January 28, 2014
Reforming the Fed
Peter Conti-Brown and Simon Johnson posted their policy brief, Governing the Federal Reserve System after the Dodd-Frank Act, on SSRN (also on the Peterson Institute for International Economics website). I have said before that the Fed is a “riddle, wrapped in a mystery inside an enigma” and I stand by that characterization. This policy brief is very helpful, however, in identifying the legal structure of the Federal Reserve System as well as the practical constraints and political forces that affect the workings of that legal structure.
The authors write that by statute, the chair of the Fed
decides almost nothing herself: The Federal Reserve System is supervised by a Board of seven presidentially appointed, Senate-confirmed governors, of whom the chair is but one. In practice, the chair has frequently had a disproportionate influence on the monetary policy agenda and also the potential to predominate on regulatory matters—working closely with the Fed Board’s senior staff. Even so, for the most significant decisions, the Board must vote, and the chair must rely on the votes of the other six governors (for Board matters) and in addition, on a rotating basis, the votes of five of the twelve Reserve Bank presidents (for monetary policy). On regulation and supervision issues, the chair can do little of consequence without the support of at least three other governors. (1)
The brief goes on to document other aspects of the Fed’s organizational structure and the practical politics of Fed decisionmaking. For those of us who have a hard time parsing how the Fed acts, this is a useful document.
The brief also argues for a new approach to Fed governance:
The Fed chair is arguably the most important economic appointment any president makes. After the crises, new statute, and bold decisions of recent years, this job has become even more important.
During its first 100 years of existence, the position of Fed chair has risen to exercise great potential power. By statute, an appointee can remain in office 20 years or more. A perceived “maestro” effect in which insiders and outsiders are discouraged from challenging the chair is no longer a model with broad appeal, if it ever was.
The Board of Governors could provide an effective counterweight to the chair. Indeed, such a counterweight is what Congress intended by requiring presidential appointment and Senate confirmation of the entire Board. In order to break the tradition of a chair-dominated board, governors need sufficient expertise and experience to engage with and in some instances counteract the chair and Fed staff.
A president’s choice for Fed chair matters enormously, but the choice for members of the Board also matters a great deal. Monetary policy remains a crucial criterion but not at the exclusion of regulatory policy. The Board is second to none—in the nation and indeed arguably in the world—in its responsibility for regulatory oversight over the financial system. The president, members of the Senate, and the general public ignore these considerations at significant peril to the financial system and the economy. (9)
The brief presents a powerful alternative to business as usual at the Fed. Hopefully, it will gain some traction.
January 28, 2014 | Permalink | No Comments
Maine Superior Court Denies Foreclosure Action Because Bank Failed to Strictly Follow Statutory Notice Requirement
In Bank of N.Y. Mellon v. McKenna, the Superior Court of Maine precluded a foreclosure action on a finding that the plaintiff bank failed to strictly follow the relevant statutory notice requirements.
In 2007, defendant Robert McKenna (“McKenna”) bought a home in Maine with a mortgage for $245,000.00 from First Magnus Financial Corporation (“First Magnus”) and MERS. In September 2008, MERS sold the mortgage to plaintiff Bank of New York, which had been acquired by plaintiff Bank of New York Mellon (“Mellon”) in July 2007. McKenna defaulted on the loan in April 2008. Mellon later bought McKenna’s loan from MERS in November 2012. In July 2013, Mellon initiated a foreclosure action against McKenna.
However, in this case the Maine Superior Court entered a judgment against Mellon. The Court found that Mellon failed to strictly comply with the notice and service requirements under Maine state law. Specifically, the Court noted that the relevant statute required a mortgagee to provide notice to all mortgagors and all cosigners who had a right to cure the mortgage default 35 days before the start of the foreclosure action. Here, the Court found that Mellon only served notice on Robert McKenna, and not his wife and co-defendant, Nancy McKenna. The Court found that the lack of notice to Nancy McKenna represented a failure to strictly follow the statutory requirements for foreclosure actions. The Court therefore entered a judgment in favor of McKenna.
January 27, 2014 | Permalink | No Comments
Federal Court of Appeals for the Fifth Circuit Holds that Successor Note Holder had Proper Authority to Initiate Foreclosure Under Texas State Law
Federal Court of Appeals for the Fifth Circuit Holds that Successor Note Holder had Proper Authority to Initiate Foreclosure Under Texas State Law
In Hall v. BAC Home Loans Servicing, L.P., the United States Court of Appeals for the Fifth Circuit rejected a homeowner’s challenge to a foreclosure action finding that the note holder had proper authority to initiate the foreclosure and that the homeowner had filed an invalid restraining order to block the foreclosure.
In 2007, Raphael Hall (“Hall”) bought a home in Texas with a mortgage from First Magnus Financial Corporation (“First Magnus”). Two years later in 2009, MERS (the deed beneficiary), sold the mortgage to BAC Home Loans (“BAC”). By October 2010, Hall had fallen behind in his mortgage payments and received a default notice because he had an overdue amount on his mortgage. By June 2011, he was still in default on the mortgage and received a notice of a trustee sale and a scheduled foreclosure for August 2011 that was later delayed. In September 2011, Hall sought a restraining order in Texas state court to stop the foreclosure proceedings, but the foreclosure sale still proceeded on September 6, 2011 and Fannie Mae purchased Hall’s property. After the purchase, BAC removed the case from state court to federal district court and filed a motion for summary judgment. The district court granted BAC’s summary judgment motion and Hall appealed.
On appeal, Hall raised three particular issues related to two of his causes of action. The causes of action were for wrongful foreclosure and suit to quiet title and void substitute trustee’s deed. Hall’s first issue was that summary judgment was improper because the temporary restraining order he sought in state court voided the foreclosure sale and that the sale was therefore a wrongful foreclosure. However, the Fifth Circuit applied Texas state law and rejected this argument because it found that Hall’s restraining order was void under Texas state law and therefore could not have stopped the foreclosure sale.
Hall’s second argument was that BAC was not the note holder, in that MERS only transferred the property deed and not the not, and that BAC could not enforce the foreclosure on the note. The Fifth Circuit rejected this argument as well because it found that under Texas state law, MERS had properly transferred its rights to BAC that allowed it to initiate a foreclosure action on Hall’s property. The Court therefore found that BAC had proper authority to initiate the foreclosure action.
Hall raised a final argument on appeal challenging the validity of the foreclosure notice because of an incorrect designation about BAC’s ownership status. However, the Court did not consider this argument because Hall raised it for the first time on appeal. As the Court rejected each of Hall’s arguments, the Fifth Circuit therefore affirmed the district court’s summary judgment ruling against Hall.
January 27, 2014 | Permalink | No Comments
January 24, 2014
Preserving Low-Income Housing
NYC Mayor De Blasio announced an aggressive goal of producing and preserving 200,000 units of affordable housing over the next ten years. New York City will need to be as creative as possible to achieve this goal and will need to look to all of the resources that it has at its disposal to achieve it. Enterprise Community Partners released Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons Learned for the Extended Use Period. This report looks at important component of a preservation agenda: Low-Income Housing Tax Credit buildings that “reach the end of their initial 15-year compliance period.” (4) The report presents data about LIHTC buildings during the 15-year “extended use period” that follow the compliance period
and shares how some state and local housing agencies around the country are addressing the post-Year 15 Housing Credit properties. While the condition of the Housing Credit portfolio at Year 15 is strong, as properties age into a second 15-year period of rent restrictions and beyond, the ability for some of those properties to be able to afford to make improvements while maintaining affordability is clearly a challenge. Some of these local best practices point to solutions demonstrating programmatic and regulatory flexibility, new resources as well as resyndication where appropriate. (4)
Across the nation, roughly 100,000 units of housing age out of the initial compliance period each year, so we are talking about a lot of housing. New York has a significant portion of that housing stock. While these properties are in pretty good condition overall, the report found that
very limited financing choices exist throughout the extended use period for properties with modest recapitalization or capital improvement needs. Currently, the best choice seems to be a resyndication with a new Housing Credit allocation. However, the use of Housing Credits to preserve and extend the affordability of existing affordable housing competes with other Housing Credit properties, including public housing revitalization and new projects (both as adaptive reuse of existing buildings and new construction). The Housing Credit was created to address affordable housing needs that the private market could not effectively serve. It incentivized a public-private partnership that includes affordability for 30 years. In order to preserve this inventory, more investment will be required. Ensuring the physical and economic stability of these assets through their extended use periods will require innovative uses of limited public subsidy by states and municipalities. (5)
New York City will certainly want to plan for the modest recapitalization of its LIHTC properties as part of its affordable housing strategy. And it will be better to plan for it now than pay too much for deferred maintenance down the line.
January 24, 2014 | Permalink | No Comments
January 23, 2014
U.S. Dismissive of Frannie Suits
The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:
The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.
Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)
While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.
January 23, 2014 | Permalink | No Comments
January 22, 2014
S&P’s Fightin’ Words
S&P filed a memorandum in support of its motion to compel discovery in the FIRREA case that the United States brought against S&P last year. S&P comes out fighting in this memorandum, arguing that the “lawsuit is retaliation for S&P’s decision to downgrade the credit rating of the United states in August 2011.” (1)
S&P argues that the “most obvious explanation” for the United States’ “decision to pursue a FIRREA action against S&P alone” among the major rating agencies “is apparent:” “S&P alone among the major rating agencies downgraded the securities issued by the United States.” (17) This is not obvious to me, particularly given the various explanations for this disparate treatment that have appeared in outlets like the WSJ over the last couple of years. But it may be true nonetheless.
In any case, I do not find the “chronology of events relating to the downgrade and the commencement of this lawsuit” to provide “powerful evidence linking the two.” (17) The chronology ends with the following entries:
- S&P’s downgrade of the United States occurred on Friday, August 5, 2011. That Sunday, August 7, Harold McGraw III, the Chairman, Chief Executive Officer and President of McGraw Hill (of which S&P was a unit), received a telephone message from a high-ranking official of the New York Federal Reserve Bank; when the call was returned, the official conveyed the personal displeasure of the Secretary of the Treasury with S&P’s rating action.
- This was followed on Monday by a call to Mr. McGraw from the Secretary of the Treasury, Timothy Geithner, in which Secretary Geithner stated that S&P had made a “huge error” for which it was “accountable.” He said that S&P had done “an enormous disservice to yourselves and your country,” that S&P’s conduct would be “looked at very carefully,” and that such behavior could not occur without a response.
- The McClatchy Newspapers subsequently reported in a piece authored by Kevin G. Hall and Greg Gordon that while the United States’ original investigation included S&P and Moody’s, “[i]nvestigator interest in Moody’s apparently dropped off around the summer of 2011, about the same time S&P issued the historic downgrade of the United States’ creditworthiness because of mounting debt and deficits.” A source familiar with the investigations was quoted as stating: “After the U.S. downgrade, Moody’s is no longer part of this.”
- In the year preceding S&P’s downgrade of the United States, two states, Mississippi and Connecticut, had initiated proceedings alleging deceptive practices based specifically on an alleged lack of independence. Each of those states named both Moody’s and S&P as defendants. After the downgrade, additional state lawsuits were commenced, with allegations nearly identical to those of the Connecticut and Mississippi complaints. Drafted after coordination and consultation with the U.S. Department of Justice, none of those lawsuits named Moody’s. (19, footnotes omitted)
This is surely no smoking gun and lots of dots remain to be connected. How did DoJ get involved? Are the state Attorneys General in on the conspiracy? Why would DoJ stop an investigation of Moody’s to punish S&P? Sounds a bit like cutting off your nose to spite your face?
That being said, S&P might be right about the motivation for this suit and their allegations may be enough to win this motion to compel discovery. But whoever wins this round, this should be a fight worth watching.
January 22, 2014 | Permalink | No Comments
