Release of “Way Too Big to Fail” Simply Opening Salvo in Efforts to Reform Mortgage Finance

It’s tempting when you have an enormous task before you to focus all of your attention on completing that task while blocking out any thoughts of what comes next.  For me, that enormous task has been the publication of a book with William (“Bill”) Frey to address the structural deficiencies in mortgage finance that brought about the subprime meltdown.  I must confess that with so much of my attention over the last several months dedicated to completing this book, I had little time to contemplate the even greater enormity of the task that lay ahead.  But with the publication by Greenwich Financial Press of Way Too Big to Fail: How Government and Private Industry Can Build a Fail-Safe Mortgage System (WTBTF) on October 31, 2011 (official website here), and its release on CreateSpace and Amazon last week, it’s suddenly sinking in how much work remains to be done for the words on those pages to have any impact.

Let me start by saying that I am extremely proud of the final product that is WTBTF.  While many books have attempted to identify the causes or villains behind the mortgage crisis, Way Too Big to Fail is the first that examines why government-enacted fixes have failed and explains in detail what must, should, and can be done to right the ship.  It thus takes a positive and proactive approach to the problems plaguing our economy, providing a welcome ray of hope in an industry in dire need of some good news.  As much as I enjoy covering the ongoing mortgage litigation playing out in our courts as we speak (more on that later), which has the capacity to decide the fate of huge financial institutions and perhaps the future of the U.S. mortgage market, I am even more excited about turning my attention to helping to ensure that the U.S. housing market survives and thrives going forward.

I believe that Way Too Big to Fail is an important first step down that path.  With the combination of Bill’s expertise in mortgage finance and my expertise—cultivated in no small part through my work on The Subprime Shakeout—in communicating complex ideas regarding mortgage finance and litigation in straightforward ways, I think the book succeeds at providing an accessible blueprint to the mortgage finance machine of the past, present, and future.  I can say without hesitation that it has been one of the most productive and enjoyable collaborations of my professional career.

But as I sit here at the San Francisco Airport, waiting to board the redeye to New York, I realize that this is only the beginning.  To sit back and allow myself to revel in this accomplishment would be to miss the larger and more important opportunity—the opportunity for these words to have an impact in the current mortgage finance landscape.  And though the book has now taken on a life of its own, with its own website, Facebook page, and Twitter account, I know that it will not succeed in influencing the conversation without a lot more effort on our part.

Thus, I am heading off to spend the next week with Bill in New York and Washington, D.C. to meet with a full slate of lawmakers, academics, financiers, reporters and others in the industry with the desire and/or the capacity to influence where our nation goes from here.  My hope is that we can all start from the common understanding that the federal government should not and cannot support the entire mortgage market—and that private investors must step in to fill the void—and begin discussing concrete proposals for attracting private capital.

Of course, as most people have now come to understand, private investors will not put any more money into private mortgage securities until the litigation raging over the mortgage backed securities (MBS) created from 2004 to 2007 is resolved.  As the FHFA stated in a press release in connection with its slew of recent lawsuits,

the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation’s financial system.

In this regard, several major decisions are anticipated in the coming weeks.  The first is the decision in MBIA v. Countrywide on MBIA’s Motion for Partial Summary Judgment.  This decision, expected sometime this month, will determine the viability of Countrywide/BofA’s so-called “loss causation argument,” which maintains that an underwriting breach must actually cause a loan to go into default to constitute grounds for a putback.  All signs point to Countrywide/BofA losing this motion, as they find little support for their position in the contract language or the small amount of existing MBS putback precedent.  The “materially adverse” standard found in most pooling and servicing agreements mirrors closely the materiality standard used in the insurance context, and I see no reason why some proximate cause standard should be read into these contracts that would alter the ordinary understanding of a materially adverse impact on the value of a loan—i.e., something that increases the loan’s risk.

Moreover, with Judge Eileen Bransten having ruled against BofA in a recent motion to sever MBIA’s successor-in-interest claims from the rest of the case and try them separately with such claims from the other monoline cases, Bransten has now ruled against Countrywide/BofA in nearly every major decision thus far (see, e.g., her adverse rulings on discovery issues, statistical sampling, and the viability of MBIA’s successor-in-interest claims).  As Bransten has long appeared fed up with the heel-dragging and hide-the-ball tactics of Countrywide’s attorneys (entertaining transcript on motion to dismiss available here), there’s no reason to believe she’ll be any friendlier to their arguments this time around.

And the impact of a ruling against Countrywide/BofA on this motion will not be limited to this case alone; the opinion will almost certainly be cited in every ongoing putback case in the country.  Already, after Bransten’s most recent decision allowing MBIA to move forward with depositions on successor liability, we know that this case will be the country’s bellwether on the question of whether BofA engaged in a de facto merger with Countrywide.  The crowds that gathered inside the overflowing courtroom for the October 5 hearing on Partial Summary Judgment (see transcript part I and part II) illustrate just how closely the markets are watching this legal proceeding.

The other major decision that will be coming down the pike in the next few months is a ruling on Bank of New York’s appeal of Judge William Pauley’s order denying remand.  The significance of this ruling cannot be understated.  If this proposed settlement remains in federal court, Bank of America and/or Bank of New York will likely attempt to withdraw (as discussed by the astute Alison Frankel at Reuters) and the settlement will fall apart, creating even more chaos for the embattled lender.  Should the settlement go back to state court and breeze through to approval under the favorable standards of Article 77, you can expect every other major lender with subprime exposure to try the same tactic to resolve its outstanding putback liabilities.

I will certainly be watching these and other developments closely over the coming months.  But, I’m also going to be doing something a little different on The Subprime Shakeout.  I’m going to start making it a little more personal, by updating readers on the successes and failures of my efforts with Bill to push the needle on reforming the country’s mortgage finance system.

I’m going to start by blogging my East Coast trip this week, as we reach out to policymakers and industry leaders about the book and begin discussing our ideas for reform.  If you have an interest in seeing change in the way this country finances mortgages in the future, I invite you to participate by reading this blog and responding to me via the comments section or Twitter (@isaacgradman); interacting with WTBTF on Facebook and Twitter; and, of course, reading Way Too Big to Fail (you’ll notice this site’s first and only banner ad on the right sidebar, which links to the WTBTF’s CreateSpace page)and sharing your feedback and reviews with us, on Amazon, and with anyone else who you think could benefit from the ideas we present.  While I do not expect that our ideas will please everyone all of the time, I do think that the book initiates a conversation that has been a long time coming.

Way Too Big to Fail, authored by Bill Frey and edited by Isaac Gradman, was published by Greenwich Financial Press on October 31, 2011.  Please visit www.waytoobigtofail.com for information about the book, its author, and its editor; news and reviews on the book; and to view actual excerpts and illustrations.  The paperback edition is available on CreateSpace and Amazon; a limited edition hardback was also printed, some copies of which may be available through Amazon later this year.  If you feel so inclined, please like WTBTF on Facebook and follow @WTBTF on Twitter.

About igradman

I am an attorney, consultant, book editor, and one of the nation's leading experts on mortgage backed securities litigation. I am the author of The Subprime Shakeout mortgage litigation blog, a partner at Northern California law firm Perry Johnson, Anderson, Miller & Moskowitz, LLP, and the editor of the critically-acclaimed book, "Way Too Big to Fail: How Government and Private Industry Can Build a Fail-Safe Mortgage System," by Bill Frey. Follow me on Twitter @isaacgradman
This entry was posted in allocation of loss, appeals, Bank of New York, banks, BofA, bondholder actions, causes of the crisis, contract rights, Countrywide, discovery, FHFA, global settlement, investors, irresponsible lending, lawsuits, liabilities, litigation, lobbying, loss causation, MBIA, monoline actions, mortgage market, pooling agreements, private label MBS, putbacks, regulation, Regulators, remand, repurchase, RMBS, securitization, settlements, statistical sampling, successor liability, The Subprime Shakeout, Uncategorized, Way Too Big to Fail, William Frey. Bookmark the permalink.
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