August 12, 2014

Fannie+Freddie=FRANNIE?!?

By David Reiss

The Federal Housing Finance Agency (FHFA) has posted a Request for Input on “the proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac.” The FHFA’s press release states that

The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities by creating a Single Security that is eligible for trading in the to-be-announced (TBA) market.  FHFA is requesting public input on all aspects of the proposed Single Security structure and is especially focused on issues regarding the transition from the current system to a Single Security.  Specific questions FHFA is asking relate to TBA eligibility, legacy Fannie Mae and Freddie Mac securities, potential industry impact of the Single Security initiative, and the risk of market disruption.

 The particular questions for which the FHFA invites feedback are

  1. What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?
  2. What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?
  3. As discussed above, this is a multi-year initiative with many stakeholders. What operational, system, policy (e.g., investment guideline), or other effects on the industry should be considered?
  4. What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption? (8)

The FHFA states it is most concerned with achieving “maximum secondary market liquidity,” so it is particularly interested “in views on how to preserve TBA eligibility and ensure that legacy MBS [mortgage-backed securities] and PCs [participation certificates] are fully fungible with the Single Security.” (8)

I must say that I am a little skeptical about the reasons for this move to a Single Security. It is unclear to me that this is an urgent need for the FHFA, the two companies, originating lenders or borrowers. While I have no doubt that it could slightly increase liquidity and slightly decrease the cost of credit, I do not see this move as having a dramatic effect on either.

I would say, though, that this move is consistent with an agenda to move toward a new model of government-supported housing finance, one that could contemplate an end to Fannie and Freddie as we know them and the beginning of a more utility-like securitizer like those proposed in the Johnson-Crapo and Corker-Warner bills. Perhaps the regulator will lead the way to housing finance reform when Congress and the Executive have failed to do so . . ..

Input is due by October 13, 2014.

 

August 12, 2014 | Permalink | No Comments

August 11, 2014

Reiss on The Future of the Private Label Securities Market

By David Reiss

I have posted The Future of the Private Label Securities Market to SSRN (as well as to BePress). I wrote this in response to the Department of Treasury’s request for input on this topic. The abstract reads,

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain healthy throughout the entire business cycle.

August 11, 2014 | Permalink | No Comments

August 8, 2014

Conservative Underwriting or Regulatory Uncertainty?

By David Reiss

Jordan Rappaport (Federal Reserve Bank of Kansas City) and Paul Willen (Federal Reserve Bank of Boston) have posted a Current Policy Perspectives,Tight Credit Conditions Continue to Constrain The Housing Recovery. They write,

Rather than cutting off access to mortgage credit for a subset of households, ongoing credit tightness more likely takes the form of strict underwriting procedures applied to all households. Lenders require conservative appraisals, meticulous documentation, and the curing of even the slightest questions of title. To the extent that these standards constitute sound lending practices, adhering to them is a positive development. But the level of vigilance suggests that regulatory uncertainty may also be playing a role.

Since the housing crisis, the FHA, the Federal Housing Finance Agency, the Consumer Financial Protection Bureau, and other government and private organizations have been continually developing a new regulatory framework. Lenders fear that departures from the evolving standards will result in considerable costs, including the forced buyback of loans sold to Fannie and Freddie and the rescinding of FHA mortgage guarantees. The associated uncertainty has caused lenders to act as if strict interpretations of possible restrictive future standards will apply. (2-3)

The authors raise an important question: has the federal government distorted the mortgage market in its pursuit of past wrongdoing and its regulation of behavior going forward? Anecdotal reports such as those about Chase’s withdrawal from the FHA market seem to suggest that the answer is yes. But it appears to me that Rappaport and Willen may be jumping the gun based on the limited data that they analyze in their paper.

Markets cycle from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and government interventions are undoubtedly fierce (just ask BoA). But the government should not chart its course based on short-term market conditions. Rather, it should identify fundamentals and stick to them. Its enforcement approach should reflect clear expectations about compliance with the law. And its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain vibrant throughout the entire business cycle.

August 8, 2014 | Permalink | No Comments

One Hour Left To Nominate REFinblog for Blawg 100!

By David Reiss

The ABA Journal is soliciting suggestions for the Blawg 100, its annual listing of the 100 best legal blogs. Please consider nominating REFinblog.  The nomination form is here and nominations are due by 5:00 pm EST on Friday, August 8th.  Thank you for your consideration!

August 8, 2014 | Permalink | No Comments

August 7, 2014

Unfair Loan Mod Negotiations

By David Reiss

The Ninth Circuit issued an Opinion in Compton v. Countrywide Financial Corp. et al., (11-cv-00198 Aug. 4, 2014).  The District Court had dismissed Compton’s unfair or deceptive act or practice [UDAP] claim because she had failed to allege that the lender had “exceeded its role as a lender and owed an independent duty of care to” the borrower. (14) The Court of Appeals concluded, however, that the homeowner/plaintiff had

sufficiently alleged that BAC engaged in an “unfair or deceptive act or practice” for the purpose of withstanding a motion to dismiss. As previously noted, Compton does not base her UDAP claim on allegations that BAC failed to determine whether she would be financially capable of repaying the loan. Rather, the gist of Compton’s complaint is that BAC misled her into believing that BAC would modify her loan and would not commence foreclosure proceedings while her loan modification request remained under review. As a result of these misrepresentations, Compton engaged in prolonged negotiations, incurred transaction costs in providing and notarizing documents, and endured lengthy delays. The complaint’s description of BAC’s misleading behave or sufficiently alleges a “representation, omission, or practice” that is likely to deceive a reasonable consumer.(15)

This seems to be an important clarification about what a reasonable consumer, or at least a reasonable consumer in Hawaii, should be able to expect from a lender with which she does business.

While the Court reviews a fair amount of precedent that stands for the proposition that a lender does not owe much of a duty to a borrower, Compton seems to stand for the proposition that lenders must act consistently, at least in broad outline, with how we generally expect parties to behave in consumer transactions: telling the truth, negotiating in good faith, minimizing unnecessary transaction costs; and minimizing unnecessary delays.

In reviewing many cases with allegations such as these, it seems to me that judges are genuinely shocked by lender behavior in loan modification negotiations. It remains to be seen whether such cases will change UDAP jurisprudence in any significant way once we have worked through all of the foreclosure crisis cases.

August 7, 2014 | Permalink | No Comments

August 5, 2014

Offering Opinions About MBS Exposure

By David Reiss

The Tenth Circuit issued an opinion in MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P. et al. (No. 13-1016 Aug. 1, 2014). The case concerns a 2009 stock offering by Bancorp. Bancorp was significantly exposed to mortgage-backed securities (MBS) and said as much in its securities filings. It also predicted that the market for MBS would rebound soon.

The highly readable opinion asks,

When does section 11 of the Securities Act of 1933 impose liability on issuers who offer opinions about future events? The statute prohibits companies from making statements that are false or misleading. Establishing that an opinion about the future failed to pan out in the end may go some way to meeting that standard but it doesn’t go all the way. After all, few of us would label a deeply studied, carefully expressed, and earnestly held opinion about the future as false or misleading at the time it’s made simply because later events proved it wrong. To establish liability for an opinion about the future more is required. But what? Answering that question is the challenge posed by this case.

The opinion provides a clear overview of what differentiates opinion from fact in securities offering statements. The Court does this by carefully walking through three theories of opinion liability under section 11:

  1. “no one should depend on the puffery of salesmen . . . especially when the salesman’s offering a guess about the future” (5-6)
  2. “an opinion can qualify as a factual claim by the speaker regarding his current state of mind.” (7)
  3. “some subset of opinions about future events contain within them an implicit factual warranty that they rest on an objectively reasonable basis” (13)

In this case, the Court found that the plaintiffs could not establish liability under any theory.

The opinion provides a nice, clean framework for understanding section 11 liability claims.  This framework should apply to offering statements for MBS that set forth opinions about future events as well as those for any other type of security that does the same.

August 5, 2014 | Permalink | No Comments