Commonwealth v. Fed. Hous. Fin. Agency, Fed. Home Loan Mortg. Corp.

• Decision Date: 21 October 2014
• Docket Number: Civil Action No. 14–12878–RGS
• Citation: 54 F.Supp.3d 94
• Court: U.S. District Court — District of Massachusetts
• Parties: Commonwealth of MASSACHUSETTS v. FEDERAL HOUSING FINANCE AGENCY, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.

54 F.Supp.3d 94

Commonwealth of MASSACHUSETTS

v.FEDERAL HOUSING FINANCE AGENCY, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.

Civil Action No. 14–12878–RGS

United States District Court, D. Massachusetts.

Signed Oct. 21, 2014.

Validity Called into Doubt

M.G.L.A. c. 244, § 35C(h)M. Claire Masinton, Stephanie Kahn, Office of the Attorney General, Boston, MA, for Commonwealth of Massachusetts.

Asim Varma, Howard N. Cayne, Michael A.F. Johnson, Arnold & Porter LLP, Washington, DC, Eric F. Eisenberg, Robert T. Ferguson, Jr., Hinckley, Allen and Snyder, LLP, Gregory S. Bombard, Justin M. Fabella, Eric F. Eisenberg, Hinshaw & Culbertson LLP, Lawrence R. Kulig, Eckert Seamans Cherin & Mellott, LLC, Boston, MA, for Federal Housing Finance Agency, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS

STEARNS, District Judge.

In this litigation, conflicting responses by the Federal government and the Commonwealth of Massachusetts to the housing market crisis of 2007–2008 vie for supremacy. Plaintiff Commonwealth of Massachusetts, by its Attorney General, Martha Coakley, alleges that the “Arms–Length Transaction” and “Make–Whole” restrictions imposed on the sale of pre- and post-foreclosure homes by defendants Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) violate the Non-profit Buyback Provision of the Massachusetts Foreclosure Law, Mass. Gen. Laws ch. 244, § 35C(h). The Commonwealth also names as defendant the Federal Housing Finance Agency (FHFA) in its capacity as conservator for Freddie Mac and Fannie Mae. Defendants contend that the Supremacy Clause of the U.S. Constitution bars this lawsuit.

BACKGROUND

After the collapse of the housing market and the global financial crisis of 2007–2008, and the wave of foreclosure actions that followed, in 2012, the Massachusetts Legislature passed “An Act Preventing Unlawful and Unnecessary Foreclosures.” SeeMass. Gen. Laws ch. 244, §§ 14, 35B–35C (the Foreclosure Law). The Foreclosure Law extends a layer of consumer protection to homeowners saddled with the riskiestsubprime mortgages and seeks to curb abusive foreclosure practices on the part of some mortgage purchasers. Among its provisions, the Foreclosure Law requires a mortgagee-creditor to extend a loan modification offer to a borrower in circumstances where a restructuring of the mortgage would result in an affordable payment for the borrower and would incur less expense to the creditor than the anticipated costs of foreclosure. See id. § 35B. The Foreclosure Law also imposes stringent notice requirements, prohibits the initiation of a foreclosure by a party without the actual authority to do so, forbids a creditor from shifting the costs of correcting title defects to third-parties or imposing non-foreclosure related fees on borrowers, and punishes a creditor for making false statements in a court of law about its compliance with these requirements or about the borrower's payment history. See id. §§ 14 & 35C.

A beneficiary of the Foreclosure Law is a Massachusetts non-profit entity, Boston Community Capital (BCC), which in 2009 undertook a Stabilizing Urban Neighborhoods (SUN) Initiative with the goal of remediating inner-city neighborhoods plagued by “underwater” mortgages and abandoned homes. The SUN formula involves the purchase of troubled mortgages or post-foreclosure homes (also known as Real Estate Owned (REO) homes) at their current fair market value and the resale or renting of the properties to the former homeowners at their reassessed (lower) value, in instances where the prior owner is able to afford the new monthly payment. Since 2009, the BCC claims to have kept 475 Massachusetts families in homes that they would otherwise have lost to foreclosure.

The Foreclosure Law's “Non–Profit Buyback Provision” is tailored to support programs like the SUN Initiative by barring mortgage creditors from setting restrictive conditions on the sale of residential properties to non-profit organizations like BCC that give preferences to existing homeowners. The Non–Profit Buyback Provision reads as follows.

In all circumstances in which an offer to purchase either a mortgage loan or residential property is made by an entity with a tax-exempt filing status under section 501(c)(3) of the Internal Revenue Code, or an entity controlled by an entity with such tax exempt filing status, no creditor shall require as a condition of sale or transfer to any such entity any affidavit, statement, agreement or addendum limiting ownership or occupancy of the residential property by the borrower and, if obtained, such affidavit, statement, agreement or addendum shall not provide a basis to avoid a sale or transfer nor shall it be enforceable against such acquiring entity or any real estate broker, borrower or settlement agent named in such affidavit, statement or addendum.

Id. § 35C(h).

Defendants Freddie Mac and Fannie Mae are two federally chartered private corporations of the type commonly referred to as government-sponsored enterprises (GSEs). GSEs Freddie Mac and Fannie Mae own or guarantee roughly half of the outstanding residential mortgage loans in the United States. Defendant FHFA is a federal agency created by the Housing and Economic Recovery Act of 2008 (HERA), 12 U.S.C. § 4617 et seq. FHFA oversees and regulates the two GSEs and the twelve U.S. government sponsored Federal Home Loan Banks. Since September of 2008, as a result of the collapse of the housing market, the FHFA has (under the authority of HERA) held Fannie Mae and Freddie in conservatorship.¹

The two GSEs issue Servicing Guides to banks and other entities with whom they contract to service the mortgages under guarantee and to manage any foreclosed properties. In 2010, the GSEs imposed an Arms–Length Transaction (ALT) restriction on both pre-foreclosure and REO sales—a prospective buyer must attest that there are no agreements, understandings, or contracts guaranteeing that the original borrower will remain in the home as a tenant or will later have a right of first-refusal when the property is put up for sale. With respect to REO sales, the Servicing Guides preclude a selling agent from accepting any sum less than the full outstanding mortgage loan amount from the former mortgage holder or a person acting as a proxy for the former homeowner (the Make–Whole restriction).

The Complaint, the allegations of which the court for present purposes accepts as true, describes several instances in which the GSEs have declined offers from BCC to purchase homes in foreclosure at their market-value, citing to the ALT and/or the Make–Whole restriction. Compl. ¶¶ 23–26. The Complaint seeks a declaration that such refusals violate the Non–Profit Buyback Provision of the Foreclosure Law (Counts I & II). The Complaint also alleges that the GSEs' refusal to sell to BCC (and similar non-profit entities) based on the ALT and Make–Whole restrictions is an unfair or deceptive business practice that violates the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A (Count III). In addition to monetary penalties, the Commonwealth asks the court to enjoin the GSEs from enforcing the ALT and the Make–Whole restrictions in Massachusetts. On July 14, 2014, defendants collectively moved to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(1) & (6). The court heard argument on October 9, 2014.

DISCUSSION

Defendants' principal contention is that HERA bars the court from granting the declaratory and injunctive relief the Commonwealth seeks. HERA expressly prohibits any “court [from] tak[ing] any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator....” 12 U.S.C. § 4617(f) (the Anti–Injunction Clause). As conservator, FHFA may “take such actions as may be (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” 12 U.S.C. § 4617(b)(2)(D).

Defendants maintain that FHFA, in directing the GSEs to implement and enforce the ALT and the Make–Whole restrictions, acted within the scope of its powers and duty as conservator to “preserve and conserve” the GSEs' assets. They analogize this to the directive issued by the FHFA to Freddie Mac and Fannie Mae to “protect themselves against ... risks [ ] raised by PACE [ (Property Assessed Clean Energy) ] programs that impose priority or first-liens on participating properties.” Town of Babylon v. Fed. Hous. Fin. Agency, 699 F.3d 221, 225–226 (2d Cir.2012).

PACE programs are operated by local governments. They encourage property owners to make home improvements that reduce energy consumption, promote clean energy, create local jobs, and reduce greenhouse gas emissions, thereby mitigating the effect of global climate change. The local governments offer financing to commercial and residential property owners to fund the cost of the property improvements. Typically, the owners repay the particular local government, which calls the financing advances “assessments,” on a scheduled periodic basis. If a scheduled payment is not made, in many PACE programs, the delinquent amount attaches to the real property as a “tax lien.” Such a lien has priority over any other lien attached to the property, including new and preexisting mortgage liens, and stays with the property in the event of sale.

Id. at 225.

In response to the FHFA directive, Freddie Mac and Fannie Mae issued policy statements declaring that “they would no longer purchase mortgages secured by properties subject to first-lien PACE obligations.” Id. at 226. The Town of Babylon and the Natural Resources Defense Council challenged the decision in a lawsuit. The Second Circuit affirmed the district court's...