Residential Mortgages

Week in Review: Dell Buyout and Mortgage Crisis Litigation

By Christopher Hammond, J.D. Candidate 2015 | Posted on

More is better – or so it’s said.  That’s bad news for Dell stockholders, as the Blackstone Group has dropped its bid for the company.  Blackstone had not formally announced an offer to compete with the $13.65 per share Michael Dell hopes will take the company private.  Through the due diligence process, Blackstone became unsatisfied with the world’s third-largest PC maker’s rapidly-atrophying marketshare—notably including a 14% decline in PC volume during 2013 Q1.  With Blackstone out, the activist investor Carl Icahn is the only likely competitor.  Mr. Icahn has preliminarily discussed a $15-per-share offer, but has not yet put it on the table.  For more, see NYTimes and Business Insider.

AIG v. BAC is headed to New York state court.  American International Group’s $10 billion lawsuit against Bank of America, filed in August 2011, alleges “fraudulent misrepresentations” regarding $28 billion in residential MBSs (mortgage-backed securities) which resulted in heavy losses for the insurer.  The merits of the case have been stalled as each side has jockeyed for jurisdictional advantage.  The Second Circuit Court of Appeal ruled this morning that the lower court had improperly denied AIG’s motion the case to state court.  For more, see Reuters.

The Week in Review: SEC Nomination, Symposium, DOJ and FDIC

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee.  Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney.  She appears likely to win confirmation (as early as next week).  If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency.  During her testimony, Ms. White said:  “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.”  For more, see the NYTimes.  On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.

The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15.  Registration is required.  See a previous post for a complete description of this year’s symposium lineup.

Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger.  In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’  “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case.  The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank.  For more, see Bloomberg. 

A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.”  The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.”  Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.”  Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?”  For more, see the LATimes and Forbes.

 

FRB Governor Raskin Urges Banks to Take Proactive Role in Dealing with Reputational Risk

By Eric R. Fischer, Jackson Galloway, and Elizabeth Shea Fries, Goodwin Proctor, LLP | Posted on

[Editor’s Note:  The following post is from Goodwin Proctor’s recent Financial Services Alert by Eric R. Fischer, Jackson B. R. Galloway, and Elizabeth Shea Fries.  This and other updates from Goodwin Proctor are available here.] 

On February 28, 2013, FRB Governor Sarah Bloom Raskin made a presentation entitled “Reflections on Reputation and its Consequences” to the 2013 Banking Outlook Conference at the Federal Reserve Bank of Atlanta.  Governor Raskin noted that, in the aftermath of the 2007-2009 financial crisis, financial institutions of all sizes have seen a decline in the public’s perception of their reputation and trustworthiness (and she added that the quality of their reputation is of particular importance to financial institutions).  Governor Raskin stated that the decline in public trust of, and confidence in, financial institutions has been increased recently by, among other things, “the Occupy Wall Street movement, payday loans, overdraft fees, rate-rigging settlements in London Interbank Offered Rate [LIBOR] cases, executive compensation and bonuses that seem to bear no relationship to performance or risk, failures in the foreclosure process, and a drumbeat of civil litigation.”

Please click here to read the rest of this entry.

CFPB Announces “Ability to Repay” Rule for Mortgage Lenders

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages.  The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act.  The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.

The Ability-to-Repay rule is aimed at protecting American consumers.  According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”

Under the new rule:

  • 1. Lenders are required to obtain and verify financial information from potential borrowers,
  • 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
  • 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.

In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors:  1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.

(more…)

Mortgage Closing Costs May Rise Under the New Rules to Prevent Illegal House “Flipping”

By Mark Rutter, J.D. Class of 2015 | Posted on

In August 2012, six federal financial regulatory agencies issued a proposed rule to implement Section 1471 of the Dodd-Frank Act which sets forth appraisal requirements for “higher-risk” mortgage loans.

The intended purpose of the proposed rule is to tighten valuation standards for homes in order to reduce the risk of appraisal fraud, a move meant to reassure creditors, borrowers, and investors alike. Section 1471 was created as part of Congress’ intention to prevent the use of false or inflated appraisals in obtaining mortgages. If the proposed rule is finalized without amendment, lenders seeking to issue high-risk mortgage loans will be “unable to value properties on the basis of broker-price opinions, automated valuations, or drive-by appraisals”. The proposed rule would affect mortgages with annual percentage rates (APRs) at designated levels above the Average Prime Offering Rate (APOR). First-lien loans (such as standard mortgages) with an APR 1.5 percentage points above the APOR would be classified as a higher risk mortgage under the proposed rule, while first-lien jumbo loans with APRs 2.5 percentage points above, and subordinate-lien loans with an APR 3.5 percentage points above the APOR would similarly be considered higher-risk.

(more…)

The Second Circuit Casts Doubt on 5% Materiality Guideline

By By Charles Rogerson, J.D. Class of 2013 | Posted on

In Litwin v. Blackstone Group, L.P. (2011) the U.S. Court of Appeals for the Second Circuit concluded that the District Court erred in dismissing Plaintiffs’ complaint because Plaintiffs plausibly alleged that omitted or misstated trends from Defendants’ initial public offering registration statement and prospectus were material under Item 303(a)(3)(ii). In so holding, the Second Circuit stressed the importance of both a quantitative and qualitative analysis of materiality, stating that “[e]ven where a misstatement or omission may be quantitatively small compared to a registrant’s firm-wide financial results, its significance to a particularly important segment of a registrant’s business tends to show its materiality.” The decision casts doubt on the widely held belief amongst practitioners that a misstatement or omission that affects less than 5% of a firm’s assets is immaterial.

The case concerned the 2007 initial public offering of Defendant Blackstone Group, L.P., an alternative asset management and financial services company holding approximately $88.4 billion in assets in 2007. Plaintiff alleged misstatements and omissions with regard to its holdings in FGIC Corp., Freescale Semiconductor, Inc, and general residential real estate holdings.

(more…)

SEC Rolls Out the “Skin in the Game” Regulation to Mitigate Moral Hazard for Lenders and Bond Issuers Involved in Asset-Backed Securities

By Peter Benesch, J.D. Class of 2013 | Posted on

On March 31 the SEC began seeking public comment on its proposed “skin in the game” regulation, which would require lenders and bond issuers of asset-backed securities (ABS’s) to retain 5% of the credit risk of the securities they issue. This requirement would apply to each of the tiers of ABS’s issued individually, preventing a lender or bond issuer from issuing a large proportion of risky securities and yet only retaining its 5% stake in those safer, higher-grade securities it issues. In the alternative, a lender or bond issuer could also comply with the regulation by retaining 5% of the first-loss residual interest of all ABS’s issued or a 5% interest in a representative sample of the underlying securities.

The rule is one of the many proposed by the SEC in accordance with the mandates of the Dodd-Frank Act. The rule was motivated by the public perception that there was an incentive problem, often referred to as a moral hazard, inherent in lending practice that became hegemonic in the mortgaged-backed securities (MBS’s) market. The potential problem lies in the fact that the banks and lenders extending loans to home buyers may not fully appreciate the credit risk of doing so because of their ability to turn around and easily sell these mortgages on the secondary market (commonly referred to as the “originate-and-distribute” model). Large financial institutions, acting as intermediaries between these lenders and investors, would buy mortgages and combine many of them into an investment tool, dividing the pool of mortgages into traunches (with returns on investment commensurate with the perceived security of the traunch invested in). While this securitization process is effective at providing greater liquidity in the mortgage market (as more investors will be willing to invest in the industry if the risk of default can be managed and mitigated through diversification and stratification inherent in the securitization process) the process also debased the incentive for lenders and bond issuers to ensure that borrowers were truly credit-worthy and able to sustain their mortgage payments.

(more…)

Live Blogging at the Dodd-Frank Symposium: Tracking Securitized Residential Mortgages

By James Nguyen, J.D. Class of 2013 | Posted on

Nancy Wallace from the Haas School of Business followed her fellow Haas colleague with a talk on the evolution of residential mortgage recording and tracking and the legal implications of MERS.

Some Key Highlights:

  • Residential Mortgage Recording and Tracking has Diverged: while so-called “Shoebox” technology continue to be used to record and track property interest transfers (property sales) at county-level recording offices, the MERS system has supplanted the old technology and now comprises over 60% of the recording/tracking market.
  • Chain of Title and Chain of Mortgage (Promissory Note) Separated Under MERS: the MERS system has detached the dual-recording/tracking of both property title and mortgage, which has significant complications for determining property ownership and mortgage liability.
  • Transfer Language in Pooling-Servicing Agreement (PSA): the property transfer language MERS-tracked PSAs use stock MERS language that some courts have not given full recognition.
  • Why does this matter: participants in the market for mortgage-backed securities may suffer significant financial losses if the validity of MERS transfers cannot be upheld.

A complete description of the presentation can be found here.

Bigger than Fannie and Freddie: Defining Qualifying Residential Mortgages

By James Nguyen, J.D. Class of 2013 | Posted on

A prominent feature of the Dodd-Frank Act is the risk-retention provision in Title IX (Subtitle D, § 941).  It requires banks that originate mortgages to retain 5 percent of the credit risk in their portfolios.  The risk-retention requirement was created in direct response to the oft-cited lending practice that contributed to the housing bubble where mortgage originators would sell off the securitized loans without retaining any of the credit risk.  A key exception to the provision concern “qualified residential mortgages” (QRM) and loans designated as QRMs are exempt from the risk-retention requirement.

(more…)