November 6, 2013
Homeowners in Fifth Circuit Fail to Defeat Deutsche Bank Assignments
In Reinagel v. Deutsche Bank Nat’l Trust Co., 2013 U.S. App. LEXIS 22133 (5th Cir. Tex. July 11, 2013), the U.S. Court of Appeals for the Fifth Circuit upheld the Texas district court’s decision to grant Deutsche Bank’s motion to dismiss the homeowners’ complaint alleging the loan assignments were invalid due to robo-signing. The Reinagels refinanced their property in 2006 with Argent Mortgage Company, LLC who sold the loan to Deutsche Bank where it was pooled and sold to investors. The sale of the loan to Deutsche Bank was not documented until 2008, when the assignment was executed. The first assignment of the deed of trust failed to reference the promissory note. A second assignment was executed in 2009, expressly naming the subject note.
After the homeowners defaulted on payments, the state court granted the order for foreclosure in 2010, naming Deutsche Bank as mortgagee with right to foreclose. The Reinagels brought this action for a temporary injunction alleging that the assignments were “robo-signed” and as such facially void. They further argued that the assignments violated the pooling and service agreement (“PSA”), which did not permit transfers into the Deutsche Bank trust after October 1, 2006. The case was removed to the district court on diversity grounds, where the court later granted Deutsche Bank’s motion to dismiss the complaint. The Fifth Circuit affirmed this decision on appeal, finding the Reingals’ challenge of the the assignments unconvincing. The court held that although a non-party to a contract cannot enforce said contract, the obligor may defend on any ground which renders the assignment void, giving homeowners standing as they assert the assignments are facially void. The first assignment was held valid, as the court notes “the transfer of a mortgage presumptively includes the note secured by the mortgage” even if it doesn’t expressly reference the note; the validity of the second assignment is irrelevant here. Additionally, the Reinagels cited no precedent to support invalidating the assignments solely on account of robo-signing, or that violations of the PSA would invalidate the assignments. Further, the court did not find sufficient evidence of robo-signing in regard to either assignment. The court is careful to note that its decision is a narrow one, and provides a warning to banks: “we merely reaffirm that under Texas law facially valid assignments cannot be challenged for want of authority except by the defrauded assignor. We do not condone ‘robo-signing’ more broadly and remind that bank employees or contractors who commit forgery or prepare false affidavits subject themselves and their supervisors to civil and criminal liability.” Id at 12.
November 6, 2013 | Permalink | No Comments
Reiss on Mayor De Blasio’s Plans for Mandatory Inclusionary Zoning
Law360.com interviewed me about Mayor-Elect de Blasio’s plans for mandatory inclusionary zoning in NYC Real Estate Faces Less Friendly Market Under De Blasio (behind a paywall). It reads in part:
One of the biggest and most controversial pieces of de Blasio’s affordable housing platform is a plan to mandate inclusionary zoning — requiring developers to build affordable housing as part of their market-rate multifamily projects — when developments are being constructed in areas rezoned by the city.
Mandatory inclusionary zoning is meant to be a “hard-and-fast rule” to replace the incentives de Blasio plans to end for big developers, and he predicted on his campaign website that the strategy would create up to 50,000 new affordable housing units during the next 10 years.
But “mandatory” anything is considered an added cost when developers are weighing their options in deciding where to build, and requiring that residential developments include affordable housing could push some developers elsewhere, experts say.
“The devil is in the details,” said Brooklyn Law School professor David Reiss, noting that the way the de Blasio administration writes and implements the rule will make a big difference, either encouraging more development of affordable housing or shutting down the market to new developers.
And while de Blasio has emphasized that inclusionary zoning would only be mandatory for projects taking place in areas specifically rezoned for new development, Learner points out that the Bloomberg administration rezoned more than 30 percent of the city, so the new rule could likely affect many developers.
“When the program is designed, a lot of thought needs to go into what impact mandatory inclusionary zoning will have on the bottom line of developers,” Reiss said. “If it’s too significant of an impact, a less than optimal amount of housing will be built.”
November 6, 2013 | Permalink | No Comments
November 5, 2013
FHA’s Net Cost of $15 Billion
The Congressional Budget Office posted FHA’s Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? In response to the question, “Has FHA’s Guarantee Program for Single-Family Mortgages Produced Net Savings to Taxpayers,” the CBO responds,
No. Collectively, the single-family mortgage guarantees made by FHA between 1992 and 2012 have had a net federal budgetary cost of about $15 billion, according to the most recent estimates by FHA. In contrast, FHA’s initial estimates of the budgetary impact of those guarantees sum to savings of $45 billion . . .. That swing of $60 billion from savings to cost primarily reflects higher-than-expected defaults by borrowers and lower-than-expected recoveries when the houses of defaulted borrowers have been sold—especially for loans made over the 2004-2009 period. (1)
The document contains a chart of estimates of the budgetary impact of the FHA’s single-family mortgage guarantees by year. It shows that the 2008 vintage was particularly bad, accounting for over $15 billion in losses by itself (the other years’ savings and costs would thus net out).
There are some disturbing aspects of this finding and some that are not. First, the disturbing ones. The FHA has not been transparent about its potential for losses and bailouts (see here for instance). Second, its own financial projections have been overly optimistic.
That being said, the mere fact that the FHA is expected to have losses is not in itself an indictment of the government’s strategy of using the FHA to provide liquidity to the mortgage markets during the financial crisis. If only this were done forthrightly . . . but perhaps that is too much to ask in the midst of the crisis itself.
November 5, 2013 | Permalink | No Comments
November 1, 2013
Measuring Progress at the CFPB
The Bipartisan Policy Center issued a white paper, The Consumer Financial Protection Bureau: Measuring the Progress of a New Agency:
This paper measures the agency’s actions against its mandate. It analyzes the start-up and operational challenges the Bureau has faced and the critical choices it has made. Throughout this process, the Task Force met with leading consumer advocates, federal and state bank regulators and their staffs, and regulated industry participants in the bank and nonbank space. (5)
I was particularly intrigued by the external metrics that the Bipartisan Policy Center recommends for the CFPB:
- Are there quality, safe products available in both the bank and nonbank space?
- Is the CFPB identifying and responding promptly to problems in both the bank and nonbank space?
- Does the Bureau engage consumers in a meaningful way? For example, specific metrics should track its regulatory and outreach efforts to growing minority populations.
- Is the CFPB collaborating effectively with other regulators in both the bank and nonbank space, to ensure a high level of consumer protection?
- Is there a healthy amount of quality product innovation in the financial services marketplace the Bureau regulates? (10)
These are all reasonable metrics, but most importantly, the white paper “recommends that the CFPB measure success as it relates to consumer behavior by finding demonstrable evidence of improved consumer decision-making with regard to consumer products.” (10) I think that this is perhaps the most important of the metrics and one that the CFPB has made the least progress in measuring. It will be interesting to see how the CFPB makes progress in this regard.
The rest of their findings are organized as follows:
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Guidance vs. Rule-Making
- Supervisory and Examination Process
- Data Requests and Collection
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Consumer Complaint Portal
- Civil Penalty Fund
- CFPB Consultation with Other Agencies
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CFPB’s Authority to Cover Lending Activities of Auto-Dealers
- CFPB Funding and Accountability
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Performance Metrics
- [External Metrics]
- Internal Metrics
November 1, 2013 | Permalink | No Comments
October 31, 2013
Qualified Residential Mortgage Comments
The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday. And comments there were. Here is a sampling:
The Urban Institute argues that
In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)
The Securities Industry and Financial Markets Association effectively agrees with this and argues that
QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)
The American Enterprise Institute, on the other hand, argues that
The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)
My thoughts on the proposed QRM rule can be found here, here, here and here.
October 31, 2013 | Permalink | No Comments
October 30, 2013
Reiss (and Others) on Post-Bloomberg Brooklyn
The NY Daily News ran a story on a panel I moderated last night at Brooklyn Law School, The Fab Four! Brooklyn Heights Councilmen Since 1975 Share Stage and Talk About Past, Future, Bloomberg. The speakers gave their thoughts on a variety of topics, including what’s next for New York City:
David Reiss: What are your predictions for a post-Bloomberg Brooklyn?
Levin: The likely mayor is going to be very far to the left. (Bill de Blasio) has been more engaged with people that are not elite and he has a greater vision of equity. It’s a big challenge because it’s a big city, like steering a gigantic ocean liner. I don’t think there will be lots of changes on day one but there will be policy changes that can be shifted that will cause a big change, like universal pre-kindergarten and mandatory inclusionary zoning. His goal is to decrease the economic disparity in the city and it’s a big challenge.
Yassky: A lot of the changes you’ve seen are here to say. There’s a much bigger swatch of Brooklyn that will be professional office workers, people who are working in Manhattan and not in traditional blue collar jobs. That spread throughout Brooklyn is here to stay. So many neighborhoods have excellent public spaces which is ameliorating inequality in the near term. It’s taking better public goods, like parks, to do it, and you don’t need rose colored glasses to see that. These changes don’t reverse very quickly and easily.
Fisher: He’ll be a mayor from Brooklyn, so it’s got to be a good thing for all of us. The nostalgia here is over; Brooklyn is the world again. When I grew up, people were nostalgic for the good old days. No one is nostalgic for those days now. Brooklyn has really reached a turning point. The bar has been raised in post-Bloomberg Brooklyn. So many people in Brooklyn now expect government to function and be responsive. As long as people feel invested in the borough, they’ll make it possible for Steve and whoever comes after to keep the progress going.
October 30, 2013 | Permalink | No Comments
