- The CFPB increased PHH Corp.’s penalty to $109 million from $6.4 million on appeal, while upholding an administrative judge’s ruling that the firm was involved in a mortgage insurance kickback scheme.
- A class of PHH borrowers have been granted cert to the U.S. Supreme Court alleging that PHH Corp. violated the Real Estate Settlement Procedures Act.
- NY Court of Appeals bars mortgage-backed securities suit for $330 million against Deutsche Bank AG due to a six-year statute of limitations that started when the contract was signed.
- Nomura Holdings Inc. is appealing $806 million verdict in suit brought by the Federal Housing Finance Agency for selling bad mortgage-backed securities to Fannie Mae and Freddie Mac.
- The Securities and Exchange Commission brought suit against a New York broker for $4.1 million for allegedly selling unregistered securities through several entities.
Tag Archives: Supreme Court
Monday’s Adjudication Roundup
- The United States Supreme Court held that Chapter 7 debtors cannot get rid of junior liens on underwater home loans under the bankruptcy code.
Reiss on SCOTUS Junior Lien Decision
Bloomberg BNA quoted me in Nagging Economic and Credit Questions Dampen Bankruptcy Victory for Bankers (behind paywall). It reads, in part:
The U.S. Supreme Court delivered an important bankruptcy ruling for bankers that doesn’t, however, do anything about still-struggling homeowners (Bank of Am. N.A. v. Caulkett, 2015 BL 171240, U.S., No. 13-cv-01421, 6/1/15); (Bank of Am. N.A. v. Toledo-Cardona, 2015 BL 171240, U.S., No. 14-cv-00163, 6/1/15).
In a June 1 decision, the court said Chapter 7 debtors cannot void junior liens on their homes when first-lien debt exceeds the value of the property, as long as the senior debt is secured and allowed under the Bankruptcy Code.
The decision is a victory for Bank of America, which held both junior liens in the two related cases, and for banking groups that said a different result could have destabilized more than $40 billion in commercial loans secured by similar liens.
But Brooklyn Law School Professor David Reiss June 2 said the case highlights the need for a broad remedy for homeowners who have continued to struggle to make payments since the financial crisis.
“The bank’s position as a legal matter is a very reasonable one, but from a policy perspective we needed and still need a bigger and more systemic solution to the problems that households face,” Reiss told Bloomberg BNA.
* * *
[S]ome said the ruling highlights economic questions on several levels.
Reiss, who coedits a financial blog, June 2 said the case shows the federal government’s inability to deal head-on with the impact of financial turmoil in 2008 and 2009.
“Not enough is being done to move households beyond the crisis, and it’s bad for households and it’s bad for the financial sector,” Reiss said. “Here we are seven or eight years later and we’re sitting here with these valueless second mortgages. We’re just slogging through the muck and we’re not coming up with any good solutions to get past it.”
Tenants in Foreclosure
Judge Demarest issued a Decision and Order in 650 Brooklyn LLC v. Hunte et al. (No. 504623/2013 Feb. 5, 2015). The defendants moved for dismissal because the foreclosing plaintiff failed to comply with a relatively new NY statute that requires that the “foreclosing party in a mortgage foreclosure action, involving residential real property shall provide notice to: (a) any mortgagor if the action relates to an owner-occupied one-to-four family dwelling; and (b) any tenant of a dwelling unit in accordance with the provisions of this section . . ..” (12, citing NY RPAPL section 1303(1))
The Court dismissed defendants’ motion, relying on the plain language of the statute. The Court also noted that the purpose of the RPAPL notice provision, according to the 2009 Sponsor’s Memorandum, was to “establish protections for tenants residing in foreclosed properties” and noting that
20% of all foreclosure filings across the country were in non-owner occupied properties . . . Often, renters have been unaware that their landlords are in default until utilities are shut off or an eviction notice appears on their door . . . This [notice] provision will allow tenants to be fully aware of the status of the property and allow them to make informed decisions about whether they should remain in such property. (15)
Given the straightforward language of the statute, this seems like the right result as a matter of law. It also seems like the right result as a matter of policy. Certain dense jurisdictions, like NYC, have a lot of of tenants living in 2-4 family buildings. Many of these buildings are in areas that have been hard hit by the foreclosure epidemic. Indeed, according to the State of New York City’s Housing and Neighborhoods in 2013, “most of the foreclosure filings in 2013 and other recent years have been on 2–4 family properties.” (3) Many foreclosures have unnecessary collateral damage and improving notice to affected parties like tenants seems like a small and reasonable step for any jurisdiction to take.
Monday’s Adjudication Roundup
- S&P agrees to settlement of $58 million for fraudulent ratings on commercial mortgage-backed securities.
- SEC order regarding violations of Section 17(a)(1) of the Securities Act, Section 15E(c)(3) of the Exchange Act, and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $6.2 million disgorgement, plus $800,000 prejudgment interest, and $35 million civil money penalty for affirmatively claiming to use one method of rating when it was actually using another method.
- SEC order regarding violations of Section 17(a)(l) of the Securities Act and Exchange Act Rule 17g-2(a)(6). $15 million penalty for publishing “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress.”
- SEC order regarding violations of Section 15E(c)(3)(a) of the Exchange Act and Exchange Act Rules 17g-2(a)(2)(iii) and 17g-2(a)(6). $1 million civil money penalty for failure in oversight of residential mortgage-backed securities (RMBS) ratings.
- SEC order regarding a public hearing.
- Following the Consumer Financial Protection Bureau filing a complaint in the District Court for the District of Maryland, JP Morgan and Wells Fargo agreed to pay $37.5 million in penalties for a mortgage-kickback scheme with a title company.
- The Supreme Court heard oral arguments for disparate impact case on January 21st. (Whether disparate impact is a cognizable claim under the Fair Housing Act).
Supreme Take on Truth in Lending
The United States Supreme Court issued its ruling in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684 (Jan. 13, 2015). Jesinoski resolved a circuit split regarding notice requirements under the Truth in Lending Act (TILA) that apply when a homeowner is rescinding certain types of home mortgage loans.
Justice Scalia wrote the short opinion for a unanimous Court. The Court held that a “borrower exercising his right to rescind under the Act need only provide written notice to his lender within the 3-year period, not file suit within that period.” (syllabus at 1) Countrywide had argued that the borrower had to file suit within that 3-year period. In finding for the borrowers, the Court found that the language of the statute was “unequivocal.”
While some have said that this result will lead to borrowers walking away from their loans, that is unlikely to occur in all but a handful of cases. That is because in order to rescind the loan, a borrower would need to tender back the original loan proceeds. Hard to imagine too many borrowers being able to do that.
The opinion is important because it resolves a significant circuit split, but its unanimity reflects that this case was perceived by the members of the Court as a straightforward question of statutory interpretation. As such, it does not appear to be signaling much about the Court’s approach to consumer protection jurisprudence more generally.
Strip-Downs Are Good
The Philadelphia Fed has posted a Working Paper, Using Bankruptcy to Reduce Foreclosures: Does Strip-Down Of Mortgages Affect The Supply of Mortgage Credit? The paper’s abstract reads,
We assess the credit market impact of mortgage “strip-down” — reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 7 or Chapter 13 bankruptcy. Strip-down of mortgages in bankruptcy was proposed as a means of reducing foreclosures during the recent mortgage crisis but was blocked by lenders. Our goal is to determine whether allowing bankruptcy judges to modify mortgages would have a large adverse impact on new mortgage applicants. Our identification is provided by a series of U.S. Court of Appeals decisions during the late 1980s and early 1990s that introduced mortgage strip-down under both bankruptcy chapters in parts of the U.S., followed by two Supreme Court rulings that abolished it throughout the U.S. We find that the Supreme Court decision to abolish mortgage strip-down under Chapter 13 led to a reduction of 3% in mortgage interest rates and an increase of 1% in mortgage approval rates, while the Supreme Court decision to abolish strip-down under Chapter 7 led to a reduction of 2% in approval rates and no change in interest rates. We also find that markets react less to circuit court decisions than to Supreme Court decisions. Overall, our results suggest that lenders respond to forced renegotiation of contracts in bankruptcy, but their responses are small and not always in the predicted direction. The lack of systematic patterns evident in our results suggests that introducing mortgage strip-down under either bankruptcy chapter would not have strong adverse effects on mortgage loan terms and could be a useful new policy tool to reduce foreclosures when future housing bubbles burst.
This paper seems to cut through some of the hyperbole that surrounds this topic. Its concluding paragraphs indicate how a modest introduction of strip-downs would have only a modest impact on the availability of mortgage credit. It contrasts such a modest step with more far-reaching proposals, such as using eminent domain to take underwater mortgages throughout an entire jurisdiction. The paper seems to argue that the more modest proposal could be acceptable to the lending industry. I am not so sure that that is true, particularly in the current political environment. But it is certainly true that strip-downs could be a useful tool to have when “future housing bubbles burst,” as they most certainly will.
