Author Archives: David Reiss

No Justice for Mortgage Fraud

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The Audit Division of the Department of Justice’s Office of the Inspector General has issued an Audit of the Department of Justice’s Efforts to Address Mortgage Fraud.  One word for it — DEPRESSING:

The Department’s inability to accurately collect data about its mortgage fraud efforts was starkly demonstrated when we sought to review the Distressed Homeowner Initiative. On October 9, 2012, the FFETF [Financial Fraud Enforcement Task Force] held a press conference to publicize the results of the initiative. During this press conference, the Attorney General announced that the initiative resulted in 530 criminal defendants being charged, including 172 executives, in 285 criminal indictments or informations filed in federal courts throughout the United States during the previous 12 months. The Attorney General also announced that 110 federal civil cases were filed against over 150 defendants for losses totaling at least $37 million, and involving more than 15,000 victims. According to statements made at the press conference, these cases involved more than 73,000 homeowner victims and total losses estimated at more than $1 billion.

Shortly after this press conference, we requested documentation that supported the statistics presented. In November 2012, in response to our request, DOJ officials informed us that shortly after the press conference concluded they became concerned with the accuracy of the statistics. Based on a review of the case list that was the basis for the figures, the then-Executive Director of the FFETF told us that numerous significant errors and inaccuracies existed with the information. For example, multiple cases were included in the reported statistics that were not distressed homeowner-related fraud. Also, a significant number of the included cases were brought prior to the FY 2012 timeframe. (ii, footnote omitted)

According to the report, this was not a one time problem with the DoJ’s reporting about mortgage fraud.

The audit “makes 7 recommendations to help DoJ improve its understanding, coordination, and reporting of its efforts to address mortgage fraud.” (iii) The last two seem to be the most important:

6. Develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization.

7. Develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes. (30)

I (along with Brad Borden) have previously argued that law enforcement agencies have not been tough enough on high-level perpetrators of mortgage fraud, although our position appears to be the minority view among lawyers (see here for a more common view). I think this audit supports our view that, for one reason or another, prosecutors have dropped the ball on this in a big way. It’s probably too late to do anything about the last financial crisis, but it sure would be swell to have a system of accountability put in place for the next one!

Dog Bites Man: Housing Vouchers Are Good

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The Center for Budget and Policy Priorites has issued a short report, Research Shows Housing Vouchers Reduce Hardship and Provide Platform for Long-Term Gains Among Children. Many housing policy researchers favor housing voucher programs over project-specific housing subsidies, although policymakers consistently favor the latter. So while this report isn’t really news, it is important to that its main points are frequently reiterated:

The Housing Choice Voucher program, the nation’s largest rental assistance program, helps more than 2 million low-income families rent modest units of their choice in the private market. Vouchers sharply reduce homelessness and other hardships, lift more than a million people out of poverty, and give families an opportunity to move to safer, less poor neighborhoods. These effects, in turn, are closely linked to educational, developmental, and health benefits that can improve children’s long-term life chances and reduce costs in other public programs. This analysis reviews research findings on vouchers’ impact on families with children, people with disabilities, and other poor and vulnerable households. (1, footnote omitted)

The report is not as precise as I would have liked. It describes a study of Temporary Assistance for Needy Families-eligible families as a study of “low-income” families. (compare text on page one with text in footnote ii). People eligible for Housing Choice Vouchers and TANF are “very low-income,” which is a meaningfully distinct subset of low-income families.Very low-income families have incomes that do not exceed 50% of the area median income whereas low-income families generally have incomes that do not exceed 80% of the area median income. I would guess that the findings about the very low-income subset would not directly apply to the bigger set of low-income families.

With that caveat in mind, here are the report’s main findings about Housing Choice Vouchers. They

  • Reduced the share of families that lived in shelters or on the streets by three-fourths, from 13 percent to 3 percent.
  • Reduced the share of families that lacked a home of their own — a broader group that includes those doubled up with friends and family in addition to those in shelters or on the streets — by close to 80 percent, from 45 percent to 9 percent.
  • Reduced the share of families living in crowded conditions by more than half, from 46 percent to 22 percent.
  • Reduced the number of times that families moved over a five-year period, on average, by close to 40 percent. (1)

These are big effects. Policymakers, pay attention!

 

Duties to Serve in Housing Finance

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Adam Levitin and Janneke Ratcliffe have posted Rethinking Duties to Serve in Housing Finance to SSRN (also on the Harvard Center for Housing Studies site here). The paper states that

an important question going forward concerns the role of duties to serve (DTS) — obligations on lending institutions to reach out to traditionally underserved communities and borrowers. Should there be DTS, and if so, who should have the responsibility to serve whom, with what, and how? (2)

These are, indeed, important questions as regulators chart a course between requiring safe underwriting by lenders and ensuring access to credit for communities that have historically had little access to sustainable credit. The authors distinguish fair lending from duties to serve, with the former being an obligation not to discriminate and the latter being an affirmative duty to address the “disparity of financial opportunity.” (2) The paper describes two main DTS regimes,the Community Reinvestment Act and the Fannie/Freddie housing goals, as well as their limitations.

The paper concludes that the “aftermath of the housing bubble presents an opportunity to rebuild DTS” and proposes a set of reforms. (29) I highlight the first two here:

  1. “DTS should apply universally to the entire primary market,” covering both depositories and non-depositories in order to avoid incentives to engage in regulatory arbitrage. (30)
  2. “DTS should apply equally for all secondary market entities,” not just the Fannies and Freddies of the world. (30)

This paper has a lot to offer thoughtful policymakers. As with everything to do with our massive housing finance system, however, the devil is in the details of any regulatory regime. Mandatory duties to serve must be drafted to so that they are consistent with safe underwriting practices. This paper starts a conversation about doing just that.

This Note and Mortgage Are Unenforceable

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The Bankruptcy Appellate Panel of the Sixth Circuit issued a thoughtful opinion in In re: Dorsey, File No. 14b0002n.06 (March 7, 2014) but it leaves me dissatisfied. As Elizabeth Renuart and Dale Whitman have each demonstrated, courts have had a hard time parsing how UCC Article 3 relates to the enforceability of mortgage notes. That is not the problem with this opinion — the Court carefully applies UCC Article 3, but still concludes that the possessor of the note could not establish that it was a Person Entitled To Enforce it. As a result, the Court concludes that the possessor of the note cannot enforce the note and as a result, the mortgage is “no longer enforceable under Kentucky law.” (12)

Because of the complexity of the analysis, I refer interested readers directly to the opinion itself, which is as clear as can be expected for such a technical subject. But I will note that the Court’s result means that a party that holds the note itself and has much circumstantial evidence that the note was transferred to it by the original lender under the note can forfeit the entire value of the note and mortgage. I generally believe that lenders should be held to strict standards when seeking to enforce the terms of a mortgage loan. But in this bankruptcy proceeding, the possessor of the note is left with nothing and the borrower is granted a windfall — the entire mortgage debt has been extinguished. This does not seem to be consistent with the principles of equity.

I am curious to know what others think, particularly bankruptcy experts. Perhaps I am missing something.

 

[HT April Charney]

Reiss on NYC Development

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Law360 quoted me in Domino Deal Shows De Blasio Can Play Nice With RE Cos. (behind a paywall). The story reads in part,

New York City Mayor Bill de Blasio’s affordable housing deal with the developer of the Domino Sugar factory, despite being for a unique project, may be a harbinger of how the mayor will implement his affordable housing goals without hampering the market, experts say.

When De Blasio first took office, many in the real estate community, and their attorneys,were concerned that the new mayor’s “tale of two cities” approach to governing might elevate the development of affordable housing to the detriment of other types of projects.

While his administration is still young and the Domino Sugar project is a unique one that had previously been approved in a different form under former Mayor Michael Bloomberg, experts say the way De Blasio handled negotiations that led to the project’s City Planning Commission approval on Wednesday may be a positive sign for the future.

*     *     *

But the mayor’s willingness to reach out directly to a developer and negotiate for terms that fit his goals — De Blasio wants to add or retain 200,000 affordable units over the next 10 years — without harming the deal will be noted by developers.

“One data point does not make a trend, but as a symbol at the beginning of the administration, I think it’s a pretty powerful one,” said David Reiss, a real estate professor at Brooklyn Law School.

Community Preservation Corp. and Kattan Group LLC had originally planned to build a $2.2 billion, 2,200-unit residential project in place of the Domino Sugar factory, but the plan stalled in 2012, and the partners began looking for a new buyer.

When Two Trees Management Co. was chosen in June 2012, the developer purchased the property for $185 million after a long court battle with Katan. The approvals process then began anew, and Two Trees’ revised plan — for 2.3 million square feet of residential space, plus office and retail components — was certified for review in November.

This week, as the City Planning Commission was poised to cast its vote on Two Trees’ plan, De Blasio stepped in to ask for a larger affordable housing component. The project called for about 660 units, but the mayor wanted about 60 more in exchange for zoning changes Two Trees would need to construct the development.

Two Trees Principal Jed Walentas told the New York Times that the mayor’s request was “not workable,” and onlookers worried that the mayor’s relationship with the real estate industry, which had thawed after a Real Estate Board of New York speech in which he assured developers that he wanted them to “build aggressively,” might again be chilling.

But the fears were premature; the mayor and developer reached a deal late Monday that would yield an additional 110,000 square feet of affordable housing at the development.

In connection with the deal, Two Trees agreed to construct 700 permanently affordable units ranging in size to accommodate small and large families that will be integrated throughout the complex.

“This agreement is a win for all sides, and it shows that we can ensure the public’s needs are met, while also being responsive to the private sector’s objectives,” Deputy Mayor of Housing and Economic Development Alicia Glen said in a statement.

That balance will not be lost in the city’s development community, even if another project of this size and complexity doesn’t come around any time soon, experts say. There are many developers looking to do deals in the city, and many of them may now feel at least a bit more comfortable that their needs will be understood by a mayor with an ambitious affordable housing plan.

“He took a line and stuck to it and got what he wanted, without killing the deal,” Reiss said. “That’s a good thing from the development perspective.”

Whitman on Servicer Lies

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Professor Dale Whitman posted a commentary on Quintana v. Bank of America, No. CV 11–2301–PHX, 2014 WL 690906 (D.Ariz. Feb. 24, 2014) (not reported in F.Supp.2d) on the Dirt listserv:

Synopsis: A borrowers who is “jerked around” by a mortgage servicer may have claims in fraud or on other theories.

Karoly Quintana’s home mortgage loan was serviced by Bank of America, When she began having difficulty making her payments in 2009, she was told by B of A that she would have to miss three payments to be considered for a loan modification, and that the servicer would forbear foreclosure while it did so. She missed the payments and applied for a modification, but (she alleged) B of A did not consider it, and instead accelerated her loan and commenced foreclosure.

Quintana filed a suit in federal court to stop the foreclosure. In March 2012 the suit was dismissed voluntarily on the assurance that B of A would again consider a loan modification, but again it did not do so. (Oddly, B of A’s counsel conceded these facts.)

The court held that the allegations of both the 2009 and 2012 conduct of B of A stated claims of fraud, sufficient to withstand a motion to dismiss. The statements that she would be considered for a modification were false, she relied upon them, and was damaged. Her damages were the expenditure of additional attorney’s fees, and the court found this sufficient, even though in general attorneys’ fees are not recoverable in a fraud action.

The court also held that the plaintiff’s count for breach of the implied covenant of good faith and fair dealing survived a motion to dismiss. While the loan documents did not require the servicer to consider the mortgage modification or to forbear foreclosure, when it promised to do so and then did not, it breached the implied covenant. The promise was only oral, and B of A asserted it was inadmissible under the Statute of Frauds, but the court found that Quintana’s detrimental reliance (in missing the payments) provided a basis for promissory estoppel, overcoming the Statute of Frauds defense.

However, the court dismissed Quintana’s claim under the Arizona Consumer Fraud Act (on the ground that it was barred by the 1-year statute of limitations). There’s a convoluted argument about whether B of A can be liable under the FDCPA, but the court ultimately refused to dismiss that claim.

Comment: Borrowers have often tried to claim that they should have received loan modifications, but have not in fact received them. In general, of course, there’s no legal right to a modification. But this court holds that a false promise to consider a modification is enough to make out a claim of fraud.

Reiss on Fannie/Freddie Suits

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Bloomberg BNA quoted me in No Basis for Discovery by GSE Investors, Treasury Department, FHFA Memos Say. It reads

[Reproduced with permission from BNA’s Banking Report, 102 BBR 417, 3/11/14. Copyright  2014 by The Bureau
of National Affairs, Inc. (800-372-1033) https://www.bna.com]

The Treasury Department and the Federal Housing Finance Agency March 4 said a federal judge should deny a motion for discovery in lawsuits by Fannie Mae and Freddie Mac investors, citing an agreed-upon schedule and saying the motion would do nothing to address legal questions at the core of the case (Fairholme Funds v. Federal Housing Finance Agency, D.D.C., No. 13-cv-01053, 3/4/14).

In its memo filed in the U.S. District Court for the District of Columbia, Treasury said Fairholme’s Feb. 12 motion for discovery (31 DER EE-6, 2/14/14) would be “improper” under a November scheduling order, and urged the court to dismiss the Fairholme suit and related cases.

“These cases should proceed on the agreed briefing schedule, which already provided ample time to the plaintiffs to file their substantive briefs, and the Court, upon review of a completed set of briefing with respect to the defendants’ dispositive motions, should dismiss these cases,” Treasury said March 4.

In its March 4 filing, the FHFA memo said “no discovery is necessary to assess the purely legal arguments” before the court, adding the Housing and Economic Recovery Act of 2008 (HERA) bars second-guessing of the FHFA’s actions as conservator of Fannie Mae and Freddie Mac.

Litigation Ongoing

The suit is one of several in at least two district courts and the U.S. Court of Federal Claims that challenge Treasury and FHFA action in August 2012 that restructured contracts governing preferred stock issued by the two government-sponsored enterprises.

Fairholme and other investors say the August 2012 amendment amounted to an expropriation of their assets and have variously sought damages and compensation in response.

The government has sought to dismiss the Fairholme case and others, but in its Feb. 12 motion, Fairholme said the government’s motion to dismiss was too expansive and raised questions that require access to government documents, e-mails and other materials.

Arrowood Indemnity Co., the plaintiff in a related case in the district court and a separate case in the Claims Court, Feb. 20 sought to link its own bid for discovery to Fairholme’s (36 DER EE-8, 2/24/14).

Fairholme has already prevailed on its discovery motion in the Claims Court. In a Feb. 26 order, Judge Margaret M. Sweeney granted Fairholme’s motion for a continuance to pursue discovery in that case.

March Reply Scheduled

In the district court, Fairholme is scheduled to respond to the government’s March 4 memos by mid-March.

“We are reviewing the opposition briefs filed by the defendants just yesterday, and we will respond to them in our reply brief, due on March 14,” a spokesman for Fairholme told Bloomberg BNA March 5.

High Stakes Seen

Professor David Reiss of Brooklyn Law School in New York March 5 said discovery usually occurs after motions to dismiss have been decided.

In this case, he said, “the stakes are so high and the quality of lawyering so high that there is litigation over the scheduling order itself.”

“This is a hard-fought battle and the issues are incredibly complex,” Reiss told Bloomberg BNA. “Each side characterizes their arguments as relatively straightforward, but I think the judge will have a hard time parsing out the issues, because there are different statutory regimes, policy issues and the like that must be rationalized with each other. I think this is just the beginning of a long slog,” he said.