Pawlenty Kills Foreclosure Bill

Governor Pawlenty said no to a simple foreclosure deferment bill. It appears to be a Pawlenty effort to have more people foreclosed on and more bank-owned property. Here is the story (click) Here is an excerpt:

The final bills to fall were a resolution urging him to prepare an action plan to deal with dwindling oil supplies and another giving struggling homeowners more breathing room by deferring foreclosures if they work toward paying off their loan. Pawlenty also cut a small appropriation out of a budget-balancing bill with his line-item veto authority.

The mortgage foreclosure deferment bill was a key element of a broader legislative effort to give hardpressed homeowners help; 11 other bills dealing with the mortgage mess made it into law.

Pawlenty said Minnesota government shouldn't interfere in private contracts by retroactively changing their terms.

Pawlenty In "Hot Seat" Related to Foreclosure Bill

The Wall Street Journal has a good article about the political implications related to Pawlenty's decision related to supporting or rejecting (with veto) the Subprime Mortgage Foreclosure Relief Act. Where's our local media on this story?

Click here for the WSJ article. Here is an excerpt:

Gov. Pawlenty's stance is similar to that of Sen. McCain, who has advocated government assistance for some homeowners but generally endorses a hands-off approach.

If the governor takes a higher profile in the presidential election, amid a widespread housing crisis, a veto of the deferment plan could be portrayed as insensitive to homeowners.

"Anything he does right now is magnified because of his possible role as a vice-presidential nominee," said Steven Schier, a political-science professor at Carleton College in Northfield, Minn. "He has to consider whether any actions he takes now could show up in the fall campaign."

A recent study conducted by HousingLink, a Minnesota nonprofit research group that compiles data on affordable housing, projects a 39% increase in foreclosures in the state this year, with perhaps 28,000 households affected. In a May 13 conference call, Robert Toll, chief executive officer of luxury builder Toll Brothers Inc., rated Minnesota an "F-minus" in his assessment of regional housing markets.

Under the foreclosure-deferment plan, loans closed from Jan. 1, 2001, through Aug. 1, 2007, when an antipredatory-lending law took effect, would be eligible. Borrowers must be legal U.S. residents and have household adjusted gross incomes of less than $250,000. Second homes are not covered. During the "deferment period," borrowers must keep paying a portion of their mortgages. The plan sets those payments at either the monthly payment of principal and interest when the loan was originated, or 65% of the monthly payment at the time of default, whichever is less.

BPA And Baby Bottles

Bill Moyers had an excellent story on his show this weekend about BPA, which is the chemical found in most hard plastics. These hard plastics are often water bottles, like the Nalgene bottle, or baby bottles. The report profiled the work of investigative reporters at the Milwaukee Journal Sentinal. (click here to see the Moyer's story)

Or, you can read the actual newspaper report by (clicking here). I was aware of the issue and had posted about it here a few times, but these stories actually prompted me to go out and buy glass bottles for my little baby and toss the chemical ones. Target has a very limited selection, but Babies R Us has quite a few to choose from at a pretty reasonable price. Given the fact that the majority of non-industry sponsored studies have linked BPA to breast cancer, testicular cancer, hyperactivity, and a host of other bad stuff, it seemed like a pretty minor thing to do. Yet, most people aren't aware of the risk and a relatively simple thing you can do to avoid the risk.

It's just sad that it took a while for me to find BPA free baby bottles, and the ones I found didn't have a huge neon sign pointing that fact out.

Here are some excerpts/facts from the Bill Moyers story:

More than half the studies, 168 of them, evaluated Bisphenol A at low doses. The vast majority of those - 132 of the 168 - showed harm to lab animals. And, Rust would report, "nearly three-fourths of the studies that found the chemical had no harmful effects were funded by industry." Rust's overall conclusion: an overwhelming majority of the studies found BPA to be harmful in lab animals - causing breast and testicular cancer, diabetes, hyperactivity, obesity, low sperm counts, miscarriage and other reproductive failures. Studies paid for by the chemical industry were much less likely to find damaging effects or disease.

....

And so we did a study where we administered it to mice, and found that at a dose 25,000 times below what anybody had ever tested, we caused damage to the entire developing male reproductive system.


....

Endocrine disruptors were first identified as the cause of wildlife abnormalities in the early 90s. The Environmental Protection Agency and the Food and Drug Administration, though, repeatedly reassured the public that BPA, at least, was safe.

The agencies cited studies done in the 1980s. But prompted by an outcry from advocacy groups, President Bill Clinton signed the Food Quality Protection Act in 1996. That same year, the Safe Drinking Water Act was amended.

The combined legislation promised a chemical screening program of endocrine disruptors to be overseen by the EPA. The goal was to determine whether or not they were dangerous to human beings.

1998 - the EPA, headed by Carol Browner, sets a deadline to fast track the testing of 15,000 chemicals suspected as endocrine disruptors….

1999 - the EPA misses the deadline. The Natural Resources Defense Council sues the agency to enforce screening. 2001 - a new administration takes office; Christine Todd Whitman becomes head of the EPA.

2003 - two more suits are brought against the EPA, one by a coalition of environmentalists and advocacy groups…the other by the attorneys general of four states. The suits attempt to force the agency into compliance with the food quality protection act….

2007 - 11 years after the laws were passed…the EPA had yet to screen its first chemical.

....

Canada's government has announced its intention to ban the sale of plastic baby bottles containing BPA and last Thursday, the California State Senate voted to forbid the use of BPA in childcare products.

Neighborhood Walk Score

My neighborhood scored a 91 out of 100, see if you can top that. By the way, President Bush's Crawford ranch scored a 0.

Click here for your neighborhood's walk score.

Buffett: "Long, Deep Recession"

From Reuters (click here):

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investor Warren Buffett said in an interview published in German magazine Der Spiegel on Saturday.

He said the United States was "already in recession" and added: "Perhaps not in the sense that economists would define it" with two consecutive quarters of negative growth.

"But the people are already feeling the effects," said Buffett, the world's richest man. "It will be deeper and last longer than many think."

Is Goldman Sachs the Voice of Reason?

Goldman Sachs has severed its ties to the Institute of International Finance after the institute proposed accounting tricks that would make financial markets less transparent, rather than more transparent. Specifically, the proposed accounting rules would allow financial companies to disregard the "actual market value" or "fair value" of the properties in their portfolio. Instead, the companies could use crazy numbers of what the properties "should" be. Thus, shielding companies from disclosing their actual losses and massive write-downs.

Here's a great quote from the CEO of Goldman Sachs:

"The proposals are extraordinary,” a Goldman official said on Thursday. “This is Alice-in-Wonderland accounting.”

These accounting rules are the things that ordinarily slip-by unnoticed, but have a tremendous impact on regular people and our ability to invest our precious retirement funds wisely.

Here's the full story (click).

Senate Passes New G.I. Bill

Well, somebody is listening, but it isn't President Bush and John McCain. The Senate passed the 21st Century GI Bill, despite opposition from our top flag wavers.

Here is the story from Salon.

Here's an excerpt:

By a vote of 75-22, the Senate approved an expanded version of the GI bill today. Proposed by Sen. Jim Webb, D-Va., it's the biggest expansion of the bill in the past quarter-century, according to the New York Times. But it has also been opposed by, among others, President Bush and presumptive Republican presidential nominee John McCain.

Bush, McCain and the others who've opposed Webb's bill argue that the expanded provisions -- the government would pay tuition and expenses at a four-year public university for anyone who spent three years in the military after 9/11 -- will hurt the military's efforts to retain its troops. Bush has threatened to veto Webb's bill, and McCain introduced one of his own. He did not vote today.

SEC Chairman Cox: "Complete Breakdown in Lending Standards"

From a story in the Financial Times (click here):

“The regulatory lessons here extend far beyond the SEC,” said Christopher Cox, the SEC chairman, in an interview with the Financial Times. “Subprime only leached into the securities markets after it was already a horrible problem. There was complete breakdown in lending standards, a complete breakdown, one can infer from that fact, in supervisory standards for lending or at least the application of those standards.”

“We’ve also found other regulatory gaps, not just statutory regulatory gaps for investment banks, but also for mortgage brokers, and we have discovered a host of perverse incentives in the securitisation process, only a small portion of which are the responsibility of securities regulators.”

43% Spike In Minnesota Bankruptcy Filings

Credit Slips has a good breakdown in the dramatic increase in bankruptcy filings in Minnesota (one of the nation's leaders, but not in a good way). The filings correlate to foreclosures, and, in my opinion, the rampant fraud and extreme housing bubble in the Twin Cities metro area. (click here for the full Credit Slips post)

Here is an excerpt:

It is popular to assume the increases in the bankruptcy filing rate are tied to the home mortgage foreclosure crisis here in the United States. Is that really the case? I've checked the data, and it appears that it is.

$12 a gallon?

Here's a report from CNBC:

It may be the mother of all doom and gloom gas price predictions: $12 for a gallon of gas is “inevitable.”

Robert Hirsch, Management Information Services Senior Energy Advisor, gave a dire warning about the potential future of gas prices on CNBC’s May 20 “Squawk Box”. He told host Becky Quick there was no single thing that would solve the problem, due to the enormity of the problem.

“[T]he prices that we’re paying at the pump today are, I think, going to be ‘the good old days,’ because others who watch this very closely forecast that we’re going to be hitting $12 and $15 per gallon,” Hirsch said. “And then, after that, when oil – world oil production goes into decline, we’re going to talk about rationing. In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we’re not going to be able to get the fuel when we want it.”

Hirsch told the Business & Media Institute the $12-$15 a gallon wasn’t his prediction, but that he was citing Charles T. Maxwell, described as the “Dean of Oil Analysts” and the senior energy analyst at Weeden & Co. Still, Hirsch admitted the high price was inevitable in his view.

Poetry Wednesday: Forgetfulness

Forgetfulness by Billy Collins (A Garrison Keillor regular)

Foreclosure Deferment Bill Passes Minnesota House and Senate

Overshadowed by the budget deal was the fact that the Subprime Borrower Relief Act of 2008 passed the Minnesota House and Senate. Hats off to Representative Davnie and Senator Anderson. The odds were steep but they got it done.

(click here for the text of the bill that passed)

Here's the summary of who voted for in House (81 for, 53 against):

Those who voted in the affirmative were:
Anzelc
Atkins
Benson
Bigham
Bly
Brown
Brynaert
Bunn
Carlson
Clark
Davnie
Dill
Dittrich
Dominguez
Doty
Faust
Fritz
Gardner
Greiling
Hansen
Hausman
Haws
Hilstrom
Hilty
Hornstein
Hortman
Howes
Huntley
Jaros
Johnson
Kahn
Kalin
Kelliher
Knuth
Kranz
Laine
Lenczewski
Lesch
Liebling
Lieder
Lillie
Loeffler
Madore
Mahoney
Mariani
Marquart
Masin
Moe
Morgan
Morrow
Mullery
Murphy, E.
Murphy, M.
Nelson
Norton
Ozment
Paymar
Pelowski
Peterson, A.
Peterson, S.
Poppe
Rukavina
Ruud
Sailer
Scalze
Sertich
Simon
Slawik
Slocum
Smith
Swails
Thao
Thissen
Tillberry
Tingelstad
Tschumper
Wagenius
Walker
Ward
Welti
Westrom

Here's who voted no in the House, failing to provide homeowners relief, including Congressional Candidate Erik Paulson:

Abeler
Anderson, B.
Anderson, S.
Beard
Berns
Brod
Buesgens
Cornish
Dean
DeLaForest
Demmer
Dettmer
Drazkowski
Eastlund
Eken
Emmer
Erhardt
Erickson
Finstad
Garofalo
Gottwalt
Gunther
Hackbarth
Hamilton
Heidgerken
Holberg
Hoppe
Hosch
Juhnke
Koenen
Kohls
Lanning
Magnus
McFarlane
McNamara
Nornes
Olin
Olson
Otremba
Paulsen
Peppin
Peterson, N.
Ruth
Seifert
Severson
Shimanski
Simpson
Solberg
Urdahl
Wardlow
Winkler
Wollschlager
Zellers

Here's who voted for in the Senate (34 for, 33 against--by just one vote)

For:
Anderson
Bakk
Berglin
Bonoff
Carlson
Chaudhary
Clark
Cohen
Dahle
Dibble
Doll
Erickson Ropes
Foley
Higgins
Langseth
Larson
Latz
Lourey
Lynch
Marty
Olseen
Olson, M.
Pappas
Pogemiller
Rest
Rummel
Saltzman
Saxhaug
Scheid
Sheran
Sieben
Tomassoni
Vickerman
Wiger

Against:

Betzold
Day
Dille
Fischbach
Frederickson
Gerlach
Gimse
Hann
Ingebrigtsen
Johnson
Jungbauer
Koch
Koering
Kubly
Limmer
Metzen
Michel
Moua
Murphy
Olson, G.
Ortman
Pariseau
Prettner Solon
Robling
Rosen
Senjem
Skoe
Skogen
Sparks
Stumpf
Torres Ray
Vandeveer
Wergin

Volcker Speaks the Truth

Here is the testimony of Former Fed Chief Paul Volcker. He makes some great points in a way that I could never, but here's a few highlights:

We are in an "unbalanced" economy, with too high a debt.

Our current financial markets lack "transparency," meaning they are too complicated and that "mathematicians" have taken over. Combined with a huge financial incentives for those mathematicians, this new financial system has broken down.

No time for complacency.

What is the role of the "lender of last resort"?

Servicers vs. Actual Owners Of The Mortgage

Mortgage securitization, the process of pooling mortgages and converting them into bonds sold by Wall Street investment firms, has had many consequences that are bad for consumers. But, one that has been standing out recently is the disconnect between the owners of the mortgages (investors, trusts, etc.) and the people who service the mortgage.

Most people don't know that the company you write your check to every month or receive statements from actually doesn't own your mortgage.

I was on a panel at the American Bar Association's Equal Justice Conference last week and I raised the point that servicers are often not acting in the best interest of the actual owners of the mortgage loan. Specifically, they are insisting on homeowners paying late fees, attorney fees, inspection fees, etc. to avoid foreclosure....when everybody knows that it is in the actual owners interest to avoid foreclosure all together, forgive those fees, and get the homeowner back on track. Foreclosure is expensive. Yet, homeowners are being forced into it by servicers.

Other folks on the panel vehemently disagreed, including a representative from the Office of Thrift Supervision. She stated that servicers always waive these fees to avoid foreclosure. That hasn't been my experience. And, I don't think that it has been the experience of too many of the housing counselors I talk to. Well, to that end, I wanted to point out Professor Porter's great post at Credit Slips. Here is an excerpt (click here for the full). I will wait for my apology from the Office of Thrift Supervision.

In the recent hearing on mortgage servicing, the Senators probed Countrywide's chief executive for loan administration, Steve Bailey, on exactly how mortgage servicers (distinct from the owners of the mortgage) make their profits. Mr. Bailey confirmed the description in my article of the three ways that servicers earn revenue: a fee that is a percentage of the mortgage, float income from interest on temporarily-held funds, and retained fees such as late charges and other fees that are paid by borrowers. Senator Schumer described the imposition of these default costs as "piling on" and expressed a fear that a "vulture mentality" was developing among servicers as defaults rise. Mr. Bailey tried to diffuse these concerns, but Senator Schumer called him to task in attempting to deny that servicers can and do generate profit from delinquent homeowners, even when borrowers and loan holders might benefit if the family retained its home, rather than struggle to pay an avalanche of default costs. The Senator quoted from a Countrywide earnings' call that characterized the "piling on" practice as a "counter-cyclical diversification strategy."

....

Mr. Sambol is saying that, for the 75-88% of loans that Countrywide services but does not hold any loss position, the servicer's additional expenses when a loan defaults are paid by the borrower. Defaults do not cut into a servicer's profits. Indeed, the reference to ancillary income tending to "fully offset" increased operating expenses suggests that in at least some cases, a servicer will make money when a loan is non-performing, particularly if that loan is repeatedly non-performing but ultimately the borrower pays (Gee, that sounds a lot like the situation before bankruptcy, doesn't it?)

I think the most damning part of this statement is the reference to "in-sourced vendor functions." Allegations are swirling around that servicers, and their agents such as MERS, bloat their actual costs of collection or default and build in a profit margin. This is illegal, in part, because most mortgages only permit the recovery of "costs," which most courts read to mean actual costs incurred, not some amount chosen to "offset" the costs of servicing delinquent loans. Judge Elizabeth Magner has a recent opinion that addresses the propriety of this practice. She writes in the Memorandum Opinion in In re Stewart (07-11113, Bankr. E.D. La. April 10, 2008) that "Wells Fargo's national counsel has represented to this Court that only $50.00 of each invoice represents the actual cost incurred by Wells Fargo fro a BPO. The remaining amounts, approximately $880.00 in total, were added to the actual costs by Wells Fargo. The Court concludes that these additional charges are an undisclosed fee, disguised as a third party vendor cost, and illegally imposed by Wells Fargo." Her opinion, combined with the statement in Countrywide's earnings statement, suggest that Senator Schumer may be too generous in calling servicers' practices "piling on." If this practice is widespread, the more apt term may be "ripping off" struggling homeowners.

Pawlenty Vetoes Sick Time To Care for Elderly

The Star Tribune has the story (click here).

Here is an excerpt:

In previous action late Thursday, Pawlenty vetoed a bill that would allow workers to use their sick leave to care for immediate relatives. Pawlenty called such a proposal "an unfunded mandate" on hard-pressed local governments.

The law currently allows workers to use their sick leave to care for ill or injured children. The bill he vetoed would have expanded that to allow use of sick leave for adult children, spouses, siblings, parents and stepparents, and grandparents.

This is bizarre. Because some employers provide one or two days of "personal" time, sick leave should be unavailable to everybody to take care of their elderly parents or adult children (who usually have a serious illness. It's cruel. But, also it's extremely sad that this story is limited to three paragraphs on the inside of the metro section. I guess the story of the middle-aged women dancing at a bar took priority.

Sometimes you have to love Chris Mathews...

I know this has little to do with consumers, but I guess today we are on a foreign policy and military theme. Here's a discussion about the difference between appeasement and diplomacy/talking to someone. It was highlighted in a post at the Daily Kos, and it gets good about four minutes into it...

Support our troops

While some folks think patriotism is about lapel pins, bumper stickers, and snappy-slogan t-shirts, I happen to think it's about real actions...increasing our reservist's pay while they are deployed and taking care of our troops once they come home with health care benefits and scholarships. In addition to serving our country, many of these troops went into the military to have an opportunity to get an education. Why not reward them?

Democrat Senator Webb has a bill to do just that, and it has overwhelming bipartisan support. There is only one problem: the White House and Senator McCain are against it. Why? I reckon it has something to do with the upcoming election. They don't want the Democrats to demonstrate that they are every bit as patriotic as they are, so the gamesmanship is on.

I don't understand why this story isn't being covered in the local media, because it's got everything and it shows just how far the Washington politicians have devolved.

Click here for a full profile of the Webb bill.

Click here for a good explanation of the recent procedural games.

Countrywide lawsuit moves forward

The New York Times has the story:

Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

(click here for full story)

Try to cancel, just try

Here's a good post from one of our new featured links, Red Tape Chronicles:

The next time you find yourself on the phone with a pushy customer service representative trying to sell you something, remember this: There could be serious cash incentives motivating that hard sell you're getting. And I do mean serious.

One consultant I spoke to recently said that some call-center employees for a national internet service provider were making six-figure salaries, thanks to aggressive bonuses. While customers were infuriated after being deceived while trying to cancel their service, the phone reps were raking in the dough, sometimes doubling or tripling their salaries with incentives.

Benefits that encourage employees to lie for profit are called "perverse incentives." Call centers are awful places to work, so employers have developed elaborate incentive schemes to keep workers returning to the phone banks. In some cases, they are simple or silly -- pizza parties for the top selling groups or free game consoles. But in their most extreme, perverse incentives can encourage outright fraud.

....

Red Tape Wrestling Tips

How do you protect yourself from overly aggressive phone operators, who are fueled by big bonus programs?
1) We've already mentioned this one. Repeat your understanding of the conversation at the end of the call, knowing that the firm will likely keep the recording and it can be used during a dispute.

2) Be particularly wary at the end of the month, said Broetzmann, because many incentives are paid on a monthly basis. Sellers can become very aggressive during the last few days of an internal sales contest.

3) Make sure you are talking to the right person before launching into your story, said Katz. Many consumers explain their detailed version of events over and over again because they begin talking before they are connected to the right department. So always ask something like: Can you disconnect my account? Can you grant a refund?

Ortho-Evra Side Effects

From Public Citizen:

When Johnson & Johnson received approval from the FDA in November 2001 for Ortho-Evra, a contraceptive patch, the company claimed its product would have two key advantages over existing oral contraceptives:

1) A constant delivery of hormones

2) Improvements in compliance compared to the daily dosing of oral contraceptives

It sounded like a great deal. Women could wear the patch on their skin for seven days before removal. No longer would they have to worry about taking a pill at the same time every day or about the ups and downs of hormone delivery associated with pill use. However, evidence soon emerged showing that the patch wasn’t as great a deal as originally thought.

....

Indeed, evidence compiled by Public Citizen reveals that the patch exposes women to:

• More estrogen and a greater range of estrogen levels;
• A possible two-fold increase in the risk of blood clots;
• Increased painful side effects such as breast discomfort, severe menstrual pain, nausea and vomiting;
• An increased likelihood of discontinued contraceptive use; and
• No improvement in contraceptive outcomes.

Car-centric...

Here's an interesting graph from Paul Krugman. It shows that you don't have to live in a "dense" place to have some transit options...just look at Canada (the 51st state) versus the United States. Click here for the post.

Foreclosure Vultures

Here is a sad story from the New York Times about people who buy a foreclosed homeowner's stuff when the homeowner can no longer pay the storage unit costs (click here for the story) Here is an excerpt:

The foreclosure crisis is hitting yet another American locale: the self-storage center.

As they lose their homes, people are turning to these humble cinderblock and sheet-metal boxes to store their stuff. But some people cannot keep up with their storage bills any better than they could handle their mortgage payments, and storage companies are auctioning off their property for a pittance.

A cottage industry has developed to profit from these lost and abandoned items. The other day in this Chicago suburb, Stephanie Donahou and her son Marcus had only a moment to decide whether to bid on a unit in default. They could see a couch, a sewing machine, a fish tank, a washer and dryer, lots of Christmas wrapping paper, a television and other trappings of daily life.

Citigroup for sale?

The Financial Times has a story about Citigroup being on the auction block, and it actually sounds like a pretty good deal. Here is an excerpt:

Citigroup will on Friday identify as much as $400bn in non-core assets that could be sold as part of plans to reduce costs and restore profit growth to double-digit rates, according to people close to the situation.

At a long-awaited meeting with Wall Street analysts, Vikram Pandit, Citi’s chief executive, also plans to confirm his pledge, first disclosed in the Financial Times, to cut Citi’s cost base of over $60bn by about 20 per cent.

Click here for the full story

Fannie Mae Destined To Become The Country's New Subprime Lender

It is odd that there is this large push to make Fannie Mae or some other government entity the new subprime lender for the nation. This push is occurring as a purported helping hand to homeowners in trouble, but who really benefits? Certainly there is a benefit to homeowners in trouble to have an opportunity for credit, but large financial institutions benefit even more by avoiding being the last stop before foreclosure. For example, here's a post from Calculated Risk about Fannie Mae originating loans at 120% the actual market value. (click)

So, I'm asking, is there a sunset to these proposals, a point in which Fannie returns to prudent underwriting standards and actual down payments? Are legislators and regulators really being upfront with the public about the fact that these loans and "investments" for Fannie Mae are toxic and going to later explode? Are we ready for a government bail-out when that happens? Or, are we going to follow the traditional path of bailing out private entities, and then, when Fannie Mae is in trouble, bemoan the ineffectiveness of government and/or call for Fannie Mae to be completely privatized or dismantled?

Those are my thoughts.

You know it's bad when...

Here's a summary of the headlines from the New York Times business section, which provides a pretty bleak picture of the economy:

Gas prices expected to peak in June

UBS to cut 5,500 jobs after loss

Tight credit worries for a hotel and mall operator

New Price Drop Could Imperil Mortgage Agencies

Economic Troubles Affect Vegas Strip

Acquisition of lender in jeopardy

Morgan Stanley to cut 5% of staff

Is Lifelock a scam?

Here's an interesting article on the latest so-called privacy protection plan. (click here for the article) Here's an excerpt from ConsumerAffairs.com:

Almost 1 million consumers have signed up for LifeLock, which promises to protect their credit and identity. But in the midst of three lawsuits against the company, consumer advocates say LifeLock customers are wasting their money while the company's founder insists it is the best way for consumers to protect themselves.

LifeLock's co-founder and chief executive officer, Todd Davis, is so confident in the product that he shares his own Social Security number in the company's many TV, radio and print ads.

But consumer advocates and two class action lawsuits claim that LifeLock actually provides very little protection. LifeLock, based in Tempe, Arizona, works by renewing an individual's fraud alert with one of the nation's three large credit bureaus, a service which federal laws mandate any individual can do for free, usually within a few minutes over the phone or Internet.

Negative Equity: Auto Loan Style

Nouriel Roubini has a good post on the confluence of two issues facing the auto industry: (1) economic meltdown plus high oil prices, and (2) the increasing number of vehicles that are upside down, meaning the owners owe the bank more than the SUV is worth. Evidently 25% of auto loans are underwater, not so good when that automobile is supposedly your security interest for the loan. (click here for the post) Here is an excerpt:

We have been worrying for a while about the collapse of home sales, the free fall in home prices, reckless lending practices that occurred in mortgages and now millions of households being “under water” or with negative equity on their mortgages.

But guess what? The same kind of credit mess did occur in auto sales and auto loans. The latest auto sales for April have been an unmitigated disaster. As Reuters put it:

“U.S. auto sales fell to their lowest annual rate in more than 15 years in April as weak consumer confidence and rising gas prices hit the industry's most profitable vehicles hardest.”

So auto sales are free falling and desperate car makers are cutting on prices and providing further price cuts via loose financing terms. But at the same time a time bomb of negative equity in auto loans is emerging. For the last few years auto loan lenders sharply loosened their lending standards, used aggressive, deceptive and predatory lending practices, allowed households to buy cars with little equity in them (as zero down-payment deals became the norm) and thus caused a bubble in car production and in car sales (individuals with cars too big and too many cars each) that was financed with a reckless lending bubble.

Sounds familiar? The car lending bubble was as reckless as the subprime and mortgage bubble. And now this credit bubble is going bust leading to rising default rates, significant negative equity in car loans (25% of all car loans are “under water”), massive losses to auto loan firms and a severe recession in the auto industry.

New Credit Card Regulations Proposed

The Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration released a set of new regulations related to credit cards pursuant to the FTC Act Section 5 (the main one, for non-lawyers). (click here to see the nearly 300 page whopper).

Luckily Adam Levitin over at Credit Slips read them for us (click here for his summary). Here are a few highlights from his post:

(1) Card issuers must provide consumers a reasonable amount of time to make a payment before it is considered late. If the bill is mailed (or delivered) at least 21 days before the due date, it is considered reasonable. The proposed rules would also require a payment received before 5pm EDT to be treated as timely and to have payments received the day after a day on which the USPS does not deliver mail treated as if received the day before. This is an important step I think the provision could have been drafted better, however. First, the safe harbor should be presumptive, not conclusive. Second, it raises the question of what constitutes proof of mailing? Can an issuer prove that it mailed the bill 21 days before absent a USPS certification? And third, what about the Providian problem of deliberately miscoding return envelopes? Nothing in this rule prevents that. Likewise, it does not create any procedure whereby a consumer can prove on-time delivery absent USPS certification, etc.

(2) Payment allocation. Issuers are required to allocate payments to balances accruing interest at different rates in one of three methods (highest rates first, pro rata, equal amounts to all balances) or a method more favorable to the consumer. This is a very good provision. I would have preferred to have the equal amounts option be eliminated, but it is an improvement on the current situation.

....

(6) Fee harvester cards are limited to charging initial account opening fees of no more than 50% of the line of credit and any fees over 25% of the line of credit must be spread out over the course of a year. Also, there is an increased opt-out (not of a lot of value, if you ask me, given the sophistication of fee harvester card users). How the Fed came up with 50% is anyone's guess. It strikes me as ridiculous to have to pay a $150 fee for an effective $150 credit limit ($300 nominal limit, half taken up by the fee). I would think a more reasonable number should be in the 10%-20% range.

(7) When making firm offers of credit, issuers must specify the criteria for determining APRs and credit limits. This can be satisfied with meaningless boilerplate language: “If you are approved for credit, your annual percentage rate and/or credit limit will depend on your credit history, income, and debts.” Gee, that's a helpful disclosure. I suspect anyone who doesn't know that also doesn't read disclosures. It's not a harmful provision, but let's not pretend that this is a useful disclosure provision.

Notably, the rules do not address several other serious problems with credit card billing practices.

First, they do not make any attempt to address universal cross default.

Second, they do not prohibit or limit unilateral term changes other than barring retroactive applications of increased APRs to existing balances.

Third, the do not limit the number of overlimit fees that may be applied in a single billing cycle or give consumers the option of opting out of overlimit transactions.

Fourth, they still permit the accrual of residual interest.

Fifth, they do not limit the application of finances charges to fees incurred in that billing cycle.

Sixth, they allow the application of finance charges from the transaction date, rather than from the posting date (when the issuer actually extends financing).

Seventh, the proposed rules do not limit pay to pay fees.

Eighth, although they lop off two-cycle billing, they don't eliminate the imposition of finances charges on balances paid off on time when part of a balance is not within the same cycle.

And ninth, they fail to institute definitions for terms like "Prime Rate" and "Fixed Rate".

Arbitration Victory for Consumers

We've had a number of blows recently at the U.S. Supreme Court, so it is with great pleasure that I learned that the Second Circuit Court of Appeals has brought a class-action back to life against major banks that require their credit card customers to settle disputes through arbitration-mills like the National Arbitration Forum here in Minnesota. (click here for the article).


Click here for the actual order via the Wall Street Journal. Here is an excerpt:

Assuming the facts asserted in the Complaint to be true,“[b]eginning before late 1998 or early 1999, Defendants began communicating with each othermand their co-conspirators concerning the imposition and use of mandatory arbitration clauses.”


After preliminary meetings and communications, the banks formed an “Arbitration Coalition” torecruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups.

Ultimately, “Defendants jointly forced unwilling and unaware cardholders to accept arbitration clauses and class action prohibitions on a ‘take-it-or-leave-it basis’ through the joint exercise of immense market power.”
The harms claimed by the cardholders, which lie at the heart of their Complaint, are injuries to the market from the banks’ alleged collusion to impose a mandatory term in cardholder agreements, not injuries to any individual cardholder from the possible invocation of an arbitration clause. The antitrust harms set forth in the Complaint – for example, the reduction in choice for consumers, many of whom might well prefer a credit card that allowed for more methods of dispute resolution – constitute present market effects that stem directly from the alleged collusion and are distinct from the issue of whether any cardholder’s mandatory
arbitration clause is ever invoked. The reduction in choice and diminished quality of credit services to which the cardholders claim they have been subjected are present anti-competitive effects that constitute Article III injury in fact.

...

We believe that at least in these two independent respects the cardholders have alleged an illegal conspiracy that resulted in a present injury by requiring them to accept less valuable cards than would otherwise have been available, but for the illegal collusion.

Why positive blip in quarterly GDP does not mean we're saved...

I have to admit that when I saw the .6% growth in first quarter national GDP I was surprised. It seemed entirely inconsistent with everything else, particularly the continuing softness in the retail sector, the default rates in credit cards and home equity lines of credit, and the utter collapse of the housing market. Luckily, Nouriel Roubini could explain it all. (click here for his full post). Here is an excerpt:

[I]f you exclude the increase of inventory of unsold goods (that moved positive after a negative figure in Q4) the Final Sales of Domestic Product were a negative 0.2%. In other terms, inventories of unsold goods added an artificial 0.8% to Q1 growth boosting it from a negative 0.2% to a positive 0.6%. So actual aggregate demand (Final Sales of Domestic Product) – the actual measure of growth of true demand - fell in Q1. And this build-up of inventories in Q1 means that the fall in GDP in Q2 will be larger than otherwise as firms will have to reduce that large inventory of unsold goods via a further reduction in production and employment.

....

Fifth, both durables goods consumption and non durable goods consumption grew at a negative rate in Q1. What boosted an anemic 1% growth in Q1 consumption was a still positive growth in services consumption. Durable consumption spending is clearly collapsing (-6.1%) But the fact that spending on non durable goods is falling – something that has not happened in decades – is an ominous sign.

Also, congratulations to Professor Roubini for making the list of the top 100 Intellectuals in the world.

What's wrong with this stimulus package?

According to a post by Professor Elizabeth Warren (who is also a consumer rights hero), 70% of people receiving the tax rebate/stimulus check won't actually spend the money. So it's kind of a mini-bail-out of the credit card industry. Most people are using the money to pay down debts or sock it away for the next round of layoffs or medical emergencies. (click here for full post)

It makes me wonder if the money would have been better spent as a block grant to cities who are dealing with vacant, foreclosed, abandoned houses. The money could be spent on rehab and employ thousands of union, construction workers. Then, the money would have a multiplier effect on the economy and improve our housing stock as well....but, nobody asked me and it's tough for politicians in Washington DC to say no to any sort of cash to voters in an election year.

Married for the Health Insurance

The Los Angeles Times has a story about a Kaiser Family Foundation poll. Sadly, 7% of Americans said that they or someone in their household decided to get married to access the significant other's health insurance policy. If ever there was a reason for universal health care, this is it. (click here for the story). Here is an excerpt:

Some people marry for love, some for companionship, and others for status or money. Now comes another reason to get hitched: health insurance.

In a poll released today, 7% of Americans said they or someone in their household decided to marry in the last year so they could get healthcare benefits via their spouse.

"It's a small number but a powerful result, because it shows how paying for healthcare is reflected not only in family budgets but in life decisions," said Drew E. Altman, president of the Kaiser Family Foundation, which commissioned the survey as part of its regular polling on healthcare.

On a broader scale, the survey found that healthcare costs outranked housing costs, rising food prices and credit card bills as a source of concern. Twenty-eight percent of those surveyed said they had experienced serious problems because of the cost of healthcare, compared with 29% who had problems getting a good job or a raise. Gasoline prices were the top economic worry, with 44% saying they had serious problems keeping up with increases at the pump.