Protecting gullible homebuyers

It's hard to know what to make of ReadyTrac's foreclosure filings for May. Numbers compiled by the Irvine-based firm are way higher than anyone else's because ReadyTrac registers individual filings multiple times. Based on this suspect methodology, California led the way last month with 39,214 filings, followed by Florida and Ohio. Nationwide, filings were up 90 percent from a year earlier. Even assuming that the numbers are wacky, the trendline is not. Foreclosures will be going up bigtime. From now until October, more than $100 million worth of adjustable-rate mortgages - all in the subprime category - are scheduled to reset, some to as high as 11 percent. That's why there's so much concern about the housing slowdown dragging out into next year. (The situation in L.A. is complicated because demand at the higher end remains strong. That's boosting prices, even though sales are way down because lending requirements are tightening up at the lower levels.)

Elizabeth Warren, a Harvard Law School professor and bankruptcy expert, says unsuspecting borrowers need protection from predatory lenders. Here's how she opens a piece in the Spring issue of Democracy: A Journal of Ideas:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the "R-word" supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves. Credit products, by comparison, are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features. By comparison, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.

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Americans are drowning in debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders have missed payments in the past year, and an additional 2.1 million families missed at least one mortgage payment. Last year, 1.2 million families lost their homes in foreclosure, and another 1.5 million families are likely headed into mortgage foreclosure this year. Families’ troubles are compounded by substantial changes in the credit market that have made debt instruments far riskier for consumers than they were a generation ago. The effective deregulation of interest rates, coupled with innovations in credit charges (e.g., teaser rates, negative amortization, increased use of fees, cross-default clauses, penalty interest rates, and two-cycle billing), have turned ordinary credit transactions into devilishly complex financial undertakings. Aggressive marketing, almost nonexistent in the 1970s, compounds the difficulty, shaping consumer demand in unexpected and costly directions. And yet consumer capacity–measured both by available time and expertise–has not expanded to meet the demands of a changing credit marketplace. Instead, consumers sign on to credit products with only a vague understanding of the terms.