January 3, 2014
Yes, I know, a dry subject for most. But for some nerds, there are lots of insights in Mortgage Banking in the United States 1870-1940. The author, Kenneth Snowden, highlights this finding, which gives more credit to the Federal Farm Loan Bank system for the development of the modern mortgage market than do many other histories of the industry:
The Federal Farm Loan Bank system and the FHA mortgage insurance programs that restructured both the farm and urban mortgage banking sectors shared three common features:
+ They each encouraged the widespread adoption of long-term, amortized mortgage loans.
+ They each created mechanisms to stimulate the inter-regional transfer of mortgage credit and the convergence of mortgage rates and lending terms across regions.
+ They each established federal chartering systems for privately financed European-style mortgage banks to create active secondary markets for long-term, amortized loans. (2)
This history provides a lot more detail than one finds in standard histories of the American mortgage market, including much about the early history of securitization. Writers in this area (myself included) tend to think that securitization was birthed in the 1970s, but Snowden documents some proto-securitizations in the early 20th Century. I will come back to this report in a later blog post, but I highly recommend it to serious students of the mortgage markets.
January 2, 2014
Law360 quoted me in Real Estate Cases To Watch In 2014. The story reads in part,
The real estate market’s recovery from the financial crisis of the past few years has created a host of new issues — from contract disputes to eminent domain litigation — for government lenders, developers and investors to litigate in 2014.
Real estate finance attorneys are paying close attention to an expected rise in judicial scrutiny of banks’ ownership of loans, while also closely watching the multitude of cases that have been brought against the U.S. government and its handling of profits made by Fannie Mae and Freddie Mac.
At the same time, development attorneys are tuned in to how an increase in construction in gateway cities might soon lead to more litigation over land use and eminent domain.
Here are some of the most important cases and trends real estate attorneys are watching closely:
Challenges to Allocation of Fannie and Freddie Profits
A collection of cases making their way through the Washington, D.C., federal court and the Court of Federal Claims challenge the government’s taking of all of the profits from Fannie Mae and Freddie Mac and directing them toward the U.S. Department of the Treasury.
Two of the most-watched cases were brought by hedge funds Perry Capital LLC and Fairholme Capital Management LLC, the latter of which has since offered to purchase the government-sponsored entities’ insurance businesses.
Perry Capital accused the Treasury in July of illegally speeding up the GSEs’ liquidation, entitling the government to all of their mounting profits and essentially “extinguishing” privately held securities, according to the complaint filed in Washington federal court.
Fairholme made a similar claim in the Court of Federal Claims two days later, alleging that the government had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.
“The universe of cases impacting the current operation of Fannie and Freddie is very important from a policy perspective, and it’s also an interesting battle between hedge funds and the government,” said David Reiss, a professor at Brooklyn Law School.
There will likely be a flurry of motions to dismiss and requests for summary judgment on all sides in these cases 2014, but from the perspective of a real estate attorney, the policy implications will be more interesting than the precedential value of any decisions, he said.
A hearing on defendants’ dispositive motions and plaintiffs’ cross motions has been set for June 23 in the Washington cases.
Perry Capital is represented by Theodore B. Olson, Janet Weiss, Douglas Cox, Matthew McGill, Nikesh Jindal and Derek Lyons of Gibson Dunn. The case is Perry Capital LLC v. Lew et al., case number 1:13-cv-01025, in the U.S. District Court for the District of Columbia.
Fairholme is represented by Charles J. Cooper, Vincent J. Colatriano, David H. Thompson and Peter A. Patterson of Cooper & Kirk PLLC. That case is Fairholme Funds Inc. v. U.S., case number 1:13-cv-00465, in the U.S. Court of Federal Claims.
December 31, 2013
Reuters quoted me in Mortgage Bonds Reward Yield-Sensitive Investors, which addresses the future of Fannie and Freddie. It reads in part,
Investors who buy mortgage-backed securities from Fannie Mae and Freddie Mac and hold those bonds until they mature will get their full investment back; there is no “principal risk.”
* * *
Washington has spent years debating what to do with Fannie Mae and Freddie Mac in the future, and quick change is unlikely.
Even if Fannie and Freddie are privatized, older bonds would be safe, suggests David Reiss, a law professor of real estate finance at Brooklyn Law School.
“The government would not change the rules of the game for securities purchased with the guarantee. Pre-privatization (securities) would retain the guarantees, and future securities would have a different type of guarantee,” he said.
December 30, 2013
Loans.org quoted me in a story, CFPB Rules Reiterate Current and Future Lending Practices. It reads in part,
David Reiss, professor of law at the Brooklyn Law School, said there could be other long-term effects due to this high DTI ratio since the lending rules will likely remain for several decades.
If the rules remain intact, the high DTI number can still be lowered at a later time. For instance, if few defaults occur when the bar is set at 43 percent, the limit might increase. Conversely, if a large number of defaults occur, the limit will decrease even further.
Reiss hopes that the agencies overseeing the rule will make these changes based on empirical evidence.
“I’m hopeful that regulation in this area will be numbers driven,” he said.
Despite the wording, Bill Parker, senior loan officer at Gencor Mortgage, said that lenders are technically “not required to ensure borrowers can repay their loans.” He said lenders are legally required to make a “good faith effort” for reviewing documents and facts about the borrower and indicating if he or she can repay the debt.
“If they do so, following the directives of the CFPB, then they are protected against suit by said borrower in the future,” Parker said. “If they can’t prove they investigated as required, then they lose the Safe Harbor and have to prove the borrower has not suffered harm because of this.”
The statute of limitations for the CFPB law is three years from the start of loan payments. After that time period, the lender is no longer required to provide evidence of loan compliance.
Even though the amendment could impact the current lending market, experts told loans.org that the CFPB’s standards will make a greater impact on the future of the housing industry.
Reiss believes that the stricter rules will create a sustainable lending market.
December 28, 2013
The court in deciding Newman v. Bank of N.Y. Mellon, 2013 U.S. Dist. LEXIS 147562 (E.D. Cal. 2013) granted the defendant’s motion and dismissed the complaint.
Plaintiff (Newman) argued that he was not challenging the authorization to foreclose, nor was he requiring defendants to “produce the note.” Rather, he was challenging whether the correct entity is initiating foreclosure. He claimed that BONY did not have the right to enforce the mortgage because it did not own the loan, the note, or the mortgage.
Plaintiff alleged claims for declaratory relief, quasi-contract, California Civil Code § 2923.5, the Fair Debt Collection Practices Act (15 U.S.C. § 1692 et. seq.) (“FDCPA”),California Business & Professions Code § 17200 (“UCL”), and negligence.
Defendants argue that dismissal is appropriate for several reasons. First, Newman could not bring an action to determine whether the person initiating the foreclosure was authorized to do so. Second, Newman’s allegations that the assignments of the deed of trust involved illegible signatures and “robo-signers” were irrelevant. Third, Newman had no standing to challenge any violations of the Pooling and Servicing Agreement (“PSA”).
After reviewing the arguments the court found that the claims for declaratory relief, quasi-contract, under Cal. Civ. Code § 2923.5, and under the Fair Debt Collection Practices Act (FDCPA) failed because any claims that were based on violation of the pooling and servicing agreement were not viable, the borrower was estopped from arguing that the assignment violated the automatic stay, and the allegations of fraudulent assignments were insufficient and implausible.
The negligence claim also failed. The claim under Cal. Bus. & Prof. Code § 17200 (UCL) failed because the complaint did not state a claim for violation of the FDCPA, Cal. Penal Code § 532f(a)(4) could not have formed the basis of a UCL claim, and no violation of the Security First Rule was apparent.
December 27, 2013
Judge Cote (SDNY) issued an Opinion and Order in Federal Housing Finance Agency v. HSBC North America Holdings Inc, et al., 11-cv-06201 (Dec. 10, 2013). The opinion relates to the potential liability of individuals who signed various documents containing alleged misrepresentations that were filed with the Securities and Exchange Commission. These misrepresentations, if true, may violate the Securities Act of 1933. Individuals who signed off on the alleged misrepresentations could be liable as “control persons” or other key individuals under the Act. The alleged misrepresentations were contained in offering materials for RMBS purchased by Fannie Mae and Freddie Mac.
The issue in the case is a pretty technical one: “the motion requires the Court to decide whether the SEC radically altered Section 11 liability for individuals who sign registration statements in the context of the shelf registration process when the SEC promulgated Rule 430B in 2005.” (5) Less technically, the motion requires that the Court decide the scope of potential liability for individuals for misrepresentations made in documents that they DID NOT sign that were supplemental to documents that they DID sign. The Court found that individuals could be held liable for such misrepresentations as had been the case before Rule430B had been promulgated.
I am not a securities law expert, so I assume that Judge Cote is right in stating that the defendants were arguing for a radical change to the Securities Act of 1933 liability regime. I am also on the record in support of liability for individuals who are responsible for material aspects of the financial crisis. But I have also expressed concern about incredibly broad liability provisions. As a non-expert in this area, I was surprised that individuals could be held liable for misrepresentations that were made after they signed off on the preliminary documentation for securitizations.
The court in deciding Cornia v. Countrywide Home Loans, Inc., 2013 U.S. Dist. LEXIS 149592 (D. Utah 2013) granted defendant’s motion to dismiss. Plaintiffs’ claims based on securitization, assignment to MERs, or “robo-signing,” were dismissed with prejudice.
Plaintiffs’ complaint sought to quiet title in the property in plaintiffs’ names. As the basis for this relief, plaintiffs claimed that defendant (1) engaged in predatory lending, mail fraud, and wire fraud, (2) violated the Real Estate Settlement Procedures Act (“RESPA”), the Fair Debt Collection Practices Act (“FDCPA”), the Racketeer Influence and Corrupt Organizations Act (“RICO”), Homeowners Affordable Modification Program (“HAMP”), Equal Credit Opportunity Act (“ECOA”), the Utah Fraudulent Transfer Act and other statutes, regulations and unspecified consent orders, (3) fraudulently “robosigned,” the deeds of trust, and (4) securitized the loan.
Defendant moved pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”) and also pursuant to FRCP 8(a) and 9(a)(2) to dismiss all Plaintiffs’ claims. After considering both arguments, the court granted defendant’s motion.