Author Archives: David Reiss

Mortgage Servicer Accountability

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Joseph A. Smith, Jr, the Monitor of the National Mortgage Settlement, issued his third set of compliance reports (I blogged about the second here). For those needing a recap,

As required by the National Mortgage Settlement (Settlement or NMS), I have filed compliance reports with the United States District Court for the District of Columbia (the Court) for each servicer that is a party to the Settlement. The servicers include four of the original parties – Bank of America, Chase, Citi and Wells Fargo. Essentially all of the servicing assets of the fifth original servicer party, ResCap, were sold to and divided between Ocwen and Green Tree pursuant to a February 5, 2013, bankruptcy court order. Accordingly, Ocwen and Green Tree are now subject to the NMS for the portions of their portfolios they acquired from ResCap.1 These reports provide the results of my testing regarding compliance with the NMS servicing standards during the third and fourth calendar quarters of 2013, or test periods five and six. They are the third set of reports for the original four bank servicers, the second report for Ocwen and the first report assessing Green Tree. (3)

The Monitor concludes that Bank of America, Citi, Chase, Ocwen and Wells Fargo “did not fail any metrics during the most recent testing periods.” (2) The Monitor also reports on “fourth-quarter compliance testing results for the loans Green Tree acquired from the ResCap Parties. Green Tree implemented the Settlement’s servicing standards after such acquisition. Green Tree failed a total of eight metrics during this time period.” (2) The metrics that Green Tree failed include a number of practices that have made the lives of borrowers miserable during the foreclosure crisis. They are,

  • whether the servicer accurately stated amounts due from borrowers in proofs of claims filed in bankruptcy proceedings
  • whether the servicer accurately stated amounts due from borrowers in affidavits filed in support for relief from stay in bankruptcy proceedings
  • whether loans were delinquent at the time foreclosure was initiated and whether the servicer provided borrower with accurate information in a pre-foreclosure letter
  • whether the servicer provided borrower with required notifications no later than 14 days prior to referral to foreclosure and whether required notification statements were accurate
  • whether the servicer waived post-petition fees, charges or expenses when required by the Settlement
  • whether the servicer has documented policies and procedures in place to oversee third party vendors
  • whether the servicer responded to government submitted complaints and inquiries from borrowers within 10 business days and provided an update within 30 days
  • whether the servicer notified the borrower of any missing documents in a loan modification application within five days of receipt (9, emphasis added)

These metrics seem pretty reasonable — one might even say they are a low bar for sophisticated financial institutions to exceed. Until the servicing industry can do such things as a matter of course, close government regulation seems appropriate. The monitor notes that “work still remains to ensure that the servicers treat their customers fairly.” (2) Amen to that, Monitor.

Foreclosure Review

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The US Government Accountability Office issued a report, Foreclosure Review:  Regulators Could Strengthen Oversight and Improve Transparency of the Process. GAO did this study because it was asked to examine the amended consent order process relating to foreclosures. This process was pretty controversial. By way of background,

In 2011 and 2012, OCC and the Federal Reserve signed consent orders with 16 mortgage servicers that required the servicers to hire consultants to review foreclosure files for errors and remediate harm to borrowers. In 2013, regulators amended the consent orders for all but one servicer, ending the file reviews and requiring servicers to provide $3.9 billion in cash payments to about 4.4 million borrowers and $6 billion in foreclosure prevention actions, such as loan modifications. One servicer continued file review activities. (no page number)

GAO concluded that

One of the goals that motivated the original file review process was a desire to restore public confidence in the mortgage market. In addition, federal internal control standards and our prior work highlight the importance of providing relevant, reliable, and timely communications, including providing information about the processes used to realize results, to increase the transparency of activities to stakeholders — in this case, borrowers and the public. Without making information about the processes used to categorize borrowers available to the public, such as through forthcoming public reports, regulators may miss a final opportunity to address questions and concerns about the categorization process and increase confidence in the results. (66)

GAO also found that in “the absence of specific expectations for evaluating and testing servicers’ actions to meet the foreclosure prevention principles, regulators risk not having enough information to determine whether servicers are implementing the principles and protecting borrowers.” (66)

So we are left with an ongoing crisis in confidence for the public and homeowners in particular. We are also left with regulators who are at risk of not being able to properly regulate financial institutions. With much of the news we are receiving these days, it feels as if we have let our financial crisis go to waste. No foreclosure reform, no housing finance reform, no real leadership to create a housing finance system for the 21st Century.

During the Great Depression, the federal government created the Federal Home Loan Bank System, the Federal Housing Administration, the Home Owners’ Loan Corporation. We have created a black hole — Fannie and Freddie are in that limbo known as conservatorship. The President must take a lead on housing finance reform. Otherwise, my money is on another bailout in the not so distant future.

Wary of FHA HAWKing Mortgage Access

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The Federal Housing Administration issued its Access Blueprint: What FHA is Doing to Expand Access to Mortgage Credit for Underserved Borrowers. The blueprint identifies a serious problem:

The economic crisis significantly constrained credit making it tough for anyone with less than perfect credit to obtain a mortgage.

According to the Urban Institute, the average credit score for loans sold to the GSEs is 752. Currently, there are 13 million people with credit scores ranging from 580 to 680. Shutting these consumers out of the market hurts American families and undermines our efforts to build more stable communities, create pathways to the middle class, and increase homeownership opportunities for minority and low-wealth borrowers.

A healthy mortgage market serves all qualified borrowers. FHA is committed to finding ways to responsibly increase access for underserved borrowers. (3)

Unfortunately, the FHA’s solutions to this problem seem half-baked. The blueprint states that “Responsible access can be enhanced by ensuring borrowers are well-educated about the home- buying and mortgage finance process.” (3) Under the heading, Homeowners Armed with Knowledge (HAWK), the blueprint states that “Housing Counseling works.  Research shows a strong correlation between housing counseling and mortgage performance.” (4)

As the FHA should know, correlation is not the same thing as causation. It could be that those who have the traits that make them likely to sign up for housing counseling also make them more likely to make their mortgage payments. In fact, the scholarly literature on making people financially capable is not so comforting when it comes to decreasing credit defaults.

The blueprint has other disturbing passages that make one wonder if the FHA is keeping safety and soundness concerns as high priorities. For instance, it states that

FHA primarily selects higher-risk loans for review, e.g. loans evidencing payment challenges. FHA recognizes that this risk-based approach does not accurately reflect a lenders overall underwriting quality as it is primarily focused on non-performing loans. Going forward, we plan to expand our evaluation of loans to include random sampling of performing loans closer to the time of endorsement. This approach provides a more balanced view of underwriting quality. (5)

This is kind of the inverse of the old saw about the drunk who is searching for something for a long time under a lamp post.  When asked why he is looking so long and so unsuccessfully in that one place, he responds that that is is where the light is. FHA appears to be saying that it is going to be spending less time looking in the problem areas because that is where they are likely to find problems. What is that about?#@!?

Obviously, the FHA should be focused on promoting sustainable homeownership for “all qualified borrowers.” (3)  Obviously, the FHA should find ways to “responsibly increase access for underserved borrowers.” (3) What is not obvious is whether the FHA’s blueprint will achieve those goals.

Stealing Fannie and Freddie?

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Jonathan Macey and Logan Beirne have posted a short working paper, Stealing Fannie and Freddie, to SSRN. It advocates a position similar to that taken by the plaintiffs in the GSE shareholder litigation. They argue,

Politicians are running rough-shod over the rule of law as they seek to rob private citizens of their assets to achieve their own amorphous political objectives. If we were speaking of some banana republic, this would be par for the course – but this is unfolding in the United States today.

“The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last,” declares the Senate Banking Committee Leaders’ Bipartisan Housing Finance Reform Draft. The proposed legislation’s first step towards this laudable goal, however, is to liquidate the government sponsored enterprises Fannie Mae and Freddie Mac – in defiance of the rule of law. This paper analyzes the current House and Senate housing finance reform proposals and faults their modes of liquidation for departing from legal norms, thereby harming investors and creditors, taxpayers, and the broader economy.

Under proposals before Congress, virtually everyone loses. First, the GSEs’ shareholders’ property rights are violated. Second, taxpayers face the potential burden of the GSEs’ trillions in liabilities without dispensing via the orderly and known processes of a traditional bankruptcy proceeding or keeping the debts segregated as the now-profitable GSEs seek to pay them down. Finally, the rule of law is subverted, thereby making lending and business in general a riskier proposition when the country and global economy are left to the political whims of the federal government. (1)

I found a number of unsupported assertions throughout the piece. For instance, they assert, without support, that Fannie and Freddie “never reached the point of insolvency.” (3)  Badawi & Casey convincingly argue that without “government intervention, [Fannie and Freddie] would have defaulted on their guaranty obligations and more generally on obligations to all creditors.” (Badawi & Casey at 5) All in all, I don’t find this short working paper to be compelling reading — perhaps a more comprehensive one is in the works.

Watt’s up with Fannie and Freddie

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There has been a lot of press coverage of FHFA Director Watt’s first public speech since taking on his job. Watt emphasized that

we must ensure that Fannie Mae and Freddie Mac operate in a safe and sound manner.  It means that we’ll work to preserve and conserve Fannie Mae and Freddie Mac’s assets.  And it means that we’ll work to ensure a liquid and efficient national housing finance market.  Our job at FHFA is to balance these obligations . . ..

He also set forth three goals for his FHFA:

Strategic Goal 1: MAINTAIN, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets. 

Strategic Goal 2: REDUCE taxpayer risk through increasing the role of private capital in the mortgage market.

Strategic Goal 3: BUILD a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.

These goals are all totally reasonable for the FHFA to pursue. But it is also clear that Director Watt is taking the FHFA in a direction that is quite different than the one pursued by his predecessor, Acting Director DeMarco.  DeMarco had taken the position that the best way to protect taxpayers was to be pretty tough on everyone else. “Everyone else” included defaulting and underwater homeowners as well as originating lenders who had sold Fannie and Freddie tons of mortgages that did not comply with the reps and warranties that the parties had agreed to about the quality of those mortgages. DeMarco’s strategy was much criticized but also quite coherent.

Watt has made it clear that he is going to be more flexible with homeowners. He highlighted a pilot program in Detroit that will include “deeper loan modifications.”  He has also made it clear that he is going to be more flexible with lenders, relaxing rep and warranty standards for mortgages that Fannie and Freddie purchase from lenders. These may be very good policies to pursue, but it would be helpful if he set forth a clearer vision of how safety and soundness is best balanced with liquidity and efficiency. Federal housing finance policy typically goes off the rails when its goals get all mixed up. Director Watt should ensure that FHFA’s safety and soundness goals are clearly set forth and that other goals for Fannie and Freddie are designed to work in harmony with them.

Reiss on High Loan Fees

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CRM Buyer quoted me in On-Premises Banks Stick It to Walmart Customers. It opens,

Walmart customers who use the banking services provided inside the chain’s stores are among the highest payers of fees — especially overdraft fees — in the U.S., a Wall Street Journal analysis of federal filings concluded.

The five banks with the most Walmart branches ranked among the top 10 U.S. banks in fee income as a percentage of deposits last year, the paper reported, compared to other U.S. banks that earn most of their income through lending.

It is a notable finding, especially given Walmart’s brand: First and foremost, the company has built a reputation for providing low-cost products at significant savings compared to other stores.

Walmart cannot be held completely responsible for the banks’ practices, of course. The financial sector is highly regulated, and no third-party retailer is in a position to set standards or make policies.

However, Walmart told the Journal that it has a thorough process for vetting banks to make sure they are in line with its philosophy.

Financial Reform? What Financial Reform?

Apart from the Walmart branding issue, the report highlights some other concerns. In spite of curbs on financial industry practices in the last few years, it still is possible for providers to levy high fees on consumers in the lowest economic brackets, making it more difficult for them to work their way out of debt. A new government agency, the Consumer Finance Protection Bureau, was established to curtail such activities. Why do they still occur?

The Wall Street Journal leads off its article with the story of a consumer who knowingly overdraws her checking account to pay for a needed car repair. The US$30 fee, which translated into an APR of more than 300 percent, was actually cheaper than a payday loan, the borrower said.

In the bank’s defense, there are certain financial, market, regulatory and business realities that cannot be ignored.

“While I am not going to defend high-cost fees for financial products, I would say that the lenders often have high fixed costs for each transaction that can work out to a higher percentage of the amount borrowed than they would be for larger transactions,” David Reiss, a professor at Brooklyn Law School, told CRM Buyer.

“So, I would say that there is some gouging going on in this market, but also some basic business reality,” he remarked.

Reiss on FHFA Leadership of Housing Finance Reform

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Law360.com quoted me in FHFA Set To Take The Lead In Housing Finance Reform (behind a paywall). It reads in part,

With hopes for a legislative fix for the U.S. housing finance market fading after six key Democrats reportedly refused to support a reform bill pending in the Senate Banking Committee, the Federal Housing Finance Agency will become the central player in reshaping the market and set the terms for any future changes.

The Banking Committee’s leaders — Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho — were unable to scare up the overwhelming support their housing finance reform bill needed in a last-gasp effort at getting a vote from the full Senate. That leaves the bill’s prospects of getting to President Barack Obama prior to the midterm elections at near zero and the FHFA, the conservator for Fannie Mae and Freddie Mac since 2008, as the biggest player in reshaping the U.S. housing market.

“It was always my operating assumption that it was going to be exceedingly difficult to get congressional consensus. Most of the action was going to take place by way of the actions at the FHFA,” said former Republican Rep. Rick Lazio, now a partner at Jones Walker LLP.

The lack of legislation also throws a wild card into the equation, since FHFA head Mel Watt has essentially been silent about his intentions for the FHFA since he won Senate confirmation in December.

“Hopefully, Watt will have a positive vision of the future of the two companies,” said Brooklyn Law School professor David Reiss.

More than five years after Fannie Mae and Freddie Mac were placed under FHFA conservatorship after receiving a more-than-$187 billion taxpayer bailout in the fall of 2008, Congress has yet to act on creating a new system for home purchases and eliminating the two companies.

And then, beginning last spring, Congress kicked into gear.

First, Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., introduced a bill that Johnson and Crapo would use as the basis for their own legislation, leaving a limited role for government in guaranteeing the mortgage market.

Soon after, the House Financial Services Committee passed its own housing finance reform bill looking to eliminate the government’s role in the housing market entirely.

Johnson and Crapo released their bill, which would eliminate Fannie and Freddie within five years and replace it with a mortgage insurance agency modeled on the Federal Deposit Insurance Corp., in March. They scheduled a markup and vote on the bill for late April.

But the two senators delayed the vote at the last minute when it became clear that while they had the 12 votes needed to pass the bill out of the 22-member committee, they lacked the 16 to 18 votes needed to force Senate Majority Leader Harry Reid to bring it up for a vote.

Johnson and Crapo said they would continue negotiations with six undecided Democrats, but according to media reports, those negotiations foundered on worries about access to affordable housing in the bill.

Undeterred, Johnson vowed to bring the bill up for a vote next week.

“Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week,” Sean Oblack, a Democratic spokesman for the committee, said in a Thursday statement.

Still, the failure to get overwhelming support for the Johnson-Crapo bill essentially dooms the prospects for housing finance legislation this year, Lazio said.

“The administration will probably wait until early next Congress to make a decision about whether they think reform is possible,” he said.

But reform efforts will not stop, since the FHFA has a large amount of discretion over the futures of Fannie Mae and Freddie Mac.

“The regulator here is very powerful,” Reiss said.

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