Author Archives: David Reiss

Reiss on Threats to Housing

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CBS News interviewed me (and gave a shout out to REFinblog.com) about The 5 Biggest Threats to the Housing Recovery. It reads in part:

3. The government’s role in the mortgage market will change

The U.S. government currently backs about 97 percent of mortgages though the Federal Housing Authority, Fannie Mae and Freddie Mac. That’s unlikely to continue. It may take years, but the feds will eventually start edging out of the mortgage market. Private mortgage financiers will have to fill the void. But exactly how that will happen and what effect it will have on borrowers remains to be seen.

“The entire lending industry needs [government] leadership as to what the bulk of the market is going to look like in the long run,” said David Reiss, professor at Brooklyn Law School and editor of real estate finance industry site REFinBlog. “How tight or loose will credit be? The Federal Housing Finance Agency will decide this to a large extent, as seen by the recent announcement that Fannie and Freddie will no longer buy interest only mortgages.”

Lender Agrees to Permanent Injunction of Non-Judicial Foreclosure in Colorado

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A pro se plaintiff has won at least a procedural victory against her lender in Brumfiel v. U.S. Bank et al. (May 14, 2013) (12-cv-02716-WJM-MEH).  US Bank filed a Notice of Withdrawal of the foreclosure action and then a Motion to Vacate in which it consented “to a permanent injunction preventing it from” proceeding with a non-judicial foreclosure. (3) (quoting Motion to Vacate, emphasis in the original)

Under Colorado law, a party “may foreclose on a property by providing a document by his or her attorney that either ‘certifies’ or simply ‘states’ that ‘holder claims to be a qualified holder’ for the purposes of foreclosure.” (Order granting Plaintiff’s Request for Interim Preliminary Injunction, May 6, 2013, at 2)  The court holds a Rule 120 hearing to confirm the existence of the default.  Brumfiel challenges the constitutionality of this hearing on due process grounds.

In its May 6th order, the Court held that the questions that Brumfiel “raised regarding the serious, substantial, difficult issues apparent in this case” were a sufficient basis for an interim preliminary injunction.  These difficult issues included whether the Colorado process

(1) [] lowers the standard of proof that a creditor must meet in order to proceed to foreclosure from original documentary evidence to an unsworn statement; and

(2) [] creates an additional burden upon a debtor to establish evidence of the creditor’s identity which the creditor, itself, is not required to locate.

Whether these issues create due process concerns within the limited scope of a Rule 120 hearing creates serious constitutional questions. (13-14)

This is only a tactical victory for the homeowner.  By consenting to the permanent injunction, the lender should still be able to proceed with a judicial foreclosure.  But the constitutionality of Colorado’s non-judicial foreclosure process will have to wait to be tested until another day,

 

Reform for Whom?

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David Stevens, the head of the Mortgage Bankers Association, gave an important and revealing speech about the direction of housing finance reform.  It contains some good ideas, but also raises an alarm.  Because the Administration and Congress are at an impasse, Stevens is leading the private sector in pushing for reform of Fannie and Freddie.

While Stevens is proposing some good ideas, the federal housing finance system should be designed — big surprise here — by the federal government first and foremost.  Unfortunately, the private sector can take the lead because the federal government has not.  Housing finance policy abhors a vacuum.

Stevens’ prepared remarks provide a “proposal for transition” for Fannie and Freddie. (3)  The proposal has three steps:

First, it is imperative in this state of overlapping regulatory confusion that the White House name a Housing Policy Coordinator.  This is an immediate need with a simple solution.

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Second, we must have absolute transparency.  FHFA, Fannie Mae and Freddie Mac must stop making market shifting decisions without the input of consumers or the industry.

Finally, we must have a clear path to transition out of conservatorship.   To achieve this goal, we must move toward a single security, encourage additional risk sharing by mandating Fannie and Freddie to accept lower guarantee fees for deeper credit enhancements, and redirect the FHFA platform initiative. (3-4)

The first suggestion — some kind of Housing Czar — is both intuitively right and attractive.  Housing cuts across so many arms of the federal government:  the FHFA, HUD, FHA, CFPB and on and on.  Those arms are frequently at cross purposes.  A Housing Czar could seek to rationalize them.  The second is also attractive, but given the focus of the housing finance industry, one would assume that “industry” would get a lot more input than “consumers.”  And the third suggestion may have merit, but is not the type of decision that we want industry to make — we want the government, the people, to make it.

It is no secret that both parties have punted on housing finance reform.  But it will be a tragedy if they do not recover the ball.  Otherwise, industry will write the rules for future homeowners.  Homeowners will then be playing a game designed for industry to win, not them.

Underwater Domain

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The securitization industry is still fighting tooth and nail against the proposal to use the power of eminent domain to acquire underwater mortgages from private-label mortgage-backed security trusts.  Four California towns are considering working with Mortgage Resolution Partners LLP to take mortgages in their communities by eminent domain and then refinance them at current rates and with valuations that reflect today’s prices.

The heavy hitters in the industry — including the ABA, MBA and SIFMA — have written to the four communities  (San Joaquin letter here) warning of the consequences of proceeding.  Some of the warned of consequences appear to be thinly veiled threats such as, we are going to sue your pants off.  Some are constitutional challenges, although I think that they are overstating their case in that regard.

The letter does, however, raise some important legal, business and practical concerns that will need to be addressed if the proposal is actually acted upon.  Will the municipalities have jurisdiction over the mortgage notes if they are located out of California and is that necessary to proceed?  Will lenders punish communities that employ eminent domain in this way by making less credit available in the future?  Will the proposal be financially workable if fair market value for the mortgages is actually paid?  To what extent will “widows and orphans” be hurt by this proposal because pension funds are big holders of MBS?  These are important questions without obvious answers. Given what is at stake, it seems worth sketching out the answers a bit more before rejecting this innovative proposal out of hand.

Michigan Federal District Court Finds that Holder of Unsigned Note Can Enforce

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The District Court for the Eastern District of Michigan affirmed the Bankruptcy Court in Mentag v. GMAC Mortgage LLC, No. 12-13350 (Feb. 8, 2013), finding that the holder of the note was entitled to enforce it and has standing to challenge the automatic stay.  The court said that the “real issue is whether GMAC Mortgage LLC [the holder] was a holder of the note on the date it filed its motion to lift the stay.” (8)

Under Michigan law, a holder is either “in possession of an unsigned note that is made out to it” or is “in possession of a signed note.” (8) Based on the evidence, the Court found that GMAC Mortgage LLC was “the holder of the note when it challenged the stay.” (8) The court also noted that “a holder of the note may enforce it, notwithstanding that the holder may have sold the note and failed to transfer it to the purchaser.” (8-9)

FIRREA Flies

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Law360 interviewed me about the federal government’s continuing reliance on FIRREA in Prosecutors Get Last Laugh In $1B BofA Fraud Case (behind a paywall):

A controversial legal theory at the heart of a $1 billion mortgage fraud suit against Bank of America Corp. could become a go-to enforcement tool for civil prosecutors in the wake of a New York federal judge’s surprise ruling Wednesday, experts say.

U.S. District Judge Jed Rakoff pared the suit in a two-page order, granting BofA’s motion to dismiss False Claims Act allegations but keeping alive claims under the Financial Institutions Reform Recovery Enforcement Act, an anti-fraud law passed in the wake of the 1980s savings-and-loan crisis.

FIRREA allows civil prosecutors to sue entities that negatively “affect” the stability of federally insured banks. Seizing on a broad interpretation of that term, prosecutors have launched several suits in recent years accusing firms of affecting themselves, prompting an outcry from Wall Street and the defense bar.

Judge Rakoff said during an April 29 hearing that he was “troubled” by the government’s use of FIRREA to sue BofA, prompting many in the securities bar to be taken by surprise by Wednesday’s ruling. It comes two weeks after U.S. District Judge Lewis Kaplan refused to dismiss FIRREA claims against Bank of New York Mellon Corp. in a suit alleging the bank defrauded forex customers.

The rulings by Judges Kaplan and Rakoff suggest a consensus is beginning to form within the judiciary that FIRREA may be interpreted broadly, according to David Reiss, a professor at Brooklyn Law School. That could pose challenges for financial institutions, he said.

“There seems to be a greater interest now in pursuing financial wrongdoing,” he said. “With FIRREA, it’s a whole new game.”

And the law’s generous 10-year statute of limitations could give new life to allegations of misconduct during the financial meltdown, Reiss said.

“If FIRREA continues to be interpreted broadly, it ensures the government will still have a tool to bring claims,” he said.

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.

*  *  *

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.