Tag Archives: federal housing policy

Reiss on Big BoA FIRREA Penalty

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Bloomberg BNA quoted me in FIRREA-Fueled Penalty Against BofA Signals More Risk for Large Institutions (behind a paywall). It reads in part,

A federal judge in New York ordered Bank of America to pay $1.26 billion in civil penalties to the U.S. government in connection with a Countrywide lending program, setting up a likely appeal in one of the most closely watched cases in the financial services arena (United States v. Bank of Am. Corp., S.D.N.Y., No. 12-cv-01422, 7/30/14).

The ruling by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York, which also said former Countrywide official Rebecca Mairone must pay $1 million in installments, followed an October jury verdict that found Bank of America liable for Countrywide’s sale of bad loans to Fannie Mae and Freddie Mac, some of which were securitized.

Countrywide sold those loans under its “High-Speed Swim Lane” program—an initiative aimed at speeding the loan approval process and one launched before Bank of America acquired Countrywide in 2008.

Rakoff called the nine-month HSSL program “from start to finish the vehicle for a brazen fraud,” and imposed a $1,267,491,770 penalty on Bank of America.

The amount was less than the $2.1 billion sought by the government, but well above what Bank of America argued was appropriate, which was $1.1 million at the most .

“We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Bank of America spokesman Lawrence Grayson told Bloomberg BNA July 30. “We are reviewing the ruling and assessing our appellate options,” he said.

*     *      *

According to Rakoff, Firrea could have allowed a penalty in this case that would have equaled the value of the loan transaction itself, which totaled $2.96 billion.

Rakoff, citing the discretion granted to judges in such cases, reduced the penalty to $1.267 billion, saying not all of the loans were flawed.

Brooklyn Law School Professor David Reiss called Rakoff’s ruling significant and a new turn in an important area of case law for businesses.

“We’re beginning to see a jurisprudence of Firrea penalties and a penalty regime that is very pro-government,” Reiss told Bloomberg BNA. “This shows that the penalty can be as high as the nominal amount of the transaction. It’s good guidance in the sense that it helps businesses know the outer boundaries of their risk, but it’s a generous view of deterrence,” he said.

New Direction for Federal Housing Policy? Finally!

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The Bipartisan Policy Center has released Housing America’s Future: New Directions for National Policy.  The Wall Street Journal reported (behind a paywall) that the report represents a “behind-the-scenes effort to jumpt-start the debate over Fannie’s and Freddie’s future . . ..”  My preliminary thoughts on it:

  • The report’s first key policy objective is exactly right:  “The private sector must play a far greater role in bearing
    credit risk.” (8) I have taken this position for years.  There is no reason that a large share of the credit risk should not be underwritten and borne by the private sector.  That is, after all, what they are supposed to do in free market.  This is not to say that the federal government has no role.  But the current state of affairs — with the government supporting more than 90 percent of home loans — is a recipe for the next housing disaster.
  • The government’s role should be limited to supporting the mortgage market for low- and moderate-income households and to playing the role of lender/insurer of last resort when the mortgage market dries up.
  • The report is again exactly right when it says that Fannie and Freddie should be wound down and replaced with a wholly-owned government entity that will not suffer from the dual mandate of fulfilling a public mission and maximizing profits for its shareholders.
  • The report favors a policy of assisting all very low-income households with their housing expenses.  This is a great and radical step.  But any such policy should take into account the Glaeser and Gyourko’s research that indicates that local land use policy can be at odds with federal housing policy in order to make sure that federal monies are used effectively.

I do not agree with the report in all respects.  Some examples:

  • The report characterizes the FHA as having only one “traditional mission of primarily serving first-time homebuyers.” (8) This characterization repeats the conventional wisdom but the conventional wisdom reads the history of the FHA incorrectly.  I will be posting an article on the history of the FHA later this year that will hopefully set the record straight.  The FHA certainly needs reform, but we should start with all of the relevant facts before jumping in.
  • The report asserts that housing counseling is effective (9) but the empirical evidence is not so clear.  Any policy that devotes significant resources to counseling should be built on a solid basis of empirical support.

Notwithstanding these criticisms, the report is a great first step toward developing a federal housing policy for the 21st Century.  More on the report anon.

Reiss on Federal Housing Policy

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Law360 ran a story on President Obama’s vision for America’s housing policy and asked for my reaction:

For a piece of mortgage-related legislation to have any chance of passing, it has to require that a borrower pay some kind of down payment so as to remain responsible for at least a small amount of risk, said David Reiss, a professor of real estate and consumer financial services law at Brooklyn Law School.

“What we’ve seen fail pretty consistently is [legislation in which] the homeowner has no skin in the game at all,” and is allowed to obtain a loan — often backed by the government — without putting down a cent, he said.

While this type of policy may help more Americans become homeowners, it does little to fix the housing finance system, which needs a major overhaul, according to Reiss.

“This is the time to reset the market in a rational way, where private lenders make responsible loans because they are doing responsible underwriting,” he said. “Setting up the framework for that should be happening now, even though right now government lending in the residential sector is really the dominant form of lending.”

The rest of the story is here (behind a paywall).

Federal Involvement in Real Estate — It’s Big!

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SmartGrowth America has issued an interesting report, Federal Involvement in Real Estate:  A Call for Examination, which provides a high level summary of the topic.  While it does not contain any surprises, it is somewhat shocking to see the range of budget and tax expenditures all laid out in one document.  The report states, “While $450 billion was the average amount directly committed to real estate each fiscal year by the federal government, the government’s impact goes even further. This figure does not include the obligations of GSEs Fannie Mae and Freddie Mac, which exceed $5.5 trillion in outstanding loans and loan guarantees.”  (4, footnote omitted)

The report makes the obvious point, “Though many think of the United States as a free market economy, real estate is greatly influenced by government policies.” (6)  While obvious, it bears repeating often and loudly whether one is a free marketeer who would like to reduce the government role in real estate or a proponent of the welfare state who would like to see government resources directed more rationally.

The reports key points include, among others, the fact that federal housing policy favors homeowners over renters, single-family homes over multifamilies, vacation homeowners and upper-income households.  (6-8)

Last point:  Appendix B has an interesting table that compares total single-family and multifamily expenditures from 2007 through 2011.  it comes out to about $606 billion for the former and $227 billion for the latter, nearly a 3-1 ratio.  (17)