December 17, 2012
CFPB Issues Fair Lending Report That Highlights Data Collection
The Fair Lending Report of the Consumer Financial Protection Bureau provides an overview of the Bureau’s actions over the last year. Some of the most interesting elements of the report relate to future HMDA and TILA rulemaking:
Section 1094 of the Dodd-Frank Act amends HMDA to require the collection and submission of additional data fields related to mortgage loans, including certain applicant, loan, and property characteristics, as well as “such other information as the Bureau may require.” The CFPB is examining what changes it may propose to Regulation C. . . .
Finally, section 1403 of the Dodd-Frank Act requires that the CFPB prescribe regulations under TILA to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age. The CFPB has begun preliminary planning with regard to this rule. (26) (emphasis added)
Data collection about borrower and mortgage characteristics is very fraught. Lenders have typically fought against efforts to increase such data collection as it could only hurt them if others knew their business so well. Academics and consumer advocates have complained that data about the mortgage market is very hard to come by unless one had massive financial resources to pay private providers for it.
This was especially true, given the rapid rate of change in that market. Working with data that is twelve months old was the same as working with outdated information during the Boom years of the early 2000s. If the CFPB collects and analyzes data in something approximating real-time, it will be far more nimble than previous regulators. If it shares its data with outside researchers, it is likely to become even more sophisticated in its approach to the dynamic housing finance sector.
December 17, 2012 | Permalink | No Comments
December 14, 2012
Levitin and Wachter’s New History of American Housing Finance
Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance. The paper provides a history of the development of the housing finance infrastructure in the United States. It concludes that
[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)
Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper: “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.” (30) As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing. Personally, I believe it can handle a lot more than we give it credit for.
December 14, 2012 | Permalink | No Comments
December 12, 2012
CRL Issues Report on State of Lending
The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households. CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred. And while they are consumer advocates, their research is solid.
Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”
• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.
• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.
• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)
December 12, 2012 | Permalink | No Comments
December 10, 2012
MERS Must Possess Note or Have Authority to Act on Behalf of Note Holder in Order to Foreclose, According to Massachusetts Supreme Court
In Eaton v Federal National Mortgage Association, 462 Mass. 569 (Mass. 2012), the Supreme Judicial Court of Massachusetts addressed “the propriety of a foreclosure by power of sale undertaken by a mortgage holder that did not hold the underlying mortgage note.” In this case, the homeowner executed both a promissory note, solely to the lender, and a mortgage to the lender and to MERS. Under the terms of the mortgage, the lender was referred to as “lender” and MERS was referred to as “mortgagee.” As mortgagee, MERS was stipulated to hold legal title to the property with the power of sale “solely as nominee.” MERS was also given explicit authority under the mortgage to exercise the right to foreclose the property as nominee for lender. Subsequently, MERS assigned its interest to Green Tree servicing, LLC (Green Tree). The assignment was recorded in the county register of deeds, but without evidence of transfer of the note.
Eventually, the homeowner fell behind on his mortgage payments and Green Tree moved to foreclose. Green Tree was the highest bidder at the foreclosure auction, and assigned the rights to its bid to Fannie Mae. Fannie Mae later moved to evict the homeowner from the property. In response, the homeowner filed a counterclaim, arguing that the underlying foreclosure was invalid because Green Tree did not hold the note at the time of the foreclosure action. The housing court and the superior court found in favor of the homeowner, holding that a mortgagee must possess both the mortgage and the mortgage note to have authority to foreclose.
However, the Supreme Court, transferring the case to its court on its own motion, came to a different conclusion. The Supreme Court found that the lower courts relied only on common law for their holdings, and that statutory law, particularly G.L.c. 183, § 21 and G.L.c. 244, § 14, changes the analysis. Relying on these stautes, the court held “that where a mortgagee acts with the authority and on behalf of the note holder, the mortgagee may comply with these statutory requirements without physically possessing or actually holding the mortgage note.” Whether a mortgagee is acting with authority and on behalf of the note holder is a an agency question, which the Supreme Court could not address based on the record.
The court also held that the ruling only had prospective effect, and thus the ruling “appl[ies] only to mortgage foreclosure sales for which the mandatory notice of sale has been given after the date of this opinion.” However, the court also applied the ruling to the parties in the case, and the court remanded the case to the superior court to determine whether Green Tree was acting with authority and on behalf of the lender at the time of the closing.
December 10, 2012 | Permalink | No Comments
December 6, 2012
Nolan Robinson Argues that MERS Should not be Allowed to Initiate Foreclosure Proceedings in Cardozo Law Review
Abstract:
Few American homeowners know much about the small, Virginia-based company that has revolutionized the mortgage industry over the past fifteen years. Yet, Mortgage Electronic Registration Systems, Inc. (MERS) is the named mortgagee on nearly two-thirds of all newly originated residential mortgages in the United States. Industry leaders – including Freddy Mac, Ginnie Mae, and a host of private lenders – created MERS in the mid-1990s to help facilitate a burgeoning market in mortgage-backed securities.
At the time MERS was created, a robust and lightly regulated secondary market for mortgage-backed securities seemed like a good idea. The recent subprime mortgage crisis, which has impacted millions of American homeowners and played a key role in a global recession, has done much to challenge that presumption. One unfortunate byproduct of the subprime mortgage crisis has been a dramatic increase in the number of American homeowners facing foreclosure. For many of these homeowners, the MERS system may compound their hardships by effectively masking the identity of the owner of their loans. One of the benefits of MERS membership, according to MERS, is the legal right to foreclose on a defaulting homeowner in MERS’s name rather than in the name of the entity who actually owns the mortgage. This can mean that homeowners have no way of ascertaining the identity of the party with whom they can negotiate their loans.
Several state courts have considered challenges to MERS’s right to initiate foreclosure actions in its own name. MERS claims to have the legal authority to initiate foreclosure proceedings throughout the United States, but not every court has agreed. Some jurisdictions have expressly upheld MERS’s right to foreclose, while some have questioned or limited MERS’s foreclosure rights. Still other courts have reserved judgment, expressing frustration and confusion regarding MERS’s role in an increasing number of foreclosure and bankruptcy proceedings, and the ostensible connection between MERS and the subprime mortgage crisis.
MERS is currently a plaintiff in as many as forty percent of pending foreclosure actions in some locales. This Note argues that foreclosure actions brought in MERS’s name, without joining the real party in interest, are unlawful. Furthermore, this Note reveals how granting standing to MERS in foreclosure actions threatens to undermine the protections for homeowners that foreclosure law has traditionally provided, and violates important property law doctrines that ensure the proper functioning of the recording system and minimize clouds on title.
Article can be found here.
December 6, 2012 | Permalink | No Comments
New York Supreme Court Holds that MERS Does Not Have Standing to Foreclose if it Does Not Own Both Note and Mortgage
In LaSalle Bank Nat’l Ass’n v. Lamy, 824 N.Y.S.2d 769 (NY S. Ct., 2006), the court held that MERS did not have standing to foreclose because it did not own the note and mortgage. Court reasoned that “well established case authorities have held that where a mortgage debt is represented by a bond or other instrument, an assignment of the mortgage without a concomitant assignment of the note or bond for which said mortgage was given as security is a nullity.”
December 6, 2012 | Permalink | No Comments
Retail Trading Comes to Mortgage-Backed Securities
By David Reiss
In a recent paper, Bessembinder et al. look at the implications of FINRA’s proposal to disseminate trade prices for structured products like mortgage-backed securities to the public. They evaluate how price transparency has impacted the corporate bond market and find that it “increased bonds’ propensity to trade and increased overall volume.” (24) They note that trading costs shrank. They argue that the same impact may be felt in structured product markets.
It is unclear what this change will mean for the homeowner, but it would seem to mean that there will be a reduction in interest expense and an increase in liquidity in the market for credit but perhaps also an increase in the role that “animal spirits” will play as the business cycle inexorably turns from bust to plateau to boom to bust . . ..
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December 12, 2012 | Permalink | No Comments