August 20, 2014
The Consumer Financial Protection Bureau has issued a Compliance Bulletin and Policy Guidance on Mortgage Servicing Transfers (Bulletin 2014-01). Mortgage Serving Transfers have been receiving a lot of attention (also here) recently from regulators as the servicing industry is going through many changes.
The CFPB is right to focus on the impact of the transfer of mortgage servicing rights on homeowners. Many complaints made directly to regulators and seen in foreclosure cases relate to the Kafkaesque treatment that homeowners receive as their servicer point-of-contact changes from interaction to interaction.
The Bulletin indicates that servicers will have to do a fair amount of planning to ensure that consumers are not harmed by the transfer of servicing rights. In particular, the CFPB will be watching to see that servicers are (WARNING: Boring and Technical Language Alert!):
- Ensuring that contracts require the transferor to provide all necessary documents and information at loan boarding.
- Developing tailored transfer instructions for each deal and conducting meetings to
discuss and clarify key issues with counterparties in a timely manner; for large transfers, this could be months in advance of the transfer. Key issues may include descriptions of proprietary modifications, detailed descriptions of data fields, known issues with document indexing, and specific regulatory or settlement requirements applicable to some or all of the transferred loans.
- Using specifically tailored testing protocols to evaluate the compatibility of the
transferred data with the transferee servicer’s systems and data mapping protocols.
- Engaging in quality control work after the transfer of preliminary data to validate that the data on the transferee’s system matches the data submitted by the transferor.
- Recognizing when the transfer cannot be implemented successfully in a single batch and implementing alternative protocols, such as splitting the transfer into several smaller transactions, to ensure that the transferee can comply with its servicing obligations for every loan transferred. (3)
As a bonus, the Bulletin provides an overview of statutes and regulations that govern the transfer of mortgage servicing.
August 19, 2014
The financial crisis and the foreclosure crisis have pushed many scholars to take a fresh look at all sorts of aspects of the housing finance system. John Patrick Hunt has added to this growing body of literature with a posting to SSRN, Should The Mortgage Follow The Note?. It is an interesting and important article, taking a a fresh look at the legal platitude, “the mortgage follows the note” and asking — should it?!? The abstract reads,
The law of mortgage assignment has taken center stage amidst foreclosure crisis, robosigning scandal, and controversy over the Mortgage Electronic Registration System. Yet a concept crucially important to mortgage assignment law, the idea that “the mortgage follows the note,” apparently has never been subjected to a critical analysis in a law review.
This Article makes two claims about that proposition, one positive and one normative. The positive claim is that it has been much less clear than typically assumed that the mortgage follows the note, in the sense that note transfer formalities trump mortgage transfer formalities. “The mortgage follows the note” is often described as a well-established principle of law, when in fact considerable doubt has attended the proposition at least since the middle of the last century.
The normative claim is that it is not clear that the mortgage should follow the note. The Article draws on the theoretical literature of filing and recording to show that there is a case that mortgage assignments should be subject to a filing rule and that “the mortgage follows the note,” to the extent it implies that transferee interests should be protected without filing, should be abandoned.
Whether mortgage recording should in fact be abandoned in favor of the principle “the mortgage follows the note” turns on the resolution of a number of empirical questions. This Article identifies key empirical questions that emerge from its application of principles from the theoretical literature on filing and recording to the specific case of mortgages.
The article does not answer the core question that it asks, but it certainly demonstrates that it is worth answering.
August 18, 2014
The Urban Institute’s Housing Finance Policy Center really does give a a nice overview of the American housing finance system in its monthly chartbook, Housing Finance at A Glance. I list below a few of the charts that I found particularly informative, but I recommend that you take a look at the whole chartbook if you want to get a good sense of what it has to offer:
- First Lien Origination Volume and Share (reflecting market share of Bank portfolio; PLS securitization; FHA/VA securitization; an GSE securitization)
- Mortgage Origination Product Type (by Fixed-rate 30-year mortgage; Fixed-rate 15-year mortgage; Adjustable-rate mortgage; Other)
- Securitization Volume and Composition (by Agency and Non-Agency Share of Residential MBS Issuance)
- National Housing Affordability Over Time
- Mortgage Insurance Activity (by VA, FHA, Total private primary MI)
As with the blind men and the elephant, It is hard for individuals to get their hands around the entirety of the housing finance system. This chartbook makes you feel like you got a glimpse of it though, at least a fleeting one.
August 15, 2014
Here is a copy of the Complaint in Louise Rafter et al. v. U.S., Pershing Square’s Takings case in the U.S. Court of Federal Claims. I will blog about it later, but thought that some might want to see it as soon as possible because it is not widely available yet.
Yesterday, I wrote about the Securities Industry and Financial Markets Association (SIFMA)’s FHFA comment letter. Today I write about SIFMA’s comment letter in response to Treasury’s request for input relating to the future of the private-label securities market. Like the FHFA comment letter, this one is written with the concerns of SIFMA’s members in mind, no others, but it identifies many of the structural problems that exist in the housing finance system today.
If I were to identify a theme of the comments, it would be that the federal government has not moved with sufficient speed to establish a well delineated infrastructure for the housing finance market. Some commentators identify benefits of a slow approach — time to get consensus, time to get rules right, time to for trial and error before committing for the long term. Few identify the costs of regulatory uncertainty — failure to get buy-in for capital-intensive ventures, atrophy of existing resources, limited investor interest.
Now, SIFMA’s members want a vibrant private-label MBS market to make money. But a vibrant private-label MBS market is also good for the overall health of the mortgage market as it spreads risk to private MBS investors and reduces the footprints of the gargantuan GSEs and the government’s own FHA. After all, most of us want the private sector taking a lot of the risk, not the taxpayer.
Notwithstanding the strengths of SIFMA’s comment letter to Treasury in critiquing the status quo, I will highlight a few passages from it that hit a false note. The first relates to the role that private-label securities (PLS) have played
in funding mortgage credit where loan size or other terms may differ from those available in the Agency markets, or where economics dictate that PLS execution is superior. The PLS market may also be more innovative and flexible than the Agency markets in adapting to economic conditions or consumer preferences, or to changing capital markets appetite. (3)
This innovation has obviously cut both ways in terms of introducing new products that can help expand access to credit as well as expand access to credit on abusive terms. The latter way seems to have predominated during the most recent boom in PLS MBS.
The second one relates to assignee liability. SIFMA states that
Investors are concerned with the prospect of assignee liability stemming from violations of the ability-to-repay rules contained in Title XIV of Dodd-Frank and embodied in the CFPB’s implementing regulations. SIFMA has raised concerns with assignee liability in many forms over the years based on the fact that mortgage investors are not at the closing table with the lender and borrower, and should not be held liable for defects of which they have no knowledge or ability to prevent. While efforts were made by policymakers to provide some level of certainty through the inclusion of safe-harbor provisions, no safe harbor is entirely safe, and it is important to note that none of these provisions have been tested in court. It will be in litigation where the market learns the exact boundaries of the protections provided by any safe harbor. This potential liability for investors is likely to reduce the availability of higher-priced QM loans and non-QM loans, all else equal, due to higher required yields to compensate for the increased risk. (5-6)
This focus on assignee liability seems to be a red herring, one that SIFMA has floated for years. The risk from assignee liability provisions is not limitless and it can be modeled. Moreover, the notion that investors should face no liability because they are not at the closing table is laughable — without them, there would be no closing table at all. They paid for it, even if they are not in the room when the closing takes place.
The last one relates to the threatened use of eminent domain by some local governments to take underwater mortgages and refinance them to reflect current property valuations:
Investors have significant concerns with, and continuing distrust of the policy environment because of a sense that rules have been and continue to be changed ex-post. The threat by certain municipalities to use eminent domain to seize performing mortgage loans has been a focus of MBS investors for the last two years and would introduce a significant new risk into investing in PLS. These municipalities propose to cherry-pick loans from PLS trusts and compensate holders at levels far below the actual value of the loans. SIFMA’s investor members view such activity as an illegal taking of trust assets, and successful implementation of these plans would severely damage investor confidence in investing in PLS. (6)
This is another red herring as far as I am concerned. The use of eminent domain is not an ex post legal maneuver. Rather, it is an inherent power of government that precedes the founding of this country. I understand that MBS investors don’t like it, but it is not some kind of newfangled violation of the rule of law as many investor advocates have claimed.
Notwithstanding its flaws, I recommend this letter as a trenchant critique of the housing system we have today.
August 14, 2014
The Securities Industry and Financial Markets Association (SIFMA) released their comment letter to the Federal Housing Finance Agency’s request for input relating to the role of the Fannie and Freddie guarantee fee (g-fee) in the housing finance market. While clearly reflecting the concerns of SIFMA’s members, the letter provides a thoughtful take on the complexities of the housing finance system. SIFMA writes,
Policymakers should not assume that increases in g-fees alone will lead to a significant increase in PLS issuance. Specific decisions on best execution for a given loan vary depending on the terms of the loan being originated. In some instances, a portfolio purchase may offer best execution, and in other instances the GSEs, private label MBS (PLS) or FHA may be optimal. Taken wholly in isolation, we do agree that increases in guarantee fees should cause originators to look toward other avenues to fund loans – in their portfolios, FHA, or in PLS. However, it is not so simple that an across the board increase in guarantee fees will result in a corresponding uptick in private-label securitization. To the extent GSE securitization becomes more expensive for issuers, PLS are one of a number of options, and not necessarily the most attractive in all instances. Today bank portfolios offer a more attractive funding alternative to the GSEs than PLS for most institutions. Of course, the appetite of banks for loans held in portfolio will vary with economic and regulatory conditions, and cannot always be assumed to comprise a certain percentage of the market.
There are also a number of reasons that increases to g-fees will not directly lead to increased PLS issuances that are not precisely quantifiable or directly related to cost. PLS issuers and investors face uncertainty as to the future shape of the mortgage market and questions related to compliance with the future regulatory regime. The re-regulation of the mortgage and securitization markets is not complete, and a number of consequential rulemakings are incomplete. These include but are not limited to risk retention and proposed revisions to the SEC’s Regulation AB. The final form of the definition of QRM and the rest of the risk retention rules will directly impact the economics of securitization. Regulation AB will impact the offering process, disclosure practices, and require fairly massive infrastructure adaptation at many RMBS issuers and sponsors. Of course, given that final rules are not available for any of these items, issuers and sponsors cannot begin this work. In this environment of uncertainty, it is difficult and indeed may be unwise for issuers or investors to expend resources to develop long-term issuing and investment platforms.
* * *
For these reasons, we do not believe FHFA or other policymakers should look at increases to GSE g-fees in a vacuum, and must consider them within the broader context of mortgage finance conditions. (6-7, footnotes omitted)
SIFMA is right to emphasize the regulatory uncertainty that its members face. The federal government has not done enough to address this. Housing finance, like nature, abhors a vacuum. More on this tomorrow.
August 13, 2014
The Structured Finance Industry Group has issued RMBS 3.0: A Comprehensive Set of Proposed Industry Standards to Promote Growth in the Private Label Securities Market. This “green paper,” frequently referred to as a First Edition, states that RMBS 3.0 is an initiative
established with the primary goal of re-invigorating the “private label” residential mortgage-backed securities (“RMBS”) market.
Initiated by members of SFIG, the project seeks to reduce substantive differences within current market practices through an open discussion among a broad cross-section of market participants. Where possible, participants seek to identify and agree upon best practices. RMBS 3.0 focuses on the following areas related to RMBS:
- Representations and warranties, repurchase governance and other enforcement mechanisms;
- Due diligence, disclosure and data issues; and
- Roles and responsibilities of transaction parties and their communications with investors. (1 footnotes omitted)
RMBS 3.0 is expected to
1. Create standardization where possible, in a manner that reflects widely agreed upon best practices and procedures.
2. Clarify differences in alternative standards in a centralized and easily comprehendible manner to improve transparency across RMBS transactions.
3. Develop new solutions to the challenges that impede the emergence of a sustainable, scalable and fluid post-crisis RMBS market.
4. Draft or endorse model contractual provisions, or alternative “benchmark” structural approaches, where appropriate to reflect the foregoing.(2)
There is much of interest in this attempt at self-regulation by the now quiescent but formerly roaring private-label market. But I think that readers of this blog would be interested in its approach to consumer protection regulation. First, the green paper refers to it as “consumer compliance.” (See, e.g., 23) Unsurprisingly, the paper is only concerned with protecting industry participants from liability for violations of consumer protection/consumer compliance laws. It pays no lip service to the spirit of consumer protection — promoting sustainable credit on transparent terms. That’s fine given the constituents of the SFIG, but it only confirms the importance of active consumer protection regulators and enforcement agencies who will look beyond rote compliance with regulations. The private-label industry is capable of rapid change once it gets going, change that can outpace regulations. Someone has to keep an eye on it with an eye toward to the principles that should guide a fair market for consumer credit.