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Current Issue : Winter 2007-2008

David Reiss

A lifelong New Yorker and graduate of NYU School of Law, Professor David Reiss' scholarly interests grew out of two areas of law — community development and real estate finance — that impact daily life for millions of people. As the director of the Community Development Clinic at Brooklyn Law School, he helps students take an active role in the local issues that are defining the New York City landscape. And in the debates over what went wrong in the secondary mortgage market in the summer of 2007, he is emerging as a powerful new voice that is critical of ratings agencies and major government-backed lending institutions.

In private practice as a transactional real estate attorney, and as a public interest litigator of predatory lending cases, Reiss noticed the inordinate amount of power that ratings agencies such as Standard & Poor's and Moody's hold over real estate mortgage markets. In addition, he had a personal interest in the issue. "When I applied for a mortgage, I couldn't get terms that weren't standard," he says. "I was told that was impossible since my mortgage would be securitized." Referring to that incident as his wake-up call, he started researching the issues from a consumer law standpoint.

In 2006, Reiss published an article about predatory lending that raised a red flag that many regulators would have been smart to heed. In it, he argues that the ratings agencies that are supposed to be neutral observers of the market are actually beset by major conflicts of interest. Named the best article of the year by the American College of Consumer Financial Services Lawyers, the piece attracted attention, and Reiss is now called on regularly by the media to comment on the latest developments in the subprime market.

His next article, which will be published in the Georgia Law Review, (see abstract) takes a critical look at the companies that helped to create the infrastructure of the secondary mortgage market — Fannie Mae and Freddie Mac. Reiss argues that these two companies benefit from an implied guarantee of their obligations, which has allowed them to grow into two of the largest financial services companies in the country. A future project has already developed from that piece: "This first article assesses the risk to taxpayers that these entities pose," he says. "The sequel will set up a theoretical framework that will allow us to evaluate the costs and benefits of the implied guarantee under which Fannie and Freddie operate." That will require taking a cross-disciplinary approach by drawing on policy, finance and business scholarship, particularly empirical scholarship about the mortgage market.

As for his interest in local community planning, Reiss focuses on rapidly changing communities. From development of the Red Hook waterfront to the Atlantic Yards project in downtown Brooklyn, he and his students in the Community Development Clinic represent clients who are small voices in big projects in the city. "It's useful for students to see lawyers work in community situations," he says.

At first glance, his interest in community development and his study of the secondary mortgage market seem somewhat unrelated. Community development focuses on how people interact with the land, whereas the workings of the secondary mortgage market are rooted in global financial trends. But, says Reiss, he sees his interests as connected. "I'm keen on both because of their relation to real estate," he explains, "I like to have my experience range from the intensely local to the intensely global. I would feel cheated without one or the other."

David Reiss | Abstract

The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's Obligations: Uncle Sam Will Pick Up the Tab

This article provides the most comprehensive statutory analysis to date of the federal government's implied guarantee of Fannie Mae and Freddie Mac's financial obligations. Fannie and Freddie together have $4.45 trillion in mortgage-related obligations. The magnitude of their obligations can only be understood in comparison to the amount of outstanding U.S. government debt — $5.04 trillion. Given the ongoing meltdown of the residential mortgage market, it is important that the implied guarantee be understood for what it is, a contingent liability of the federal government. After explaining the nature of the implied guarantee and the risks that it poses, the article argues that Fannie and Freddie should be privatized and that the implied guarantee be terminated.

This article is timely both because of the spreading crisis in the mortgage markets and because Congress is currently considering legislation to increase regulation of Fannie and Freddie. Even if enacted, this legislation does not go nearly far enough to protect the American taxpayer from the consequences of having to bail out these two companies. And if the federal government were to fail to bail them out, the world's financial markets will face a financial crisis that could easily dwarf the 1994 Mexican peso collapse, the 1997 East Asian "flu" and the 1998 Russian bond default, the last of which triggered the collapse of Long-Term Capital Management.


SCHOLARSHIP FOCUS Secondary Mortgage Market

COURSES Property, Property Law Colloquium, Real Estate Practice, Community Development Clinic

  • The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's Obligations: Uncle Sam Will Pick Up the Tab, ___ Ga. L. Rev. ___ (forthcoming 2008)
  • Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 Fla. St. U. L. Rev. — (2006)