September 20, 2013
American Dream/American Nightmare
I will be presenting “How Low Is Too Low? The Federal Housing Administration and the Low Down Payment Mortgage” at the 2013 Meeting of the Canadian Law and Economics Association next week in Toronto. I just came back from an interesting conference at the Cleveland Fed where I was on a panel devoted to the FHA. The other two panelists presented some disturbing findings about default rates for FHA mortgages.
The two panelists were
Edward J. Pinto, Resident Fellow, American Enterprise Institute, How the FHA Hurts Working-Class Families
Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York, Interpreting the Recent Developments in Housing Markets
Pinto’s summary is as follows:
The Federal Housing Administration’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers, leading to homeownership success and neighborhood stability. But is the FHA achieving this mission? This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes. Based on an analysis of the FHA’s FY 2009 and 2010 books of business, the FHA’s lending practices are inconsistent with its mission. The findings indicate: An estimated 40 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012). The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores or high debt burdens to make risky financing decisions—combining a low credit score and/or a high debt ratio with a 30-year loan term and a low down payment. A substantial portion of these loans has an expected failure rate exceeding 10 percent. Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.
Tracy reported that rates of defaults by households rather than by mortgages gave a truer picture of the FHA’s success because many FHA borrowers would refinance into another FHA loan. Thus, to study defaults by mortgages covers up the real rate of default.
I believe that their studies were preliminary and have not gone through peer review, but both of them reported extraordinary default rates for certain types of FHA mortgages.
Pinto and his empirical work are very controversial so I cannot endorse his findings. But I can say that if he got it only somewhat right about predictable and ridiculously high default rates for some categories of borrowers, the FHA must immediately defend the underwriting of such loans or change its practices. It would be criminal to have predictable default rates in excess of 20% for any population. Such a rate transforms the American Dream of homeownership into an American Nightmare of foreclosure far, far too often.
September 20, 2013 | Permalink | No Comments
Northern District of California Rules That MERS Had the Authority to Appoint a Substitute Trustee
The United States District of the Northern District of California dismissed fraud claims brought by plaintiff against MERS in Labra v. Cal-Western Reconveyance Corp., No. C 09-02537 PJH (C.D. Cal. 2010). The court also denied the plaintiff’s request for injunctive relief.
The Northern District of California court affirmed the lower court’s ruling that MERS had the authority to appoint a substitute trustee after finding that the deeds of trust explicitly stated that MERS was the nominal beneficiary under the deeds of trust. Further, it also provided that MERS had the right to foreclose and sell the property as well as take any action that a lender could take.
September 20, 2013 | Permalink | No Comments
California Court Finds That Under State Civil Code Section 2924(a), MERS Had the Right to Foreclose
The United States District Court for the Northern District of California Oakland Division in deciding Earl A. Dancy v. Aurora Loan Services, LLC, No: C10-2602 SBA (2010) found that the plaintiff’s contentions lacked merit.
The court found that the plaintiff’s assertion that neither the loan servicer nor MERS were the true beneficiaries of the subject deed of trust and therefore had no authority to institute foreclosure proceedings, lacked merit. The court held that the deed of trust expressly designated that MERS was acting solely as nominee for the lender and the lender’s successors and assigns.
Further, the court held that regardless of whether or not MERS owned the note or was entitled to any payments as a result, the fact remained that the deed of trust designated MERS as a beneficiary. Thus, under section 2924(a) of the California Civil Code, MERS had the right to foreclose.
September 20, 2013 | Permalink | No Comments
The United States District Court for the Eastern District of California Finds That MERS Was the Beneficiary and Did Not Breach Duty of Care
The United States District Court for the Eastern District of California in deciding Knowledge Hardy v. IndyMac Federal Bank, et al, No. CV F 09-935 (E.D. Cal. 2009) found that MERS was the beneficiary and did not breach a duty of care.
The court found that MERS did not breach duty of care owed to the borrower by acting as the beneficiary and assigning the deed of trust to IndyMac. The court found that MERS participation in the foreclosure failed to amount to a violation of the covenant of good faith and fair dealing.
September 20, 2013 | Permalink | No Comments
September 19, 2013
Court Holds That California State Law Did Not Require Possession of the Note to Commence a Non-Judicial Foreclosure
The court in Chilton v. Federal National Mortgage Association, No. 1:09-cv-02187-OWW-SKO (2010), held that California state law did not necessitate possession of the promissory note in order to proceed with a non-judicial foreclosure.
The court dismissed the plaintiff’s complaint, after hearing the plaintiff’s arguments alleging wrongful foreclosure and lack of standing. Even though MERS was not named as a party to the action, the plaintiff argued that based on recent Kansas case law, MERS did not have standing to foreclose since the note and deed of trust had been separated.
The court distinguished Kansas’s recent precedent from this case in that the court held that Kansas’s case law did not consider the requirements of California’s non-judicial foreclosure process.
September 19, 2013 | Permalink | No Comments
Reiss on Fannie/Freddie Loan Limits
Law360 quoted me in Time May Not Be Right To Limit Fannie, Freddie Loans (behind a paywall). It reads in part,
The Federal Housing Finance Agency has proposed lowering the maximum size of the loans Fannie Mae and Freddie Mac can purchase as part of an effort to attract more private-sector lending, but some experts warn that other market factors including rising interest rates will keep private lenders from filling the gap.
The FHFA announced earlier this month that it planned to reduce the maximum size of home mortgage loans eligible for backing by the government-sponsored enterprises. The move is part of the agency’s strategic plan of slowly backing away from the mortgage market and encouraging private capital to take its place. But some real estate attorneys and practitioners say private lenders need more than customers to convince them to take the plunge.
Many other environmental factors affect private lenders’ decisions about whether to enter the residential mortgage market, said Bob Bostrom, a shareholder of Greenberg Traurig LLP and former counsel to Freddie Mac.
Reducing the number of loans eligible for Fannie and Freddie backing and raising guarantee fees — another recent tactic — sound good in theory, but they don’t change the fact that the interest rate for a 30-year fixed-rate mortgage rose a full percentage point over the past several months and the housing market dipped correspondingly, Bostrom said.
“The housing recovery is extraordinarily fragile right now,” he said.
The steps the FHFA is taking to reduce the GSEs’ size and scope will work only when there’s a private sector ready to step in, experts say. Until then, these measures can only push the housing market backward, they warn.
* * *
Not everyone is convinced of this dark forecast, however. David Reiss, a Brooklyn Law School professor and real estate finance scholar, told Law360 on Thursday that he’s not convinced the FHFA’s moves will have a negative effect.
Although the pullback should be gradual, it must be done, because the government can’t continue to hold up the mortgage market indefinitely, he said.
Reiss says current market factors actually favor weaning borrowers off Fannie and Freddie, noting that private capital in the sector has increased — particularly in the market for jumbo loans — and that the overall housing market has stabilized.
“We’re past the immediate crisis,” he said. “There’s nothing going on right now that makes me think a downward adjustment in conforming loan limits won’t be met by an increase in capital from private lenders,” Reiss said.
September 19, 2013 | Permalink | No Comments
Court Holds MERS’ Previous Business Activities Prior to Proper Registration in California Did Not Render its Foreclosing Illegal
By Ebube Okoli
The court in Perlas et al v. MERS, No. C 09-4500 (N.D.Cal. 2010) held that MERS’ previous business activities prior to becoming registered to do business in California did not render its foreclosing activities illegal.
Despite the plaintiff’s arguments to the contrary, the court noted that since MERS is now registered in California any alleged error had since been retroactively fixed. The Court in delivering their holding also noted that MERS, acting as the lender’s agent, had the authority to initiate non judicial foreclosures.
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September 19, 2013 | Permalink | No Comments