CREDIT CARD RIGHTS | Obama Supports a Bill

Barack Obama told a round table meeting with local residents in Des Moines, Iowa on December 3, 2007 that he supports a Credit Card Bill of Rights that would:

1. Prevent credit card companies from raising interest rates without giving consumers the option to opt out of the agreement.
2. Ban rate changes to past debt so that rate increases only apply to future debt.
3. Prevent credit card companies from charging interest on transaction fees.

As President, he will implement such a plan, he said:

Our middle class families are not going to be secure so long as they can’t get out of debt. If we’re serious about stopping Americans from falling deeper into debt, we’ve got to crack down on the predatory credit card companies that are pushing them over the edge. Many credit card companies today are tricking Americans into agreements they can’t afford because that’s how they make big profits. Well, no company’s bottom line should come before what’s right for the American people. And we’ve got to stop these kinds of deceptive practices to help strengthen our middle class families and make sure that credit cards don’t become the next subprime crisis. 

Every American has a responsibility to pay what they owe, but we need to make sure that what they’re paying is fair. And we’ve got to do more for those Americans who aren’t able to climb out of debt and actually have to declare bankruptcy. That’s why I voted against a bankruptcy bill in 2005 that protects credit card companies and banks, while preventing middle class Americans from getting back on their feet after a crisis – even if they’ve suffered an illness. And that’s why as President, I’ll reform our bankruptcy laws so we can make sure Washington works for working Americans.

There's a bill just like that introduced by Rep. Carolyn Maloney.

Postscript

The bill was passed and signed in 2009.

Credit Slips Blog Supports Credit Cardholders Bill of Rights

Adam Levitin of the blog site Credit Slips has posted a blog on the Credit Cardholders Bill of Rights. Credit Slips is a joint site based at the University of Illinois of academics (the others are from Georgetown, Harvard, Iowa, Michigan, Ohio) who are concerned about credit and bankruptcy issues.

Levitin favors the bill, although he says it has some omissions -
"it doesn’t deal with problems of price structure, rewards programs, antitrust, merchant fees, or identity theft prevention". He also observes that even with the bill, "the card industry might well find other ways to extract rents from unwitting cardholders even if the ways enumerated in the bill are shut down."

With these minor reservations, Credit Slips concludes that the bill is "an important first step to reining in an industry that has run wild in a regulatory no-man’s land of outdated and threadbare federal laws, preempted state laws, and somnolent consumer protection by federal banking regulators."

This is a nice piece of writing as well as being an accessible primer on the ways that consumers have been hoodwinked on a grand scale by the ploys and practices of some credit card issuers.

MALONEY | Credit Cardholders Bill of Rights

New York Representative Carolyn Maloney, who serves as Vice Chair of the Joint Economic Committee (Senator Chuck Schumer is Chair), has performed a public service by introducing the Credit Cardholders Bill of Rights, H.R. 5244. She describes her bill as "comprehensive credit card reform legislation" that ends "abuses that unfairly hurt consumers".

Comprehensive it does seem to be, and reasonable. The bill prohibits "arbitrary interest rate increases", requires a notice of any interest rate increase at least 45 days in advance, reserves to cardholders their right to pay off their existing balance at the current interest rate if the rate is increased, requires that cardholders who pay on time will not be "unfairly penalized", prohibits "due date gimmicks" and "misleading terms", allows cardholders to set their own limits on their credit, requires that credits and payments be posted "promptly and fairly", prohibits imposing "excessive fees" on cardholders and prohibits issuing subprime credit cards to people who can't afford them.

If you agree, click here to Support the Credit Cardholders Bill of Rights.

Mortgage Industry Regulatory Reform

Having had the temerity last week to propose some regulatory reforms, I have had feedback from a number of quarters. So let me amplify with six ideas that I have seen proposed in print recently and explain why they should be rejected, and then move on to the six that I think have some legs. My claim to some authority in this area is that I worked as an economist for four years for the Federal Reserve Board and the FDIC in Washington, founded the Journal of Financial Education in 1971, and have taught finance to MBA students for 20 years. But I’m not a mortgage industry practitioner and I greatly appreciate both the practitioners and the consumer advocates who have filled me in on some of the nuances of the business. Their hope has been that I will come up with a useful list of proposals. Here’s where I am now.

Six Rejected Ideas

1. “Make it a free-for-all. Let Wal-Mart compete. Could it be worse?” Comment: It already is a free-for-all. The competition is tough and with property values turning down there are too many brokers in the industry. It will be devastated enough without letting Wal-Mart loose on what is left during the next few years. All of the brokers have been originating to the guidelines of a lender or securitizer.

2. “Require mortgage brokers to serve clients. The documentation is too hard to read and understand.” A mortgage broker has to serve both the lender and the client. A broker’s career and assets are continually at risk. In a normal market prior to 2000, brokers who delivered lousy paperwork were finished. A real estate purchase is a complicated transaction. The options are to check the details, ask a friend, go to a government or nonprofit counselor for help - or pay for an attorney.

3. "End loan fees and commissions. Too many people were put into the wrong mortgage because their broker was paid extra.” Loan fees have been shrinking. Every line of work has its shady operators. But brokers provide an important service and have to eat. The fact is, brokerage firms of any kind earn more income from loans that carry higher rates.

4. “Allow any organization in the mortgage-making process to rebate a business partner to get extra sales." Most state laws at present prevent a broker from providing kickbacks, and so do HUD’s RESPA rules. Why would kickbacks be an improvement? Combine this proposal with letting in Wal-Mart and…

5. “Prohibit stated-income mortgages.” When stated-income mortgages were first introduced in 1980, they worked. These loans had special requirements that were unfortunately eased in 2000, i.e., a higher down payment, reserves after closing corresponding to income claimed, and a minimum two-year documented history.

6. “End the size limit on conforming loans for government-sponsored mortgage packagers.” The conforming loan size limits make sense for several reasons. Fannie Mae and Ginny Mae are not meant for mortgages on mansions. The diversification of loans works better with many small loans than a few big ones.

Six Serious Ideas for Regulatory Reform

Bernard Shaw said that the lesson of history is that we don’t learn from the lessons of history. But it doesn’t have to be so.

The Fed was created because of the Crash of 1906, during which the Dow dropped from a high of 103 to 53 in 1907, contributing to the Bankers' Panic of 1907. The FDIC and SEC were created out of the stock market crash of 1929 and the bank panics that followed. The Office of Thrift Supervision was created to supervise what was left of the Savings and Loan industry after its meltdown following the recession of the early 1980s. Sarbanes-Oxley was created in July 2002 after the two largest bankruptcies in U.S. history, Enron and Worldcom following the stock market declines of 2000-2001. Now we have another stock-market decline and a financial-market freezeup on our hands. Can we introduce some regulatory reforms that will stave off another phony boom and real bust soon? How about these:

1. Establish an Interagency Committee on Affordable Housing and Keep It Going Afterwards. The Council should be created immediately as a multi-stakeholder initiative, bringing together all the regulators – FRB, OCC and OTS, FDIC, SEC, HUD – and representatives of industry, consumers and local government. It’s important to include everyone. We don’t want a fast-track set of laws that are then the subject of contention for years (as in the case of the Sarbanes-Oxley law). HUD has been working on behalf of people trying to finance the purchase of a home for 30 years.

2. Introduce New Prohibitions against Predatory Lending. Some state laws aimed at predatory lending have been praised. The North Carolina Predatory Lending Law of 1999, for example. It applies to mortgages of $300,000 or less that carry a rate of 8 percent above a benchmark U.S. Treasury rate. It prohibits negative amortization, interest-rate increases after a borrower default, balloon payments and other features associated with predatory loans, say three Wharton professors.

3. Stop SIVs. By enforcing existing bank regulatory laws and FASB principles, end the dangerous Structured Investment Vehicles, which can be spun off with no capital and potentially disastrous contingent liabilities to the issuer.

4. Mandate that the SEC Watch Wall Street’s New Instruments. Someone has to keep a risk-assessing eye on what is cooking in the Wall Street derivative kitchen. The SEC was missing in action from due-diligence oversight back in 1999 when the dot-com IPOs were cooking and then again when the toxic CDOs were on the stove.

5. Encourage the FDIC to Price Risk More Aggressively. The FDIC has some latitude in requiring higher deposit insurance premiums and it should have more. Introduce the Basel II bank capital-adequacy guidelines ahead of schedule. Financial innovation should never override the basic mission of the bank regulatory agencies, which is to ensure orderly markets. The Northeast United States has not had as serious a problem with subprime loans as the rest of the country. The credit for this should go to stuffy Northeast bankers.

6. Raise the Profile of the Fed's HOEPA Consumer-Protection Activity and Make Basic Financial Education a National Priority. The Affordable Housing Council should provide counselors in every city that will look at proposed deals, provide free advice to would-be borrowers, and keep an eye on local credit practices. Counseling works. Just as a buyer of a drug at a pharmacy must sign a waiver of consultation on a prescription that is filled, every borrower must sign a statement saying that they are aware of the availability of local counseling services (with addresses and phone numbers provided). The counselor should be empowered to report an especially bad deal to an oversight body. States with counselors at the state and county level help ensure that low-income mortgages have default rates below the FHA's.

MORTGAGES | Where Were the Regulators?

Feb. 17, 2008–Matthew Padilla asked in the Feb. 15, 2008 Orange County Register, "Where Were the Regulators?" He says he started writing on loan delinquencies in June 2006 with a critical profile of Irvine's ECC Capital, which was accused of the now-familiar offense of making loans to borrowers who could not afford them long term (e.g., after the teaser rates expired). It was this issue that state attorneys general raised (and settled) with Ameriquest Mortgage in Orange.

Padilla asks whether it is the government's job to protect consumers from making bad choices. Should the government have cracked down on brokers who pursued bigger commissions by selling consumers loans that were unaffordable over time? He specifically asks whether the Fed should have done more with its 1994 HOEPA consumer protection powers and whether the FDIC moved quickly enough (e.g., on Fremont Investment & Loan). He also asks whether California was too lax and what role California's AG play in getting a 49-state settlement with Ameriquest in 2006.

Comment: Matt has a lot of good questions. With hindsight, the regulators surely should have intervened earlier. But Chairman Greenspan told the Greenlining Institute (as reported by Gretchen Morgenson of the NY Times on December 18) that he didn’t want to interfere with financial innovation. Would Edward Gramlich have taken such a benign view of lax regulation if he were rewriting his article for the Kansas City Fed from today's vantage point? How many of the 12 million homeowners financed by the subprime industry since 1993 will be left owning their homes in 2010 than there would have been if the economy had avoided the excesses of the last few years?

The financial system broke down at both ends of the mortgage process and the weaknesses fed on each other. At the mortgage origination end, rules were not enforced by anyone, and at the securitization end the CDOs appear to have been orphans in the regulatory arena. The ability of the mortgage brokers to engage in predatory lending activity depended on the insatiable demand for mortgage paper, and this demand in turn came from the massive mispricing of collateralized debt obligations that raised yields 1,2,3 while raising risks 1,2,4. Even Milton Friedman accepted that the government has to set the rules of the game – and enforce them.

Fixing the regulatory system may seem like calling in a locksmith after a theft, but after the mortgage lending mess of the 1980s the Office of Thrift Supervision was supposed to have been the cleanup. Obviously the OTS was not enough.

Here are a few ideas for a concerned Senator or an incoming President seeking to clean up the mess: (1) Can the near-bank mortgage lenders and bank-like SIV structures be brought under some kind of regulatory umbrella?
(2) Could the SEC look at new financial products as they come on the market and to evaluate their risk?
(3) Should the FDIC be pricing risk more aggessively in its deposit insurance premiums, and can the Basel II bank capital-adequacy guidelines be introduced ahead of schedule?
(4) Can the Fed raise the profile of its HOEPA activity and beyond that make basic financial education a national priority. How about a comic book (with a cautionary tale about a young couple hornswoggled into borrowing for a house that they can't afford when the teaser rates end) on how to borrow money for your first house?
(5) Where has HUD been on all of this? Anyone who has ever bought or sold a house is familiar with pages in the closing document that warn buyers about closing costs. When did someone with a consumer orientation last take a look at these pages? 2/17/08 John Tepper Marlin, Blogspot, Where Were the Regulators?

Federal Spending on Statistics

The Web site of the Economics and Statistics Administration of the U.S. Department of Commerce opens with: "Due to budgetary constraints, the Economics Indicators Service will be discontinued effective March 1, 2008." This sounded serious to me. Forbes awarded EconomicIndicators.gov one of its "Best of the Web" for public service. I was ready to believe the worst, because the Bush Administration has been short-changing Federal data collection programs. Maurine Haver of Haver Analytics has long been concerned about underfunding of these programs. For example:
The United States has moved from the old SIC manufacturing-based code to the new NAICS code, which requires that Census collect more data on employment and wages in the services industry, but the administration hasn't provided the needed new funding.
The CPI numbers are suspect in part because the housing sample hasn’t grown with the growth of housing since 1990.
Some critics of the administration are concerned that data collection is being starved because advisers to the President only want to put out good news. However, on second look, the fact is that the ESA and the web site that is closing are duplicative of FedStats and the websites of the agencies - BEA, Census and BLS, which provide similar services and cover a much broader number of series (ESA doesn't cover the CPI and payroll employment numbers from the BLS).
So more support for Federal statistics is crucial, but in the real world of scarce resources the money spent for ESA's website might well be rechanneled to the Census Bureau.

SUBPRIME | What the Crash Means

Deutsche Bank and the Royal Bank of Scotland are on record as warning that subprime losses could hit $400-$500 billion.

Now (yesterday) the Bank of America has put out a report that the subprime-related credit problems have reduced global stock market capitalization since last October, i.e., in three months, by $7.7 trillion or 56 percent of current-dollar U.S. GDP.  What does this mean?

• The decline in market cap is 14.7 percent, compared with a similar loss three months later of 13.2 percent after the LTCM crisis (1998), 9.8 percent for Black Monday (1987) and 6.1 percent for the Brazil currency crisis (1999). 
• The losses were also greater than those suffered after the 9-11, the Asian financial crisis (1997), Argentina's default (2001) or the 1994 Mexican peso crisis (1994). 
• What does this mean? Those in the stock market, alas, already know. 
• Local government agencies trying to raise money, like Michigan and the Port Authority of New York and New Jersey, also know there is a crisis in the municipal markets. 
• Some of the $7.7 trillion losses are likely to be showing up in pension fund portfolios. New York City taxpayers may not know that they have to make up the shortfall below a projected 8 percent annual return on the funds' assets. Stock market losses mean that OMB and Mayor Bloomberg are going to have to go back to the City's financial plan and refigure.

NYC | More Catholic, Jewish, Muslim

At the beginning of the Aeneid, Virgil describes how Aeneas came from Troy to what became Rome and brought his households gods along ("inferretque deos Latio" - he brought with him his religion to Latium). As America's Number One immigrant gateway city, New York City has many Aeneases. What the city lacks in mainline and even evangelical Protestant adherents it more than makes up for in numbers of Catholic, Jewish and Muslim adherents.

NYC vs. Nation: More Catholic, Jewish, Muslim and Less Protestant. New York City is much more Catholic (62 percent versus 44 percent) and much more Jewish (22 percent versus 4.3 percent) than the rest of the United States. It's also more Muslim (more than 2 percent, compared with only about a half of 1 percent of all Americans).

Protestants are much less well represented. Only 4.2 percent of NYC religious adherents belong to evangelical Protestant churches, compared with 28.2 percent nationally. Only 6.5 percent belong to mainline Protestant churches, compared with 18.5 percent nationally.

By Borough. Manhattan, Queens and Brooklyn have a higher proportion of Jews and Muslims, while Staten Island and the Bronx are much more Catholic. Manhattan has the highest proportion of mainline Protestants, while Brooklyn leads in numbers of Evangelical Protestants.

Percent of All Adherents by Borough
Catholic Bk 58.8% M 52.5% Q 60.0% SI 79.6% Bx 77.5%
Evangelical Protestant Bk 5.5% M 3.0% Q 3.9% SI 2.8% Bx 4.2%
Mainline Protestant Bk 6.6% M 9.3% Q 5.7% SI 4.3% Bx 4.7%
Jewish Bk 24.4% M 29.2% Q 22.2% SI 10.1% Bx 11.2%
Muslim Bk 3.7% M 3.4% Q 4.9% SI 2.4% Bx 1.6%
Eastern Orthodox Bk 0.7% M 1.8% Q 2.7% SI 0.6% Bx 0.5%

Source: Andrew Beveridge of Queens College, CUNY in Gotham Gazette today, using data released February 1 by Social Explorer and the Association of Religious Data Archives.

How Much House Can You Afford?

2/15/08 How Much House Can You Afford? CNNMoney. The same question is asked by FannieMae, BankRate.com, Yahoo! Real Estate, SmartMoney, HomeFair (Moving.com). Question: Has anyone compared the answers that these - and other - calculators give? What is the range? Who was using these calculators in Arizona, California, Florida and Nevada during the last three years?

Ideas for Financial Regulatory Reform

I received an email from Vasos Panagiotopoulos recommending an article by Edward M. Gramlich, “Booms and Busts: The Case of Subprime Mortgages,” Economic Review, Federal Reserve Bank of Kansas City, Fourth Quarter 2007, 105-113 [official Summary here]. Vasos provided a brief summary that I have with his permission amplified as follows: "The Monetary Control Act of 1980 ended usury limits for risky mortgages. The subprime industry since 1993 created 12 million new homeowners, raising the total by five percent [106]. It is important to appreciate that the boom and bust has left, besides investor losses, about 88 percent of the homes still solvent [107]. Borrowers had difficulty comprehending the implications of teaser adjustable mortgage rates and their often-onerous prepayment penalties [107]. Moreover, because the debt was immediately securitized, risk was transferred to buyers of collateralized securities. Independent brokers, unlike banks in the traditional mortgage relationship, had nothing to lose when borrowers defaulted. A “giant hole” in financial supervision has existed, exactly where supervision was needed the most. The weaknesses seem concentrated among on state-chartered lenders but joint Fed/Office of Thrift Supervision action, with the support of state banking supervisors, has already started to bring these under supervision without new legislation [109]. The Fed has a predatory lending statute it can use to intervene in some cases [111]. Strenuous efforts be made to prevent foreclosures [112], in part by buying up properties in default for rentals. Above all, weaknesses in supervision must be corrected soon."

TAXES | Rethinking the U.S. Code

FEB. 9, 2008–On Monday I had the pleasure of hearing Chairman Charles Rangel of the House Ways & Means Committee talk about the Federal tax code. He made a lot of sense. Something has to give. The official national debt is up to $9.2 trillion today, according to the online National Debt Clock, which is in sync with the reading on the physical clock (created by the late Seymour Durst) at 6th Avenue and 44th Street in Manhattan. The physical clock posts an average U.S. debt per family of $78,000.

Slowing down the growth in U.S. debt means smaller deficits, which means less spending or higher taxes - a rock and a hard place for Washington's nomenklatura. Chairman Rangel will have a lot to say about how the Federal tax code evolves. He said that the entire code will be up for debate in the coming years, whichever of the candidates is elected President ("whoever she may be").

He noted that some believers in tax simplicity want to impose a Flat Tax and are raising fundamental questions. He didn't spend a lot of time on this topic (see comment below for a possible explanation of the short shrift).
For Chairman Rangel, the concern that seems highest on his list is fairness, as a weak economy punishes the "jobless, the homeless, the hopeless". (Warren Buffett has spoken out against the unfairness of a tax system that requires a higher rate of taxation for his secretary than for him.)

The argument that risk-taking needs to be rewarded may apply to investors in hedge funds, but Chairman Rangel wonders why non-risk-taking managers of hedge funds get to pay taxes on their income at these lower capital gains rates. The argument that the lower rate is good for attracting people to these jobs may be valid, but he wonders whether there aren't executives who could make the same argument for their businesses. In the end, he said, the lobbyists for special interests are not nearly as important to political leaders than the biggest lobby of them all, the American public.

John Skolas of New Hope, PA read my post above and commented to me (I have his permission to append his comment):

Thank you for sending this. As someone who started his career as a tax lawyer, I have always wanted to ask an economist why politicians talk about a flat tax being simpler. The vast majority of tax code complexity seems to be definitional, e.g., taxable income, business expense, transfer pricing - as to what is U.S. income and on and on. A flat tax could get rid of Schedule A for individuals, but leaves the whole rest of the alphabet of schedules and all the same issues for businesses, regardless of the tax rate.

PEACE | Ireland Bond Proposal

Hillary Clinton with Irish-born professor Louise Richardson
 (R), a terrorism scholar and the new Vice Chancellor of
Oxford University

With Hillary Clinton maintaining her position at the front of the field of U.S. presidential candidates, it's worth taking looking again at her proposal last year for a new bond to raise money for the Northern Ireland economy.

As reported in the Belfast Telegraph, she urged Northern Ireland leaders in Washington on June 27, 2007 to consider floating a bond to allow Northern Ireland to obtain greater international funds for local companies seeking to go global. The bonds would be sold to international investors.

An Ireland Peace Bond was proposed by the New York City Comptroller in March 1995, when the issuer was envisioned as a multi-country development bank as opposed to, in Clinton's proposal, the Northern Ireland Government.

It is interesting to note that Eamon de Valera obtained crucial American money as a leader of Éire. In 1919-1920 he came to the United States to sell bonds issued in January 1920 to Irish-Americans and raised $5.5 million, far more than the Dáil of the new Irish Republic expected.

Of this money, $500,000 was devoted to the American presidential campaign in 1920, which helped de Valera gain wider U.S. support. Questions were later raised about $1.5 million of proceeds spent in the United States and how much reached Ireland. Some of the Éire bond certificates are in museums because they were not repaid, something that will surely not be held against the Northern Ireland Government.