September 30, 2014
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.
September 26, 2014
Inside Mortgage Finance highlighted a DBRS Presale Report for J.P. Morgan Mortgage Trust, Series 2014-IV3. This securitization contains prime jumbo ARMS, some with interest only features. So, these are not plain vanilla mortgages.
The report raises some concerns about loosening standards in the residential mortgage-backed securities market, particularly relating to standards for the representations and warranties that securitizers make to investors in the securities:
Relatively Weak Representations and Warranties Framework. Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers, as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting as compared with the traditional lifetime representations and warranties standard in previous DBRS-rated securitizations. (4)
Underwriting and fraud (other than the above-described fraud) representations and warranties are only allowed to sunset if certain performance tests are satisfied. . . .
Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.
Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent, any loan that has incurred a cumulative loss or any loan for which the servicers have stopped advancing funds.
Pentalpha Surveillance LLC (Pentalpha Surveillance) acts as breach reviewer (Reviewer) required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes. . . .
September 25, 2014
Until the financial crisis hit, the Federal Housing Administration has never required budgetary support for its mortgage insurance programs. When it received a $1.7 billion infusion from the Treasury, it was seen as a sad day in the FHA’s long history by many. Others felt that the FHA worked, overall, at a relatively low cost to keep the mortgage markets functioning through the 2000s.
The budgetary impact of the FHA will certainly be factor in the politics of housing finance reform. The Congressional Budget Office has produced a report, Budgetary Estimates for the Single-Family Mortgage Guarantee Program of the Federal Housing Administration, that sheds some light on this topic. The CBO first estimated the costs of FHA loan guarantees made from 1992 through 2013 and found that between “1992 and 2013, FHA guaranteed roughly $2.8 trillion of single-family mortgages. Using the methodology specified by FCRA, CBO estimates that those guarantees account for $2.2 billion in subsidy costs to the federal government.” (2) In contrast, the CBO’s projects that FHA loan guarantees being made in 2014 and 2015, “will generate savings—negative subsidy costs—of $16.4 billion.” (2)
FHA’s critics and fans will both be able to crow about these figures. But perhaps the most important issue is whether the FHA’s capital reserve requirements can be designed to both cushion the FHA during severe housing market downturns while also keeping FHA borrowers (often low- and moderate-income households) from effectively subsidizing the federal budget by generating “savings” or “negative subsidy costs” when the market is functioning more normally. Such a goal seems to best align with FHA’s mission.
September 23, 2014
This is a residential mortgage foreclosure case. The original foreclosure by CMI (CitiMortgage, apparently Freddie Mac’s servicer) was by “advertisement” – i.e., pursuant to the Michigan nonjudicial foreclosure statute. Freddie was the successful bidder at the foreclosure sale. In a subsequent action to evict the borrowers, they raised two defenses.
Their first defense was based on the argument that, even though Freddie Mac was concededly a nongovernmental entity prior to it’s being placed into conservatorship in 2008 (see American Bankers Mortgage Corp v. Fed Home Loan Mortgage Corp, 75 F3d 1401, 1406–1409 (9th Cir. 1996)), it had become a federal agency by virtue of the conservatorship with FHFA as conservator. As such, it was required to comply with Due Process in foreclosing, and the borrowers argued that the Michigan nonjudicial foreclosure procedure did not afford due process.
The court rejected this argument, as has every court that has considered it. The test for federal agency status is found in Lebron v. Nat’l Railroad Passenger Corp, 513 U.S. 374, 377; 115 S Ct 961; 130 L.Ed.2d 902 (1995), which involved Amtrak. Amtrak was found to be a governmental body, in part because the control of the government was permanent. The court noted, however, that FHFA’s control of Freddie, while open-ended and continuing, was not intended to be permanent. Hence, Freddie was not a governmental entity and was not required to conform to Due Process standards in foreclosing mortgages. This may seem overly simplistic, but that’s the way the court analyzed it.
There’s no surprise here. For other cases reaching the same result, see U.S. ex rel. Adams v. Wells Fargo Bank Nat. Ass’n, 2013 WL 6506732 (D. Nev. 2013) (in light of the GSEs’ lack of federal instrumentality status while in conservatorship, homeowners who failed to pay association dues to the GSEs could not be charged with violating the federal False Claims Act); Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012) (Fannie Mae, while in conservatorship, is not a federal agency for purposes of a wrongful discharge claim); In re Kapla, 485 B.R. 136 (Bankr. E.D. Mich. 2012), aff’d, 2014 WL 346019 (E.D. Mich. 2014) (Fannie Mae, while in conservatorship, is not a “governmental actor” subject to Due Process Clause for purposes of foreclosure); May v. Wells Fargo Bank, N.A., 2013 WL 3207511 (S.D. Tex. 2013) (same); In re Hermiz, 2013 WL 3353928 (E.D. Mich. 2013) (same, Freddie Mac).
There’s a potential issue that the court didn’t ever reach. Assume that a purely federal agency holds a mortgage, and transfers it to its servicer (a private entity) to foreclose. Does Due Process apply? The agency is still calling the shots, but the private servicer is the party whose name is on the foreclosure. Don’t you think that’s an interesting question?
The borrowers’ second defense was that Michigan statutes require a recorded chain of mortgage assignments in order to foreclose nonjudicially. See Mich. Comp. L. 600.3204(3). In this case the mortgage had been held by ABN-AMRO, which had been merged with CMI (CitiMortgage), the foreclosing entity. No assignment of the mortgage had been recorded in connection with the merger. However, the court was not impressed with this argument either. It noted that the Michigan Supreme Court in Kim v JP Morgan Chase Bank, NA, 493 Mich 98, 115-116; 825 NW2d 329 (2012), had stated
to set aside the foreclosure sale, plaintiffs must show that they were prejudiced by defendant’s failure to comply with MCL 600.3204. To demonstrate such prejudice, they must show they would have been in a better position to preserve their interest in the property absent defendant’s noncompliance with the statute.
The court found that the borrowers were not prejudiced by the failure to record an assignment in connection with the corporate merger, and hence could not set the sale aside.
But this holding raises an interesting issue: When is failure to record a mortgage assignment ever prejudicial to the borrower? One can conceive of such a case, but it’s pretty improbable. Suppose the borrowers want to seek a loan modification, and to do so, check the public records in Michigan to find out to whom their loan has been assigned. However, no assignment is recorded, and when they check with the originating lender, they are stonewalled. Are they prejudiced?
Well, not if it’s a MERS loan, since they can quickly find out who holds the loan by querying the MERS web site. (True, the MERS records might possibly be wrong, but they’re correct in the vast majority of cases.) And then there’s the fact that federal law requires written, mailed notification to the borrowers of both any change in servicing and any sale of the loan itself. If they received these notices (which are mandatory), there’s no prejudice to them in not being able to find the same information in the county real estate records.
So one can postulate a case in which failure to record an assignment is prejudicial to the borrowers, but it’s extremely improbable. The truth is that checking the public records is a terrible way to find out who holds your loan. Moreover, Michigan requires recording of assignments only for a nonjudicial foreclosure; a person with the right to enforce the promissory note can foreclose the mortgage judicially whether there’s a chain of assignments or not.
All in all, the statutory requirement to record a chain of assignments is pretty meaningless to everybody involved – a fact that the Michigan courts recognize implicitly by their requirement that the borrower show prejudice in order to set a foreclosure sale aside on this ground.
September 22, 2014
New York State Comptroller DiNapoli issued a critical audit of a loan program of the New York City Department of Housing Preservation and Development. HPD disagreed with many of the audits key findings. For the purposes of this blog post, however, I am more interested in the Article 8A loan program itself. The program derives its name from its enabling statute, Article 8A of the New York State Private Housing Finance Law.
According to the audit, the program is intended
to improve living conditions and to preserve safe and affordable housing for low- and moderate-income households. The Program attempts to achieve this goal by providing low interest rate loans, of up to $35,000 per unit, to owners of rent-regulated, multiple dwelling buildings in New York City (City). The loans are to be used to correct substandard or unsanitary conditions, to replace and rehabilitate building systems (i.e., heating, plumbing, and electrical work), or for other necessary improvements. (4)
To become eligible for this program, building owners “applying for Article 8-A loans must submit an application demonstrating that the physical condition of the property in question, and the owner’s property-related finances, warrant Program funding; and the applicant was unable to obtain a loan from at least two traditional lenders.” (5)
This is an interesting program design because it makes low-cost City funds available to owners who are already required to provide affordable housing pursuant to applicable rent regulation statutes. Given that many other owners of rent regulated buildings are able to operate their buildings without subsidized loans, one wonders why the relatively small number of buildings in this program should receive special treatment.
Legitimate policy rationales could include (i) preventing rent-regulated units from being left vacant due to their poor condition or (ii) preventing units from exiting rent regulation because they are eligible for the “substantial rehabilitation” exception to further rent restrictions. But better than assuming that a particular subsidized loan was made consistent with a legitimate policy rationale, would be for the City to make a specific finding of what it was getting in return for this subsidy. If subsidized loans were just going to (i) owners who had made bad choices in the past that led them to be rejected by private lenders or (ii) to owners in the “know” about this program, that would be a poor use of public funds.
September 19, 2014
Lauren Willis has posted Performance-Based Consumer Law to SSRN. This article