June 18, 2015
What Is To Be Done with Mortgage Servicers?
The Office of the Comptroller of the Currency has found that EverBank; HSBC Bank USA, N.A.; JPMorgan Chase Bank, N.A.; Santander Bank, National Association; U.S. Bank National Association; and Wells Fargo Bank, N.A. have not met all of the requirements of consent orders they had entered into because of deficiencies in how they dealt with foreclosure servicing. The details of these deficiencies are pretty bad.
The OCC recently issued amended consent orders with these banks. The amended orders restrict certain business activities that they conduct. The restrictions include limitations on:
- acquisition of residential mortgage servicing or residential mortgage servicing rights (does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks);
- new contracts for the bank to perform residential mortgage servicing for other parties;
- outsourcing or sub-servicing of new residential mortgage servicing activities to other parties;
- off-shoring new residential mortgage servicing activities; and
- new appointments of senior officers responsible for residential mortgage servicing or residential mortgage servicing risk management and compliance.
HSBC had the most deficiencies of the six: it did not make 45 of the 98 changes it had agreed to over the last few years. I was particularly interested in the portion of the consent orders that relate to MERS. The HSBC consent order states:
(1) The Bank shall implement its Revised Action Plan and ensure appropriate controls and oversight of the Bank’s activities with respect to the Mortgage Electronic Registration System (“MERS”) and compliance with MERSCORPS’s membership rules, terms, and conditions (“MERS Requirements”), include, at a minimum:
(a) processes to ensure that all mortgage assignments and endorsements with respect to mortgage loans serviced or owned by the Bank out of MERS’ name are executed only by a certifying officer authorized by MERS and approved by the Bank;
(b) processes to ensure that all other actions that may be taken by MERS certifying officers (with respect to mortgage loans serviced or owned by the Bank) are executed by a certifying officer authorized by MERS and approved by the Bank;
(c) processes to ensure that the Bank maintains up-to-date corporate resolutions from MERS for all Bank employees and third-parties who are certifying officers authorized by MERS, and up-to-date lists of MERS certifying officers;
(d) processes to ensure compliance with all MERS Requirements and with the requirements of the MERS Corporate Resolution Management System (“CRMS”);
(e) processes to ensure the accuracy and reliability of data reported to MERSCORP and MERS, including monthly system-to-system reconciliations for all MERS mandatory reporting fields, and daily capture of all rejects/warnings reports associated with registrations, transfers, and status updates on open-item aging reports. Unresolved items must be maintained on open-item aging reports and tracked until resolution. The Bank shall determine and report whether the foreclosures for loans serviced by the Bank that are currently pending in MERS’ name are accurate and how many are listed in error, and describe how and by when the data on the MERSCORP system will be corrected; and
(f) an appropriate MERS quality assurance workplan, which clearly describes all tests, test frequency, sampling methods, responsible parties, and the expected process for open- item follow-up, and includes an annual independent test of the control structure of the system-to- system reconciliation process, the reject/warning error correction process, and adherence to the Bank’s MERS Plan.
(2) The Bank shall include MERS and MERSCORP in its third-party vendor management process, which shall include a detailed analysis of potential vulnerabilities, including information security, business continuity, and vendor viability assessments.
These should all be easy enough for a financial institution to achieve as they relate to basic corporate practices (e.g., properly certifying officers); basic data management practices (e.g., system-to-system reconciliations); and basic third-party vendor practices (e.g., analyzing potential vulnerabilities of vendors).
It is hard to imagine why these well-funded and well-staffed enterprises are having such a hard time fixing their servicing operations. We often talk about governments as being too poorly run to handle reform of complex operations, but it appears that large banks face the same kinds of problems.
I am not sure what the takeaway is in terms of reform, but it does seem that homeowners need protection from companies that can’t reform themselves while they are under stringent consent orders with their primary regulator for years and years.
June 18, 2015 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Round-Up
- On June 23, at 2pm the Urban Land Institute, John D. and Catherine T. MacArthur Foundation, and Hart Research are hosting a Virtual Conversation entitled: Housing, Communities, & Messaging that Resonates: Results from Three New Polls (RSVP Here).
- Americans’ housing and community preferences in this rapidly changing landscape,
- where and how Millennials want to live,
- overall satisfaction with government’s prioritization of housing affordability, and
- the most persuasive messaging about affordable housing.
- Corelogic’s Equity Report finds that 245,000 properties regained equity in the first quarter of 2015 – over 90% of properties have positive equity and the percentage of “underwater” mortgages decreased by over 19% year-over year.
June 18, 2015 | Permalink | No Comments
June 17, 2015
The Quest for Consumer Comprehension
Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN. it opens,
Dodd-Frank tasked the Consumer Financial Protection Bureau with ensuring that “consumers … understand the costs, benefits, and risks associated with” financial products. Despite this ambitious mandate, and despite the Bureau’s self-branding as a “21st century agency,” the Bureau’s pursuit of consumer comprehension has thus far focused on the same twentieth century tool that has already proven ineffective at regulating financial products: required disclosures. No matter how well the Bureau’s “Know Before You Owe” disclosures perform in the lab, or even in field trials, firms will run circles around disclosures when the experiments end, confusing consumers and defying consumers’ expectations. Even without any intent to deceive, firms not only will but must leverage consumer confusion to compete with other firms that do so. While firms are not always responsible for their customers’ confusion, firms take advantage of this confusion to sell products.
If the Bureau wants to ensure that consumers understand the financial transactions in which they engage, then to meet the challenge posed by the velocity of today’s marketplace, the Bureau must induce firms themselves to promote consumer comprehension, either by educating consumers or by simplifying products. To generate this change in firm behavior, the Bureau should require firms to regularly demonstrate, through third-party testing of random samples of their customers, that their customers understand key costs, benefits, and risks of the products they have bought. Rather than attempting to perfect the format of price disclosures, for example, the Bureau should require firms to prove that their customers understand the price at the moment when the customers are deciding whether to take the actions that will trigger it, whether those actions be taking out a mortgage, overdrawing a checking account, or calling customer service to inquire about the balance on a prepaid debit card. Where consumers are confused about benefits rather than costs, such as the benefit of signing up for a credit repair service, buying credit life insurance, or paying off a debt that is beyond limitations, firms should be required to show that their customers understand the actual benefits the firm is offering before the consumer commits to the purchase or action. (1, footnotes omitted)
This paper poses an important challenge to the CFPB — can disclosure regimes be replaced with something better? One hopes that the answer is yes, although Willis’ previous work on financial education makes me somewhat pessimistic.
This new paper does offer some reason for optimism though. Willis argues that comprehension rules may induce firms to simplify products, so such rules may have a positive impact even if the CFPB cannot move the dial on consumer comprehension all that much.
June 17, 2015 | Permalink | No Comments
Wednesday’s Academic Roundup
- An Extrapolative Model of House Price Dynamics, Edward L. Glaeser & Charles Nathanson, HKS Working Paper No. RWP15-012.
- Old Suburbs Meets New Urbanism, Nicole Stelle Garnett, Notre Dame Legal Studies Paper No. 1512.
- Credit Scoring and Loan Default, Rajdeep Sengupta & Geetesh Bhardwaj, International Review of Finance Vol. 15, Issue 2, pg. 139-167, 2015. (Paid access).
- Product Market Effects of Real Estate Collateral, Azizjon Alimov.
- Reforming REIT Taxation (Or Not), Bradley T. Borden, Houston Law Review, Vol. 52, 2015, Forthcoming; Brooklyn Law School, Legal Studies Paper No. 416.
- Age, Demographics, and the Demand for Housing, Revisited, Richard K. Green & Hyojung Lee, June 4, 2015.
June 17, 2015 | Permalink | No Comments
June 16, 2015
NYC’s 421-Abyss
New York City’s 421-a tax exemption has lapsed as of yesterday because of disagreements at the state level (NYS has a lot of control over NYC’s laws and policies, for those of you who don’t follow the topic closely). 421-a subsidizes a range of residential development from affordable to luxury. In the main, though, it subsidizes market-rate units.
This subsidy for residential development is heavily supported by the real estate industry. Many others think that the program provides an inefficient tax subsidy for residential development, particularly affordable housing development.
I fall into the latter camp. I would note, however, that NYC’s dysfunctional property tax system is highly inequitable because it taxes different types of housing units (single family, coop and condo, rental) so very differently.
With that in mind, let me turn to a policy brief from the Community Service Society, Why We Need to End New York City’s Most Expensive Housing Program. The reports key conclusions are,
At $1.07 billion a year, 421-a is the largest single housing expenditure that the city undertakes, larger than the city’s annual contribution of funds for Mayor de Blasio’s Housing New York plan.
The annual cost of 421-a to the city exploded during the recent housing boom as a result of market changes, not because of any intentional policy decision to increase the amount of tax incentives for housing construction.
Half of the total 421-a expenditure is devoted to Manhattan.
The 421-a tax exemption is a general investment subsidy that has been only superficially modified to contribute to affordability goals.
The 421-a tax exemption is extremely inefficient as an affordable housing program, costing the city well over a million dollars per affordable housing unit created.
The reforms made to 421-a in 2006 and 2007 have not resulted in a significant improvement of 421-a’s efficiency as an affordable housing program.
A large share of buildings that receive 421-a and include affordable housing also receive other subsidies, such as tax-exempt bond financing. Affordable units in these buildings cannot be credited entirely to the 421-a program.
The great majority of the tax revenue forgone through 421-a is subsidizing buildings that would have been developed without the tax exemption. (3-4)
The brief argues that 421-a should be allowed to expire and be replaced “with a targeted tax credit or other new incentive that is structured to provide benefits only in proportion with a building’s contribution to the affordable housing supply.” (4)
I don’t have any real disagreement with the thrust of this brief. I would just add that the fight over 421-should be expanded to include an overhaul of the City’s property tax regime. It is unclear, of course, whether Governor Cuomo and NYS legislators have the stomach for a battle so large.
June 16, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- 2016 Transportation Housing and Urban Development Bill passed in the House of Representatives – funding for certain programs, such as section 8 has been increased, however according to Enterprise Community partners (see Budget chart), it underfunds other critical federal housing and community development programs by as much as $1.5 billion.
- The U.S. Treasury’s Community Development Financial Institutions Fund recently completed its final round of New Market Tax Credit (NMTC) allocations. NMTC are used to stimulate investment in low-income communities. Legislation is currently pending in both the House and the Senate to permanently extend this successful and popular program. A bipartisan dear colleague letter urging permanent extension of NMTC is currently circulating – CDFI Fund’s recent report highlights the effectiveness of the program between 2003 and 20013.
June 16, 2015 | Permalink | No Comments
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
