Tag Archives: HERA

Reiss on Who Should Be Providing Mortgage Credit to American Households?

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I have posted a short Response, Who Should Be Providing Mortgage Credit to American Households?, to SSRN (as well as to BePress).  The abstract reads,

Who should be providing mortgage credit to American households? Given that the residential mortgage market is a ten-trillion-dollar one, the answer we come up with had better be right, or we may suffer another brutal financial crisis sooner than we would like. Indeed, the stakes are as high as they were in the Great Depression when the foundation of our current system was first laid down. Unfortunately, the housing finance experts of the 1930s seemed to have a greater clarity of purpose when designing their housing finance system. Part of the problem today is that debates over the housing finance system have been muddled by broader ideological battles and entrenched special interests, as well as by plain old inertia and the fear of change. It is worth taking a step back to evaluate the full range of options available to us, as the course we decide upon will shape the housing market for generations to come. This is a Response to Brent Horton, For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933, 89 Tulane L. Rev. __ (forthcoming 2014-2015).

Reiss and Lederman on Affordable Housing Goals

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Jeff Lederman and I have posted our comment to the FHFA’s proposed housing goals for Fannie Mae and Freddie Mac for 2015 through 2017.  We argue,

As the FHFA sets the housing goals for 2015-2017, it should focus on maximizing the creation and preservation of affordable housing. Less efficient proposed subgoals should be rejected unless the FHFA has explicitly identified a compelling rationale to adopt them. The FHFA has not identified one in the case of the proposed small multifamily subgoal. Thus, it should be withdrawn.

The Other GSE Conservatorship Lawsuit

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While there has been a lot of attention over Judge Lamberth’s ruling on the shareholders’ cases regarding Fannie and Freddie’s conservatorships, much less has been given to Judge Cooke’s dismissal of Samuels v. FHFA (No. 13-22399 S.D. Fla. ) (Sept. 29, 2014 ). The low-income and organizational plaintiffs in Samuels challenged the FHFA’s decision to suspend Fannie and Freddie’s obligation to fund the Housing Trust Fund after they entered into conservatorship. The Housing Trust Fund was to be funded by contributions by that were based on Fannie and Freddie’s annual purchases. The FHFA took the position that they GSEs need not pay into the fund while they themselves were in such a precarious financial position. Judge Cooke held that “The Individual and Organizational Plaintiffs lack Article III standing because their alleged injuries are too remote from and not fairly traceable to the Defendants’ allegedly unlawful conduct.” (13)

I found the dicta in the case to be the most interesting. The court found that the relevant provision from the Housing and Economic Recovery Act of 2008

provides no meaningful standards for determining when “an enterprise” is financially instable, undercapitalized, or in jeopardy of unsuccessfully completing a capital restoration plan. Considering the history of Fannie Mae and Freddie Mac; the government’s placing Fannie Mae and Freddie Mac in conservatorship; the Treasury Department providing liquidity to Fannie Mae and Freddie Mac through preferred stock purchase agreements, the mortgage backed securities purchase program, and an emergency credit facility; it is not for this Court to judicially review Defendants’ statutorily mandated suspension of payments into the Housing Trust Fund. (13)

My takeaway from this opinion is that we  now have another federal judge finding that the federal government is to be given great deference in its handling of the financial crisis. And this deference derives not just from the text of the relevant statute but also from the particular historical events that led to its adoption and that followed it. This seems like an important trend, as far as I am concerned.

Big Decision in GSE Litigation

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Regular readers of this blog know that I have written a lot about the shareholder suits arising from the conservatorships of Fannie and Freddie. One of the main cases is being presided over by Judge Lamberth in the District Court for the District of Columbia. This case raises a range of challenges to the government’s action: violations of the Administrative Procedures Act, violations of the Housing and Economic Recovery Act of 2008 and more. Judge Lamberth has issued an opinion that dismissed all of the plaintiffs’ claims, dealing a severe (but not fatal) blow to their cause. His conclusion captures the tenor of the whole opinion:

It is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text. Here, the plaintiffs’ true gripe is with the language of a statute that enabled FHFA and, consequently, Treasury, to take unprecedented steps to salvage the largest players in the mortgage finance industry before their looming collapse triggered a systemic panic. Indeed, the plaintiffs’ grievance is really with Congress itself. It was Congress, after all, that parted the legal seas so that FHFA and Treasury could effectively do whatever they thought was needed to stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system, this Court does not seek to evaluate the merits of whether the Third Amendment is sound financial — or even moral — policy. The Court does, however, find that HERA’s unambiguous statutory provisions, coupled with the unequivocal language of the plaintiffs’ original GSE stock certificates, compels the dismissal of all of the plaintiffs’ claims. (52)
Not one to typically say “I told you so” (or at least not on the blog), I will say that I had predicted that deference to the Executive during a time of national crisis was going to be hard for the plaintiffs to overcome. That being said, this is an extraordinarily complex cases both legally and factually so we can expect appeals up to the Supreme Court (and perhaps a return to the District Court), so it is premature to say that the plaintiffs’ claims are DOA just yet.

Housing Goals and Housing Finance Reform

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The Federal Housing Finance Agency issued a proposed rule that would establish housing goals for Fannie and Freddie for the next three years. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required that Fannie and Freddie’s regulator set annual housing goals to ensure that a certain proportion of the companies’ mortgage purchases serve low-income households and underserved areas. Among other things, the proposed rule would “establish a new housing subgoal for small multifamily properties affordable to low-income families,” a subject that happens to be near and dear to my heart.(54482)

This “duty to serve” is very controversial, at the heart of the debate over housing finance reform. Many Democrats oppose housing finance reform without it and many Republicans oppose reform with it. Indeed, it was one of the issues that stopped the Johnson-Crapo reform bill dead in its tracks.

While this proposed rule is not momentous by any stretch of the imagination, it is worth noting that the FHFA, for all intents and purposes, seems to be the only party in the Capital that is moving housing finance reform forward in any way.

Once again, we should note that doing nothing is not the same as leaving everything the same. As Congress fails to strike an agreement on reform and Fannie and Freddie continue to limp along in their conservatorships, regulators and market participants will, by default, be designing the housing finance system of the 21st century. That is not how it should be done.

Comments are due by October 28, 2014.

Reiss on FIRREA Storm

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Law360 quoted me in Bold 10th Circ. Opinion Muddies FIRREA Challenges. The article opens,

The Tenth Circuit last week gave a strong argument as to why a recent U.S. Supreme Court decision has no bearing on one federal agency’s ability to sue over soured mortgage-backed securities, but that won’t stop big banks from trying to convince different courts otherwise, legal experts say.

The appeals court’s opinion said a June high court ruling did not alter its original ruling that the National Credit Union Administration Board’s suit against Nomura Home Equity Loan Inc. and a number of other MBS originators was not time-barred.

The Supreme Court had found that a lawsuit by North Carolina residents under the federal Comprehensive Environmental Response, Compensation and Liability Act was time-barred by the state’s statute of repose

But the regulator of federally chartered credit unions is bringing its claim under the Financial Institutions Reform, Recovery and Enforcement Act, and the appeals court said that law’s so-called extender statute was not subject to the same limitations the Supreme Court had found in the Superfund pollution cleanup law at the heart of CTS Corp. v. Waldburger.

Rather, the language of FIRREA and its legislative history made it clear Congress had intended the law to have its own statute of limitations and not be bound by other statutes of repose, the appeals panel wrote, responding to a Supreme Court order that it take a second look at its earlier decision.

Before the Tenth Circuit issued its decision, defense attorneys had looked to the Supreme Court’s remand as a chance to give banks some relief from the lingering hangover of government lawsuits, many of which have ended with banks coughing up hundreds of millions, if not billions, of dollars in damages.

And it’s clear banks will still fight for that relief. In a motion for summary judgment Friday, attorneys for RBS told a Connecticut district court judge he should toss an FHFA suit brought under the extender statute of the Housing and Economic Recovery Act, in light of the time bar established by the Supreme Court in Waldburger.

In doing so, the attorneys also urged the judge to disregard the Tenth Circuit’s opinion, arguing it was flawed.

“Nomura, of course, is not controlling in this circuit, and the opinion on remand fails to faithfully apply the analytical framework established in Waldburger, instead sidestepping Waldburger by focusing on superficial distinctions between the CERCLA and NCUA extender statutes,” the attorneys wrote.

Experts say such disputes will continue on.

“The debate is not over by any stretch of the imagination,” David Reiss, a professor at Brooklyn Law School, said. “There’s enough at stake for powerful and well-financed institutions that this will be played out to the fullest.”

While legal experts say they can’t predict how other jurisdictions will move on similar questions about timeliness under FIRREA, they say the Tenth Circuit approached the task of reaffirming its earlier opinion in a way that appeared designed to withstand high court scrutiny.

“It is a thorough opinion. I think that other courts will take this opinion very seriously,” Reiss said.

Regulating Fannie and Freddie With The Deal

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Steven Davidoff Solomon and David T. Zaring have posted After the Deal: Fannie, Freddie and the Financial Crisis Aftermath to SSRN. The abstract reads,

The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.

Reading the briefs in the various GSE lawsuits, one feels lost in the details of the legal arguments and one thinks that the judges hearing these matters might feel the same way.  This article is an attempt to see the big picture, encompassing the administrative, corporate and takings law aspects of the dispute. However the judges decide these cases, one would assume that they will need to do something similar to come up with a result that they find just.

I also found plenty to argue with in this article.  For instance, it characterizes the Federal Housing Finance Administration as the lapdog of Treasury. (26) But there is a lot of evidence that the FHFA charted its own course away from the Executive Branch on many occasions, for instance when it rejected calls by various government officials for principal reductions for homeowners with Fannie and Freddie mortgages. Notwithstanding these disagreements, I think the article makes a real contribution in its attempt to make sense of an extraordinarily muddled situation.