REFinBlog

Editor: David Reiss
Brooklyn Law School

July 1, 2016

The Sloppy State of the Mortgage Market

By David Reiss

photo by Badagnani

I published a short article in the California Real Property Law Reporter, Sloppy, Sloppy, Sloppy: The State of the Mortgage Market, as part of a broader discussion of Foreclosures Following Problematic Securitizations.  The other contributors were Roger Bernhardt, who organized the discussion,  as well as Dale Whitman, Steven Bender, April Charney and Joseph Forte.  My article opens,

Much of the discussion about the recent California Supreme Court case Yvanova v New Century Mortgage Corp. (2016) 62 C4th 919  has focused on the scope of the Court’s narrow holding, “a borrower who has suffered a nonjudicial foreclosure [in California] does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” 62 C4th at 924. This is an important question, no doubt, but I want to spend a little time contemplating the types of sloppy behavior at issue in the case and what consequences should result from that behavior.

Sloppy Practices All Over

The lender in Yvanova was the infamous New Century Mortgage Corporation, once the second-largest subprime lender in the nation.  New Century was so infamous that it even had a cameo role in the recently released movie, The Big Short, in which its 2007 bankruptcy filing marked the turning point in the market’s understanding of the fundamentally diseased condition of the subprime market.

New Century was infamous for its “brazen” behavior.  The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Jan. 2011) (Report) labeled it so because of its aggressive origination practices.  See Report at page 186. It noted that New Century “ignored early warnings that its own loan quality was deteriorating and stripped power from two risk-control departments that had noted the evidence.” Report at p 157. And it quotes a former New Century fraud specialist as saying, “[t]he definition of a good loan changed from ‘one that pays’ to ‘one that could be sold.”  Report at p 105.

This type of brazen behavior was endemic throughout the mortgage industry during the subprime boom in the early 2000s.  As Brad Borden and I have documented, Wall Street firms flagrantly disregarded the real estate mortgage investment conduit (REMIC) rules and regulations that must be complied with to receive favorable tax treatment for a mortgage-backed security, although the IRS has let them dodge this particular bullet.  Borden & Reiss, REMIC Tax Enforcement as Financial-Market Regulator, 16 U Penn J Bus L 663 (Spring 2014).

The sloppy practices were not limited to the origination of mortgages. They were prevalent in the servicing of them as well. The National Mortgage Settlement entered into in February 2012, by 49 states, the District of Columbia, and the federal government, on the one hand, and the country’s five largest mortgage servicers, on the other, provided for over $50 billion in relief for distressed borrowers and in payments to the government entities. While this settlement was a significant hit for the industry, industry sloppy practices were not ended by it. For information about the Settlement, see Joint State-Federal National Mortgage Servicing Settlements and the State of California Department of Justice, Office of the Attorney General, Mortgage Settlements: Homeowners.

As the subprime crisis devolved into the foreclosure crisis, we have seen those sloppy practices have persisted through the lifecycle of the subprime mortgage, with case after case revealing horrifically awful behavior on the part of lenders and servicers in foreclosure proceedings.  I have written about many of these Kafka-esque cases on REFinBlog.com.  One typical case describes how borrowers have “been through hell” in dealing with their mortgage servicer. U.S. Bank v Sawyer (2014) 95 A3d 608, 612 n5.  Another typical case found that a servicer committed the tort of outrage because its “conduct, if proven, is beyond the bounds of decency and utterly intolerable in our community.” Lucero v Cenlar, FSB (WD Wash 2014) 2014 WL 4925489, *7.  And Yvanova alleges more of the same.

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July 1, 2016 | Permalink | No Comments

June 30, 2016

Building a Wall

By David Reiss

photo by I, Xauxa

Realtor.com quoted me in Mark Zuckerberg Annoys His Neighbors by Building a Big Wall. It opens,

They say good fences make good neighbors, but that’s definitely not the case for Facebook founder Mark Zuckerberg. Word has it he’s been building a 6-foot wall around his 700-acre property in Kilauea, Kauai—and this construction has sparked an outcry among his neighbors, who say the wall obstructs the gorgeous ocean view.

“It’s immense,” longtime resident Gy Hall told West Hawaii Today. “It’s really sad that somebody would come in and buy a huge piece of land, and the first thing they do is cut off this view that’s been available and appreciated by the community here for years.”

To make their annoyance known, neighbors have resorted to posting messages on Zuckerberg’s wall—the real wall, not the virtual one on his Facebook profile—asking (mostly) politely for him to take it down. But the signs get removed soon after they appear (most likely by the tech giant’s henchmen).

Granted, it does seem to be a bit of a travesty when a billionaire swoops in and builds a wall that blocks ocean vistas that have been enjoyed by Hawaiians for centuries. So, what are the rules, exactly, on building walls or fences on your property? Can you build whatever you want, or might he have overstepped his bounds?

“Fence and wall limits are generally set by local laws, and residential properties generally have a maximum allowable height,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “Common limits are 6 feet for backyard fences and 4 feet for front-yard fences.”

That said, in relatively unpopulated areas like Kauai, it’s certainly possible that no laws exist at all.

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June 30, 2016 | Permalink | No Comments

June 29, 2016

Saving On Homeowners Insurance

By David Reiss

Insurance Policy

Trulia quoted me in 5 Ways To Save On Homeowners Insurance. It opens,

Some basic decisions in life shouldn’t demand much debate in your mind. Behind car and life insurance, homeowners insurance is one of the biggest no-brainers. When golf ball–sized hail rips your Boca Raton, FL, roof to shreds, your dog bites a clueless runner, or someone breaks in and steals your vintage Larry Bird jersey and Grandmother’s pearl earrings, a basic homeowners insurance policy should have you covered. But as with any other form of shopping, it’s always best to look around, sniff out a good deal, and compare home insurance options. Luckily, deep discounts can be found. Here are five ways to save on your policy.

1. Shop around, then enlist help

Finding the biggest discount isn’t just for cars and airline tickets. In fact, a few phone calls and internet searches can land you some serious deals on homeowners insurance. “Start by looking to see if there are any companies that offer discounts,” says Cory Gagnon, associate financial adviser, The Beacon Group at Assante Wealth Management Ltd. in Calgary, Canada. “An insurance broker or financial planner can be very helpful in these situations as they have access to databases that allow them to source a wide variety of companies.”Then think about memberships you have — are you a veteran or AARP member? If you’ve used membership discounts for say, buying a car or booking a vacation, see if the association has discounts for homeowners insurance. Think hard about groups you’re part of: Check if your college alumni association offers discounts, or even the wholesale club you belong to (like Costco, BJ’s, or Sam’s Club).

2. Improve your home

Sometimes, Gagnon adds, little changes and improvements to your home can lead to lower premiums. “Some insurance companies offer lower rates for a variety of factors having to do with the structure and build of your home, including the type of wiring, plumbing, and structure material,” he says. “If you are in an older home, making an investment in upgrades to some of these core elements will make your home safer — for example, less threat of pipe bursts, electrical fires — and thus lower your insurance premiums with certain companies, saving you money in the long run.”

3. Know the difference between replacement cost and actual cash value

Homeowners insurance comes with options, and the best way to navigate those options is to know what they are. “One of the most important things that a homeowner should know about when shopping for [a] new or existing homeowners policy is the difference between replacement cost versus actual cash value [ACV],” explains Craig Ciotti, an insurance agent/broker with Fidishun Insurance & Financial Inc. in Yardley, PA. “Replacement cost will insure you for the cost that it would take to replace your home and all of the other personal property in it,” he says. “The other option is actual cash value. ACV is the actual value of your home and does not take into consideration zoning permits or removal of damaged property. ACV is more often used by investors and not homeowners.” If, for instance, a laptop you bought for $1,000 is stolen, with replacement cost insurance, you will get $1,000 for a new laptop. With ACV, you’ll get the current market value for the laptop — which will most likely be far less, since it has probably depreciated over time. ACV premiums generally cost less, but you’ll likely pay more out of pocket after a loss.

4. Agree to a higher deductible

As with other forms of insurance (ahem, car), you can save big on your policy if you simply increase your deductible. “This can shave a significant amount off of your annual premium, which is the good thing,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “The bad thing about it is, if you have a casualty, you will be responsible for it until it reaches the higher deductible limit. Thus, you should be able to handle that additional amount before agreeing to the higher deductible. Given that your premium typically goes up when you make a claim, a silver lining of the higher deductible is that you will file fewer claims.”

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June 29, 2016 | Permalink | No Comments

June 28, 2016

Chances of Negative Mortgage Interest Rates

By David Reiss

graphic by blamevaraia

TheStreet.com quoted me in Odds of Negative Interest Rates in the U.S. Are Slim. It reads, in part,

The odds of the U.S. lowering interest rates to negative levels remain low, because other forms of monetary policy such as quantitative easing could be adopted first.

The odds of utilizing quantitative easing are “quite high” or policies such as the use of repurchase agreements and the term deposit facility, said Michael Kramer, a portfolio manager on Covestor, the online investing marketplace and founder of Mott Capital Management, a registered investment advisor in Garden City, NY.

Choosing a negative interest rate policy (NIRP) in the U.S. would also affect the stock markets immensely and hinder bank profits.

“Due to the size of treasury and money markets, it could have some very severe ramifications,” he said. “In my view, our treasury markets are the safest and most liquid in the world.”

Investors would seek a higher return on capital elsewhere such as higher paying bonds which carry more risk, Kramer said.

“This could become problematic for the US government which is dependent on issuing debt to fund the government operation,” he said.

Negative rates in the U.S. would result in too much risk and backlash and would only occur if all other attempts by the Fed failed.

“At this point, the Fed has a few other tools it can use before it has to use the tool of last resort,” Kramer said.

The use of negative rates remains divisive despite the growing adoption of them in the central banks of the Eurozone along with Denmark, Japan, Sweden and Switzerland. In countries such as Japan and Germany, investors are forced to pay a fee instead of earning interest.

Lowering current interest rates to negative ones “would not be a panacea,” said former Federal Reserve Chairman Ben Bernanke, now a distinguished fellow in residence at a meeting hosted by the Hutchins Center on Fiscal and Monetary Policy at Brookings last week. He also said the effect on consumers would be nominal.

During periods of low inflation, negative interest rates are now a more likely option to policymakers, but they have not proved to be a solution to boosting lackluster economies. The use of negative rates has not proven that they are an effective monetary tool, said Torsten Slok, chief international economist for Deutsche Bank, at the meeting.

Negative rates have produced anxiousness among investors who are seeking greater yield.

*     *     *

The probability of U.S. banks paying consumers interest on their mortgages even though Danish banks are paying borrowers interest on them remains scant, said David Reiss, a law professor at the Brooklyn Law School. The interest rates of adjustable rate mortgages (ARM) are typically set for the first five or seven year and resets to a new rate. The new interest rate is the combination of an index and a spread with the index often being the London Inter Bank Offered Rate (LIBOR), which has flirted with 0%.

The majority of ARMs have a clause which limits the amount the interest rate can be changed annually, including ones offered by Fannie Mae.

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June 28, 2016 | Permalink | No Comments

June 27, 2016

The State of the Union’s Housing in 2016

By David Reiss

photo by Lawrence Jackson

The Joint Center for Housing Studies of Harvard University has released its excellent annual report, The State of the Nation’s Housing for 2016. It finds,

With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. (1)

Its specific findings include,

  • nominal home prices were back within 6 percent of their previous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. (1)
  • The US homeownership rate has tumbled to its lowest level in nearly a half-century. . . . But a closer look at the forces driving this trend suggests that the weakness in homeownership should moderate over the next few years. (2)
  • The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. (3)

There is a lot more of value in the report, but I will leave it to readers to locate what is relevant to their own interests in the housing industry.

I would be remiss, though, in not reiterating my criticism of this annual report: it fails to adequately disclose who funded it. The acknowledgments page says that principal funding for it comes from the Center’s Policy Advisory Board, but it does not list the members of the board.

Most such reports have greater transparency about funders, but the interested reader of this report would need to search the Center’s website for information about its funders. And there, the reader would see that the board is made up of many representatives of real estate companies including housing finance giants, Fannie Mae and Freddie Mac; national developers, like Hovnanian Enterprises and KB Homes; and major construction suppliers, such as Marvin Windows and Doors and Kohler. Nothing wrong with that, but disclosure of such ties is now to be expected from think tanks and academic centers.  The Joint Center for Housing Studies should follow suit.

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June 27, 2016 | Permalink | No Comments

June 24, 2016

Urban Income Inequality

By David Reiss

photo by sonyblockbuster

The union-affiliated Economic Policy Institute has released a report, Income Inequality in the U.S. by State, Metropolitan Area, and County. The report finds that

The rise in inequality in the United States, which began in the late 1970s, continues in the post–Great Recession era. This rising inequality is not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets. It affects every state, and extends to the nation’s metro areas and counties, many of which are more unequal than the country as a whole. In fact, the unequal income growth since the late 1970s has pushed the top 1 percent’s share of all income above 24 percent (the 1928 national peak share) in five states, 22 metro areas, and 75 counties. It is a problem when CEOs and financial-sector executives at the commanding heights of the private economy appropriate more than their fair share of the nation’s expanding economic pie. We can fix the problem with policies that return the economy to full employment and return bargaining power to U.S. workers.

The specific findings are very interesting. They include,

  • Overall in the U.S. the top 1 percent took home 20.1 percent of all income in 2013. (4)
  • To be in the top 1 percent nationally, a family needs an income of $389,436. Twelve states, 109 metro areas, and 339 counties have thresholds above that level. (2)
  • Between 2009 and 2013, the top 1 percent captured 85.1 percent of total income growth in the United States. Over this period, the average income of the top 1 percent grew 17.4 percent, about 25 times as much as the average income of the bottom 99 percent, which grew 0.7 percent. (3)
  • Between 1979 and 2013, the top 1 percent’s share of income doubled nationally, increasing from 10 percent to 20.1 percent. (4)
  • The share of income held by the top 1 percent declined in every state but one between 1928 and 1979. (4)
  • From 1979 to 2007 the share of income held by the top 1 percent increased in every state and the District of Columbia. (4)
  • Nine states had gaps wider than the national gap. In the most unequal states—New York, Connecticut, and Wyoming—the top 1 percent earned average incomes more than 40 times those of the bottom 99 percent. (2)
  • For states the highest thresholds are in Connecticut ($659,979), the District of Columbia ($554,719), New Jersey ($547,737), Massachusetts ($539,055), and New York ($517,557). Thresholds above $1 million can be found in four metro areas (Jackson, Wyoming-Idaho; Bridgeport-Stamford-Norwalk, Connecticut; Summit Park, Utah; and Williston, North Dakota) and 12 counties. (3)

The income threshold of the top 1% for individual counties is also interesting.  For example, New York County (Manhattan) comes in second, at $1,424,582 (following Teton, WY at $2,216,883) and San Francisco County comes in 24th at $894,792. (18, Table 6)

Income inequality is a fact of life for big cities and affects so many aspects of American life — housing, healthcare, education, to name a few important ones. The Economic Policy Institute focuses on union-movement responses to income inequality, but urbanists could also consider how to respond systematically to income inequality in the design of urban systems like those for healthcare, transportation and education. If the federal government is not ready to do anything about income inequality itself, states and local governments can make some progress dealing with its consequences. That is a far better route than acting as if income inequality is just some kind unexpected aspect of modern urban life and then bemoaning its visible manifestations, such as homelessness.

 

 

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June 24, 2016 | Permalink | No Comments

June 23, 2016

Why Houses Don’t Sell

By David Reiss

photo by BriYYZ

I was quoted on Trulia in 8 Reasons Your House Isn’t Selling. It opens,

It’s a seller’s market in many cities across the U.S. If your home is in one of those cities, say Charleston, SC, or Colorado Springs, CO, and isn’t getting offers, something could be wrong. The good news? Knowing there’s a problem is the first step toward resolving it. However, there could be many reasons your house isn’t selling. We’ve asked real estate professionals and agents from all over the country what those top reasons might be — and they’ve provided some sound advice on how to remedy each situation.

1. You’re overconfident

Being in a seller’s market might mean that your home will get snapped up for premium price, no matter its condition. But that isn’t always the best strategy to count on. “Sometimes homeowners and agents get overconfident in a seller’s market and get lazy about ‘Home Selling 101,’” says Sep Niakan, broker and owner of HB Roswell Realty in Miami, FL.

Solution: Be realistic from day one. Although you may love your house, brace yourself for it to potentially sit on the market for quite some time. And no matter the market, it’s still important to “position your home to sell well,” says Niakan. “What does that mean? Staging, staging, and more staging.

2. The house is priced too high

Classic supply and demand conditions come into play in a seller’s market: There’s high demand, yet low supply. Therefore, you can usually expect to get more money for your home. But that doesn’t mean the sky’s the limit when it comes to your listing price. “In a seller’s market, a seller may feel comfortable pushing the asking price a bit higher, and this can be a huge mistake,” says Chase Michels of Brush Hill Realtors in Downers Grove, IL. “Determining the best asking price for a home is one of the most important aspects of selling a home. If your home is listed at a price that is above market value, you will miss out on prospective buyers.”

Solution: Make sure that you and your agent are certain of the value of your home in your market and price it right. “Get an analysis of the local market with a professional agent, solid comparables, and specific market trend data,” says Jill Olivarez, a Miramar Beach, FL, real estate agent.

3. The home needs some TLC

It can be a bitter pill to swallow to pay for home improvements that you may not enjoy for long. But if you want to sell for full asking price, you might need to get your house in a condition that warrants it — and not base this number only on price per square foot. “Retail buyers understandably still want the most house for their money,” says Barbara Grassey, author of How to Sell Your House Fast in a Slow Market and founder of the West Florida Real Estate Investors Association.

Solution: “The seller should have amenities comparable to other properties for sale in that price range and should really upgrade certain amenities,” says Grassey. Some upgrade examples, she says, include a pull-down gooseneck faucet, an upgraded ceiling fan, a double-bar towel rack, or upgraded door handles. They sound simple, but a few small changes can make a big impact.

4. There’s a problem with the title

“Title” in this case doesn’t mean the cute name you might have given your place (“The Laurels,” “The Conners’ Corner Cottage,” etc.). Rather, it’s the document that shows ownership. “One reason a house won’t sell is because there is a problem with the title to the house that spooks buyers,” says David Reiss, law professor at Brooklyn Law School in Brooklyn, NY. Here are some examples he gives of title problems:

  • Conveyance without a recorded deed (can sometimes happen in transfers between family members).
  • A paid-off mortgage that is still showing up as a valid lien on the house.
  • A mechanic’s lien that was filed for work done on the house by a subcontractor.

Solution: “Some [title] problems just require a little time to resolve,” says Reiss. Contact the title company to find out what you need to do to prepare for selling — then do it.

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June 23, 2016 | Permalink | No Comments