CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

Last summer, we at Crunched Credit wrote (here, here and here) about Mortgage Resolution Partner’s (“MRP”), a San Francisco-based venture-capital firm, proposal whereby underwater performing residential mortgage loans held in private label securitization would be seized, refinanced, or restructured and sold to third party investors, with the government recovering the administration costs and MRP earning a fee on each transaction (the “Program”), which (or some version of which) was (and in some cases still is) being considered by, for example, the County of San Bernardino (which has dropped the idea), the City of Chicago (a decision on whether to move forward is still pending), Wayne County, MI (Detroit area) (Wayne County has dropped the idea), and the City of Salinas, CA (which has entered into an agreement with MRP to provide residential foreclosure data but has indicated that this agreement does not mean that they are considering the Program at this time).

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February has certainly been a big month for federal agencies to issue long-awaited final rules. The latest agency to throw its hat into the ring is the U.S. Department of Housing and Urban Development, which recently codified its long standing position that liability under the Fair Housing Act may be proven by disparate impact without any discriminatory intentions.  This final rule provides additional support to potential government and private plaintiffs seeking to challenge “facially neutral” practices as violations of the Fair Housing Act.  We have previously blogged about the different types of liability related to discrimination in lending here.  This rulemaking comes at a time when lenders have already begun to reexamine how they will structure their residential mortgage lending activities in the face of the CFPB’s new qualified mortgage rules.  (See our DechertOnPoints for more information on the new QM/ATR rule and the additional proposal).

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One of this year’s most discussed investment ideas is the conversion of distressed or foreclosed single family homes into rental properties on a mass scale.  With the FHFA’s Real Estate Owned Initiative offering product in bulk sales and major institutions stepping up to develop programs to finance the acquisition of the pools, REO-to-Rental strategies are taking shape.  Still, several questions remain as these deals actualize; most importantly among them, what will the Rating Agencies be looking for beyond their initial assessments, and will securitization develop into a viable exit?  An interdisciplinary team of Dechert attorneys from our Finance and Real Estate Group and Financial Institutions Group partnered to author this Dechert OnPoint on the issue, discussing the structure of a recent offering by the FHFA, keys areas of concern for investors and ratings considerations.  The update can be found here.

By: Matthew Clark

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Federal fair lending laws prohibit discrimination in credit transactions. The Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act prohibit discrimination in mortgage lending on the basis of certain factors including race or color, religion, national origin, sex, marital status, age, handicap or an applicant’s receipt of public assistance funds.   

The spotlight in this blog post is on the tension between the potential requirements of fair lending laws and the regulatory pressure to originate relatively standardized mortgage products under relatively stringent underwriting guidelines. To the extent that tighter lending policies and a menu of plain vanilla mortgage products restrict access to credit in a way that disproportionately affects a protected class of borrowers, an increase in the number of disparate impact challenges by regulators and the Department of Justice (the “DOJ”) may result -- regardless of intent to discriminate and regardless of whether lending policies appear neutral on their face. Disparate impact theory may also be a basis for liability under the Fair Housing Act and the ECOA.

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As is the case in too many cities in the United States, even after more than 4 years since the beginning of the foreclosure crisis, Chicago’s homeowners have been hard hit. In March of 2012, nearly 667,000 Chicago area homes were underwater, and 13% of those homeowners were also delinquent on their mortgage payments for three months or more. Add to these troubling statistics Chicago’s above-average unemployment rate which, as of May 2012, was 9.8%, and the city’s condition appears even more dire. 

Chicago has been willing to take aggressive (though problematic) actions to solve problems brought on by the financial crisis. One such move was the passage of the vacant building ordinance which landed a leading role here at Crunched Credit on two separate occasions (click here and here). 

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It’s no secret that California has been hit harder than most states by the housing crisis. Just east of Los Angeles, the county of San Bernardino has cities with some of the highest foreclosure rates in the U.S.

On July 18, the San Bernardino City Council declared a fiscal emergency and voted to file for Chapter 9 bankruptcy protection.

Attempting to stimulate the local economy, the county of San Bernardino entered into an agreement with two of its cities, Fontana and Ontario, to create the Homeownership Protection Program Joint Powers Authority (“JPA”) “to explore a variety of proposals to assist homeowners within their jurisdictions who are underwater on their mortgages.” Currently, the JPA is considering a controversial eminent domain plan put forth by Mortgage Resolution Partners (“MRP”), a San Francisco-based venture-capital firm, whereby (based upon publicly available information) underwater performing residential mortgage loans held in private-label securitizations would be seized, refinanced or restructured and sold to third-party investors, with the government recovering administrative costs and MRP earning a fee on each transaction (the “Program”). On July 13, the JPA held its first organizational meeting where it created the structure for moving forward and heard a handful of public comments from opponents of the Program. The next meeting of the JPA is planned for August 16. The Joint Exercise of Powers Agreement states that the Homeownership Protection Program established by the JPA “may include the Authority’s acquisition of underwater residential mortgage loans by voluntary purchase or eminent domain and the restructuring of these loans to allow homeowners to continue to own and occupy their homes.”

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Earlier this month I was a panelist at the HOPE NOW REO Symposium in DC. The Symposium brought together residential mortgage loan servicers, community non-profits, private equity investors, government agencies and lenders to discuss the growing number of REO on the balance sheets of Fannie, Freddie and private mortgage lenders. I participated in a panel that focused on how private investors in REO might finance their investment in a pool of REO. One key financing option for investors will be the securitization of the rental income from the REO. Of course, in order to move this forward, we will need rating agency criteria.

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