June 15, 2015
AIG’s “Victory” and the GSE Litigation
Court of Federal Claims Judge Wheeler issued an Opinion and Order in Starr International Company, Inc. v. United States, No. 11-779C (June 15, 2015), the case that Hank Greenberg brought against the government over the terms of the bailout of AIG during the financial crisis. The judge found that the government exceeded its authority in taking an equity interest in AIG, but did not award the plaintiffs any damages. Many will read the tea leaves of this opinion to see what they tell us about the litigation brought against the federal government by shareholders in Fannie and Freddie arising from the bailout of those two companies. I think it offers little guidance as to liability but lots as to damages.
My most important takeaway from the opinion (which seems well-reasoned to me) is that the holding is based on a close reading of the Federal Reserve Act. The Act enumerates the powers and limitations of the Fed. The Court held that the Act does not authorize the Fed to take equity in a company as part of a bailout.
Fannie and Freddie are regulated by the Federal Housing Finance Administration (FHFA). The FHFA’s powers and limitations, in contrast, derive from the Housing and Economic Recovery Act of 2008 (HERA), passed during the financial crisis itself. HERA explicitly granted the FHFA broad powers as conservator. Section 1117 of HERA authorized the Secretary of the Treasury to make unlimited equity and debt investments in the two companies’ securities through December 31, 2009. (There is a disagreement as to whether the the Third Amendment to the Preferred Stock Purchase Agreement, discussed here, created new securities after that date, but the more general point is that HERA authorized equity investments in a way that the Federal Reserve Act did not.)
In sum, I would not read too much into the GSE litigation from the AIG litigation as it relates to the government’s ability to take equity in Fannie and Freddie. The two cases arise under two completely different statutes.
As to the damages component of the opinion, there are many cases when a court finds for a plaintiff but only awards nominal damages. Thus, the Court’s opinion is not particularly out of the ordinary in this regard. Here, the Court relied on the reasoning of the Court of Appeals for the Federal Circuit in a TARP case, A&D Auto Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014). In that case, the Federal Circuit found that absent allegations that “GM and Chrysler would have avoided bankruptcy but for the Government’s intervention and that the franchises would have had value in that scenario,” there was no basis to argue that the government caused “a net negative economic impact” on the plaintiffs (Starr at 66, quoting A&D at 1158).
It would appear that to prove damages, the GSE litigation plaintiffs will need to overcome that bar too, even if they were to succeed in proving that the government had acted improperly in bailing out Fannie and Freddie.
June 15, 2015 | Permalink | No Comments
June 12, 2015
Reiss on Big Kickback Penalty
Law360 quoted me in CFPB Ruling Adds New Front In Administrative Law Fight (behind a paywall). The story opens,
Consumer Financial Protection Bureau Director Richard Cordray’s decision last week upholding an administrative ruling against PHH Mortgage Corp. and jacking up the firm’s penalty highlights concerns industry has about the bureau’s appeals process, and it adds to a growing battle over federal agencies’ administrative proceedings.
Cordray’s June 4 decision in the PHH case marked the first time the bureau’s administrative appeals process was put to the test. And the result highlighted both the power that Cordray has as sole adjudicator in such an appeal and his willingness to review a decision independently and go against his enforcement team, at least in part, experts say.
But because PHH has already vowed to appeal the decision, the structure of the CFPB’s appeals process could be put in play, and it could be forced to change — a battle that comes as the U.S. Securities and Exchange Commission is also facing challenges to its administrative proceedings.
The way the CFPB handles administrative appeals “might be one of the issues that the court of appeals might be asked to consider,” said Benjamin Diehl, special counsel at Stroock & Stroock & Lavan LLP.
In the case before Cordray, PHH had been seeking to overturn an administrative law judge’s November 2014 decision that found it had engaged in a mortgage insurance kickback scheme under the Real Estate Settlement Procedures Act, or RESPA.
Cordray agreed with the underlying decision, but he found that Administrative Law Judge Cameron Elliot incorrectly applied the law’s provisions when assessing the penalty PHH should face.
And when Cordray applied those provisions in a way that he found to be correct, PHH’s penalty soared from around $6.4 million to $109 million, according to the ruling.
The reasoning behind Cordray’s decision irked lenders, which say the CFPB director dismissed precedent on mortgage reinsurance, including policies from the U.S. Department of Housing and Urban Development and judicial interpretations of the statute of limitations on RESPA claims.
“If the rules are going to change because an agency can wave a magic wand and change them, that’s disconcerting,” Foley & Lardner LLP partner Jay N. Varon said.
The rise in penalties highlighted both the risk that firms face in an appeal before the CFPB and Cordray’s desire to send a message to companies that he believes violate the law, said David Reiss, a professor at Brooklyn Law School.
“It is unsurprising that Cordray would take a position that is intended to have a significant deterrent effect on those who violate RESPA, and I expect that he wanted to signal as much in this, his first decision in an appeal of an administrative enforcement proceeding,” Reiss said.
June 12, 2015 | Permalink | No Comments
Friday’s Government Reports
- Consumer Financial Protection Bureau (CFPB) recently released a report entitled A Closer Look a Reverse Mortgage Advertisements and Consumer Risks which discusses its findings regarding the failure of reverse mortgage ads to mention the considerable risks involved in reverse mortgage loans (while extolling their virtues). The CFPB also released a consumer advisory to warn seniors about the potential pitfalls of reverse mortgages.
- A new rule requiring a Three Day Review Period for Mortgage applications submitted after August 1st, 2015 will only apply if certain (3) changes are made before closing: 1. Changes in Annual Percentage Rate (APR); 2) Prepayment terms; 3) Basic loan product changes (i.e. from fixed at adjustable rate). The CFPB has released a factsheet detailing how the new rule functions.
- The Federal Housing Finance Agency unveiled an interactive online map to help “in the money borrowers” identify the opportunity (those eligible for The Home Affordable Refinance Program aka HARP).
June 12, 2015 | Permalink | No Comments
June 11, 2015
Renting in America’s Largest Cities
Following up on an earlier graphic they produced, the NYU Furman Center and Capital One have issued a report, Renting in America’s Largest Cities. The Executive Summary reads,
This study includes the central cities of the 11 largest metropolitan areas in the U.S. (by population) from 2006 to 2013: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York City, Philadelphia, San Francisco, and Washington, DC.
The number and share of renters rose in all 11 cities.
The rental housing stock grew in all 11 cities from 2006 to 2013, while owner-occupied stock shrank in all but two cities.
In all 11 cities except Atlanta, the growth in supply of rental housing was not enough to keep up with rising renter population. Mismatches in supply and demand led to decreasing rental vacancy rates in all but two of the 11 cities in the study’s sample.
The median rent grew faster than inflation in almost all of the 11 cities in this study. In five cities, the median rent also grew substantially faster than the median renter income. In three cities, rents and incomes grew at about the same pace. In the remaining three cities, incomes grew substantially faster than rents.
In 2013, more than three out of every five low-income renters were severely rent burdened in all 11 cities. In most of the 11 cities, over a quarter of moderate-income renters were severely rent burdened in 2013 as well.
From 2006 to 2013, the percentage of low-income renters facing severe rent burdens increased in all 11 cities in this study’s sample, while the percentage of moderate-income renters facing severe rent burdens increased in six of those cities.
Even in the cities that had higher vacancy rates, low-income renters could afford only a tiny fraction of units available for rent within the last five years.
The typical renter could afford less than a third of recently available rental units in many of the central cities of the 11 largest U.S. metro areas.
Many lower- and middle-income renters living in this study’s sample of 11 cities could be stuck in their current units; in 2013, units occupied by long-term tenants were typically more affordable than units that had been on the rental market in the previous five years.
In six of the cities in this study, the median rent for recently available units in 2013 was over 20 percent higher than the median rent for other units in that year, indicating that many renters would likely face significant rent hikes if they had to move. (4)
While this report does an excellent job on its own terms, it does not address the issue of location affordability, which takes into account transportation costs when determining the affordability of a particular city. It would be very helpful if the authors supplemented this report with an evaluation of transportation costs in these 11 cities. This would give a more complete picture of how financially burdened residents of these cities are.
June 11, 2015 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Round-Up
- The MacArthur Foundation’s report on the findings of its, How Housing Matters Survey – reveals a lasting perception that the Housing Crisis persists.
- NYU Furhman Center released the third in a five part series of policy briefs on affordable housing. The Challenge of Rising Rents: Exploring Whether a New Tax Benefit Could Help Keep Unsibsidized Rental Units Affordable offers a policy option to maintain a stock of unsubsidized affordable apartments in New York City.
- The Urban Center released: Headship and Home-ownership: What Does the Future Hold in which it explores the desire and ability of young Americans to become homeowners of the future; it also discusses whether the average home-ownership rate will go up or down in coming decades.
June 11, 2015 | Permalink | No Comments
June 10, 2015
Reiss on EB-5 Green Card Reform
Ellis Island
GlobeSt.com quoted me in Congress Moves to Revamp EB-5. It reads in part,
Last week Senate Judiciary Committee Chairman Chuck Grassley and ranking member Senator Patrick Leahy introduced bipartisan legislation to reauthorize and reform the EB-5 Regional Center program.
This did not come as a surprise to the commercial real estate industry, which has been watching the approaching Sept. 30, 2015 deadline with a mixture of dread and anticipation.
Simply put, the program has become an increasingly popular funding source for projects, David Cohen, a shareholder at Brownstein Hyatt Farber Schreck in Washington DC, tells GlobeSt.com.
“As the popularity of the EB-5 program has grown in the last few years, so too has the scope of the deals its being used to fund,” he says. “There is far more money at stake than there was even a few years ago.”
The changes proposed in the bill — officially called the American Job Creation and Investment Promotion Reform Act — touched upon some of the more controversial parts of the program. It proposes strengthening oversight by Department of Homeland Security and Securities and Exchange Commission oversight and putting in place measures that would discourage fraud. Overall, national security would have a greater focus this time around.
* * *
The EB-5 program “has a very interesting mix of policy goals, including immigration, community development and employment ones,” says David Reiss, a law professor at Brooklyn Law School and research director of the Center for Urban Business Entrepreneurship (CUBE).
It also has a great deal of flexibility – and many say too much flexibility, he continues. “For instance, companies have been able to characterize hot locations in Brooklyn and Manhattan as areas of high unemployment by defining the targeted employment area expansively,” he tells GlobeSt.com.
“For instance, the biggest real estate project in Brooklyn, Pacific Park — formerly known as Atlantic Yards –used nearby neighborhoods with high unemployment for an EB-5 investment located in a relatively low unemployment area,” he says.
In short, “there is a lot of talk of reform of the program that comes from all different directions – raise the minimum investment amount! – ensure that the targeted employment area is more narrowly drawn! – establish national standards!” Reiss says.
“But it is too early to tell which reforms might stick.”
June 10, 2015 | Permalink | No Comments
