- New York state appeals court affirmed denying dismissal of claims against Morgan Stanley for fraud. Plaintiff bought $17 million in high-risk notes tied to residential mortgage-backed securities in a $500 million collateralized debt obligation that eventually were wiped out.
- Quicken Loans’ suit was dismissed against the U.S. government for its use of the False Claims Act for failure to state a claim. This suit was brought to prevent a costly enforcement action.
- JP Morgan has settled to pay $48 million fine for shoddy mortgage servicing practices in response to allegations from the Office of the Comptroller of the Currency (OCC). (Consent Order; Termination).
- Credit Suisse AG has settled for $110 million in class action alleging the use of misleading financial disclosure documents that caused the plaintiffs to purchase $1.6 billion in bad mortgage-backed securities.
Tag Archives: MBS
P2P, Mortgage Market Messiah?
As this is my last post of 2015, let me make a prediction about the 2016 mortgage market. Money’s Edge quoted me in Can P2P Lending Revive the Home Mortgage Market? It opens,
You just got turned down for a home mortgage – join the club. At one point the Mortgage Bankers Association estimated that about half of all applications were given the thumbs down. That was in the darkest housing days of 2008 but many still whisper that rejections remain plentiful as tougher qualifying rules – requiring more proof of income – stymie a lot of would be buyers.
And then there are the many millions who may not apply at all, out of fear of rejection.
Here’s the money question: is new-style P2P lending the solution for these would-be homeowners?
The question is easy, the answers are harder.
CPA Ravi Ramnarain pinpoints what’s going on: “Although it is well documented that banks and traditional mortgage lenders are extremely risk-averse in offering the average consumer an opportunity for a home loan, one must also consider that the recent Great Recession is still very fresh in the minds of a lot of people. Thus the fact that banks and traditional lenders are requiring regular customers to provide impeccable credit scores, low debt-to-income (DTI) ratios, and, in many cases, 20 percent down payments is not surprising. Person-to-person lending does indeed provide these potential customers with an alternate avenue to realize the ultimate dream of owning a home.”
Read that again: the CPA is saying that for some on whom traditional mortgage doors slammed shut there may be hope in the P2P, non-traditional route.
Meantime, David Reiss, a professor at Brooklyn Law, sounded a downer note: “I am pretty skeptical of the ability of P2P lending to bring lots of new capital to residential real estate market in the short term. As opposed to sharing economy leaders Uber and Airbnb which ignore and fight local and state regulation of their businesses, residential lending is heavily regulated by the federal government. It is hard to imagine that an innovative and large stream of capital can just flow into this market without complying with the many, many federal regulations that govern residential mortgage lending. These regulations will increase costs and slow the rate of growth of such a new stream of capital. That being said, as the P2P industry matures, it may figure out a cost-effective way down the line to compete with traditional lenders.”
From the Consumer Financial Protection Bureau (CFPB) to Fannie and Freddie, even the U.S. Treasury and the FDIC, a lot of federal fingers wrap around traditional mortgages. Much of it is well intended – the aims are heightened consumer protections while also controlling losses from defaults and foreclosures – but an upshot is a marketplace that is slow to embrace change.
Monday’s Adjudication Roundup
- HSBC settles class action by homeowners that claimed the bank received kickbacks for insurance policies on their properties.
- Goldman Sachs, Deutsche Bank and RBS have petitioned the US Supreme Court to consider repose statutes and statutes of limitations extenders that could block a $2.1 billion mortgage-backed securities suit against them.
Reviewing the Big Short
Wax Statue of Ryan Gosling at Madame Tussauds
Realtor.com quoted me in Explaining the Housing Crash With Jenga—Did ‘The Big Short’ Get It Right? The story reads in part,
One of the more hyped movie releases this Oscar season stars the housing crisis itself: “The Big Short,” in which four financial wheelers and dealers (Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt) join forces to figure out what caused the housing bubble of 2003-2005 to burst (and how they could profit from it, of course). It’s based on the best-selling, intensively reported book by journalist Michael Lewis.
Granted, the subprime mortgage meltdown is a complicated subject… but this movie purports to illuminate all with a simple visual aid: a tower of Jenga blocks. As Gosling explains in [this video clip], mortgage bonds at that time were made up of layers called tranches, with the highest-rated and most secure loans stacked on top of the lower-rated “subprime” ones. And once holders of those subprime mortgages defaulted in droves, as they did starting in 2006, the whole structure collapsed. Jenga!
Which seems simple enough. Only is this depiction accurate, or just a Hollywood set piece?
Well, according to David Reiss, Research Director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, this movie’s high-concept depiction of the mortgage crisis is largely on the money.
“There is a lot that is accurate in the clip: the history of mortgage-backed securities, the degradation of mortgage quality during the subprime boom, the loss of value of lower grade tranches,” he says.
* * *
Yet there is one thing that the movie did fudge, according to Reiss.
“I would argue that there is one big inaccuracy that exists, I am sure, for dramatic effect,” he says. “I would have put the AAA [tranches] at the bottom of the Jenga stack. In fact, the failure of the Bs and BBs did not cause the failure of AAAs, and many AAAs survived just fine or with modest losses.”
In other words, only the top half of the Jenga tower should have crumbled … but that wouldn’t have looked quite as flashy, would it?
“It would not sound as cool if only the top part of the stack crashed,” Reiss concedes. “But the bigger point, that the failures of the secondary mortgage market led to the crash of the housing market, is spot on.”
And hopefully one that won’t play out again in real life.
Reps and Warranties Mean What They Say
The New York Appellate Division, 1st Department, issued a ruling in Bank of New York Mellon v. WMC Mortgage, 654464/12 (Dec. 1, 2015) that stands for the proposition that representations and warranties regarding mortgage-backed securities mean what they say and say what they mean. The opinion opens,
This breach of warranty action arises from a residential mortgage backed securitization called the J.P. Morgan Mortgage Acquisition Trust 2006-WMC4 (the Trust). The Trust was arranged and sponsored by defendant J.P. Morgan Mortgage Acquisition Corporation (JPMMAC), which made certain representations and warranties as to the quality of the mortgage loans in the Trust. We find that plaintiff’s interpretation of the language of the representations and warranty at issue is the only reasonable interpretation . . ..
The Pooling and Servicing Agreement represented and warranted that
“With respect to the period from [the] Whole Loan Sale Date to and including the Closing Date, [JPMMAC] hereby makes the representations and warranties contained in paragraph (a) . . . of Schedule 4 attached hereto . . . . [that] [t]he information set forth in the Mortgage Loan Schedule and the tape delivered by [WMC] to [JPMMAC] is true, correct and complete in all material respects.”
It also stated that if “JPMMAC breached a representation or warranty it made . . . it was to cure the breach within 90 days after notification; if it failed to do so, it was to repurchase the defective mortgage loan or substitute a qualifying loan for the defective one.” This is pretty standard stuff so far.
By 2012, it appeared that more than 40% of the mortgages remaining in the pool were delinquent and that the R&Ws had been violated. The certificate holders therefor demanded that JPMMAC repurchase the mortgages that were in breach of the R&Ws, which JPMMAC refused to do.
JPMorgan argued, against the plain language of the R&Ws, that it only covered defects that arose during a short period prior to the closing date of the securitization. The Court gave short shrift to this implausible reading of the R&Ws.
This opinion does not make new law, but one wonders what effect it will have on securitization business practices. R&Ws are driven by many things — concerns about credit risk, but also tax compliance with the REMIC rules, to name a couple. I am curious as to how MBS R&Ws have changed since the early 2000s — and whether the parties to these transactions understand how R&Ws allocate risk among them.
Wednesday’s Academic Roundup
- Introduction to Special Issue: Government Involvement in Residential Mortgage Markets, W. Scott Frame, Real Estate Economics, Vol. 43, Issue 4, pp. 807–819, 2015 (Paid Access).
- How Does the Federal Reserve’s Large‐Scale Asset Purchases (LSAPs) Influence Mortgage‐Backed Securities (MBS) Yields and U.S. Mortgage Rates?, Diana Hancock & S. Wayne Passmore, Real Estate Economics, Vol. 43, Issue 4, pp. 855–890, 2015 (Paid Access).
- Property Rebels: Reclaiming Abandoned Bank-Owned Homes for Community Uses, Valerie Schneider, American University Law Review, Vol. 65, Issue 2, Forthcoming.
- Is an Apartment a Nuisance?, Michael Lewyn, 43 Real Est. L.J. 509 (2015).
- Helping the Middle-Class: How Interest Rates Affect the Distribution of Housing Wealth, Isaac Hacamo.
- Urbanization and Property Rights, Yongyang Cai, Harris Selod & Jevgenijs Steinbuks, World Bank Policy Research Working Paper No. 7486.
- Crowdfunding the City: The End of ‘Cataclysmic Money’?, David S. Bieri.
- The Role of Property Rights in the Debate on Large-Scale Land Acquisitions, Olivier De Schutter.
- Using Urban Agriculture to Grow Southern New England, Laurie J. Beyranevand, Sara C. Bronin, Marie Mercurio & Sorell E. Negro, Connecticut Planning, SNEAPA 2015.
Monday’s Adjudication Roundup
- Following SCOTUS’s March Omnicare decision, a pension fund is claiming that the Second Circuit failed to take into account said decision in failing to revive Bank of America mortgage suit. The plaintiff requests SCOTUS’s review.
- U.S. District Court judge dismisses whistleblower suit against CitiMortgage where ex-VP claimed the bank engaged in reckless lending practice and made false claims.
- NY appellate court will not revive suit against Morgan Stanley and UBS for misrepresentation of $665 million in residential mortgage-backed securities.
