The FHFA’s Take on Housing Finance Reform

FHFA Director Watt

Federal Housing Finance Agency Director Watt sent Federal Housing Finance Agency Perspectives on Housing Finance Reform to Senate Banking Chair Michael Crapo (R-ID) and Senator Sherrod Brown of Ohio, the top Democrat on that committee. There are no real surprises in it, but it does set forth a series of housing finance objectives that the FHFA supports:

• Preserve the 30-year fixed-rate, prepayable mortgage;

• End taxpayer bailouts for failing firms;

• Maintain liquidity in the housing finance market;

• Attract significant amounts of private capital to the center of the housing finance system through both robust equity capital requirements and credit risk transfer (CRT) participation;

• Provide for a single government-guaranteed mortgage-backed security that will improve the liquidity of the to-be-announced (TBA) market and promote a fair and competitive funding market for Secondary Market Entities (SMEs);

• Ensure access to affordable mortgages for creditworthy borrowers, sustainable rental options for families across income levels, and a focus on serving rural and other underserved markets;

• Provide a level playing field for institutions of all sizes to access the secondary market;

• Include tools for the regulator to anticipate and mitigate downturns in the housing market, including setting appropriate capital and liquidity requirements for SMEs, having prompt, corrective action authority for SMEs that are weak or troubled, and having authority to adjust CRT requirements as needed; and

• Provide a stable transition path that protects the housing finance market and the broader economy from potential disruptions and ensures that the new housing finance system operates as intended. (1)

The FHFA’s take on housing finance reform seems to be somewhat different from what various members of Congress are reportedly promoting. It is not clear though that the views of the FHFA are all that relevant to the Congressional leaders who are shaping the next housing finance reform bill. Nor do I expect that Director Watt’s views are particularly valued by the Trump Administration, given that he is a former Democratic member of Congress. That being said, Director Watt has always made it clear that it is Congress and not the FHFA that should be charting the path forward for housing finance reform.

While his views on the matter differ from those of some members of Congress, all of the relevant stakeholders seem to agree on the broad contours of what the 21st century’s housing finance infrastructure should look like. There should be an explicit guarantee to support the housing market during liquidity crises.  And the main elements of the current market, such as the thirty year fixed-rate mortgage, should be maintained. Here’s hoping that a bipartisan push can get this done this year.

Mortgages for Grads quoted me in College Grads Can Get Home Grants—but There’s a Catch. It opens,

Recent college graduates hoping to buy a home have one more reason to toss their caps in the air these days: Programs offering home grants to new grads are popping up across the country, offering thousands of dollars in assistance that could put homeownership within reach. Talk about a nice graduation gift!

In New York, for instance, Gov. Andrew Cuomo recently announced a $5 million pilot program, “Graduate to Homeownership,” providing assistance to first-time buyers who’ve graduated from an accredited college or university with an associate’s, bachelor’s, master’s, or doctorate degree within the past two years. That aid can take the form of low-interest-rate mortgages, or up to $15,000 in down payment assistance.

The catch? You’ll have to live upstate—in Jamestown, Geneva, Elmira, Oswego, Oneonta, Plattsburgh, Glens Falls, or Middletown—eight areas that many just-sprung college students tend to flee as soon as they have their diploma in hand.

“Upstate colleges and universities have world-class programs that produce highly skilled graduates—who then leave for opportunities elsewhere,” Cuomo admitted in a statement. “This program will incentivize recent graduates to put down roots.”

The trade-off for college grads

New York is not the only state offering this type of assistance to college grads, many of whom are saddled with significant student loan debt. According to analysis by, nearly half of states offer some form of housing assistance to student loan borrowers, with a handful focusing on recent grads.

For instance, Rhode Island’s Ocean State Grad Grant program offers up to $7,000 in down payment assistance to those who’ve earned a degree in the past three years. Ohio’s Grants for Grads program offers down payment assistance or reduced-rate mortgages to those who have graduated in the past four years.

Still, what’s noteworthy about programs like New York’s is that you can’t just buy a home anywhere. Rather, you have to plunk yourself down in semi-ghost towns. That’s hardly ideal for someone who’s trying to kick-start a career.

So as tempting as this home-buying “help” might appear at first glance, you have to wonder: Is it enough to offset what these students give up? Some experts say it’s a risky bet.

“The New York program aims to retain highly educated people in economically depressed regions and revitalizing struggling downtowns in those regions,” says David Reiss, research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School. “It can certainly help people who are dealing with high student debt burdens. But programs like this have to deal with a fundamental issue: Do these communities have enough jobs for recent college graduates? Time will tell.”

Find a job first, then a home

Experts say students should think carefully before they pounce on this “gift” and make sure they can be happy in one of the designated locations—and gainfully employed.

“No question, they should have a job lined up first [before buying a house],” says Reiss. After all, “a good deal on a house or a mortgage is not a good deal if we don’t have a job to go along with it.”

Consumer Protection, Going Forward

photo by Lawrence Jackson

Warren, Obama and Cordray

The New York Times quoted me in Consumer Protection Bureau Chief Braces for a Reckoning. It opens,

Mild-mannered, lawyerly and with a genius for trivia, Richard Cordray is not the sort of guy you picture at the center of Washington’s bitter partisan wars over regulation and consumer safeguards.

But there he is, a 57-year-old Buckeye who friends say prefers his hometown diner to a fancy political reception, testifying in hearing after hearing on Capitol Hill about the agency he leads, the Consumer Financial Protection Bureau. Republicans would like to do away with it — and with him, arguing that the agency should be led by a commission rather than one person.

And with a Republican sweep of Congress and the White House, they may get some or all of what they wish.

Mr. Cordray, a reluctant Washingtonian who has commuted here for six years from Grove City, Ohio, where his wife and twin children live, is the first director of the consumer watchdog agency, which was created in 2010 after Wall Street’s meltdown. By aggressively deploying his small army of workers — he has 1,600 of them — Mr. Cordray has turned the fledgling agency into one of Washington’s most powerful and pugnacious regulators.

The bureau has overhauled mortgage lending rules, reined in abusive debt collectors, prosecuted hundreds of companies and extracted nearly $12 billion from businesses in the form of canceled debts and consumer refunds. In September, it exposed the extent of Wells Fargo’s creation of two million fraudulent customer accounts, igniting a scandal that provoked widespread outrage and toppled the company’s chief executive.

And, according to Mr. Cordray, he and his team have barely scratched the surface of combating consumer abuse.

“We overcame momentous challenges — just building an agency from scratch, let alone one that deals with such a large sector of the economy,” Mr. Cordray said in an interview at his agency’s office here. “I’m satisfied with the progress we have made, but I’m not satisfied in the sense that there’s a lot more progress to be made. There’s still a lot to be done.”

But his future and the agency’s are uncertain. Democrats in Ohio are encouraging Mr. Cordray to run for governor in 2018, which would require him to quit his job in Washington fairly soon, rather than when his term ends in mid-2018. Champions of the agency are imploring him to stay, arguing that if he leaves, the agency is likely to be defanged, its powers to help consumers sapped.

Opponents of the bureau just won a big legal victory: The United States Court of Appeals for the District of Columbia Circuit said last month that the structure of the Consumer Financial Protection Bureau was unconstitutional, and that the president should have the power to fire its director at will.

The agency is challenging the decision — which was made in a lawsuit brought by the mortgage lender PHH Corporation that contests the consumer bureau’s authority to fine it — and that has temporarily stopped the decision from taking effect. But the ruling has kept alive questions about whether too much power is concentrated in Mr. Cordray’s job, and whether the agency should be dismantled or restructured.

Mr. Cordray, who also battled on behalf of consumers in his previous jobs as Ohio’s attorney general and, before that, its treasurer, is praised in some circles as enormously effective, wielding the bureau’s power to restructure some industries and terrify others.

The bureau has “helped save countless people across the country from abusive financial practices,” said Hilary O. Shelton, the N.A.A.C.P.’s senior vice president for advocacy and policy.

Even the regulator’s frequent foes — including Alan S. Kaplinsky, a partner at Ballard Spahr in Philadelphia, who says the agency often overreaches — acknowledge its impact.

“I’ve been practicing law in this area for well over 40 years, and there’s nothing that compares to it,” Mr. Kaplinsky said. “Every company in the consumer financial services market has felt the effects.”

The Consumer Financial Protection Bureau has nearly replaced the Better Business Bureau as the first stop for dissatisfied customers seeking redress. It has handled more than a million complaints, many of which it has helped resolve.

*     *    *

The housing crisis dominated the bureau’s early days. When Congress created the new overseer, it also dictated its first priority: making mortgages safer. The deadline was tight. If the bureau did not introduce new rules within 18 months, a congressionally mandated set of lending guidelines would automatically take effect.

The bureau made it with one day to spare.

It banned some practices that had fueled the crisis, like home loans with low teaser rates or no documentation of the borrower’s income, and steered lenders toward “qualified” loans with a stricter set of safeguards, including checks to ensure that customers could afford to repay what they borrowed.

After much grumbling — and many dire forecasts that the new rules would limit credit and harm consumers — mortgage lenders adjusted. They made nearly 3.7 million loans last year for home purchases, the highest number since 2007, according to government data.

“It seems like the financial services industry has figured out how to adapt to this new regulatory regime,” said David Reiss, a professor at Brooklyn Law School who studied the effects of the bureau’s rule-making. “We’ve moved from the fox-in-the-henhouse market in the early 2000s, where you could get away with nearly anything, to this new model, where someone is looking over your shoulder.”

The State of the Foreclosure Crisis

Rob Pitingolo of the Urban Institute issued State of the Foreclosure Crisis: Past the Peak but Not Recovered. It opens,

Much attention has been given to statistics that show new foreclosure activity nationally has slowed over the past few years. When it comes to metropolitan area markets, however, some have gotten worse, while others have stagnated. It is not simple enough to declare an end to the foreclosure and delinquency crisis when there are as many as a quarter (25%) of metro areas that have not yet begun their recovery. (1)

It continues,

the rate of 90 day or more delinquency steadily fell in 2010 and 2011, ending at 3.1% in September 2013. In contrast, the foreclosure inventory only turned the corner in mid -2012, and is still higher than the March 2009 level at 4.5%, around seven times the pre-crisis level. Historically, a foreclosure inventory under 1% is what we would expect in “normal” market conditions.” (1, footnote omitted)

It concludes, “attention must be paid to individual metropolitan housing markets. Some are in much better shape than others; and some have made great strides since the peak of serious delinquency in December 2009. However, it may be premature to declare the problem is “ending” until all metro area markets show signs of recovery.” (2) The report identifies the starkest differences in metro areas:

Three geographic regions were hard hit at the beginning of the foreclosure crisis: California metros, Florida metros, and “Rust Belt” metros (those in Midwest states like Ohio, Michigan and Indiana). All three of those regions have seen solid improvements since December 2009.

On the other hand, the Northeast has generally performed poorly in the past several years. Serious delinquency rates in major metropolitan markets like New York City, Philadelphia and Baltimore have all worsened since December 2009. Other metro areas in New York like Buffalo, Rochester and Syracuse have similarly struggled, as have metro areas surrounding New York like New Jersey and Connecticut. (5)

The report concludes with a call for a nuanced response to the current state of the foreclosure crisis:  “communities need strong examples to build upon, rigorous data and analysis, and a commitment to evidence-based policymaking that strives toward the best fit between policy solutions and policy problems.” (6) This seems like the right call and the appropriate response to headlines that report the national trend without mentioning the variations among metro areas.

Ohio Court Grants in Part Securitization Sponsors’ Motions to Dismiss

In Western & Southern Life Ins. Co. v. Residential Funding Co., No. A1105042, slip op. at 15 (Ohio Ct. Common Pleas June 6, 2012), an Ohio state trial court granted in part and denied in part motions to dismiss brought by defendants involved in the securitization and sale of mortgage backed securities. The court granted in part a motion to dismiss based on the statute of limitations and granted a motion to dismiss brought by officers of one of the defendant corporations on the ground that it lacked personal jurisdiction over those individuals. The rest of the motions were denied.

In connection with the purchase of $200 million of mortgage backed securities, plaintiffs Western & Southern Life Insurance Company, Western and Southern Life Assurance Company, Columbus Life Insurance Company, Integrity Life Insurance Company, National Integrity Life Insurance Company, and Fort Washington Investment Advisors brought an action alleging various kinds of fraud against defendants, a group of entities that participated in the securitization and sale of mortgage backed securities. The sponsors of the ten securitization actions in this case include Residential Funding Company, LLC, GMAC Mortgage, and Residential Accredit Loans. The underwriters included UBS Securities, RBS Securities, J.P. Morgan Securities, Deustche Bank, and Citigroup Global Markets.

Plaintiffs alleged that defendants’ fraudulent behavior included misrepresentation about owner occupancy rates, loan origination guidelines, appraisals and loan value ratios, underwriting guidelines, borrowers’ ability to pay, and transfer title issues. This case was before the court following oral argument on motions to dismiss plaintiff’s complaint on several grounds, defendants arguing (1) that the plaintiff’s claims are barred by the statute of limitations; (2) the plaintiffs failed to state a claim for which relief could be granted; (3) that plaintiffs failed to plead that the misrepresented or omitted matters were material; (4) that plaintiffs failed to properly plead reliance; (5) that plaintiffs failed to state the fraud and misrepresentation claims with sufficient particularity; (6) that plaintiffs failed to properly plead civil conspiracy; (7) that plaintiffs failed to adequately plead a claim for negligent misrepresentation; (8) that plaintiff National Integrity’s claims must be dismissed because its purchases occurred in New York, and (9) that the court lack personal jurisdiction over RFC Officers.

The Court granted in part and denied in part defendants’ motion to dismiss on the basis of the statute of limitations. The relevant statute provided that no action “shall be brought more than two years after the plaintiff knew, or had reasons to know, of the facts by reason of which the actions of the person or directors were unlawful, or more than five years from the date of such sale or contract for sale, whichever is shorter.” The court rejected defendants’ claims that plaintiffs had constructive notice more than two years before the complaint was filed because of rising delinquency rates and credit agency downgrades. The Court concluded that there was no “storm of warnings” sufficient to put plaintiffs on notice more than two years before the complaint was filed. However, the court granted defendants’ motion for all of plaintiffs’ claims within the 5 year statute.

The Court denied defendants’ motion to dismiss for failure to state a claim, finding that plaintiffs had pled facts sufficient to state claims for misrepresentation of underwriting guidelines, transfers of title, appraisals and loan to value ratios, credit ratings, and owner occupancy data.

The Court denied defendants’ motions to dismiss for failure to plead materiality of misrepresented material, failure to plead reliance, failure to state fraud with particularity, failure to plead the elements of civil conspiracy, and failure to plead negligent misrepresentation. The Court found that plaintiffs had sufficiently pled all of these elements. The Court also denied defendants’ motion to dismiss National Integrity’s claims.

With regard to defendants’ jurisdictional claim, the court found that although Ohio’s long arm statute extended jurisdiction to the officer defendants, such jurisdiction would not meet the requirements of due process with regard to the RFC officers.

Ohio Court of Appeals Holds that the Note Follows the Mortgage Where Intent of Parties is Clear

In Bank of New York v. Dobbs, 2009-Ohio-4742, the court found that the Bank of New York (Bank) had standing to bring a foreclosure action against the homeowners. In this case, Countrywide Home Loans (Countrywide) was the original note holder, and Bank claimed that Countrywide assigned the note to MERS, who then assigned to Bank. The homeowners argued that Bank did not have standing to foreclose because there was no evidence that Countrywide assigned the note to MERS and thus the chain of title was incomplete. In determining standing, the court found that “the chain of title between Countrywide, MERS and [Bank was] not broken” because “the obligation follows the mortgage if the record indicates the parties so intended” and in this case there was “clear intent by the parties to keep the note and mortgage together, rather than transferring the mortgage alone.” Thus, the note followed the mortgage upon transfer, and Bank was the lawful holder of the note.

Ohio Court of Appeals Holds that MERS, as Mortgagee, has Standing to Foreclose Despite Lacking a Beneficial Interest in the Note

In Mtge. Electronic Registration Sys., Inc., v. Mosley, 2010-Ohio-2886, the Court of Appeals of Ohio held that MERS had standing to foreclose on the homeowners. The court found that language in the mortgage naming MERS as nominee, as well as a provision explicitly giving MERS the right to foreclose on the property, was sufficient to give MERS standing to foreclose. The court was not persuaded by the argument that MERS lacked standing because MERS did not have a beneficial interest in the underlying note. In response to this argument, the court stated, “The fact that MERS, the mortgagee, lacked a beneficial interest in the note that was secured by the mortgage does not deprive MERS of standing to enforce the note and foreclose the mortgage. . . . MERS has always been the mortgagee and [thus] has had a contractual right to foreclose on the Mortgage.”