Consumer Law & Policy Blog

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?

Reports on Senator Dodd's Mortgage Bill and Ask.Com's Privacy Protections

Here is the report in today's Times on Senate Banking Committee Chair Dodd's mortgage bill.  The story compares the Dodd bill to the House bill.  An excerpt:

Like the House measure . . . Mr. Dodd’s bill requires lenders to make only those loans that benefit borrowers and that they can repay. But Mr. Dodd’s proposal would also require brokers to act in the interest of borrowers, and that Wall Street firms could be sued.

Investment banks that securitize mortgages could also be sued under Mr. Frank’s measure, but state authorities would be prohibited from pursuing certain claims against Wall Street.

In an interview last week, [Congressman Barney] Frank [who authored the House bill] said he planned to toughen his bill’s enforcement provisions as it relates to investment banks, but he added that the demand for home loans would dry up if investors in mortgage securities were subject to lawsuits brought by state officials.

Unlike the Frank bill, Mr. Dodd’s proposal would bar specific practices in subprime lending like prepayment penalties, which borrowers have to pay if they try to refinance or pay off their loans early within a few years, and yield spread premiums, which are commissions lenders pay to brokers for gettingpersuading borrowers to take out a higher-cost loan than they could qualify for. But Mr. Dodd’s bill would not create a national registry of brokers and loan officers as the House measure would.

The Times also reports here on Ask.com's program to discard information gathered from consumer searches.  Consumers wishing to keep Ask.com from retaining their information wil have to use "AskEraser," which is to be conspicuously displayed on Ask.com's main search page.  Ask.com contrasts with other search engines, like Google, which retain consumer information for 18 months or so.  This promises to be an interesting privacy experiment.  Ask.com is betting that enough consumers care about their privacy to switch to their service from competitors; it will be interesting to see whether Ask.com's market share, currently under 5%, increases.  It's not clear to me, though, how much privacy protection consumers will get.  Ask.com will still provide query information to Google (!) which supplies many of Ask.com's ads. 

More Criticism of the Bush Subprime Mortgage Plan

The Times, echoing to some extent earlier criticisms of the Bush subprime mortgage plan (referred to here and here), published an editorial titled "Show Us the Mortgage Relief," in yesterday's edition and Paul Krugman's column, "Henry Paulson's Priorities," today.  Here's an excerpt from the editorial:

The plan is too little, too late and too voluntary. Mr. Paulson and his boss, President Bush, have left it to the private sector — the mortgage industry — to protect the public interest, without any negative consequences if it does not. That is not the way the private sector works. And it is not how government is supposed to work at a time when Americans are facing mass foreclosures that threaten entire communities, financial markets and the wider economy.

Many mortgage servicers . . . fear being sued by mortgage investors. For some investors, letting a troubled borrower default would actually be better business, for others not. It all depends on how their particular security is set to pay out.

* * * [L]lenders that stick to the government-brokered guidelines have no guarantee that they cannot be sued.

And here's some of what Krugman (drawing on Elizabeth Warren of Harvard Law School and the Credit Slips blog, has to say:

[T]here’s a growing consensus among financial observers that the Paulson plan isn’t mainly intended to achieve real results. The point is, instead, to create the appearance of action, thereby undercutting political support for actual attempts to help families in trouble.

* * *

* * * Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house’s value — which means that in many, perhaps most, cases those who get debt relief will be borrowers who owe more than their house is worth. These people would be nearly as well off in financial terms if they simply walked away.

And what about people with good credit who were misled into bad mortgage deals, who should have been steered to loans with better terms? They get nothing: the Paulson plan specifically excludes borrowers with good credit scores.

How The Subprime Mortgage Implosion Has Hit One Area

This detailed, fact-intensive article in today's Washington Post describes how home foreclosures have risen sharply in recent months in the D.C. metropolitan area. 

Improving Your Credit Score By Buying Someone Else's

Check out this wild LA Times article about a San Diego company, TradeLine Solutions, Inc., that, for about $1200, effectively sells better credit scores to people with bad credit scores by putting their customers' names on paid-up mortgage loans. The company's website says its business model is "100% legal." But, according to the Times, the company's chief executive Ted Stearns concedes that other folks may not see it that way: "Are there people out there who are going to say that it's mortgage fraud?" Stearns asks. "Sure, there could be." He goes on to say that though it's "possible" that his customers might  face legal problems, but noted "that it is really hard to enforce the law." The company's website describes its services succinctly:

TradeLine Solutions is proud to be the only company offering Seasoned Primary Accounts to our customers including a Rapid Rescore! What does this mean? Now, a customer with a 550 credit score can come to us on Monday and walk into a bank by Friday with great credit ready to refinance or obtain a loan. How? By purchasing someone else's perfect credit history.

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.

Thursday's other Foreclosure News

by Alan White
Valparaiso Law School

Perhaps not coincidentally, the American Securitization Forum and the Bush Administration announced the “teaser freezer” plan on the same day that the latest quarterly foreclosure numbers were announced by the Mortgage Bankers Association. The numbers are appalling.

For example, in the 3rd quarter (July August and September) 4.72% of subprime ARMs went into foreclosure, up from 3.84% the previous quarter. This represents a filing rate rapidly approaching 20% per year, i.e. nearly 1 million more new foreclosures just on subprime ARMs, which represent fewer than 7% of outstanding mortgages. In one state, Ohio, 25.67% of subprime ARMs are now 90 days past due or in foreclosure. Combining all delinquencies (20%) with foreclosures (10%), 30% of all subprime ARMs nationwide are in trouble.

The rate of new foreclosure starts in the quarter, and the percentage of all outstanding mortgages now in foreclosure, for all categories combined, have now reached their highest rates ever (since MBA has done the National Delinquency Survey).

More Coverage of the Bush Administration Mortgage Meltdown Plan

The Times has a couple of interesting reports today on the Bush administration's plan to help distressed borrowers.  First, this article about people who won't be helped by the plan.  An excerpt:

Jason Bosch, president of Home Center Realty in California’s hard-hit Riverside County, [commented] “We were selling $300,000 homes to people who could only afford $175,000 homes,” he said. “Even if you freeze their payments, they still can’t handle it.”

If they knew the borrowers couldn't make their payments, why were they selling them the homes?

The second article goes into more detail about the program and includes a considerable amount of criticism.  An excerpt:

Nonprofit housing groups that try to help troubled homeowners renegotiate mortgages were underwhelmed by Mr. Bush’s plan.

The Greenlining Institute, a housing advocacy group in California that began raising alarms about subprime loans nearly four years ago, estimated that only 12 percent of all subprime borrowers and only 5 percent of minority homeowners would benefit from the rate freeze. The Center for Responsible Lending, a nonprofit group that supports homeownership, said the freeze would help only about 145,000 people.

* * *

Some Wall Street analysts were equally unenthusiastic. “This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors” in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capital Economics.

Subprime Loan Interest Rate Freeze Agreement

The Associated Press is reporting here (on the New York Times website) that the Bush administration has reached an agreement to freeze interest rates for five years on certain subprime loans.  It sounds very much like the proposal previously put forward by the head of the FDIC, Sheila Bair, about which we previously blogged here and here.  It's not clear from the report who the parties to the agreement are, but the article refers to talks among "banking regulators and banks, mortgage investors and consumer groups . . ."

The Loans are Subprime, Not the Borrowers

By Alan White

The Wall Street Journal has a story today confirming that nearly half of homeowners with subprime mortgages could have qualified for prime-rate loans. While many of us have pointed this out before, the WSJ analysis, based on the best loan database available, shows how much the steering problem has worsened in the last three years. One industry response is that a 620 credit score is a bit low as a definition of a prime borrower. But even if you set the bar higher, 40% of subprime borrowers were over 640 FICO, and 30% were over 660. There is no getting around the fact that the mostly unregulated subprime market is neither efficient nor fair, and is costing homeowners billions in excess interest costs, quite apart from the devasting cost of foreclosures.

The dramatic contraction in the subprime mortgage market undoubtedly has a human toll, for the workers in the housing and mortgage industries who are losing income and jobs. On the other hand, the rapid expansion to the point where $600 billion in subprime loans were made in 2006 has done many consumers (and lately, investors) more harm than good. Hopefully this debacle can lead to the emergence of a smaller subprime market offering regulated, tailored products to the small group of homeowners with marginal credit who can benefit from buying or refinancing a home.