November 21, 2013
And How About the Just?
Some believe that there are 36 righteous people whose existence justifies the whole of humanity. Each bears the world’s pain and the world would come to an end without these Just ones. Oddly enough, I was thinking about this story when reading about the the JPMorgan Chase settlement with the Department of Justice.
I was glad to see that the company was being held accountable for its behavior (the Statement of Facts outlines the basis for the settlement). I was also glad to see that Justice is not giving a free pass to the individuals who may be individually guilty of wrongdoing. The settlement does not bar future prosecutions and Justice seems energized to hold individuals accountable for their intentional and wrongful acts that contributed to the financial crisis. These actions by Justice will hopefully deter some potential wrongdoers going forward.
But what is missing from all of this allocating of responsibility is an acknowledgment that some people in these financial institutions tried to do the right thing. They tried to underwrite mortgages properly; they tried to rate securities properly; they tried to follow established due diligence procedures. These people were overrun by their superiors who were chasing short term profits for their employers and bigger annual bonuses for themselves. Some of these Financial Industry Just were fired, some retired, some moved on.
How might the FI Just view their actions so many years later? Their supervisors likely received large bonuses and promotions and very few of them will be held responsible for their bad acts. The FI Just, on other other hand, got harsh words, poor treatment and relatively poor compensation for their troubles.
Just as we want to disincentivize bad behavior, we should also seek to incentivize good behavior. This does not necessarily require financial compensation. For many people, an acknowledgement of their good judgment might be enough. Is there a role for government in such an initiative? Can their be a medal for financial rectitude; an honor roll for underwriting: a listing of the Just by Justice?
November 21, 2013 | Permalink | No Comments
November 19, 2013
California Court Determines Plaintiff’s Claims are Barred by Res Judicata
The court in deciding Maxwell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. LEXIS 155930, 2013 WL 5882457 (N.D. Cal. Oct. 30, 2013) concluded that the plaintiff’s claims were barred by res judicata and therefore granted [with prejudice] the defendant’s motion to dismiss.
Plaintiffs brought this action against defendants Deutsche, OneWest, and MERS. Plaintiff alleged various violations of California and federal consumer protection statutes. The plaintiff asserted a claim for an invalid transfer of a trust deed, and sought declaratory and injunctive relief.
The defendants moved to dismiss the proceedings, arguing that the claims were barred by res judicata. The court, after considering the evidence presented, concluded that the plaintiff’s claims were barred by res judicata. Accordingly, the court granted the defendant’s motion to dismiss.
November 19, 2013 | Permalink | No Comments
Northern District of California Court Dismisses Plaintiff’s Claims for Lack of Subject Matter Jurisdiction
The court in deciding Murphy v. Bank of N.Y. Mellon, 2013 U.S. Dist. LEXIS 155923, 2013 WL 5883675 (N.D. Cal. Oct. 29, 2013) dismissed the plaintiff’s action without prejudice.
The plaintiff in this case brought this action against defendants [Bank of New York Mellon and MERS] for (1) violations of 18 U.S.C. § 1001; (2) violations of 18 U.S.C. § 1341; (3) violations of the Fair Debt Collection Practices Act (“FDCPA”); (4) violations of California’s Business and Professions Code Section 17200; (5) slander of title; (6) cancellation of void instruments; (7) quiet title; and (8) wrongful foreclosure. Compl., ECF No. 1.
The plaintiff’s complaint revolved around the main theory that the defendants lacked the authority to execute any foreclosure proceedings. After considering the plaintiff’s arguments, the court first concluded that the plaintiff’s action must be dismissed for lack of subject matter jurisdiction. Second, the court found that the federal claims in the operative complaint failed as a matter of law.
November 19, 2013 | Permalink | No Comments
3 Housing Riddles For De Blasio
I wrote an op ed for Law360,com that was posted today. While it is behind a paywall on Law360, it reads in full as follows:
3 Housing Riddles For De Blasio
As Mayor-Elect Bill de Blasio is making the transition from campaigning to governing New York City, it is worth contemplating some of the fundamental riddles that perplex those who spend their time thinking about the city’s housing policy. I address three of the most perplexing below.
The Riddle of Mandatory But Not Sufficient
The housing policy centerpiece of the de Blasio campaign is to require developers to build some affordable housing units when they build on lots that have been upzoned, a policy known as mandatory inclusionary zoning. The campaign website states that this policy will create 50,000 new units of housing.
Let’s put aside the fact that this number appears to be very aggressive given the lack of significant upzonings on the horizon (see second riddle below). Just because the city mandates that affordable housing be part of any new construction, it cannot mandate that developers build any housing at all if the deal does not make economic sense for them.
The de Blasio administration will need to carefully calibrate the mandatory inclusionary zoning rules to ensure that builders are sufficiently incentivized to build in the first place. This may limit the amount of affordable housing that can be mandated as part of that new construction.
One key aspect of this policy is whether the mandatory affordable housing will be required to be on-site or if the developer can build it off-site. If it is the former, it will help achieve the progressive goal of increasing socio-economic diversity in a city that is rapidly losing it.
But each unit of on-site housing would likely be more expensive to construct than off-site affordable units. And the opposite is true if the mandatory affordable units are allowed to be off-site; they will be likely cheaper to construct and thus more housing could be built. But it would not work toward increasing socio-economic diversity in the city.
And thus, the riddle of mandatory but not sufficient poses two challenges to the administration. Can it incentivize the creation of a meaningful number of units? And should it favor socio-economic diversity or the maximum production of affordable units? No easy answers here.
The Riddle of Now Versus Later
Can you increase the supply of housing to address the needs of a growing population while also downzoning large swaths of the city to respond to the preferences of the city’s current residents?
The Michael Bloomberg administration wanted to have this both ways, but that can’t work. The Bloomberg administration had planned on an increase in population of roughly another million people by 2030 while at the same time downzoning a large swath of the city (and, to be fair, upzoning some other portions).
This downzoning made current residents happy as it kept big, modern, out-of-context buildings from popping up near their homes. But it also limited the opportunities for increasing the housing stock, particularly near transit hubs. This is the basis of the second riddle — what is seen as bad by current residents may be good for future residents.
It is a fundamental economic truth that if more and more people are flocking to New York City, housing costs will rise unless supply increases. But for city residents, there is a paradox. New Yorkers see gleaming towers rise in their neighborhoods along with the rents for their nearby apartments. There are two explanations for this paradox.
First, the supply of new housing may be increasing without keeping pace with rising demand. Historically, New York City has not had many new units of housing built each year, maybe 20,000 units or so in a good year. This modest increase in supply has been overwhelmed by the increase in population of a million people in the last 20 or so years. This disparity goes a long way to explain the high rents and the miniscule vacancy rates that are seen throughout the city.
Second, new housing in one community (Williamsburg, for example) may be causing or be part of a wave of local gentrification in the existing housing stock. So, even if the new housing is having a tendency to decrease housing costs in the city overall because it increases the supply, it can also be pushing rents higher in the communities in which it is situated.
Increasing the supply of housing has to be a key component of providing “safe affordable homes for all New Yorkers,” as de Blasio calls for on his campaign website. This has to mean zoning significantly more land for high-rise residential construction as well as incentivizing the construction of affordable housing units in that new construction.
At the same time, de Blasio must attend to the concerns of those negatively impacted by the new construction. Hence, the riddle of now versus later.
The Riddle of the Few Versus the Many
The de Blasio campaign website calls for “tighter standards that ensure subsidies meet the needs of lower-income families and are distributed equitably throughout the five boroughs.” Distributing affordable housing subsidies equitably throughout the city is important, but there is another equity issue — should the city heavily subsidize affordable housing for a small portion of those who are eligible or should it distribute resources more broadly and thinly among everyone who is eligible?
Fewer than 8 percent of low- and middle-income households receive a direct or indirect subsidy for an apartment (excluding public housing) while more than 20 percent live below the poverty line of $23,283 annually for a family of four.
Should the city’s limited resources be used to create a relatively small number of new affordable units or should some of them be used in ways that benefit a broader swath of low- and moderate-income New Yorkers, albeit more modestly?
Certain policies can address the needs of many, many more low- and moderate-income households than does heavily subsidized new construction that houses perhaps a few thousand low- and moderate-income households each year.
Examples of such policies include tax credits for low- and moderate-income households that put money in their pockets and increased enforcement directed against landlords who try to illegally drive their tenants out of rent-regulated units. On the other hand, without an affordable apartment, staying in NYC can just be untenable no matter what additional benefits the government may be able to provide through more broadly available programs.
Thus, the third riddle is — do you give a lot of help to a few or do you give a little help to the many? It’s like choosing between the rock and the hard place for policymakers and New Yorkers alike.
Mayor-Elect de Blasio and his team will have to struggle with these riddles, and more. The only thing that is clear is that there are no right answers and no easy answers when it comes to housing policy in New York City.
—By David Reiss, Brooklyn Law School
David Reiss is a professor of law at Brooklyn Law School. He concentrates on real estate finance and community development and writes about housing policy.
November 19, 2013 | Permalink | No Comments
November 18, 2013
Fannie and Freddie in Play?
Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac. News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed. The proposal, according to Fairholme,
- Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
- Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
- Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
- Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
- Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
- Ends the unsustainable Federal conservatorship. (Press Release, 1)
Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)
Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.
November 18, 2013 | Permalink | No Comments
Maine Supreme Judicial Court Holds that a NonHolder in Possession of a Mortgage Can Initiate a Foreclosure Action
The state Supreme Judicial Court of Maine in Wells Fargo Bank, N.A. v. Burek, 2013 WL 5760946 (2013) held that Wells Fargo properly initiated a foreclosure action against two homeowners, even though the court found that Wells Fargo was not the actual mortgage holder under Maine real estate law.
In the case, the Plaintiffs Kenneth and Shelley Burek entered a mortgage for $324,000 with Union Federal Bank of Indianapolis (“UFBI”) in 2004. UFBI initially sold the mortgage to Fannie Mae (this sale was not recorded) and then subsequently sold the mortgage to MERS in 2005. MERS eventually sold the mortgage to the Defendant, Wells Fargo Bank, in 2009. The Defendant executed a loan modification with the Plaintiffs in 2009 that lowered their interest rate and extended the original loan term to help them avoid foreclosure. However, Wells Fargo initiated a foreclosure action against the Plaintiffs in 2010 in Maine Superior Court after they defaulted on the mortgage.
At trial, the Plaintiff’s challenged the Defendant’s status as the mortgage holder with the right to enforce the foreclosure. The Bureks alleged that the Defendant was not the holder because the specific document designating Wells Fargo as the mortgage holder (the allonge), was not attached to the “assigning document” (sale agreement), as required under Maine’s real estate law.
While the Defendant presented evidence at trial that it was the mortgage holder, including the promissory note and loan modification agreement between both parties and the entire mortgage file that had both the allonge and the agreement, the court held that the Defendant failed to prove that it was the mortgage holder under the relevant real estate law. However, the court found that the Defendant was a “nonholder in possession” and was still entitled to enforce the foreclosure. The trial court ordered a foreclosure judgment for the Defendant in the amount of $308, 211.21.
The Plaintiffs filed a motion to amend the judgment on the grounds that 1) the unrecorded mortgage sale to Fannie Mae to undermine the chain of title from UFBI to Wells Fargo and that 2) the Defendant did not have the right to foreclose as a nonholder in possession.
The trial court denied the motions and the Plaintiff’s appealed. The Supreme Judicial Court of Maine affirmed the trial court’s judgment. The Supreme Judicial Court affirmed the judgment because the Plaintiff’s failed to raise the chain of title issue during the trial, and did not show that the Defendant acted in bad faith in “withholding” the unrecorded Fannie Mae assignment since it was in Wells Fargo’s file that was admitted into evidence. The court also found that the Defendant was properly considered a nonholder in possession under the relevant statutes and was therefore entitled to initiate the foreclosure.
November 18, 2013 | Permalink | No Comments
November 20, 2013
Reiss on $13B JPMorgan Settlement in CSM
By David Reiss
The Christian Science Monitor quoted me in JPMorgan Chase settles. Is $13 billion for role in mortgage crisis fair? The story reads in part,
The settlement does not, however, release any individuals within JPMorgan from further criminal or civil charges. The bank has agreed to cooperate fully in any investigations related to the fraud covered in the agreement.
“I think that the Department of Justice has heard the public in terms of saying, if people were criminally responsible, they should be held liable,” says David Reiss, a professor at Brooklyn Law School, who has written extensively on the mortgage crisis. “Just a handful of people have faced any serious personal liability as a result of the events of the financial crisis of the 2000s.”
But some feel that the unprecedented scope and size of the penalty is unfair for the bank behemoth, which was seen as something of a financial savior when it took on the imploding assets of Bear Stearns and Washington Mutual after the financial collapse. Some estimate that employees at these banks conducted up to 80 percent of the fraud found by the Justice Department. JPMorgan assumed these firms’ legal jeopardy when it took on their troubled assets.
“There’s a moral narrative about this, that it’s unfair to go after JPMorgan because they stepped in to help,” says Mr. Reiss.
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November 20, 2013 | Permalink | No Comments