July 30, 2013
GMAC to Pay Out
In a statement by the Federal Reserve, GMAC Mortgage will pay $230 million to compensate borrowers for improper handling of foreclosures. GMAC Mortgage will pay about 232,000 borrowers to settle claims it improperly seized homes. In a deal similar to those regulators struck with 13 other mortgage servicers this year, the money goes to borrowers who faced foreclosure in 2009 and 2010.
July 30, 2013 | Permalink | No Comments
Cuomo and Lawsky: Mind The Gap Authority
Law360 quoted me in a story, NY’s Powerful Financial Regulators Poised To Extend Reach (full story behind a paywall). The story reads in part,
New York’s proposed tougher standards for debt collectors marked state regulators’ first use of their unusual authority to fill gaps in financial regulation, proving state officials will use that power to take charge of the few areas of consumer finance they do not already oversee, attorneys say.
The New York Department of Financial Services has already proved to be an aggressive and creative regulator in its nearly two years of operation, taking on alleged money laundering at Standard Chartered PLC and force-placed insurance, among other moves. Until now, though, Gov. Andrew Cuomo and Financial Services Superintendent Benjamin Lawsky had not fully exploited the state’s “gap authority,” which allows them to regulate areas they feel aren’t sufficiently policed by existing state or federal laws.
* * *
That power makes New York state unique. In most other jurisdictions, state regulators can only regulate financial products and institutions based directly on statute. New York’s regulators can simply decide to enact rules where none exist, and do it quickly, said Brooklyn Law School professor David Reiss.
“You now have an activist government in New York saying, ‘We’re going to look broadly at using this authority we have. So if we hear about problems we can respond to them in six months, not three years,'” Reiss said.
* * *
In addition, there may be some confusion about where the lines between regulations set by the Consumer Financial Protection Bureau — which is considering its own rules for debt collectors — and the DFS may overlap. Technically, the DFS can only extend its gap authority into areas where it feels appropriate rules do not exist, either from state or federal regulators.
The CFPB has consistently asserted that it does not intend to preempt state regulations, and that its rules are merely a floor, Reiss said.
* * *
“We have a governor who has a strong view of gubernatorial authority. He’s appointed an active former prosecutor to a sleepy office and given him a lot of authority, and Lawsky has run with it,” Reiss said.
July 30, 2013 | Permalink | No Comments
July 29, 2013
Fannie/Freddie Take Down 3: Washington Federal v. The U.S. of A.
This should catch us up on the Fannie/Freddie preferred stock Takings litigation (see here and here for two other suits). Washington Federal et al. v. United States was filed June 10, 2013 and is a class action complaint. The theories are pretty similar in the three cases. I had earlier written about the importance of narrative in these Takings cases. Having lived through this history myself and having read the “first draft” of history carefully in the pages of the New York Times, the Wall Street Journal and many trade periodicals, I am somewhat taken aback by this revisionist history. For instance, the complaint states that the companies were not “likely to incur losses that would deplete all or substantially all of” their capital. (38) News to me!
But what is most striking about the complaint is this notion that if the government had just taken this action (allowing the companies to buy more subprime mortgages) or not taken that action (strong arming the board to accept the conservatorship) or not deferring taking this other action (waiting to raise the guarantee fee), then everything would have worked out for the companies and their shareholders. Maybe so, but it sure will be hard to categorize each of the government’s actions as either totally okay or completely inappropriate for the companies’ health in the context of the financial crisis. This leaves the plaintiffs with some tough work ahead. They are going to need to show a judge just how to categorize each of those facts and ensure that the categorization does not interfere with their theory of the case.
All of this raises a bigger, more interesting question. What role should these types of lawsuits play after a crisis has passed? Some would say that they are an outrage — second-guessing what are leaders did to avert financial ruin. Others might say that this is an efficient way to respond to crises: allow the government to do what it needs to do during the crisis, but use litigation to make an accounting to all of the stakeholders once the situation has stabilized. I don’t have a fully thought out view on this, but I am struck by the dangers of each approach. The first allows for various kinds of scapegoating (as Hank Greenberg argues in the AIG bailout litigation) while the second allows for the kind of revisionism that favors the wealthy and powerful (as with these Takings suits by powerful investors who bought Fannie and Freddie preferred shares on the cheap as a sort of long shot bet on what the two companies will look like going forward). Tough to choose between the two . . ..
July 29, 2013 | Permalink | No Comments
July 26, 2013
The Taking of Fannie and Freddie 2
Today, I look at one more complaint filed in response to the federal government’s amendment to its Preferred Stock Purchase Agreements with Fannie and Freddie (the PSPAs). Cacciapelle et al. v. United States, filed July 10, 2013, is another takings clause case like the one filed by Fairholme the day before. The facts alleged in the complaint should be familiar to readers of REfinblog.com (here, here and here), although this is a class action complaint.
The plaintiffs state that the members of the class “paid valuable consideration to acquire these rights, and in doing so helped provide financial support for Fannie and Freddie, both before and after the conservatorship, by contributing to a viable market for Fannie’s and Freddie’s issued securities. Plaintiffs certainly had a reasonable, investment-backed expectation that the property they acquired could not be appropriated by the Government without payment of just compensation.” (4-5)
Now having read four complaints dealing with the same issue arising from the financial crisis, I am struck by the importance of narrative in litigation. Given that the federal government saved the Fannie and Freddie from certain financial ruin, we may label the Cacciapelle narrative the “Have Your Cake and Eat It Too” storyline.
One can well imagine the government’s version of events in its inevitable motion to dismiss.
Fannie and Freddie were at the brink of ruin. We swept in, provided unlimited capital and rescued the companies, the housing market, the country and the world from the Second Great Depression. To have the private preferred shareholders engage in Monday Morning Quarterbacking and focus on the details from the crisis response that harmed them, to have them ignore the competing concerns that were at stake for each of these critical decisions, adds insult to this injurious lawsuit. Judge, do not succumb to this hindsight bias!
Let’s label this the Corialanus storyline.
These lawsuits have caught reporters’ eyes and will be well-covered in the press. I would look to see which narratives resonate and I wouldn’t be surprised if the dominant narrative finds its way into the judicial opinions that decide these cases.
July 26, 2013 | Permalink | No Comments
July 25, 2013
Federal Government’s a Fairholme-weather Friend?
Following up on my posts (here and here) about other suits against the federal government over its amendment of the terms of the distribution of dividends and other payments by Fannie Mae and Freddie Mac, I now look at Fairholme Funds, Inc. et al. v. FHFA et al., filed July 10, 2013. The suit alleges very similar facts to those found in Fairholme Funds, Inc. v. United States, filed July 9, 2013, but the claims for relief are more similar to those found in Perry Capital, LLC v. Lew et al.
Here are some of the key claims made by the plaintiffs (owners of Fannie and Freddie preferred shares):
- While the FHFA is the conservator of the two companies, it is acting acting like a receiver by “winding down” Fannie and Freddie’s “affairs and liquidating” their assets, while conservatorship should aim to return a company “to normal operation.” (15) The goal of the conservator, claim the plaintiffs, is to return the company “to a safe, sound and solvent condition.” (15, quoting Conservatorship and Receivership, 76 Fed. Reg. 35, 724, 35, 730(June 20, 2011)) As a result, plaintiffs argue that the Net Worth Sweep (which gives to the federal government substantially all of Fannie and Freddie’s profit) “is squarely contrary to FHFA’s statutory responsibilities as conservator of Fannie and Freddie” because it does not put them in “a sound and solvent condition” and it does not “conserve the assets and property” of the two companies. (25, quoting 12 U.S.C. section 4617(b)(2)(D))
- “Neither Treasury nor FHFA made any public record of their decision-making processes in agreeing to the Net Worth Sweep.” (29) The plaintiffs argue that the FHFA’s “authority as conservator of” Fannie and Freddie “is strictly limited by statute.” (31, citing 12 U.S.C. section 4617(b)(2)(D)) As a result, the FHFA’s actions were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” (33, quoting the APA, 5 U.S.C. section 706(2)(A))
- The plaintiffs’ relationship with Treasury as Fannie and Freddie’s controlling shareholders is governed by state corporate law and thus Treasury owes “fiduciary duties to minority shareholders.” (38)
- “Implicit in every contract is a covenant of good faith and fair dealing. The implied covenant requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.” (41) Plaintiffs argue that their contractual rights pursuant to their preferred shares have been breached by FHFA’s consent to the Net Worth Sweep.
The validity of these claims should not be assessed superficially. The courts will need to read HERA in the context of the APA and the amendment to the terms of the government’s preferred shares in the context of the contractual obligations found in the private preferred shares. The court will also need to assess the extent to which state corporate law governs the actions of the federal government when it is acting in the multiple capacities of lender, investor, regulator and conservator. Let the memoranda in support and in opposition to motions to dismiss come forth and enlighten us as to how it should all play out . . ..
July 25, 2013 | Permalink | No Comments
MERS Has Standing to Bring Foreclosure Action as Court Ruled There Was No Question That the Defendant-Homeowner Was the Correctly Named Party
In the case of Mortgage Elec. Registration Sys., Inc. v. Ventura, No. CV 054003168S, 2006 WL 1230265 (Conn. Super. Ct. April 20, 2006) the plaintiff-lender moved for summary judgment against defendants, a husband and wife, as to liability only. After review of the lender’s complaint and allegation that the husband was indebted to the lender, the court found that because the husband and quit claimed his interest in the property to the wife, she was the owner of the equity of redemption. Consequently, the wife was properly named as a party to the litigation as a defendant.
Moreover, there was no question that the named lender was the correct party to bring the action. Consequently, the lender was entitled to summary judgment as to the husband’s and the wife’s liability only.
The defendants first claimed there was a question of fact as to whether the defendant Tina Galka-Ventura was liable to MERS. However, the court determined this was not a question of fact as the plaintiff properly alleged that the defendant Joseph Ventura quitclaimed his interest to Gina. Thus, the court determined she was the owner of the equity of redemption.
Second, the defendants claimed that there was a genuine issue of material fact as whether a debt was owed to the plaintiff. The court determined that this was not a material fact. Thirdly, the defendants claimed there was material fact as to what entity is the holder of the note securing the property. The court also determined that this was not a material question.
July 25, 2013 | Permalink | No Comments
