Tag Archives: disclosure

Discovery War in GSE Litigation

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The United States filed a motion for a protective order in the Fairholme Funds case in the Court of Federal Claims (the Fairholme Takings case). You may not be familiar with protective orders. By way of background, Federal Rule of Civil Procedure 26(c) states that “The court may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense . . ..”

The federal government can request a protective order, like any other party.  But there may be some unique policies at issue when the federal government makes such a request.  For instance, the federal government may assert a variety of privileges to limit discovery.  These may include the deliberative process qualified privilege.  This privilege is asserted to protect communications about the government’s decisions.  Another example would be the qualified government privilege for official information.  This privilege would be asserted to maintain the confidentiality of official government records.  These are just two examples – there are a whole other range of privileges that the government might assert.  A court’s protective order analysis involving the federal government thus might take into account a variety of legitimate objectives that would not apply in a dispute between two private parties.

Here, the United States is seeking to limit discovery requests that “seek documents that relate in their entirety to the future termination of the conservatorships, with no end date” and “documents that relate (in part) to the future profitability of the Enterprises, again with no end date.” (2) The government argues that

Disclosure of these documents is contrary to the strictures of the Housing and Economic Recovery Act of 2008 (HERA), which bars a court from taking “any action to restrain or affect the exercise of powers or functions” of the Federal Housing Finance Agency (FHFA) as conservator. 12 U.S.C. § 4617(f). The declaration of FHFA Director Melvin Watt explains that disclosure would “have extraordinarily deleterious  consequences on the Conservator’s conduct of the ongoing and future operations of the conservatorships.”  Decisions about when and how to terminate the conservatorships and the future profitability of the Enterprises are at the heart of FHFA’s responsibilities as conservator, and Court-mandated disclosure of information bearing on such matters would jeopardize the stewardship of the Enterprises. (2, footnotes and some citations omitted)

While some of the government’s language in the motion seems hyperbolic, the court should certainly focus on the deliberative process privilege that the government asserts. Defining its scope will have implications far beyond this case, no matter that this case is incredibly important itself.

As to this case itself, it is interesting to see how even procedural disputes in the GSE lawsuits implicate the current operations of the GSEs as well as their post-conservatorship future. There is no question that the plaintiffs are very aware of their effect on the broader debates about the housing finance system as they press their individual claims in court. It is not yet clear to me how much the Court will weigh those considerations in its decision regarding the reach of the deliberative process privilege.

Georgia Court Dismisses TILA and RESPA Claims Brought by Plaintiff

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The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga. Sept. 25, 2013) granted the motion to dismiss proffered by the defendant.

The first enumerated cause of action in Plaintiffs’ complaint was a claim for fraud. Plaintiffs argued that their original mortgage lender, Accredited, engaged in a practice of filing false prospectus supplements with the Securities and Exchange Commission. Plaintiffs’ complaint also included a claim for wrongful foreclosure.

Next, the plaintiffs asserted that Deutsche Bank and MERS had “unclean hands” as they failed to make certain disclosures required by TILA. Plaintiffs also asserted that the defendants or their predecessors in interest violated RESPA in a number of ways. Plaintiffs’ complaint also included a claim for fraud in the inducement. Moreover, the plaintiffs’ complaint raised a claim for quiet title under O.C.G.A. § 23-3-40 and O.C.G.A. § 23-3-60 et seq. Lastly, the plaintiffs’ complaint raised a claim for fraudulent assignment.

Ultimately the court concluded that the plaintiffs’ complaint failed to state a viable claim for relief. Accordingly, this court granted the defendants’ motion to dismiss the plaintiffs’ complaint.

A Shared Appreciation for Underwater Mortgages

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New York State’s Department of Financial Services has proposed a rule that would allow for “shared appreciation” of a property’s value if an underwater loan is refinanced. The Department states that this will provide a helpful option for underwater homeowners facing foreclosure. If a homeowner were to take a shared appreciation mortgage, he or she would get a principal reduction (and thus lower monthly payments) in exchange for giving up as much as fifty percent of the increase in the home’s value, payable when the property is sold or the mortgage is satisfied.

The precise formula for the holder of the mortgage is as follows:

The Holder’s share of the Appreciation in Market Value shall be limited to the lesser of:

1. The amount of the reduction in principal (deferred principal), plus interest on such amount calculated from the date of the Shared Appreciation       Agreement to the date of payment based on a rate that is applicable to the Modified Mortgage Loan; or

2. Fifty percent of the amount of Appreciation in Market Value. Section 82-2.6(b).

The principal balance of a shared appreciation mortgage “shall be no greater than: (i) an amount which when combined with other modification factors, such as lower interest rate or term extension, results in monthly payments that are 31% or less of the Mortgagor’s DTI; or (ii) 100% of the Appraised Value.” Section 82-2.11(i). The proposed regulation contains mandatory disclosures for the homeowner, including some examples of how a shared appreciation mortgage can work.

How does this all play out for the homeowner? We should note that similarly situated homeowners can be treated differently in a variety of ways. Here are a few examples. First, two similarly situated homeowners with different incomes can receive different principal balances because of the DTI limitation contained in section 82-2.11(i). Second, similarly situated homeowners can receive different principal balances because their houses appraise for different amounts. And third, different rates of appreciation of homes can make two similarly situated homeowners give up very different absolute dollars in appreciated value.

All of this is to say that homeowners will have to consider many variables in order to evaluate whether a share appreciation mortgage is a good option for them. They should also know that what is a good deal for one homeowner may not be a good deal for a similarly situated one. It is unlikely that the mandatory disclosures will be sufficient to explain this to them in all of its complexity. It is not even clear that loan counselors could do a great job with this either.

I am not arguing that the share appreciation mortgage is a bad innovation. But I do think that lenders will be able evaluate when offering one is a good deal for them while homeowners may have trouble evaluating when accepting one is a good deal on their end. I would guess that many may take one for non-economic reasons — I want to keep my home — and just take their chances as to how it all will play out financially.