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American Banker quoted me in Everything Lenders Need to Know About GSE Shareholders’ Lawsuits (behind a paywall, but available in full here). It reads in part,

A powerful group of shareholders is amplifying attacks on housing finance reform legislation as they await resolution of a major legal battle, attempting to slow momentum on the bill before it likely passes the Senate Banking Committee.

Several big hedge funds that stand to possibly win billions of dollars for their shares in Fannie Mae and Freddie Mac are leading the charge, both in federal court and in the court of public opinion.

New investors’ rights groups said to be backed by the funds have popped up in recent weeks attacking legislation by Sens. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Mike Crapo, the panel’s top Republican.

Their presence is yet another complicating factor in the tumult ahead of a scheduled April 29 vote by the committee, potentially hurting efforts to secure additional support for the measure.

“Now that different people have come out with their bills, it’s been laid bare that the people working on [government-sponsored enterprise] reform aren’t going to do major favors for the shareholders,” said Jeb Mason, a managing director at Cypress Group. “As a result, the shareholders have adjusted their strategy to muddy the waters – and, if they can, kill the Johnson-Crapo bill.”

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As part of their effort, investors have begun taking their concerns public through new tax-exempt groups in Washington. The investors argue they were on the receiving end of a rotten deal from the government, particularly those that bought the stocks before the enterprises were put into conservatorship.

“The hedge funds have this incredibly sophisticated, multi-pronged strategy – lawsuits, legislation, academics on the payroll, funding anonymous PR campaigns, offering to buy the companies. They’re coming at it from all angles,” said David Reiss, a professor at Brooklyn Law School.

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Given the size and complexity of the cases, it’s likely to take years before the matter is resolved entirely. Analysts have suggested that if both sides continue to push the issue, it could even rise up to the Supreme Court over the next several years.

“You’re talking about many-year or potentially, decades-long lawsuits,” said Reiss. “The stakes are humongous and the parties are incredibly sophisticated and well financed. The government parties’ incentives to settle are not the same as a private party – I could imagine them seeing this all the way through.”

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Judge Chesler issued an Opinion in The Prudential Insurance Company of America et al. v. Bank of America, National Association et al., No. 13-1586 (Apr. 17, 2014), deciding the motion to dismiss the Complaint. Claims relating to fraud, a theory of underwriting abandonment and the 1933 Securities Act survived the motion to dismiss. The Court summarized the case as follows:

In a nutshell, this case arises from a dispute over the sale of certain residential mortgage-backed securities (“RMBS”) by Defendants [various Bank of America parties , including Merrill Lynch parties] to Plaintiffs [various Prudential parties]. The Complaint alleges that Defendants obtained the underlying mortgages, created the securitizations based on them, issued “offering Materials” for their sale, and sold them to Plaintiffs.

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The Complaint alleges a variety of statistics in support of its claims. It is often not clear, however, what the basis for a particular statistic is. (1-2)

The Court’s description of the Complaint is pretty damning. But the Court does not find that the poor use of statistics in the Complaint is fatal to all of its claims.

Here are some highlights of the Court’s assessment of the Complaint:

  • “this Court does not find that the Analysis, as described in the Complaint, is such obvious junk research that it fails to constitute relevant factual allegations which, considered along with the other factual allegations in the Complaint, make plausible certain of the assertions of misrepresentation.” (8)
  • “The Complaint alleges that Defendants knowingly misrepresented that they would properly transfer title to the underlying mortgage loans to the particular trusts. The sole factual allegation made in support is: ‘Prudential’s forensic loan-level analysis revealed that across the Offerings Prudential tested, 43% of the Mortgage Loans were not properly assigned to the Trusts.’ Yes, if true, that is an astonishing fact– but there is not even a suggestion in the Complaint of a theory of how this gives rise to the inference of a knowing misrepresentation.” (13)
  • “The Complaint has so little explanation of the AVM [automated valuation model] methodology that this Court has no idea of how the computer used what information to generate property appraisals.” (15)

Notwithstanding the Court’s critique, it ends up finding the Complaint persuasive in the main:

The claim that Defendants’ representations about the underwriting practices and standards used in the issuance of the underlying mortgage loans were fraudulent because of a systemic abandonment of such underwriting standards is perhaps the central claim in this case. in brief, this Court has carefully examined the Complaint and finds that it states an abundance of factual allegations supporting this claim. (21)

The drafters of the complaint might reckon, ‘no harm no foul’ from the Court’s conclusion. But the rest of us might better see this as their having dodged a bullet, a bullet that the Plaintiffs’ attorneys shot at themselves. Mark Twain had said that “There are three kinds of lies: lies, damned lies, and statistics.” Not sure what he would have said about those in this Complaint — damned statistics?

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Matt Festa has posted an interesting, short article, Land Use in the Unzoned City, to SSRN. He writes,

The popular conception that Houston is unzoned because it is some sort of ultra-Texan free-market landscape is not accurate. Houston’s land use is in fact highly regulated. While no Houston ordinance explicitly uses the “z-word,” and its rules for the most part don’t prescribe limitations on use, there are numerous land use regulations that, in any other city, would be part of the zoning code. Houston defines certain areas as “urban” versus “suburban,” with different regulations.There are laws prescribing minimum lot sizes, which in turn restrict density. There are setbacks from the street, buffer zones for development, and regulated street widths. There are other laws that affect land use, such as the new historical preservation ordinance, which allows citizens to petition the council for designation as a historic area, which comes with additional restrictions. These are all government measures that, in my opinion, operate as “de facto zoning”— they prescribe different land use rules based partly on geographic location. And even these rules pale in comparison to the extensive regime of private covenants and deed restrictions that govern a majority of the property in Houston. (17)

Festa explains that this lack of zoning may have some partial explanations that have to do with the culture of the city. But he finds a more compelling explanation in the ban on zoning contained in the Houston City Charter. This ban, which can only be overturned by referendum, has been challenged three times but zoning supporters have come up a bit short each time.

Festa is certainly correct that land use scholars (Edward Glaeser, for instance) use Houston as a foil to communities that heavily limit new construction with restrictive zoning provisions. So Festa’s thesis is an important one that I hope he develops in a longer article. Until we determine how much less restrictive Houston’s land use regime is than other American cities’ formal zoning ordinances, we can’t fully understand the interaction between restrictive land use policies and the housing crisis affecting cities across the country.

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The court in deciding Dias v. Fannie Mae, 2013 U.S. Dist. LEXIS 181584 (D. Haw., 2013) rejected all but one of the plaintiff’s claims.

The court found that the plaintiff’s Haw. Rev. Stat. § 667-5 defective assignment claims against defendants failed because the mortgage gave the requisite authority.

The court found that a claim that no sale could be held pending a Home Affordable Modification Program (HAMP) modification failed because the mortgagor lacked standing. The false mortgage assignment claim failed because nothing showed a publicly recorded assignment was false. Likewise, the breach of contract claim for violating HAMP guidelines failed because the mortgagor had no such claim, no HAMP trial payment plan supported it, and she was not an intended beneficiary of any HAMP agreement between defendants and the U.S. Treasury.

However, the plaintiff’s Fair Debt Collection Practices Act, 15 U.S.C.S. § 1692, claims survived because a defaulted debt was assigned, so defendants could not show they were not debt collectors, under 15 U.S.C.S. § 1692a(6)(F).

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The court in deciding Bank of Am., N.A. v. Pasqualone, 2013-Ohio-5795 (Ohio Ct. App., Franklin County, 2013) affirmed the decision of the lower court.

The court found that the promissory note was a negotiable instrument subject to relevant provisions of R.C. Chapter 1303 because it contained a promise to pay the lender the amount of $100,000, plus interest, and did not require any other undertakings that would render the note nonnegotiable.

Further, the court found that since the bank was the holder of the note it was a person entitled to enforce the note pursuant to R.C. 1303.31(A)(1). Based on the authorization, the note became payable to the bank as an identified person and, because the bank was the identified person in possession of the note, it was the holder of the note.

Lastly, as the property owner’s defenses to the mortgage foreclosure did not fit the criteria of a denial, defense, or claim in recoupment under R.C. 1303.36 or R.C. 1303.35, the bank’s right to payment and to enforce the obligation was not subject to the owner’s alleged meritorious defenses.

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The court in deciding M & T Bank v. Strawn, 2013-Ohio-5845 (Ohio Ct. App., Trumbull County 2013) affirmed the lower court’s decision and found that appellant’s argument was without merit.

Appellant framed three issues for this court’s review. First, appellant contended that the trial court erred in relying upon the affidavit of Mr. Fisher to demonstrate that appellant had possession of the promissory note and that the copies were true and accurate. Second, appellant questioned whether appellee fulfilled the condition precedent of providing notice of the default and notice of acceleration. Third, appellant argued that there was a genuine issue of material fact as to whether appellee was the real party in interest possessing an interest in the promissory note and mortgage.

The court found that the bank’s possession of the note was shown by an affidavit, along with attached copies of the note endorsed to the bank, and one in possession of a note endorsed to that party was a holder, for purposes of R.C. 1301.201(B)(21)(a), and thus entitled to enforce the instrument under R.C. 1303.31.

The court also found that the affidavit for the bank clearly stated that the bank had been in possession of the original promissory note, and the affidavit was sufficient for the trial court to have held that the affiant had personal knowledge. Lastly, the court found that nothing suggested that voided endorsements affected the bank’s status as a holder, and thus it did not create an issue of fact and that the bank acquired an equitable interest in the mortgage when it became a holder of the note, regardless of whether the mortgage was actually or validly assigned or delivered.

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The Rand Corporation has posted Flood Insurance in New York City Following Hurricane Sandy. The report has a chapter on affordability issues that is worth a read, particularly as the de Blasio Administration undertakes its ambitious affordable housing plan. The report notes that

many New Yorkers will face substantially higher flood insurance premiums moving forward. Many more structures will be in areas considered high-risk than in the past, and premiums for many structures already in high-risk areas will be based on considerably higher flood levels.

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These substantial premium increases will reduce the disposable income or wealth (or both) of many households and may well be unaffordable for some. In the absence of intervention, the consequences may be foreclosures, turnover, and hardship for some of New York City’s more-vulnerable citizens.(63)

The book goes on to review a variety of approaches “for addressing the affordability issue.” (67) It reviews “tax credits, grants, and vouchers that could be applied toward the cost of flood insurance.” (63) It also notes that such interventions distort “the price signal that incentives property owners to invest in risk-mitigation measures in order to reduce premiums.” (67) It considers proposals to deal with such distortion, such as a means-tested voucher program that is coupled “with a requirement that mitigation measures be taken that make sense for the property.” (67) The book only scratches the surface of this topic, noting that more “information is needed to address the advantages and disadvantages of alternative strategies for addressing affordability.” (68)

As the de Blasio Administration considers the preservation portion of its affordable housing agenda, one could imagine that a concerted effort to incentivize risk mitigation while also promoting affordability could be a significant component of the final plan. Solutions could range from deferred payment, due on sale or refinance of a home, to outright subsidies as outlined by the Rand report. Whatever the ultimate solution is, the problem should be incorporated into the City’s planning now.