Tag Archives: Treasury

U.S. Dismissive of Frannie Suits

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The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:

The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.

Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)

While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.

Reiss on Cases To Watch In 2014

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Law360 quoted me in Real Estate Cases To Watch In 2014. The story reads in part,

The real estate market’s recovery from the financial crisis of the past few years has created a host of new issues — from contract disputes to eminent domain litigation — for government lenders, developers and investors to litigate in 2014.

Real estate finance attorneys are paying close attention to an expected rise in judicial scrutiny of banks’ ownership of loans, while also closely watching the multitude of cases that have been brought against the U.S. government and its handling of profits made by Fannie Mae and Freddie Mac.

At the same time, development attorneys are tuned in to how an increase in construction in gateway cities might soon lead to more litigation over land use and eminent domain.

Here are some of the most important cases and trends real estate attorneys are watching closely:

Challenges to Allocation of Fannie and Freddie Profits

A collection of cases making their way through the Washington, D.C., federal court and the Court of Federal Claims challenge the government’s taking of all of the profits from Fannie Mae and Freddie Mac and directing them toward the U.S. Department of the Treasury.

Two of the most-watched cases were brought by hedge funds Perry Capital LLC and Fairholme Capital Management LLC, the latter of which has since offered to purchase the government-sponsored entities’ insurance businesses.

Perry Capital accused the Treasury in July of illegally speeding up the GSEs’ liquidation, entitling the government to all of their mounting profits and essentially “extinguishing” privately held securities, according to the complaint filed in Washington federal court.

Fairholme made a similar claim in the Court of Federal Claims two days later, alleging that the government had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

“The universe of cases impacting the current operation of Fannie and Freddie is very important from a policy perspective, and it’s also an interesting battle between hedge funds and the government,” said David Reiss, a professor at Brooklyn Law School.

There will likely be a flurry of motions to dismiss and requests for summary judgment on all sides in these cases 2014, but from the perspective of a real estate attorney, the policy implications will be more interesting than the precedential value of any decisions, he said.

A hearing on defendants’ dispositive motions and plaintiffs’ cross motions has been set for June 23 in the Washington cases.

Perry Capital is represented by Theodore B. Olson, Janet Weiss, Douglas Cox, Matthew McGill, Nikesh Jindal and Derek Lyons of Gibson Dunn. The case is Perry Capital LLC v. Lew et al., case number 1:13-cv-01025, in the U.S. District Court for the District of Columbia.

Fairholme is represented by Charles J. Cooper, Vincent J. Colatriano, David H. Thompson and Peter A. Patterson of Cooper & Kirk PLLC. That case is Fairholme Funds Inc. v. U.S., case number 1:13-cv-00465, in the U.S. Court of Federal Claims.

Reiss on Fannie and Freddie Buyout

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Law360 quoted me in Fairholme Changes The Game For Fannie And Freddie (behind a paywall).  It reads in part,

Fairholme Capital Management LLC’s plan to buy Fannie Mae’s and Freddie Mac’s insurance businesses will likely turn out to be more symbolic gesture than successful deal, experts say, but the hedge fund’s bold move could increase interest in privatization of the entities and potentially encourage other bidders to join the fray.

*     *     *

Some experts believe this emphasis on the ownership stakes of Fairholme and other hedge funds will be a major turnoff for the White House, the Federal Housing Finance Agency and the Treasury.

“It’s a very good idea, but the question is, will it keep the government and taxpayers off the hook? And will it bring in sufficient private capital to provide a vibrant residential mortgage market?” said David Reiss, a real estate finance professor at Brooklyn Law School. “Of course they’re looking to maximize their return, so the question has to be, what’s the angle that they’re playing?”

The angle, experts and analysts say, is likely connected to claims Fairholme and other hedge funds have made recently against the federal government, accusing it of devaluing their shares of Fannie and Freddie in order to reap all the GSEs’ mounting profits.

Fairholme and Perry Capital LLC both sued the government over its management of Fannie and Freddie this summer.

In July, Perry Capital accused the Treasury of wrongfully altering stock purchasing agreements with Fannie and Freddie, which allegedly allowed it to illegally speed up the liquidation of the companies and reap more than $200 billion over the next decade.

Two days later, Fairholme and insurance holding company W.R. Berkley Corp. sued the federal government, alleging it had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

Fairholme’s proposal assumes that their shares have the value they claim they have in their lawsuit, Reiss said. If the deal were to move forward, valuation of Fairholme’s stake could be a major sticking point.

*     *     *

“It begins the conversation as to whether you can have effectively a buyout of the federal government from Fannie and Freddie, which is a healthy thing, I think,” Reiss said.

Qualified Residential Mortgage Comments

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The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday.  And comments there were.  Here is a sampling:

The Urban Institute argues that

In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)

The Securities Industry and Financial Markets Association effectively agrees with this and argues that

QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)

The American Enterprise Institute, on the other hand, argues that

The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)

My thoughts on the proposed QRM rule can be found here, here, here and here.

Post-Bubble Foreclosure-Prevention and -Mitigation Options in Your Town?

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Bob Hockett has posted Post-Bubble Foreclosure-Prevention and -Mitigation Options in Seattle. I recommend it to those interested in issues beyond Seattle’s borders because it actually covers foreclosure-prevention and mitigation options across the country, although it looks at them with a Seattle focus.

He argues that

There is a potentially bewildering array of means available to at least some underwater homeowners, and these programs are also noteworthy for failing to solve the fundamental problems affecting these mortgages. There are three vitiating weakness share by nearly all of these means . . ..

The first weakness among currently available options is that they do not concentrate upon mortgage principal-reduction, meaning that they do nothing about the underwater status of underwater mortgage loans – which is the principal predictor of default and foreclosure – at all. Instead they rely upon temporary forbearance, term-extension, or interest rate reduction. . . .

The second weakness of the currently available options is that they are voluntary from the creditor’s point of view. That is problematic not because creditors lack in appreciation of their own enlightened self-interest or in desire to do the right thing, but because where there are structural or contractual barriers to principal reduction, as we shall see there are here in abundance, even creditor-benefiting such changes cannot occur on an adequate scale. Creditors are very often unable to do what benefits themselves and homeowners alike, meaning that voluntary programs can be useless.

Finally, the third weakness that the options discussed here suffer is that they do not extend to underwater PLS loans, which, as seen above, constitute the great bulk of troubled mortgage loans; they are in general available only to GSE and bank portfolio loans . . .. (11)

I found the review of “publicly encouraged debt relief” programs useful. (14) They include

  1. HAMP (the federal Home Affordable Modification Program)
  2. HARP (the federal Home Affordable Refinance Program)
  3. Miscellaneous Specialized HAMP Analogues
  4. FHA Short Refinance Program
  5. HAFA(federal Home Affordable Foreclosure Alternative)
  6. “Hardest Hit” Fund & Program (Treasury)
  7. HOPE NOW Alliance
  8. The Attorney Generals’ Settlement

Hockett also proposes some innovative approaches that he suggests that Seattle should consider including the use of eminent domain as well as a land bank. Worth the read.

 

Reiss on the Future of Fannie and Freddie

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I will be speaking at NYU Law next week on

The Future of Fannie and Freddie

Friday, September 20, 2013
9:00 am – 5:00pm
Reception to follow

Greenberg Lounge, NYU School of Law
40 Washington Square South
New York, NY 10012

Jointly sponsored by:
The Classical Liberal Institute & NYU Journal of Law & Business

 

This conference will bring together leaders in law, finance, and economics to explore the challenges to investment in Fannie Mae and Freddie Mac, and the future possibilities for these government-sponsored entities (GSEs).  Panels will focus on the reorganization of Fannie and Freddie, as well as the recent litigation surrounding the Treasury’s decision to “wind down” these GSEs.  Panelists will explore the legal issues at stake in the wind down, including the administrative law and Takings Clause arguments raised against the Treasury and Federal Housing Finance Agency.  Panelists will also look at economic policy and future prospects for Fannie and Freddie in light of legislation proposed in the House and the Senate.

Conference Panels:

  • The Reorganization of Fannie Mae and Freddie Mac
  • Fannie Mae, Freddie Mac, and Administrative Law
  • Conservatorship and the Takings Clause
  • The Future of Fannie and Freddie

Confirmed Participants:

  • Professor Barry Adler (NYU)
  • Professor Adam Badawi (Washington University)
  • Professor Anthony Casey (Chicago)
  • Charles Cooper (Cooper & Kirk PLLC)
  • Professor Richard Epstein (NYU)
  • Randall Guynn (Davis Polk & Wardwell LLP)
  • Professor Todd Henderson (Chicago)
  • Professor Troy Paredes (former SEC Commissioner)
  • Professor David Reiss (Brooklyn)
  • Professor Lawrence White (NYU Stern)

Fannie/Freddie Take Down 3: Washington Federal v. The U.S. of A.

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This should catch us up on the Fannie/Freddie preferred stock Takings litigation (see here and here for two other suits).  Washington Federal et al. v. United States was filed June 10, 2013 and is a class action complaint. The theories are pretty similar in the three cases. I had earlier written about the importance of narrative in these Takings cases. Having lived through this history myself and having read the “first draft” of history carefully in the pages of the New York Times, the Wall Street Journal and many trade periodicals, I am somewhat taken aback by this revisionist history. For instance, the complaint states that the companies were not “likely to incur losses that would deplete all or substantially all of” their capital. (38) News to me!

But what is most striking about the complaint is this notion that if the government had just taken this action (allowing the companies to buy more subprime mortgages) or not taken that action (strong arming the board to accept the conservatorship) or not deferring taking this other action (waiting to raise the guarantee fee), then everything would have worked out for the companies and their shareholders.  Maybe so, but it sure will be hard to categorize each of the government’s actions as either totally okay or completely inappropriate for the companies’ health in the context of the financial crisis. This leaves the plaintiffs with some tough work ahead. They are going to need to show a judge just how to categorize each of those facts and ensure that the categorization does not interfere with their theory of the case.

All of this raises a bigger, more interesting question. What role should these types of lawsuits play after a crisis has passed? Some would say that they are an outrage — second-guessing what are leaders did to avert financial ruin. Others might say that this is an efficient way to respond to crises: allow the government to do what it needs to do during the crisis, but use litigation to make an accounting to all of the stakeholders once the situation has stabilized. I don’t have a fully thought out view on this, but I am struck by the dangers of each approach. The first allows for various kinds of scapegoating (as Hank Greenberg argues in the AIG bailout litigation) while the second allows for the kind of revisionism that favors the wealthy and powerful (as with these Takings suits by powerful investors who bought Fannie and Freddie preferred shares on the cheap as a sort of long shot bet on what the two companies will look like going forward). Tough to choose between the two . . ..