Tag Archives: mortgage

Catalyzing Savings

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The Consumer Financial Protection Bureau has announced a Project Catalyst  Pilot to Promote Regular Saving Behavior Among Prepaid Card Users.The pilot involves an American Express product, a prepaid card with a saving feature.

The CFPB’s research study associated with this pilot will explore two major research questions:
1.  Can certain strategies encourage or support regular consumer saving behavior?
2.  Is saving behavior associated with better outcomes for consumers, particularly for
     low-income and underserved consumers?
Within these broad questions, the research goals for this project are to:

>  Gain insight into consumer saving behavior and identify practices that promote saving behavior among prepaid card users

>  Evaluate the impact of saving on consumer wellbeing among prepaid card users (2)

I have been critical of some of the CFPB’s financial literacy initiatives, but this seems like a good one. What is important about this pilot study is that it is not just evaluating whether consumers respond to the product in the expected way — save more, for instance — but whether it has longer-term and more significant effects. Does it help consumers develop saving habits in other contexts? Do those saving habits lead to better outcomes in housing and consumer credit contexts? These are really important questions. If the pilot study helps to answer them, it will be of great value.

Solving Complexity in Consumer Credit

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Kathleen Engel posted Can Consumer Law Solve the Problem of Complexity in U.S. Consumer Credit Products? to SSRN. The abstract reads,

People like to know and understand the total cost of credit products they are considering. They also like to know and understand products’ terms and features. Given these preferences, issuers of credit should market products with transparent features and simple pricing. That is not the case. In fact, over the last few decades we have seen a plethora of complex terms in products such as mortgage loans, credit cards, and prepaid debit cards.

As credit products have become ever more complex, consumers have more choices and can select products that satisfy their particular needs and preferences. No longer are borrowers limited to a 30-year, fixed-rate mortgage. If they know they will be moving in a few years, a 3-year fixed-rate mortgage with a low interest rate that converts to a 27-year adjustable rate mortgage based on the LIBOR might be the right product for them. However, for borrowers who do not understand the complexities of a 3-27 mortgage loan, the low, initial interest rate could be a costly lure. Confusion is commonplace. In one study giving consumers a choice between two credit cards that varied only in terms of the annual fee and the interest rate, forty percent of the participants chose the more expensive card.

One would expect that consumers, who cannot decipher terms and calculate the cost of complex products, would turn to those with easy-to-understand terms. There are some simple products on the market. Instead, consumers often misperceive that the more complex products are less expensive than the simple ones. They, thus, shun the products that would be in their best interest.

In this paper, I explain why borrowers make sub-optimal choices when selecting credit products. I then analyze whether extant laws could be used to address obfuscating complexity. I ultimately conclude that policy-makers should look to extra-legal remedies to protect consumers against exploitative complexity.

I find those “extra-legal remedies” to be the most interesting part of this paper. Engel writes,

The approach I find most appealing is to use digital technology to help consumers make decisions. A software program would act like an agent, helping consumers determine what they could afford, what product would best meet their needs, and, lastly, would generate bids from providers of the product. Several goals motivate this idea: (1) the approach is preventative; (2) it does not require the courts to interpret vague standards; (3) it is less costly than litigation; (4) it protects unsophisticated consumers without requiring them to become sophisticated; and (5) it permits consumers to “pull” the information they need to select a product, rather than having issuers “push” hundreds of pages of information to them on multiple products. (24-25)

The paper does not explore how consumers would access this “choice agent,” but it is certainly an idea worth exploring. As some of my recent posts suggest, it is hard to rationally regulate for the entire population of consumers as they are a heterogeneous bunch. But it is important that we keep trying. Engel’s paper has some interesting ideas that are worth pursuing further.

Homeowners Lost in the Shuffle

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The Special Inspector General of the Troubled Asset Relief Program (SIGTARP) issued a report, Homeowners Can Get Lost in the Shuffle And Suffer Harm When Their Servicer Transfers Their Mortgage But Not the HAMP Application or Modification, that highlights some of the structural problems in the servicing industry. The report notes, for instance, that, “Homeowner calls to SIGTARP’s Hotline about difficulties experienced in HAMP as a result of mortgages being transferred from one servicer to another have persisted throughout the life of the program and have escalated in the last year.” (1) This is just the most recent reminder that servicing transfers continue to be a major source of trouble for homeowners.

SIGTARP concludes,

Given the scale of the reported problems related to transfers to new servicers, and the potentially serious harm to struggling homeowners who need relief from HAMP, Treasury must be aggressive and swift in sending the message to servicers that Treasury will not tolerate harm to homeowners in HAMP from servicing transfers. HAMP is five years old, and servicers have had ample time to understand the rules and to follow them. Treasury should no longer tolerate a failure to follow HAMP rules. Treasury should report on violations publicly, and permanently withhold incentive payments from servicers that do not comply with HAMP rules on transfers. (12)
The problems in the servicer industry are structural, but it is far from clear that there are sufficient structural changes in the works to deal with them. This sad state of affairs will last far into the future unless thoughtful solutions are designed and implemented in the present. So, while it is important that SIGTARP draws attention to this problem, it is more important for other regulators like the Consumer Financial Protection Bureau and the Federal Housing Finance Agency to take up the cause and start implementing far-reaching solutions.

Reiss on Saving Thousands on Your Mortgage!

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MainStreet.com quoted me in You Can Save Thousands on Your Mortgage By Taking This Tiny Step.  It reads in part,

Homeowners can save thousands of dollars when they work with counselor to get their mortgages modified and decrease their odds of defaulting again.

A new study for NeighborWorks America by the Urban Institute determined that homeowners were able to avoid spending millions of dollars annually because of the National Foreclosure Mitigation Counseling (NFMC) program. Homeowners working with NFMC program counselors are nearly three times more likely to obtain a mortgage modification and are nearly twice as likely to get their mortgage back on track without a modification.

After working with counselors, homeowners are 60% less likely to re-default after curing a serious delinquency and able to complete short sales faster than homeowners who don’t work with counselors.

The research is based on analysis of nearly 240,000 homeowners with outcomes observed through June 2013. More than 1.8 million homeowners have been helped by the NFMC program, administered by NeighborWorks America since it began in March 2008.

  *     *     *

Since buying a home is something that most people only do once or twice in their lives, there is no question that homeowners whose mortgages are in default or at risk of default should look for assistance as soon as possible, said David Reiss, professor of law at Brooklyn Law School in New York.

“Losing their home is something that most never do at all, so to think that going it alone is the best strategy is a mistake,” he said. “Foreclosure counselors know the range of options available to borrowers and may have access to more direct lines of communication with lenders. They also will have a better sense of when to complain to regulators about bad behavior by lenders.”

Are the FHA’s Losses Heartbreaking?

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The Inspector General of the Department of of Housing and Urban Development issued an audit of FHA’s Loss Mitigation Program (2014-KC-0004).  The Office of the Inspector General (the OIG) did the audit because of its “concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans. Our audit objective was to determine the extent to which loans modified under the FHA program generated gains for the lenders.” (1)

The OIG found that

Lenders generated an estimated $428 million in gains from the sale of Government National Mortgage Association securities when modifying defaulted FHA loans in fiscal year 2013. These loan modifications were completed as part of FHA’s loss mitigation program. None of these lender generated gains were used to offset FHA’s insurance fund costs. As a result, FHA missed opportunities to strengthen its insurance fund. (1)

Given that the FHA had to be bailed out for the first time in its 80 year history, the findings of this audit are a bit heartbreaking, at least for a housing finance nerd like me.  $428 million would cover more than a quarter of the amount that Treasury had to advance to the FHA, no small potatoes.

The OIG found that the FHA “may have missed opportunities to strengthen its insurance fund. Lenders could be required to offset gains they obtained from the sale of securities for incentive fees and claims for modified loans that redefault.” (5)

The Auditee Comments and the OIG’s Evaluation of Auditee Comments make it clear that the extent of the gains had by lenders is very contested because the OIG did not “know the costs of the lenders.” (17) This seems like a pretty important missing piece of the story. Nonetheless, I hope that HUD, as the parent of both the FHA and Ginnie Mae, takes questions raised by this audit seriously to ensure that public monies are being put to their best use.

Cool Mortgage Tool

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The Urban Institute has created a cool interactive tool to map mortgages in the United States. Enterprise describes the tool as follows: it

maps 12 years of data on more than 100 million mortgage originations throughout the U.S. by race and ethnicity, illustrating how the housing boom and bust affected borrowers of different backgrounds by metropolitan area. According to the data, not only were African-American and Hispanic communities particularly damaged by the housing bust, but they have also been the least likely to recover since the recession. The map also shows how geographically uneven the housing recovery has been. For instance, while mortgage originations have only decreased 18 percent in San Francisco and San Jose since 2005, they have fallen by 39 percent in Detroit.

The Urban Institute argues that

For a full mortgage market recovery, we need to expand the credit box again. A number of reforms can be undertaken to encourage lending to creditworthy borrowers who would have qualified before the housing boom. A return to 2005 and 2006 lending practices would be ill-fated, but the pendulum has unquestionably swung too far. Today’s tight standards have locked out many prospective borrowers from homeownership, disproportionately preventing African American and Hispanic families from building wealth and benefiting from the recovery.

There is a growing outcry to loosen credit. It is important that those calling for that loosening also support reforms that ensure that new credit is sustainable credit.  The last thing that people need is a mortgage that has a high likelihood of ending up in default. The Urban Institute acknowledges this point, but it can get lost in the political fight over the future of housing finance.

Policy folk also need to better understand how homeownership helps households build wealth, particularly given the rapid changes in the mortgage market. If households can readily access the equity in their homes through home equity loans, homeownership’s wealth-building function becomes more of a consumption spreading one.  That is, if homeowners access equity in the present in order to supplement current income, they will not be building wealth over the long term.

The robust Consumer Financial Protection Bureau should protect consumers from predatory attempts to get them to refinance, but people may not protect their future selves from their current desires. This may just be the way it goes, but we should not make claims about wealth building until we know more about how homeownership in the 21st century actually promotes it.

Performance-Based Consumer Law

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Lauren Willis has posted Performance-Based Consumer Law to SSRN. This article

makes the case for recognizing performance-based regulation as a distinct tool in the consumer-law regulatory toolbox and for employing this tool broadly. Performance-based consumer law has the potential to incentivize firms to educate rather than obfuscate, develop simple and intuitive product designs that align with rather than defy consumer expectations, and channel consumers to products that are suitable for the consumers’ circumstances. Moreover, the process of establishing performance standards would sharpen our understanding of our goals for consumer law, and the process of testing for compliance with those standards would produce data about how to meet those goals in a continually evolving marketplace. Even if performance-based regulation does not directly lead to dramatic gains in consumer comprehension or marked declines in unsuitable uses of consumer products, the process of establishing and implementing such regulation promises dividends for improving traditional forms of regulation. (1)
This seems like a pretty radical change from our current approaches to the regulation of consumer financial transactions. Willis argues that disclosure does not work (no argument there) and industry can easily circumvent bright line rules (no argument there). She claims that a suitability regime, like ones that exist in the brokerage industry, offer a superior alternatives.  She writes,
Suitability standards would be closer to traditional substantive regulation, but more flexible. Regulation might define suitable (or unsuitable) uses of types or features of products, or firms might define suitable uses of their products, provided that they did so publicly. Although suitability might be required of every transaction, testing every transaction for suitably would often be prohibitively expensive and ad hoc ex post enforcement would create only limited incentives for firm compliance. Better to set performance benchmarks for what proportion of the firm’s customers must use the products or features suitably (or not unsuitably) and use field-based testing of a sample of the firm’s customers to assess whether the benchmarks are met. Enforcement levers could include, e.g., fines, rewards, licensing consequences, regulator scrutiny, or unfair, deceptive, or abusive conduct liability. (4)
This is certainly intriguing. But just as certainly, one can see the consumer finance industry raising concerns about a lack of clear rules to guide their actions and the after-the-fact evaluations that this approach would subject them to. Willis is too quick to reject such concerns, but they are legitimate ones that would need to be addressed if performance-based consumer law was to be widely adopted. Nonetheless, this is an intriguing paper and its implications should be further explored.