- The Federal Housing Administration (FHA) released a final notice, The Small Buildings Risk Sharing Initiative invites private sector lenders to partner with the FHA to provide long term fixed rate capital to small building owners with mortgages of $3 – 5 million. Lending under this initiative will be limited to properties which are willing to meet affordability requirements. The FHA will guarantee 50% of the mortgages. The FHA is also pursing a change to Section 542(b) of the Housing and Community Development Act of 1992 to allow SBRSI lenders to access capital through Ginnie Mae and to authorize securitization of the loans. In the mean time lenders can access low interest long term capital through the U.S. Treasury’s Federal Financing Bank.
- The Mayor of Seattle has released an Action Plan to address the affordability crisis in that city, where 15-20% of the population is severely rent burdened and minorities are disproportionately impacted. The Mayor’s goal is to create 50,000 units over the next 10 years.
- The U.S. Department of the Treasury has proposed a rule which, “provides for the enforcement of Title VI of the Civil Rights Act of 1964…to that end no person in the United States shall on the grounds of race, color, or national origin be denied participation in, be denied benefits of, or be otherwise subjected to discrimination under any program or activity that receives Federal financial assistance from the Department of the Treasury.” The rule, open for comment until September 11, provides guidance to recipients and provisions for “consistent and appropriate enforcement.” The proposed ruled covers 12 programs including the Community Developments Financial Institutions Fund (CDFI).
Tag Archives: securitization
Possession of Note Confers Standing to Foreclose
Dale Whitman posted this discussion of Aurora Loan Services, LLC v. Taylor, 2015 WL 3616293 (N.Y. Ct. App., June 11, 2015) on the DIRT listserv:
There is nothing even slightly surprising about this decision, except that it sweeps away a lot of confused and irrelevant language found in decisions of the Appellate Division over the years. The court held simply holds (like nearly all courts that have considered the issue in recent years) that standing to foreclose a mortgage is conferred by having possession of the promissory note. Neither possession of the mortgage itself nor any assignment of the mortgage is necessary. “[T]he note was transferred to [the servicer] before the commencement of the foreclosure action — that is what matters.” And once a note is transferred, … “the mortgage passes as an incident to the note.” Here, there was a mortgage assignment, the validity of which the borrower attacked, but the attack made no difference; “The validity of the August 2009 assignment of the mortgage is irrelevant to [the servicer’s] standing.”
The opinion in Aurora makes it clear that prior Appellate Division statements are simply incorrect and confused when they suggest that standing would be conferred by an assignment of the mortgage without delivery of the note. See, e.g., GRP Loan LLC v. Taylor 95 A.D.3d at 1174, 945 N.Y.S.2d 336; Deutsche Bank Trust Co. v. Codio, 94 A.D.3d 1040, 1041, 943 N.Y.S.2d 545 [2d Dept 2012].) For an excellent analysis of why these decisions are wrong, see Bank of New York Mellon v. Deane, 970 N.Y.S.2d 427 (N.Y. Sup. Ct. 2013).
The Aurora decision implicitly rejects such cases as Erobobo, which suppose that the failure to comply with a Pooling and Servicing Agreement would somehow prevent the servicer from foreclosing. In the present case, the loan was securitized in 2006, but the note was delivered to the servicer on May 20, 2010, only four days before filing the foreclosure action. This presented no problem at all the court. If the servicer had possession at the time of the filing of the case (as it did), it had standing. (I must concede, however, that the rejection is only implicit, since the Erobobo theory was not argued in Aurora.)
If there is a weakness in the Aurora decision, it is its failure to determine whether the note was negotiable, and (assuming it was) to analyze the application UCC Article 3’s “person entitled to enforce” language. But this is not much of a criticism, since it is very likely that under New York law, the right to enforce would be transferred by delivery of the note to the servicer even if the note were nonnegotiable.
It has taken the Court of Appeals a long time to get around to cleaning up this area of the law, but its work is exactly on target.
LawProfs in MERS Litigation
The Legal Services Center of Harvard Law School (through Max Weinstein et al.); Melanie Leslie, Benjamin N. Cardozo School of Law; Joseph William Singer, Harvard Law School; Rebecca Tushnet, Georgetown University Law Center and I filed an amicus brief in County of Montgomery Recorder v. MERSCorp Inc, et al. (3rd Cir. No. 14-4315). The brief argues,
MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.
The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.
Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times. (2-3)
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.
Transferring Risk from Fannie & Freddie
The Federal Housing Finance Agency has posted its FHFA Progress Report on the Implementation of FHFA’s Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. As its name suggests, it provides a progress report on a range of topics, but I was particularly interested in its section on credit risk transfers for single-family credit guarantees:
The 2014 Conservatorship Strategic Plan’s goal of reducing taxpayer risk builds on the Enterprises’ previous risk transfer efforts. Under the 2013 Conservatorship Scorecard, FHFA expressed the expectation that each Enterprise would conduct risk transfer transactions involving single-family loans with an unpaid principal balance (UPB) of at least $30 billion. The 2014 Conservatorship Scorecard tripled the required risk transfer amount, with the expectation that each Enterprise would transfer a substantial portion of the credit risk on $90 billion in UPB of new mortgage-backed securitizations. FHFA also expected each Enterprise to execute a minimum of two different types of credit risk transfer transactions. FHFA required the Enterprises to conduct all activities undertaken in fulfillment of these objectives in a manner consistent with safety and soundness. During 2014, the two Enterprises executed credit risk transfers on single-family mortgages with a UPB of over $340 billion, which is well above the required amounts. (14)
Risk transfer is an important tool to reduce the risks that taxpayers will be on the hook for future bailouts. The mechanism for these risk transfer deals are not well understood because they are pretty new. The Progress Report describes how they work in relatively clear terms:
The primary way that the Enterprises have executed single-family credit risk transfers to date has been through debt-issuance programs. Freddie Mac transactions are called Structured Agency Credit Risk (STACR) notes, and Fannie Mae transactions are called Connecticut Avenue Securities (CAS). Following the release of historical credit performance data in 2012, each Enterprise has issued either STACR or CAS notes that transfer a portion of the credit risk from large reference pools of single-family mortgages to private investors. These reference pools are comprised of loans that the Enterprises had previously securitized to sell the interest rate risk of the loans to private investors. The STACR and CAS transactions take the next step of transferring a portion of the credit risk for these loans to investors as well. Each subsequent credit risk transfer transaction is intended to provide credit protection to the issuing Enterprise on the mortgages in the relevant reference pool. (14)
The Progress Report provides more detail for those who are interested. For the rest of us, we may just want to think through the policy implications. How much credit risk can Fannie and Freddie offload? Is it sufficient to make a real dent in the overall risk that the two companies pose to taxpayers? It would be helpful if the FHFA answered those questions in future reports.
Treasury Gives RMBS a Workout
The Treasury has undertaken a Credit Rating Agency Exercise. According to Michael Stegman, Treasury
recognized that the PLS market has been dormant since the financial crisis partly because of a “chicken-and-egg” phenomenon between rating agencies and originator-aggregators. Rating agencies will not rate mortgage pools without loan-level data, yet originator-aggregators will not originate pools of mortgage bonds without an idea of what it would take for the bond to receive a AAA rating.
Using our convening authority, Treasury invited six credit rating agencies to participate in an exercise over the last several months intended to provide market participants with greater transparency into their credit rating methodologies for residential mortgage loans.
By increasing clarity around loss expectations and required subordination levels for more diverse pools of collateral, the credit rating agencies can stimulate a constructive market dialogue around post-crisis underwriting and securitization practices and foster greater confidence in the credit rating process for private label mortgage-backed securities (MBS). The information obtained through this exercise may also give mortgage originators and aggregators greater insight into the potential economics of financing mortgage loans in the private label channel and the consequent implications for borrowing costs.
While this exercise is very technical, it contains some interesting nuggets for a broad range of readers. For instance,
The housing market, regulatory environment, and loan performance have evolved significantly from pre-crisis to present day. Credit rating agency models appear to account for these changes in varying ways. All credit rating agency models incorporate the performance of loans originated prior to, during, and after the crisis to the degree they believe best informs the nature of credit and prepayment risk reflected in the market. Credit rating agency model stress scenarios may be influenced by loans originated at the peak of the housing market, given the macroeconomic stress and home price declines they experienced. The credit rating agencies differ, however, in how their models adjust for the post-crisis regime of improved underwriting practices and operational controls. Some credit rating agencies capture these changes directly in their models, while other credit rating agencies rely on qualitative adjustments outside of their models. (10)
It is important for non-specialists to realize how much subjectivity can be built into rating agency models. Every model will make inferences based on past performance. The exercise highlights how different rating agencies address post-crisis loan performance in significantly different ways. Time will tell which ones got it right.
S&P’s Upbeat Outlook on Mortgage Market
S&P posted U.S. RMBS Roundtable: Mortgage Origination And Securitization In The Post-Qualified Mortgage/Ability-To-Repay Market. The roundtable discussion offers views on many aspects of the 2015 mortgage market, but I found this passage to be particularly interesting:
Originators agreed loans that fall outside of the safe harbor by virtue of interest-only (IO) features have been and will continue to be attractive non-QM lending products. These loans have been originated post-crisis, and originators expect to continue lending to high-quality borrowers with substantial equity in their properties. There was general consensus that IO loans should not have been automatically excluded from QM treatment.
However, large bank depository lenders have shown a desire to originate and hold larger balance IO loans on their balance sheets rather than including them in securitizations. One participant from a major depository institution indicated that, given the increasing IO concentration on those institutions’ balance sheets, there may be a desire to securitize these loans upon meeting balance sheet thresholds. (1)
After Dodd-Frank, there was a lot of concern that the Qualified Mortgage and Ability-to-Repay rules would shut down the mortgage markets. It seems pretty clear to me that lenders are figuring out how to navigate both the plain-vanilla world of the Qualified Mortgage and the exotic world of the non-Qualified Mortgage, with its interest-only and other non-prime products. Lenders are still figuring out how far afield they can roam from a plain-vanilla product, but that is to be expected during a major transition such as the one from the pre- to the post-Dodd-Frank world.
