Fannie Mae Pushing Foreclosures

Fannie Mae has systematically refused mortgage servicer requests to postpone foreclosures for viable modifications, according to an investigation by The Detroit Free Press.  Because servicers usually recommend modifications only when they will maximize net present value, i.e. make economic sense, Fannie Mae's policy is resulting in unneccesarily higher foreclosure losses, losses which for now are being absorbed by taxpayer subsidies.  To be clear, this is not a matter of Fannie Mae economists disagreeing with the servicers' evaluation of whether a homeowner can successfully pay a modified loan.  The policy appears to be simple-minded in the extreme - no postponements if the mortgage has been in default for more than 12 months.  Never mind that another foreclosure sale in the current market will result in losses averaging 60% or or more of the loan balance, or that an unemployed homeowner may have found a new job that will permit full repayment of the loan.

Why would Fannie adopt such a ridiculous anti-workout policy in the midst of a massive foreclosure crisis?  My inference is that current management is indifferent to foreclosure losses while they are being absorbed by the Treasury, and more concerned about getting non-paying mortgages off Fannie's books regardless of the cost.  By doing so, they can slim down the mortgage portfolio so that, in the event Fannie gets to be a private company again, those pesky troubled mortgages will be gone.

What this also reveals to my mind is a complete failure of oversight by Treasury and Fannie's regulator and "conservator", F.H.F.A.  It also reflects the Administration's policy drift about the future of the GSEs.  The proper role for Fannie and Freddie should be either 1) a government funder of last resort, analagous to F.H.A.'s role as insurer of last resort, or 2) a public utility, providing safe dividends to shareholders in return for providing low-cost capital to serve only the mortgage market that can't be funded by private capital.  What should not happen is to return Fannie and Freddie to a growth company model in which they leverage their explicit or implicit subsidy to engage in mortgage capital arbitrage.  If current management is still imagining that they will some day return Fannie Mae to the go-go days of pre-2007, then Fannie Mae needs new management. 

Fair shake for Obama consumer protection nominee

The Pittsburgh Post-Gazette generously ran an essay I wrote today.  They cut it a bit, so I'm inserting most of the original version below:

President Obama has nominated former Ohio Attorney General Richard Cordray to head the Consumer Financial Protection Bureau, but 44 Republican Senators have declared that they will oppose any nominee because the Bureau's director will have "far too much power."  The Senators complain that the Director will have a five-year term, will not be subject to the congressional appropriation process, and will have extensive authority over financial institutions, among other businesses.

You might think that the Bureau is the only federal agency whose head has a five-year term.  But no: to pick just one agency, the Office of the Comptroller of the Currency's chief,  the Comptroller of the Currency also has a five-year term and can be removed only for cause.  Similarly, the OCC is funded outside the congressional appropriation process.

Well then, is the OCC less powerful than the Bureau?  While their authority is not congruent (otherwise, we wouldn't need the Bureau), the OCC indeed has sweeping power.  It regulates and supervises all national banks, and also supervises federal branches and agencies of foreign banks.  And, unlike the Bureau, the OCC's regulations cannot be set aside by the Financial Stability Oversight Council.  The OCC has even outmuscled states; when states passed laws to prevent predatory lending in the years preceding the subprime crisis, the OCC announced that the laws did not apply to the banks it regulated.  Moreover, under the Dodd-Frank Act, the OCC will be even more powerful, assuming responsibility for regulating federal savings and loans.

Nor is the explanation for the differing treatment simply that the issue of the Bureau has arisen because the President has nominated its director and the Senators will address the Comptroller of the Currency when that position falls vacant.  The last Comptroller, John Dugan, left office last summer, and the President recently nominated a new one.  Yet the Senators have not said they will oppose confirming a new Comptroller until that office's powers are constrained; in fact, when John Dugan was confirmed in 2005 by a Republican Senate, his confirmation was so uncontroversial it was decided on a voice vote.

So how to explain the difference?  Only the Senators know what their motivations are, but when the evidence of pretext is so strong, it is difficult to resist more cynical conclusions.  Perhaps the answer for the differing treatment of the two agencies lies in their politics: the Bureau promises to protect consumers, while the OCC has been thoroughly captured by the banks.  Indeed, former Comptroller Dugan was a bank lobbyist before his appointment.  That may explain why, when New York's Attorney General sought to investigate whether banks had violated fair lending laws, the OCC went to court to protect the banks, ultimately litigating the case to the Supreme Court.    By contrast, it is difficult to imagine the Bureau suing to protect banks from a state trying to determine if banks have engaged in discriminatory practices.

The Senators properly have a role in advising and consenting to appointments, but they should recognize that if they want to challenge Congress's decision in structuring the Bureau as it has, the appropriate way to do so is to pass legislation, not hold up filling a job that is needed, and amply supported by precedent.

Has Arthur Alan Wolk Finally Learned That He Cannot Sue Every Critic?

by Paul Alan Levy

As I noted in an update to my previous blog post about him, Arthur Alan Wolk responded to the post by threatening to sue me, and then suing me three days later, albeit without filing an actual complaint that would tell me the basis for his complaint against me.  On the same day, he threatened to sue another lawyer blogger, Scott Greenfield, and two days later he threatened to sue the Techdirt blog. 

This time, however, Wolk had a new experience.   Instead of expressing concern about his threats, Techdirt, Greenfield and Public Citizen have defied him, promising not to be silenced.

Breaking News: Eleventh Circuit Strikes Down Health-Care Law's Insurance Mandate

By a 2-1 vote. So, I guess that sets up a circuit split, as if that really matters. Any guess on how many amicus briefs will be filed in the Supreme Court? 50? 100? The Eleventh Circuit's website has crashed, and I cannot yet get a copy of the decision. Check back later. UPDATE: Here are the 304 pages of opinions!

Another story here.

 

SEC Opens New Whistleblower Office Mandated by Dodd-Frank Bill

As the New York Times explains, the SEC has opened a new whistblower office demanded by the Dodd-Frank financial reform bill. It will respond to consumer tips, and if a consumer tip leads to a successful prosecution, the consumer and the federal fisc will benefit (and, perhaps, corporate wrongdoing will be deterred):

Under the program, corporate tipsters could reap as much as 30 percent of the money the S.E.C. collects from a company or its executives. To qualify for the reward, an employee must turn over new information that leads to successful enforcement actions yielding more than $1 million in fines. The agency will tap the $450 million Investor Protection Fund to dole out awards. Still, the S.E.C. says the whistle-blower program will actually save money in the long run, as tipsters offer guidance to the agency’s strapped staff of lawyers and investigators.

Self-inflating tires

According to the National Highway Traffic Safety Administration, "[s]afety experts estimate that 25 percent of passenger vehicles are operated with tires that are under inflated. Vehicles with properly inflated tires experience optimum ride and handling characteristics, shorter braking distances, longer tire life, and improved fuel economy." Put the other way around, vehicles with underinflated tires can be unsafe and are costly for consumers. That's why since 2008 new cars must come equipped with tire pressure monitoring systems.

Now, get this: Goodyear is developing a self-inflating tire, that is, a tire that, as the LA Times explains, will stay "inflated at the optimum pressure without the need for any external pumps or electronics." Read more about how self-inflating tires work.

The "Feral" Economy vs. the Real Economy

Jay Youngdahl at the East Bay Express discusses why he thinks the "feral" economy of hedge fund speculators and the like is operated at the expense of a real economy that is not creating enough well-paying jobs.

What Will Uncle Sam Do With All Its Foreclosed Property?

When the housing bubble burst, Fannie and Freddie and the Federal Housing Administration became the owners of lots of residential housing. The Treasury Department, the Department of Housing and Urban Development, and the Federal Housing Finance Agency have now asked the public for input on what to do with all this housing in a way that benefits potential homeowners and tenants and spurs the housing market. As the Washington Post explains, given the depressed housing market, Uncle Sam is having trouble selling the property to individual buyers and is considering selling pools of the foreclosed housing to investors who will then turn the property into rentals.

Articles on the CFPB

by Jeff Sovern

Mark W. Olson, former Federal Reserve Board governor, and former chairman of the American Bankers Association predicts here a compromise on appointment of a CFPB director.  He writes:

Expect a compromise that will please very few. It is hard to believe that many members of Congress running for reelection will support the repeal of a regulatory entity designed to "protect consumers."

On the other hand, that sort of a concentration of authority is unlikely to stand over multiple changes in administrations. Look for the single "director" to be replaced at some point by a board, which would require its re-designation from an executive agency to a commission.

Meanwhile, Alan Charles Raul attacks the independence of the Bureau while Clyde Mitchell, formerly a partner at White and Case, and an adjunct professor at Fordham has a piece in the New York Law Journal (behind a paywall) agreeing with Republicans that the Bureau should be run by a commission instead of a director (he doesn't refer to the problems with the House bill providing for a commission) but arguing that the Bureau's funding should be left as is, contrary to Republican demands.

None of these writers explains why it is ok for the Office of the Comptroller of the Currency to have an independent director rather than a commission, not be subject to the congressional appropriation process, and (unlike the CFPB), not be subject to overruling by the Financial Stability Oversight Council.

Lisa Tripp's Empirical Study of Arbitration Clauses in Nursing Home Contracts

Lisa Tripp of John Marshall has written An Empirical Study of Pre-Dispute Binding Arbitration Agreements in Nursing Home Admission Contracts. Here's the abstract:

The use of pre-dispute binding arbitration agreements has been commonplace in variety of commercial contexts, such as brokerage agreements, insurance contracts and credit card contracts for many years. Health care had historically been one of the fields that had not embraced pre-dispute binding arbitration agreements. The reluctance to use pre-dispute binding arbitration agreements appears to be changing in at least one sector of the health care field. An examination of admission contracts used by North Carolina nursing homes and telephone survey of North Carolina nursing homes revealed that 43 percent of nursing homes now incorporate pre-dispute binding arbitration provisions into their admission contracts. All of the major nursing home chains operating in North Carolina use pre-dispute binding arbitration agreements in at least some of their facilities, while smaller operators use them sporadically.

The terms of these agreements vary considerably. The large chains tend to incorporate some of the provisions in the model arbitration agreement drafted by the American Health Care Association (AHCA), the nursing home industry trade organization. AHCA’s model language includes a 30-day rescission period and language that acceptance of the arbitration provision is not a precondition to admission. Some of the large chain facilities also include a provision that the arbitration will be conducted at the facility if the parties can’t agree on another location. Some of the smaller operators include provisions that limit damages and discovery, prohibit punitive damages, and expressly condition entry to the facility on signing the pre-dispute arbitration agreement.

The implications of the rising use of pre-dispute binding arbitration clauses may be significant. There are many counties in North Carolina where 50-100 percent of all of the nursing home operators use these agreements. With so many operators selecting pre-dispute binding arbitration, this may have the effect of forcing some vulnerable elders out of the public court system with all of its safeguards, and into private arbitration without those protections.

Although some of these agreements contain language stating that the agreement is voluntary or may rescinded, this language, by itself, provides no guaranteed protection that facilities are enforcing the contracts as written. This study found incidents where nursing homes were requiring new residents to sign pre-dispute binding arbitration agreements as a condition of admission, even though the language in those facilities’ agreements stated that signing the agreement was voluntary. This study also found evidence of a significant amount of confusion among staff of nursing homes using these agreements about whether their facilities were using them at all and what arbitration agreements really meant.