Posted on June 21, 2018 by Neil Garfield
Pretender lenders are going to cite this case as support for the idea that the note and mortgage can be separated and that either one can be the basis of a successful foreclosure. They will rely on the “exception” implied in the court decision wherein the owner of the note has an agency relationship with the servicer who is the foreclosing party.
In this case Freddie Mac clearly possessed the note, although there was no evidence cited that Freddie Mac had actually purchased it. That was presumed in this case. The purchase of the note was not an issue on appeal.
Freddie Mac had made it clear in public announcements that foreclosures should be in the name of servicers. So the possession of one part of the paperwork by the agent and the other by the principal are joined as a single unit.
This decision was correct in ruling against the homeowner, given the issues before it. The homeowner was attempting to make a technical distinction contrary to the facts and contrary to law. The issue brought on appeal was whether Freddie Mac was the only party with standing to foreclose. I would say that shouldn’t have been the issue. Both Freddie Mac and Capital One had standing depending upon who asserted it. Either one could have foreclosed.
Any party may foreclose in its own name or through an agent with authority to do so — if they otherwise plead and prove their status as holder in due course, or holder, or non-holder with rights to enforce. The issue on appeal was a non-starter.
Despite the article, there is no exception here. This New Jersey court simply followed the law.
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see case decision: Peck adv Capital One
The difference between this case and most other cases is that in this case there appears to be a tacit admission that Freddie Mac, as possessor of the note, was a holder or non-holder with rights to enforce because they had purchased the note. It is assumed in this case that Freddie was the actual owner of the debt.
The key differences between this case and most other cases are as follows:
- The “principal” in this case has been identified and assumed to be the owner of the debt.
- The “agent” in this case, Capital One, is a servicer whose authority to act as agent was not contested.
What is missing is whether Freddie Mac actually purchased the debt or the note and whether Freddie Mac still owned anything at all. Purchase of the note does not mean purchase of the debt if the debt is owned by someone other than the seller of the note. It is well settled law that only the owner of the debt can foreclose. But even if a purchase transaction did in fact take place, the question remains as to whether the interest of Freddie Mac was sold back to some private label REMIC Trust or some other third party such as the seller who may have given warranties as tot he performance of loans.
But if the note was purchased in good faith and without knowledge of the borrower’s defenses, if any, then the purchaser of the note increases their status to holder in due course where there are no defenses even if the preceding origination or transfers had defects.
On the other hand, if the seller of the note did not own the note, then the purchase by Freddie would be nullity. This is also well settled law. A seller of an interest that is nonexistent or in which the seller has no interest, cannot create the interest by selling it. This is the basic problem with “originations” and most “transfers” by endorsement or assignment. In such circumstances the buyer would be a possessor without rights to enforce unless the owner of the debt was in privity with the buyer of the note. The buyer would have a potential claim against the seller, but not the maker of the note.
In such circumstances, the owner of the debt or the true owner of the note would be able to file a claim against the maker and the buyer of the note, explaining how the possession of the note was lost and pleading (and proving) ownership of the debt.
NOTE THAT THERE IS A DEEPER ISSUE PRESENT. But it probably won’t get you any traction despite the clear basis in law and fact. Freddie Mac may or may not have actually made a purchase of the subject loan. If they didn’t then asserting them as the owner of the note might be OK for pleading, but the case ought to fail at trial — if the homeowner denies that they are the owner of the note.
If it paid in money, then to whom was payment sent? This is different than who claimed ownership of the note and mortgage. More often than not the money trail is NOT the same as the paper trail.
Note that many transactions occurred in which the “Mortgage Loan Schedule” was incomplete or nonexistent at the time of the purported sale. The identity of the seller in such purported transactions is also obscured by clever wording.
If they paid using RMBS certificates, then things get more interesting. Because the RMBS certificates were in all probability worthless. Hence there would a failure of consideration and Freddie Mac could not claim to be a purchaser for value. The vast majority of RMBS were sold under the false pretense that they were “backed” my residential mortgages. The issuer of the certificates is asserted to be a named trust. But if the trust never came into ownership of the alleged mortgage loans, then the RMBS certificates were backed by nothing at all.
Not to draw too fine a point here, it is still possible that Freddie could be considered a purchaser for value even if the RMBS certificates appeared to be worthless. That is because in the shadow banking marketplace, such certificates and the synthetic derivatives deriving their purported value from the purported value of the certificates nevertheless take on a life of their own. Even if they have no fundamental value they may well have a trading value that far exceeds anything that is fundamental to the certificates (i.e.m, zero).
Filed under: boarding process, burden of persuasion, burden of pleading, BURDEN OF PROOF, Fabrication of documents, Fannie MAe, foreclosure, forensic investigation, legal standing | Tagged: CAPITAL ONE, Freddie Mac, HOLDER, holder in due course, note mortgage split, Peck | 12 Comments »
Posted on May 15, 2018 by Neil Garfield
Payment by third parties may not reduce the debt but it does increase the number of obligees (creditors). Hence in every one of these foreclosures, except for a minuscule portion, indispensable parties were left out and third parties were in reality getting the proceeds of liquidation from foreclosure sales.
The explanations of securitization contained on the websites of the government Sponsored Entities (GSE’s) clearly demonstrate what I have been writing for 11 years and reveal a pattern of illusion and deception.
The most important thing about a financial transaction is the money. In every document filed in support of the illusion of securitization, it steadfastly holds firm to discussion of paper instruments and not a word about the actual location of the money or the actual identity of the obligee of that money debt.
Each explanation avoids the issue of where the money goes and how it was “processed” (i.e., stolen, according to me and hundreds of other scholars.)
It underscores the fact that the obligee (“debt owner” or “holder in due course” is never present in any legal proceeding or actual transaction or transfer of of the debt. This leaves us with only one conclusion. The debt never moved, which is to say that the obligee was always the same, albeit unaware of their status.
Knowing this will help you get traction in the courtroom but alleging it creates a burden of proof for you to prove something that you know is true but can only be confirmed with access to the books, records an accounts of the parties claiming such transactions ands transfers occurred.
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For one such example see Freddie Mac Securitization Explanation
And the following diagram:
What you won’t find anywhere in any diagram supposedly depicting securitization:
- Money going to an originator who then lends the money to the borrower.
- Money going to a named REMIC “Trust” for the purpose of purchasing loans or anything else.
- Money going to the alleged unnamed beneficiaries of a named REMIC “Trust.”
- Money going to the alleged unnamed investors who allegedly purchased “certificates” allegedly issued by or on behalf of a named REMIC “Trust.”
- Money going to the originator for sale of the debt, note and mortgage package.
- Money going to originator for endorsement of note to alleged transferee.
- Money going to originator for assignment of mortgage.
- Money going to the named foreclosing party upon liquidation of foreclosed property.
- Money going to the homeowner as royalty for use of his/her/their identity forming the basis of value in issuance of derivatives, hedge products and contract, insurance products and synthetic derivatives.
- Money being credited to the obligee’s loan receivable account reducing the amount of indebtedness (yes, really). This is because the obligee has no idea where the money is coming from or why it is being paid. But one thing is sure — the obligee is receiving money in all circumstances.
Payment by third parties may not reduce the debt but it does increase the number of obligees (creditors). Hence in every one of these foreclosures, except for a minuscule portion, indispensable parties were left out and third parties were in reality getting the proceeds of liquidation from foreclosure sales.
Filed under: boarding process, BURDEN OF PROOF, CORRUPTION, discovery, Discovery -Subpoena, escrow agent, evidence, Fabrication of documents, foreclosure, Investor, legal standing, securities fraud, Servicer, sham transactions, Title, TRUST BENEFICIARIES | Tagged: Freddie Mac, indispensable parties, loan receivable, money trail, obligee, paper trail, REMIC TRUST, REMIC Trust IPO, securitization | 18 Comments »
Posted on April 12, 2018 by Neil Garfield
The following is but a short sampling supporting the argument that any document coming from the banks and servicers is suspect and unworthy of any legal presumption of authenticity or validity. Judges are looking into self-serving fabricated documentation and coming to the wrong conclusion about the facts.
“Chase provided no prior notice to its cardholders that their crypto ‘purchases’ would be treated as ‘cash advances’ on a going forward basis,” according to the suit.
Tucker claims he was hit with about $140 in fees and a “sky-high” interest rate of 26 percent without warning after Chase reclassified his purchases as cash advances, a violation of the Truth in Lending act.
Its never been a secret that Freddie Mac’s business policy is to remain stealth in any chain of title if possible, and to rely on the servicers to keep its presence a secret in foreclosure proceedings. In fact, this PNC case which was overturned against PNC, involved the Defendant’s assertion that PNC was concealing Freddie Mac’s interest in the loan. Freddie Mac’s business policy appears to rely upon nothing more than handshakes with the originators and servicers. Here is some verbiage from a “Freddie Mac – Mortgage Participation Certificates” disclosure (See: Freddie Mac – Mortgage Participation Certificates):
“Defendants, and each of them initiated a malicious campaign to disrupt the chain of title to prevent Plaintiff from enforcing its contractual rights in the 2006 DOT by way of recording fraudulent documents to purportedly assign the rights under the 2006 DOT without the consent of Plaintiff, and otherwise thereafter fraudulently transfer all rights via a trustee deed upon sale, even though no trustee sale was ever conducted. All subsequently recorded or unrecorded transactions are therefore null, void, and of no effect.”
EDITOR COMMENT: So Deutsch is admitting that its practice of recording fraudulent documents are “null, void and of not effect.” In order to get to that point Deutsch is going to be required to prove standing — i.e., definitive proof that it paid for the debt, which it did not. Deutsch is on dangerous ground here and might deliver a bonus for homeowners. As for the defense, is it really a crime to steal a fraudulent deed of trust supported by fraudulent assignments and endorsements?
Barclays’ offering documents “systematically and intentionally misrepresented key characteristics of the loans,” and more than half of the loans defaulted, federal officials said.
Additionally, the Department of Justice reached similar settlements with two Barclays’ employees involved with subprime residential mortgage-backed securities. They will pay $2 million collectively.
The agreements mark the latest in a string of U.S. settlements with major banks over sales of tainted mortgage securities from 2005 to 2007 that helped set the stage for the real estate crash that contributed to the financial crisis.
Confirming settlement details the bank disclosed in late December, federal investigators said Deutsche Bank will pay a $3.1 billion civil penalty and provide $4.1 billion in consumer relief to homeowners, borrowers, and communities that were harmed.
The federal penalty is the highest ever for a single entity involved in selling residential mortgage-backed securities that proved to be far more risky than Deutsche Bank led investors to believe. Nonetheless, the agreement represents relief of sorts for the bank and its shareholders, because federal investigators initially sought penalties twice as costly.
Credit Suisse‘s announcement said it would pay the Department of Justice a $2.48 billion civil monetary penalty. The bank will also provide $2.8 billion in consumer relief over five years as part of the deal, which is subject to negotiations over final documentation and approval by Credit Suisse’s board of directors. [Credit Suisse owns SPS Portfolio Servicing.]
“The consent order provides that Ocwen will transition its servicing portfolio off of its current servicing platform to a platform better able to manage escrow accounts and establish a new complaint resolution process,” the Georgia Department of Banking and Finance said in a press release. “Ocwen shall hire a third-party firm to audit a statistically significant number of escrow accounts in high-risk areas of the portfolio to determine whether problems continue to exist around the management of escrow accounts and to identify the root cause of those problems.
“Ocwen has faced many legal and regulatory challenges in recent years. In December 2013 it reached a settlement over foreclosure and modification processes with the CFPB and state regulators. A year later, it made a separate agreement with New York regulators that removed company founder William Erbey as CEO.
In 2014, according to Mr. Tran, his boss ordered him to lie to customers who were facing foreclosure. When Mr. Tran refused, he said, he was fired. He worried that he wouldn’t be able to make his monthly mortgage payments and that he was about to become homeless.
Joining a cadre of former employees claiming they were mistreated for speaking out about problems at the bank, Mr. Tran sued. He argued in court filings that he had been fired in retaliation for blowing the whistle on misconduct at the giant San Francisco-based bank. Mr. Tran said he didn’t want his job back — he wanted Wells Fargo to admit that it had been wrong to fire him and wrong to mislead customers who were facing foreclosure.
Filed under: CORRUPTION, currency, foreclosure, TILA | Tagged: Barclays, Chase Bank, DEUTSCHE BANK, Fannie MAe, Freddie Mac, JPMorgan Chase, Ocwen, SPS, Truth in Lending Act, Wells Fargo Bank | 13 Comments »
Posted on August 8, 2017 by Neil Garfield
Editor’s Note: Fannie and Freddie have foreclosed on almost 4 million homes since the financial crisis of 2008. The GSEs typically can’t prove they own the loan if it was securitized between 1999 and 2014. Did you know that Fannie Mae and Freddie cannot accept a note that is not properly endorsed and assigned? A note that is not properly endorsed or assigned is considered a ‘fail’. See Document Custodian information here.
Fannie Mae and Freddie Mac wrapped up 15,683 foreclosure prevention actions in May, according to the Federal Housing Finance Agency (FHFA) May Foreclosure Prevention Report. This brings the total number of foreclosure prevention actions to 3,914,668 since the inception of the conservatorships back in September 2008. More than half of the actions reported for May—or 10,769—were permanent loan modifications, compared with 11,328 in April. All told, since September 2008, the Enterprises have granted permanent loan mods to 2,076,345 distressed homeowners.
Along those same lines, the share of modifications with principal forbearance accounted for 25 percent of all permanent modifications in May, according to the report. Modifications with extend-term only leapt to 45 percent during the month thanks to ongoing positive headwinds in house prices. Additionally, a combined 1,489 short sales and deeds-in-lieu sealed in May. There were 10 percent more—or 1,650—in April.
As for the Enterprises mortgage performance metrics, the serious delinquency rate spiraled down further, plunging from 1.01 percent at the close of April to 0.98 percent at the end of May. Loans 30–59 days’ delinquent charted at 402,780 in April; they stood at 348,141 in May. Continuing their downward trajectory, 60-plus-days’ delinquent loans hit 1.3 percent in May, decreasing from April’s 1.34 percent.
In terms of Fannie and Freddie foreclosures, third-party and foreclosure sales jumped 9 percent, from 5,523 in April to 6,042 in May. Foreclosure starts tumbled 13 percent from 17,056 in April to 14,905 in May.
The top five reasons for delinquency in May included curtailment of income (21 percent), excessive obligations (22 percent), unemployment (7 percent), illness of principal mortgagor or family member (6 percent), and marital difficulties (3 percent).
Posted on August 4, 2017 by Neil Garfield
Editor’s Note: Former Secretary of Treasury Timothy Geitner was instrumental in greasing the runways for HAMP so the GSEs could steal homes. But he also engineered the theft of GSE investor profits while proclaiming Fannie Mae and Freddie Mae to be on the verge of collapse. Instead, the federal government, in an act of unconscionable bad faith, implemented net worth sweeps to steal money from investors. These massive profits were also used to artificially prop up failing Obamacare.
July 19, 2017 marked the release of the first set of much-awaited government documents that addressed the government knew and when, before the implementation of its net worth sweep on August 17, 2012, which gave the government all profits from the operation of those two Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac. That deal was embodied in the Third Amendment to the original Senior Preferred Stock Purchase Agreements (SPSPAs) of September 2008. Analytically, these documents are irrelevant: the case against the government is air tight without them. Practically, these documents should transform all phases of this complex litigation. The best way to beat the government in litigation is to show its bad faith throughout. It is important to see why both the propositions are true, and how they impact on the ongoing litigation. I am offering this analysis, in my capacity as an advisor to institutional investors.
The Analytics. A close look at the disclosed documents tell us nothing about the net worth sweep that is not apparent on the face of the published agreement that the Federal Housing Finance Authority (FHFA) and the Department of Treasury used to put the Net Worth Sweep (NWS) in place. These were expert lawyers and they meant what they said and said what they meant—namely, that the sole purpose of the deal was to make sure that all the future profits generated by Fannie and Freddie would end up in the pockets of the United States Treasury above and beyond the 10 percent dividend set in the original 2008 agreement. It would have been, of course, imprudent for the two government agencies to announce their intention to collude publicly, so they engaged in a planned, but sham, transaction, that made it appear as if their joint action was the salvation of Fannie and Freddie. The supposed benefit was that the enterprises were relieved of any obligation to pay money to Treasury when they did not have money to pay it.
Unfortunately, for the government, the enterprises and their private shareholders already had two airtight defenses against such an unhappy result. First, if a company is insolvent it can’t pay any money to its shareholders as dividends or to its creditors anyhow. So it is a simple sham to claim that consideration has been supplied by relieving parties of any obligation to pay amounts that could not pay in any event. Second, as a legal matter, the SPSAs contained a so-called payment-in-kind clause, which allows Fannie and Freddie to not pay cash dividends so long as the deferred amounts accrue at a rate of 12 percent annually, two points higher than the 10 percent rate stipulated for cash dividends.
The ability to exercise this deferred option carries with it two unambiguous consequences. First, it meant that Treasury never had to make any further advances to the entities if it thought it imprudent to do so. The GSE amounts due would just continue to accrue. Accordingly, there could be no death spiral in which Treasury would have to make advances to prop up a worthless enterprise, and no exhaustion of Treasury’s financing commitments. Second, this arrangement was not an open invitation for the conservators of the enterprises to squander money. Any net distributions to the enterprises’ private shareholders, whether as dividends or distributions on liquidation, were subordinate to the government’s senior preferred stock.
It would therefore be unwise for any prudent trustee to incur higher rates of payment on the senior preferred if cash were available to make current cash dividends. The initial deal had a built-in financial stability that worked well in all states of the world. At no point in the documents did Treasury make reference to this decisive clause.
Similarly, the judicial treatment of the complete dividend arrangement on the motion to dismiss, no less, completely misunderstood these provisions. That short cut is perfectly permissible if the opinions make an accurate assessment of the stated transaction. But that was not to be had. In the original 2014 trial court decision by judge Royce Lamberth in Perry Capital v. Lew, this additional shareholder option was perversely construed as a penalty for late payment, which therefore had to be ignored in deciding on the validity of the NWS. Similarly, the clause was put to one side on the decision of the majority of the D.C. Circuit in Perry v. Mnuchin, with the glib pronouncement that director of FHFA, as a fiduciary, did not have to avail himself of the one option that worked to the greatest advantage of his beneficiaries, but could instead fork over all that excess cash to the government knowing that it received nothing of value in return. Why this extreme statement? Because there is no state of the world in which the private shareholders were better off after the NWS than they were without it. On the downside, the got no money either way. On the upside, they got no money either, as all the cash above the standard 10 percent (or, if appropriate, 12 percent) dividend went to the government. The government should have lost on the motion to dismiss.
The Documents. The overall message from the published documents is in perfect sync with the basic structure of the underlying deal. None of them are remotely privileged. The only damaging information that they contain is directly pertinent to the case, namely, on the state of mind of key government officials on the eve of the NWS. In order to best understand their impact, it is useful to examine the documents in reverse chronological order, starting with those that prepared just before the NWS was implemented. The point is quite simple. Whatever the earlier uncertainties, given the indications of the GSEs’ financial strength right before planned enactment, the government could have simply canceled the NWS without any public fanfare, knowing that the financial situation had stabilized. By going forward with the NWS, the high government officials knew that the NWS was not a salvage operation to prevent the bailout from collapsing, but a calculated effort to strip all the profits from the GSEs in a no-risk transaction for the Treasury.
Thus, on the Monday, August 13, four days before the announcement of the NWS, an email from Jim Parrott to Brian Deese, takes the candid view that:
- We are making sure that each of these entities pays the taxpayer back every dollar of profit they make, not just a 10% dividend. (emphasis in original)
- The taxpayer will thus ultimately collect more money with the changes.
- With the overall set of changes, we have removed any doubt about the long-term fate of these entities: they will NOT be allowed to return to profitable entities at the center of our housing finance system, but instead wound down and replaced with a system driven by private capital and lower risk to the taxpayer.
That of course is exactly what the NWS did. The obvious reading of this document is that four days before the NWS all the relevant officials on the eve of the NWS knew that government stood to make profits in excess of the agreed 10 percent dividend rate, notwithstanding any earlier doubts Treasury and FHFA had several months prior about the expected financial performance of Fannie and Freddie.
Just before the NWS, these officials knew with certainty that there was no possibility of a death spiral in which the Treasury would constantly have to lend money to the GSEs in order to collect the required dividend from them. That result is confirmed by an earlier memo dated July 30, 2012, which announces the government’s intention to announce the changes on Friday, August 10 after the markets close. (The actual launch date was a week later, still on a Friday in in August in order to avoid serious media attention.) The memo’s stated rationale for the NWS was “GSEs will report very strong earnings on August 7, that will be in excess of the 10% dividend to be paid to Treasury.” The relevant information had not changed from July 30 to the announcement of the NWS on August 17.
The next critical document was dated June 25, 2012 from Treasury official Mary Miller to Michael Stegman. It relates that Ed DeMarco, the acting head of FHFA, had some doubts about how to proceed but no doubts about the increasing financial strength of Fannie and Freddie. Its relevant portion reads:
- Through weeks of negotiating terms of possible amendments to the PSPAs, he [DeMarco] never questioned the need to adjust the dividend schedule this year. Since the Secretary raised the possibility of a PR [principal reduction to benefit distressed homeowners] covenant, DeMarco no longer sees the urgency of amending the PSPAs this year.
- He has raised two competing reasons for this new position: (1) the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future even with the caps; and, (2) instituting a net worth sweep in place of the dividend will further extend the lives of the GSEs to such an extent that it would remove the urgency for Congress to act on long-term housing finance reform. He now sees the PSPA amendments as a backdoor way of keeping the GSEs alive-getting to an Option 3-type plan [calling for the separation of special purpose vehicles for good and bad assets] without the need for legislation.
For these purposes the most salient portion of the document is the acknowledgment of the large revenues that will be sufficient to cover the dividend payments in the future with the caps in place, which meant that Treasury understood that no additional advances would ever be needed. The third option mentioned in the last paragraph refers to a position paper submitted to Secretary Timothy Geithner on December 12, 2011, or over eight months before the bailout took place. It contained a preliminary discussion of various policy options, the first of which called for restructuring “Treasury’s dividend payments from a fixed 10 percent annual rate to a variable payment based on available positive net worth (i.e. establish an income sweep). This will ensure that remaining PSPA funding capacity is not reduced in the future by draws to pay dividends.” At the very least both Miller and Stegman knew that both Fannie and Freddie could turn profitable shortly, which came to pass to its knowledge when the NWS was put into effect in August, 2012. This case is open and shut.
Commentaries on the released documents. Most of the commentators who read the documents thought that they revealed that Treasury and FHFA had a full knowledge that the GSEs had turned the corner into positive territory when the NWS was adopted. Gretchen Morgenson’s article of July 23 was entitled “U.S. Foresaw a Better Return in Seizing Fannie and Freddie Profits.” It was well understood”, she wrote “that decision to divert the profits knew that the change would most likely generate more revenue for the treasury. She explicitly concluded that Treasury’s stated explanation, to protect the taxpayers from further losses, was contradicted by the documents which showed “as early as December 2011, high level treasury official knew that Fannie and Freddy would soon become profitable again.”
Her views were adopted wholesale by HousingWire, where once again the headline tells the whole story: “Newly sealed documents reveal real reason for Fannie, Freddie Profit sweep: Report: Geithner knew in 2011 that GSEs would soon be profitable.” Bloomberg News told the same story when it wrote “New Documents Give Hope to Fannie Shareholders seeking redress,” specifically pointing out that evidence undercut the key government claim that the NW was necessary to avert “a process known as a ‘circular draw’ or ‘death spiral.’”
The impact on litigation. The last question is how these revelations will impact ongoing litigation. The documents were released in connection with the Fairholme takings claim in the Federal Court of Claims. The sound theory of that case is that government had confiscated shareholder property when it stripped them of their dividend rights, their liquidation preferences, and their voting rights—the three attributes that give shares their value. Similarly, Jerome Corsi at InfoWars stated: “New Docs Support Fannie Mae and Freddie mac Shareholders in Court: Apologist [John Carney] Ignores Evidence They Illegal Confiscated Fannie and Freddie Earnings.”
That claim is made out by an examination of the relevant documents. If these cases are treated as direct expropriation of funds, governed by the per se rule in Loretto v. Teleprompter Manhattan CATV Corp. the bad faith of the government should not matter. But, if, as thus far has been the case, the NWS is evaluated under the more flexible doctrine of Penn Central Transportation Company v. City of New York this evidence fills any gap in the plaintiff’s case. Penn Central requires an explicit examination of the government reasons for imposing the sweep.
The Treasury’s bad faith of the government overrides any potential government justification for making these shareholders bear a disproportionate share of funding general government activities. In the language of Penn Central, the NWS “has interfered with distinct investment-backed expectations,” without reference to any traditional police power concerns with health and safety. As Justice Holmes quipped in Pennsylvania Coal v. Mahon “a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change.” The government has meet its financial needs from general revenues, not by picking the pocket of the private shareholders. The takings claim therefore should be solidified by the release of these documents.
The documents revealed in the takings litigation should also influence the treatment of the various breach of fiduciary and contract claims in Perry Capital v. Lew, and in Perry Capital v. Mnuchin. Both the trial court in Lew and the D.C. Circuit on appeal in Mnuchin let the government win on summary judgment, without the benefit of any discovery at all. A correct reading of these documents shows that they gave summary judgment for the wrong party, the government. But now that Mnuchin is back to the District Court on remand, it should take those documents into account in making its decision on the validity of the plaintiff’s surviving contract claims.
The first time around, the Circuit Court badly mangled the proper tests for determining expectation damages. Its decision to divide outstanding shares into different subclasses destroys the underlying market, which can function only if all shares have identical attributes. Hence it was a huge mistake to insist that shareholder claims be fractionated so that individual shareholder expectations somehow depend whether the shares were purchased before or after the NWS was into place. The correct answer in all cases is that shareholder expectations are fixed at the time of initial issuance and purchase of these shares, such that any resales or other transfers of those shares do not affect the nature of the contract claims.
The D.C. Circuit’s revised opinion of July 17, 2017 backs off that categorical error. Nonetheless it still goes astray because of its failure to affirmatively state as a matter of law the correct rule that treats all shares identically. Instead its states the relevant inquiry on remand is “whether the Third Amendment violated the reasonable expectations of the parties.” The government knew at the time of the NWS that it was claiming more than it was entitled to. That fact should shape the reasonable expectations of the private parties who are entitled to think that the government will not consciously abuse its power by collusive transactions that were intended to strip the shareholders of all value in a sham transaction.
The NWS benefited the government, and only the government. The District Court cannot decide this case in an informational vacuum, but must take this information into account in determining the reasonable shareholder expectations. The abuse of NWS is as relevant to the contract claims as it is to the takings claims. Judge Lamberth should not ignore undisputed evidence, which points to the total viability of the contract claims that the D.C. Circuit has asked him to reevaluate on remand.
Richard A. Epstein is the Laurence A. Tisch professor of Law at NYU, senior fellow at the Hoover Institution, and senior lecturer at the University of Chicago Law School.
Posted on June 19, 2017 by Neil Garfield
Do we always need an appraiser to tell us what a house is worth? The two biggest sources of mortgage financing in the country — Freddie Mac and Fannie Mae — think not.
With no formal public announcement, on June 19 Freddie Mac began phasing in its plan to transition to appraisal-free mortgage for certain loan applications. Though limited initially to some refinancings, Freddie expects to expand the concept to home purchases in the coming months. Under the program, borrowers no longer will have to pay hundreds of dollars for a professional appraisal — a reversal of long-standing mortgage industry practice. There will be no traditional appraisal charges at closing and lenders no longer will be required to assume responsibility for the accuracy of home valuations. The program currently is limited to refi applicants who have at least 20 percent equity in their homes and are not pulling out cash.
Fannie Mae, the other giant, government-supervised financing company, has been quietly offering no-appraisal refinancings for months. Both companies emphasize that they only permit waivers of appraisals when they have substantial data on the property involved and the local real estate market. Fannie says it has a database containing more than 23 million previously completed appraisal reports and uses “proprietary analytics” to come up with value estimates. Unlike Freddie Mac, Fannie Mae has not indicated whether it plans to expand its “property inspection waiver” concept to loans for home purchases, though industry sources say they expect it.
Mortgage lenders generally are enthusiastic about the two companies’ moves. Dave Norris, chief revenue officer of loanDepot, one of the highest volume retail lenders in the country, says “leveraging technology” to arrive at property valuations “gives consumers certainty” about the status of their application upfront, sharply reduces the time needed to get to closing, plus saves money. Roughly 12 percent of loanDepot’s refinancings through Fannie Mae already are proceeding appraisal-free, Norris told me.
“Consumers definitely appreciate it,” he added. There’s “more cash in their pockets” and the total experience is better.
Pete Mills, a senior vice president at the Mortgage Bankers Association, also welcomed the appraisal-free concept. “If there is a way to use technology to streamline or automate the process while ensuring the same standards of accuracy are met,” he said, “it would benefit both lenders and consumers and should be pursued.” Nonetheless, loan applicants should retain the right to request a full, walk-through appraisal if they want one, added Mills.
Not surprisingly, appraisers view the whole trend as an impending nightmare — potentially sending them to the fate of buggy whip manufacturers, travel agents and others whose industries have been decimated by new technologies. Unlike buggy whip makers in an age of automobiles, however, appraisers argue that they have a legitimate, continuing role. There is simply no technological substitute for what they bring to the table: Eyes, ears, noses and the ability to independently analyze a home, its interior, the neighborhood environment and market conditions, and arrive at an accurate opinion of its current worth. Computer programs may be jam-packed with data and algorithms but they have no clue about what damage — or improvements — may be present inside a house.
“I’ve walked into 5-year-old houses that are in such bad shape that they look like they haven’t been maintained for 25 years,” says Pat Turner, a Richmond, Virginia, appraiser. Eliminating appraisals is a “a throwback” to the disastrous practices of subprime lenders during the housing boom and bust, he said. “This is a return to no doc and low doc on steroids.”
Carl S. Schneider, an appraiser in Tulsa, Oklahoma, says the path Fannie and Freddie are on is “fraught with danger,” not only for banks but for the taxpayers who may have to bail them out. The databases Fannie and Freddie are using may contain voluminous appraisal information previously submitted as part of mortgage files. But that “property data will age and change without being refreshed” if large numbers of new appraisals are not being done, he said. Without new professional appraisals that include updated information on the interior conditions of homes — plus observations on the presence of value-depressing environmental features in the area that aren’t likely to be picked up by computers — “where will it all lead?” asks Schneider.
Where indeed? Fannie and Freddie are confident that they are introducing appraisal-free mortgages carefully and responsibly. Appraisers have serious doubts. The jury is out.
Posted on May 17, 2017 by Neil Garfield
A sluggish mortgage-bond market could be jump-started by a new service that allows investors to short home loans.
Skeptics say the rise of derivatives on credit-risk transfer notes sold by Fannie Mae and Freddie Mac has echoes of the 2008 credit crisis, when the market plunged under the weight of collapsing subprime securities.
Fannie and Freddie – the biggest guarantors of U.S. home loans – started transferring mortgage-default risk to bond funds and other investors in 2013 to help reduce risks to taxpayers according to Bloomberg. But the program has been generating more traction in recent months, after New York-based Vista Capital Advisors rolled out a pilot program that would eventually allow investors to bet on U.S. homeowner defaults.
Craig Phillips, a former BlackRock executive serving as head of financial markets advisory and client solutions for the Treasury Department, said credit-risk transfers will be core to U.S. housing policy.
The madness begins again with creative new derivatives and credit risk transfers that put the risk on the taxpayer.