help homeowners avoid foreclosure; and (4) close the bankruptcy loophole for mortgage companies.

So there you have it. The Democrats seem to have given the subprime meltdown more thought than the Republicans, with the possible exception of Ron Paul, whose solution involves a fundamental change to the market.

[Caveat Emptor crosspost]

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. 

The mortgage mess explained

The good folks at NEDAP in New York have made a wonderful video of one woman's testimony about how an ordinary, well-educated middle class homeowner can find herself facing foreclosure. We need more first-person accounts from foreclosure victims like this one.

Where is the mortgage insurance?

by Richard Alderman

As a general rule, we read blogs for information. It is a great way to find out what is going on and who is doing what. But a blog is also a great way solicit information--and that is the point of this post.

I may be showing my ignorance, but I don't understand how mortgage insurance (PMI) fits into the recent mortgage crisis. I assume most, if not all, of these mortgages are insured. If that is the case, one of two things should happen. Either the lenders should not take the losses they are reporting, or, the insurers should go bankrupt. If it is the later, what happens to the insurance that everyone else has been paying for?

I am sure that someone reading this has much more knowledge about this subject than I do, and hopefully, he or she will post a reply comment explaining how PMI fits into the mortgage crisis equation.

MBA & CRL duke it out on Bankruptcy reform

by Alan M. White

The Mortgage Bankers Association issued a press release yesterday denouncing the Center for Responsible Lending for misstating facts about foreclosures and loan modifications in its reports. Both groups are trying to influence the bankruptcy legislation being considered in Congress at a hearing today.

According to MBA, bankruptcy reform is not the answer. MBA asserts that many foreclosures are “avoided” not just by loan modifications, but also by repayment plans and short sales. If Congress gives bankruptcy judges power to modify mortgages, interest rates will rise and refinancings will be curtailed, says the MBA.

Let’s examine the MBA’s facts.

Pres. Clinton and Gov. Schwarzenegger Team Up To End Payday Loans

U.S. PIRG's Consumer Blog has this interesting post about a Bill Clinton-Arnold Schwarzenegger op-ed in the Wall Street Journal last week discussing their joint effort to end payday loans. As the PIRG blog summarizes: "They want to terminate demand for payday loans by opening up a supply of better-priced, affordable bank accounts." Another chapter in the Terminator's activist political career. Take a look.

New York State's Human Rights Division Files Landmark Suits Against Sellers of Tax Refund Anticipation Loans

by Brian Wolfman

The New York State Human Rights Division has just filed first-of-their-kind suits against firms that market tax refund anticipation loans (RALs). The suits claim that the firms' RAL businesses illegally target African-American and hispanic consumers and members of the military. The New York Times suggests that the suits are an effort to end the RAL industry. The complaints in the two cases can be found here and here. Read the press release announcing the suit.

I blogged last year about the annual report of the National Consumer Law Center and Consumer Federation of America on RALs. Yesterday, those groups issued a press release concerning their most recent findings.

Predatory Borrowing?

Sunday's Times reported here on a study by BasePoint Analytics of more than three million loans.  According to the article, the study found that "[a]s much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications . . . . Applications with misrepresentations were also five times as likely to go into default."  The article explains: "In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application . . . ."  The study is not posted on the web, but you can request a copy from BasePoint here.  In some cases, borrowers have claimed that the mortgage broker misrepresented facts in the applications without the borrower's knowledge, see e.g., Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874 (S.D.Oh. 2002), so I'm curious to see if the study sheds any light on who is responsible for the fabrications.