Affirmatively Furthering Fair Housing

OLYMPUS DIGITAL CAMERAAnthony22 at English Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

The United States Court of Appeals for the Second Circuit issued a ruling in Westchester v. HUD, No. 15-2294 (Sept. 25, 2015) the longstanding case regarding whether Westchester County has “adequately analyzed — in its applications for HUD funds — impediments to fair housing within the County’s jurisdictions.” (3) The Second Circuit affirmed the District Court’s judgment in favor of HUD, which means that HUD’s withholding of funds under the Community Planning and Development (CPD) Formula Grant Programs stands.

HUD withheld those funds because it found that the County had failed to “assess the impediments to fair housing choice caused by local zoning ordinances or to identify actions the County would take to overcome these impediments.” (6) HUD further found, as a result that the County would not “affirmatively further fair housing” as required by the Fair Housing Act. (6)

The case resolved a narrow, legalistic question:

May HUD require a jurisdiction that applies for CPD funding to analyze whether local zoning laws will impede the jurisdiction’s mandate to “affirmatively further fair housing”? Because HUD may impose such a requirement on jurisdictions that apply for CPD funds, and because the decision to withhold Westchester County’s CPD funds in this case was not arbitrary or capricious, we conclude that HUD’s action complied with federal law. (50)

While the case was decided on narrow grounds, the Court does notes that

The broader dispute between the County and HUD implicates many “big‐picture” questions. Beyond prohibiting direct discrimination based on race or other protected categories, what must a jurisdiction do to “affirmatively further fair housing”? What is the difference, if any, between furthering “fair” housing and furthering “affordable” housing? How much control may HUD exert over local policies, which, in its view, impede the creation of “fair” or “affordable” housing? And if conflicts of this sort between HUD and local governments are to be avoided, is the simplest solution to avoid applying for federal funds in the first place? (32)

These are all very good questions and it is unfortunate that this case does not help to answer any of them. The level of segregation in the United States by race has been a tragedy for many, many decades and we are no closer to figuring out how to deal with it after all these years.

Lederman, Rahman & Reiss on CFPB No-Action Policy

Jeff Lederman, Sabeel Rahman and I submitted a comment on the Consumer Financial Protection Bureau’s proposed policy on No-Action Letters. Basically,

This is a comment on the Consumer Financial Protection Bureau’s (the “Bureau”) proposed Policy on No-Action Letters (the “Policy”).  The Policy is a step in the right direction, but a more robust Policy could better help the Bureau achieve its statutory purposes.

The Bureau recognizes that there are situations in which consumer financial service businesses (“Businesses”) are uncertain as to the applicability of laws and rules related to new financial products (“Products”); how regulatory provisions might be applied to their Products; and what potential enforcement actions could be brought against them by regulatory agencies for noncompliance.  Businesses could therefore benefit from the issuance of a No-Action Letter to reduce that uncertainty.

There is very little scholarly literature on the use of No-Action Letters by administrative agencies.  In the absence of comprehensive studies, it is hard to precisely determine how to allocate agency resources to informal guidance as opposed to other types of regulatory action.  Notwithstanding this, an agency should attempt to determine the optimal amount of its resources that should be devoted to informal guidance as opposed to the alternatives and then refine that initial estimate as experience dictates.

A rapidly changing field like consumer finance can benefit from the availability of quick and informal feedback for Businesses so long as the process is properly designed.  Because the Policy would use a relatively small amount of Bureau resources compared to other types of regulatory action, a well-designed No-Action Letter Policy would be a win-win-win for Businesses, for the Bureau and for consumers.

Big Decision in GSE Litigation

Regular readers of this blog know that I have written a lot about the shareholder suits arising from the conservatorships of Fannie and Freddie. One of the main cases is being presided over by Judge Lamberth in the District Court for the District of Columbia. This case raises a range of challenges to the government’s action: violations of the Administrative Procedures Act, violations of the Housing and Economic Recovery Act of 2008 and more. Judge Lamberth has issued an opinion that dismissed all of the plaintiffs’ claims, dealing a severe (but not fatal) blow to their cause. His conclusion captures the tenor of the whole opinion:

It is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text. Here, the plaintiffs’ true gripe is with the language of a statute that enabled FHFA and, consequently, Treasury, to take unprecedented steps to salvage the largest players in the mortgage finance industry before their looming collapse triggered a systemic panic. Indeed, the plaintiffs’ grievance is really with Congress itself. It was Congress, after all, that parted the legal seas so that FHFA and Treasury could effectively do whatever they thought was needed to stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system, this Court does not seek to evaluate the merits of whether the Third Amendment is sound financial — or even moral — policy. The Court does, however, find that HERA’s unambiguous statutory provisions, coupled with the unequivocal language of the plaintiffs’ original GSE stock certificates, compels the dismissal of all of the plaintiffs’ claims. (52)
Not one to typically say “I told you so” (or at least not on the blog), I will say that I had predicted that deference to the Executive during a time of national crisis was going to be hard for the plaintiffs to overcome. That being said, this is an extraordinarily complex cases both legally and factually so we can expect appeals up to the Supreme Court (and perhaps a return to the District Court), so it is premature to say that the plaintiffs’ claims are DOA just yet.

Regulating Fannie and Freddie With The Deal

Steven Davidoff Solomon and David T. Zaring have posted After the Deal: Fannie, Freddie and the Financial Crisis Aftermath to SSRN. The abstract reads,

The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.

Reading the briefs in the various GSE lawsuits, one feels lost in the details of the legal arguments and one thinks that the judges hearing these matters might feel the same way.  This article is an attempt to see the big picture, encompassing the administrative, corporate and takings law aspects of the dispute. However the judges decide these cases, one would assume that they will need to do something similar to come up with a result that they find just.

I also found plenty to argue with in this article.  For instance, it characterizes the Federal Housing Finance Administration as the lapdog of Treasury. (26) But there is a lot of evidence that the FHFA charted its own course away from the Executive Branch on many occasions, for instance when it rejected calls by various government officials for principal reductions for homeowners with Fannie and Freddie mortgages. Notwithstanding these disagreements, I think the article makes a real contribution in its attempt to make sense of an extraordinarily muddled situation.

Reiss in Bloomberg Industries Q&A on Frannie Litigation

Bloomberg Industries Litigation Analyst Emily Hamburger interviewed me about The Government as Defendant: Breaking Down Fannie-Freddie Lawsuits (link to audio of the call). The blurb for the interview is as follows:

As investors engage in jurisdictional discovery and the government pleads for dismissals in several federal cases over Fannie Mae and Freddie Mac stock, Professor David Reiss of Brooklyn Law School will provide his insights on the dynamics of the lawsuits and possible outcomes for Wall Street, the U.S. government and GSEs. Reiss is the author of a recent article, An Overview of the Fannie and Freddie Conservatorship Litigation.

Emily questioned me for the first half of the one hour call and some of the 200+ participants asked questions in the second half.

Emily’s questions included the following (paraphrased below)

  • You’re tracking several cases that deal with the government’s role in Fannie Mae and Freddie Mac, and I’d like to go through about 3 of the major assertions made by investors – investors that own junior preferred and common stock in the GSEs – against the government and hear your thoughts:
    • The first is the accusation that the Treasury and FHFA’s Conduct in the execution of the Third Amendment was arbitrary and capricious. What do you think of this?
    •  Another claim made by the plaintiffs is that the government’s actions constitute a taking of property without just compensation, which would be seen as a violation of the 5th Amendment – do you think this is a stronger or weaker claim?
    • And finally – what about plaintiffs asserting breach of contract against the government? Plaintiffs have said that the Net Worth Sweep in the Third Amendment to the Preferred Stock Purchase Agreement nullified Fannie and Freddie’s ability to pay dividends, and that the two companies can’t unilaterally change terms of preferred stock, and that the FHFA is guilty of causing this breach.
  • Is the government correct when they say that the section 4617 of the Housing and Economic Recovery Act barred plaintiff’s right to sue over the conservator’s decisions?
  • Former Solicitor General Theodore Olson, an attorney for Perry Capital, has said that the government’s powers with respect to the interventions in Fannie and Freddie “expired” – is he correct?
  • Can you explain what exactly jurisdictional discovery is and why it’s important?
  • Do we know anything about what might happen if one judge rules for the plaintiffs and another judge rules for the government?
  • Is there an estimate that you can provide as to timing?
  • Are there any precedents that you know of from prior crises? Prior interventions by the government that private plaintiffs brought suit against?
  • How do you foresee Congress and policymakers changing outcomes?
  • What do we need to be looking out for now in the litigation?
  • How does this end?

You have to listen to the audiotape to hear my answers, but my bottom line is this — these are factually and legally complex cases and don’t trust anyone who thinks that this is a slam dunk for any of the parties.

 

The Government Takeover of Fannie and Freddie

Richard Epstein has posted a draft of The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards. The paper addresses “the various claims of the private shareholders, both preferred and common, of Fannie and Freddie.” (2) He notes that those claims have

now given rise to seventeen separate lawsuits against the Government, most of which deal with the Government’s actions in August, 2012. One suit also calls into question the earlier Government actions to stabilize the home mortgage market between July and September 2008, challenging the constitutionality of the decision to cast Fannie and Freddie into conservatorship in September 2008, which committed the Government to operating the companies until they became stabilized. What these suits have in common is that they probe, in overlapping ways, the extent to which the United States shed any alleged obligations owed to the junior preferred and common shareholders of both Fannie and Freddie. At present, the United States has submitted a motion to dismiss in the Washington Federal case that gives some clear indication as to the tack that it will take in seeking to derail all of these lawsuits regardless of the particular legal theory on which they arise. Indeed, the brief goes so far to say that not a single one of the plaintiffs is entitled to recover anything in these cases, be it on their individual or derivative claims, in light of the extensive powers that HERA vests in FHFA in its capacity as conservator to the funds. (2-3, citations omitted)

Epstein acknowledges that his “work on this project has been supported by several hedge funds that have hired me as a legal consultant, analyst, and commentator on issues pertaining to litigation and legislation over Fannie and Freddie discussed in this article.”(1, author footnote) Nonetheless, as a leading scholar, particularly of Takings jurisprudence, his views must be taken very seriously.

Epstein states that “major question of both corporate and constitutional law is whether the actions taken unilaterally by these key government officials could be attacked on the grounds that they confiscated the wealth of the Fannie and Freddie shareholders and thus required compensation from the Government under the Takings Clause. In addition, there are various complaints both at common law and under the Administrative Procedure Act.” (4)

Like Jonathan Macey, Epstein forcefully argues that the federal government has greatly overreached in its treatment of Fannie and Freddie. I tend in the other direction. But I do agree with Epstein that it “is little exaggeration to say that the entire range of private, administrative, and constitutional principles will be called into question in this litigation.” (4) Because of that, I am far from certain how the courts should and will decide the immensely complicated claims at issue in these cases.

In any event, Epstein’s article should be read as a road map to the narrative that the plaintiffs will attempt to convey to the judges hearing these cases as they slowly wend their way through the federal court system.

Tough Row to Hoe for Frannie Shareholders

Inside Mortgage Finance quoted me in a story, GSE Jr. Preferred Shareholders Have a Tough ‘Row to Hoe’ in Winning Their Lawsuits (behind a paywall). It reads,

Expect a long and winding legal road to resolution of investor lawsuits challenging the Treasury Department’s “net worth sweep” of Fannie Mae and Freddie Mac earnings, warn legal experts.

More than a dozen lawsuits filed against the government – including hedge funds Perry Capital and Fairholme Capital Management – are pending in federal district court in Washington, DC, and in the Court of Federal Claims. The private equity plaintiffs allege that the Treasury’s change in the dividend structure of its preferred stock leaves the government-sponsored enterprises with no funds to pay anything to junior shareholders.

The complaints raise complex constitutional and securities law issues, according to Emily Hamburger, a litigation analyst for Bloomberg Industries. “It may be a year before the crucial questions can be answered by the courts because the parties are still in the early stages of gathering evidence,” explained Hamburger during a recent webinar.

Brooklyn Law School Professor David Reiss agrees. “The plaintiffs, in the main, argue that the federal government has breached its duties to preferred shareholders, common shareholders, and potential beneficiaries of a housing trust fund authorized by the same statute that authorized their conservatorships. At this early stage, it appears that the plaintiffs have a tough row to hoe,” notes Reiss in a draft paper examining the GSE shareholder lawsuits.

Government attorneys argue that Treasury has authority to purchase Fannie and Freddie stock when it’s determined such actions are necessary to provide stability to the financial markets, prevent disruptions in the availability of mortgage finance and protect the taxpayer. The government also argues that the plaintiffs do not have a legal property interest for purposes of a Fifth Amendment “takings” claim due to the GSEs’ status in conservatorship.

Hamburger predicted that the judges in the various suits won’t be able to ignore the “obvious equitable tensions” involved. “The government is changing the terms years after their bailout, but on the other hand, the timing and motivation of investors is going to be challenged too,” she noted.

While Reiss agrees that the junior shareholders “look like they are receiving a raw deal from the federal government,” it’s a tall order to sue the federal government even under the most favorable of circumstances. The plaintiffs will have to overcome the government’s sovereign immunity, unless it is waived, and the government has additional defenses, including immunity from Administrative Procedures Act claims, under the Housing and Economic Recovery Act of 2008.

Reiss explained that HERA states that except “at the request of the Federal Housing Finance Agency, no court may take any action to restrain or affect the exercise of powers or functions of [FHFA] as conservator or receiver.” It remains to be seen how this language might apply to Treasury’s change in the preferred stock agreement, but Reiss said it could be read to give the government broad authority to address the financial situation of the two companies.

“The litigation surrounding GSE conservatorship raises all sorts of issues about the federal government’s involvement in housing finance,” said Reiss. “These issues are worth setting forth as the proper role of these two companies in the housing finance system is still very much up in the air.”

The full paper, An Overview of the Fannie and Freddie Conservatorship Litigation (SSRN link), can also be found on BePress.