Author Archives: David Reiss

Do Foreclosures Cause Crime?

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The Furman Center says yes.  The Center conducted an empirical study in New York City and found that “foreclosure activity appears to be linked to subsequent crime” if “there have been three or more foreclosure notices issued on a blockface.” (4)

The study may give law enforcement agencies something to chew over now (perhaps CrimeStat should track foreclosures?!?), but it should also give those who study housing finance policy something to plan for as we look ahead to the next foreclosure crisis.  If this finding is replicated in other jurisdictions, should federal and state governments put into place any policies and programs that will address this foreseeable consequence of concentrated foreclosures?  The Furman study suggests some policies on its last page.

The GAO’s Take on The FHA

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The Government Accountability Office issued an update to its 2013 HIGH-RISK SERIES.  It had this to say about the Federal Housing Administration:

a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. (25)

Discussion about the FHA is getting in high gear, in large part because of Ed Pinto.  I expect to take up the issue of the FHA’s appropriate role in the housing market over the coming months and will offer an alternative vision to his.

Reiss on Qualified Mortgages and Fair Housing

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Law360 ran Banks Fear CFPB Rule Could Spur Fair Lending Fights (behind a paywall) which asked for my thoughts:

banks may be getting a bit ahead of themselves when it comes to worrying about how the fair lending law will work in the qualified mortgage context, said David Reiss, a professor at Brooklyn Law School.

Any mortgage that is purchased by Fannie Mae, Freddie Mac and — key for low-income borrowers — the Federal Housing Administration for seven years after the rules take effect in January will be deemed qualified mortgages. The FHA currently backs around $1.1 trillion worth of mortgages.

Unless the FHA drastically reduces its presence in the market that should cover many of the loans that have banks worried, he said.

The banks are not wrong to flag potential problems that may arise in the future, and the issue of fair lending law bumping up against decisions regarding extending only qualified mortgages is a legitimate potential problem, Reiss said.

It’s simply a bit premature with the federal government’s heavy role in the housing finance market.

“They are predicting a scenario, but there’s a lot that’s going to happen between now and that scenario ever being actualized,” Reiss said.

Reiss on Federal Housing Policy

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Law360 ran a story on President Obama’s vision for America’s housing policy and asked for my reaction:

For a piece of mortgage-related legislation to have any chance of passing, it has to require that a borrower pay some kind of down payment so as to remain responsible for at least a small amount of risk, said David Reiss, a professor of real estate and consumer financial services law at Brooklyn Law School.

“What we’ve seen fail pretty consistently is [legislation in which] the homeowner has no skin in the game at all,” and is allowed to obtain a loan — often backed by the government — without putting down a cent, he said.

While this type of policy may help more Americans become homeowners, it does little to fix the housing finance system, which needs a major overhaul, according to Reiss.

“This is the time to reset the market in a rational way, where private lenders make responsible loans because they are doing responsible underwriting,” he said. “Setting up the framework for that should be happening now, even though right now government lending in the residential sector is really the dominant form of lending.”

The rest of the story is here (behind a paywall).

Reiss on Pino Robo-Signing Case

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I had blogged about the case here.  Law360 interviewed me about the broader significance of the case:

Despite its application to just Florida, real estate and foreclosure attorneys around the country have been keeping tabs on the case, according to Brooklyn Law School professor David Reiss. The ruling highlights a trend around the country of foreclosure mills and debt collection firms “making thousands of filings and paying very little attention to whether the filings are accurate,” he said.

Reiss said the court could have taken broader action by stating clearly that fraudulent filings undercut the rule of law.

“You could easily imagine a court saying that the kind of behavior alleged here does impugn the litigation process and [that] the court can take actions to remedy it,” Reiss said. “I’m not saying they made a mistake, but if you are aware of behavior that is taking advantage of the judicial system, I think I can imagine another set of judges saying, ‘We have the inherent authority to handle that.'”

The rest of the story is here (behind a paywall, alas).

Asset Quality Misrepresentation in RMBS Market

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Piskorski, Seru & Witkin have posted Asset Quality Misrepresentation by Financial Intermediaries:  Evidence from RMBS Market, in which they “identify misrepresentations by comparing the characteristics of mortgages in the pool that were disclosed to the investors at the time of sale with actual characteristics of these loans at the same time and show that such misrepresentations constitute a significant proportion of the loans.” (2) In particular, they

identify two, relatively easy-to-quantify, dimensions of asset quality misrepresentation by intermediaries during the sale of mortgages. The first misrepresentation concerns loans that are reported as being collateralized by owner-occupied properties when in fact these properties were owned by borrowers with a different primary residence (e.g., a property acquired as an investment or as a second home). The second form of misrepresentation concerns loans that are reported as having no other lien when in fact the properties backing the first (senior) mortgage were also financed with a simultaneously originated closed-end second (junior) mortgage. (3)

The paper has some extraordinary findings:

  • there “are instances where, in the process of contractual disclosure by the sellers, buyers received false information on the characteristics of assets.” (2)
  • “loans with misrepresented borrower occupancy status have about a 9.4% higher likelihood of default (90 days past due on payments during the first two years since origination), compared with loans with similar characteristics and where the property was truthfully reported as being the primary residence of the borrower.” (3-4)
  • “loans with a misrepresented higher lien . . . have about a 10.1% higher likelihood of default . . ..” (4)
  • lenders were “aware of the presence of second liens, and hence their misreporting likely occurs later in the supply chain.” (5)

The conclude that these “results suggest that RMBS investors had to bear a higher risk than they might have perceived based on the contractual disclosure.” (4)

1st Circuit Holds that MA Borrowers Can Challenge Mortgage Assignments

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A First Circuit panel (including Justice Souter) ruled that under Massachusetts law, “a mortgagor has standing to challenge a mortgage assignment as invalid, ineffective, or void (if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee).”  (14)  The court concisely sets forth what is at issue in the case:

The fact pattern here is emblematic: the mortgagor’s note was delivered to one party (the lender) and then transferred; the mortgage itself was granted to a different entity, Mortgage Electronic Registration Systems, Inc., and later assigned to the foreclosing entity. We are asked, as a matter of first impression for this court, to pass upon not only the legality and
effect of this arrangement but also the mortgagor’s right to challenge it. The substantive law of Massachusetts controls our inquiry.  (2-3, footnotes omitted)

There are some important dicta in the case.  The court states that “there is no reason to doubt the legitimacy of the common arrangement whereby MERS holds bare legal title as mortgagee of record and the noteholder alone enjoys the beneficial interest in the loan.” (16)