Author Archives: David Reiss

Mooting The CFPB Constitutional Challenge

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Law360 quoted me in DC Circ. May Skip CFPB Fight After Cordray’s Exit. It opens,

The legal battle over who will temporarily lead the Consumer Financial Protection Bureau comes as the D.C. Circuit is considering whether the bureau’s structure is constitutional, and experts say the fight over its leadership could lead the appeals court to punt on the constitutional question.

The full D.C. Circuit has been considering an appeal filed by mortgage servicer PHH Corp. to overturn a $109 million judgment entered by former CFPB Director Richard Cordray over alleged violations of anti-kickback provisions of the Real Estate Settlement Procedures Act. PHH’s argument is that the agency’s structure, which includes a single director rather than a commission along with independent funding not appropriated by Congress, is unconstitutional.

But now that a political and legal fight has broken out over who should temporarily lead the CFPB since Cordray has left the bureau, the D.C. Circuit may be even more inclined to find a way to decide the underlying arguments about the CFPB’s enforcement of a decades-old mortgage law without touching the constitutional questions.

“If the D.C. Circuit wants to avoid this question, they certainly have plausible means to do it,” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

The battle over the CFPB’s constitutionality waged by PHH in some ways opened the door for the current conflict over who should serve as the bureau’s acting director.

PHH’s fight with the CFPB stems from Cordray’s decision to jack up a RESPA penalty against the New Jersey-based mortgage company in June 2015.

A CFPB administrative law judge had originally issued a $6.4 million judgement against PHH over alleged mortgage kickbacks, but on appeal Cordray slapped the company with a $109 million penalty.

PHH then took its case to the D.C. Circuit, arguing that the single-director structure at the CFPB, which allowed Cordray to unilaterally hike the penalty, was a violation of the Constitution’s separation of powers clause.

Ultimately, a three-judge panel led by U.S. Circuit Judge Brett Kavanaugh found that the CFPB’s structure was unconstitutional but declined to eliminate the bureau and invalidate its actions. Instead, the panel elected to eliminate a provision that only allowed the president to fire the CFPB director for cause, rather than allowing the director to be fired at will by the president.

The original, now vacated, D.C. Circuit decision also overturned the CFPB’s penalty against PHH. That portion of the decision was unanimous.

The CFPB then sought an en banc review of the decision, with oral arguments held in May. Since then, the CFPB and the industry have waited for a decision.

In fact, the wait for that decision may have allowed Cordray to hang on as long as he did at the CFPB. Trump was expected to fire Cordray soon after taking office, but that never happened, and instead Cordray waited until November to depart the bureau for what many believe will be a run for governor in his home state of Ohio.

Many predicted the D.C. Circuit would go the route of U.S. Circuit Judge Karen L. Henderson, a member of the original panel that ruled in the PHH litigation. Judge Henderson dissented on the constitutional question but supported the decision on RESPA enforcement.

“You arguably don’t have to reach the constitutional question,” said Christopher Walker, a professor at Ohio State University’s Moritz School of Law.

But the D.C. Circuit’s decision comes as two individuals argue over which one of them is the CFPB’s rightful acting director.

Cordray last Friday promoted his chief of staff, Leandra English, to be the CFPB’s deputy director just moments before he formally announced his departure. Cordray and English argue that the 2010 Dodd-Frank Act, which created the CFPB, made the deputy director the acting director in his absence.

Hours later, Trump appointed Office of Management and Budget Director Mick Mulvaney, a fierce CFPB opponent, to be the federal consumer finance watchdog’s acting director under a different federal law.

English sued to block Mulvaney’s appointment, and although the case will continue, a judge on Tuesday rejected her request for a temporary restraining order.

Against that backdrop, the D.C. Circuit may have more of an incentive to lie low on the constitutional questions, said Brooklyn Law School professor David Reiss.

“My reading would be that if they reversed the agency on the RESPA issues, then they may be able to moot the constitutional issues,” he said.

Storm-Induced Delinquencies

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The Urban Institute’s Housing Finance Policy Center has released its November 2017 Housing Finance at a Glance Chartbook. The Introduction looks out how this summer’s big storms have pushed up delinquency rates:

The Mortgage Bankers Association recently released the results of its National Delinquency Survey (NDS) for Q3 2017. The non-seasonally adjusted NDS data for Q3 2017 showed a significant increase in delinquency rates across all past due categories (30-59 days, 60-89 days and 90 days and over). The increase was largest–and most noteworthy–for the 30-59 day category, spiking by 57 basis points from 2.27 percent in Q2 2017 to 2.84 percent in Q3. The D60 rate increased by a much smaller 12 basis points, from 0.74 to 0.86 percent, while the D90 rate increased the least, by 9 basis points, from 1.20 to 1.29 percent. The rise in delinquencies was broad based, affecting FHA, VA and Conventional channels with FHA D30 seeing the largest increase (4.57 to 5.92 percent).
While early payment delinquency rates were expected to increase in the wake of the storms Harvey, Irma and Maria for the affected states, the magnitude of increase in the D30 rate is quite remarkable. The reported Q3 2017 D30 rate is the highest in nearly four years. The 57 basis points increase in a single quarter was also the largest in recent history. The last time D30 rate increased by more than 50 bps in one quarter was in Q4 2000, when it rose by 61 bps. In comparison, both D60 and D90 rates, while slightly higher in Q3, are well within their recent range.
MBA’s state level NDS data confirms that storms were a major driver behind the increase. For Florida, the non-seasonally adjusted D30 rate more than doubled from 2.12 to 4.64 percent, the highest ever D30 rate recorded. The D30 rate for Puerto Rico also nearly doubled from 4.98 to 9.12 percent, while Texas D30 rate increased from 5.05 to 7.38 percent. The increase in FL and PR was larger than in TX because of the statewide impact of hurricanes Irma and Maria. In contrast Harvey’s impact was limited to Houston and surrounding areas. The increase in the D90 rate is not storm-related as not enough time has elapsed since the storms made landfall (Harvey made landfall in Houston on August 25, Irma made landfall in Florida on September 9, and Maria made landfall in Puerto Rico on September 20).
Besides storms, there are other factors that are driving the D30 rate higher. As the figure shows, there is a very strong seasonal pattern associated with 30 day delinquencies. The D30 rate typically witnesses an uptick in the second half of each calendar year after declining in the first half because of tax refunds. Another reason for the Q3 increase is that the last day of September was a Saturday, which means that payments received on this day were not processed until Monday Oct 2nd and were identified as past due (mortgage payments are due on the 1st of the month; D30 rate is based on mortgages unpaid as of 30th of the month).
There is one more thing worth pointing out. Many borrowers affected by recent storms have received forbearance plans that allow them to defer mortgage payments for a few months. Under the NDS methodology, these borrowers are considered delinquent. Many will likely resume making monthly payments once they regain their financial footing or after forbearance ends. Others unable to afford payments could get a loan modification. Therefore, although it will take several quarters before the eventual impact of storms on delinquency rates becomes clear, many borrowers who are currently 30-days delinquent might not enter D60 or D90 status.
While the Chartbook does not look at the longer term impact of climate change on mortgage markets, it is clear that policy makers need to account for it in terms of mortgage servicing, flood insurance, land use and building code regulation.

Another FHFA Win Against Shareholders

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The U.S. Court of Appeals for the Sixth Circuit issued an opinion in Robinson v. FHFA et al. (No. 16-6680, Nov. 22, 2017) that is another win for the federal government in the fight with shareholders over Fannie and Freddie’s profits. The Court summarizes the issue presented as follows:

Appellant Arnetia Joyce Robinson is a stockholder in the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”; collectively, the “Companies”). During the economic recession in 2007–2008, Congress enacted the Housing and Economic Recovery Act of 2008 (“HERA”), which created an agency, Appellee Federal Housing Finance Agency (“FHFA”), and authorized FHFA to place the Companies in conservatorship. The Companies, through FHFA as their conservator, entered into agreements with Appellee Department of the Treasury (“Treasury”) that allowed the Companies to draw funds from Treasury in exchange for dividend payments and other financial benefits. The Third Amendment to those agreements modified the dividend payment structure and required the Companies to pay to Treasury, as a quarterly dividend, an amount just short of their net worth. The Third Amendment effectively transferred the Companies’ capital to Treasury and prevented dividend payments to any junior stockholders, such as Robinson. Robinson brought suit against FHFA, its Director, and Treasury, alleging that the Third Amendment violated the Administrative Procedure Act (“APA”). The district court found that Robinson’s claims were barred by HERA’s limitation on court action and that Robinson had failed to state a claim upon which relief can be granted. We AFFIRM. (2)

As I have argued previously, I think that courts have been getting these cases right — HERA granted the FHFA broad authority to act as conservator. In the words of the Court, “Congress granted to the Companies ‘unprecedented access’ to guaranteed capital from Treasury. And, in exchange, Congress also granted FHFA unparalleled authority to manage the Companies’ business.” (17) While I would not count out the plaintiffs in these cases, courts have been coming up with pretty consistent results based upon their reading of HERA.

A lot of what you read on the web about these cases is filled with a certainty about the wrongfulness of the government’s actions that borders on the fanatical. I recommend that those who want to get a sense of the legal issues at stake read the cases themselves. The judges have been struggling with the structure and text of the relevant statutes and have been making very reasonable determinations about their meaning.

But these cases are far from over. We still have to see what the Supreme Court has to say on these issues, and plaintiffs may get a more sympathetic hearing there.

Investing in Homes

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photo by Pictures of Money

TheStreet.com quoted me in Investing In Your Home Remains a Sound Financial Decision for 2018. It reads, in part,

Homeowners are still pouring money into their homes as renovations and upkeep are generating a large portion of sales for Home Depot as demand for purchasing homes rose in September and the three massive hurricanes in the U.S. boosted revenue.

Home Depot’s third-quarter sales surged in the aftermath of a robust hurricane season that spanned from Texas to Puerto Rico, increasing demand from homeowners who faced immense rebuilding as homes were destroyed by relentless floodwaters.

The Atlanta-based home improvement retailer reported an impressive 7.9% increase in comparable-store sales in the third quarter, which exceeded the Wall Street estimate of 5.8%. Home Depot also beat on earnings, reporting $1.84 a share, 2 cents ahead of forecasts. The company’s total revenue was $25.03 billion, up 8% from the same period last year.

 Home Depot’s third-quarter earnings rose 15% from a year ago and its comparable sales in the U.S. increased at a 7.7% clip.

“Though this quarter was marked by an unprecedented number of natural disasters,” said CEO Craig Menear in a statement, “the underlying health of our core business remains solid.

The company was able to raise its fiscal 2017 guidance due to its stellar earnings and now estimates comp sales growth of 6.5% and earnings per share of $7.36, which reflects its $8 billion buyback program this year.

Home Depot shares rose 2.7% to $168.06 on Nov. 14.

 Interest from first-time home buyers remains strong and home sales rose in September — new home sales increased to a seasonally adjusted rate of 667,000, which is up 18.9% month over month and 17% year over year.

*     *     *

“When an individual buys a share of stock they can monitor the value of the investment on a minute-to-minute basis,” Johnson said. “People can see the fluctuation in value. With real estate, however, no one is quoting you a price instantaneously on your real estate purchase. Absent a market price, people tend not to worry about the value of their real estate purchase and assume that it is very stable in the short run.”

Millennials tend to be conservative with their investment choices and are “drawn to this seeming stability in the value of residential real estate,” he said.

Nevertheless, purchasing a home can often be a very poor financial decision and potential home buyers need to be aware of the additional costs and potential pitfalls.

“People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road,” Johnson said.

Noble laureate economist and Yale University professor Robert Shiller had made a compelling case that real estate, especially residential homes, are a much inferior investment when compared to stocks. He found that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.

The stock market’s average return on a large stock index such as the S&P 500 has been about 10% while inflation has averaged around 3% from 1926 through 2016 while the inflation adjusted return of the stock market over the past 90 years has been approximately 7%.

The rate of homeownership still remains much lower than the 1998 rate of 9.5% and the rate has remained stable since the commencement of the financial crisis — hovering around 5% since 2008.

So should you own or rent?

Renting can be a better deal for many consumers, depending on the city and region, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“This is a better question to ask yourself than whether owning is a sound investment choice because you are going to need to live somewhere no matter what,” he said. “It is not too helpful to look at national numbers to answer this question – you should look at the figures in the communities you are considering living in.”

Delaying Trump’s Wall

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photo by Jimmysalv

USA Today cited me in No, Cards Against Humanity Can’t Delay Trump’s Border Wall. It opens,

By now you’ve played a rousing game of Cards Against Humanity or at least heard the game makers want to buy land to block the construction of President Trump’s proposed border wall between the U.S. and Mexico.

The raunchy game, where people fill in the blank or complete sentences with terrible — but funny — things, pulls a holiday marketing stunt every year. Last year, Cards Against Humanity raised money to dig a hole. Before that, they mailed people boxes filled with actual bulls–t.

This year, they asked for $15 from customers to buy a large plot of land along the U.S./Mexico border for their “Cards Against Humanity Saves America” campaign. The promotion already sold out.

A marketing video implies they would separate acres of land into tiny pieces for each participant, in order to hold the government up in court for years. They want to make the push to build a wall time-consuming and expensive by hiring lawyers to keep the land tied up in court, according to the website.

The only problem is, that’s not how eminent domain works.

“This is a way for them to utilize their popularity with an audience most people assume are either indifferent toward political issues or at the very least unsophisticated about how things get done,” said Steve Silva, an eminent domain and land use attorney for Fennemore Craig law group in Reno. Silva has literally used eminent domain to build a wall.

“It’s got a lot of people literally buying into this issue of significant public importance,” he said.

The Fifth Amendment to the U.S. Constitution allows the Federal Government to take property from people for “just compensation.” The amendment favors the government’s ability to take while also protecting an owner’s right to make money. Meaning, property owners must be paid fair-market value for the land.

Determining value is what usually ends up taking years in court, Silva said. TheCongre actual taking of the property takes very little time.

“It’s a two-step process: First thing is that the government has to prove it has the right to take the property,” he said. “Once it establishes that, it can take it immediately.”

The federal government need only establish the land will be used for the public, such as for a large wall owned by the government. Then it can basically take that acreage and start building the wall while fighting out the value in court.

“Congress can also just pass a special bill to take land,” Silva said. “They’ve done that for national parks before. Finally, the U.S. Supreme Court has noted that the U.S. can just seize land summarily by occupying it and ousting the former owner.

“I suspect this sort of move would be really unpopular,” he added.

So, Cards Against Humanity may end up fighting the government for years after the wall is finished.

Even if Cards Against Humanity spreads the ownership of the land out to lots of people — say, thousands of them — the Federal Government can still take the land all at once. But now those individual owners will need to fight each other, Cards Against Humanity and the government for their just compensation.

Since people paid $15 for land, it’s likely they would establish land value and get that $15 back unless Cards Against Humanity somehow improves the land or plans to build a museum, monument or even a parking lot on that space.

But again, that would only increase its value, not slow down the wall’s construction.

In an interview on Mashable.com, law professors David Reiss and Richard Epstein argued the court would reject Cards Against Humanity’ claim over the land because they’re using it for political purposes. But attorneys Silva and Lynn Blais disagree. The game makers are using land as a protest, which should be respected by the court, so their protest shouldn’t matter in eminent domain proceedings.

Lincoln’s Last Thanksgiving Proclamation

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President Lincoln issued the following proclamation, his last, in 1864:

It has pleased Almighty God to prolong our national life another year, defending us with His guardian care against unfriendly designs from abroad and vouchsafing to us in His mercy many and signal victories over the enemy, who is of our own household. It has also pleased our Heavenly Father to favor as well our citizens in their homes as our soldiers in their camps and our sailors on the rivers and seas with unusual health. He has largely augmented our free population by emancipation and by immigration, while He has opened to us new sources of wealth and has crowned the labor of our workingmen in every department of industry with abundant rewards. Moreover, He has been pleased to animate and inspire our minds and hearts with fortitude, courage, and resolution sufficient for the great trial of civil war into which we have been brought by our adherence as a nation to the cause of freedom and humanity, and to afford to us reasonable hopes of an ultimate and happy deliverance from all our dangers and afflictions:

Now, therefore, I, Abraham Lincoln, President of the United States, do hereby appoint and set apart the last Thursday in November next as a day which I desire to be observed by all my fellow-citizens, wherever they may then be, as a day of thanksgiving and praise to Almighty God, the beneficent Creator and Ruler of the Universe. And I do further recommend to my fellow-citizens aforesaid that on that occasion they do reverently humble themselves in the dust and from thence offer up penitent and fervent prayers and supplications to the Great Disposer of Events for a return of the inestimable blessings of peace, union, and harmony throughout the land which it has pleased Him to assign as a dwelling place for ourselves and for our posterity throughout all generations.