Author Archives: David Reiss

Reiss on CFPB Muscle

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Law360 interviewed me in CFPB Flexes Enforcement Muscle In 1st Criminal Referral (behind a paywall) regarding the prosecution of an alleged debt relief scam:

Criminal charges filed Tuesday against a New York debt settlement firm based on a referral from the Consumer Financial Protection Bureau show that the fledgling agency’s enforcement staff will be able to successfully leverage its unique investigative powers, attorneys say.

U.S. Attorney Preet Bharara of the Southern District of New York charged Michael Levitis, his company Mission Settlement Agency and three employees of the company with mail fraud, wire fraud and conspiracy to commit mail and wire fraud alleging they scammed 1,200 customers seeking debt relief out of about $2.2 million.

The case was the direct result of a referral from the CFPB, marking the first time that criminal charges have come out of a probe by the bureau. And it won’t be the last, experts said.

The bureau already has an aggressive enforcement policy and broad authority and investigative powers, and will likely use the referral tool to make its enforcement powers even more formidable, according to K&L Gates LLP partner Larry Platt.

“Most people have had the CFPB on their radar screen as an enforcement agency. But what this shows is that it’s also working as a scout,” he said.

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But observers say the bureau may be more willing to use that power than other banking regulators.

Prudential banking regulators view their main mission as preserving the safety and soundness of the institutions they regulate, not necessarily seeking criminal actions for consumer protection violations, according to Brooklyn Law School professor David Reiss. The CFPB, by contrast, is charged solely with a mission for consumer protection, he said.

“There’s no question that the CFPB would be more aggressive on criminal investigations than other bank regulators,” Reiss said.

Reiss on FIRREA!

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Law360 quoted me in a story, Rakoff Ruling In $1B BofA Case May Halt DOJ Hot Streak, that reflects some judicial skepticism about the federal government’s broad reading of FIRREA:

Prosecutors have seized on an obscure 1989 law to launch a series of splashy cases against banks in recent years, but a prominent New York federal judge with a penchant for scrutinizing government actions could soon reverse the trend in a $1 billion mortgage fraud suit against Bank of America Corp.

The Financial Institutions Reform Recovery Enforcement Act, enacted in the wake of the savings and loan crisis, allows the government to sue entities that negatively “affect” the stability of federally insured banks. The law was used sparingly for decades, but it has been dusted off in a series of recent complaints that seek to hold firms liable for hurting their own stability. In the BofA case, for example, the bank is accused of putting its health at risk by selling shoddy loans that were later packaged into securities.

U.S. District Judge Jed Rakoff is threatening to stem the tide. He said at an April 29 hearing that he was “troubled” by the government’s novel interpretation of FIRREA and vowed to issue a formal ruling on the issue by May 13.

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“The federal government is searching for different theories of liability, and FIRREA is incredibly attractive right now,” said David Reiss, a professor at Brooklyn Law School. “I have no doubt this issue will rise in the court of appeals, and potentially make its way to the U.S. Supreme Court.”

Judge Rakoff’s call is expected to have a ripple effect either way. A decision allowing the government to sue banks for self-inflicted wounds may embolden prosecutors to launch even more cases, experts say.

A ruling in favor of BofA would be a coup for financial institutions as they seek to limit legal exposure from the crisis, according to Reiss.

But if the government loses FIRREA as a fraud enforcement tool, it won’t be out of options. The BofA case and some other FIRREA actions also include claims under the federal False Claims Act, which allows prosecutors to collect treble damages and penalties.

“As Judge Rakoff seems to say, I don’t think this issue has been settled,” Reiss said.

Reiss on New Limits on Lending for Fannie and Freddie

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Law360 interviewed me in Fannie, Freddie Will Only Buy Qualified Mortgages, FHFA Says (behind a paywall) about the new limits on lending imposed on Fannie and Freddie:

The Federal Housing Finance Agency on Monday said that Fannie Mae and Freddie Mac would only be allowed to purchase so-called qualified mortgages when the new standard comes into effect in January.

Under the new standard, Fannie Mae and Freddie Mac will only be able to purchase and securitize mortgages that qualify to an exemption to the Consumer Financial Protection Bureau’s ability to repay rule, which the federal consumer finance watchdog finalized in January.

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Given the cautious state of mortgage lending, the change is likely to only affect Fannie, Freddie and the mortgage market along the margins, said Brooklyn Law School professor David Reiss.

“It will be interesting to see, however, whether the private-label market will step into the void and offer more of these products — and it will be interesting to see how the market prices them,” he said in an email.

Principled Forgiveness

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The Congressional Budget Office issued a report, Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness, that reviews where we are with principal-forgiveness loan modifications. It notes that “Fannie Mae and Freddie Mac have not been allowed to implement principal forgiveness out of concerns about fairness, implementation costs, and the incentive that the approach could provide for people to become delinquent in order to obtain principal forgiveness.” (1)

The report examines how the GSEs could employ principal forgiveness. A key issue that the report addresses is how to deal with the moral hazard of homeowners “becoming delinquent in order to obtain principal forgiveness.” (3) This could result in large costs for the federal government and would be inequitable to those who are similarly situated who choose not to become delinquent.

The CBO analyzes three principal forgiveness options.  Each option would allow a GSE to choose between a standard HAMP modification or one that involved principal forgiveness, “depending on which one lowered the government’s expected costs more.” (3) CBO estimates that 1.2 million borrowers might be eligible for such a program, which would be about 40 percent of all underwater borrowers. CBO estimates that the federal government would save a modest amount of money with these options.

The CBO’s cost-benefit principle seems like a reasonable basis upon which to expand principal forgiveness loan modifications.  The FHFA should pursue these options even before its new leadership is in place.

Noncompliance with PSA Voids Assignment of Note and Mortgage

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Wells Fargo Bank, N.A. v Erobobo, 2013 NY Slip Op 50675(U) (Sup. Ct. Kings, Apr. 29, 2013) reaches a pretty extraordinary result: noncompliance with the assignment provisions of a Pooling and Servicing Agreement voids the assignment of a note and mortgage. In particular, the court found that

The assignment of the note and mortgage from Option One [the first assignee] rather than from the Depositor ABFC violates section 2.01of the PSA which requires that the Depositor deliver to and deposit the original note, mortgage and assignments to the Trustee. The assignment of the Defendant’s note and mortgage, having not been assigned from the Depositor to the Trust, is therefore void as in being in contravention of the PSA.The evidence submitted by Defendant that the note was acquired after the closing date and that assignment was not made by the Depositor, is sufficient to raise questions of fact as to whether the Plaintiff owns the note and mortgage, and precludes granting Plaintiff summary judgment. (13)

If the Court’s reasoning holds up on appeal or is adopted in other jurisdictions, it could have a big, big impact on Foreclosure litigation.

The Weak Can Never Forgive?

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S&P has issued a report, Principal Forgiveness, Still The Best Way To Limit U.S. Mortgage Redefaults, Is Becoming More Prevalent, that asserts that its research “demonstrates the likelihood that servicers will recover a greater portion of their receivables through principal forgiveness versus other modification tools,” such as rate modification. (5) In particular, the authors found that as of March of 2013, “loans that received a principal reduction maintained the highest percentage (about 76%) of current-pay borrowers. By contrast, on average less than 50% of loans outstanding that received a modification other than principal forgiveness remained current.” (4)

I am not sure that their research actually demonstrates a causal connection between principal modification and recoveries as opposed to just providing a correlation between the two.  This perhaps naive analysis does, in any event, raise interesting and important questions about the efficacy of modifications.

And modifications are increasing.  Indeed, as of “February of this year, more than 1.5 million homeowners have received a permanent modification through the U.S. federal government’s Home Affordable Modification Program (HAMP).” (1) Since last year, there has been “22% rate of growth in the number of modifications on an additional $2.4 billion in mortgage debt.” (1) Among the big five servicers, “principal forgiveness, as a percentage of average modifications performed on a monthly basis, has increased by about 200% since the latter half of 2011.” (1) And since 2009, “servicers have forgiven principal on approximately $45 billion of outstanding non-agency mortgages.” (1)

At the beginning of the crisis, many were terrified about the impact that principal modification would have on investors. FHFA Acting Director DeMarco was also concerned about the impact of Fannie and Freddie principal reductions on taxpayers. With a new Director for FHFA on the horizon, there might be a change of direction on this.

Gandhi said that forgiveness is an attribute of the strong.  Perhaps, our housing market is now strong enough to contemplate some serious loan forgiveness.

Disney-fied Homeownership Policy

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The Census Bureau just released a report indicating that the homeownership rate is 65 percent, which is its lowest in since 1995. (5)  While some will greet this news with dismay, it provides an opportunity to ask — what are we trying to do with homeownership policy anyway?  For the longest time, both Democratic and Republican Administrations acted as if more homeownership was always better.  More recently, commentators on the Left and Right have begun to question that unthinking devotion to such a goal.

I have previously argued that federal housing policy should work toward ensuring that all Americans live in a safe, well-maintained and affordable housing unit.  Note that such a goal does not require homeownership, just a home.  For too long rental housing, which is more appropriate for all sorts of people, has been treated as the Cinderella of housing, with all the perks (for example, the mortgage interest deduction and property tax deduction) going to single family homeowners (Drizella?) and owners of coop and condo units (Anastasia?).

Politicians make all sorts of claims about the benefits of homeownership to justify this special treatment for the mostly upper-middle class households that benefit from these perks.  After our experience with the Boom and Bust of the 2000s, the financial benefits of homeownership must be evaluated with the financial risks that it poses in mind as well as its upside.

There is also a significant amount of scholarship that argues that there are a range of non-economic benefits that result from homeownership. Supposed benefits include better outcomes for homeowners and their families in education, health and employment. The supposed benefits also include increased civic engagement, as demonstrated through higher levels of volunteerism and participation in community activities. Homeownership policy is thereby often justified by the claim that it helps to achieve better outcomes for residents regarding these non-economic benefits. But the connection between homeownership and these benefits has not been clearly demonstrated.

The bottom line:  let’s develop a housing — not homeownership — policy that would make old Walt proud. That would be one where everyone can live stably ever after in a “castle” of their own, not just the upper middle class homeowners who get a bunch of tax breaks for living in a big, expensive house.