August 14, 2013 Newsletter
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Issue Spotlight

Recent Developments


SFIG's first position paper (Position Paper) is on the critical issue of the use of eminent domain by municipalities to seize underwater mortgage loans from securitization trusts. Members of SFIG’s Residential Mortgage Committee prepared the Position Paper with input from a wide variety of SFIG members, including investors, servicers and trustees. The Residential Mortgage Committee includes SFIG participants from a large cross section of SFIG’s member organizations. Eminent domain is also the topic of this week’s ISSUE SPOTLIGHT in light of the current eminent domain controversy in Richmond, CA.

Click here for the Position Paper.

If you are interested in participating in SFIG's Residential Mortgage Committee, please contact SFIG at


Among the latest developments in the fast moving situation in the City of Richmond, CA (Richmond), three trustee banks filed a complaint in federal court on August 7 to demand declaratory and injunctive relief from Richmond’s plan to seize mortgage loans from private label securitizations through the use of eminent domain. Wells Fargo Bank, N.A., Deutsche Bank National Trust Company, and Deutsche Bank Trust Company Americas (the Trustees) filed suit against Richmond and Mortgage Resolution Partners (MRP), a private for-profit entity. The Trustees reportedly are undertaking the litigation at the request of several of the largest investors in the securitizations, including BlackRock, Inc., Pacific Investment Management Co. (PIMCO), Fannie Mae and Freddie Mac. In a separate action, also filed in the U.S. Federal District Court for the Northern District of California, Bank of New York Mellon is suing Richmond and MRP requesting the same relief.

For over a year, MRP has been marketing a strategy to communities that purports to help local homeowners avoid foreclosure, while generating a return for the municipality and for MRP. Of the several cities that have entered into consulting agreements with MRP, Richmond is the first to send preliminary "offer to purchase" letters to trustees. Under California’s eminent domain law, such letters are a prerequisite to initiating a "quick taking" of private property.

MRP's basic strategy involves seizing performing but "underwater" mortgage loans (those loans that have a principal balance greater than the current fair market value of the house). The municipality would pay an amount for the performing mortgage loan equal to approximately 80% of the value of the house. MRP then assists the homeowner in refinancing the loan with the Federal Housing Administration (FHA), for example, at a higher loan to value ratio (LTV), like 97.5%. MRP and the municipality share the difference between the 80% LTV purchase price and the 97.5% LTV refinancing amount. The strategy depends on seizing performing mortgage loans because the homeowner must be able to qualify for the planned refinancing

SFIG's Position

SFIG's Residential Mortgage Committee has prepared a position paper (Position Paper) that examines the constitutionality, public policy and other challenges that are raised in connection with a municipality's seizure of underwater mortgage loans from private securitization trusts through the use of the power of eminent domain. The Position Paper states that while SFIG is sympathetic to the difficulties faced by municipalities and borrowers adversely affected by the current condition of the housing market and the economy, it strongly objects to any proposed use of eminent domain in this manner. SFIG believes that such use of eminent domain by local municipalities will harm the housing market and future borrowers in those municipalities and investors across the country.

Definition of Eminent Domain

Eminent domain is the power to take private property for public use. The exercise of eminent domain is limited by the Fifth Amendment to the U.S. Constitution, state constitutions, and other law. Those legal limitations generally provide for governmental authorities to forcibly take private property only for a "public purpose" in exchange for "just compensation." While eminent domain is most typically used to seize real property, it has been used to successfully seize intangible property, like contracts. The mortgage loans in the securitizations would fall into the latter category. The Trustees' law suit alleges that Richmond’s plan does not meet the legal requirements for eminent domain.

The Trustees claim, among other arguments, that Richmond’s stated public purpose – avoiding foreclosures – is not adequate because the loans in question are not in default. To achieve its stated public purpose, Richmond should instead be assisting defaulted home owners. Next, the Trustees claim Richmond's intention to calculate the seizure price for the mortgage loans based on a discounted value of the collateral (the house) rather than the mortgage loan itself (using a net present value of the mortgage loan’s cash flow stream, for example), is also contrary to the requirements to exercise the right of eminent domain. Richmond's planned calculations would produce an artificially low purchase price and would not be just compensation to the securitizations' bond holders. The Trustees also claim the mortgage loans Richmond seeks to seize are contracts made under the laws of other jurisdictions, not property located in Richmond. In other words, Richmond doesn’t have the authority to reach beyond its own borders to seize the mortgage loans in question.

MRP and the Plan to Seize Underwater Mortgages

MRP is a private, for-profit business run by Stephen Gluckstern and funded by a group of private investors. According to the Wall Street Journal, MRP’s sole business appears to be entering into advisory contracts to assist municipalities in conducting mortgage loan seizures through the use of eminent domain. Cornell University law professor Robert Hockett is credited with first devising the mortgage loan eminent domain plan, referred to by Professor Hockett as the "Municipal Plan." Professor Hockett has been quoted in numerous news articles defending his Municipal Plan against Constitutional arguments like the ones raised in the Trustees' suit. Professor Hockett also serves as a consultant to MRP.

Since 2012, in addition to Richmond, MRP has been in talks with North Las Vegas, NV, the County of San Bernardino, CA, Brockton, MA, Chicago, IL, and dozens of other municipalities. One by one, these municipalities have either rejected MRPs proposals or delayed action in recognition of the formidable legal hurdles to be faced in implementing MRP’s program, leaving Richmond to move forward as the test case.

In January 2013, San Bernardino, which was one of the first municipalities to publicly announce that it was considering an eminent domain proposal, rejected the idea due to widespread local opposition and the risks that would be associated with it. The Homeownership Protection Program Joint Powers Authority Board, which is made up of San Bernardino County and two of its cities, Ontario and Fontana, voted unanimously to discontinue developing its eminent domain plan. Instead, officials in San Bernardino are now soliciting proposals from interested groups on the creation of a program that explicitly will not include the use of eminent domain.

In April 2013, Brockton announced that it was rejecting a proposal to use eminent domain to acquire and restructure underwater mortgage loans in that city. Members of the Brockton working group expressed concern that the question of whether using eminent domain was permissible was not legally clear enough to warrant further discussion at that time.

By contrast, in the summer and fall of 2012, supporters of MRP’s plan were attracting headlines. For example, Lt. Gov. Gavin Newsom of California came out in favor of eminent domain proposals. Newsom accused investors in private label securitization trusts, the Securities Industry and Financial Markets Association (SIFMA) and others of restraint of trade, collusion and threatening to "redline" municipalities participating in eminent domain programs. He called upon the U.S. Department of Justice to investigate and take action against the mortgage industry.

SIFMA, the Mortgage Bankers Association, the Association of Mortgage Investors, and others have sent joint letters (Joint Letters) to both North Las Vegas and Richmond outlining the numerous potential legal impediments to MRPs proposals. With respect to North Las Vegas, the Joint Letters have addressed aspects of Nevada law that likely prohibit use of eminent domain for mortgage loans.

The Richmond Case

Richmond is a working class community of about 100,000 residents, located near Berkeley, CA. Richmond is the largest city in the U.S. to be served by a Green Party mayor. That mayor, Gayle McLaughlin, has been quoted as saying that she is not troubled by the impending law suit or by the concerns expressed by the Federal Housing Finance Agency (FHFA), discussed below, and others that the MRP eminent domain plan will ultimately cause more harm than good for Richmond. "The fact these threats are being put out there are very, very disturbing – but we are not afraid to go to court," McLaughlin said to The Los Angeles Times on August 8. "We are looking forward to it, because we think fully that our legal reasoning will win." Reportedly, about 12,000 Richmond families – approximately half of all homeowners in the city – currently have underwater mortgages. As its first step in executing the eminent domain plan, Richmond has sent letters to trustees and servicers offering to purchase 642 mortgage loans in private securitization trusts. Richmond wrote that it will proceed to forcibly seize the mortgage loans using its eminent domain powers if trustees or servicers do not consent to Richmond’s proposed purchase terms. "It's the responsibility of banks to fix this, and they haven't, so we're taking it into our hands," said Mayor McLaughlin.

According to CoreLogic data provided to The Wall Street Journal, with respect to a sampling of 1,100 Richmond loans on owner-occupied homes that were current on their payments in June, some 42% of the loans had received modifications. Around half of those borrowers whose loans had been modified received some form of principal forgiveness or forbearance.

In their suit, the Trustees argue that the MRP eminent domain plan violates the law on a number of grounds. The suit argues that the plan targets mortgages for a purely private use, which is a violation of the Fifth Amendment to the U.S. Constitution, the California Constitution and of other eminent domain law. By reaching beyond the city's borders to take control of loans, Richmond and MRP also may be violating due process requirements of the U.S. Constitution. And, the suit argues, by rewriting mortgage contracts, the program violates the interstate commerce clause of the U.S. Constitution, likely resulting in major harm to the national mortgage and housing industries. Also, by eradicating the debts of some local residents at the expense of out-of-state creditors, the plan would violate the "dormant" commerce clause doctrine, the suit alleges.

In a press release issued on August 7, John Ertman, a lawyer at Ropes & Gray who is acting as counsel to the Trustees said, "Under this scheme, 100% of the cost will be borne by pensioners, savers and in some cases, the taxpayers who currently own these mortgage backed securities. A hundred percent of the profit will be split between [MRP] and the city of Richmond."

The FHFA Study

On August 8, the FHFA posted a legal memorandum on its website summarizing its conclusions following a yearlong study of the eminent domain issue. The memorandum states, "There is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are 'underwater' on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law, [and] would run contrary to the goals set forth by Congress for the operation of conservatorships by FHFA… [FHFA] has a broad range of authorities…that could be deployed to respond" to an eminent domain action. "In making a determination on an appropriate course, the agency would consider carefully and fully the context of an action or planned action by a location and the impact on FHFA's regulated entities." The agency said that it would instruct Fannie Mae and Freddie Mac to "limit, restrict or cease business activities" in any jurisdiction using eminent domain to seize mortgages.

Professor Hockett, who advised MRP on the Richmond plan, said that the FHFA was acting outside of its authority by issuing its threats. "How many times must it be repeated that principal write-downs on deeply underwater mortgage loans increase the value of the loans – even while keeping homeowners in their homes and communities intact," Hockett said to The Los Angeles Times on August 8. "[The FHFA position] is not only illegal, it is disgusting," he added.

Executives and legal counsel for Fannie Mae and Freddie Mac also singled out the eminent domain plan last week during conference calls with journalists to discuss second-quarter financial results. The use of eminent domain is "a serious issue that has the potential to unsettle investors in mortgage securities," Fannie Mae Chief Executive Timothy Mayopoulos said on August 8. "Our sense is that so-called voluntary loan sales would not be very voluntary. They are loan sales under pressure," said William McDavid, general counsel of Freddie Mac, on a conference call with reporters on August 7.

Impact on Financial Recovery

The recent activity in Richmond has caused the securitization industry to significantly increase their efforts in opposition to MRP’s proposal as evidenced by the Trustees' law suit, the statements by FHFA, and the statements and actions of the industry groups, including SFIG. The Wall Street Journal on August 8 quoted Professor Hockett in his Municipal Plan as saying, "That bondholders will effectively be 'paying themselves' less for their loans than face in so doing is just a roundabout way of saying that they will be writing down principal." What Professor Hockett doesn’t discuss is that if his theory of using eminent domain to seize mortgage loans is held to be Constitutional, there may be no rational limit on the seizure of other financial assets or intangible property by municipalities in the name of public purpose. Such an outcome could be highly disruptive to the entire economy.

Click here for the SFIG Position Paper. Click here for the Trustees' complaint. Click here for the Bank of New York Mellon complaint. Click here for the FHFA study. Click here for Professor Hockett's Municipal Plan. Click here for the Joint Industry Letter.

If you would like to participate in SFIG's Residential Mortgage Committee, contact SFIG at


According to an August 12, 2013 Fitch Ratings press release, the disposition of a significant portfolio of CMBS Loans in a single transaction resulted in the largest post-recession drop in U.S. commercial mortgaged-backed securities (CMBS) delinquencies. The transaction involved a July 2013 sale of a $773 million CMBS portfolio from the LB-UBS 2007 C2 deal of which $759 million of loans serviced by Orix Capital Markets LLC were delinquent prior to the sale. Following the sale, the U.S. CMBS delinquency rate fell 40 basis points to 6.78%, representing a 2.23% drop from its July 2011 peak of 9.01%.

CMBS delinquency rates decreased for all major property types as a result of the sale with the drop in office loans (a recent underperformer according to the Fitch press release) standing out by falling nearly 60 basis points month-over-month. Industrial, hotel, multifamily and retail CMBS also experienced significant delinquency drops.

Although the Orix portfolio sale was a major factor in the CMBS delinquency rate decrease, CMBS delinquencies have been falling in recent months as originations increase, the size of delinquent CMBS loans decrease and the CMBS market remains active.

Click here for the August 12, 2013 press release.


Following the SEC's June 2013 proposal of two alternatives for money market fund reform, some managers have begun lining up behind what they identify as the preferable option. According to The Wall Street Journal JPMorgan Chase, Goldman Sachs and Charles Schwab favor the adoption of a floating share price requirement over the imposition of share redemption restrictions. From a market participant perspective, liquidity is arguably a more important feature of money market funds than a fixed $1/share price. However, the efficacy of requiring daily marked share prices in combating runs may be limited—the SEC could come out in favor some combination of floating share prices and redemption restrictions.

Click here for the SEC's money market fund reform proposal.

SFIG members interested in joining the SFIG Task Force for money market fund regulation initiatives should contact SFIG at


During a wide ranging radio interview on August 9, 2013, U.S. Senate Majority Leader Harry Reid (D-NV) distinguished his views on the future of Fannie Mae and Freddie Mac from those of President Obama. When asked about the future of homeownership for the middle class, Senator Reid said on KNPR, Nevada's public radio station, that he will look at the legislation the President is proposing but is giving no guarantees he will support the plan to get rid of the government-backed mortgage companies. "The President said just a few days ago we are going to have to take a look at Fannie and Freddie, these are the government organizations that have made homeownership so easy. I don't agree with the President," Reid said. "He says he wants to get rid of them. I think we'd better be very, very careful in doing that. I will look closely at his recommendations because on their face, I don't like them. I have no problem looking at them, revising, revamping, but I think getting rid of them is not a great thing to do."


Sandra Pianalto, head of the Federal Reserve Bank of Cleveland, announced on August 8, 2013 that she would step down from the her role as CEO and president of the institution in early 2014. Pianalto joined the Cleveland Fed, one of the 12 regional banks that makes up the Federal Reserve System, in 1983 and moved to her current position in 2003. Pianalto is among the longest-serving current officials on the Fed's policy committee and has served in a variety of roles at the Cleveland Fed since joining its research department as an economist three decades ago.

Pianalto is the latest senior Fed official to announce plans to step down. Fed Chairman Ben Bernanke's second term at the central bank's helm expires on January 31, 2014, and he is widely expected not to seek a third term. In addition, Fed Governor Elizabeth Duke is departing from the Fed Board at the end of this month and Fed Governor Sarah Bloom Raskin is slated to move to the U.S. Treasury Department.


On August 8, 2013, Fannie Mae and Freddie Mac reported a combined $15.1 billion profit for the second quarter of 2013. They will return more than $14 billion to the U.S. Treasury as dividend payments. Both Fannie Mae and Freddie Mac have operated under the conservatorship of the Federal Housing Finance Agency since 2008 when they received $187 billion in federal bailout money. Fannie Mae's and Freddie Mac's near-record profits come at a time when leaders of both parties have called for Fannie Mae and Freddie Mac to be dissolved. The companies' profits are likely going to complicate discussions related to mortgage market reform efforts.

Fannie Mae will make a dividend payment of $10.2 billion to the U.S. Treasury in September 2013. Once the second-quarter dividend is paid, Fannie Mae’s repayments will total roughly $105 billion — 90 percent of the $117.1 billion it received from the U.S. Treasury. Fannie Mae's senior preferred stock outstanding and held by the U.S. Treasury remains at $117.1 billion at June 30, 2013, but Fannie Mae has not received funds from the U.S. Treasury since the first quarter of 2012. In connection with its earnings report, Fannie Mae stated that it expects to remain profitable for the foreseeable future. It also stated that in addition to dividend payments, it expects to make substantial federal income tax payments to the U.S. Treasury going forward.

Freddie Mac said it will pay the Treasury $4.4 billion. Freddie Mac’s latest dividend payment will bring the amount that it has returned to the Treasury to $41 billion. Freddie Mac received about $71 billion from the U.S. Treasury in bailout funds.

Click here for Fannie Mae's 10-Q. Click here for Freddie Mac's 10-Q.


On August 8, 2013, IndyMac Bancorp. Inc.'s former chief executive, Michael W. Perry (Perry), made yet another filing in ongoing litigation in the Ninth Circuit Court of Appeals. The appeal is from a lower federal court decision (District Court Decision) in a case pitting the FDIC, IndyMac's Chapter 7 trustee, Perry and other former IndyMac executives (IndyMac) against a group of insurers that includes XL Specialty Insurance Company, Arch Insurance Company, ACE American Insurance Company, Axis Insurance Company, Lloyds, Catlin Insurance Company, Zurich American Insurance Company, Twin City Fire Insurance Company and Continental Casualty Company (Insurers).

The Insurers prevailed at the District Court. The court determined that the Insurers do not need to cover IndyMac's costs of defending and settling litigation brought by the U.S. Securities and Exchange Commission (SEC) for false representations regarding IndyMac's financial stability in SEC filings (SEC Litigation).

The case stems from the 2008 bankruptcy filing of IndyMac. In July 2008, the Office of Thrift Supervision seized IndyMac Bank, F.S.B. and appointed the FDIC as receiver to manage IndyMac Bank's assets and secured liabilities and file its bankruptcy.

IndyMac was subsequently sued in several state and district courts for breaches of corporate fiduciary duties and violations of securities laws. The cases include a class action securities lawsuit alleging that IndyMac ignored its own underwriting standards when originating loans to increase IndyMac's loan volume, sold these high risk loans through securitization transactions, and falsely portrayed the financial stability and health of IndyMac through SEC filings (Class Action).

IndyMac had substantial directors and officers (D&O) insurance coverage. The D&O policies at issue provide that claims arising from "interrelated wrongful acts" are covered under only the first policy period in which the claims are made.

The Insurers successfully argued to the District Court that IndyMac's claims related to the SEC Litigation stem from the same interrelated circumstances that gave rise to the claims brought during the policy period of the Class Action. Because the policy periods are the same, the claims were found to be interrelated, and IndyMac couldn’t collect on the D&O coverage a second time.

Since the IndyMac D&O policies' language is similar to language found in many other policies, the District Court Decision will likely be cited by insurers in other disputes to limit coverage where lawsuits were brought over multiple policy periods because it provides a broad interpretation of what makes claims interrelated enough to be covered under only one policy period.

Click here for brief filed by IndyMac on August 8, 2013. Click here for the brief filed by IndyMac on April 22, 2013. Click here for the brief filed by the Insurers on June 28, 2013. Click here for the District Court Decision.


In a decision that could affect the tax status of offshore investment vehicles, The First Circuit in Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312 (1st Cir. 7/24/2013), held that a private equity fund was engaged in a trade or business for purposes of the ERISA pension termination liability rules, which reference the federal tax law concept of trade or business. More specifically, the court held that the management services provided by the general partner of the fund to a bankrupt portfolio company could be attributed to the private equity fund such that the fund should not be treated as a passive investor under the ERISA rules.

If private equity funds are found to be in a trade or business, for federal tax purposes the result could cause foreign investors in the funds to be treated as receiving income effectively connected with a trade or business and tax-exempt investors to be treated as receiving unrelated business taxable income. Although the Sun Capital case concerned whether a private equity fund should be liable for the bankrupt portfolio company's termination liability to the union pension plan, if the trade or business rationale is applied from the ERISA context to federal tax law generally, it is possible that offshore investment vehicles with U.S. activities conducted by a manager could be subject to increased taxation. In the structured finance context, the activities of offshore investment vehicles, including activities engaged in by managers of such funds, should be considered in the context of the First Circuit's ruling in Sun Capital.

Click here for the decision.


ABS Vegas 2014 – January 21-24, Las Vegas, Nevada. Click here for more information.

SFIG is now accepting sponsorship contracts for this conference. If you are interested, please contact SFIG.


SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry. Please visit our website for more information, including how to join.


SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community. To ensure that you receive future editions of the newsletter, please visit our website ( to learn about membership opportunities.


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