National Housing Trust Fund: A Call for Bipartisanship

“We’ve all been there before, my friend,” were the first words I heard as I got up from the witness table in the House Financial Services Committee hearing room.  The person patting me on the back and whispering in my ear was someone I had admired for many years, going back to when he was mayor of San Antonio.  The individual was none other than Henry Cisneros who served as HUD Secretary under President Clinton.  

I had just concluded a grueling 2 ½ hour testimony and appeared to be the only person among the many witnesses and supporters who was lukewarm to the idea of a national housing trust fund (NHTF).  Let me be clear: I wasn’t lukewarm to the idea of a national housing trust fund; rather I was less than excited about using FHA receipts to fund it.  Throughout the hearing, I was grilled, basted, and largely denounced by the various Congressmen, most of whom in attendance were Democrats.

Many states have housing trust funds that use a variety of funding sources: a portion of document recording fees, real estate transfer taxes, and the like.  Since no similar fee exists at the federal level, finding a funding source becomes, well, tricky. 

Before delving into the intricacies of a funding source, it is fair question to ask why exactly do we need a national housing trust fund?

Some people would say, “Isn’t that why we have HUD?”  And to my earlier point regarding state housing trust funds, aren’t they augmenting federal housing efforts? 

Truth is, most state housing trust funds are woefully underfunded and no one can say HUD is completely meeting the housing needs of the elderly or disabled among other underserved groups.  According to the National Low Income Housing Coalition there are only 37 rental homes available and affordable for every 100 households with incomes below 30% of their area median.

It also would be helpful to understand just who would benefit from this new funding.  If current public housing tenants are any indication, the Council of Large Public Housing Agencies report that seniors account for 31% of all residents and 34% are headed by a person with a disability. Two out of every five residents is a child and 70% of households are extremely low-income; 71% of households have annual incomes of less than $15,000.

Rightfully so, the fund would be targeted at extremely low income families and persons and would help preserve existing as well as increase affordable rental housing especially in areas with inadequate supply.

The legislation that created the NHTF was included in the HERA bill signed by President Bush in July 2008.  Since then, however, no funds have been appropriated.  Not one dime. The original plan to use a portion of revenue from Fannie Mae and Freddie Mac went awry with the federal conservatorship in the fall of 2008.

To help ensure an appropriate level of control and compliance, states and governors will administer the funds based on a formula developed by HUD and will also be held accountable to the federal government for their use.  No funding formula is perfect and I for one might question why, under the existing proposed allocation formula, New York would get almost twice as much as Texas, but I will give credit to all that this is at least a step in the right direction.

And speaking of need, perhaps the housing needs of persons living in areas with less national visibility could receive funding priority once the funds have been allocated: the areas within the boundaries of the Appalachian Regional Commission and the Texas Colonias for starters.  No one could argue there is an adequate supply of decent and safe housing in either geographic area which happens to be one of the requirements under HUD’s formula.

More than two years have passed since the NHTF was signed into law.  And given the still struggling economy, there is little doubt the need has subsided since that time.  I would hope members of Congress from both parties would give the NHTF some level of funding perhaps $1 billion to start – which would be a big step forward to meeting the housing needs of those less fortunate – seniors, children, and persons with disabilities.

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Majority of States Reported on Board with Robo-Signing Settlement

Details are still sketchy, but
apparently a settlement has been agreed upon between five major banks and a
majority of the states’ attorneys general. 
The settlement involves Bank of America, Wells Fargo, Citigroup,
JPMorgan Chase, and Ally Financial and arises out of charges that the banks and
their subsidiary servicers used robo-signing and other abuses in processing
thousands of foreclosures.

The settlement was announced by lead
negotiator, Iowa Attorney General Tom Miller who, according to CNBC said of the
deal, “This enables us to move forward
into the very final stages of remaining work. Federal and state officials, as
well as representatives from the banks, continue to address matters that they
must complete before finalizing any settlement,” Miller said in a statement
released late Monday…

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ORIGINATOR COMPENSATION: STILL IN THE FIGHT

Most Americans are unfamiliar with the Administrative
Procedures Act (APA), yet it reaches each of us through an assortment of rules
that eventually lead to what some might consider red tape.  Some believe the APA is heavy-handed and will
tell you the federal government uses it much too often to circumvent the will
of Congress.  That comment is for a later
discussion. 

The crux of the Act spells out the process by which agencies
promulgate rules and regulations, among other responsibilities.  While there are several ways this can be
accomplished, at the heart of the process is the belief that the public – critics
and supporters alike – have a right to air their opinions. 

Certainly agencies must also articulate why a particular
regulation is needed in the first place lest they risk being called “arbitrary
and capricious.”
  As provisions created
through Dodd-Frank and elsewhere find themselves in the rulemaking process, you
can expect the public comments to be at a fever pitch.

You might be surprised to learn that a small office within
the federal government routinely comments on proposed rules and
regulations.  Yes, you read this
correctly: one part of the federal government proposes a rule and another part
offers an opinion either in support of or against it.

The office is an independent arm of the Small Business
Administration and is referred to as the Office of Advocacy.  They proudly proclaim on their website that
they are “the independent voice for small business in the federal government”
and do so with less than 75 employees.

I know the Office of Advocacy well from my previous position
at the Federal Housing Administration – especially from our work to reform the
Real Estate Settlement Procedures Act (RESPA). 
I can unequivocally state that they were rock solid in their defense of
small business and went on record when they felt portions of the rule would
negatively impact small businesses. 
Because of their advocacy we made changes to the rule before going final.

Apparently, that same tenacity has continued into the Obama
Administration.  In December 2010, the Office
of Advocacy sent correspondence to the Federal Reserve asking them to postpone
three pending Rules under Regulation Z prior to the transfer of authority to
the new Consumer Financial Protection Bureau. They rightfully argued that
little is known about the costs of implementation and that the rule could force
many smaller mortgage companies out of business.

Regarding the controversial “Loan Officer Compensation”
rule, the Advocacy office told Fed Chairman Bernanke in early February that
their recent “guidance” regarding loan officer compensation was wholly
inadequate.  The “LO comp rule” is
designed to prevent loan officers from steering borrowers into higher cost
loans and the Advocacy office felt that the Fed had done little to help small
businesses prepare for its implementation and compliance hurdles
.  In short, the Fed’s response was go read the
rule – again. 

Parts of the rule are somewhat murky, as can be seen in the
myriad of clarification memos the mortgage industry has sent the Federal
Reserve.

One example from qualitymortgageservices.com: “A creditor/lender has an incentive compensation plan for originators
that is based on the originator’s loan volume over a designated period of time.
It is not tied to any loan terms, it is based on a fixed percentage of the
aggregate principal balance of the loans originated by the originator during
that period and, the second part to the question, can payment of the incentive
compensation be conditioned on the company, region or branch reaching a certain
level of profit during that specified period and, thirdly, what if the profit
is calculated in whole or in part based on the aggregate value of the loans
originated during a particular period?”

Clear as day, right?

On a separate track, in early March the start-up trade group National
Association of Independent Housing Professionals (NAIHP) filed suit against the
Fed stating that the LO comp rule is “arbitrary and capricious” and would cause
their members “irreparable harm” and is “contrary to the public interest.”

In filing the lawsuit, NAIHP president Marc Savitt said, “This rule will have devastating consequences
for consumers, small business housing professionals and the overall housing
market, if allowed to be implemented on April 1, 2011.”

Days later, the National Association of Mortgage Brokers (NAMB) filed
their own lawsuit against the Federal Reserve citing that the Fed failed to
comply with the Regulatory Flexibility Act and exceeded their authority under
TILA.  Further, NAMB believed the rule
would cause their members “immediate, devastating, and irrevocable harm.”

With good reason, the Office of Advocacy has asked the Fed
to push back the April 1 implementation date

The House Financial Services Committee is also considering legislating
changes to the rule and recently said in a statement that the rule may “have an
adverse impact on the ability of small businesses that originate mortgages to
remain in business.” And in early March, Senators Vitter (R-LA) and Tester (D-MT)
asked Chairman Bernanke to delay the rules implementation in part because the
Fed has not “fully evaluated the impact of the rule on the housing market.”

On March 31, one day before the rule was supposed to go into
effect, the US Court of Appeals for the District of Columbia stayed
implementation
of the rule signaling they needed more time to review the matter.  I believe this stay may be short-lived and
from my perch, those impacted by the rule should be ready to proceed as planned
sometime next week or soon thereafter.

But while the final outcome is unknown, the industry should know that
the Office of Advocacy, the NAIHP, and NAMB are still in the fight.  While these groups lack the heavy firepower
of larger and more influential trade associations, they did not shrink from
taking on the behemoth Federal Reserve. 

The three groups believe strongly in preserving the ability of small
businesses to prosper free of onerous regulation regardless of the industry.  Given the importance of small businesses to
our economic recovery, it remains a fair question: when do new regulations
become too much regulation?
  Especially considering
that consumers will ultimately have to bear the cost of implementation. 

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MERS, Banks Sued by New York State; MERSCORP Responds

Three major banks and Virginia-based
MERSCORP, Inc. and its subsidiary Mortgage Electronic Registrations Systems
(MERS) were sued Friday by the state of New York.  The suit, filed by the state’s Attorney
General Eric T. Schneiderman
, charges that the creation and use of a privately
national electronic registration system, MERS, “has resulted in a wide range of deceptive and fraudulent foreclosure
filings in New York state and federal courts, harming homeowners and
undermining the integrity of the judicial foreclosure process.”  Further, the lawsuit charges that the
employees and agents of the three banks, Bank of America, J.P. Morgan Chase,
and Wells Fargo
, acting as “MERS certifying officers,” have
repeatedly submitted court documents containing false and misleading information
that made it appear that the foreclosing party had the authority to bring a
case when in fact it may not have.  The
suit also names additional defendants for some of the charges including loan
servicing subsidiaries of the three banks.

The
lawsuit, filed in the Supreme Court of the State of New York, Kings County levies
the following charges:   

  • MERS was created to allow financial
    institutions to evade country recording fees, avoid the need to publicly record
    mortgage transfers and facilitate the rapid sale and securitization of
    mortgages. MERS members log all of their
    transfers in a private electronic registry rather than in the local county
    clerk’s office.
     
  • MERS is a shell company with no
    economic interest in any mortgage loan.
    It is the nominal “mortgagee” of the loan in the public records and
    remains as such regardless of how often the loan is sold or transferred among
    its members.
     
  • MERS has few or no employees but
    serves as the mortgagee for tens of millions of mortgages. It has indiscriminately designated over
    20,000 MERS member employees as MERS “certifying officers” expressly
    authorizing them to assign MERS mortgages and execute paperwork to foreclose on
    properties and submit claims in bankruptcy proceedings while failing to
    adequately screen, train, or monitor their activities. Assignments were often automatically
    generated and “robo-signed” by individuals who did not review the
    underlying property ownership records, confirm the documents’ accuracy, or even
    read the documents. MERS certifying
    officers have regularly executed and submitted in court mortgage assignments
    and other legal documents on behalf of MERS without disclosing that they are
    not MERS employees, but instead are employed by other entities, such as the
    mortgage servicer filing the case or its counsel.
     
  • Use of the private database to
    record property transfers has eliminated homeowners’ and the public’s ability
    to track them through the traditional public records system. This data base is plagued with inaccuracies
    and errors which make it difficult to verify the chain of title or the current
    note-holder. In addition, as a result of these
    inaccuracies, MERS has filed mortgage satisfactions against the wrong property.
     
  • This “bizarre and complex end-around
    of the traditional recording system” has saved banks more than $2 billion in
    recording fees and allowed the banks to securitize and sell millions of loans, “often
    misrepresenting the quality and nature of the mortgages being transferred.”
     
  • The creation and use of the MERS
    System by the Defendant Servicers and other financial institutions has resulted
    in a wide range of deceptive and illegal practices, particularly with respect
    to the filing of New York foreclosure proceedings in state courts and federal
    bankruptcy proceedings.

The lawsuit estimates that MERS
members have brought over 13,000 foreclosures against New York homeowners
naming MERS as the foreclosing property when in many cases MERS lacks the
standing to foreclosure.  Even when
foreclosures were not initiated in MERS name, proceedings related to their
registered loans often included deceptive information.

The lawsuit seeks a declaration that
the alleged practices violate the law, as well as injunctive relief, damages
for harmed homeowners, and civil penalties. The lawsuit also seeks a court
order requiring defendants to take all actions necessary to cure any title
defects and clear any improper liens resulting from their fraudulent and
deceptive acts and practices.

On January 24 the U.S. Court of
Appeals for the 11th Judicial Court upheld an appeal from MERS that
contended a lower court had erred in finding that a homeowner had been
improperly foreclosed on by MERS on the grounds that:

1).   The assignment of the security deed was
invalid because MERS, as nominee of a defunct lender could not assign the
documents of its own volition.

2.
    The “splitting” of the mortgage and
the note rendered the mortgage null and void and therefore notices of
foreclosure were invalid as not coming from a secured creditor.

The New York suit differs slightly from
the facts in Smith V. Saxon Mortgage,
but if Schneiderman wins his case, it could be that the legitimacy of MERS will
ultimately have to be decided by the U.S. Supreme Court.

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Geithner Outlines Accomplishments, Future of Financial Reform

Treasury Secretary Timothy Geithner told
the Financial Stability Oversight Council that the financial system is getting
stronger and safer and that much of the excess risk-taking and careless
financial practices that caused so much damage has been forced out.  However, he said, “These gains will erode
over time if we are not able to put our full reforms into place.”

He outlined the basic framework has been
laid, with new global agreements to limit leverage, rules for managing the
failure of a large firm and the new Consumer Financial Protection Bureau (CFPB)
up and running, and the majority of the new safeguards for derivatives markets proposed.  Geithner ticked off the major accomplishments
of reform.

First, banks now face much
tougher limits on risk which are critical to reducing the risk of large
financial failures and limiting the damage such failures can cause.  The focus in 2012 will be “on defining the
new liquidity standards and on making sure that capital risk-weights are
applied consistently.”

 The new rules are tougher on
the largest banks that pose the greatest risk and are being complemented by
other limits on risk-taking such as the Volcker Rules and limits on the size of
firms and concentration of the financial systems.  These will not apply only to banks but to
other large financial institutions that could pose a threat to financial system
stability and this year the Risk Council will make the first of these
designations.

Second, the derivatives market will,
for the first time, be required to meet a comprehensive set of transparency
requirements, margin rules and other safeguards.  These reforms are designed to move
standardized contracts to clearing houses and trading platforms and will be
complemented with more conservative safeguards for the more complex and
specialized products less amenable to central clearing and electronic
trading.  These reforms, the balance of
which will be outlined this year, will lower costs for those who use the
products, allow parties to hedge against risk, but limit the potential for
abuse, the Secretary said. 

Third, is a carefully designed set
of safeguards against risk outside the banking system and enhanced protections
for the basic infrastructure of the financial markets: 

  • Money market funds will have new
    requirements designed to limit “runs.”
  • Important funding markets like the
    tri-party repo market are now more conservatively structured.
  • International trade repositories are
    being developed for derivatives, including credit default swaps.
  • Designated financial market utilities
    will have oversight and requirements for stronger financial reserves;

Fourth; there will be a stronger set
of protections in place against “too big to fail” institutions.  The key elements are:

  • Capital and liquidity rules with
    tough limits on leverage to both reduce the probability of failure and prevent
    a domino effect;
  • New protections for derivatives,
    funding markets, and for the market infrastructure to limit contagion across
    the financial system;
  • Tougher limits on institutional size;
  • A bankruptcy-type framework to
    manage the failure of large financial firms.
    This “resolution authority” will prohibit bailouts for private
    investors, protect taxpayers, and force the financial system to bear the costs
    of future crisis.

Fifth, significantly stronger
protections for investors and consumers are being put in place including the
CFPB which is working to improve disclosures for mortgages and credit cards and
developing new standards for qualified mortgages.  New authorities are being used to strengthen protections
for investors and to give shareholders greater voice on issues like executive
compensation.

Geithner pointed to the failure of
account segregation rules to protect customers in the MF Global disaster as proof
of the need for more protections and said that the Council will work with the
SEC and the Commodity Futures Trading Council on this problem.   

Moving forward, reforms must be
structured to endure as the market evolves and to work not just in isolation
but to interact appropriately with each other and the broader economy.  “We
want to be careful to get the balance right-building a more stable financial
system, with better protections for consumers and investors, that allows for
financial innovation in support of economic growth.” 

First, he said, we have to make sure
we have a level playing field at home; that financial firms engaged in similar
activity and financial instruments that have similar characteristics are
treated roughly the same because small differences can have powerful effects in
shifting risk to where the rules are softer. 
A level field globally is also important, particularly with reforms that
toughen rules on capital, margin, liquidity, and leverage, as well as in the
global derivatives markets.  “In these areas we are working to discourage
other nations from applying softer rules to their institutions and to try to
attract financial activity away from the U.S. market and U.S. institutions.” 

It is necessary to align the
developing derivatives regimes around the world; preventing attempts to soften
application of capital rules, limiting the discretion available to supervisors
in enforcing rules on risk-weights for capital and designing rules for
resolution of large global institutions.  Also, because some U.S. reforms are different
or tougher from rules in other markets, there needs to be a sensible way to
apply those rules to the foreign operations of U.S. firms and the U.S.
operation of foreign firms.

 The U.S. also needs to move
forward with reforms to the mortgage market including a path to winding down
the government sponsored enterprises (GSEs.) 
The Administration has already outlined a broad strategy, Geithner said,
and expects to lay out more detail in the spring.  The immediate concern is to repair the damage
to homeowners, the housing market, and neighborhoods.  The President spoke this week about the range
of tools he plans to use.  Our ultimate goals
are to wind down the GSEs, bring private capital back into the market, reduce
the government’s direct role, and better target support toward first-time
homebuyers and low- and moderate-income Americans.

Geithner said the new system must
foster affordable rentals options, have stronger, clearer consumer protections,
and create a level playing field for all institutions participating in the
system.  For this to happen without
hurting the broader economy and adding further damage to those areas that have
been hardest hit, banks and private investors must come back into the market on
a larger scale and they want more clarity on the rules that will apply. 

Credit availability is still a problem
and there is a broad array of programs in place to improve access to credit and
capital for small businesses.  As
conditions improve, it is important that we remain focused on making sure that
small businesses, a crucial engine of job growth, have continued access to
equity capital and credit.

Many Americans trying to buy a home
or refinance their mortgage are also finding it hard to access credit, even for
FHA- or GSE-backed mortgages.  The Administration has been working closely
with the FHA and FHFA to encourage them to take additional measures to remove
unnecessary barriers and they are making progress.  They will probably outline additional reforms
in the coming weeks.

Bank supervisors, in the normal
conduct of bank exams and supervision, as well as in the design of new rules to
limit risk taking and abuse, must be careful not to overdo it with actions that
cause undue damage to the availability of credit or liquidity to markets.

Geithner said the U.S. financial
system is getting stronger
, and is now significantly stronger than it was
before the crisis.  Among the achievements:

  • Banks have increased common equity
    by more than $350 billion since 2009.
  • Banks and other financial
    institutions with more than $5 trillion in assets at the end of 2007 have been
    shut down, acquired, or restructured.
  • The asset-backed commercial paper
    market has shrunk by 70 percent since its peak in 2007, and the tri-party repo
    market and prime money market funds have shrunk by 40 percent and 33 percent
    respectively since their 2008 peaks.
  • The financial assistance we provided
    to banks through TARP, for example, will result in taxpayer gains of
    approximately $20 billion.

The Secretary said the strength of
the banks is helping to support broader economic growth, including the more
than 3 million private sector jobs created over 22 straight months, and the 30
percent increase in private investment in equipment and software.  
Broadly, the cost of credit has fallen significantly since late 2008 and early
2009.  Banks are lending more, with commercial and industrial loans to
businesses up by an annual rate of more than 10 percent over the past six
months.  

He concluded by saying that no
financial system is invulnerable to crisis, and there is a lot of unfinished
business on the path of reform.  The reforms are tough where they need to
be tough.  “But they will leave our financial system safer, better able to
help businesses raise capital, and better able to help families finance safely
the purchase of a house or a car, to borrow to invest in a college education,
or to save for retirement.  And they will protect the taxpayer from having
to pay the price of future crisis.”

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