United States District Court, D. Massachusetts
For Commonwealth of Massachusetts, Plaintiff: M. Claire Masinton, LEAD ATTORNEY, Office of the Attorney General, Insurance & Financial Services, Boston, MA; Stephanie Kahn, LEAD ATTORNEY, Attorney General's Office, Boston, MA.
For Federal Housing Finance Agency: Asim Varma, Howard N. Cayne, LEAD ATTORNEYS, PRO HAC VICE, Arnold & Porter LLP, Washington, DC; Michael A.F. Johnson, LEAD ATTORNEY, PRO HAC VICE, Arnold & Porter, Washington, DC; Eric F. Eisenberg, Robert T. Ferguson, Jr., Hinckley, Allen and Snyder, LLP, Boston, MA.
For Federal Home Loan Mortgage Corporation, Defendant: Gregory S. Bombard, Justin M. Fabella, LEAD ATTORNEYS, Hinshaw & Culbertson LLP, Boston, MA; Eric F. Eisenberg, Hinckley, Allen and Snyder, LLP, Boston, MA.
For Federal National Mortgage Association, Defendant: Michael A.F. Johnson, LEAD ATTORNEY, Arnold & Porter, Washington, DC; Eric F. Eisenberg, Hinckley, Allen and Snyder, LLP, Boston, MA; Lawrence R. Kulig, Eckert Seamans Cherin & Mellott, LLC, Boston, MA.
MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS
Richard G. Stearns,
UNITED STATES 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.
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 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 ...