May 22, 2014
Reiss in Bloomberg Industries Q&A on Frannie Litigation
Bloomberg Industries Litigation Analyst Emily Hamburger interviewed me about The Government as Defendant: Breaking Down Fannie-Freddie Lawsuits (link to audio of the call). The blurb for the interview is as follows:
As investors engage in jurisdictional discovery and the government pleads for dismissals in several federal cases over Fannie Mae and Freddie Mac stock, Professor David Reiss of Brooklyn Law School will provide his insights on the dynamics of the lawsuits and possible outcomes for Wall Street, the U.S. government and GSEs. Reiss is the author of a recent article, An Overview of the Fannie and Freddie Conservatorship Litigation.
Emily questioned me for the first half of the one hour call and some of the 200+ participants asked questions in the second half.
Emily’s questions included the following (paraphrased below)
- You’re tracking several cases that deal with the government’s role in Fannie Mae and Freddie Mac, and I’d like to go through about 3 of the major assertions made by investors – investors that own junior preferred and common stock in the GSEs – against the government and hear your thoughts:
- The first is the accusation that the Treasury and FHFA’s Conduct in the execution of the Third Amendment was arbitrary and capricious. What do you think of this?
- Another claim made by the plaintiffs is that the government’s actions constitute a taking of property without just compensation, which would be seen as a violation of the 5th Amendment – do you think this is a stronger or weaker claim?
- And finally – what about plaintiffs asserting breach of contract against the government? Plaintiffs have said that the Net Worth Sweep in the Third Amendment to the Preferred Stock Purchase Agreement nullified Fannie and Freddie’s ability to pay dividends, and that the two companies can’t unilaterally change terms of preferred stock, and that the FHFA is guilty of causing this breach.
- Is the government correct when they say that the section 4617 of the Housing and Economic Recovery Act barred plaintiff’s right to sue over the conservator’s decisions?
- Former Solicitor General Theodore Olson, an attorney for Perry Capital, has said that the government’s powers with respect to the interventions in Fannie and Freddie “expired” – is he correct?
- Can you explain what exactly jurisdictional discovery is and why it’s important?
- Do we know anything about what might happen if one judge rules for the plaintiffs and another judge rules for the government?
- Is there an estimate that you can provide as to timing?
- Are there any precedents that you know of from prior crises? Prior interventions by the government that private plaintiffs brought suit against?
- How do you foresee Congress and policymakers changing outcomes?
- What do we need to be looking out for now in the litigation?
- How does this end?
You have to listen to the audiotape to hear my answers, but my bottom line is this — these are factually and legally complex cases and don’t trust anyone who thinks that this is a slam dunk for any of the parties.
May 22, 2014 | Permalink | No Comments
May 21, 2014
The Government Takeover of Fannie and Freddie
Richard Epstein has posted a draft of The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards. The paper addresses “the various claims of the private shareholders, both preferred and common, of Fannie and Freddie.” (2) He notes that those claims have
now given rise to seventeen separate lawsuits against the Government, most of which deal with the Government’s actions in August, 2012. One suit also calls into question the earlier Government actions to stabilize the home mortgage market between July and September 2008, challenging the constitutionality of the decision to cast Fannie and Freddie into conservatorship in September 2008, which committed the Government to operating the companies until they became stabilized. What these suits have in common is that they probe, in overlapping ways, the extent to which the United States shed any alleged obligations owed to the junior preferred and common shareholders of both Fannie and Freddie. At present, the United States has submitted a motion to dismiss in the Washington Federal case that gives some clear indication as to the tack that it will take in seeking to derail all of these lawsuits regardless of the particular legal theory on which they arise. Indeed, the brief goes so far to say that not a single one of the plaintiffs is entitled to recover anything in these cases, be it on their individual or derivative claims, in light of the extensive powers that HERA vests in FHFA in its capacity as conservator to the funds. (2-3, citations omitted)
Epstein acknowledges that his “work on this project has been supported by several hedge funds that have hired me as a legal consultant, analyst, and commentator on issues pertaining to litigation and legislation over Fannie and Freddie discussed in this article.”(1, author footnote) Nonetheless, as a leading scholar, particularly of Takings jurisprudence, his views must be taken very seriously.
Epstein states that “major question of both corporate and constitutional law is whether the actions taken unilaterally by these key government officials could be attacked on the grounds that they confiscated the wealth of the Fannie and Freddie shareholders and thus required compensation from the Government under the Takings Clause. In addition, there are various complaints both at common law and under the Administrative Procedure Act.” (4)
Like Jonathan Macey, Epstein forcefully argues that the federal government has greatly overreached in its treatment of Fannie and Freddie. I tend in the other direction. But I do agree with Epstein that it “is little exaggeration to say that the entire range of private, administrative, and constitutional principles will be called into question in this litigation.” (4) Because of that, I am far from certain how the courts should and will decide the immensely complicated claims at issue in these cases.
In any event, Epstein’s article should be read as a road map to the narrative that the plaintiffs will attempt to convey to the judges hearing these cases as they slowly wend their way through the federal court system.
May 21, 2014 | Permalink | No Comments
May 20, 2014
Mortgage Servicer Accountability
Joseph A. Smith, Jr, the Monitor of the National Mortgage Settlement, issued his third set of compliance reports (I blogged about the second here). For those needing a recap,
As required by the National Mortgage Settlement (Settlement or NMS), I have filed compliance reports with the United States District Court for the District of Columbia (the Court) for each servicer that is a party to the Settlement. The servicers include four of the original parties – Bank of America, Chase, Citi and Wells Fargo. Essentially all of the servicing assets of the fifth original servicer party, ResCap, were sold to and divided between Ocwen and Green Tree pursuant to a February 5, 2013, bankruptcy court order. Accordingly, Ocwen and Green Tree are now subject to the NMS for the portions of their portfolios they acquired from ResCap.1 These reports provide the results of my testing regarding compliance with the NMS servicing standards during the third and fourth calendar quarters of 2013, or test periods five and six. They are the third set of reports for the original four bank servicers, the second report for Ocwen and the first report assessing Green Tree. (3)
The Monitor concludes that Bank of America, Citi, Chase, Ocwen and Wells Fargo “did not fail any metrics during the most recent testing periods.” (2) The Monitor also reports on “fourth-quarter compliance testing results for the loans Green Tree acquired from the ResCap Parties. Green Tree implemented the Settlement’s servicing standards after such acquisition. Green Tree failed a total of eight metrics during this time period.” (2) The metrics that Green Tree failed include a number of practices that have made the lives of borrowers miserable during the foreclosure crisis. They are,
- whether the servicer accurately stated amounts due from borrowers in proofs of claims filed in bankruptcy proceedings
- whether the servicer accurately stated amounts due from borrowers in affidavits filed in support for relief from stay in bankruptcy proceedings
- whether loans were delinquent at the time foreclosure was initiated and whether the servicer provided borrower with accurate information in a pre-foreclosure letter
- whether the servicer provided borrower with required notifications no later than 14 days prior to referral to foreclosure and whether required notification statements were accurate
- whether the servicer waived post-petition fees, charges or expenses when required by the Settlement
- whether the servicer has documented policies and procedures in place to oversee third party vendors
- whether the servicer responded to government submitted complaints and inquiries from borrowers within 10 business days and provided an update within 30 days
- whether the servicer notified the borrower of any missing documents in a loan modification application within five days of receipt (9, emphasis added)
These metrics seem pretty reasonable — one might even say they are a low bar for sophisticated financial institutions to exceed. Until the servicing industry can do such things as a matter of course, close government regulation seems appropriate. The monitor notes that “work still remains to ensure that the servicers treat their customers fairly.” (2) Amen to that, Monitor.
May 20, 2014 | Permalink | No Comments
Connecticut Court Denies Claim Alleging Lack of Standing
The court in deciding Deutsche Bank Nat’l Trust Co. v. Speer, 2013 Conn. Super. 2682 (Conn. Super. Ct., 2013) found that the defendant misstated the law in arguing that the plaintiff must hold the assignment of the mortgage before commencing a foreclosure action.
Defendant, Sheri A. Speer, challenged the standing of the plaintiff to commence the foreclosure action. After hearing from both sides, the court was satisfied with the fact that at the commencement of this action, the plaintiff was the holder of the promissory note that was the foundation of this cause of action.
Although the plaintiff had not been assigned the mortgage at the time of commencement of the suit, it eventually had been assigned the mortgage. Furthermore, the court noted that the defendant misstated Connecticut law in arguing that the plaintiff must hold the assignment of the mortgage prior to the commencement of this foreclosure action.
May 20, 2014 | Permalink | No Comments
S.D.N.Y. Denies Mortgagor Under 11 U.S.C.S. § 1109(b)
The court in deciding In re Residential Capital, LLC, 2013 Bankr. 5316 (Bankr. S.D.N.Y., 2013) denied the mortgagor’s motion for an order declaring that the debtors’ bankruptcy estate owned title to the note, to void a state court title transfer, and enjoin the foreclosure action.
The court decided Phillip Scott’s motion to (1) determine that bankruptcy estate owned title to note, (2) void state court title transfer, and (3) enjoin post petition.
In this case, the mortgagor (Scott) did not have standing under 11 U.S.C.S. § 1109(b) to seek a ruling from the bankruptcy court that the business declared Chapter 11 bankruptcy after it acquired and transferred the mortgage he executed with the note held title to real property that secured the note.
In regards to the order to enjoin the foreclosure action, the court found that the mortgagor was not a creditor in the debtors’ bankruptcy estate, the note and mortgage were not owned or serviced by any of the debtors, and none of the debtors was a party to the foreclosure action.
May 20, 2014 | Permalink | No Comments
