Tag Archives: California

The State of the Foreclosure Crisis

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Rob Pitingolo of the Urban Institute issued State of the Foreclosure Crisis: Past the Peak but Not Recovered. It opens,

Much attention has been given to statistics that show new foreclosure activity nationally has slowed over the past few years. When it comes to metropolitan area markets, however, some have gotten worse, while others have stagnated. It is not simple enough to declare an end to the foreclosure and delinquency crisis when there are as many as a quarter (25%) of metro areas that have not yet begun their recovery. (1)

It continues,

the rate of 90 day or more delinquency steadily fell in 2010 and 2011, ending at 3.1% in September 2013. In contrast, the foreclosure inventory only turned the corner in mid -2012, and is still higher than the March 2009 level at 4.5%, around seven times the pre-crisis level. Historically, a foreclosure inventory under 1% is what we would expect in “normal” market conditions.” (1, footnote omitted)

It concludes, “attention must be paid to individual metropolitan housing markets. Some are in much better shape than others; and some have made great strides since the peak of serious delinquency in December 2009. However, it may be premature to declare the problem is “ending” until all metro area markets show signs of recovery.” (2) The report identifies the starkest differences in metro areas:

Three geographic regions were hard hit at the beginning of the foreclosure crisis: California metros, Florida metros, and “Rust Belt” metros (those in Midwest states like Ohio, Michigan and Indiana). All three of those regions have seen solid improvements since December 2009.

On the other hand, the Northeast has generally performed poorly in the past several years. Serious delinquency rates in major metropolitan markets like New York City, Philadelphia and Baltimore have all worsened since December 2009. Other metro areas in New York like Buffalo, Rochester and Syracuse have similarly struggled, as have metro areas surrounding New York like New Jersey and Connecticut. (5)

The report concludes with a call for a nuanced response to the current state of the foreclosure crisis:  “communities need strong examples to build upon, rigorous data and analysis, and a commitment to evidence-based policymaking that strives toward the best fit between policy solutions and policy problems.” (6) This seems like the right call and the appropriate response to headlines that report the national trend without mentioning the variations among metro areas.

Glaski Full of It?

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I had blogged about Glaski v. Bank of America, No. F064556 (7/31/13, Cal. 5th App. Dist.) soon after it was decided, arguing that it did not bode well for REMICs that did not comply with the rules governing REMICS that are contained in the Internal Revenue Code. The case is highly controversial. Indeed, the mere question of whether it should be a published opinion or not has been highly contested, with the trustee now asking that the case be depublished. The request for depublication is effectively a brief to the California Supreme Court that argues that Glaski was wrongly decided.

Because of its significance, there has been a lot of discussion about the case in the blogosphere. Here is Roger Bernhardt‘s (Golden Gate Law School) take on it, posted to the DIRT listserv and elsewhere:

If some lenders are reacting with shock and horror to this decision, that is probably only because they reacted too giddily to Gomes v Countrywide Home Loans, Inc. (2011) 192 CA4th 1149 (reported at 34 CEB RPLR 66 (Mar. 2011)) and similar decisions that they took to mean that their nonjudicial foreclosures were completely immune from judicial review. Because I think that Glaski simply holds that some borrower foreclosure challenges may warrant factual investigation (rather than outright dismissal at the pleading stage), I do not find this decision that earth-shaking.

Two of this plaintiff’s major contentions were in fact entirely rejected at the demurrer level:

-That the foreclosure was fraudulent because the statutory notices looked robosigned (“forged”); and

-That the loan documents were not truly transferred into the loan pool.

Only the borrower’s wrongful foreclosure count survived into the next round. If the bank can show that the documents were handled in proper fashion, it should be able to dispose of this last issue on summary judgment.

Bank of America appeared to not prevail on demurrer on this issue because the record did include two deed of trust assignments that had been recorded outside the Real Estate Mortgage Investment Conduit (REMIC) period and did not include any evidence showing that the loan was put into the securitization pool within the proper REMIC period. The court’s ruling that a transfer into a trust that is made too late may constitute a void rather than voidable transfer (to not jeopardize the tax-exempt status of the other assets in the trust) seems like a sane conclusion. That ruling does no harm to securitization pools that were created with proper attention to the necessary timetables. (It probably also has only slight effect on loans that were improperly securitized, other than to require that a different procedure be followed for their foreclosure.)

In this case, the fact that two assignments of a deed of trust were recorded after trust closure proves almost nothing about when the loans themselves were actually transferred into the trust pool, it having been a common practice back then not to record assignments until some other development made recording appropriate. I suspect that it was only the combination of seeing two “belatedly” recorded assignments and also seeing no indication of any timely made document deposits into the trust pool that led to court to say that the borrower had sufficiently alleged an invalid (i.e., void) attempted transfer into the trust. Because that seemed to be a factual possibility, on remand, the court logically should ask whether the pool trustee was the rightful party to conduct the foreclosure of the deed of trust, or whether that should have been done by someone else.

While courts may not want to find their dockets cluttered with frivolous attacks on valid foreclosures, they are probably equally averse to allowing potentially meritorious challenges to wrongful foreclosures to be rejected out of hand.

Round One to California in Suit Against S&P

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California Superior Court Judge Karnow issued a Memorandum Order Overruling Defendants’ Demurrers in California v. The McGraw-Hill Cos. et al., CGC-13-528491 (Aug. 14, 2013 San Francisco County).   California Attorney General Harris alleged “that S&P intentionally inflated its ratings for the investments and that these knowingly false ratings were material to the investment decisions of [California Public Employees’ Retirement System (PERS) and the California State Teachers’ Retirement System (STRS)], in violation of the False Claims Act and other statutes.” (2)

S&P demurred to the False Claims Act causes of action [asked for the causes of action to be dismissed], because, among other reasons,

(l) the complaint does not plead that any ‘claims’ were ever “presented” to the state;

(2) if claims were presented, they did not involve ‘state funds’ . . .. (4)

S&P asserts, among other things, that because it “was not the seller, it did not “present” any claims for payment.” (4) The Court stated, however, that the False Claims Act “imposes liability on any person who ’causes’ a false or fraudulent claim to be presented or ’causes to be made or used a false . . . statement material to a false or fraudulent claim.’ C. 12651(a)(1)-(a}(2).” (4, citation omitted) The Court inferred “from the complaint that S&P ’caused’ PERS and STRS to purchase the securities. This is good enough for present purposes.” (4, citation omitted)

I am a longstanding critic of the rating agencies, but I have to say that I am struck by how broadly courts have interpreted statutes relied upon by the federal government and the states as they pursue alleged wrongdoing by financial institutions involved in financial crisis. In the courts’ defense, they typically rely on the plain language of the statutes, but, boy, do they interpret them broadly.

In this case, giving a rating can “cause” someone to purchase a security — is there any limit on what is a sufficient “cause” to trigger the statute? In DoJ’s case against Bank of America, a financial institution may be liable under FIRREA for a fraud it perpetrates even if the only entity affected by the fraud is — Bank of America! Similar broad interpretations of NY’s Martin Act make it relatively easy for NY government to bring a securities fraud case against a financial institution because our normal intuitions about intent are not relevant under that act.

Pursuing alleged wrongdoers: good.

Pursuing alleged wrongdoers with broad, ambiguous and powerful tools:  worrisome.

Underwater Mortgages Eminent Domain Battle Gears up

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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.”

California’s S&P Suit

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The California complaint follow on the heels of the DoJ complaint but it hangs its hat on an aggressive theory — that S&P’s ratings violate California’s False Claims Act.  While I do not yet have an opinion about whether that is a stretch, I do note the allegations in the complaint add to the tragicomic ones that we have seen in the other complaints filed against rating agencies.  Here are some of the more quote-worthy ones:

  • S&P executives “suppressed development of new, more accurate rating models that would have produced fewer AAA ratings -and therefore lower profits and market share. As one senior managing director at S&P later confessed, “I knew it was wrong at the time.” (3)
  • “S&P knew that its rating process and criteria had become so degraded that many of its ratings were, in the words of one S&P analyst, little better than a “coin toss.” During those years, its models were “massaged” using “magic numbers” and “guesses,” in the words of other senior S&P executives.” (3)
  • “it rated notes issued by structured investment vehicles (“SIVs”) another type of security central to this case-without obtaining key data about the assets underlying the SIVs. A reporter later asked the responsible executive about this failing: “If you didn’t have the data, and you’re a data-based credit rating agency, why not walk away” from rating these deals? His response was remarkably candid: “The revenue potential was too large.” (4)

This complaint, like the others, highlights the chasm between S&P’s representations of its own conduct and the alleged behavior set forth in the complaint.  Indeed, the complaint states that representations by employees which were authorized by S&P “about its integrity, competence, and the quality of its ratings were knowingly false.” (19)

If the facts in this complaint prove to be true, some of the statements by employees seem hard to explain away:

  • “As explained by Kai Gilkes, an S&P managing director of quantitative analysis at the time, analysts were encouraged to loosen criteria:  The discussion tends to proceed in this sort of way. “Look, I know you’re not comfortable with such and such assumption, but apparently Moody’s are even lower, and if that’s the only thing that is standing between rating this deal and not rating this deal, are we really hung up on that assumption?” (21)
  • “[w]e just lost a huge … RMBS deal to Moody’s due to a huge difference in the required credit support level … [which] was at least.1 0% higher than Moody’s. . . . I had a discussion with the team leads here and we think that the only way to compete is to have a paradigm shift in thinking.” (21)
  • “S&P’s highest management ordered a credit rating estimate even though S&P lacked vital loan data to perform the necessary analysis. This resulted in the “most amazing memo” Mr. Raiter had “ever received in [his] business career.” When Mr. Raiter requested the necessary loan level data, Richard Gugliada, the head of S&P’s CDO group at the time, rejected the request, stating: “Any request for loan level tapes is TOTALLY UNREASONABLE!!! : .. Furthermore, by executive committee mandate, fees are not to get in the way of providing credit estimates…. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.” (22)