October 17, 2014

The Other GSE Conservatorship Lawsuit

By David Reiss

While there has been a lot of attention over Judge Lamberth’s ruling on the shareholders’ cases regarding Fannie and Freddie’s conservatorships, much less has been given to Judge Cooke’s dismissal of Samuels v. FHFA (No. 13-22399 S.D. Fla. ) (Sept. 29, 2014 ). The low-income and organizational plaintiffs in Samuels challenged the FHFA’s decision to suspend Fannie and Freddie’s obligation to fund the Housing Trust Fund after they entered into conservatorship. The Housing Trust Fund was to be funded by contributions by that were based on Fannie and Freddie’s annual purchases. The FHFA took the position that they GSEs need not pay into the fund while they themselves were in such a precarious financial position. Judge Cooke held that “The Individual and Organizational Plaintiffs lack Article III standing because their alleged injuries are too remote from and not fairly traceable to the Defendants’ allegedly unlawful conduct.” (13)

I found the dicta in the case to be the most interesting. The court found that the relevant provision from the Housing and Economic Recovery Act of 2008

provides no meaningful standards for determining when “an enterprise” is financially instable, undercapitalized, or in jeopardy of unsuccessfully completing a capital restoration plan. Considering the history of Fannie Mae and Freddie Mac; the government’s placing Fannie Mae and Freddie Mac in conservatorship; the Treasury Department providing liquidity to Fannie Mae and Freddie Mac through preferred stock purchase agreements, the mortgage backed securities purchase program, and an emergency credit facility; it is not for this Court to judicially review Defendants’ statutorily mandated suspension of payments into the Housing Trust Fund. (13)

My takeaway from this opinion is that we  now have another federal judge finding that the federal government is to be given great deference in its handling of the financial crisis. And this deference derives not just from the text of the relevant statute but also from the particular historical events that led to its adoption and that followed it. This seems like an important trend, as far as I am concerned.

October 17, 2014 | Permalink | No Comments

October 16, 2014

Reiss on Saving Thousands on Your Mortgage!

By David Reiss

MainStreet.com quoted me in You Can Save Thousands on Your Mortgage By Taking This Tiny Step.  It reads in part,

Homeowners can save thousands of dollars when they work with counselor to get their mortgages modified and decrease their odds of defaulting again.

A new study for NeighborWorks America by the Urban Institute determined that homeowners were able to avoid spending millions of dollars annually because of the National Foreclosure Mitigation Counseling (NFMC) program. Homeowners working with NFMC program counselors are nearly three times more likely to obtain a mortgage modification and are nearly twice as likely to get their mortgage back on track without a modification.

After working with counselors, homeowners are 60% less likely to re-default after curing a serious delinquency and able to complete short sales faster than homeowners who don’t work with counselors.

The research is based on analysis of nearly 240,000 homeowners with outcomes observed through June 2013. More than 1.8 million homeowners have been helped by the NFMC program, administered by NeighborWorks America since it began in March 2008.

  *     *     *

Since buying a home is something that most people only do once or twice in their lives, there is no question that homeowners whose mortgages are in default or at risk of default should look for assistance as soon as possible, said David Reiss, professor of law at Brooklyn Law School in New York.

“Losing their home is something that most never do at all, so to think that going it alone is the best strategy is a mistake,” he said. “Foreclosure counselors know the range of options available to borrowers and may have access to more direct lines of communication with lenders. They also will have a better sense of when to complain to regulators about bad behavior by lenders.”

October 16, 2014 | Permalink | No Comments

October 15, 2014

Reiss in Newsday on Stimulus Program

By David Reiss

Newsday quoted me in State Faults Venture Capital Firm (registration required for full access).  The story reads in part,

New York State officials say Canrock Ventures, a venture capital firm in Brookville, failed to notify them of potential conflicts of interest when it invested taxpayer money in local technology startups.

An official with Empire State Development, the state’s primary business-aid agency, said under the terms of a written agreement with the state, Canrock should have convened a “valuation committee” to review its proposed investments of federal funds in four computer software startups.

The four businesses were co-founded by a Canrock partner, and the venture firm holds sizable stakes in them. The official requested anonymity.

Mark Fasciano, the Canrock partner, said yesterday that he disclosed all of Canrock’s holdings and his roles in the companies to the state at the start of the investment process.

*     *      *

Canrock’s 2013 contract with New York State, obtained by Newsday under the state Freedom of Information Law, stipulates that conflicts of interest are to be weighed by a valuation committee.

The Empire State Development official said the committee is composed of two state representatives and a Canrock representative, and can only been convened by the venture firm, not New York State.

“They [Canrock] have to disclose potential conflicts of interest to the valuation committee,” the official said last month. “They did not meet that requirement.”

*     *      *

Valuation committees were also included in the state contracts of six other venture firms investing Innovate NY money. None of the six called valuation committee meetings to handle conflicts of interest “because no conflicts had arisen,” an Empire State Development spokesman said.

Some experts questioned whether the valuation committees were effective.

David Reiss, a law professor and research director for Brooklyn Law School’s Center for Urban Business Entrepreneurship, said, “a self-reporting system,” such as the valuation committees, would only deter fraud if the probability of getting caught is high and the consequences are grave.

 “The likelihood of getting caught here sounds pretty low,” he said.

October 15, 2014 | Permalink | No Comments

October 14, 2014

Reiss on The FHFA’s Common Securitization Platform

By David Reiss

I have submitted my response to the FHFA’s Request for Input on the Proposed Single Security Structure.  The abstract for my response, The FHFA’s Proposed Single Security Structure, reads,

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 states it is most concerned with achieving “maximum secondary market liquidity” (Request for Input, at 8)

I am skeptical about the reasons for this move to a Single Security and whether it will achieve maximum liquidity. Moreover, it is unclear to me that this move reflects 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 meaningful effect on either.

This move is consistent, however, with a 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.  If, indeed, the FHFA is taking this step, it should be more explicit as to its reasons for doing so.

October 14, 2014 | Permalink | No Comments

October 13, 2014

Commemorating Columbus Day

By David Reiss

Adieu, Adieu! My Native Shore

  from Byron’s Childe Harold, Canto i, Verse 13


   ‘ADIEU, adieu! my native shore

       Fades o’er the waters blue;

   The Night-winds sigh, the breakers roar,

       And shrieks the wild sea-mew.

   Yon Sun that sets upon the sea

       We follow in his flight;

   Farewell awhile to him and thee,

       My native Land — Good Night!


   ‘A few short hours and He will rise

       To give the Morrow birth;

   And I shall hail the main and skies,

       But not my mother Earth.

   Deserted is my own good hall,

       Its hearth is desolate;

   Wild weeds are gathering on the wall;

       My dog howls at the gate.


   ‘Come hither, hither, my little page!

       Why dost thou weep and wail?

   Or dost thou dread the billows’ rage,

       Or tremble at the gale?

   But dash the tear-drop from thine eye;

       Our ship is swift and strong,

   Our fleetest falcon scarce can fly

       More merrily along.’ –


   ‘Let winds be shrill, let waves roll high,

       I fear not wave nor wind;

   Yet marvel not, Sir Childe, that I

       Am sorrowful in mind;

   For I have from my father gone,

       A mother whom I love,

   And have no friend, save these alone,

       But thee — and one above.


   ‘My father bless’d be fervently,

      Yet did not much complain;

   But sorely will my mother sigh

       Till I come back again.’ –

   ‘Enough, enough, my little lad!

       Such tears become thine eye;

   If I thy guileless bosom had,

       Mine own would not be dry. –


   ‘Come hither, hither, my staunch yeoman,

       Why dost thou look so pale?

   Or dost thou dread a French foeman?

       Or shiver at the gale?’–

   ‘Deem’st thou I tremble for my life?

       Sir Childe, I’m not so weak;

   But thinking on an absent wife

       Will blanch a faithful cheek.


   ‘My spouse and boys dwell near thy hall,

       Along the bordering lake,

   And when they on their father call,

       What answer shall she make?’–

   ‘Enough, enough, my yeoman good,

       Thy grief let none gainsay;

   But I, who am of lighter mood,

       Will laugh to flee away.


   ‘For who would trust the seeming sighs

       Of wife or paramour?

   Fresh feres will dry the bright blue eyes

       We late saw streaming o’er.

   For pleasures past I do not grieve,

       Nor perils gathering near;

   My greatest grief is that I leave

       No thing that claims a tear.


   ‘And now I’m in the world alone,

       Upon the wide, wide sea;

   But why should I for others groan,

       When none will sigh for me?

   Perchance my dog will whine in vain,

       Till fed by stranger hands;

   But long ere I come back again

       He’d tear me where he stands.


   ‘With thee, my bark, I’ll swiftly go

       Athwart the foaming brine;

   Nor care what land thou bear’st me to,

       So not again to mine.

   Welcome, welcome, ye dark blue waves!

       And when you fail my sight,

   Welcome ye deserts, and ye caves!

       My native land — Good Night!’

October 13, 2014 | Permalink | No Comments

October 10, 2014

Dodd-Frank Mortgage Rules Readiness Guide

By David Reiss

The CFPB issued Version 3.0 of its 2014 CFPB Dodd-Frank Mortgage Rules Readiness Guide “to help financial institutions come into and maintain compliance with the new mortgage rules outlined in Part I of this Guide. . . .. This Guide summarizes the mortgage rules finalized by the CFPB as of August 1, 2014, but it is not a substitute for the rules.” (2)

The Guide provides a helpful overview of the Dodd-Frank rules that relate to the mortgage market, noting that they “amend several existing regulations, including Regulations Z, X, and B.” (3) The guide provides summaries of “rules required under Title XIV of the Dodd-Frank Act” and “the Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA).” (3) These summaries include:

  • Ability to Repay
  • Qualified Mortgage
  • TILA Escrow Requirements
  • High-Cost Mortgage and Homeownership Counseling
  • Mortgage Servicing
  • ECOA Valuations for Loans Secured by a First Lien on a Dwelling
  • TILA Appraisals for Higher-Priced Mortgage Loans
  • Loan Originator Compensation Requirements
  • TILA-RESPA Integrated Disclosure

While this Guide is directed at financial institutions to help them “come into and maintain compliance” with these rules, it also provides a useful overview for everyone else who is trying to understand what the current regulatory environment for the mortgage market looks like. (2)

October 10, 2014 | Permalink | No Comments

October 9, 2014

A Framework For Housing Finance

By David Reiss

The Government Accountability Office has released Housing Finance System: A Framework for Assessing Potential Changes. The GAO writes,

To help policymakers assess various proposals for changing the single-family housing finance system and consider ways in which the system could be made more effective and efficient, we prepared this report under the authority of the Comptroller General. Specifically, this report (1) describes market developments since 2000 that have led to changes in the federal government’s role in single-family housing finance; (2) analyzes whether and how these market developments have challenged the housing finance system; and (3) presents an evaluation framework for assessing potential changes to the housing finance system. (2)
It is useful to have a framework to figure out what kind of housing finance system we want for the 21st century. The GAO’s has 9 elements:
  1. Clearly defined and prioritized housing finance system goals
  2. Policies and mechanisms that are aligned with goals and other economic policies
  3. Adherence to an appropriate financial regulatory framework
  4. Government entities that have capacity to manage risks
  5. Mortgage borrowers are protected and barriers to mortgage market access are addressed
  6. Protection for mortgage securities investors
  7. Consideration of cyclical nature of housing finance and impact of housing finance on financial stability
  8. Recognition and control of fiscal exposure and mitigation of moral hazard
  9. Emphasis on implications of the transition (54-55)
This all sounds very Yoda-like, but the report itself goes into great detail as to what each of these 9 elements means. Given that Congress has left the housing finance system to its own devices, it is helpful that other branches of government like the GAO, Treasury and the FHFA are trying to move us beyond our current state of limbo. We need a housing finance system that is designed to last longer than the Band Aids and duct tape that were applied to it during the financial crisis.

October 9, 2014 | Permalink | No Comments