Author Archives: David Reiss

Standard & Poor Puffery

Posted on by

The Department of Justice filed its opposition to S&P’s Motion to Dismiss the federal government’s FIRREA lawsuit.  At this stage of the litigation, it appears as if the key issue is whether S&P’s alleged misrepresentations about its business practices are actionable false statements or are mere “puffery” as S&P’s lawyers describe them in their brief (passim).  Let’s put aside the fact that describing your professional standards, principles and guidelines as “puffery” seems like a very bad long-term strategy (imagine the line of questioning at a Congressional hearing about S&P’s role as a Nationally Recognized Statistical Rating Organization).

But putting that cringer aside, S&P does raise a legitimate legal issue which relies heavily on Boca Raton Firefighters and Police Pension Fund v. Bahash, 12-1776-cv (2d Cir. Dec. 20, 2012). In that case, the Court of Appeals for the Second Circuit affirmed the trial court’s dismissal of the plaintiffs-investors’ claims because S&P’s statements regarding the “integrity and credibility and the objectivity of” its ratings were “the type of mere ‘puffery’ that we have previously held to be not actionable.” (6)

DoJ responds that “S&P rests its “’puffery’ defense primarily on [Boca] an unpublished, out-of-circuit opinion addressing securities fraud claims by S&P shareholders.” (opposition brief at 7). These are not substantive critiques of the Boca opinion, of course, so the 9th Circuit could well find the reasoning compelling.

But DoJ further argues that “the focus of the action here is the effect of S&P’s statements not on S&P shareholders [as in Boca], but on investors in the RMBS and CDOs S&P rated.  This is a crucial difference.” (Id.)

Will Judge Carter agree?

Risky Business Model for Homeowners?

Posted on by

The Mortgage Bankers Association issued a report, Up-Front Risk Sharing: Ensuring Private Capital Delivers for Consumers, intended to increase the role of the private sector in the portion of the mortgage market currently dominated by Fannie Mae and Freddie Mac.  The MBA argues that to “entice private capital into the mortgage market, FHFA should require the GSEs to offer risk sharing options to lenders at the “point of sale.” (1) The report notes that about “60 percent of new mortgage originations today are sold to the GSEs. This dynamic means that the GSEs’ credit pricing has effectively determined the cost of and access to credit for a wide majority of all new loans.” (5) The GSEs’ credit pricing is thus not set by the market.  The report continues, the GSEs

are now charging more than twice as much in guarantee fees as they did a few years ago, at the same time their acquisition profile shows they are taking on very little credit risk, even compared to pre-bubble credit standards. For example, average credit scores for GSE mortgage purchases prior to the crisis were about 720; today they are 760. Similarly, the weighted average LTV of loans outside of the HARP program are in the high 60% range, several percentage points lower than in the early 2000s. With this combination of high fees and ultra conservative underwriting, it is not surprising that the GSEs are seeing large, indeed record, profits — their revenues are up and their costs are down, not through their execution, but through government fiat and a privileged market position. (2)

easy direct payday lenders

Without quibbling with some of these characterizations, I would note that I have long taken the position that the private sector should bear more of the risk of credit loss in the residential mortgage market. As a result, I welcome proposals for them to do so.  This particular proposal also reduces the role of the GSEs which, while just a partial reduction, is another welcome development.  So, this proposal appears to be good for the mortgage industry (particularly private mortgage insurers).  It is also good for taxpayers because the private sector would be taking on credit risk from the federal government.

The question that remains is whether this is the right solution for homeowners.  The MBA says that this proposal will increase access to credit.  It would be helpful if the industry could model this claim.  The lending industry has its own cycle of credit loosening and tightening, so it would make sense to understand how such a cycle would impact homeowners if we moved toward such a system and moved away from the Fannie/Freddie duopoly.

Reiss on Housing Affordability

Posted on by

I will be speaking on the FHA and Housing Affordability on June 11th at the AALS Workshop on Poverty, Immigration and Property will be held June 10-12 in San Diego.

The workshop brings together three communities of scholars: poverty, immigration and property to address historical issues and recent developments in the intersection of these topics. The topics covered in this innovative workshop include plenary sessions on What Lies at the Intersection of Poverty, Property, and Immigration; After SB 1070: Exclusion, Inclusion, and Immigrants; Reconsidering State v. Shack; and Transnational Perspectives on Poverty, Immigration, and Property. A range of concurrent panels will be established based on proposed topics and a call for papers and presentations.

 I will be posting a version of my paper later this summer.

Reiss on the Ethics of Subprime Lending

Posted on by

Fordham Law School is sponsoring an event on The Mortgage Crisis – Five Years Later on June 3rd.  I will be speaking about the ethics of subprime lending on the second panel.  The speakers are

 

Panel 1: The Mortgage Crisis: It Ain’t Over ‘Til It’s Over (1 CLE Credit)

Elizabeth M. Lynch, MFY Legal Services

Adam Cohen, NY State Attorney General’s Office

Edward Kramer, Wolters Kluwers

Harvey Levine, Served on OCC/FRB Independent Foreclosure Review

Jessica Yang, Policy Director, NYU Furman Center

Panel 2: The Ethics of Sub-Prime Lending (1 CLE Ethics Credit)

Bruce Green, Louis Stein Professor, Director (Stein Center), Fordham Law School

Aditi Bagchi, Associate Professor of Law, Fordham Law School

Josh Zinner, Co-Director, NEDAP

David Reiss, Brooklyn Law School

 

Interview with 2013 Friend of the Consumer Honoree

Gretchen Morgenson, Assistant Business and Financial Editor and Columnist, NY Times

 

 

 

Wyoming Supreme Court Upholds Assignment to MERS in Bankruptcy

Posted on by

Professor Wilson Freyermuth posted this summary of the Wyoming Supreme Court’s opinion In re Gifford, 2013 WY 54 (Wyo. Sup. Ct. May 8, 2013) to the DIRT listserv and has given us permission to cross-post it here:

Synopsis:  Wyoming Supreme Court properly recognizes that a mortgage assignment to MERS is not invalid merely because it does not identify MERS as a an agent or representative of the note holder and does not describe the nature of the assignee’s agency or representative capacity.

Facts:  Betty Gifford borrowed $438,400 from the Jackson State Bank & Trust (JSB) to finance the purchase of a home in Pinedale, WY, signing a note and mortgage.  Shortly after closing, JSB assigned the note to Countrywide (now Bank of America) and the mortgage to MERS.  The assignment to MERS (which was recorded) did not describe MERS as an agent or acting in a representative capacity.

In April 2009, Gifford defaulted on the note.  In October 2009, MERS assigned the mortgage to BAC Home Loans Servicing (BAC), which was servicing the loan for Bank of America.  BAC recorded the assignment, which also did not describe BAC as an agent or as acting in any representative capacity.  In December 2009, Gifford filed a Chapter 7 bankruptcy petition.  In November 2010, the Chapter 7 trustee brought an adversary proceeding against BAC to avoid the mortgage, arguing that the mortgage was invalid because it failed to comply with the requirements of Sections 34-2-122 and 34-2-123 of the Wyoming Statutes, which provide:

In all instruments conveying real estate, or interests therein, in which the grantee is described as trustee, agent, or as in any other representative capacity, the instruments of conveyance shall also define the trust or other agreement under which the grantee is acting…. [O]therwise the description of a grantee in any representative capacity in each instrument of conveyance shall be considered and held to be a description of the grantee, only, and shall not be notice of any trust, agency or other representative capacity of the grantee who shall be held as vested with the power to convey, transfer, encumber or release the affected title. Whenever the grantee shall execute and deliver a conveyance, transfer, encumbrance or release of the property in a representative capacity, it shall not thereafter be questioned by anyone claiming as a beneficiary under the trust or agency or by anyone claiming by, through or under any undisclosed beneficiary….  [Wyo. Stat. Ann. § 34-2-122]

Any instrument which complies with this act shall be effective regardless of when it was executed or recorded. All instruments of conveyance to, or transfer, encumbrance or release of, lands or any interest therein within the state of Wyoming, which name a grantee in a representative capacity, or name a trust as grantee, and which fail to provide the information required by W.S. 34–2–122, shall cease to be notice of any trust or representative capacity of the grantee and shall be considered and held to be a description of the grantee only, who shall be held to have individually, the full power to convey, transfer, encumber or release the affected title and no conveyance, transfer, encumbrance or release shall thereafter be questioned by anyone claiming with respect to the affected property, as a beneficiary or by anyone claiming by, through, or under an undisclosed beneficiary[.] …  [Wyo. Stat. Ann. § 34-2-123]

The trustee argued that because the recorded assignments of the mortgage did not identify with specificity the terms of the agency relationship between the holder of the note and the assignees, the recorded assignments did not comply with the statutes and thus rendered the mortgage unenforceable.  The bankruptcy court certified the question of the mortgage’s validity to the Wyoming Supreme Court, which unanimously agreed that the mortgage was valid despite the fact that the assignments did not identify MERS or BAC as acting in a representative capacity.

Analysis:  The Court, in an opinion by Justice Hill, held first that the Wyoming statutes, by their express terms, applied only to instruments in which the grantee was specifically described as a trustee, agent, or representative.  Because the mortgage assignments did not specifically describe MERS or BAC as acting in an agency or representative capacity — even though they were in fact acting in such a capacity — the Court held that the statutes were inapplicable.

Furthermore, the Court held that the statutes were “notice statutes” that were not intended to apply to the situation presented in the case:

By their plain terms and stated legislative purpose, Sections 122 and 123 do not invalidate or render unenforceable a mortgage simply because the recorded assignment of that mortgage fails to include the statutorily mandated description of the principal/agent relationship.  Rather, the statutes operate to protect a third party who deals with the agent.  Thus, if the agent transfers the property to a third party, the third party is protected against a claim by the agent’s principal challenging the agent’s authority to make the transfer.

Because there was no transfer by MERS or BAC to a third party, and no challenge by an undisclosed principal to the actions of MERS or BAC, “this case presents no conflicting claims by a principal and an agent from which a third party needs protection, and the statutes therefore do not apply.”

Reporter’s Comment:   The decision is obviously correct and sensible, and it is refreshing to see the court properly articulate the idea that like any notice statute (like a recording statute), the statute has to be understood in the context of whether the plaintiff belongs to the class of persons intended to be protected by the statute.

This concept is not something that the Wyoming Supreme Court has always properly appreciated. For example, in Countrywide Home Loans, Inc. v. First Nat’l Bank of Steamboat Springs, 144 P.3d 1224 (Wyo. 2006), a refinancing lender attempted to claim the priority of the paid-off mortgage under equitable subrogation in order to claim priority over the claim of an intervening junior lienholder.  The Court improperly rejected the equitable subrogation claim, suggesting that the integrity of the state’s recording statute required a conclusion that the refinancing lender had constructive notice of the junior lien and thus took its refinancing mortgage subject to the rights of that lienholder.  The court missed the boat in so concluding; the recording statute exists to protect the interests of subsequent purchasers and mortgagees without notice; the existing junior lienholder knew that it was in a subordinate position to the original mortgage and cannot be said to have been a reliance creditor without notice vis-à-vis the refinancing lender.  Thus, the purpose of the statute was not served by using it to deprive the refinancing lender of its expected priority.

Reiss on Qualified Mortgage Rule

Posted on by

TheStreet.com quoted me in a story, New Mortgage Lending Rule Intended to Protect Borrowers May Hurt Self-Employed.  It reads in part,

“Lenders are incentivized to originate qualified mortgages, because doing so makes it easier to defend against borrower lawsuits,” says David Reiss, a law professor at Brooklyn Law School. “In return, lenders must ensure that the terms of the mortgage conform with certain requirements that protect borrowers from abusive terms.”

Qualified mortgage loans cannot have interest-only periods, negative amortization, exceed 30 years, and cannot have balloon payments at the end of the term, with exceptions in rural or underserved areas. Further, qualified mortgage loans cannot exceed 43% of the borrower’s monthly pretax income, and borrowers must provide proof of income or assets.

“Determining whether self-employed individuals are able to make the loan payments presents particular challenges,” says Reiss. “The Consumer Financial Protection Bureau had originally proposed that self-employed individuals provide heavy documentation of their income, and for the lender to make sophisticated judgments about that income.”

In response to comments, the CFPB, in its proposal, subsequently reduced income documentation requirements and the level of lender income analysis required, Reiss says, but adds that “applicants must still demonstrate that their income is stable or increasing.”

Two (or Three) Cheers for DeMarco’s Swan Song

Posted on by

FHFA acting Director Edward Demarco gave a thoughtful speech, Housing Finance, Systemic Risk, and Returning Private Capital to the Mortgage Market, on the future of federal housing finance policy.  Given that the Administration has nominated Mel Watt as his permanent replacement, it is likely that DeMarco is seeking to leave a good final impression.  I give the speech two real cheers, no more and no less.

First Cheer.  The speech provides a review of two reasons why the government might intervene in the housing market.  First, a “potential market failure could arise in housing finance if market participants have undue or unnecessary concerns about the ongoing stability and liquidity of mortgage credit in a purely private market across various economic environments.” (2)  Second, another “potential market failure is what is often thought of as the positive externality associated with homeownership. In this view, the benefits of homeownership extend beyond the individual household to the broader aspects of society, hence if left solely to the market the number of homeowners will be less than optimal.” (3)

Second Cheer. The speech also provides a very nice summary of the two main approaches that the government can take to address housing market failures.  First, is the issuer-based approach, which “is generally associated with a financial institution guaranteeing principal and interest repayment to investors. In this model, the issuer’s guarantee is backed by its shareholders’ capital. While not necessarily part of an issuer-based approach, typically this approach assumes a further credit enhancement in the form of a government guarantee on the securities issued.” (4)  Second is the securities-based approach.  With this approach, “as opposed to credit risk being absorbed by the equity of the securities issuer, credit risk would be absorbed through capital markets.” (6)

And One Bronx Cheer.  That’s right, no real third cheer for DeMarco.  Does he take a clear stand as to what course we should follow?  No.  Like the Administration in its oft-discussed White Paper, DeMarco sets forth the options and effectively punts on the trillion dollar question.

My two cents?  The federal housing finance infrastructure should focus on two goals:  (i) increasing housing affordability for low- and moderate-income households and (ii) providing a backstop during liquidity crises.  Leadership is needed now, before Congress gets riproaringly drunk on Fannie and Freddie’s massive return to profitability.  Otherwise, we have let one perfectly good crisis go to waste.