- Court denies US Bank’s opportunity to revive suit against Citigroup over hundreds of millions of dollars in mortgage-backed securities sold during the financial crisis.
- IL court refuses to dismiss suit against Bank of America over lowering underwriting standards for borrowers protected by the Fair Housing Act.
- National Credit Union Administration sues HSBC claiming it failed as trustee for $2 billion of residential mortgage-backed securities trusts and lead to the downfall of five credit unions.
Tag Archives: Fair Housing Act
Monday’s Adjudication Roundup
- S&P agrees to settlement of $58 million for fraudulent ratings on commercial mortgage-backed securities.
- SEC order regarding violations of Section 17(a)(1) of the Securities Act, Section 15E(c)(3) of the Exchange Act, and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $6.2 million disgorgement, plus $800,000 prejudgment interest, and $35 million civil money penalty for affirmatively claiming to use one method of rating when it was actually using another method.
- SEC order regarding violations of Section 17(a)(l) of the Securities Act and Exchange Act Rule 17g-2(a)(6). $15 million penalty for publishing “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress.”
- SEC order regarding violations of Section 15E(c)(3)(a) of the Exchange Act and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $1 million civil money penalty for failure in oversight of residential mortgage-backed securities (RMBS) ratings.
- SEC order regarding a public hearing.
- Following the Consumer Financial Protection Bureau filing a complaint in the District Court for the District of Maryland, JP Morgan and Wells Fargo agreed to pay $37.5 million in penalties for a mortgage-kickback scheme with a title company.
- The Supreme Court heard oral arguments for disparate impact case on January 21st. (Whether disparate impact is a cognizable claim under the Fair Housing Act).
Reiss on Real Estate Cases To Watch In 2015
Law360 quoted me in Real Estate Cases To Watch In 2015 (behind a paywall). It reads, in part,
As the real estate deals market has heated up, so have litigation dockets. And several cases with national or regional importance for developers and lenders on foreclosure practices, land use rights and housing finance reform are primed to see major developments in 2015, experts say.
A number of real estate cases wending their way through the court system – from state appeals courts to the U.S. Supreme Court – could affect how apartment owners, developers and lenders do business. And with the real estate market heating up, experts are also expecting a new wave of litigation to pop up in connection with an increasing pipeline of public-private partnership projects.
The cases are as varied as a high court suit that could throw open an avenue of Fair Housing Act litigation and a New Jersey matter that could give developers leverage to push forward on blocked projects. Here are a few cases and trends to watch in 2015:
* * *
Hedge fund Fairholme Capital Management LLC’s challenge to the government’s directing all the profits from Fannie Mae and Freddie Mac toward the U.S. Department of the Treasury has been closely watched for more than a year, and it is expected to come to a head in 2015.
The company alleges the government acted unconstitutionally when it altered its bailout deal for the government-sponsored enterprises to keep the companies’ profits for itself.
“If the plaintiffs win, it could have a dramatic impact on how housing finance reform plays out,” said David Reiss, a professor at Brooklyn Law School. “And even if they don’t win, the case can have a negative impact on housing finance reform if it casts a cloud over the whole project.”
Shareholders lost a related case in the D.C. district court, “but if they win the Fairholme case, things will get complicated,” Reiss said.
The case is Fairholme Funds Inc. v. U.S., case number 13-cv-00465, in the U.S. Court of Federal Claims.
Reiss on Fair Housing Falsehood
The Providence (R.I.) Journal quoted me in its Truth-O-Meter column: Mike Stenhouse: According to HUD, It’s Unfair, Unjust for Wealthy to Live in Exclusive Neighborhoods. The column reads, in part,
For more than three years, the Rhode Island Division of Planning has been working on RhodeMap RI, a long-term economic development plan meant to help guide efforts to improve the state’s economy.
The process, partly financed by a $1.9-million grant from the U.S. Department of Housing and Urban Development (HUD), didn’t get much notice until a nearly 200-page draft of the plan was released in mid-September, igniting a firestorm of controversy.
Critics of the plan denounced it as a thinly disguised blueprint for social engineering. If it is implemented, they say, local communities will be forced to cede authority to the federal government on issues such as affordable housing and land use, and individual property rights will be under threat.
Supporters, including Governor Chafee and the planners and community leaders who drafted the plan, say it’s a well crafted, comprehensive guide that will help move the state’s economy forward over the decades ahead. They say there’s nothing in the plan that would infringe on individual property rights or local home rule.
The debate grew so heated at one meeting a shouting match broke out, with charges of racism and bigotry hurled. And last week, at a meeting of the Statewide Planning Council, opponents called it unconstitutional, socialist and even treasonous. Nonetheless, the council voted unanimously to adopt it.
Mike Stenhouse, CEO of the Rhode Island Center for Freedom and Prosperity, a conservative research group, has led the opposition. A few weeks ago, he talked about the plan on WPRO-AM’s “The Dan Yorke Show.”
Yorke asked Stenhouse to cite a component of the plan “that highlights what you think is problematic.”
“I’m going to give you my interpretation,” Stenhouse responded. “I don’t have their plan in front of me. What we believe, for instance, take Poppasquash Point in Bristol. According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”
We wondered whether Stenhouse was right about HUD’s view of wealthy neighborhoods such as Poppasquash Point, one of the state’s priciest enclaves.
When we asked Stenhouse about his statement, he told us he was not directly quoting HUD, but said that his statement was “an accurate interpretation of HUD’s openly stated intent.” He provided links to multiple documents to support his position.
While we don’t view Stenhouse’s statement as a direct quote of HUD policy, we do believe that listeners who heard Stenhouse’s preface — “according to HUD” — would assume he was summarizing HUD’s policy.
Stenhouse’s backup is comprised primarily of links to a news story and an editorial in Investor’s Business Daily and links to various legal documents and HUD regulations.
* * *
According to David Reiss, a professor of real estate and housing policy at Brooklyn Law School, “HUD does not interpret the FHA [Fair Housing Act] to mean that `wealthy people’ can’t `live in an exclusive neighborhood.’”
“An exclusive neighborhood is an expensive one – the FHA does not ban expensive neighborhoods.” Reiss continued in an email statement. “What it does do is ban exclusionary practices. Exclusionary practices are those that exclude people based on certain of their characteristics such as their race, sex or religion. To my knowledge, HUD has never taken the position that merely living in an exclusive – that is, expensive — neighborhood violates the FHA.”
We also asked HUD whether Stenhouse had accurately characterized its rules.
“There are simply no policies, practices, regulations or anything that can validate such hyper hyperbole,” Brian Sullivan, a public affairs officer with HUD, said in an email statement.
Our ruling
Mike Stenhouse said “According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”
There’s no doubt that HUD has challenged what it considers to be discriminatory practices at the community level, including exclusionary zoning ordinances.
But that’s not nearly the same as objecting to the right of wealthy people to live in expensive neighborhoods.
We rule Stenhouse’s claim False.
Reiss on The Future of the Private Label Securities Market
I have posted The Future of the Private Label Securities Market to SSRN (as well as to BePress). I wrote this in response to the Department of Treasury’s request for input on this topic. The abstract reads,
The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with government policies regarding appropriate underwriting and sustainable access to credit. The market will adapt to these constraints. These constraints should then help the market remain healthy throughout the entire business cycle.
Duties to Serve in Housing Finance
Adam Levitin and Janneke Ratcliffe have posted Rethinking Duties to Serve in Housing Finance to SSRN (also on the Harvard Center for Housing Studies site here). The paper states that
an important question going forward concerns the role of duties to serve (DTS) — obligations on lending institutions to reach out to traditionally underserved communities and borrowers. Should there be DTS, and if so, who should have the responsibility to serve whom, with what, and how? (2)
These are, indeed, important questions as regulators chart a course between requiring safe underwriting by lenders and ensuring access to credit for communities that have historically had little access to sustainable credit. The authors distinguish fair lending from duties to serve, with the former being an obligation not to discriminate and the latter being an affirmative duty to address the “disparity of financial opportunity.” (2) The paper describes two main DTS regimes,the Community Reinvestment Act and the Fannie/Freddie housing goals, as well as their limitations.
The paper concludes that the “aftermath of the housing bubble presents an opportunity to rebuild DTS” and proposes a set of reforms. (29) I highlight the first two here:
- “DTS should apply universally to the entire primary market,” covering both depositories and non-depositories in order to avoid incentives to engage in regulatory arbitrage. (30)
- “DTS should apply equally for all secondary market entities,” not just the Fannies and Freddies of the world. (30)
This paper has a lot to offer thoughtful policymakers. As with everything to do with our massive housing finance system, however, the devil is in the details of any regulatory regime. Mandatory duties to serve must be drafted to so that they are consistent with safe underwriting practices. This paper starts a conversation about doing just that.
Qualified Mortgages and The Community Reinvestment Act
Regulators issued an Interagency Statement on Supervisory Approach for Qualified and Non-Qualified Mortgage Loans relating to the interaction between the QM rules and Community Reinvestment Act enforcement. This statement complements a similar rule issued in October that addressed the interaction between the QM rules and fair lending enforcement.
The statement acknowledges that lenders are still trying to figure out their way around the new mortgage rules (QM & ATR) that will go into effect in January. The agencies state that “the requirements of the Bureau’s Ability-to-Repay Rule and CRA are compatible. Accordingly, the agencies that conduct CRA evaluations do not anticipate that institutions’ decision to originate only QMs, absent other factors, would adversely affect their CRA evaluations.” (2)
This is important for lenders who intend to only originate plain vanilla QMs. There have been concerns that doing so may result in comparatively few mortgages being CRA-eligible. It seems eminently reasonable that lenders not find themselves between a CRA rock and a QM hard place if they decide to go the QM-only route. That being said, it will be important to continue to monitor whether low- and moderate-income neighborhoods are receiving sufficient amounts of mortgage credit. Given that major lenders are likely to originate non-QM products, this may not be a problem. But we will have to see how the non-QM sector develops next year before we can know for sure.
