- Former Freddie Mac executives, who were accused of lying about Freddie’s exposure to subprime mortgages before the financial crisis, settled with the SEC.
- Citibank shareholders slam the Bank’s motion to dismiss a case over mortgage-backed securities worth more than $17 billion as NY federal courts have rejected similar arguments to dismiss similar cases.
- The Second Circuit dismisses a class action against Royal Bank of Scotland PLC finding that the bank did not lie about its exposure to residential mortgage-backed securities.
- DC federal judge certified a class action of evicted homeowners, with a lead representative who lost his home over a $134 unpaid tax bill. The court will decide whether district law creates a property interest in equity, if its tax-sale statutes effect a taking of the property and if class members were properly compensated.
Tag Archives: securities
Wednesday’s Academic Roundup
- The Role of Prepayment Penalties in Mortgage Loans, by Andrea Beltratti, Matteo Benetton & Alessandro Gavazza, CEPR Discussion Paper No. DP10504.
- Inclusion by Design, Thinking Beyond a Civil Rights Paradigm, by Robin Paul Malloy, Land Use Law and Disability: Planning and Zoning for Accessible Communities, Cambridge University Press, 2015.
- Cancer Diagnoses and Household Debt Overhang, by Arpit Gupta, Edward R. Morrison, Catherine Fedorenko & Scott D. Ramsey, Columbia Law and Economics Working Paper No. 514.
- Zoning and Land Use Planning: How Real is Gentrification, by Michael Lewyn, 43 Real Est. L.J. 344 (Winter 2014).
- Maximizing Inclusionary Zoning’s Contributions to Both Affordable Housing and Residential Integration, by Tim Iglesias, Washburn Law Journal, Vol. 54, No. 4, 2015.
- Securitization and Mortgage Default, by Ronel Elul, FRB of Philadelphia Working Paper No. 15-15.
- The Effect of Large Investors on Asset Quality: Evidence from Subprime Mortgage Securities, by Manuel Adelino, W. Scott Frame, & Kristopher Gerardi, FRB Atlanta Working Paper No. 2014-4.
The Rescue of Fannie and Freddie
Federal Reserve researchers, W. Scott Frame, Andreas Fuster, Joseph Tracy and James Vickery, have posted a staff report, The Rescue of Fannie Mae and Freddie Mac. The abstract reads,
We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.
This staff report provides a nice overview of the two companies since the financial crisis. I was particularly interested by a couple of sections. First, I found the discussion of receivership versus conservatorship helpful. Second, I liked how it outlined the five objectives for an optimal intervention:
(i) Fannie Mae and Freddie Mac would be enabled to continue their core securitization and guarantee functions as going concerns, thereby maintaining conforming mortgage credit supply.
(ii) The two firms would continue to honor their agency debt and mortgage-backed securities obligations, given the amount and widely held nature of these securities, especially in leveraged financial institutions, and the potential for financial instability in case of default on these obligations.
(iii) The value of the common and preferred equity in the two firms would be extinguished, reflecting their insolvent financial position.
(iv) The two firms would be managed in a way that would provide flexibility to take into account macroeconomic objectives, rather than just maximizing the private value of their assets.
(v) The structure of the rescue would prompt long-term reform and set in motion the transition to a better system within a reasonable period of time. (14-15)
You’ll have to read the paper to see how they evaluate the five objectives in greater detail.
NCUA Sues JP Morgan over MBS Representations
The National Credit Union Administration has sued J.P. Morgan Securities and Bear, Stearns & Co. for alleged securities laws violations relating to the sale of mortgage-backed securities to 4 credit unions that are now in NCUA conservatorship. According to the complaint, Bear Stearns (now owned by JPMorgan) made misrepresentations to the purchasing credit unions as part of its underwriting and sales of the MBS. The press release notes that NCUA has initiated eight similar suits against a variety of financial institutions.
One of the representations at issue states that “a mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan is in substantial compliance with those underwriting standards.” (Complaint paragraph 408, page 170)
Given what we know about a lot of the securities that were issued, it is hard to imagine that reps like this were not violated for many of them.