Author Archives: David Reiss

FHFA: Critical Concerns Remain, Future Uncertain

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The FHFA issued its 2012 Report to Congress which provides a report of the annual examinations of Fannie, Freddie and the FHLBs. The report documents critical concerns about Fannie and Freddie, none of which are particularly newsworthy at this late date. But the report does have some intimations of what may lay ahead, which are particularly interesting now that the Senate has finally taken up GSE reform.

The report reviews the three goals set in 2012 for the ongoing conservatorship of Fannie and Freddie:

Build. Build a new infrastructure for the secondary mortgage market.
Contract. Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations.
Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. (1)

There are some interesting specifics attached to these general goals.

For the Build goal, FHFA has taken the position that there should be a new infrastructure for the secondary mortgage market that operates like a “market utility,” a model bandied about by Henry Paulson when he was Treasury Secretary. (13)

For the Contract goal, FHFA has indicated that it “will continue increasing guarantee fees in 2013  and evaluating how close current guarantee fee pricing is to the point where private capital would be willing to absorb credit risk.” 14)

For the Maintain goal, FHFA has taken the position that the mortgage market should transition to a more “competitive ” model, moving away from one in which “the government touches more than 9 out of every 10 mortgages.” (15)

While not surprising given Acting Director DeMarco’s past statements and actions, this report indicates that at least the FHFA believes that we should move away from such intense government involvement in the mortgage market to a system that better prices risk and which spreads that risk across a range of competitors. At such a high level of generality, I agree that these are worthwhile goals. But as with everything involving housing finance policy — the devil will be in the details.

National Mortgage Settlement: Not Too Compliant

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The Summary of Compliance: A Report from the Monitor of the National Mortgage Settlement
documents just how hard it is for the big five mortgage servicers (ResCap parties (formerly Ally/GMAC), Bank of America, Citi, JPMorgan Chase and Wells Fargo) to comply with a settlement that they themselves had agreed to.
The report tracks, among other things, complaints by professionals who work for borrowers.  The top ten are
  1. Bank failed to offer loan modification/loss mitigation opportunity.
  2. Bank failed to provide single point of contact.
  3. Bank failed to make a determination on the borrower’s loan modification no later than 30 days after receiving the complete application.
  4. Bank foreclosed while a loan modification/loss mitigation was pending.
  5. Single point of contact failed to carry out responsibilities of working with borrower on loan modification/loss mitigation activities.
  6. Bank failed to notify borrower of any known deficiency in initial submission of information no later than 5 days of receipt.
  7. Bank failed to communicate with borrower’s authorized representatives.
  8. Bank failed to keep the same single point of contact assigned until all the borrower’s needs were met.
  9. Bank failed to provide one or more direct means of communication with the single point of contact.
  10. Bank failed to acknowledge receipt of first lien loan modification application within 3 business days. (8)

I assume that the servicers are not willfully flouting the settlement because of the negative publicity they would receive for doing so as well as the millions of dollars of fines that they could thereby accrue. So these complaints must reflect some kind of systemic incompetence.  Servicers must either continue to be dramatically under-resourced to handle their work or they are bloated bureaucracies that cannot consistently disseminate key information internally or externally. Taking just the most extreme example, it is shocking (if true) that in 2013 banks are still foreclosing while loan modifications are pending with homeowners.

The Monitor, Joseph A. Smith, Jr., concludes, “It is clear to me that the servicers have additional work to do both in their efforts to fully comply with the NMS and to regain their customers’ trust. There continue to be issues with the loan modification process, single point of contact, and customer records.” (9) Amen to that.

Investor HERA-sy

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As I have previously noted, Fannie and Freddie investors have filed a complaint, Washington Federal et al. v. U.S.A., No. 1:13-cv-00385-MMS (June 10, 2013), alleging that the federal government “expropriated [Fannie and Freddie’s] common and preferred shareholders’ rights and the value of their equity in the Companies without due process, and without just compensations, thereby constituting an impermissible exaction and/or taking in violation of the Fifth Amendment to the Constitution.” (8)

Personally, I think that there is a lot of nonsense in the complaint, both in terms of its factual description of the events that led up to the placement of Fannie and Freddie in conservatorship as well as its interpretation of those events.  But I did find its analysis interesting as to whether the government complied with HERA’s requirements for placing the two companies in conservatorship.  Not compelling, just interesting.

As the complaint notes, the federal government had a number of grounds for appointing a conservator. It takes the position that none of those grounds were met. This seems facially wrong.

One of the grounds is whether Fannie or Freddie “incurred, or became likely to incur, losses that would deplete substantially all of its capital with no reasonable prospect of becoming adequately capitalized.” (31) The complaint alleges that the two companies had not incurred such losses at the time that they were placed in conservatorship. (38-39) But it does not even argue that the two companies never “became likely to incur” such losses prior to their placement in conservatorship. Seems hard, particularly with the benefit of hindsight, to take the position that they were not “likely” to incur such losses. And if the plaintiffs can’t make that case, they lose.

Fannie and Freddie Myth-Statement

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Fannie Mae and Freddie Mac’s investors have sued the federal government in Washington Federal v. United States, No. 1:13-00385 (June 10, 2013), for how it bailed out the two companies and thereby the nation’s housing market at the expense of the two companies’ shareholders. Plaintiffs claim that they have been damaged to the tune of $41 billion.

The complaint contains one of my favorite myths about the two companies.  It states that its regulator “directed that, to support the economy, the Companies purchase subprime and other risky securities.” (1) Its evidence for this assertion is that in 2007 the two companies’ “lending standards were adjusted to allow them to purchase more subprime securities” and “Congress and regulators encourage” the companies to “buy subprime and other risky securities — products that did not meet either Company’s own prior lending standards.”(1-2) The misleading nature of these statements is two-fold. First, Fannie and Freddie had been investing in non-prime securities before 2007; and (2) being ‘allowed’ or ‘encouraged’ to invest is not the same as being ‘directed’ to invest.  This points to a fundamental myth about Fannie and Freddie — being allowed to do risky things is the same as being made to do so.

This myth has come up in discussions about their affordable housing goals as well.  When Congress increased these goals, the two companies would buy risky products not because they had to, but because they wanted to keep overall growing market share.  To the extent the goals were expressed as a proportion of their total portfolio, the companies could reduce the purchase of risky loan products by risking the overall size of their portfolios.  But no one ever considers this to be a legitimate option — of course growth is more important than managing credit risk!

More on this complaint anon.

Servicing Fraud Claim Survives Motion To Dismiss

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Judge Gonzalez Rogers issued an opinion in Ellis v. J.P. Morgan Chase, No. 4:12-cv-03897-YGR (N.D. Cal. June 13, 2013) in which she denied a motion to dismiss a fraud claim in this class action lawsuit arising from Chase’s servicing business. The plaintiffs allege that “Chase engaged in fraudulent practices by charging marked-up or unnecessary fees in connection with Defendants’ home mortgage loan servicing businesses.” (1)

The opinion states that

Plaintiffs have alleged numerous instances where deficient information was provided and could have been revealed—namely, in the mortgage agreements themselves, in the mortgage statements reflecting the marked-up fees, or during communications with Chase where it told Plaintiffs that the fees were in accordance with their mortgage agreements.  Plaintiffs provide specific dates for statements in which they believe they were charged the marked-up fees, and allege they paid the fees without knowing their true nature.  Plaintiffs describe the content of the omission as the failure to inform them that the fees were marked-up and that the majority of the fees ultimately went to Chase, and not third-party vendors performing the services.  As discussed above, Plaintiffs have also sufficiently alleged that they did pay the marked-up fees. (36)

It continues,

Defendants allegedly demanded payment for fees that, in some cases, were never actually incurred. Moreover, Plaintiffs allege that false representations were made to borrowers when Chase told them that the fees were in accordance with their mortgage contracts—this is distinguishable from an omission. As alleged, the fraud is equally about the failure to disclose material information as it is that the amounts demanded on mortgage statements were false because they did not correspond to the actual amounts owed pursuant to the mortgage agreements relied upon by Defendants. Based on the alleged nature of the fraudulent scheme, the lack of an explicit “duty to disclose” is not dispositive in light of affirmative fraud that is also alleged. (37, citations omitted)

Denying the motion to dismiss this claim exposes servicers to great potential liability for their acts and omissions.

The Devil is in the Statute of Limitations

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NY Supreme Court Justice Kornreich (N.Y. County) issued an opinion ACE Securities Corp. v. DB Structured Products Inc., No. 650980/2012 (May 13, 2013) that diverges in approach from an earlier SDNY opinion as to whether the statute of limitations runs “from the execution of the contract.” (5) The case concerns allegations that an MBS securitizer made false representations about the loans that underlay the MBS.

Kornreich held that the statute of limitations begins to run when the MBS securitizer (a Deutsche Bank affiliate) “improperly rejected the Trustee’s repurchase demand” so long as the Trustee did not “wait an unreasonable time to make the demand.” (7) (On a side note, Kornreich also held that the plaintiff in such a case is not required “to set forth which of the specific loans are affected by false” representations in a breach of contract claim. (7))

This really opens up the statute of limitations under NY law. There has been a lot of speculation that the flood of lawsuits arising from the Subprime Boom would have to come to an end because the statute of limitations covering many of the claims was six years.  A variety of developments has extended the possibility of filing a suit.  There is FIRREA‘s ten year statute of limitations. There is NY’s Martin Act, with its lengthy statutes of limitation. And now there is this expansive reading of NY’s statute of limitations for breach of contract actions.

Although one might think that all of the good cases have been filed already, you never know. And with the ACE Securities Corp. case, we can see how a case can be filed more than six years after the contract was entered into, under certain circumstances.

 

CFPB Complaints Vary by State, Unsurprisingly

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The Baltimore Sun quoted me today in Marylanders Aren’t Shy About Complaining: New Federal Consumer Agency Finds State Residents Quick to Gripe About Mortgages, Credit Cards, Banks. The story opens,

Marylanders are big complainers.

At least when it comes to the financial services they receive.

Maryland ranked No. 2 in the nation in mortgage complaints per capita, second only to New Hampshire, for grievances lodged with the Consumer Financial Protection Bureau. The state came in third for grousing about credit cards and placed fifth for gripes about banks and service.

The CFPB’s database, launched toward the end of 2011, catalogs thousands of gripes about banking, credit cards and mortgages that the newfound agency has received. The agency forwards complaints — ranging from disputes about billing and interest rates on credit cards to incorrect information on credit reports and problems with loan payments — to the businesses involved. Not all complaints are resolved.

Why are Marylanders more motivated to complain? Experts point to the state’s higher education levels, relative wealth and proximity to the do-gooders in Washington, D.C.

“Education level predicts complaint behavior, and this is a very well-educated area,” said Rebecca Ratner, a professor of marketing at the University of Maryland’s Robert H. Smith School of Business.

The more educated consumers are the more likely they are to feel that they can affect outcomes and know what steps to take to complain, Ratner said.

Consumers here also are more aware of the new agency because of our proximity to Washington, the CFPB’s home, she said.

Indeed, Washingtonians also are big whiners, ranking No. 1 in complaints about bank accounts and credit cards and coming in third for mortgage grievances.

Consumers near the Beltway also may have more faith in the government to correct problems, given that they are likely to have friends and neighbors who work for Uncle Sam, said David Reiss, a professor at Brooklyn Law School with an expertise in consumer finance.

“The federal government has a face when you live in Maryland and D.C.,” he said.

Maryland also has the highest median income in the country. Moneyed consumers, Reiss said, are more inclined to speak up when there’s a problem.

“Wealthier people are more likely to expect more from financial institutions,” he said.

They also know that financial institutions are regulated and can be held accountable, he said.

The rest of the story is here.