November 1, 2017
Wednesday’s Academic Roundup
- Ditching the Middle Class with Financial Regulation, D’Acunto and Rossi
- Temporary Loan Limits as a Natural Experiment in FHA Insurance, Park
- Home Equity Conversion Mortgages: The Secondary Market Investor Experience, Begley, Fout, LaCour-Little, and Mota
- The Case for Prepaying your Mortgage, Wann
- Adverse Selection in the Home Equity Line of Credit Market, LaCour-Little and Zhang
November 1, 2017 | Permalink | No Comments
October 31, 2017
Tuesday’s Regulatory & Legislative Roundup
- The United States Department of Housing and Urban Development (HUD) continues its efforts to aid the victims of Hurricanes Irma, Maria, and Harvey. HUD recently created administrative and regulatory waivers. Though these waivers are new, current HUD programs are responsible for facilitating these waivers such as the Community Planning and Development (CPD) program.
- The federal Rental Assistance Demonstration (RAD) program, which has allowed for investment of private capital in public housing, has proven to help many lower socio-economic families and individuals. Approximately 62,000 public housing units have either been converted or rehabilitated through the conversion of subsidies and existing housing budgets. Overall, the RAD program has facilitated roughly $4 billion in investments.
October 31, 2017 | Permalink | No Comments
Relegating Consumer Protection To The Shadows
The Department of the Treasury released its report on Asset Management and Insurance, which follows on the heels of its report on the capital markets. The latest report calls for replacing the term “shadow banking” with “market based finance.” (63) The term “shadow banking” reflected a belief that there was a less regulated sector of the financial services industry that operated in the shadows of heavily regulated financial services sectors like banking.
While innocent enough as a matter of nomenclature, retiring “shadow banking” reflects the Trump Administration’s desire to reduce regulation across the financial services industry and to put an end to any negative connotations that the term shadow banking carries. The report makes this crystal clear: “Applying the term “shadow banking” to registered investment companies is particularly inappropriate as the word “shadow” could be interpreted as implying insufficient regulatory oversight, or disclosure.” (63)
Given that the Trump Administration is focused on rolling back many of the provisions of Dodd-Frank, it is worth reviewing the changes that this report advocates. I focus here on how the report seeks to limit the regulatory oversight role of the Consumer Financial Protection Bureau:
Title X of Dodd-Frank expressly excludes the “business of insurance” from the list of financial products and services within the CFPB’s jurisdiction. Dodd-Frank also prohibits the CFPB from exercising enforcement authority over “a person regulated by a State insurance regulator.” A “person” is defined to be “any person that is engaged in the business of insurance and subject to regulation by any State insurance regulator, but only to the extent that such person acts in such capacity.”
There are, however, a limited number of exceptions where the CFPB may exercise its authority over the business of insurance and persons regulated by state insurance regulators:
• If an insurer offers a financial product or service to the extent that the insurer is engaged in the offering or provision of a consumer financial product or service (e.g., debt protection contracts that are administered by insurers on behalf of a bank); To supervise and enforce violations of federal consumer laws (e.g., violations of the Real Estate Settlement Procedures Act that relate to insurers);
• If persons knowingly or recklessly provide substantial assistance in an Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) violation (i.e., if an insurer knowingly or recklessly supports a covered person or service provider in violation of the UDAAP provisions of Dodd-Frank); or
• To request information from a person regulated by a state insurance regulator in connection with the CFPB’s rulemaking, investigative, subpoena, or hearing powers.
Despite the general exclusions, these statutory exceptions create considerable uncertainty concerning what the CFPB can examine or regulate. Insurers are concerned that, if the CFPB interprets the exceptions broadly, it could potentially regulate insurers or the business of insurance in a manner more expansive than the statutory exceptions intend. Such regulatory actions could also be duplicative of actions undertaken by state insurance regulators.
Recommendations
Treasury recommends that Congress clarify the “business of insurance” exception to ensure that the CFPB does not engage in the oversight of activities already monitored by state insurance regulators. (108-09)
This recommendation seeks to further reduce consumer protection in the financial services industry. Republicans have been quite open with this goal, so there is really nothing hypocritical about this recommendation. It is just a bad one. There have been a lot of abusive debt protection contracts like credit life insurance products that are priced way higher than comparable life insurance products. Blocking the CFPB from regulating in this area will be bad news for consumers.
October 31, 2017 | Permalink | No Comments
October 30, 2017
Manafort Indicted for Real Estate Fraud
Special Counsel Mueller
Paul Manafort and his protege, Richard Gates III, were indicted on a variety of charges, including conspiracy, failure to file requirement financial reports and the making of false statements. The indictment was signed by Special Counsel Mueller. A number of the allegations involve real estate transactions. Here are the highlights (lowlights?) of the allegations that document how money can be laundered through real estate:
Manafort used his hidden overseas wealth to enjoy a lavish lifestyle in the United States, without paying taxes on that income. Manafort, without reporting the income to his tax preparer or the United States, spent millions of dollars on luxury goods and services for himself and his extended family through payments wired from offshore nominee accounts to United States vendors. Manafort also used these offshore accounts to purchase multi-million dollar properties in the United Sates. Manafort then borrower millions of dollars in loans using these properties as collateral, thereby obtaining cash in the United States without reporting and paying taxes on the income. In order to increase the amount of money he could access in the United States, Manafort defrauded the institutions that loaned money on these properties so that they would lend him more money at more favorable rates than he would otherwise be able to obtain. (para 4)
More than $75,000,000 flowed through Manafort and Gate’s 15 offshore accounts. They also had 17 US corporations through which some of these funds flowed as well. In order to avoid paying taxes on this money, Manafort and Gates made millions of dollars in wire transfers to pay “for goods, services and real estate.” (para. 15) Manafort spent more than $12,000,000 on personal items including home improvement services, clothing, cars and housekeeping. He also bought four properties for over $6,000,000.
After Manafort bought these properties, “he took out mortgages on the properties thereby allowing Manafort to have the benefits of liquid income without paying taxes on it. Further, Manafort defrauded the banks that loaned him the money so that he could withdraw more money at a cheaper rate than he otherwise would have been permitted.” (para. 33) He did this by wrongfully claiming on a loan application that an investment property was owner-occupied (banks generally give you a more favorable interest rate if the property is owner-occupied). He was also able to borrow more money by claiming that part of the proceeds of a loan would be used to fund a renovation when in fact he did not intend to use the funds for that purpose.
The allegations in the indictment provide a nice case study of how real estate is used in money laundering.
October 30, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- Quicken Loans Inc. (Quicken) stood before a Florida federal judge regarding alleged claims of telecommunications abuse. According to a consumer, the entity flooded her and other with calls regarding their services. Further Quicken allegedly has not sought the consumer’s permission before making these calls and has violated the Telephone Consumer Protection Act.
- A Florida mortgage company is on the hook for a mortgagor’s tax errors. In 2007, the mortgagee loaned money to a potential homeowner; however, the homeowner failed to properly file its taxes which resulted in a lien on the home. The now homeowner, mistakenly filed a “homestead property tax exemption” for several years.
- Real estate giant, Zillow is appealing a four million dollar award to VHT, which offers real estate photography services. Earlier this year, a federal jury awarded the sum to VHT for Zillow’s copyright infringement. However, Zillow claims error in the award because the jury awarded damages based on each single photo instead of the set of photos as a whole.
October 30, 2017 | Permalink | No Comments
October 27, 2017
Fannie and Freddie Visit the Supreme Court
Justice Gorsuch
Fannie and Fredddie investors have filed their petition for a writ of certiorari in Perry Capital v. Mnuchin. The question presented is
Whether 12 U.S.C. § 4617(f), which prohibits courts from issuing injunctions that “restrain or affect the exercise of powers or functions of” the Federal Housing Finance Agency (“FHFA”) “as a conservator,” bars judicial review of an action by FHFA and the Department of Treasury to seize for Treasury the net worth of Fannie Mae and Freddie Mac in perpetuity. (i)
What I find interesting about the brief is that relies so heavily on the narrative contained in Judge Brown’s dissent in the Court of Appeals decision. As I had noted previously, I do not find that narrative compelling, but I believe that some members of the court would, particularly Justice Gorsuch. The petition’s statement reads in part,
In August 2012—nearly four years after the Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie Mac1 in conservatorship during the 2008 financial crisis—FHFA, acting as conservator to the Companies, agreed to surrender each Company’s net worth to the Treasury Department every quarter. This arrangement, referred to as the “Net Worth Sweep,” replaced a fixed-rate dividend to Treasury that was tied to Treasury’s purchase of senior preferred stock in the Companies during the financial crisis. FHFA and Treasury have provided justifications for the Net Worth Sweep that, as the Petition filed by Fairholme Funds, Inc. demonstrates, were pretextual. The Net Worth Sweep has enabled a massive confiscation by the government, allowing Treasury thus far to seize $130 billion more than it was entitled to receive under the pre-2012 financial arrangement—a fact that neither Treasury nor FHFA denies. As was intended, these massive capital outflows have brought the Companies to the edge of insolvency, and all but guaranteed that they will never exit FHFA’s conservatorship.
Petitioners here, investors that own preferred stock in the Companies, challenged the Net Worth Sweep as exceeding both FHFA’s and Treasury’s respective statutory powers. But the court of appeals held that the Net Worth Sweep was within FHFA’s statutory authority, and that keeping Treasury within the boundaries of its statutory mandate would impermissibly intrude on FHFA’s authority as conservator.
The decision of the court of appeals adopts an erroneous view of conservatorship unknown to our legal system. Conservators operate as fiduciaries to care for the interests of the entities or individuals under their supervision. Yet in the decision below, the D.C. Circuit held that FHFA acts within its conservatorship authority so long as it is not actually liquidating the Companies. In dissent, Judge Brown aptly described that holding as “dangerously far-reaching,” Pet.App. 88a, empowering a conservator even “to loot the Companies,” Pet.App. 104a.
The D.C. Circuit’s test for policing the bounds of FHFA’s statutory authority as conservator—if one can call it a test at all—breaks sharply from those of the Eleventh and Ninth Circuits, which have held that FHFA cannot evade judicial review merely by disguising its actions in the cloak of a conservator. And it likewise patently violates centuries of common-law understandings of the meaning of a conservatorship, including views held by the Federal Deposit Insurance Corporation (“FDIC”), whose conservatorship authority under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), served as the template for FHFA’s own conservatorship authority. Judge Brown correctly noted that the decision below thus “establish[es] a dangerous precedent” for FDIC-regulated financial institutions with trillions of dollars in assets. Pet.App. 109a. If the decision below is correct, then the FDIC as conservator could seize depositor funds from one bank and give them away—to another institution as equity, or to Treasury, or even to itself—as long as it is not actually liquidating the bank. The notion that the law permits a regulator appointed as conservator to act in a way so manifestly contrary to the interests of its conservatee is deeply destabilizing to our financial regulatory system. (1-2)
We shall see if this narrative of government overreach finds a sympathetic ear at the Court.
October 27, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- The city of New York is hard at work to promote an expansion of affordable housing. Mayor Bill de Blasio’s affordable housing plan is projected to complete its final phase of “building or preserving 200,000 below-market-rate apartments” in the year 2020. This completion date comes two years before its projected end date of 2022. Further, the New York City government recently approved a $275 million fund geared towards preserving affordable housing.
- The U.S. Commerce Department recently released data analyzing single-family home sales. Based on the Commerce Department’s data, home sales rose by a whopping 18% in the month of September. This increase places single-family home sales at a rate closer to the pre-financial crisis rate. Though this growth depicts signs of a stronger economy, the inventory of new homes remains constant.
October 27, 2017 | Permalink | No Comments
