The idea of using a local government’s eminent domain authority to “take” and restructure the mortgages of underwater borrowers is getting more attention from municipal officials, who like the concept, and from the Federal Housing Finance Agency (FHFA), which doesn’t like it at all.
Moving to short-circuit the eminent domain move, which seems to be gaining traction, the FHFA, which oversees Fannie Mae and Freddie Mac, issued a statement recently expressing “significant concerns” with an approach that, the agency said, “could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market." The statement, published in the Federal Register, also said the agency may take unspecified action “to avoid a risk to safe and sound operations and to avoid taxpayer expense.”
More than a dozen communities, including San Bernardino, Sacramento and Berkley in California, Suffolk County in New York and Chicago are reportedly considering the eminent domain strategy, although none have taken formal steps to implement it.
Mortgage Resolution Partners, a San Francisco-based private venture firm, is pitching the concept, offering to advance the funds governments would use to purchase mortgages at current market value AND charging a fixed fee of $4,500 for each restructured loan. Homeowners would be able to refinance at the lower value, reducing their mortgage payments, avoiding foreclosure in many cases, and stimulating the housing market as well.
Critics, including the mortgage and securities industries, as well as the FHFA, argue that the plan would be counterproductive, harming investors and homebuyers alike, ultimately increasing mortgage costs and further depressing home values.
“It’s absolutely a reflection of frustration, but that doesn’t mean it’s right and it doesn’t mean it’s responsible,” David Stevens, president of the Mortgage Bankers Association, told reporters. “In cities or counties where they pass ordinances to do this they’re going to make credit availability extremely limited. And that’s just going to hurt recovery of those communities much greater than families that would be helped.”
Mortgage and securities industry executives have also questioned the constitutionality of the strategy, pointing out that the plan would benefit only selected borrowers, while eminent domain is supposed to be used only for broadly defined “public” benefits. Supporters of the plan say the community as a whole would benefit from the boost to the housing market and the local economy.
“They’re using their power for the public good to improve the quality of life and services for their residents," Steven Gluckstern, a principal in Mortgage Resolution Partners, argued. While taking is “a tough word,” he agreed, it is a justifiable one for communities struggling with battered housing markets that are weighing on local economies. “It's a local community saying, ‘I can’t stand by and watch the continued degradation of my community so I’m just going to take the loan,’" Gluckstern told MSNBC.
Responding directly to the FHFA’s statement – and its threat of legal action – Gluckstern issued a statement of his own, asserting, "The use of eminent domain to purchase mortgage loans from private label securitization trusts is constitutional. We expect that the FHFA will, after due consideration, respect state and local sovereign powers of eminent domain over private property within their jurisdictions," he added.
CFPB: “COMMON SENSE” REQUIREMENTS
The Consumer Finance Protection Bureau (CFPB) has issued proposed regulations designed to ensure best practices and prevent abuses by mortgage servicing companies. The regs, which come on the heels of new rules requiring clearer disclosures by mortgage lenders, and a separate proposal addressing the points and fees loan originators can charge (see below) reflect “two basic, common sense standards,” CFPB Director Richard Cordray told reporters: “No surprises and no runaround.”
- The rules target both the information servicers must give borrowers about their loans and how they must respond to inquiries and payment problems. Among the major provisions, servicers would have to:
- Provide monthly statements detailing the allocation of payments to principal, interest, fees and escrow. The statements would also have to specify the amount and date of the next payment due and alert borrowers to any fees they may incur.
- Warn borrowers in advance before an adjustable rate mortgage is due to reset and outline alternatives available to them, including refinancing, if they don’t like or can’t afford the adjusted rate.
- Give borrowers advance notice and pricing information before “force placing” property insurance if the owner’s policy has lapsed and cancel a force-placed policy within 15 days if owners provide proof that they are insured.
- Attempt to contact delinquent borrowers and connect them with staff members able to advise them and help them avoid foreclosure.
- Credit a borrower’s account the day a payment is received.
The regulations “are about putting the service back in mortgage servicing,” Cordray told reporters in a conference call outlining the proposal, which is scheduled to be finalized in January.
The preliminary reaction from industry trade groups has been relatively mild, but the response from consumer advocates has been surprisingly critical. “We’re very disappointed,” Margot Saunders, of counsel to the National Consumer Law Center, told The Hill.
Advocacy groups are concerned primarily about what the regulations would not do — specifically, they would not require servicers to suspend foreclosure actions while considering borrower requests to modify their loans. The proposed rules would slow the foreclosure process pending modification reviews, but would not halt the action.
While the rules would require servicers to respond quickly to error reports and correct them, that won’t provide much of a remedy in foreclosure situations, Saunders suggested, noting, “It’s like saying you can complain about the fact that they cut off your leg after they cut it off, but you can’t put it back.”
A POINT-LESS ALTERNATIVE
Continuing its focus on the mortgage lending process, the Consumer Financial Protection Bureau (CFPB) has proposed rules that would require loan originators to offer at least one mortgage product without any added fees or points as an alternative to loans that allow borrowers to reduce the interest rate by paying additional fees or points up front. The Dodd-Frank financial reform legislation, which mandated this rule and several others targeting perceived mortgage lending abuses, prohibited lenders from charging fees and points on most loans. Exercising its exception authority under that law, the CFPB decided to allow lenders to continue charging points and fees on some loans as long as they offer a fee-less, point-less alternative.
“The Bureau believes this approach would benefit consumers and industry alike,” the CFPB said in the introduction to the proposed rule, published in the Federal Register. “Making both options available would make it easier for consumers to evaluate different pricing options, while preserving their ability to make some upfront payments if they want to reduce their periodic payments over time,” the notice said. The proposed rule would also “promote stability in the mortgage market, which would otherwise face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank Act requirement.”
The CFPB is seeking comments on, among other questions, how to ensure that borrowers who “buy down” their rate by paying points or fees receive a reasonable rate reduction in return. The proposed rule would also establish training and experience standards for loan originators and prohibit the once common practice of linking loan officer compensation to the interest rate on a borrower’s loan.
NOTHING TO FEAR BUT….CONGRESS
Conventional wisdom – as reflected in many discussions of what’s ailing the economy – is that concern about new regulations is preventing businesses from investing in new equipment and expanding their payrolls. But recent reports indicate that business executives are most concerned not about regulatory actions but about Congressional inaction that will push the country over the “fiscal cliff” – shorthand for the automatic tax increases and sweeping budget cuts that will take effect in January if lawmakers are unable to agree on a deficit reduction plan.
More than 40 percent of the executives is responding to a recent poll by Morgan Stanley cited the fiscal cliff as their primary reason for delaying investment and hiring decisions.
“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” timothy Powers, chief executive of Hubbell Inc., a manufacturer of electrical products, told the New York Times.
Economists estimate that concern about political gridlock in Washington combined with worries about the debt crisis in Europe will reduce economic growth by at least half-a-percentage point in the second half of this year.
Some industry executives are beginning to complain publicly about political paralysis in Washington. “Totally irresponsible and absolutely insane,” is how the head of one manufacturing trade group quoted in the Times article described the current impasse. “Companies see the writing on the wall,” he added, “and business decisions are now being made [based] on this.”
WINS AND LOSSES FOR MERS
The Mortgage Electronic Registration Systems (MERS), the mortgage tracking system that was ensnared in the robo-signing fiasco, continues to rack up mixed results in law suits challenging its ability to foreclose on behalf of lenders.
In the most recent decision, the Washington Supreme Court held that the company could not foreclose on a borrower because it did not have physical possession of the note the borrower had signed with the lender who had registered the mortgage with MERS. The court didn’t hold that the foreclosures themselves were invalid; only that MERS did not have standing to pursue them.
"There is nothing in this opinion that prevents the parties from proceeding with judicial foreclosures" and "it does not find that deeds of trust that name MERS as beneficiary are invalid," MERS noted in a press statement. The company also pointed out that no longer forecloses in its own name – a practice it abandoned more than a year ago when the robo-signing controversy exploded. So the decision has no impact on its current operations, MERS emphasized, but analysts pointed out that it could affect an untold number of past foreclosures in Washington State that have been or could be contested.
Courts in other jurisdictions have sided with MERS on the standing issue. A federal district court in Minnesota sanctioned an attorney for filing multiple foreclosure challenges based on MERS’ failure to hold the note, finding that the actions were “frivolous” and designed only to impede legitimate foreclosures.
Separately, the 10th Circuit Court of Appeals found recently that Utah’s laws would allow MERS, as a beneficiary of a deed of trust, to foreclose on behalf of lenders it represents.
