Banking and Finance Law Commons^™

Eminently Reasonable, David J. Reiss

Cornell Law Faculty Working Papers

Using the power of eminent domain to restructure underwater mortgages is constitutional, beneficial and administratively feasible.

Comment On The Use Of Eminent Domain To Restructure Performing Loans, David J. Reiss

Cornell Law Faculty Working Papers

There has been a lot of fear-mongering by financial industry trade groups over the widespread use of eminent domain to residential mortgages. While there may be legitimate business reasons to oppose its use, its inconsistency with Takings jurisprudence should not be one of them. To date, the federal government’s responses to the current crisis in the housing markets have been at cross purposes, half-hearted and self-defeating. So it is not surprising that local governments are attempting to fashion solutions to the problem with the tools at their disposal. Courts should, and likely will, give these democratically-implemented and constitutionally-sound solutions a …

Once A Failed Remic, Never A Remic, Bradley T. Borden, David J. Reiss

Cornell Law Faculty Working Papers

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured (or failed to structure) these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start.

Wall Street Rules, Bradley T. Borden, David J. Reiss

Cornell Law Faculty Working Papers

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.

Comment On The Federal Housing Finance Agency’S Strategic Plan: Fiscal Years 2013-2017, David J. Reiss

Cornell Law Faculty Working Papers

This is a comment upon Performance Goal 4.3 from the Federal Housing Finance Agency’s Strategic Plan: Fiscal Years 2013-2017. Performance Goal 4.3 addresses the future of Fannie Mae and Freddie Mac as well as the future of the infrastructure of the residential housing finance market. This comment will address the future of Fannie and Freddie after they exit conservatorship. Once analyzed in the context of regulatory theory, Fannie and Freddie’s future seems clear. They should be privatized so that they can compete on an even playing field with other financial institutions, and their public functions should be assumed by pure …

Were "It" To Happen: Contract Continuity Under Euro Regime Change, Robert C. Hockett

Cornell Law Faculty Working Papers

One way or another, the European Monetary Union (EMU) is apt to endure. The prospect of continuation under the precise contours of the regime as we presently find it, however, is anything but certain. Hence many investors and other actual or prospective contract parties are likely to remain skittish until matters grow clearer. This skittishness, importantly, can itself hamper the prospect of expeditious European recovery. Addressing particular sources of ongoing uncertainty about EMU prospects can itself therefore aid in the project of recovery.

This Essay accordingly aims to impose structure upon one particular, and indeed particularly complex, source of uncertainty …

Fannie Mae And Freddie Mac: A Bibliography, David J. Reiss

Cornell Law Faculty Working Papers

This is an unannotated bibliography of writings about Fannie Mae and Freddie Mac as well as some material that covers other government sponsored enterprises such as the Federal Home Loan Bank System. While it is comprehensive, it is not exhaustive, with a focus on work published through 2011 by government agencies, economists, legal and policy scholars, private sector analysts and think tanks. It does not include Congressional testimony and shorter works. This bibliography will be posted on Wikipedia so that others can make additions to it.

Regulation Of Subprime And Predatory Lending, David J. Reiss

Cornell Law Faculty Working Papers

The bust of the subprime market in the mid-2000s led to the global financial crisis of the late 2000s. This crisis has virtually ended subprime lending for the current credit cycle. Most subprime lenders have gone out of business or merged with other financial institutions. The remaining financial institutions have tightened their underwriting so that they no longer lend to those with subprime credit profiles. It is likely, however, that subprime lending will return in some form once the credit cycle turns. Other than the recent amendments to Regulation Z, the regulation of subprime and predatory lending has not changed …

Creditors And Debt Governance, Charles K. Whitehead

Cornell Law Faculty Working Papers

This chapter from the book Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.), provides an introduction to the law and economic theory relating to creditors and debt governance.

The chapter begins with a look at the traditional role of debt, focusing on the impact of debt on corporate governance and, in particular, the effect of an illiquid credit market on creditors’ reliance on covenants and monitoring. It then turns to changes in the private credit market and their effect on lending structure. Greater liquidity raises its own set of agency costs. In response, loans …

Comment On Enterprise Duty To Serve Underserved Markets, David J. Reiss

Cornell Law Faculty Working Papers

FHFA invited further comment on the merit of considering properties without affordable use restrictions as part of the Enterprises’ duty to serve, noting that affordable housing preservation “encompasses efforts to keep unsubsidized properties in good condition while maintaining affordability for low- and moderate-income households.” (Page 32102)

FHFA should be certain that any aid given to buildings without affordable use restrictions will actually be passed on in large part to their tenants, whether through lower rents or improved conditions. I question whether that is in fact the case.

There are two main rationales for subsidizing multifamily buildings without affordable use restrictions. …

Fannie Mae And Freddie Mac: Privatizing Profit And Socializing Loss, David J. Reiss

Cornell Law Faculty Working Papers

This book chapter describes the role of Fannie Mae and Freddie Mac in the ongoing financial crisis. The chapter first explains the hybrid public-private nature of Fannie and Freddie, which are what is known as Government Sponsored Enterprises (GSEs). Fannie and Freddie were originally chartered by the federal government to create a national mortgage market. The chapter then explains how the two GSEs morphed into extraordinarily large companies that profited enormously from their special relationship with the federal government, while providing only modest benefits to American homeowners. In what turned out to be a disastrous trade-off for American taxpayers, Fannie …

Rating Agencies: Facilitators Of Predatory Lending In The Subprime Market, David J. Reiss

Cornell Law Faculty Working Papers

This book chapter explores how the three largest rating agencies, Standard & Poor’s, Moody’s Investor Service and Fitch Ratings, exploited their privileged regulatory status to profit from the booming subprime mortgage market at the expense of homeowners. These rating agencies boosted their own bottom lines and assisted predatory lenders by effectively vetoing state consumer protection initiatives. While regulators have identified enhanced investor protection regulation of credit rating agencies as a priority, future regulation must ensure that the systemic biases of the rating agency industry are no longer permitted to trump legitimate state consumer protection initiatives.

Coming Out Of Conservatorship: Developing An Exit Strategy For Fannie And Freddie, David J. Reiss

Cornell Law Faculty Working Papers

This brief article reviews the various policies that the Obama Administration can choose from as it considers how Fannie Mae and Freddie Mac should exit conservatorship. It first reviews the benefits and costs associated with the two companies. It then reviews four broad positions regarding the appropriate role of Fannie and Freddie in the housing finance market. It argues that the two companies should be privatized because Fannie and Freddie pose a systemic risk to the financial system, unfairly benefit from their regulatory privilege and do not create net benefits for the American people. Finally, it reviews four concrete plans …

Fannie Mae And Freddie Mac And The Future Of Federal Housing Finance Policy: A Study Of Regulatory Privilege, David J. Reiss

Cornell Law Faculty Working Papers

The federal government recently placed Fannie Mae and Freddie Mac, the government-chartered, privately owned mortgage finance companies, in conservatorship. These two massive companies are profit-driven, but as government-sponsored enterprises they also have a government-mandated mission to provide liquidity and stability to the United States mortgage market and to achieve certain affordable housing goals. How the two companies should exit their conservatorship has implications that reach throughout the global financial markets and are of key importance to the future of American housing finance policy.

While the American taxpayer will be required to fund a bailout of the two companies that will …

Ratings Failure: The Need For A Consumer Protection Agenda In Rating Agency Regulation, David J. Reiss

Cornell Law Faculty Working Papers

As the credit crisis unfolds, rating agencies have been properly identified as playing a central role in causing the crisis and misleading investors. What has been forgotten in this acrimonious environment is that in their quest to increase the market for their services, rating agencies also took positions that were particularly bad for many homeowners.

This article first reviews the explosive growth of the subprime mortgage market. It then discusses the ways in which the leading rating agencies, Standard & Poor’s, Moody’s and Fitch, acted as government-approved gatekeepers to the financial markets and contributed to the rapid expansion of the …

The Role Of The Fannie Mae/Freddie Mac Duopoly In The American Housing Market, David J. Reiss

Cornell Law Faculty Working Papers

The purpose of this paper is to provide a brief introduction to the role of the Fannie Mae/ Freddie Mac duopoly in the American housing market. First, the paper defines the "government sponsored enterprise," which is the type of hybrid public/private entity that Fannie and Freddie are and provides an introduction to the other significant government sponsored enterprises. It then explains what Fannie and Freddie do in the American mortgage market and provides a brief history of how the two companies developed. Finally, it evaluates the two companies as duopolists in the conforming mortgage market. The paper concludes by suggesting …

Changing The Paradigm Of Stock Ownership From Concentrated Towards Dispersed Ownership? Evidence From Brazil And Consequences For Emerging Countries, Erica Gorga

Cornell Law Faculty Working Papers

This paper analyzes micro-level dynamics of changes in ownership structures. It investigates a unique event: changes in ownership patterns currently taking place in Brazil. It builds upon empirical evidence to advance theoretical understanding of how and why concentrated ownership structures can change towards dispersed ownership.

Commentators argue that the Brazilian capital markets are finally taking off. The number of listed companies and IPOs in the Sao Paulo Stock Exchange (Bovespa) has greatly increased. Firms are migrating to Bovespa’s special listing segments, which require higher standards of corporate governance. Companies have sold control in the market, and the stock market has …

After Fannie & Freddie, David J. Reiss

Cornell Law Faculty Working Papers

Treasury Secretary Henry M. Paulson has announced that he is placing Fannie Mae and Freddie Mac in conservatorship. It is all but certain that both will exit their conservatorship in one form or another: perhaps retaining some of their hybrid public/private structure, perhaps as fully privatized companies, perhaps broken up into smaller companies. As the two cease to exist in their current form, it is worth thinking about what the future of the American mortgage market should look like without them.

Socialization Of Loss, David J. Reiss

Cornell Law Faculty Working Papers

The stated ideology of the Bush era has been that the free markets should run unfettered. In light of the U.S. government's recent intervention with Fannie Mae and Freddie Mac, it is clear that the actual ideology is the privatization of profit and the socialization of loss, at least for huge financial institutions. Our regulatory structure has to address three issues. Financial institutions may be too big, too complex or too politically connected to fail. Fannie and Freddie, unfortunately, are all three.

Time To Avert A Bailout, David J. Reiss

Cornell Law Faculty Working Papers

More and more bad news piles up about Freddie Mac and Fannie Mae, the two government-chartered, but publicly traded, mortgage finance companies. If Fannie or Freddie were to become insolvent, the American taxpayer would be on the hook for the cost of making good on the government's implied guarantees.

Let The States Legislate, David J. Reiss

Cornell Law Faculty Working Papers

Predatory lending was the most pressing consumer protection issue of 2004. Indeed, the Center for Responsible Lending found that predatory loans cost U.S. families more than $9 billion a year. It is such a serious problem that it looks as if major changes are in store in 2005 for how loans are to be made.

Unusual Impetus For A Consumer Law, David J. Reiss

Cornell Law Faculty Working Papers

The judgment about the suitability of consumer protection laws is becoming less and less the domain of New Jersey citizens and their elected representatives; rather, it has shifted into the domain of a financial services firm that is an advocate for investors, not the public.

Hold The Line Against Diluting Anti-Predatory Lending Law, Baher Azmy, David J. Reiss

Cornell Law Faculty Working Papers

Last month, the New Jersey Legislature held off an attempt by certain elements of the lending industry to eviscerate the recently enacted Home Ownership Security Act. Those same elements, however, are regrouping as the new session begins, hoping to take another swipe at the act. Legislators should oppose this assault, because the measure maintains a good balance between reducing mortgage abuses and preserving a healthy residential mortgage market.

The Petrochina Syndrome: Regulating Capital Markets In The Anti-Globalization Era, Stephen F. Diamond

Cornell Law Faculty Working Papers

This article argues that the process of globalization has generated a legitimation deficit that can be the source of wasteful, even destructive, social and political conflict. I stylize this outcome as "the PetroChina Syndrome," after a leading example of the kind of activity generated in response to globalization, the PetroChina Campaign, where a coalition of labor, human rights, environmental, anti-slavery and religious groups worked together to oppose the initial public offering of a major Chinese oil company led by Goldman Sachs. The article begins with a discussion of this important but largely unexplored dimension of the anti-globalization era triggered by …

Modeling A Response To Predatory Lending: The New Jersey Home Ownership Security Act Of 2002, Baher Azmy, David J. Reiss

Cornell Law Faculty Working Papers

Professor Baher Azmy and Professor David Reiss document how predatory home lending practices have become rampant throughout the country and, notably, among low- and moderate-income and African American communities in New Jersey. Their article analyzes this emerging problem as a sometimes devastating side effect of the rapid increase in American home ownership, an otherwise almost completely desirable phenomenon. Because predatory lending has been so difficult to define, states have struggled to regulate it. New Jersey, building on the work of a few other leading states, has drafted what many consider to be the new standard for predatory lending legislation, the …