March 3, 2014
United States District Court Rejects Show-me-the-Note Theory and SpIit-the-Note Theory Claims
In deciding McWright v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 180500 (N.D. Tex. Nov. 7, 2013) the United States District Court for the Northern District of Texas rejected the plaintiff’s claims.
In her complaint, plaintiff raised the following causes of action: (1) violation of the federal Fair Debt Collection Practices Act, (2) Negligence, (3) Fraud, (4) Declaratory relief, and (5) Quiet Title. Because many of these claims were premised upon unfounded legal theories, the court first addressed the underlying theories before turning to the merits of each of plaintiff’s claims. In addressing the plaintiff’s claims the court uniformly rejected them.
Plaintiff unsuccessfully contended that defendants were required to show proof that they are the holder of the note prior to foreclosing on the property. However, the court noted that this “show-me-the-note” theory has been regularly rejected and would so be in this case as well.
To the extent plaintiff argued that MERS lacked the authority to transfer the loan, the court found that such an argument similarly fails. Moreover, the court denied the remaining plaintiff’s claims as lacking merit.
March 3, 2014 | Permalink | No Comments
Kansas Court of Appeals Upholds Summary Judgment in Favor of Wells Fargo
The Court of Appeals of Kansas in deciding Wells Fargo Bank, N.A. v. Richards, 2013 Kan. App. LEXIS 1160 (Kan. Ct. App. 2013) ultimately affirmed the lower court’s granting of summary judgment for Wells Fargo.
Plaintiff appealed the lower court’s decision granting summary to Wells Fargo Bank.
In this appeal, plaintiff asserted that (1) Wells Fargo lacked standing to bring the foreclosure action; (2) the lower court erred in holding Wells Fargo’s possession of the promissory note he signed was insufficient to enforce and foreclose the mortgage it secures; (3) Wells Fargo did not experience/suffer a default; (4) there was no contract because the note and mortgage were split; and (5) Richards was not afforded due process.
After examining the record and considering the arguments of the parties, this court held that there was no merit to any of Richards’ arguments. Consequently, this court affirmed the lower court.
March 3, 2014 | Permalink | No Comments
Fannie and Freddie Boards: Caveat Fairholme
Fairholme Capital Management has sent stern letters to the the boards of Fannie Mae and Freddie Mac (the letters are essentially the same). Fairholme’s funds have millions of common and preferred shares in the two companies and Fairholme has taken a multi-pronged to trying to wring some value out of those shares. It has sued the federal government. It has offered to buy the two companies’ mortgage guaranty operations. Now, it is threatening the board of the two enterprises with personal liability for their actions and inaction.
In regard to the cash dividends that the two companies have paid to the Treasury as a result of their Preferred Stock Purchase Agreements (as amended), Fairholme writes,
It is common sense that no Board should approve cash distributions without independent financial advice as to the effect of such payments on the Company’s safety, soundness, and liquidity. Moreover, corporate laws generally prohibit the payment of dividends in many circumstances, imposing personal liability on Directors for illegal dividends – a liability that, pursuant to the Housing and Economic Recovery Act of 2008, is not assumed by the Conservator. (Fannie Letter, 3) (emphasis added)
This is a straightforward threat that will likely get the attention of the directors of the two companies and get them to check in with their D&O insurer before taking any further actions. But it is genuinely unclear what they should be doing at this point.
As I note in a forthcoming article, An Overview of the Fannie and Freddie Conservatorship Litigation (NYU J. Law & Bus.), the Fannie/Freddie shareholder litigation raises all sorts of complex and novel legal issues, and I am not willing to predict their outcomes. But I will go as far to say that Fairholme presents the way out of this mess as far clearer than it is — “Various solutions are simple, equitable, and need not be contentious.” (5) The ones that Fairholme has in mind likely involve large payouts for shareholders, one way or the other.
At the same time that Fairholme presents the solution as simple, it does acknowledge (as it really must) that the problem itself is not: “we are aware of no circumstance in which the controlling shareholder and its affiliates simultaneously act as director, regulator, conservator, supervisor, contingent capital provider, and preferred stock investor.” (3-4) Yup, this is one big mess with no real precedent. I am confident, however, that the federal government has no interest in reaching a settlement with shareholders that shareholders would find acceptable. So, no end in sight to this aspect of the Fannie/Freddie situation, a far as I can tell.
March 3, 2014 | Permalink | No Comments
February 28, 2014
Appraisals in the Coal Mine
The Federal Housing Finance Agency Office of Inspector General released an Audit Report, FHFA’s Oversight of the Enterprises’ Use of Appraisal Data Before They Buy Single-Family Mortgages. As the IG notes,
Assessing the value of collateral securing mortgage loans is one of the pillars in making sound underwriting decisions. Since September 2008, the Federal Housing Finance Agency (FHFA) has operated Freddie Mac and Fannie Mae (the Enterprises) in conservatorship, due to poor business decisions and risk management that led to enormous losses. While in conservatorship, the Enterprises have relied on Treasury’s financial support to operate in the secondary mortgage market, buying loans in order to provide needed liquidity to lenders. In 2010, FHFA directed the Enterprises to improve single-family residential loan quality and risk management through, among other things, developing a uniform collateral data portal (portal).
Unfortunately, the IG found that
- from January 2013 through June 2013, Fannie Mae spent $13 billion buying over 56,000 loans even though the portal’s analysis of the associated appraisals warned the Enterprise that the appraisals were potentially in violation of its underwriting requirements.
- from June 2013 through September 2013, Freddie Mac spent $6.7 billion buying over 29,000 loans despite the portal warning the Enterprise that either no property value could be provided or the value of the property was in question.
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the Enterprises bought nearly $88 billion in loans when system logic errors in the portal did not allow them to determine if the appraiser was properly licensed to assess the value of the properties, which served as collateral for the loans.
The IG did not characterize these problems as particularly worrisome, but I wonder if they are somewhat symbolic of the limbo state that the Enterprises find themselves in. Like canaries in a coal mine, they alert us to a serious problem.
Neither private companies nor government instrumentalities, the Enterprises must stagger on until the federal government decides what to do with them. Let’s hope that the Enterprises are not silently building up to another crisis, one not driven by the profit-motive as the last one was, but driven by bureaucratic incompetence. “Bureaucratic” in the sense of the “rule of no one,” as Mary McCarthy defined it.
Fannie and Freddie’s current profitability should not be used as an excuse to delay reform further. They are too important to have been left in limbo for so long.
February 28, 2014 | Permalink | No Comments
February 27, 2014
Reiss on Marketplace: Cash Cows to Slaughter
I was interviewed on Marketplace for its story, Fannie and Freddie: Cash Cows Avoid The Slaughter? (sound file) The text of the story reads
We are making money – the tax payer, that is – on Fannie and Freddie Mac.
When Freddie Mac hands the treasury a $10.4 billion dividend next month, tax payers will have received more money in interest than was put in. (Technically the two institutions still owe the principal on the loan that bailed them out, but the interest they’re paying will shortly exceed that amount).
But.
There always is a but with these things.
Making money for the tax payer isn’t good if you ask those who want reform.
Back during the financial crisis, conservatives and liberals disagreed over whether Freddie and Fannie were a victim of or a cause of the housing collapse, but they agreed that the institutions needed reform. The profits are throwing a wrinkle into this debate.
“As long as Fannie and Freddie continue to pay substantial amounts of money to the government, they are looked at by some people in Congress as a great source of revenue that reduces the deficit,” explains Peter Wallison with the American Enterprise Institute. His concern – shared by reformers on both sides of the political spectrum – is that if Fannie and Freddie become cash cows, congress won’t want to touch them.
David Reiss, professor of law at the Brooklyn Law School, agrees. He says the financial crisis wasn’t a one time problem.
“We should think of it as that we dodged a bullet. There’s fundamental problems with the Fannie and Freddie business model which rests on this notion of privatizing profits and socializing losses.”
Freddie and Fannie buy mortgages from lenders, and then bundle them into “mortgage backed securities” that can be sold to investors. It’s useful because it converted illiquid mortgage loans into liquid securities. In plain English, it means a bank or investor who made a mortgage loan to someone didn’t have to wait around for 30 years to be paid back. They could sell their stake in the mortgage to Fannie or Freddie, move along, and go invest in other things. This helped more people get mortgages.
One concern was that Fannie and Freddie were simply too big and too concentrated. Another concern was that the federal government implicitly guaranteed investments in Freddie and Fannie, and that encouraged people to make home loans that were too risky.
Even without the complication of profits, the debate over how to reform Fannie and Freddie is at a stand still.
House Republicans don’t want the government involved at all, they want an efficient market. The Senate wants the government to be involved a little bit, essentially to promote housing.
“What I see,” says David Reiss, “is nothing really happening, and us being a holding pattern for a long time.”
It’s possible that reform-minded politicians will compromise before they lose their chance. Also possible they won’t.
February 27, 2014 | Permalink | No Comments
February 26, 2014
Subprime Mortgage Conundrums
Joseph Singer has posted Foreclosure and the Failures of Formality, or Subprime Mortgage Conundrums and How to Fix Them (also on SSRN). Singer writes,
One of the striking features of the subprime era is that banks acted without adequate regard for state property law. They were intent on serving the national and international financial markets with new and more profitable products, and they treated state property law as an obstacle to get around rather than a foundation on which to build. Rather than sell mortgages to families that could afford them, they hoodwinked the vulnerable by picking their pockets. Rather than honestly disclose the high risks associated with subprime loans, they paid rating agencies to give them AAA ratings, inducing investors to take risks they neither were prepared for nor understood. The banks made huge amounts of money marketing mortgages to people who could not afford to pay them back while offloading the risks of such deals onto hapless third parties. And rather than observe longstanding laws and customs designed to clarify property titles, banks evaded requirements of publicity and formality that traditionally governed real estate transactions. In short, the banks misled both borrowers and investors while undermining property titles. This was both a clever and a profitable way to engage in business, but it was neither honorable nor responsible. (501, footnotes omitted)
Brad Borden and I have made a similar point in our debate with Joshua Stein, but Singer’s article plays it out in far greater depth. The article is a property prof’s cri de coeur over the near death of real property law principles during the early 2000s subprime boom, but it is also a very thorough inquest. The article concludes with a review of tools that are available to respond to failures in the mortgage market. All in all, it provides a nice overview of what led to the crisis as well as potential policy tools that are available to prevent future ones.
February 26, 2014 | Permalink | No Comments
February 25, 2014
FIRREA Does the Hustle
Judge Rakoff has issued another Opinion in U.S. v. Countrywide Fin. Corp. et al., 12 Civ. 1422 (Feb. 17, 2014). Rakoff reconfirms his broad reading of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which covers fraudulent behavior that is self-affecting; that is, where the perpetrator and victim of the fraud are one and the same financial institution. This Opinion goes further, however, based on on developments in the litigation since that earlier opinion.
The Opinion notes that the defendants were found liable at trial and finds that
Based on the charge as given to the jury, the jury, by finding liability, necessarily found that the defendants intentionally induced two government-sponsored entities, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), to purchase from the Bank Defendants thousands of loans that Fannie Mae and Freddie Mac would not otherwise have purchased. The defendants did so, the jury necessarily found, by misrepresenting that the loans they were selling were “investment quality” and that they knew of nothing that might cause investors to regard the mortgages as poor investments, when in fact the defendants knew that their underwriting process, known as the “High Speed Swim Lane,” “HSSL,” or “Hustle,” was calculated to produce loans that were not of investment quality. (3)
The Court had previously found that “the fraud here in question, perpetrated by the Countrywide defendants and Ms. Mairone, had a huge effect on Bank of America defendants, which, as a result of Bank of America’s purchase of Countrywide, paid, directly or through affiliates, billions of dollars to settle repurchase claims brought by Fannie Mae and Freddie Mac.” (4) The opinion concludes that
It is highly improbable that Congress would have intended to place beyond the reach of FIRREA those defendants whose misconduct “affects” federally insured banks that have the great fortune to be fully insured [by their affiliates] for such losses. Even less so can it be imagined that the device of having BAC [the BoA parent holding company] indemnify BANA [the BoA federally insured bank] for losses that otherwise would result from Countrywide’s fraud immunizes Countrywide from liability under FIRREA. Indeed, defendants’ labeling of this theory of liability as the “self-affecting” theory is something of a misnomer; Countrywide’s fraud, which culminated before the merger with BANA, directly affected, not just Countrywide, but its merger partner, BANA, as well. While the effect on Countrywide might be “self-affecting,” the effect on BANA was not. (5)
This Opinion seems to bolster Rakoff’s broad reading of FIRREA. As of now, FIRREA gives the federal government a powerful tool to pursue alleged wrongdoing affecting federally insured financial institutions. The caselaw reads FIRREA broadly and the statute’s ten-year statute of limitations means that additional suits may still be coming down the pike.
February 25, 2014 | Permalink | No Comments
