August 9, 2013
Fannie, Freddie & Affordable Housing
I was quoted in a Law360.com story, Affordable Housing May Trip Up Fannie, Freddie Fixes (behind a paywall). It reads in part,
While the debate over housing finance reform in Washington has focused on the government’s role as market backstop, analysts say questions about federal funding for affordable housing add another potential pitfall for lawmakers looking to dismantle and replace Fannie Mae and Freddie Mac.
Fannie and Freddie long have been part of a broader government program to add to the country’s affordable housing stock. Republicans have been critical of that mission and targeted it as something that should be abolished along with the two mortgage giants, while Democrats want to keep programs promoting affordable housing in any reform of the housing finance system.
As the U.S. House of Representatives and Senate move forward with their own visions of a new system for financing home purchases, it is likely that those two perspectives on affordable housing promotion will clash, said Rick Lazio, a former four-term Republican member of Congress from New York.
“That will be a significant obstacle to getting an agreement,” said Lazio, now the chairman of Jones Walker LLP’s housing and housing finance industry team.
One of the main issues lawmakers will have to confront will be what to do with the National Housing Trust Fund, a program created by the 2008 Housing and Economic Recovery Act.
HERA required Fannie Mae and Freddie Mac to transfer a small percentage of the money from new business to the fund, which would then be used to subsidize the construction of rental housing for low-income families.
The fund’s inclusion in HERA was seen as a major victory for affordable housing advocates, but the benefits never materialized.
Soon after HERA passed, Fannie and Freddie were placed into conservatorship after mounting losses from exposure to subprime mortgages, and the two companies took a combined $187 billion bailout. The Federal Housing Finance Agency canceled all contributions to the fund.
Several housing advocacy groups have sued the FHFA to force the agency to allow Fannie Mae and Freddie Mac to resume their contributions now that the entities are generating profits and repaying the bailout money.
What seems more likely than getting the money the two companies were supposed to pay out is that the funds allocated to affordable housing will be shrunk under a new system, as envisioned by a Senate bill, or eliminated altogether, as proposed by a bill introduced by House Republicans.
“If it’s included at all, it will be smaller,” Brooklyn Law School professor David Reiss said of affordable housing money.
August 9, 2013 | Permalink | No Comments
August 8, 2013
Bankruptcy Court Rules MERS Has Standing and the Customary Rights of a Mortgagee Under a Mass. Mortgage and May Act Under the Mortgage
The Massachusetts bankruptcy court hearing In re Sonya D. Huggins f/k/a SONYA D. HICKS, Debtor Chapter 13, Case No. 05-18826-RS overruled the Huggins’ objection to the standing of the nominee to seek relief from the automatic stay and ordered an evidentiary hearing on the motion for stay relief.
After Huggins commenced her Chapter 13 case, the court denied a motion by a nominee mortgagee for relief from stay to foreclose a mortgage on the debtor’s residence but ordered monthly adequate protection payments. The nominee filed a second stay relief motion under 11 U.S.C.S. § 362(d), and the debtor objected.
Huggins maintained that the nominee could not stay relief in bankruptcy because it had no rights to enforce the mortgage outside bankruptcy. The court disagreed, finding that the nominee was acting for a lender that held the note, thus there was no disconnection between the note and the mortgage. The nominee was the record mortgagee under the terms of the mortgage with its powers expressly set forth, and Mass. Gen. Laws Ch. 244, § 14 expressly authorized the exercise of sale powers by a mortgagee or a person authorized to sell, which was precisely the position of the nominee.
The court concluded that the denial of the nominee’s foreclosure right as mortgagee could lead to anomalous and perhaps inequitable results, such as the lender being able to foreclose despite the fact that it was not named as mortgagee or that no one could foreclose. Thus, as the court concluded, the nominee had standing to foreclose on the lender’s behalf. As to relief from stay, the court concluded that there was no irrefutable presumption that the property was necessary for an effective reorganization under 11 U.S.C.S. § 362(d)(2)(b). The debtor was required to proffer evidence on those issues.
August 8, 2013 | Permalink | No Comments
Underwater Mortgages Eminent Domain Battle Gears up
I was quoted in a recent story in www.thestreet.com, Eminent Domain Mortgage Battle Is a Lose-Lose Situation. It reads in part,
The move by Richmond, Calif., to seize “underwater mortgages” from private investors using its powers of eminent domain has drawn controversy and consternation within the mortgage industry.
The law has mostly been used to seize property for public purposes such as building roads, highways or schools and other critical infrastructure.
Richmond is now testing whether the rule can be applied to seizing underwater mortgages.
Home prices in Richmond, a city with a population of a little more than 100,000 and a significant Hispanic and African-American presence, are still far below peak levels. More than half of its homeowners are underwater — they owe more than their homes are worth.
Richmond Mayor Gayle Mclaughlin said eminent domain is the only way to help borrowers and repair the local economy, as investors of private-label mortgages have been either reluctant or too slow to provide relief to borrowers.
The city, partnering with San Francisco-based Mortgage Resolution Partners (MRP), began sending letters to owners and servicers of 624 underwater mortgages this week.
If the investors do not agree to sell at the negotiated price, the city will seize the property through eminent domain.
The mortgage industry is, predictably, threatening a legal battle.
* * *
“The constitutional challenges for this proposal are weak,” according to David Reiss, law professor at the Brooklyn Law School.
* * *
The bigger source of legal conflict, according to Reiss and other experts, would be on determining what is fair compensation for a mortgage, especially one that is still current.
* * *
“Courts tend to overcompensate properties taken under eminent domain as a general rule,” said Reiss. “The proponents of this rule may be underestimating how these mortgages will be valued.”
* * *
Eminent domain is “theoretically a great idea,” said Reiss. “States certainly have the legal authority to try this experiment. But it is not clear whether the outcome of all this is beneficial.”
August 8, 2013 | Permalink | No Comments
August 7, 2013
Racial Discrimination in the Secondary Mortgage Market
Judge Baer issued an opinion in Adkins et al. v. Morgan Stanley et al., No 1:12-cv-07667 (July 25, 2013), denying Morgan Stanley’s motion to dismiss the plaintiff-homeowners’ Fair Housing Act claims. The homeowners claimed “that Morgan Stanley’s policies and practices caused New Century Mortgage Company to target borrowers in the Detroit, Michigan region for loans that had a disparate impact upon African-Americans” in violation of the FHA. (1)
The Court found that the plaintiffs met their pleading burden sufficient to survive a motion to dismiss:
First, they have identified the policy that they allege has a disproportionate impact on minorities. That policy consisted of Morgan Stanley
(1) routinely purchasing both stated income loans and loans with unreasonably high debt-to-income ratios,
(2) routinely purchasing loans with unreasonably high loan-to-value ratios,
(3) requiring that New Century’s loans include adjustable rates and prepayment penalties as well as purchasing loans with other high-risk features,
(4) providing necessary funding to New Century, and
(5) purchasing loans that deviated from basic underwriting standards.
Plaintiffs go on to state that these policies resulted in “New Century aggressively target[ing] African-American borrowers and communities . . . for the Combined-Risk Loans.” (Compl. ¶ 81.) Indeed, Plaintiffs allege in detail the effect that New Century’s lending had upon the African-American community in the Detroit area. (Compl. ¶¶ 115–122). That lending, according to Plaintiffs, was a direct result of Morgan Stanley’s policies. And while Plaintiffs do not allege that they qualified for better loans, they allege discrimination based only upon the receipt of these predatory, toxic loans that placed them at high financial risk. These risks exist regardless of Plaintiffs’ qualifications. On a motion to dismiss, these allegations are sufficient to demonstrate a disparate impact. (11)
The opinion goes farther afield than the questions presented at points. For instance, Judge Baer writes,
Detroit’s recent bankruptcy filing only emphasizes the broader consequences of predatory lending and the foreclosures that inevitably result. Indeed, “[b]y 2012, banks had foreclosed on 100,000 homes [in Detroit], which drove down the city’s total real estate value by 30 percent and spurred a mass exodus of nearly a quarter million people.” Laura Gottesdiener, Detroit’s Debt Crisis: Everything Must Go, Rolling Stone, June 20, 2013. The resulting blight stemming from “60,000 parcels of vacant land” and “78,000 vacant structures, of which 38,000 are estimated to be in potentially dangerous condition” has further strained Detroit’s already taxed resources. Kevyn D. Orr, Financial and Operating Plan 9 (2013). And as residents flee the city, Detroit’s shrinking ratepayer base renders its financial outlook even bleaker. Id. Given these conditions, it is not difficult to conclude that Detroit’s current predicament, at least in part, is an outgrowth of the predatory lending at issue here. See Monica Davey & Mary Williams Walsh, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. Times, July 18, 2013, at A1 (listing Detroit’s “shrunken tax base but still a huge, 139-square-mile city to maintain” as one factor contributing to the city’s financial woes). (3-4)
This kind of judicial history does not seem to speak to the legal issue at hand and may negatively impact its reception on appeal. Furthermore, all Fair Housing Act cases will be impacted by the Supreme Court’s decision in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. for which it has recently granted cert. In that case, the Supreme Court will decide whether disparate impact is a cognizable claim under the Fair Housing Act.
But, whatever happens in the future, Adkins proceeds apace for now.
August 7, 2013 | Permalink | No Comments
August 5, 2013
U.S. District Court for the Eastern District of Texas Rules in Favor of MERS in Foreclosure Proceeding, Upholding its Power of Sale Over the Plaintiff’s Property
In Richardson v. Citimortgage, No. 6:10cv119, 2010 WL 4818556, at 1-6 (E.D. Tex. November 22, 2010) the U.S. District Court for the Eastern District of Texas, Tyler Division, granted the Defendants’, Citimortgage and MERS, motion for summary judgment against the Plaintiff, Richardson, in a foreclosure proceeding. The Court reiterated MERS’s power of sale and its role as an “electronic registration system and clearinghouse that tracks beneficial ownerships in mortgage loans.”
Plaintiff purchased his home from Southside Bank with a Note. As the Lender, Southside Bank could transfer the Note and it, or any transferee, could collect payments as the Note Holder. In the agreement, Plaintiff acknowledged that Citimortgage, the loan servicer, could also receive payments. A Deed of Trust secured the Note by a lien payable to the Lender.
Under a provision in the deed, Southside Bank secured repayment of the Loan and Plaintiff irrevocably granted and conveyed the power of sale over the property. The Deed of Trust also explained MERS’s role as its beneficiary, acting as nominee for the Lender and Lender’s and MERS’s successors and assigns. MERS “[held] only legal title to the interests granted by the Borrower but, if necessary to comply with law or custom, [had] the right to exercise any and all of the interests [of the Lender and its successors and assigns], including the right to foreclose and sell the property.”
Plaintiff signed the Deed of Trust but eventually stopped making mortgage payments to CitiMortgage and filed for bankruptcy protection. As a result, “MERS assigned the beneficial interest in the Deed of Trust to Citimortgage.” Citimortgage posted the property for foreclosure after receiving authorization from the United States Bankruptcy Court. Plaintiff brought suit, seeking declaratory and injunctive relief and challenging Citimortgage’s authority to foreclose on the property.
In granting Citimortgage and MERS’s motion for summary judgment, the court explained that Citimortgage could enforce the loan agreements, including the power of foreclosure, after it received the Note from Southside Bank. Furthermore, under the doctrine of judicial estoppel, Plaintiff could not challenge Citimortgage’s right to enforce the Note after he “represented that it was [his] intention to surrender [the] property to Citimortgage,” in bankruptcy court. Citimortgage subsequently acquired a “valid, undisputed lien on the property for the remaining balance of the Note.”
Plaintiff also challenged MERS’s role with “respect to the enforcement of the Note and Deed of Trust.” In response, the court explained that “[u]nder Texas law, where a deed of trust expressly provides for MERS to have the power of sale, as here, MERS has the power of sale,” and that the Plaintiff’s argument lacked merit.
The court described MERS as a “[book entry system] designed to track transfers and avoid recording and other transfer fees that are otherwise associated with,” property sales. It concluded that MERS’s role in the instant foreclosure “was consistent with the Note and the Deed of Trust,” and that Citimortgage had the right to sell the Plaintiff’s property and schedule another foreclosure.
August 5, 2013 | Permalink | No Comments
Not That I’m Complaining, But
Ian Ayres, Jeff Lingwall and Sonia Steinway have posted Skeletons in the Database: An Early Analysis of the CFPB’s Consumer Complaints on SSRN. It is interesting both for the details it documents, but also for what it represents. Details first:
Analyzing a new data set of 110,000 consumer complaints lodged with the Consumer Financial Protection Bureau, we find that
(i) Bank of America, Citibank, and PNC Bank were significantly less timely in responding to consumer complaints than the average financial institution;
(ii) consumers of some of the largest financial services providers, including Wells Fargo, Amex, and Bank of America, were significantly more likely than average to dispute the company‘s response to their initial complaints; and
(iii) among companies that provide mortgages, OneWest Bank, HSBC, Nationstar Mortgage, and Bank of America all received more mortgage complaints relative to mortgages sold than other banks. (1)
The financial services industry has complained that the CFPB complaint system would unfairly expose companies to unverified complaints. But this kind of comparative look at financial services companies shows the great value of the CFPB’s approach. As the authors’ note, this dataset is a treasure trove for researchers and should result in helpful information for consumers and regulators alike. Sunlight is the best disinfectant!
August 5, 2013 | Permalink | No Comments
