Here’s a little nugget of potentially good news that may materialize out of the fiscal cliff.
The Treasury Department is reportedly floating a new initiative, referred to as the “Market Rate Modification Program,” which will allow underwater borrowers with non-agency mortgages to do a rate and term refinance to take advantage of today’s low interest rates.
As it stands, if Fannie Mae, Freddie Mac, or Ginnie Mae don’t back your mortgage, getting a loan modification is difficult, if not impossible.
And while most newly originated loans are now backed by these government agencies, many non-agency mortgages, also referred to as private-label mortgages, were originated during the housing boom.
As a result, millions of Alt-A loans, subprime loans, option arms, jumbo loans, and so forth are not eligible for the existing government refinance and modification programs, such as the popular HARP II.
The Treasury Department has determined that “Significantly Underwater Borrowers,” characterized as those with loan-to-value ratios of 125% or higher who have such loans are more likely to default, despite being current on payments.
In short, these borrowers are unable to get the assistance fellow Americans (or even neighbors) receive because their loans aren’t backed by Fannie, Freddie, or the FHA/VA, so the Obama Administration fears they may walk.
Obviously, the last thing we need is more foreclosures, especially now that everyone seems to think we’ve “turned the corner.”
How the Market Rate Modification Program Would Work
It all sounds quite simple. If you’re one of those “Significantly Underwater Borrowers” that is current on mortgage payments, all you’d need to do is provide a hardship affidavit with your application.
The letter is meant to prove a “reasonably foreseeable default” under mortgage securitization rules to appease investors who might otherwise prefer their higher original yield.
From there, if approved, participating loan servicers would lower your mortgage rate to the “current market rate,” as determined by the Freddie Mac Primary Mortgage Market Survey.
At last check, the going rate for a 30-year fixed was a very attractive 3.32%, a far cry from the 6-7% rates seen during the housing run-up.
Surely that reduction in mortgage payment would make homeowners think twice about hating their “now worthless” properties.
Each month during the five years after the modification took place, the Treasury would pay loan servicers the difference in interest between the borrower’s old rate and new.
After the five years are up, the Treasury would stop compensating servicers, regardless of whether said loans were above water or not, and the borrower’s interest rate would remain at the lower rate.
Apparently this would appease investors while also providing much needed relief to homeowners thinking of throwing in the towel.
It would also provide much needed stability to the housing market, which is surely not yet on solid ground.
Why It’s Important
Back in 2009, I wrote about private-label mortgages, which while only making up a small percentage of total mortgages outstanding, accounted for 62% of the delinquencies.
If these bad loans continue not to be addressed, the resulting defaults and foreclosures could hamper a housing recovery for everyone, including those with agency-backed loans.
So this is a very important initiative, and one that could make the impending fiscal cliff a little less painful.
For the record, House Democrats are also working on a bill that would provide principal reductions for those with Fannie and Freddie backed loans.
Of course, the more they attempt to stuff into negotiations, the longer it will take to reach a resolution.
For months, I’ve been banging on about the lack of a refinance program for private-label mortgages, those not backed by Fannie Mae and Freddie Mac.
Sure, HARP is great for underwater homeowners whose loans are owned by the pair, but what about those who aren’t so fortunate?
I’ve brought up proposals such as HARP 3 on several occasions, along with Oregon Senator Jeff Merkley’s refinance program that targets those who hold mortgages that aren’t government-backed.
The Obama administration has also been open to an expanded HARP for these types of borrowers, but without Congressional approval, any stirrings of such relief continue to fall on deaf ears.
But apparently these borrowers are actually receiving some assistance outside of HARP.
45% of Borrowers Have Received a Loan Modification
A new commentary released today by Fitch Ratings revealed that about 45% of all underwater borrowers with private-label mortgages have received a loan modification.
The company noted that loan modifications, distressed loan liquidations, and home price gains have reduced the number of underwater loans in private-label residential mortgage-backed securities (RMBS) by a sizable 25%.
There are still roughly 1.5 million underwater loans in these at-risk securities, though that number has fallen from 2.04 million.
Perhaps the biggest driver has been home price increases, with double-digit growth seen in some of the hardest-hit areas, including Arizona, California, and Nevada.
Assuming home prices continue to tick higher, which they’re expected to, the number of waterlogged loans will continue to drop at a steady clip.
While this is all good and well, the carnage is far from over. Fitch said about one-third of all outstanding borrowers in private-label RMBS pools (no pun intended) remain underwater.
It’s unclear how deeply underwater they are, but underwater nonetheless.
Additionally, the company projects some regions of the United States, notably the Northeast, to experience further home price declines before bottoming.
Why This Is Good and Bad
At first glance, it appears to be good news. Underwater borrowers with all types of loans are generally getting the help they need to continue making mortgage payments and hold on to their homes.
This benefits everyone involved because it makes for a stronger housing market. But the numbers can be deceiving.
Sure, 45% of these non-Fannie/Freddie underwater borrowers received loan mods, but what type of loan mod?
Did they get a $100 off their loan each month? Did they get a .125% interest rate reduction? Was principal forgiveness involved?
We don’t know what level of assistance they received, and if history tells us anything, a lot of these private loan mods weren’t all that attractive, at least not compared to HARP.
Through HARP, borrowers have been able to refinance their mortgages to interest rates a few percentage points lower than their previous rate.
That’s serious assistance, enough to stick around and see this crisis out. The private mods are another question.
This improvement also doesn’t bode well for an expanded HARP for non-Fannie/Freddie borrowers. The more improvement we see and hear about, the less likely Congress will be to act.
So the prospects of a new assistance program are dwindling each day.
The Multnomah Pilot Program
There is a small glimmer of hope though. Last month, the Treasury Department approved a new pilot program to assist underwater borrowers without Fannie and Freddie loans.
The so-called “Rebuilding American Homeownership Assistance” (RAHA) Pilot was launched in Multnomah County, which includes the city of Portland.
It’s limited to borrowers with “significant negative equity” who intend to stay in the prpoerty for 5+ years. They must not own any other residential property and be current on the mortgage.
As expected, the Senate passed the mortgage bailout bill by a comfortable margin of 74 to 25 Wednesday evening.
Both presidential hopefuls, Republican John McCain and Democrat Barack Obama, appeared on the Senate floor to cast “aye” votes.
The bill, now a staggering 451 pages (up from just three), will move to a Friday vote in the House, where it was recently shot down, causing panic on Wall Street.
Of course it’s not the same bill anymore, with a number of add-ons now tacked on, including a boost to the federal deposit insurance limit and tax breaks that should save individuals and corporations roughly $110 billion over the next ten years.
The FDIC will also be permitted to borrow unlimited funds from the Treasury Department through the end of next year to cover insurance costs, and the SEC will ease mark-to-market accounting rules to take pressure off banks.
There are also a flurry of other measures, including a bill that would demand insurance companies treat mental health illnesses and physical ailments on a level playing field.
And of course, there’s the whole government buying the bad mortgages from ailing banks and financial institutions thing.
The hope now is that the Senate’s overwhelming approval of the bill and the possibility of an all-out stock market crash will be reason enough for the House to change their minds and give it the green light.
The question remains, however, whether the bailout will work, but it should do enough to keep investor sentiment positive in the near term, and perhaps save a few banks in the process.
Unsurprisingly, the Dow was down about 250 points Thursday, as it was widely expected the Senate would pass the bill Wednesday.
A key indicator of excess liquidity in the financial system has been falling since May, a development that holds promise for banks but raises questions for financial stability.
The Federal Reserve’s overnight reverse repurchase agreement, or ON RRP, facility has seen usage decline from nearly $2.3 trillion this spring to less than $1.7 trillion through the end of August, its lowest level since the central bank began raising interest rates in March 2022.
For banks, this was a desired outcome of the Fed’s effort to shrink its balance sheet. As the central bank allows assets — namely Treasuries and mortgage-backed securities — to roll off its books, its liabilities must decline commensurately. The more of that liability reduction that comes from ON RRP borrowing, the less has to come out of reserves, which banks use to settle transactions and meet regulatory obligations.
“What we’ve seen is the decline in the Fed holding has mostly come through on the liability side in terms of a decline in reverse repos, rather than reserves,” Derek Tang, co-founder of Monetary Policy Analytics, said. “This is, of course, welcome news to the Fed, because the Fed wants to make sure that there are enough reserve balances in the banking system to operate smoothly. So that’s good news.”
Yet, as participation in the ON RRP — through which nonbank financial firms buy assets from the Fed with an agreement to sell them back to the central bank at a higher price the next day — shrinks, some in and around the financial sector worry that funds are being redirected to riskier activities.
Darin Tuttle, a California-based investment manager and former Goldman Sachs analyst, said the decline in ON RRP usage has coincided with an uptick in stock market activity. His concern is that as firms seek higher returns, they are inflating asset prices through leveraged investments.
“I tracked the drawdown of the reverse repo from April when it started until about the beginning of August. The same time that $600 billion was pumped back into the markets is when markets really took off and exploded,” Tuttle said. “There’s some similarities there in drawing down the reverse repo and liquidity increasing in the markets to take on excessive risk.”
The Fed established the ON RRP facility in September 2014 ahead of its push to normalize monetary policy after the financial crisis of 2007 and 2008. The Fed intended the program to be a temporary tool for conveying monetary policy changes to the nonbank sector by allowing approved counterparties to get a return on unused funds by keeping them at the central bank overnight. The facility sets a floor for interest rates, with the rate it pays representing the first part of the Fed’s target range for its funds rate, which now sits at 5.25% to 5.5%.
For the first few years of its existence, the facility’s use typically ranged from $100 billion to $200 billion on a given night, according to data maintained by the Federal Reserve Bank of New York, which handle’s the Fed’s open market operations. From 2018 to early 2021, the usage was negligible, often totaling a few billion dollars or less.
In March 2021, ON RRP use began to climb steadily. It eclipsed $2 trillion in June 2022 and remained above that level for the next 12 months. Uptake peaked at $2.55 trillion on December 30 of last year, though that was partially the result of firms seeking to balance their year-end books.
While it is difficult to pinpoint why exactly ON RRP use has skyrocketed, most observers attribute it to a combination of factors arising from the government’s response to the COVID-19 pandemic, including the Fed’s asset purchases as well as government stimulus, which depleted another liability item on the Fed’s balance sheet: the Treasury General Account, or TGA.
Regardless of how it grew so large, few expected the ON RRP to ever reach such heights when it was first rolled out. Michael Redmond, an economist with Medley Advisors who previously worked at Federal Reserve Bank of Kansas City and the Treasury Department, said the situation raises questions about whether the Fed’s engagement with the nonbank sector through the facility ultimately does more harm than good.
“The ON RRP, when it was initially envisioned as a facility, was not expected to be this actively used. The Fed definitely has increased its footprint in the financial system, outside of the usual set of counterparties with it,” Redmond said. “The debate is whether that increases financial instability, because obviously it is nice to have the stabilizing force of the Fed’s balance sheet there, but it also potentially leads to counterproductive pressures on private entities that need to essentially compete with the Fed for reserves.”
Fed officials have maintained that the soaring use of the facility should not be a cause for concern. In a June 2021 press conference, as ON RRP borrowing was nearing $1 trillion, Fed Chair Jerome Powell said the facility was “doing what it’s supposed to do, which is to provide a floor under money market rates and keep the federal funds rate well within its — well, within its range.”
Fed Gov. Christopher Waller, in public remarks, has described the swollen ON RRP as a representation of excess liquidity in the financial system, arguing that counterparties place funds in it because they cannot put them to a higher and better use.
“Everyday firms are handing us over $2 trillion in liquidity they don’t need. They give us reserves, we give them securities. They don’t need the cash,” Waller said during an event hosted by the Council on Foreign Relations in January. “It sounds like you should be able to take $2 trillion out and nobody will miss it, because they’re already trying to give it back and get rid of it.”
But not all were quite so confident that the ON RRP would absorb the Fed’s balance sheet reductions. Tang said there have been concerns about bank reserves becoming scarce ever since the Fed began shrinking its balance sheet last fall, but those fears peaked this past spring, after the debt ceiling was lifted and Treasury was able to replenish its depleted general account.
“If the Treasury is increasing its cash holdings, then other parts of the Fed’s balance sheet, other liabilities have to decline and there was a big worry that reserves could start declining very quickly,” Tang said. “The Treasury was going from $100 billion to $700 billion, so if that $600 billion came out of reserves, we could have been in trouble.”
Instead, the bulk of the liabilities have come out of the ON RRP, a result Tang attributes to money market funds moving their resources away from the facility to instead purchase newly issued Treasury bills.
The question now is whether that trend will continue and for how long. While Fed officials say the ON RRP facility can fall all the way to zero without adverse impacts on the financial sector, it is unclear whether it will actually reach that level without intervention from the Fed, such as a lowering of the program’s offering rate or lowering the counterparty cap below $160 billion.
A New York Fed survey of primary dealers in July found that most expected use of the ON RRP to continue falling over the next year. The median estimate was that the facility would close the year at less than $1.6 trillion and continue falling to $1.1 trillion by the end of next year.
Those same respondents also expect reserves to continue dwindling as well, with the median expectation being less than $2.9 trillion by year end and roughly $2.6 trillion by the end of this year. As of Aug. 31, there were just shy of $3.2 trillion reserves at the Fed.
“The Fed’s view is that there are two types of entities with reserves, the banks that have more than enough and they don’t know what to do with, and the ones that are having some problems and need to pay up to attract deposits, which ultimately are reserves,” Redmond said. “When there are fluctuations in reserves, it’s hard to tell how much of that is shedding of excess reserves by banks that are flush with them, and how much is a sign that this is going to be a tougher funding environment for banks.”
Tuttle said a balance-sheet reduction strategy that relies on a shrinking ON RRP is not inherently risky, but he would like to hear more from the Fed about how it sees this playing out in the months ahead.
“We have gotten zero guidance on the drawdown of reverse repo,” he said. “Everything is just happening in the shadows.”
A federal judge has reversed the U.S. Treasury Department’s decertification of Change Lending, allowing the non-bank originator to resume its non-qualified mortgages to underserved borrowers.
U.S. District Judge James V. Selna on Friday issued a temporary restraining order against the Community Development Financial Institutions Fund, which revoked Change’s status earlier this month. The certification grants lenders more flexible underwriting if they meet specific underserved lending thresholds.
Change sued the CDFI Fund earlier this week in a California federal court, arguing the government office’s decertification was based on erroneous calculations. Change met a benchmark for a number of qualified transactions but missed a dollar amount qualification by less than 3 percentage points, the Fund allegedly said.
“They did an analysis and never picked up the phone to say, ‘Hey, is our analysis correct?'” said Sanford Michelman, an attorney with Los Angeles-based Michelman & Robinson LLP on behalf of Change.
Despite Change’s suggestion to review the data, the Fund never responded, Michelman said. The CDFI Fund revoked Change’s certification Aug. 17.
Change in a statement Friday afternoon said it was relieved by the court’s quick action and it’s on track to permanently address the CDFI Fund’s “flawed analysis and mathematical errors.” It also noted both the Fund and Change agree on the lender’s 66% of lending to underserved borrower number.
A spokesperson for the Fund declined to comment Friday afternoon.
Change is one of the nation’s largest non-QM originators with $4.2 billion in volume last year, and has been certified with the Fund since 2018. It was founded by Steve Sugarman, the former chairman and CEO of Banc of California, after he resigned there amid an SEC probe in 2017.
The company came under scrutiny in June when a former Change employee accused it in a lawsuit of mischaracterizing its borrowers. The Securities and Exchange Commission is also allegedly investigating Change over its mortgage-backed securities it sold on Wall Street, a probe neither side has confirmed.
Barron’s first reported Change’s decertification, and in June uncovered the lender’s business with wealthy clients such as Johnny Depp. Change has asserted its underserved lending bona fides, writing in its lawsuit it lent $6.8 billion to low-to-moderate income borrowers and $1.3 billion in persistent poverty areas.
The Anaheim-based lender described in its complaint the bad math behind the decertification, suggesting only 188 loans in question led to the Fund’s “arbitrary and capricious” action. In one example, the Fund allegedly docked Change for not meeting an 80% of area median income threshold, when Change’s submitted data already included that 80% calculation.
“This duplicative application of the 80% factor was therefore using 64% as the standard, rather than the proper 80% standard,” the lawsuit read.
The Fund has a Sept. 11 deadline to submit an opposition to the court, Selna ordered. The sides are also set to appear before the judge Sept. 15 in Santa Ana, California to debate a more long standing preliminary injunction.
For years, residents in Solano County heard about a mysterious group buying up thousands of acres of farmland and making millionaires out of property owners. The agricultural land had been owned by the same families for decades — some of it for more than a century.
But the company, Flannery Associates, did not say what its plans were for the land, dotted with towering wind turbines and sheep grazing on pastureland. It paid several times market value and made offers on properties that were not for sale, according to officials familiar with the land purchases.
Then, last week, a survey was sent to residents asking them what they thought about “a new city with tens of thousands of new homes, a large solar energy farm, orchards with over a million new trees, and over ten thousand acres of new parks and open space,” according to a screenshot of the survey shared with the Los Angeles Times.
Advertisement
That’s when it became clear that Flannery Associates had big plans for the rural landscape.
Over a five-year period, the company became the largest landowner in Solano County after purchasing more than 55,000 acres of undeveloped land. The company has paid more than $800 million since 2018, according to court records.
U.S. Rep. John Garamendi, who represents the region, said for years he and other officials were unable to determine who was behind the dizzying land grab. Flannery Associates has purchased land that was restricted to open space and agricultural purposes under a state conservation program.
The company seeks to rezone the land, which would require approval by multiple state and county agencies and wouldn’t be as simple as asking residents to vote on the issue, officials familiar with the process said. But the lack of residential zoning in the area does not seem to be a factor for Flannery Associates.
Since its buying jag began, the company has filed suit in federal court against a group of families the firm purchased property from, seeking $510 million. Flannery Associates claims the families conspired to inflate their property values in a scheme to get more money.
Garamendi (D-Walnut Grove) lambasted the company for how it has handled the purchases and for not working with local residents.
Advertisement
“Flannery Associates is using secrecy, bully and mobster tactics to force generational farm families to sell,” Garamendi said during an informational committee hearing on Tuesday that addressed the company’s actions.
For years, residents and politicians speculated that Flannery Associates was backed by foreign investors seeking to spy on Travis Air Force Base. Located in Solano County, the base is one of the busiest military facilities in the nation. Most of the land surrounding the base is now owned by Flannery Associates, according to county documents.
Some of the company’s financial backers were revealed in an article last week by the New York Times, and they include a cadre of tech entrepreneurs and venture capitalists.
On the eastern end of Solano County, the city of Rio Vista is now surrounded by Flannery Associates land. Mayor Ronald Kott said that, like many Solano County officials, he had not been approached by anyone from the company to discuss plans for the land.
Although he’s now aware of the company’s goals and some of the financial backers, he’s still unsure how his city of 10,000 residents found itself surrounded by land owned by a group of tech billionaires.
“I have more questions than answers,” Kott said. “Our destiny is going to be determined by whatever they’re going to do.”
Flannery Associates has said little since it was formed as a limited liability company in the state of Delaware in 2018. The company’s actions were first reported by ABC7’s San Francisco Bay Area news station, KGO, which said a mysterious company was purchasing large amounts of land.
Flannery Associates is led by Jan Sramek, a former Goldman Sachs investor who found fame and fortune by the time he was 22, according to a 2010 Business Insider article. Sramek previously worked out of Goldman’s offices in London, but his LinkedIn profile now lists Fairfield, Calif., in Solano County as his primary location.
In a self-help book he co-wrote, Sramek says if given the chance to give his younger self a bit of advice, he would quote Ayn Rand: “The question isn’t who is going to let me; it’s who is going to stop me.”
He did not immediately respond to requests for comment.
For years, Garamendi and U.S. Rep Mike Thompson (D-St. Helena) tried to pierce through the opaque veil that surrounded Flannery Associates. Then, in the last week, representatives of the company attempted to arrange sit-down meetings with the Congress members and the survey was sent out to residents.
The survey said that the issue of a new city might be on next year’s ballot, which was news to Garamendi and Thompson. There have been no efforts made by any groups to get a new measure on the ballot for this project, according to officials. The survey also said the developers would replace the county’s existing aqueduct — calling it “one of the most polluted in California” — generate tax revenue for schools and be entirely funded by private sector money.
Thompson said the company’s actions had raised food and national security concerns. He’s asked the U.S. Air Force, the Treasury Department, the Defense Department and the FBI to investigate the land purchases. Thompson met with representatives from the company, including Sramek, according to KGO.
“And I don’t think they had a clear understanding of the significance of livestock in Solano County,” Thompson said. “And it was my impression that they kind of pooh-poohed the agricultural value of the land.”
Garamendi plans to meet with representatives from Flannery Associates at a later time, according to his office.
Solano County Supervisor Monica Brown is not familiar with Silicon Valley and spent most of her professional career as a schoolteacher. She heard from friends who received the survey and wondered if the company had the best interests of the county’s current residents in mind.
“We’re growing food and helping people. Why would you stop economic growth like that?” she told the Los Angeles Times. “Why would they spend $800 million and not be transparent about it?”
Flannery Associates has purchased more than 140 parcels of land, according to court records and county assessor data. That number is growing every day, officials say.
But in its lawsuit, the company claims that it overpaid and is seeking to claw back some of its money.
Attorneys for Flannery Associates have referenced personal relationships and text messages among neighbors in court documents — neighbors who could be influenced, they argue, by a scheme to drive up asking prices for the land.
The lawsuit has had a chilling effect on some landowners in the Montezuma Hills and Jebson Prairie area of the county. Multiple residents in the area declined to comment about the company for fear of being named in a lawsuit.
Others who spoke on condition of anonymity to avoid retaliation by the company say they feel as though Flannery Associates will target anyone who speaks out about the company’s aggressive tactics to buy land.
Garamendi called the lawsuit a “heavy-handed, despicable intimidation tactic.” He said that the company managed to purchase all the land without any of the current governmental safeguards in place to flag the issue. He said that, in the future, information about large land sales, and who is buying and selling, would be vital for lawmakers and residents.
Thompson introduced a bill that was inspired by the Flannery Associates land purchases that would provide more effective tools for state agencies to investigate large land sales.
Through a spokesperson, Flannery Associates said members of the company “care deeply about the future of Solano County and California and believe their best days are ahead.”
The company said the project aims to bring “good-paying jobs, affordable housing, clean energy, sustainable infrastructure, open space, and a healthy environment” to Solano County.
“We are excited to start working with residents and elected officials, as well as with Travis Air Force Base, on making that happen,” spokesperson Brian Brokaw said.
The company says it resorted to secrecy while purchasing the land to avoid rampant real estate speculation. But it has not disclosed specific details about the scope of its project. Representatives for Flannery Associates are meeting with community leaders to present their vision, according to Brokaw.
Michael Moritz, venture capitalist and longtime San Francisco resident, is one of the financial backers behind the company. In a 2017 email viewed by the New York Times, Moritz described an opportunity to invest in a new California city. He explained how investors could transform farmland into a bustling metropolis.
Sequoia Heritage, the $15-billion wealth management firm Moritz founded in 2010, did not immediately respond to requests for comment.
But in a February New York Times opinion piece, Moritz described some of his frustration with San Francisco and how the city had become “a prize example of how we Democrats have become our own worst enemy.”
He described legislators who deceived voters with tweaks and rule changes to the city’s charter so they could stay in power and drive seismic shifts in the local government.
“The core of the issue, in San Francisco and other cities, is that government is more malleable at the city level than at higher levels of government,” Moritz wrote. “If the U.S. Constitution requires decades and a chisel and hammer to change, San Francisco’s City Charter is like a live Google doc controlled by manipulative copy editors.”
Other financial backers with Flannery Associates include LinkedIn co-founder Reid Hoffman; Andreessen Horowitz venture capital firm investors Marc Andreessen and Chris Dixon; payments company Stripe co-founders Patrick and John Collison; Emerson Collective founder Laurene Powell Jobs; and entrepreneurs turned investors Nat Friedman and Daniel Gross, a Flannery Associates spokesperson confirmed.
Although those names were not repeated at an agricultural committee hearing on Tuesday, lawmakers were thinking of the financial backers’ actions.
Flannery Associates’ land buys threaten the makeup of eastern Solano County, mainly the land under the California Land Conservation Act, which sets aside properties for agricultural purposes and open space. The penalty for not obeying that policy does not seem to dissuade Flannery Associates, former West Sacramento Mayor Christopher Cabaldon said during the committee hearing.
The act, also known as the Williamson Act, can include a fee for the incompatible structures built on the land. For billionaire property owners, that could just be seen as the price of doing business.
“In some sense,” he said, the conservation program has “been like a flag that says, ‘Buy here.’”
The Flannery Associates project illustrates just how weak current tools are for dealing with a project of this size. Secrecy further hampers state regulators unaware of a buyer’s intent for the land, Cabaldon said.
Brokaw, the Flannery Associates spokesperson, said the company wouldn’t comment on specific issues brought up during the committee hearing but was meeting with county and state leaders to address their concerns.
Officials and landowners worry that much of the infrastructure needed to build a new city is just not present in eastern Solano County. And an influx of development would almost certainly drive out any farmers from the region.
But another scenario that could present itself is Flannery Associates moving ahead with its project only to have it fall apart years later.
“Even if the project is rejected locally … you can’t reset the clock,” Cabaldon said. “You cannot turn it back and say, ‘OK, no harm, no foul. Let’s just return to the way that this community was two years ago.’ Because the owners will be gone, the family farmers will have left.”
Times staff writers Jessica Garrison and Ryan Fonseca contributed to this report.
The leadership structure of the Federal Housing Finance Agency, the body that runs Fannie Mae and Freddie Mac, has been ruled unconstitutional by a federal appeals court in Texas.
Mel Watt – Brookings Institution/Flickr
According to the ruling by the U.S. Court of Appeals for the Fifth Circuit in Texas, the FHFA has been “unconstitutionally insulated from executive control” due to its single-director structure. Should the court’s decision be upheld by a higher court, the FHFA’s actions could be rendered void according to the law, American Banker reported.
“We hold that Congress insulated the FHFA to the point where the executive branch cannot control the FHFA or hold it accountable,” appeals court judges said.
The FHFA does not have a bipartisan commission, unlike other federal agencies, so there is nothing to insulate it from executive oversight, the judges explained.
At present the FHFA executive cannot be removed from his post except for good cause. However, the judges called for a change to be made in the law so that the president can remove the director at will.
The Washington Examiner says the issue is not an academic one, as Mel Watt (pictured), who is the incumbent acting FHFA director, was appointed by former president Barack Obama, and has been criticized by the Trump administration several times since it took over the White House.
The previous acting director Ed DeMarco was also criticized for his fiscally conservative management of Fannie and Freddie, leading to calls from some liberals for him to be fired.
The FHFA took control of Fannie and Freddie on a caretaker basis after the two mortgage backers were bailed out by the government in 2008. Since then the FHFA has directed their business and strongly shaped the housing market. Fannie and Freddie facilitate a national secondary mortgage market by buying home loans from banks and other lenders and packaging them into securities for sale to investors.
The lawsuit against the FHFA was brought about by shareholders of Fannie and Freddie. Those shareholders also raised concerns that the Treasury took 100 percent of profits from the mortgage giants rather than pay out a 10 percent dividend. However, the court rejected the latter argument, validating an agreement that requires both bodies to deliver almost all their profits to the Treasury Department.
The FHFA refused to comment on the case.
Courts across the country continue to focus on appropriate checks on independent regulators. Twice in less than a year, a federal court has ruled that the Consumer Financial Protection Bureau isn’t constitutionally structured, also citing its single-director format.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
President Obama and the Treasury Department today unveiled a much anticipated foreclosure prevention plan that will rely heavily on mortgage financiers Fannie Mae and Freddie Mac to assist at-risk borrowers.
The so-called “Homeowner Affordability and Stability Plan” will attack foreclosures on a number of different fronts, depending upon the borrower’s situation, while providing incentives to participating homeowners, mortgage lenders, and servicers.
For those looking to refinance their mortgage that have Fannie and Freddie owned or guaranteed loans, but are unable to do so because their loan-to-value exceeds 80 percent, guidelines will be eased to facilitate such refinancing.
This measure alone is expected to help between four and five million homeowners obtain more affordable and sustainable mortgage payments.
To ensure the government-sponsored entities are able to continue to support the mortgage market, Treasury will provide up to $200 billion in capital to the pair via preferred stock purchases.
Additionally, the Treasury will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities in an effort to keep interest rates low and improve liquidity in the secondary market.
Under the agreement, the GSEs’ retained mortgage portfolios will be increased by $50 billion to $900 billion.
Another three to four million homeowners will receive assistance through a $75 billion “Homeowner Stability Initiative.”
Borrowers would receive loan modifications that lower the housing debt-to-income ratio to 31 percent, via both voluntary lender reductions and government subsidies.
In some cases, government-sponsored modifications would provide below-market mortgage rates for five years, after which they would adjust upward at a moderate pace until reaching the average rate for a conforming loan during the time of the modification.
Once a modification is complete, borrowers will receive $1,000 per year, for up to five years, in incentive pay that will go towards the principal balance of the mortgage, if they continue to make payments.
Loan servicers will receive an upfront fee of $1,000 for each completed loan mod, as well as incentives of up to $1,000 each year for three years if the borrower stays current on the new loan.
Additionally, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before a borrower becomes delinquent
Lenders would be encouraged to modify loans thanks to a partial guarantee program, which would create an insurance fund at a size of up to $10 billion.
“Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index,” Treasury said on its website.
Treasury will develop uniform guidelines for the loan modifications, which will be used for the Administration’s new foreclosure prevention plan, and mirrored by lenders participating in government aid programs.
Other measures to reduce foreclosures include principal balance reductions during bankruptcy, $2 billion in neighborhood stabilization funds, and improved flexibility of Hope for Homeowners and other FHA loan programs.
Complete details will be provided on March 4 when the program is launched.
The regulator of Fannie Mae and Freddie Mac improperly amended stock purchase agreements in 2012 when it allowed the U.S. Treasury to sweep up the companies’ net profits, a jury in Washington, D.C. found Monday.
The jury awarded shareholders of the government sponsored enterprises a total of $612.4 million in damages.
Fannie Mae will pay junior preferred shareholders $299.4 million and Freddie will pay $281.8 million. The jury also issued $31.4 million to owners of Freddie’s common shares.
The surprising verdict in Berkley v. FHFA comes after the case was dismissed in October due to a hung jury.
Related cases, like Collins v. Yellen, which typically argued that the FHFA had no right to allow Treasury to sweep up the GSEs’ profits, have also been dismissed, mostly on technicalities or that shareholders had no standing.
The plaintiff’s argument in Berkley v. FHFA is that the FHFA violated the contractual rights of shareholders when it gave away all their dividends in perpetuity.
The case stems from the restructuring of the agencies in 2008. A group of GSE investors alleged that the government knew the GSEs would turn a huge profit after a $100 billion bailout from the Treasury in 2008.
An agreement between FHFA and the Treasury Department promised the investors compensation in the form of stock, dividends tied to the amount of money invested in the companies and priority over other shareholders in recouping their investment.
But that agreement was modified in 2012, to require Fannie Mae and Freddie Mac to pay dividends to the Treasury pegged to the companies’ net worth. The arrangement essentially washed out private investors’ ownership interests in the GSEs. Investors cried foul.
“By August 2012, FHFA and Treasury knew that the Companies were on the verge of generating huge profits,” the plaintiffs argued in the suit.
In 2018, the Fifth Circuit Court of Appeals ruled that the FHFA was within its statutory authority when it enacted the “net worth sweep” of the GSEs’ dividends, but found that the FHFA was not constitutionally structured. In 2019, the Fifth Circuit Court of Appeals reversed its ruling on the “net worth sweep” and remanded the case back to the district court. The Supreme Court last year dealt a blow to shareholders in Collins v. Yellen when it ruled the FHFA did not exceed its authority under federal law.
The victory in Berkley v. FHFA is sweet for shareholders, notably in that it’s their first one since the beginning of conservatorship, said David Stevens, a former Federal Housing Administration commissioner and Mortgage Bankers Association president.
“Whether this sets the tone for a new direction for the conservatorship is yet to be seen,” Stevens said. “But without question, a political leadership that oversees these two companies in Washington will be likely focusing on options ahead. While the jury awarded less than what was asked for by the plaintiffs, it is without question victory for the shareholder interest. What happens next will be interesting.”
Most observers expect the FHFA to appeal the decision.
President Donald Trump’s administration is teasing real estate investors with the possibility of significant tax breaks when they buy properties in “distressed economic areas” that have since been labeled as “opportunity zones” by the U.S. Treasure Department.
Steve Mnuchin, the Treasury’s Secretary, said the newly designated zones could attract as much as $100 billion in investment.
The idea for the tax breaks is to tempt investors to inject new capital into areas of the U.S. that have fallen behind the rest of the country since the Great Recession. The plan is that capital gains in a certified opportunity zone can avoid taxation through the end of 2026, or until the investment is sold, whichever comes first. Any gains would be permanently shielded from being taxed if the investors holds the asset for at least 10 years. In addition, after a seven year period, the initial investment will be discounted by up to 15 percent for taxation purposes.
The Treasury Department also says that “large scale” projects could possibly qualify for tax breaks. For example, those who invest capital for startup business in opportunity zones could be exempt. Also include are individuals, corporations, businesses, REITs and estates and trusts. More guidance will be issued at the end of the year, the Treasury Department said.
The Treasury Department has published a full list of “Opportunity Zones”, available here.
“The creation of opportunity zones is one of the most significant provisions of the Tax Cut and Jobs Act,” Mnuchin said earlier this year. “Incentivizing private investment into these low-income communities can be transformational, stimulating economic growth and job creation across the country. This administration will work diligently with states and the private sector to encourage investment and development in opportunity zones and other distressed communities so that they may enjoy the benefits of robust economic growth.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].