Fintech and Mortgage Lending

image by InvestmentZen, www.investmentzen.com

The Trump Administration released its fourth and final report on Nonbank Financials, Fintech, and Innovation in its A Financial System That Creates Economic Opportunity series. The report differs from the previous three as it does not throw the Consumer Financial Protection Bureau under the bus when it comes to the regulation of mortgage lending.

The report highlights how nonbank mortgage lenders, early adopters of fintech, have taken an immense amount of market share from traditional mortgage lenders like banks:

Treasury recognizes that the primary residential mortgage market has experienced a fundamental shift in composition since the financial crisis, as traditional deposit-based lender-servicers have ceded sizable market share to nonbank financial firms, with the latter now accounting for approximately half of new originations. Some of this shift has been driven by the post-crisis regulatory environment, including enforcement actions brought under the False Claims Act for violations related to government loan insurance programs. Additionally, many nonbank lenders have benefitted from early adoption of financial technology innovations that speed up and simplify loan application and approval at the front-end of the mortgage origination process. Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of  technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product. (11)

I am not sure that the report has its causes and effects exactly right. For instance, why would banks be more disincentivized than other financial institutions because of False Claims Act lawsuits? Is the argument that banks have superior lending opportunities that are not open to nonbank mortgage lenders? If so, is that market segmentation such a bad thing? 

That being said, I think the report is right to highlight the impact of fintech on the contemporary mortgage lending environment. Consumers will certainly benefit from a shorter and more streamlined mortgage application process.

Property Taken by Eminent Domain Unused

Photo by Marc A. Hermann / MTA New York City Transit

CBS2’s Mary Calvi, photo by Marc A. Hermann / MTA New York City Transit

I was interviewed by Mary Calvi on CBS New York in Man Wants Back Property NYC Took From His Family In 1967 (click here to watch the segment). The transcript of the segment reads, in part,

There is a property battle that has been brewing in the Bronx for some time.

A man is fighting to get back a piece of land that he claims belongs to his family.

He says the city took the land five decades ago saying it wants to extend a road, but all these years later nothing has changed, CBS2’s Mary Calvi reported Monday.

Fred Filomio fixes what’s broken on trucks in the Bronx. For decades, one problem has lingered, unfixed.

You see, back in 1967, when he was entering military service, the city of New York, using eminent domain, took part of his family’s property.

“When my uncle Freddie came back from World War II, they bought the whole block,” Filomio said.

A 13,000-square foot piece that sits up 22 feet above street level is a small part of a larger piece of property on Boston Road in the Bronx for his family’s trucking business. Back those 50 years ago, the city said it had to have the property in order to widen a street adjacent to it.

“They haven’t used one square foot of the property,” Filomio said, adding it looks the same as it did five decades ago.

In 50 years, the city has literally done nothing with the property. Filomio even uses it to park his trucks. His lawyer, Richard Apat, has filed suit.

“We feel showing number one it was an excess taking. Number two, it’s now being held as a proprietary. Number three, that we have been in possession we should get it back. But even with that, Fred is a reasonable person. If the city will talk to us and say let’s work something out, he’ll pay them some money, he’ll start paying taxes and that’s why I say I think it’s win-win,” Apat said.

The city responded to CBS2’s numerous requests for comment, with only the following from a spokesperson: “The property involved in this ongoing litigation is not subject to a claim of adverse possession, as a matter of law. We have no further comment while this litigation is pending.”

Professor David Reiss teaches students about eminent domain at Brooklyn Law School. He said he believes this one, like most others, is a difficult one to win.

“It looks like they have a tough row to hoe,” Reiss said. “Once the government takes ownership of the property, generally it’s theirs.”

The “Bump” Clause

The Wall Street Journal quoted me in In Cooling Housing Markets, ‘Bump Clauses’ Help Seal Win-Win Deals. It opens,

What to do when a home-seller gets an offer but holds out hope for something better?

Enter the bump clause.

A bump clause lets sellers enter into a contract with a buyer while still continuing to market the property. If the sellers get a better deal, they can “bump” the original buyer.

It’s most commonly used when a buyer’s offer has some contingency, usually that they need to sell their current home first. It can help coax the sellers into contract by offering them the ability to seek alternate buyers who don’t have a home-sale contingency or who are offering higher prices.

The clause tends to become more popular in markets that are “transitional,” where once-hot home sales are cooling but sellers haven’t yet adjusted their expectations. The tactic can be “a savvy technique” to help the sellers feel they could still get a better offer, says David Reiss, a Brooklyn Law School professor who specializes in real estate.

If the sellers do get another written offer they want to take, they must notify the original buyer. The buyer then typically has a few days to tell the seller they’ve sold their house, or that they’ve decided to waive the contingency. If not, the original contract terminates. The original buyer gets back the money they put down, and the sellers enter into contract with the new buyer.

The sellers can only keep marketing the property until the buyers satisfy or waive the contingency. So once the buyers notify the seller they’ve sold their existing home, the seller’s right to market the property ends.

Rebekah Carver, a real-estate broker with Douglas Elliman Real Estate in Brooklyn, N.Y., says Brooklyn has been a hot market for a long time, and bump clauses haven’t been common. But now she’s representing buyers on a deal where the seller had resisted signing a contract with a home-sale contingency, even though the property had been on the market for about six months. Ms. Carver offered the bump clause to try to put the seller’s mind at ease.

In general, the bump clause can “give the seller some sense of security and comfort,” says Ms. Carver. The bump clause can be proposed by either the buyer’s or seller’s side, but is often offered by the buyer’s agent as a way to get the seller to accept a contingency.

Robin Sheridan, a real-estate broker with Realogics Sotheby’s International Realty in Seattle, says that when she is representing a seller facing a home-sale contingency, Ms. Sheridan often does her own due diligence. “I want to be certain the other property is one that will sell quickly,” she says. “I vet the buyers via their lender and ensure all their ducks are in a row to navigate the two nearly consecutive transactions. Knowing the bump clause is a possibility is comforting to a seller, but most of my clients remain firmly committed to the contract in hand.”

Here are some things to consider with bump clauses.

For sellers:

• Use it as leverage. Since the house is already under contract, a seller can use the clause as a negotiating tactic with any other buyers that show interest. The seller can try to get the other buyers to outbid the current price or negotiate a contract without contingencies.

• Don’t get greedy. If the seller receives a second offer, he may be tempted to “bump” the first buyer and sell to the second. But sellers should make sure the second offer is at least as strong as the first, which means looking deeper than price and contingencies. The new buyers may have poor credit, for example, and be less likely to obtain a mortgage. “It’s a bird in the hand,” says Mr. Reiss. “If they walk away and are stuck negotiating with a second offer that’s weak, they could end up with nothing.”

Court Limits NY Attorney General’s Reach

New York State Attorney General                  Barbara D. Underwood

Bloomberg quoted me in Credit Suisse Wins Narrowing of $11 Billion Suit, Martin Act. It opens,

New York’s powerful anti-fraud weapon known as the Martin Act was crimped by the state’s highest court, which scaled back what was an $11 billion lawsuit against Credit Suisse Group AG over mortgage-securities practices in the run-up to the financial crisis.

The New York Court of Appeals found that many of the claims were too old, trimming the statute-of-limitations of the law to three years from six years. The Martin Act has been used by the state’s attorney general to police the securities markets since the 1920s, so the ruling may limit the prosecution of fraud in stock and bond sales and some other financial transactions.

“Anything that reduces a statute of limitations will have a big impact on enforcement,” said David Reiss, a professor at Brooklyn Law School, noting that it can take many years to develop complex financial cases. “This case reflects a significant curtailment of the New York attorney general’s ability to go after alleged financial wrongdoing.”

Prior to the legal battle against Credit Suisse, the Martin Act, one of the country’s oldest and toughest anti-fraud tools, faced relatively few tests in court. The law can be used by the state attorney general to file both civil suits and criminal charges, and requires a lower standard of proof for civil cases than other anti-fraud statutes. It can also be used to launch investigations, which can help extract settlements.

Legal Tool

Through the specter of the Martin Act, New York state has been able to collect billions of dollars in fines from investment banks, insurance companies and mutual funds over a wide variety of alleged fraud. It has also been used to charge individuals, including executives at Tyco International Ltd., accused of looting the company, and former officials at the law firm Dewey & LeBoeuf.

Amy Spitalnick, a spokeswoman for Attorney General Barbara Underwood, said she pursues cases quickly and will continue to do so.

“This decision will have no impact on our efforts to vigorously pursue financial fraud wherever it exists in New York,” Spitalnick said. “That includes continuing our case against Credit Suisse.”

In recent years, the Martin Act has been used against Barclays Plc and other banks to pursue claims they misled customers about the role of high-frequency traders in dark pools, to win a settlement from the Bank of New York Mellon Corp. over foreign-currency trading, and to start an investigation into Exxon Mobil Corp. about whether it misled investors about the impact of climate change.

The case against Zurich-based Credit Suisse came as the office started probes into allegations of wrongdoing related to the financial crisis. The lawsuit, filed by former Attorney General Eric Schneiderman in November 2012, claimed the bank ignored warning signs about the quality of loans it was packaging and selling in 2006 and 2007.

Housing in the Trump Era

 

The Real Estate Transactions Section of the American Association of Law Schools has issued the following Call for Papers:

Access + Opportunity + Choice: Housing Capital, Equity, and Market Regulation in the Trump Era

Program Description:

The year 2018 marks the 10th anniversary of the 2008 housing crisis—an event described as the most significant financial and economic upheaval since the Great Depression. This year is also the 50th anniversary of the Fair Housing Act, which upended many decades of overt housing discrimination. Both events remind us of the significant role that housing has played in the American story—both for good and for bad.

Of the many aspects of financial reform that followed 2008, much of the housing finance-related work was centered around mortgage loan origination and creating incentives and rules dealing with underwriting and the risk of moral hazard. Some of these reforms include the creation of the qualified mortgage safe-harbor and the skin-in-the-game risk retention rules. But when it came to the secondary mortgage market, little significant reform was undertaken. The only government action of any serious importance related to the federal government—through the Federal Housing Finance Agency (FHFA)—taking over control of Fannie Mae and Freddie Mac. This major government intervention into the workings of the country’s two mortgage giants yielded takings lawsuits, an outcry from shareholders, and the decimation of the capital reserves of both companies. Despite Fannie and Freddie having both paid back all the bailout funds given to them, the conservatorship remains in place to this day.

In the area of fair housing, the past several years saw the Texas Department of Housing and Community Affairs v. Inclusive Communities case whereby the U.S. Supreme Court upheld (and narrowed the scope of) the disparate impact theory under the Fair Housing Act. We also saw efforts aimed at reducing geographic concentrations of affordable housing through the Obama administration’s promulgation of the affirmatively furthering fair housing rule.

Yet, meaningful housing reform remains elusive. None of the major candidates in the most recent presidential election meaningfully addressed the issue in their policy platforms, and a lack of movement in resolving the Fannie/Freddie conservatorship is viewed as a major failure of the Obama administration. Additionally, housing segregation and access to affordable mortgage credit continues to plague the American economy.

In recent months, the topics of housing finance reform and providing Americans with credit (including mortgage credit) choices have been a point of focus on Capitol Hill and in the Trump White House. Will these conservations result in meaningful legislation or changes in regulatory approaches in these areas? Will programs like the low-income-housing tax credit, the CFPB’s mandatory underwriting requirements, public housing subsidies, and the government’s role in guaranteeing and securitizing mortgage loans significantly change? Where are points of possible agreement between the country’s two major parties in this area and what kinds of compromises can be made?

Call for Papers:

The Real Estate Transactions Section looks to explore these and related issues in its 2019 AALS panel program titled: “Access and Opportunity: Housing Capital, Equity, and Market Regulation in the Trump Era.” The Section invites the submission of abstracts or full papers dealing broadly with issues related to real estate finance, the secondary mortgage market, fair housing, access to mortgage credit, mortgage lending discrimination, and the future of mortgage finance. There is no formal paper requirement associated with participation on the panel, but preference will be given to those submissions that demonstrate novel scholarly insights that have been substantially developed. Untenured scholars in particular are encouraged to submit their work. Please email your submissions to Chris Odinet at codinet@sulc.edu by Friday, August 3, 2018. The selection results will be announced in early September 2018. In additional to confirmed speakers, the Section anticipates selecting two to three papers from the call.

Confirmed Speakers:

Rigel C. Oliveri, Isabelle Wade and Paul C. Lyda Professor of Law, University of Missouri School of Law

Todd J. Zywicki, Foundation Professor of Law, George Mason University Antonin Scalia Law School

David Reiss, Professor of Law and Research Director for the Center for Urban Business Entrepreneurship, Brooklyn Law School

Eligibility:

Per AALS rules, only full-time faculty members of AALS member law schools are eligible to submit a paper/abstract to Section calls for papers. Faculty at fee-paid law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.

All panelists, including speakers selected from this Call for Papers, are responsible for paying their own annual meeting registration fee and travel expenses.

Light Blogging This Summer

I am trying to do a final push on my forthcoming book, Paying For The American Dream: How To Reform The Market For Mortgages (Oxford University Press), this summer, so I will not be keeping to my regular blogging schedule.

Noise Pollution and Property Values

photo by Luis Miguel Bugallo Sánchez

Realtor.com quoted me in What Is Noise Pollution and How Does It Affect Property Values? It opens,

When it comes to a home’s value (and your sanity), noise pollution can be a major downer. But what is noise pollution exactly? Most people have different definitions of what noise pollution actually is—anything from sirens to a barking dog, or the noise of traffic on the street outside.

While outside noise isn’t totally escapable (even the prairie has ambient noise), home buyers will want to be on the lookout for excessive noise pollution, because it could affect a property’s value. After all, you don’t want to live in (or have to eventually unload) a place that requires a lifetime supply of earplugs.

First, let’s define what noise pollution actually means.Re

What is noise pollution?

In defining noise pollution, there are several variables in the mix.

“Noise pollution is basically any noise that you don’t like, but I guess we would define it as noise that most people generally don’t like,” says Brooklyn Law School Professor David Reiss, research director for the Center for Urban Business Entrepreneurship. “When governments regulate noise, however, it is usually based on how loud a noise is.”

For example, Reiss explains that according to A Guide to New York City’s Noise Code, in that city, “Noise that exceeds the ambient sound level by more than 10 decibels (dB) as measured from 15 feet from the source as measured from inside any property or on a public street is prohibited.”

Of course, the ambient sound level in NYC is considerably louder than in a rural area.

How to measure noise pollution near a home

Although decibels are used to measure the intensity of a sound, there are more accurate ways to identify noise pollution around a particular house. When it comes to getting ballpark figures for typical noise levels, Tom Davies, Co-Founder and Manager of the property buying company Accelerate Homes, suggests that most buyers figure out the day-night average sound level (Ldn) or the day-evening-night average sound level (Lden), which are measurements that can help assess the impact that road, rail, air, and general industry has on the local population. Either of these measurements give a potential buyer a much more accurate assessment of overall noise pollution near their home. To measure these levels, get a regular decibel meter, take hourly readings, and plug those numbers into this online noise calculator.

You can also check this interactive national transportation map created by the U.S. Bureau of Transportation Statistics to get a general idea of noise pollution levels created primarily by interstate highways and airports in your area. Just type in your address (or the address of any home you’re considering) and get a general reading. Red means loud—think vacuum cleaner (like 60dB-80 dB), and purple means even louder, like the constant sound of a garbage disposal (80 dB and up).

Identifying noise pollution culprits

It’s not always easy to figure out what’s making all the noise, but it is possible.

“While some of the main factors could be easily spotted—like the proximity of highways, stadiums, airports, train, and bus stations—other factors like specialized traffic (regular truck deliveries or rubbish removal), or the presence of neighbors with loud dogs, are far less likely to be spotted at first sight,” says Davies. The only way to get to the bottom of it is to talk to the neighbors.

Reiss also suggests taking it a step further.

“Visit at different times of the day. For example, if there is a bar across the street, drive by on a Saturday night,” he says. “Also, ask local government officials, like community board district managers, about noise complaints.” Basically, it’s up to you to do your due diligence on sound.

How noise pollution affects property prices

High noise levels don’t automatically correlate with lower prices, Reiss says. Some of the most expensive homes in New York City are located in midtown Manhattan, a busy area that’s home to the theater district, the tourist magnet Times Square, and many major corporate offices.

“But within a certain market, there will be those who value quietness and those who value being in the middle of the action,” he says.

To get a true reading on how noise pollution will affect the value of a property, “you would need to distinguish short-term noise—like a neighboring construction site—from permanent noise—like from a neighboring firehouse,” says Reiss.