July 16, 2014
The Federal Housing Finance Agency released a White Paper on the FHFA Mortgage Analytics Platform. By way of background, the White Paper states that
The Federal Housing Finance Agency (FHFA) maintains a proprietary Mortgage Analytics Platform to support the Agency’s strategic plan. The objective of this white paper is to provide interested stakeholders with a detailed description of the platform, as it is one of the tools the FHFA uses in policy analysis. The distribution of this white paper is part of a larger effort to increase transparency on mortgage performance and the analytical tools used for policy analysis and evaluation within the FHFA.
The motivation to build the FHFA Mortgage Analytics Platform derived from the Agency’s need for an independent empirical view on multiple policy initiatives. Academic empirical studies may suffer from a lack of high quality data, while empirical work from inside the industry typically represents a specific view. The FHFA maintains several vendor platforms from which an independent view is possible, yet these platforms tend to be inflexible and opaque. The unique role of the FHFA as regulator and conservator necessitated platform flexibility and transparency to carry out its responsibilities.
The FHFA Mortgage Analytics Platform is maintained on a continuous basis; as such, the material herein represents the platform as of the publication date of this document. As resources permit, this document will be up dated to reflect enhancements to the platform. (2)
This platform is a very welcome development for exactly the reasons that the White Paper sets forth. Academics have a very hard time accessing good data on the mortgage markets (its usually expensive, untimely, limited). Industry interpretations of data typically have agendas.
A sampling of the Platform’s elements include:
- Performing Unpaid Principal Balance
- Scheduled Paid Principal Balance
- Unscheduled Paid Principal
- Dollars of New 90 Day Delinquencies
- Non-Performing Balances
- Property Value of Non-Performing Loans (30-31)
Let us hope that the Platform offers a transparent and flexible tool to track this very dynamic market.
July 15, 2014
Law360 quoted me in Feds Deploy Potent Bank Fraud Law In $7B Citi Pact (behind a paywall). It reads in part:
The U.S. Department of Justice’s $7 billion mortgage bond settlement with Citigroup Inc. on Monday may not have been possible without the help of a once-obscure fraud law that has become a legal magic wand for prosecutors.
Citigroup’s settlement included a $4 billion civil fine under the Financial Institutions Reform Recovery and Enforcement Act, the largest such penalty in history. FIRREA was passed in the wake of the 1980s savings-and-loan crisis but has been dusted off in recent years as prosecutors have targeted major Wall Street banks that packaged and sold toxic residential mortgage-backed securities before the 2008 economic collapse.
The law’s government-friendly provisions are well-documented. FIRREA contains a 10-year statute of limitations, rather than the typical five-year window for fraud suits. That has permitted the government to comfortably sue banks over conduct that occurred in 2006 and 2007, when many of the shoddy loans implicated in the crisis were securitized. Prosecutors can use tolling agreements to keep potential claims alive even longer.
* * *
The sheer size of the government’s FIRREA fines thus far, combined with the lack of case law underpinning the statute, has placed banks and their defense counsel in a difficult negotiating position, according to David Reiss, a professor at Brooklyn Law School.
“The message for people in negotiations is: Expect to pay a lot, or else, the government is going to call your bluff,” Reiss said. “It’s the Wild West for civil penalties.”
Monday’s settlement relates to Citigroup’s due diligence on loans that were packaged into securities and sold to investors for tens of billions of dollars. According to an agreed-upon statement of facts, the bank “received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations provided to investors about the pools of loans to be securitized.”
In one case, a Citigroup trader wrote an internal email questioning the quality of loans in mortgage-backed securities issued in 2007. The trader said that he “went through the diligence reports and think that we should start praying … I would not be surprised if half of these loans went down.”
The bank did not admit to breaking any particular law, and neither it nor any individual employees were criminally charged. At the same time, DOJ officials were quick to point out that the settlement did not release Citigroup or any individuals from potential criminal liability.
Reiss said the threat of criminal prosecution could become a hallmark of FIRREA cases, giving banks another cause for concern.
“That again demonstrates a lot of leverage on the side of the government,” Reiss said. “It’s a powerful tool to keep in your back pocket.”
July 14, 2014
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!
Law360 quoted me in FHFA Capital Rules Will Squeeze Older Mortgage Insurers (behind a paywall). It opens,
The Federal Housing Finance Agency on Thursday released proposals that would impose higher capital requirements on private mortgage insurers doing business with Fannie Mae and Freddie Mac, but experts say insurers with bubble-era mortgages in their portfolios may find it tough to meet the new mandates.
The new standards will force mortgage insurers to determine the amount of cash and other liquid assets they retain to cover potential payouts using more of a risk-based formula than they have up to this point, meaning that the riskier the mortgage, the more capital will be required.
Because of that, mortgage insurers that were in business during the housing bubble era and have older loans on their books will be hit harder than insurers that have only post-financial crisis loans on their books, said Paul Hastings LLP partner Kevin Petrasic.
“The older vintage mortgages have more challenging issues than the newer mortgages,” he said.
Fannie Mae and Freddie Mac are barred from backing mortgages where the borrower has contributed less than a 20 percent down payment without getting private mortgage insurance to make up the difference. The insurance on those mortgages absorbs any losses before Fannie Mae and Freddie Mac do in the case of default, in essence putting private money before taxpayer money.
During the financial crisis, private mortgage insurers paid out billions of dollars on bad mortgages even as Fannie Mae and Freddie Mac took on over $180 billion in federal bailout money in the fall of 2008, when they were put under the FHFA’s conservatorship.
However, the financial crisis also saw many of the larger mortgage insurers fail under the weight of the huge number of claims they had to cover, contributing to Fannie and Freddie’s collapses.
“The history of the mortgage insurance industry is a history of good profits during good times and catastrophic losses in bad times,” said Brooklyn Law School professor David Reiss. “It seems like what the FHFA is doing is saying we don’t want the taxpayer on the hook during the next period of catastrophic losses.”
That is exactly what the FHFA says it intends with its new regulations, part of a so-called strategic plan to strengthen Fannie Mae and Freddie Mac and to bring more private money into the mortgage market.
July 11, 2014
Treasury is requesting Public Input on Development of Responsible Private Label Securities (PLS) Market. Comments are due on August 8, 2014. The request for information wants input on the following questions:
1. What is the appropriate role for new issue PLS in the current and future housing finance system? What is the appropriate interaction between the guaranteed and non-guaranteed market segments? Are there particular segments of the mortgage market where PLS can or should be most active and competitive in providing a channel for funding mortgage credit?
2. What are the key obstacles to the growth of the PLS market? How would you address these obstacles? What are the existing market failures? What are necessary conditions for securitizers and investors to return at scale?
3. How should new issue PLS support safe and sound market practices?
4. What are the costs and benefits of various methods of investor protection? In particular, please address the costs and benefits of requiring the trustee to have a fiduciary duty to investors or requiring an independent collateral manager to oversee issuances?
5. What is the appropriate or necessary role for private industry participants to address the factors cited in your answer to Question #2? What can private market participants undertake either as part of industry groups or independently?
6. What is the appropriate or necessary role for government in addressing the key factors cited in your answer to Question #2? What actions could government agencies take? Are there actions that require legislation?
7. What are the current pricing characteristics of PLS issuance (both on a standalone basis and relative to other mortgage finance channels)? How might the pricing characteristics change should key challenges be addressed? What is the current and potential demand from investors should key challenges be addressed?
8. Why have we seen strong issuance and investor demand for other types of asset-backed securitizations (e.g., securitizations of commercial real estate, leveraged loans, and auto loans) but not residential mortgages? Do these or other asset classes offer insights that can help inform the development of market practices and standards in the new issue PLS market?
These are all important questions that go way beyond Treasury’s portfolio and touch on those of the FHFA, the FHA and the CFPB to name a few. Nonetheless, it is important that Treasury is framing the issue so broadly because it gets to the 10 Trillion Dollar Question: Who Should Be Providing Mortgage Credit to American Households?
Some clearly believe that the federal government is the only entity that can do so in a stable way and certainly history is on their side. Since the Great Depression,when the Home Owners Loan Corporation, the Federal Housing Administration and Fannie Mae were created, the federal government has had a central role in the housing finance market.
Others (including me) believe that private capital can, and should, take a bigger role in the provision of mortgage finance. There is some question as to how much capacity private capital has, given the size of the residential mortgage market (more than ten trillion dollars). But there is no doubt that it can do more than the measly ten percent share or so of new mortgages that it has been originating in recent years.
Treasury should think big here and ask — what do we want our mortgage finance to look like for the next eight or nine decades? Our last system lasted for that long, so our next one might too. The issue cannot be decided by empirical means alone. There is an ideological component to it. I am in favor of a system in which private capital (albeit heavily-regulated private capital) should be put at risk for a large swath of residential mortgages and the taxpayer should only be on the hook for major liquidity crises.
I also favor a significant role for government through the FHA which would still create a market for first-time homebuyers and low- and moderate-income borrowers. But otherwise, we would look to private capital to price risk and fund mortgages to the extent that it can do so. Round out the system with strong consumer protection regulation from the CFPB, and you have a system that may last through the end of the 21st century.
Comments are due August 8th, so make your views known too!
July 10, 2014
The Maine Supreme Judicial Court seems to be on a roll against the mortgage industry, having recently issued an opinion that effectively wiped out a mortgage because of the lenders bad faith negotiations during a foreclosure proceeding.
And now, the Maine Supreme Judicial Court issued an opinion in Bank of America, N.A. v. Greenleaf et al., 2014 ME 89 (July 3, 2014), that casts into doubt whether MERS has any life left in it in Maine. The case’s reasoning is, however, somewhat suspect. The Greenleaf court held that the bank did not have standing to seek foreclosure even though it was the holder of the mortgage note. The court stated that
The interest in the note is only part of the standing analysis, however; to be able to foreclose, a plaintiff must also show the requisite interest in the mortgage. Unlike a note, a mortgage is not a negotiable instrument. See 5 Emily S. Bernheim, Tiffany Real Property § 1455 n.14 (3d ed. Supp. 2000). Thus, whereas a plaintiff who merely holds or possesses—but does not necessarily own—the note satisfies the note portion of the standing analysis, the mortgage portion of the standing analysis requires the plaintiff to establish ownership of the mortgage. (8)
This seems to go against the weight of authority. The influential Report of The Permanent Editorial Board for The Uniform Commercial Code, Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes (November 14, 2011), states that
the UCC is unambiguous: the sale of a mortgage note (or other grant of a security interest in the note) not accompanied by a separate conveyance of the mortgage securing the note does not result in the mortgage being severed from the note. . . . UCC Section 9-308(e) goes on to state that, if the secured party’s security interest in the note is perfected, the secured party’s security interest in the mortgage securing the note is also perfected . . .. (12-13, footnotes omitted)
The Maine Supreme Judicial Court is the ultimate authority on the meaning of Maine’s foreclosure statute, of course, but their reasoning is still open to criticism.