Tag Archives: Reiss

Reiss on Buying a Home

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Mainstreet.com quoted me in Potential Homeowners Should Seek Counseling Before Making First Purchase. It reads, in part,

Many consumers have made buying their first home less of a daunting task by seeking housing counseling from a non-profit organization.

In 2014, more than 73,000 people received housing counseling from the National Foundation for Credit Counseling’s member agencies, making it the highest volume experienced during the past five years. The renewed interest in housing counseling could be an indicator that many people are considering home ownership as an affordable option.

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Homeowners should look at a range of mortgages before committing to one since the typical American homeowner moves every seven years, said David Reiss, professor of law at the Brooklyn Law School in N.Y. For example, obtaining a “relatively expensive 30-year fixed rate mortgage may not make sense,” he said, if you can save a lot in monthly payments with an adjustable rate mortgage (ARM).

ARMs have a certain period of time where the interest rate remains the same, such as 84 months for a 7/1 ARM or 120 months for a 10/1 ARM and then it adjusts each year for the remainder of the mortgage.

“This might be particularly true for very young households or for empty nesters, both of whom may have different needs in five or ten years,” Reiss said. “It is hard to predict where interest rates and prices are going, so holding off on buying when it seems like the right time to do so for your personal situation is risky.”

Reiss on $1.5B S&P Settlement

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Westlaw Journal Derivatives quoted me in S&P Settles Fraud Suits for $1.5 Billion. The story reads in part,

Standard & Poor’s has agreed to pay $1.5 billion to settle lawsuits filed by the U.S. Department of Justice, 19 states and a pension fund that accused the ratings agency of damaging the economy by inflating credit ratings in the years leading up to the 2008 financial crisis.

According to a statement issued Feb. 3 by S&P, a subsidiary of McGraw-Hill Cos, the ratings agency will pay $687.5 million each to the DOJ and the states. It also will pay $125 million to settle a lawsuit filed by California Public Employees’ Retirement System. Cal. Pub. Employees’ Ret. Sys. Moody’s Corp. et al., No. CGC-09-490241, complaint filed (Cal. Super. Ct., S.F. County July 9, 2009).

The parties filed a joint stipulation of dismissal with the U.S. District Court for the Central District of California on Feb. 4.

“After careful consideration, the company determined that entering into the settlement agreement is in the best interests of the company and its shareholders and is pleased to resolve these matters,” McGraw-Hill said in the statement.

S&P did not admit to any wrongdoing in agreeing to settle.

U.S. Attorney General Eric Holder announced the settlement for the Justice Department and states.

“On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised,” he said in a statement.

*     *     *

David Reiss, a professor at Brooklyn Law School, also said the settlement closes an important chapter of the crisis.

“S&P would have faced a lot of unquantifiable risk if it had to admit wrongdoing in the settlement,” he said. “It is unclear that the Justice Department would have wanted to expose one of the three major rating agencies to such a risk because it could have destabilized the rating agency industry.”

Reiss added that the $1.5 billion settlement should have a deterrent effect.

”[It] likely gives ratings analysts some firm ground to stand on if they are pressured to lower their standards by others in their organizations,” he said. (1, 18-19)

The article also has a sidebar that reads,

Ratings agencies had avoided liability for their actions for quite some time based on the theory that they were First Amendment actors who dealt in opinions.

Recent cases have held that the rating agencies can be held liable for some of their ratings notwithstanding the First Amendment. United States v. McGraw-Hill Cos. et al., No. 13-CV-0779, 2013 WL 3762259 (C.D. Cal. July 16, 2013) and Federal Home Loan Bank of Boston v. Ally Financial Inc. et al., No. 11-10952, 2013 WL 5466631 (D. Mass. Sept. 30, 2013).

For instance, if the rating agency did not follow its own rating procedures, it could be held liable for fraud.

—David Reiss, Brooklyn Law School (18)

Reiss on $191B for Fannie & Freddie

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GlobeSt.com quoted me in About that $191B Profit from the GSEs. It opens,

Last week when the White House released its budget for fiscal year

2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship.

The item gave the commercial real estate industry pause for a few reasons. This number 1) assumes the GSEs will remain under federal conservatorship 2) it assumes that the lawsuits filed by GSE shareholders disgruntled by the government’s decision to sweep all profits from the GSEs back to the US Treasury will go nowhere 3) it assumes the GSEs will continue to bring in record profits.

Of all of these, the latter supposition is the least controversial.

The two GSEs have paid back more than what their received in federal aid; Fannie Mae has sent back the government $134.5 billion in payments compared to $116.1 billion it received, while Freddie Mac has sent $91 billion compared to $72.3 billion it received in rescue funds.

This cash flow is one reason why some in the industry quietly speculate that the government has little intention of cutting the GSEs loose to be privatized—despite the stated intention of the Obama Administration to do so.

Also, consider that the government can basically set the GSEs’ profit levels, David Reiss, professor of Law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School, tells GlobeSt.com.

“Their regulator, the Federal Housing Finance Agency, sets the amount of their guarantee fee. If the FHFA raises it, it tends to raise profits for the two companies,” he notes.

The FHFA also sets, within limits, the types of mortgages the GSEs can buy, thereby increasing the size of the total market and the market share of the two entities, Reiss continues. “For instance, the FHFA recently lowered the down payment requirements for Fannie/Freddie loans. This action will increase the total number of loans made and will also increase Fannie and Freddie’s market share because they can now operate in a part of the market that had been off limits.”

Reiss on Financial Crisis Litigation

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Law360 quoted me in Feds’ Moody’s Probe Marks Closing Of Financial Crisis Book (behind a paywall). It opens,

A reported investigation into Moody’s Investors Service’s ratings of residential mortgage-backed securities during the housing bubble era could be the beginning of the last chapter in the U.S. Department of Justice’s big financial crisis cases, attorneys say.

Federal prosecutors are reportedly making their way through the ratings agencies for their alleged wrongdoings prior to the financial crisis after wringing out more than $100 billion from banks and mortgage servicers for their roles in inflating the housing bubble. But the passage of time, the waning days of the Obama administration and the few remaining rich targets likely means that the financial industry and prosecutors will soon put financial crisis-era enforcement actions behind them, said Jim Keneally, a partner at Harris O’Brien St. Laurent & Chaudhry LLP.

“I do look at this as sort of the tail end of things,” he said.

With the ink not yet dry on a rumored $1.375 billion settlement between the Justice Department, state attorneys general and Standard & Poor’s Ratings Services, prosecutors have already reportedly turned their attention to the ratings practices at S&P’s largest rival, Moody’s, in the period leading up to the 2008 financial crisis, according to The Wall Street Journal.

The federal government and attorneys general in 19 states and Washington, D.C., had launched several suits since the financial crisis accusing S&P of assigning overly rosy ratings to mortgage-backed securities and other bond deals that ended up imploding amid a wave of defaults, causing a cascade of investor losses that amounted to billions of dollars.

Although S&P originally elected to fight the government, it ultimately elected to settle. The coming $1.375 billion settlement arrives on top of an earlier $77 million settlement with the U.S. Securities and Exchange Commission and the attorneys general of New York and Massachusetts over similar claims.

Moody’s is reportedly next in line, with Justice Department investigators reportedly having had several meetings with officials from the ratings agency that looked into whether the Moody’s Corp. unit had softened its ratings of subprime RMBS in order to win business as the housing bubble inflated.

Both the Justice Department and Moody’s declined to comment for this story.

The pursuit of Moody’s as the S&P case wraps up follows a pattern that the Justice Department set with big bank settlements for the financial crisis.

“You would expect that they would sweep through, so to speak,” said Thomas O. Gorman, a partner with Dorsey & Whitney LLP.

After reaching a $13 billion deal with JPMorgan Chase & Co. in November 2014, the Justice Department quickly turned its attention to Citigroup Inc. and Bank of America Corp., which reached their own multibillion-dollar settlements last summer.

Now prosecutors are in talks with Morgan Stanley about another large settlement, according to multiple reports.

All of those deals follow the $25 billion national mortgage settlement from 2012 that targeted banks’ pre-crisis mortgage servicing practices.

Time may be catching up with the Justice Department more than six years following the height of the crisis, even after the Justice Department began employing novel uses of the Financial Institutions Reform, Recovery and Enforcement Act, a 1989 law passed following the savings and loan crisis, Keneally said.

Using FIRREA extended the statute of limitations on financial crisis-era cases, allowing for prosecutors to develop their cases and take a systematic approach. Even that statute may have run its course, as it pertains to the crisis.

“The passage of time is such that you have evidence that no longer exists,” Keneally said.

Politics may also play a role as the financial crisis recedes from memory and the next holder of the presidency potentially looks to move forward, he said.

“We’re getting to the end of the Obama administration,” Keneally said. “I think it’s going to be hard for any administration to ramp things up again.”

And that has some wondering whether the Obama administration and the Justice Department under Attorney General Eric Holder followed the correct path.

“The Justice Department and the states’ attorneys general collected far more in their penalties and settlements than anyone could have imagined before the financial crisis,” said Brooklyn Law School professor David Reiss.

Those large settlements may give investors and top management pause when it comes to questionable activity. However, because no traders or other top banking personnel went to prison, questions remain about what deterrent effect those settlements will have on individuals.

“Big institutions are now probably deterred from some of this behavior, but are individuals who work on these institutions deterred?” Reiss said.

Reiss on New Mortgage Tool

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Tech News World quoted me in CFPB Shifts Some Power to Mortgage Shoppers. The story reads in part,

The Consumer Financial Protection Bureau on Tuesday introduced Owning a Home, a set of online tools designed to make it easier for consumers to comparison shop for the best deal in mortgage financing.

With one tool, users can plug in a credit score and ZIP code to get a sense of the current interest rates being offered within a particular area.

There is also a guide that walks consumers through the various loan options on the market, complete with basic definitions of “loan term,” “interest rate type” and “loan type.”

Another guide describes the closing documents in a typical home purchase.

There is also a checklist that offers suggestions for a smooth closing, including advice on mistakes to avoid.

Other tools will be added to facilitate shopping for a mortgage and improving consumer understanding of the mortgage process.

*     *     *

This offering is not going to automatically assist all potential homebuyers as they approach the mortgage process, though, said Brooklyn Law School professor David Reiss.

“Shopping for a mortgage is one of the most complex financial transactions that people engage in,” he told CRM Buyer. “Providing additional information should help at least some people, but others are overwhelmed by this type of transaction and will continue to rely on word of mouth, advertising and preexisting relationships to find a lender.”

Shady Lenders
Some lenders benefit from dealing with uneducated consumers and are able to charge higher fees and interest rates as a result, Reiss pointed out.

The informed consumer is in a much better position to select products and services that provide the greatest value, Cadden observed.

“Informed consumers are, to put it simply, much better shoppers,” he said. “The challenge has always been how to easily acquire information.”

CFPB’s Mandate
The mortgage shopping assistance is a natural extension of the CFPB’s broader mandate to act as an advocate for consumers in financial matters, Reiss noted.

“It clearly complements the other components of that mission,” he said.

Reiss on Drop in FHA Premium

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Law360 quoted me in FHA Premium Cut Sets Up Fight Over Future Of Housing (behind a paywall). It reads in part,

President Barack Obama’s plan to lower premiums on Federal Housing Administration insurance has rekindled a battle with Republicans over the rehabilitation of the recently bailed out government mortgage insurer and the government’s role in the U.S. housing market more broadly.

Obama on Thursday officially laid out a plan that would see the FHA charge borrowers half a percentage point less on mortgage insurance premiums beginning this month in a move to boost affordability for the low- and middle-income borrowers who traditionally rely on FHA-backed mortgages.

The announcement came as the FHA continues to recover from a post-financial crisis shortfall that saw the long-standing program receive a $1.7 billion bailout from the U.S. Department of the Treasury in 2013, the first time the FHA has needed federal support.

Obama’s move on mortgage insurance premiums could make the road to a secure FHA take that much longer, and, coupled with earlier policy changes by the Federal Housing Finance Agency on mortgages backed by Fannie Mae and Freddie Mac, set up a renewed fight with Republicans over government support for the housing market.

“What’s at stake is not just housing prices and mortgage rates,” Brooklyn Law School professor David Reiss said. “What’s implicit of all of this is: What’s the appropriate role of the government in the housing market?”

The president’s plan would see the FHA charge borrowers 0.85 percent annual premiums on their mortgage insurance, down from the 1.35 percent they currently pay. First-time homebuyers will see a $900 drop in their mortgage payments each year under the new policy, according to a fact sheet released Wednesday by the White House.

“It’ll help make owning a home more affordable for millions” around the country, Obama said in a speech in Phoenix on Thursday.

Housing analysts said that the move could help boost the housing market at the margins but would not entice a large number of first-time buyers to get into the housing market.

The lower mortgage insurance premium will prove to be “marginally beneficial for the average borrower, in our opinion, and consequently, we do not believe this news … is a catalyst for higher housing demand and higher earnings estimates,” Sterne Agee analyst Jay McCanless said in a note Thursday.

But what the rate cut does is put in clear relief Obama’s plan to boost the housing market and provide a strong government role in that key economic sector, even if it means potentially putting added pressure on the agencies that provide government assistance to the housing market. Those agencies include the FHA as well as the Federal Housing Finance Agency and the two failed mortgage giants over which it has authority, Fannie Mae and Freddie Mac.

“The tension is between financial responsibility and public policy about housing,” Reiss said.

In the FHA’s case, lowering the mortgage insurance premium is likely to increase the amount of time that the agency will need to get to a 2 percent capital level that is mandated by Congress.

An independent audit of the FHA’s finances released late last year found that the agency’s Mutual Mortgage Insurance Fund stood at a positive $4.8 billion as of the end of September after being as much as $16.3 billion in the hole in 2012.

Still, while the gain on the fund has been real, its capital ratio stood at only 0.41 percent in that period, far lower than the mandated 2 percent.

*     *     *

Obama had backed congressional efforts to eliminate Fannie Mae and Freddie Mac and boost private capital in the mortgage market, but they failed amid disagreements between the Senate and House Republicans. The issue is now largely dormant.

That has left a vacuum for Obama to fill, Reiss said.

“Because Congress refused to act, Republicans are going to be stuck with a more activist government because they refused to come to the table and put together a proposal that can pass,” he said.

Reiss on Payday Lending Regs

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CRM Buyer quoted me in CFPB May Rein In Payday Lending. The story opens,

The Consumer Financial Protection Bureau is considering various approaches to reforming the payday loan industry, The Wall Street Journal reported on Sunday.

The bureau is concerned about the short-term, high-rate debt consumers take on, sources said.

States typically have been responsible for regulating payday loan company practices. If the CFPB should take action, it would be the first time federal regulations were applied to this niche in the financial sector.

Consumer advocates have long been calling for some restraints to be imposed on providers of these loans. Interest rates tend to be astronomical, and borrowers frequently are unable to repay the loans within the prescribed time period. What happens more often than not is that they roll their loans into the next pay period, committing to a never-ending series of high-interest, short-term contracts.

The CFPB reportedly is considering approval of a “vanilla” type of short-term loan with underwriting criteria that would establish whether the borrower actually would be able to repay it — an approach similar to the mortgage qualification requirements put in place after the financial crash.

That is not the only model reportedly under consideration, however, and the CFPB might waive such underwriting requirements for borrowers who don’t tap payday advance loans very often, the Journal reported.

Pushback can be expected from the industry, which has been under fire for years. The payday lenders’ argument is straightforward: With so many Americans living from paycheck to paycheck, their services are necessary to meet emergencies.

Defanging the Predator

“There is clearly a demand for payday lending by unbanked consumers who have needs for short-term credit but do not have access to credit cards, home equity loans or other loan products,” said David Reiss, professor of law at Brooklyn Law School.

“At the same time, payday lending repayment terms are often seen as onerous and predatory, with annual interest rates that run in the hundreds of percent and with many customers stuck in a cycle where they roll over their high cost debt from one month to the next, accruing more interest and fees along the way,” he told CRM Buyer.

Given the mission of the Consumer Financial Protection Bureau, Reiss said, it is natural for it to attempt to develop a regulatory structure for the industry that would allow it to function — but not extract predatory profits from its customers.