A Resilient NYC

NYU’s Furman Center released a report, The Price of Resilience: Can Multifamily Housing Afford to Adapt? It explains that storm-proofing New York City

poses several special challenges not shared by all coastal areas. First, New York City is largely built out, with much of its building stock long predating current flood-resistant design standards. Resilience in New York, then, primarily means retrofitting older buildings, not just strengthening building codes for new construction. Second, much of the official guidance about how to retrofit residential properties to reduce risk and lower insurance premiums is geared toward 1-4 family buildings, reflecting the national housing stock. In New York City, though, only one-third of the buildings thought to be vulnerable to flooding are1-4 family, detached homes. A much larger number of housing units vulnerable to future storms are located in roughly 4,500 multifamily buildings with five or more rental units. Finding ways to cost effectively retrofit these types of buildings to protect residents and reduce insurance premiums for owners needs to be central to New York City’s storm-preparedness efforts.

Finally, the extreme shortage of affordable housing in New York may make the direct and indirect costs of retrofitting particularly hard to bear. Based on current federal policy, increased flood risk requires for many buildings either investment in physical improvements or payment of higher insurance premiums. Without external funding or other relief, there is no clear avenue to enact these resilience improvements while maintaining affordability. Eliminating all units below the predicted flood level, for example, could result in the loss of thousands of indispensable housing units. Even if units are not lost, property owners may pass on the costs of retrofitting buildings to residents through a rent increase, reducing the supply of affordable units in New York City’s coastal areas. For buildings that are constrained in their ability to raise rents and raise funds for improvements, like many of the rent stabilized and subsidized buildings in the city, the financial burden of making costly retrofits might be overwhelming, leading to the conversion of those buildings to market rate (when permitted), unsustainable operating budgets that may require a bail-out, or a large number of buildings left unprepared for future storms. The costs of not retrofitting, however, may be even more burdensome: building owners may face skyrocketing flood insurance premiums if they do not retrofit their buildings.

While I am not so sure that storm-proofing will be what pushes New York City’s housing stock into the unaffordable column (I think the relentless increases in demand might just to the job for units that are not rent regulated), the Furman Center report reminds us that we have a lot to do to protect New York from the next big storm. The Bloomberg Administration did a lot in a short time to identify what the City can do to increase the City’s resiliency. Given the quality of his housing and economic development team, there is reason to hope that the de Blasio Administration will continue to tackle the threat of climate change in a productive way.

The Furman Center report provides three concrete recommendations to ensure that NYC’s large stock of multi-family housing in flood zones is protected from future storm events:

  1. The Federal Emergency Management Agency (FEMA) should modify the guidelines for its National Flood Insurance Program for coverage of existing multifamily buildings;
  2. New York City should expand its Flood Resilience Zoning Text Amendment to cover buildings in the 500-year floodplain; and
  3. The city should revisit its existing rehabilitation programs to ensure that resilience measures can be readily funded; and it should require that buildings in the 100-year and 500-year floodplains that receive city assistance have adequate emergency and resilience plans.

These all seem like reasonable policies that should be implemented asap.

GSE Shareholders Taking Discovery

Judge Sweeney of the Court of Federal Claims issued an Opinion and Order regarding jurisdictional discovery as well as a related Protective Order in the GSE Takings Case brought by Fairholme against the United States.  I had previously discussed the possibility of a protective order here.

By way of background, and as explained in the Opinion and Order,

Defendant [the U.S.] has filed a motion to dismiss, contending that the court lacks jurisdiction to hear this case, that plaintiffs’ claims are not ripe, and that plaintiffs [Fairholme et al.] have failed to state a claim for a regulatory taking. Plaintiffs respond that defendant’s motion relies upon factual assertions that go well beyond, and in many respects, conflict with, their complaint. The court thus entered an order on February 26, 2014, allowing the parties to engage in jurisdictional discovery. (1-2)

Judge Sweeney discussed the likely scope of jurisdictional discovery in a hearing on June 4th. She suggested that the big issue would be the extent to which she was going to defer to the federal government as to its request the discovery be limited in order to allow the government discretion in its operational and policy roles in the housing finance system. The judge indicated that she might be open to a limited protective order that allowed the plaintiffs to examine documents under certain restrictions so that they are not made public.The judge also made clear that she was not going to authorize a fishing expedition.

The Opinion and Order is pretty consistent with what she had suggested in June, but I would characterize it as a tactical win for the plaintiffs. Judge Sweeney signaled that she was not going to be overly deferential to the federal government.  This was clear throughout the Opinion and Order, regarding the scope of the Court’s jurisdiction over matters involving the FHFA, regarding the scope of the deliberative process privilege and regarding the overall scope of jurisdictional discovery that the Court will allow.  The plaintiffs should very happy with this result.

Armed, Unarmed or Harmed by Knowledge?

I posted Armed, Unarmed or Harmed by Knowledge? A Comment on the FHA’s Housing Counseling Pilot Program to SSRN (and to BePress). The abstract reads,

The FHA has requested input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers pilot program. This comment letter argues that housing counseling is not a proven solution to the problem it is meant to solve, excessive defaults by FHA borrowers. HAWK is a traditional housing counseling program but the scholarly literature casts into doubt the efficacy of such programs. It would be better to take time to research which counseling strategies, if any, are proven to be effective. This is true for the FHA but also for other government agencies, such as the Consumer Financial Protection Bureau, that have devoted significant resources to unproven financial counseling programs.

This comment was submitted to the FHA in response to its request for input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers program.

Regular readers of this blog will be familiar with my take on this topic as the comment is adapted from blog posts that have addressed various financial education topics.

Good Data for the FHFA

The Federal Housing Finance Agency released a White Paper on the FHFA Mortgage Analytics Platform.  By way of background, the White Paper states that

The Federal Housing Finance Agency (FHFA) maintains a proprietary Mortgage Analytics Platform to support the Agency’s strategic plan. The objective of this white paper is to provide interested stakeholders with a detailed description of the platform, as it is one of the tools the FHFA uses in policy analysis. The distribution of this white paper is part of a larger effort to increase transparency on mortgage performance and the analytical tools used for policy analysis and evaluation within the FHFA.

The motivation to build the FHFA Mortgage Analytics Platform derived from the Agency’s need for an independent empirical view on multiple policy initiatives. Academic empirical studies may suffer from a lack of high quality data, while empirical work from inside the industry typically represents a specific view. The FHFA maintains several vendor platforms from which an independent view is possible, yet these platforms tend to be inflexible and opaque. The unique role of the FHFA as regulator and conservator necessitated platform flexibility and transparency to carry out its responsibilities.

The FHFA Mortgage Analytics Platform is maintained on a continuous basis; as such, the material herein represents the platform as of the publication date of this document. As resources permit, this document will be up dated to reflect enhancements to the platform. (2)

This platform is a very welcome development for exactly the reasons that the White Paper sets forth.  Academics have a very hard time accessing good data on the mortgage markets (its usually expensive, untimely, limited).  Industry interpretations of data typically have agendas.

A sampling of the Platform’s elements include:

  • Performing Unpaid Principal Balance
  • Scheduled Paid Principal Balance
  • Unscheduled Paid Principal
  • Dollars of New 90 Day Delinquencies
  • Non-Performing Balances
  • Property Value of Non-Performing Loans (30-31)

Let us hope that the Platform offers a transparent and flexible tool to track this very dynamic market.

Reiss on Citigroup Settlement

Law360 quoted me in Feds Deploy Potent Bank Fraud Law In $7B Citi Pact (behind a paywall). It reads in part:

The U.S. Department of Justice’s $7 billion mortgage bond settlement with Citigroup Inc. on Monday may not have been possible without the help of a once-obscure fraud law that has become a legal magic wand for prosecutors.

Citigroup’s settlement included a $4 billion civil fine under the Financial Institutions Reform Recovery and Enforcement Act, the largest such penalty in history. FIRREA was passed in the wake of the 1980s savings-and-loan crisis but has been dusted off in recent years as prosecutors have targeted major Wall Street banks that packaged and sold toxic residential mortgage-backed securities before the 2008 economic collapse.

The law’s government-friendly provisions are well-documented. FIRREA contains a 10-year statute of limitations, rather than the typical five-year window for fraud suits. That has permitted the government to comfortably sue banks over conduct that occurred in 2006 and 2007, when many of the shoddy loans implicated in the crisis were securitized. Prosecutors can use tolling agreements to keep potential claims alive even longer.

*     *     *

The sheer size of the government’s FIRREA fines thus far, combined with the lack of case law underpinning the statute, has placed banks and their defense counsel in a difficult negotiating position, according to David Reiss, a professor at Brooklyn Law School.

“The message for people in negotiations is: Expect to pay a lot, or else, the government is going to call your bluff,” Reiss said. “It’s the Wild West for civil penalties.”

Monday’s settlement relates to Citigroup’s due diligence on loans that were packaged into securities and sold to investors for tens of billions of dollars. According to an agreed-upon statement of facts, the bank “received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations provided to investors about the pools of loans to be securitized.”

In one case, a Citigroup trader wrote an internal email questioning the quality of loans in mortgage-backed securities issued in 2007. The trader said that he “went through the diligence reports and think that we should start praying … I would not be surprised if half of these loans went down.”

The bank did not admit to breaking any particular law, and neither it nor any individual employees were criminally charged. At the same time, DOJ officials were quick to point out that the settlement did not release Citigroup or any individuals from potential criminal liability.

Reiss said the threat of criminal prosecution could become a hallmark of FIRREA cases, giving banks another cause for concern.

“That again demonstrates a lot of leverage on the side of the government,” Reiss said. “It’s a powerful tool to keep in your back pocket.”

Nominate REFinblog for The Blawg 100 (Please)

The ABA Journal is soliciting suggestions for the Blawg 100, its annual listing of the 100 best legal blogs. Please consider nominating REFinblog.  The nomination form is here and nominations are due by 5:00 pm EST on Friday, August 8th.  Thank you for your consideration!

Reiss on Mortgage Insurance Proposal

Law360 quoted me in FHFA Capital Rules Will Squeeze Older Mortgage Insurers (behind a paywall). It opens,

The Federal Housing Finance Agency on Thursday released proposals that would impose higher capital requirements on private mortgage insurers doing business with Fannie Mae and Freddie Mac, but experts say insurers with bubble-era mortgages in their portfolios may find it tough to meet the new mandates.

The new standards will force mortgage insurers to determine the amount of cash and other liquid assets they retain to cover potential payouts using more of a risk-based formula than they have up to this point, meaning that the riskier the mortgage, the more capital will be required.

Because of that, mortgage insurers that were in business during the housing bubble era and have older loans on their books will be hit harder than insurers that have only post-financial crisis loans on their books, said Paul Hastings LLP partner Kevin Petrasic.

“The older vintage mortgages have more challenging issues than the newer mortgages,” he said.

Fannie Mae and Freddie Mac are barred from backing mortgages where the borrower has contributed less than a 20 percent down payment without getting private mortgage insurance to make up the difference. The insurance on those mortgages absorbs any losses before Fannie Mae and Freddie Mac do in the case of default, in essence putting private money before taxpayer money.

During the financial crisis, private mortgage insurers paid out billions of dollars on bad mortgages even as Fannie Mae and Freddie Mac took on over $180 billion in federal bailout money in the fall of 2008, when they were put under the FHFA’s conservatorship.

However, the financial crisis also saw many of the larger mortgage insurers fail under the weight of the huge number of claims they had to cover, contributing to Fannie and Freddie’s collapses.

“The history of the mortgage insurance industry is a history of good profits during good times and catastrophic losses in bad times,” said Brooklyn Law School professor David Reiss. “It seems like what the FHFA is doing is saying we don’t want the taxpayer on the hook during the next period of catastrophic losses.”

That is exactly what the FHFA says it intends with its new regulations, part of a so-called strategic plan to strengthen Fannie Mae and Freddie Mac and to bring more private money into the mortgage market.