Commonwealth of Massachusetts v. Federal Housing Finance Agency et al

Filing 35

Judge Richard G. Stearns: ORDER entered finding as moot 15 Motion to Dismiss for Failure to State a Claim; granting 15 Motion to Dismiss for Lack of Jurisdiction. "For the foregoing reasons, defendants' motion to dismiss is ALLOWED. The Clerk is directed to close this case." (RGS, int2)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 14-12878-RGS
COMMONWEALTH OF MASSACHUSETTS
v.
FEDERAL HOUSING FINANCE AGENCY,
FEDERAL HOME LOAN MORTGAGE CORPORATION, and
FEDERAL NATIONAL MORTGAGE ASSOCIATION
MEMORANDUM AND ORDER ON DEFENDANTS’
MOTION TO DISMISS
October 21, 2014
STEARNS, D.J.
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 preand 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.” See Mass. Gen. Laws ch. 244, §§ 14, 35B-35C
(the Foreclosure Law). The Foreclosure Law extends a layer of consumer
protection to homeowners saddled with the riskiest subprime 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 thirdparties or imposing non-foreclosure related fees on borrowers, and

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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
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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 governmentsponsored 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

Under 12 U.S.C. § 4617(a)(3)(A)-(L), FHFA may place these and
related GSEs under conservatorship or receivership when circumstances
indicate that the GSEs are in deteriorating or unstable financial condition.
The purpose of the conservatorship is to “reorganize[e], rehabilitat[e], or
wind[] up the affairs of” the GSEs. Id. § 4617(a)(2).
1

4

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 ArmsLength 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 MakeWhole 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

5

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

6

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 determination that the Anti-Injunction Clause of § 4617
precluded judicial review. The Second Circuit explicitly held that in issuing
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the directive, the FHFA was acting within the scope of its power and
function as the GSEs’ conservator.
The FHFA Directive to Fannie Mae and Freddie Mac related
concerns that PACE priority liens enhanced the risks associated
with subordinated mortgages and directed the entities to
protect themselves against such risks. As a conservator, FHFA
was expressly empowered to take “such action as may be – (i)
necessary to put [Fannie Mae and Freddie Mac] in a sound and
solvent condition; and (ii) appropriate to . . . preserve . . . [their]
assets and property.” 12 U.S.C. § 4617(b)(2)(D). Directing
protective measures against perceived risks is squarely within
FHFA’s powers as a conservator.
Id. at 227. The Ninth and Eleventh Circuits, in reviewing the same PACE
program issue, reached the same conclusion. See Leon Cnty., Fla. v. Fed.
Hous. Fin. Agency, 700 F.3d 1273, 1279 (11th Cir. 2012) (“It is fully within
the responsibilities of a protective conservator, acting as a prudent business
manager, to decline to purchase a mortgage when its lien will be relegated
to an inferior position for repayment.”); Cnty. of Sonoma v. Fed. Hous. Fin.
Agency, 710 F.3d 987, 993 (9th Cir. 2013) (reversing the one district court
to rule to the contrary) (“A decision not to buy assets that FHFA deems
risky is within its conservator power to ‘carry on’ the Enterprises’ business
and to ‘preserve and conserve the assets and property of the
[Enterprises].’”).

Defendants contend that the ALT and Make-Whole

restrictions are indistinguishable from the restriction at issue in the PACE
cases.
8

At the outset, the Commonwealth questions whether FHFA “acted” at
all in issuing the ALT and Make-Whole restrictions. In the instance of the
PACE programs, the FHFA issued multiple public statements, including
one in July of 2010 specifically addressing concerns with the risks in giving
priority to PACE program liens and directing the GSEs “to review their
collateral policies in order to assure that pledged collateral is not adversely
affected by energy retrofit programs that include first liens.” Town of
Babylon, 699 F.3d at 226, quoting Fed. Hous. Fin. Agency, Statement on
Certain Energy Retrofit Loan Programs 2 (2010). In the ALT and MakeWhole instances, by contrast, the Commonwealth contends that the FHFA
took no binding action because it never issued a formal statement assessing
the risks, or required the GSEs, in so many words, to impose the
restrictions.
Defendants aptly point out that the Commonwealth’s Complaint says
something quite different in paragraph 19: “Defendant FHFA has issued the
so-called “make-whole” directive.” (emphasis added). Defendants also cite
a July of 2012 email from the FHFA’s General Counsel to the GSEs as the
pertinent “directive.” Defs’ Mem. at 4 & Ex. A. In relevant respects, the
email states:
As part of the Servicing Alignment Initiative, FHFA directed the
Enterprises to develop consistent requirements for servicing
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non-performing loans. Those discussions have resulted in an
aligned set of policies for short sales, summarized in the
attached guidances, policies and related information. On behalf
of FHFA, acting as conservator, the Enterprises are directed to
implement these Aligned Short Sale Policies.
Defs’ Mem. Ex. A. The email seems somewhat of a red herring as it makes
no reference to the ALT or Make-Whole restrictions,2 and was sent in 2012,
two years after the GSEs began implementing the ALT restriction.
Furthermore, the email is only directed to short (pre-foreclosure) sales, and
thus does not implicate the Make-Whole restriction, which is applicable
only to REO sales.3
Defendants’ more viable counter-argument is that the application of
HERA’s Anti-Injunction Clause is not limited to instances in which the
FHFA issues formal directives. Rather, by its own terms, it extends to any
“exercise of powers or functions of [FHFA] as a conservator.” 12 U.S.C. §
4617(f). The FHFA, for its part, has adopted the policy and rationale of the
GSEs with respect to the ALT and Make-Whole requirements. In a January
of 2013 letter to the Commonwealth, the FHFA’s General Counsel made it
Although the email references certain Aligned Short Sale Policies,
these were not submitted for the court’s consideration.
2

Perhaps the more salient argument, as the court noted at the
hearing, is the implicit acknowledgement by the Commonwealth that the
FHFA’s General Counsel (who was seated at counsel table) has the
authority to issue policy directives, and if there is a procedural deficiency in
the issuance of the ALT and Make-Whole restrictions, could remedy it
tomorrow, presumably nunc pro tunc.
3

10

clear that the FHFA endorses the restrictions: “FHFA . . . believe[s] that the
requirement for an affidavit that the sale is an arm’s length transaction
helps

to prevent mortgage

fraud and

protect

homeowners

and

communities.” Defs.’ Mem. Ex. D at 2. As is also evident, the FHFA is
vigorously defending Freddie Mac and Fannie Mae against the
Commonwealth’s lawsuit.

Thus, the FHFA “acts” by affirmatively

supporting the continued application of the restrictions.4
The Commonwealth next argues that even if the FHFA acted, it did so
outside its limited authority as a conservator, but instead in its capacity as
the GSEs’ regulator. The Commonwealth is certainly correct in its assertion
that that “[t]he FHFA cannot evade judicial scrutiny by merely labeling its
actions with a conservator stamp.” Leon Cnty., 700 F.3d at 1278. Rather,
“[the court] must consider all relevant factors pertaining to the directive to
determine whether it was issued pursuant to the FHFA’s powers as
conservator or as regulator.” Id. As the GSEs’ regulator, the FHFA is
tasked with, inter alia, “overseeing[ing] the[ir] prudential operations;” and
to ensure that they “operate[] in a safe and sound manner, . . . [that they]
foster liquid, efficient, competitive, and resilient national housing finance

The Commonwealth’s reliance on the act/non-act distinction is
more metaphysical than experiential as nothing in HERA suggests that only
a formal directive of the FHFA constitutes an “act” of conservation.
4

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markets . . . and [that they] operate[] [in a manner] consistent with the
public interest.”5 12 U.S.C. § 4513(a)(1)(A)-(B). In contrast,
[a] conservator is one who has been given the legal authority to
establish control of an entity to put it in a sound and solvent
condition. Essentially, the powers of the directors, officers, and
shareholders of the entity in conservatorship are transferred to
the conservator, and those powers include marshaling,
protecting, and managing assets.
Leon Cnty., 700 F.3d at 1278-1279.
The Commonwealth attempts, unsuccessfully in the court’s view, to
seize on a distinction noted by the Eleventh Circuit in its Leon County
PACE decision.

As the Eleventh Circuit observed, the FHFA directive

regarding the PACE program
did not establish a general set of criteria to be applied across the
board by Fannie Mae and Freddie Mac to their mortgage
transactions in general. A directive in that form would have the
mark of a regulation.
The directive at issue here, by
comparison, does not contain any indicia of a general regulation
and looks more like a discreet management decision by a
conservator.
Id. The Commonwealth argues that the ALT and Make-Whole restrictions
bear the stigma of broad rulemaking because they apply willy-nilly to all
pre-foreclosure and REO sales.

5 When

the FHFA promulgates rules in its role as the GSEs’ regulator,
it must adhere to the notice and public comment requirements of the
Administrative Procedure Act of 1946.
12

Defendants, for their part, characterize the ALT and Make-Whole
restrictions as “protective measures against perceived risks [that fall]
squarely within FHFA’s power as conservator.” Town of Babylon, 699 F.3d
at 227. In other words, purpose, rather than labels, determines whether the
FHFA in any given instance is acting as a regulator or as a conservator. As
the Second Circuit aptly cautioned, “[e]ven if FHFA’s powers as a regulator
and conservator overlap, the exclusion of judicial review over the exercise
of the latter would be relatively meaningless if it did not cover an FHFA
directive to an institution in conservatorship to mitigate or avoid a
perceived financial risk.”6 Id. at 227-228.
Courts have uniformly held that the FHFA is acting as the GSEs’
conservator when it evaluates the risks of certain business transactions and
takes prudential action to avoid those that it deems undesirable.
The Enterprises’ business is to purchase and securitize
mortgages, and FHFA carries on that business when it weighs
the relative risks and benefits of purchasing classes of
mortgages for investment. When FHFA decides not to purchase
a class of mortgages that it believes pose excessive risk, it is
attempting to preserve and conserve the Enterprises’ assets and
property.
Indeed, careful management of its mortgage
purchase decisions appears to be the only way FHFA can avoid
To the extent that the ALT and Make-Whole restrictions were
instituted to mitigate a particular financial risk, they can also be
characterized as “a discreet management decision by a conservator.” Leon
Cnty., 700 F.3d at 1278.
6

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the financial problems which precipitated the Enterprises’
conservatorship.
Cnty. of Sonoma, 710 F.3d at 993; see also Leon Cnty., 700 F.3d at 1279
(“Part of managing the assets and assuring the solvency of a mortgagepurchasing entity is considering the degree of risk entailed by the
acquisition of particular mortgages.”).
Defendants submit that the financial risk in selling pre-foreclosure
and REO homes to nonprofit buyback programs is not that the GSEs might
lose the opportunity to sell a home at a higher price to another buyer.
Rather,
there are concerns that in many cases, the[] borrowers were
eligible for a loan modification that they would avoid in order to
secure a repurchase from a nonprofit at a larger discount and
without other obligations that exist, including second liens.
This would run counter to federal and state efforts to provide
homeowners an “affordable” alternative to foreclosure; these
programs are not designed to provide [the] “cheapest” program
as that result would increase costs to taxpayers and to
neighborhoods through further depressed home prices.
Defs.’ Mem. Ex. D. at 2-3. In other words, defendants’ concern is that a
distressed homeowner might opt to submit to an otherwise avoidable
foreclosure on a mortgage in anticipation of later repurchasing the home at
a lower price from the non-profit intermediary entity.
Because defendants have articulated a potential risk of financial loss
in abiding by the restrictions of the Non-Profit Buyback Provision, the
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decision to reject these terms may be fairly characterized as a business
judgment intended to “preserve and conserve [the GSEs’] assets and
property.” 12 U.S.C. § 4617(b)(2)(D)(ii). Congress, by enacting HERA’s
Anti-Injunction Clause, expressly removed such conservatorship decisions
from the courts’ oversight.7 Given the jurisdictional bar,8 this court does
not have the authority to reach the merits of the Commonwealth’s claims.
However well intended the stated goals of programs like the SUN
Initiative, Congress has removed from the purview the court the power to
second-guess the FHFA’s business judgment. See Perry Capital LLC v.
Lew, 2014 WL 4829559, at *9 (D.D.C. Sep. 30, 2014) (HERA is “a statute of
exceptional scope that g[ives] immense discretion to FHFA as a
conservator.”).
7

Even if the court were to agree with the Commonwealth’s contention
that HERA’s Anti-Injunction Clause does not preclude this suit, the
Complaint would likely fail a preemption analysis. Federal law preempts
state laws that are in “irreconcilable conflict” with a federal statute. Barnett
Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 31 (1996). An
“irreconcilable conflict” exists where “[c]ompliance with both statutes . . .
may be a physical impossibility . . . or, the state law may stan[d] as an
obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.” Id. (internal quotation marks and citations
omitted). Congress intended the FHFA to “exercise [its] rights, powers,
and privileges” as conservator without being “subject to the direction or
supervision of any other agency of the United States or any State.” 12
U.S.C. § 4617(a)(7) (emphasis added). These “rights, powers, and
privileges” expressly include the “transfer or s[ale of] any [GSE] asset . . .
without any approval, assignment, or consent.” Id. § 4617(b)(2)(G). The
power to freely dispose of property necessarily encompasses the power to
not dispose of property. The Non-Profit Buyback Provision of the
Foreclosure Law is in direct conflict with Congress’s intent that the FHFA
8

15

ORDER
For the foregoing reasons, defendants’ motion to dismiss is
ALLOWED. The Clerk is directed to close this case.
SO ORDERED.
/s/ Richard G. Stearns
__________________________
UNITED STATES DISTRICT JUDGE

has the ability to dispose (or not to dispose) of GSE property as it sees fit.
See Fed. Hous. Fin. Agency v. City of Chicago, 962 F. Supp. 2d 1044, 10601061 (N.D. Ill. 2013) (City of Chicago’s ordinance requiring registration and
maintenance of vacant buildings is preempted by HERA because it conflicts
with the FHFA’s ability to “take action as may be appropriate to carry on
[the GSEs’ business] and preserve and conserve [their] assets and property
without being subject to the direction or supervision of any other agency of
the United States or any State.”) (internal quotation marks and citation
omitted).
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