Tag Archives: enterprises

Servicer Safety & Soundness and Consumer Protection

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The FHFA’s Inspector General issued an audit, FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing in Troubled Mortgages. The audit identified two major risks in the current environment:

  • Using short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties. This practice can jeopardize the companies’ operations and also the Enterprises’ timely payment guarantees and reputation for loans they back; and
  • Assuming responsibilities for servicing large volumes of mortgage loans that may be beyond what their infrastructures can handle. For example, of the 30 largest mortgage servicers, those that were not banks held a 17% share of the mortgage servicing market at the end of 2013, up from 9% at the end of 2012, and 6% at the end of 2011. This rise in nonbank special servicers has been accompanied by consumer complaints, lawsuits, and other regulatory actions as the servicers’ workload outstrips their processing capacity. (1-2)

The audit notes that “nonbank special servicers do not have a prudential safety and soundness regulator at the federal level for their mortgage servicing operations.” (6)

I think the important story here is more about consumer protection than it is about safety and soundness regulation. That is not to say that the Inspector General’s audit ignored consumer protection. Indeed, it it does spend a significant amount of time addressing that topic, noting that other federal regulators such as the CFPB have also zeroed in on the impact that non-bank servicers have on consumers.

But the safety and soundness risks may a bit overblown. A significant number of consumers, on the other hand, continue to be treated poorly, poorly, poorly by servicers.

Reiss on GSE Transfer Taxes

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Law360 quoted me in Fannie, Freddie Look Unstoppable In Transfer Tax Fight (behind a paywall).  It reads in part,

Class actions against Fannie Mae and Freddie Mac over hundreds of millions of dollars in unpaid transfer taxes in states and cities around the country continue to pile up, but experts say any attempt to challenge the housing giants’ exempt status is likely futile as court after court rules in their favor.

The Eighth Circuit on Friday joined the Third, Fourth, Sixth and Seventh circuits in ruling that Fannie Mae and Freddie Mac are exempt from local transfer taxes when it ruled in favor of the government-sponsored enterprises, or GSEs, after reviewing a suit brought by Swift County, Minnesota.

Swift County, as with a multitude of counties, municipalities and states before it, sought to dispute Fannie and Freddie’s claim that while they must pay property taxes, they are exempt from additional taxes on transfers of assets. But in what some experts say has come to seem like an inevitable answer, the Eighth Circuit found in favor of Fannie and Freddie.

“The federal statutes that set forth the charters of Fannie and Freddie are pretty clear that the two companies have a variety of regulatory privileges that other companies don’t,” David Reiss, a professor at Brooklyn Law School, said. “One of the privileges is an exemption from nearly all state and local taxation.”

The legal onslaught against the GSEs began in 2012 after U.S. District Judge Victoria A. Roberts ruled in March that they should not be considered federal agencies. In a suit filed by Oakland County, Michigan, over millions in unpaid transfer taxes, Judge Roberts rejected the charter exemption argument and, citing a 1988 U.S. Supreme Court ruling in U.S. v. Wells Fargo, found that “all taxation” refers only to direct taxes and not excise taxes like those imposed on asset transfers.

Counties, municipalities and states across the country were emboldened by the decision. Putative class actions soon followed in West Virginia, Illinois, Minnesota, Florida, Rhode Island, Georgia and elsewhere as plaintiffs rushed to see if they could elicit a similar ruling and recoup millions of dollars allegedly lost thanks to the inability to tax Fannie and Freddie’s mortgage foreclosure operations.

But Judge Roberts’ decision was later overturned by the Sixth Circuit, as were other similar orders, though many district judges found in favor of Fannie and Freddie from the start.

*     *    *

Many cases remain in the lower courts as well, but experts say the outcomes will likely echo those that played out in the Third, Fourth Sixth, Seventh and Eighth circuits, because the defendants’ chartered exemption defense appears waterproof.

“I find the circuit court decisions unsurprising and consistent with the letter and spirit of the law,” Reiss said. “I am guessing that other federal courts will follow this trend.”

G-Fee Entreaty

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The FHFA has issued a Request for Input about Fannie Mae and Freddie Mac Guarantee Fees. The Request both provides a good explanation of g-fees and poses important questions about their appropriate role in the functioning of the housing finance system. The Request opens,

On December 9, 2013, the Federal Housing Finance Agency (FHFA) announced proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac (the Enterprises) charge lenders. The Enterprises receive these fees in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in Mortgage Backed Securities (MBS) if the borrower fails to pay. The MBS, in turn, are backed by mortgages that lenders sell to the Enterprises.

 The proposed changes included an across-the-board 10 basis point increase, an adjustment of up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states. On January 8, 2014, Director Melvin L. Watt suspended implementation of these changes pending further review. (1)

The Request asks for responses to 12 questions. The most important, as far as I am concerned, is the first: “Are there factors other than those described in section III – expected losses, unexpected losses, and general and administrative expenses that FHFA and the Enterprises should consider in setting g-fees? What goals should FHFA further in setting g-fees?” (7)

Setting the g-fee has far-reaching consequences not just for the financial health of the two companies, but also for the health of the overall housing market and the mortgage industry. It will also have predictable effects on the litigation over the conservatorships of the two companies. For instance, a high g-fee will make the two companies appear to be more valuable than a low one. The size of the g-fee may also impact the scope of federal affordable housing initiatives.

While this Request for Input is pretty technical (particularly the parts of it that I didn’t blog about), it touches on some of the most fundamental aspects of our system of housing finance. As such, it invites responses from more than just industry insiders. Input is due by August 4th.

Reiss on Fannie/Freddie Suits

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Bloomberg BNA quoted me in No Basis for Discovery by GSE Investors, Treasury Department, FHFA Memos Say. It reads

[Reproduced with permission from BNA’s Banking Report, 102 BBR 417, 3/11/14. Copyright  2014 by The Bureau
of National Affairs, Inc. (800-372-1033) https://www.bna.com]

The Treasury Department and the Federal Housing Finance Agency March 4 said a federal judge should deny a motion for discovery in lawsuits by Fannie Mae and Freddie Mac investors, citing an agreed-upon schedule and saying the motion would do nothing to address legal questions at the core of the case (Fairholme Funds v. Federal Housing Finance Agency, D.D.C., No. 13-cv-01053, 3/4/14).

In its memo filed in the U.S. District Court for the District of Columbia, Treasury said Fairholme’s Feb. 12 motion for discovery (31 DER EE-6, 2/14/14) would be “improper” under a November scheduling order, and urged the court to dismiss the Fairholme suit and related cases.

“These cases should proceed on the agreed briefing schedule, which already provided ample time to the plaintiffs to file their substantive briefs, and the Court, upon review of a completed set of briefing with respect to the defendants’ dispositive motions, should dismiss these cases,” Treasury said March 4.

In its March 4 filing, the FHFA memo said “no discovery is necessary to assess the purely legal arguments” before the court, adding the Housing and Economic Recovery Act of 2008 (HERA) bars second-guessing of the FHFA’s actions as conservator of Fannie Mae and Freddie Mac.

Litigation Ongoing

The suit is one of several in at least two district courts and the U.S. Court of Federal Claims that challenge Treasury and FHFA action in August 2012 that restructured contracts governing preferred stock issued by the two government-sponsored enterprises.

Fairholme and other investors say the August 2012 amendment amounted to an expropriation of their assets and have variously sought damages and compensation in response.

The government has sought to dismiss the Fairholme case and others, but in its Feb. 12 motion, Fairholme said the government’s motion to dismiss was too expansive and raised questions that require access to government documents, e-mails and other materials.

Arrowood Indemnity Co., the plaintiff in a related case in the district court and a separate case in the Claims Court, Feb. 20 sought to link its own bid for discovery to Fairholme’s (36 DER EE-8, 2/24/14).

Fairholme has already prevailed on its discovery motion in the Claims Court. In a Feb. 26 order, Judge Margaret M. Sweeney granted Fairholme’s motion for a continuance to pursue discovery in that case.

March Reply Scheduled

In the district court, Fairholme is scheduled to respond to the government’s March 4 memos by mid-March.

“We are reviewing the opposition briefs filed by the defendants just yesterday, and we will respond to them in our reply brief, due on March 14,” a spokesman for Fairholme told Bloomberg BNA March 5.

High Stakes Seen

Professor David Reiss of Brooklyn Law School in New York March 5 said discovery usually occurs after motions to dismiss have been decided.

In this case, he said, “the stakes are so high and the quality of lawyering so high that there is litigation over the scheduling order itself.”

“This is a hard-fought battle and the issues are incredibly complex,” Reiss told Bloomberg BNA. “Each side characterizes their arguments as relatively straightforward, but I think the judge will have a hard time parsing out the issues, because there are different statutory regimes, policy issues and the like that must be rationalized with each other. I think this is just the beginning of a long slog,” he said.

Appraisals in the Coal Mine

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The Federal Housing Finance Agency Office of Inspector General released an Audit Report, FHFA’s Oversight of the Enterprises’ Use of Appraisal Data Before They Buy Single-Family Mortgages. As the IG notes,

Assessing the value of collateral securing mortgage loans is one of the pillars in making sound underwriting decisions. Since September 2008, the Federal Housing Finance Agency (FHFA) has operated Freddie Mac and Fannie Mae (the Enterprises) in conservatorship, due to poor business decisions and risk management that led to enormous losses. While in conservatorship, the Enterprises have relied on Treasury’s financial support to operate in the secondary mortgage market, buying loans in order to provide needed liquidity to lenders. In 2010, FHFA directed the Enterprises to improve single-family residential loan quality and risk management through, among other things, developing a uniform collateral data portal (portal).

Unfortunately, the IG found that

  • from January 2013 through June 2013, Fannie Mae spent $13 billion buying over 56,000 loans even though the portal’s analysis of the associated appraisals warned the Enterprise that the appraisals were potentially in violation of its underwriting requirements.
  • from June 2013 through September 2013, Freddie Mac spent $6.7 billion buying over 29,000 loans despite the portal warning the Enterprise that either no property value could be provided or the value of the property was in question.

  • the Enterprises bought nearly $88 billion in loans when system logic errors in the portal did not allow them to determine if the appraiser was properly licensed to assess the value of the properties, which served as collateral for the loans.

The IG did not characterize these problems as particularly worrisome, but I wonder if they are somewhat symbolic of the limbo state that the Enterprises find themselves in. Like canaries in a coal mine, they alert us to a serious problem.

Neither private companies nor government instrumentalities, the Enterprises must stagger on until the federal government decides what to do with them. Let’s hope that the Enterprises are not silently building up to another crisis, one not driven by the profit-motive as the last one was, but driven by bureaucratic incompetence. “Bureaucratic” in the sense of the “rule of no one,” as Mary McCarthy defined it.

Fannie and Freddie’s current profitability should not be used as an excuse to delay reform further. They are too important to have been left in limbo for so long.