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Federal District Court Holds Fannie Mae, Freddie Mac Exempt From Chicago's Property Maintenance Ordinance
On August 23, the U.S. District Court for the Northern District of Illinois held that Fannie Mae and Freddie Mac are exempt from a 2011 ordinance that established new requirements for mortgagees and their agents regarding the maintenance of vacant property. FHFA v. City of Chicago, No. 11-8795, 2013 WL 4505413 (N.D. Ill. Aug. 23, 2013). The FHFA, as conservator of Fannie Mae and Freddie Mac, sued the city over the ordinance, which requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations on mortgagees and their agents (including servicers, Fannie Mae and Freddie Mac), regardless of whether the properties are foreclosed upon, and mandates fines for non-compliance. The court granted summary judgment for the FHFA, holding that the statute that created the FHFA—the Housing and Economic Recovery Act of 2008 (HERA)—preempts the local ordinance. The court reasoned that although HERA does not expressly preempt local laws, Congress intended for the FHFA to be the only entity responsible for operating Fannie Mae’s and Freddie Mac’s business and could not have intended to allow thousands of municipalities to impose varying obligations on the FHFA. On those grounds, the court granted the FHFA’s motion for summary judgment. The court also held in the alternative “for purposes of completeness” that the registration fees imposed on Fannie and Freddie by the ordinance would constitute an impermissible tax on the FHFA in violation of the federal government’s immunity from taxation.
FHFA Plans Enhanced Oversight of Mortgage Servicing Transfers
On August 22, the FHFA Office of Inspector General (OIG) issued a report on its review of the FHFA’s oversight of Fannie Mae’s January 2013 representation and warranty settlement with a mortgage originator and the FHFA’s related approval of the sale of certain of the originator’s mortgage servicing rights (MSR) to specialty servicers. The OIG reviewed the process by which the FHFA assessed and approved the MSR transfer and concluded that the FHFA’s review of the MSR transfer did not reflect the “depth of analysis that likely would have been accorded had FHFA followed a process comparable to that used in its newly established process for reviewing mortgage repurchase . . . settlements.” As such, the OIG determined that the FHFA should establish a formal review process for “compensatory fee settlements and significant mortgage servicing rights transfers.” In a letter attached to the report, the FHFA concurred with the OIG’s recommendation, and committed to establish guidelines for compensatory fee settlements and significant MSR transfers by January 31, 2014.
Investors Sue to Preempt Locality's Planned Seizure of Mortgages Using Eminent Domain; FHFA Outlines Potential Responses
On August 7, trustees representing the interests of investors in mortgage backed securities filed two separate suits to halt the planned use of eminent domain by the city of Richmond, California to seize a group of mortgages. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663 (N.D. Cal., complaint filed Aug. 7, 2013); Bank of NY Mellon v. City of Richmond, No. 13-3664 (N.D. Cal., complaint filed Aug. 7, 2013). The city recently threatened to seize 626 mortgages if the owners and servicers of those debts do not agree to sell the mortgages to the city. The complaints allege that the city is seeking to use its eminent domain power impermissibly to generate profits for private investors. The trustees explain that the city’s plan primarily involves performing loans and would value those loans at steeply discounted prices rather than the loan balance, under the guise of seizing “underwater” mortgages to prevent future defaults and foreclosures. The complaints assert that the vast majority of the loans are not at imminent risk of default and are located outside of the city, and, as such, the seizure plan will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. The trustees seek a declaration that the eminent domain plan violates the U.S. Constitution, the California Constitution, and other state laws, and an order enjoining the city from implementing the program.
On the same day, the FHFA released a memorandum prepared by its general counsel regarding eminent domain, based in part on public input solicited last year. In a separate statement, the FHFA states that it could: (i) initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; (ii) act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or (iii) take such other appropriate actions to respond to market uncertainty or increased costs created by any movement to put in place such programs.
FHFA Announces Settlement in Lead MBS Action
On July 25, the FHFA announced that a financial institution agreed to pay roughly $885 million to settle allegations that the offering documents it provided to Fannie Mae and Freddie Mac in connection with the sale of billions of dollars in residential MBS included materially false statements or omitted material information, resulting in massive losses to the enterprises. The institution will pay approximately $415 million to Fannie Mae and $470 million to Freddie Mac to resolve claims related to securities sold to the companies between 2004 and 2007. The settlement ends the lead case of 18 cases the FHFA filed in 2011. In April 2013, the Second Circuit held that the action, filed within three years after the FHFA was appointed conservator of Freddie Mac and Fannie Mae, was timely under the relevant sections of Housing and Economic Recovery Act, and that the FHFA has standing to bring the action.
Senate Banking Committee Approves FHFA Director Nominee, Other Nominees
On July 18, the Senate Banking Committee approved Rep. Mel Watt (D-NC) to be the next Director of the FHFA, on a 12-10 party line vote. On a voice vote, the Committee also approved Michael Piwowar and Kara Stein as members of the Securities Exchange Commission, Jason Furman to serve as member and chairman of the Council of Economic Advisers, and Richard Metsger to sit on the National Credit Union Administration Board. Finally, again by voice vote, the Committee voted to extend the term of SEC Chair Mary Jo White until June 5, 2019. The nominations could come before a vote of the full Senate in the coming weeks.
Senate Confirms Richard Cordray as CFPB Director
This evening, the U.S. Senate voted 66 to 34 to confirm Richard Cordray as CFPB Director, for a five year term. As is well known, Mr. Corday had been serving in that position as a recess appointee and his recess appointment was set to expire at the end of this year. Moreover, his recess appointment has been the subject of a litigation challenge, and the issue of the validity of recess appointments such as his may have been resolved by the U.S. Supreme Court in the next term. The Senate vote on Mr. Cordray’s nomination came after several days of Senate debate over the Senate’s confirmation process and filibuster rules that resulted in a path forward on up or down votes on several presidential nominations. It ended a two-year stalemate between Republicans and Democrats over the Mr. Cordray’s nomination, based on a fundamental disagreement regarding the structure and oversight of the CFPB. For example, Republican members of both the Senate and the House have called for the CFPB’s director-led structure to be replaced by a commission, and for the CFPB’s budget to be subject to the annual congressional appropriations process.
There may be movement on one potential change to oversight of the CFPB. Concurrent with the agreement to vote on Mr. Cordray’s nomination, Senator Portman (R-OH) announced a bill that would establish an office of inspector general for the CFPB. Currently the Bureau shares an inspector general with the Federal Reserve Board. Also, following the confirmation vote, the Chairman of the House Financial Services Committee immediately dropped his objection to Mr. Cordray testifying before that committee and stated that the committee will call him to testify on the CFPB’s annual report as soon as practicable.
The confirmation of Mr. Cordray, and the expected confirmation of new presidential nominees to the National Labor Relations Board, may impact the Supreme Court’s pending review of presidential recess appointment power, a case we have written about on several other occasions, including most recently when the Supreme Court agreed to hear the case.
Other nominations of interest remain pending. For example, the President has nominated Representative Mel Watt (D-NC) to serve as FHFA Director. The Senate Banking Committee was set to vote on that nomination this morning, but postponed the vote until Thursday.
Bipartisan Group of Senators Propose Housing Finance Reform Bill
On June 25, Senators Mark Warner (D-VA) and Bob Corker (R-TN) announced the introduction of a new bill to reform the secondary mortgage market. The bill, known as the Housing Finance Reform and Taxpayer Protection Act, has bipartisan support from several other members of the Senate Banking Committee. The bill is designed to draw private capital back into the secondary mortgage market by providing a limited government guarantee to qualifying mortgage-backed securities (MBS). It would replace over a period of time Fannie Mae and Freddie Mac and in their stead establish the Federal Mortgage Insurance Corporation (FMIC), which would oversee a variety of secondary market utility functions, many of which are similar to those under development by the FHFA. Under the new system, the FMIC would insure MBS securitized by FMIC-approved issuers, provided that the MBS place in the first loss position a private investor with at least 10 cents in equity capital for every dollar of risk. FMIC-insured MBS also would be required to be collateralized by “eligible mortgages” – mortgages that, among other things, meet the CFPB’s ability to pay requirements, have a down payment of at least five percent, and are below the conforming loan limit. The FMIC also would have responsibility for approving bond guarantors to provide credit enhancement, servicers eligible to service loans in MBS pools, and private mortgage insurance companies to insure mortgages with a loan-to-value ratio above 80 percent. The bill also would establish an affordable housing fund subsidized through fees on securitized loans and would grant the FMIC authority to back the entire MBS market for a limited period of time in emergencies.
Federal Agencies Announce Two-Year HAMP Extension
On May 30, the FHFA announced that Fannie Mae and Freddie Mac will extend the Home Affordable Modification Program (HAMP) through December 31, 2015. Concurrently, the Treasury Department and HUD announced an extension of the HAMP deadline for non-Fannie Mae and Freddie Mac loans to harmonize with the FHFA extension. The programs were set to expire at the end of 2013. In addition, the FHFA extended from August 2015 through the end of 2015 its streamlined modification initiative.
FHFA Proposes Rule to Replace Federal Home Loan Banks' Use of Credit Ratings
On May 23, the FHFA proposed a rule to require the Federal Home Loan Banks (FHLBs) to base determinations about the appropriateness of specific investments or activities on their own internal documented analyses of credit and other risks. Currently the FHLBs use credit ratings provided by certain national credit rating organizations. Dodd-Frank Act section 939A requires the FHFA and other federal regulators to review regulations that require use of such credit rating firms. The FHFA proposal seeks comment on alternative analyses for use by the FHLBs in assessing investments, standby letters of credit, and liabilities. Comments on the proposal are due by July 22, 2013.
Sixth Circuit Holds Fannie Mae, Freddie Mac Exempt from Local Taxes
On May 20, the U.S. Court of Appeals for the Sixth Circuit overturned a district court decision and held that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. Oakland v. Fed. Hous. Fin. Agency, No.12-2135/2136, 2013 WL 2149964 (6th Cir. May 20, 2013). In this case, as in other similar cases pending around the country, Michigan counties and the state of Michigan sued to recover state and local real estate transfer taxes from Fannie Mae, Freddie Mac, and the FHFA for property transfers made by those entities. The appeals court held that Congress expressly exempted Fannie Mae and Freddie Mac from “all taxation,” including all state and local taxation, when it chartered those institutions and that it applied the same exemption to the FHFA as conservator in the 2008 Housing and Economic Recovery Act. The court rejected the state and local entities' argument that the phrase "all taxation" applies only to direct taxes and not excise taxes. The court added that Congress specifically carved out real property taxes from the "all taxation" exemption, but did not carve out the types of transfer taxes at issue in this case. The court vacated the district court's order and remanded with direction that the district court enter summary judgment for the FHFA, Fannie Mae, and Freddie Mac. In a statement issued after the decision, one Michigan county stated that it plans to seek Supreme Court review.