En-Titled Insurance

Benjamin M. Lawsky, the New York State Superintendent of Financial Services, has promulgated a proposed regulation regarding title insurance that is sure to shake up the title industry and, more importantly, reduce closing costs for NY homeowners.

The proposed regulation opens with a statement of its scope and purpose:

(a) The purpose of this Part is to promote the public welfare by proscribing practices that are not in accordance with Insurance Law section 2303, which provides that insurance rates shall not be excessive, inadequate, or unfairly discriminatory. This Part also interprets and implements Insurance Law section 6409(d), which prohibits giving any consideration or valuable thing as an inducement for title insurance business, as well as Insurance Law section 6409(e), which states that title insurance premiums shall reflect the anti-inducement prohibition of Insurance Law section 6409(d).

(b) This Part further protects consumers, pursuant to the authority of Insurance Law sections 2110 and 2119 and Article 24 and Financial Services Law sections 301 and 302, by ensuring that the title insurance industry provides valuable products and services to consumers at reasonable rates and fees and does not overcharge consumers or charge improper and excessive fees that constitute engaging in untrustworthy behavior and unfair and deceptive acts and practices. (Section 227.0 )

New York has long had some of the most expensive title insurance premiums in the country, so homeowners and other owners of real estate should welcome this development. Title insurance agents are not allowed to compete on price in NY, so they compete for business from real estate lawyers (who typically select the title insurance agent for any given transaction) by offering them all sorts of perks such as hard-to-get tickets to events and fancy meals. The proposed regulation attempts to rein in this behavior.

The NYS Department of Financial Services will be accepting comments for 45 days after the proposed regulation is published in the State Register, so get crackin’.

Too Many Parks?

Robert Ellickson has posted Open Space in an Urban Area: Might There Be Too Much of a Good Thing? to SSRN. The abstract reads,

Numerous policies encourage the preservation of open space in urban areas. Two of many examples are large-lot zoning and tax benefits to donors of conservation easements. These policies rest on the plausible inference that an open space can benefit nearby residents, for instance, by enhancing scenic vistas and recreational opportunities. But commentators tend to underestimate the costs of open space. The key advantage of urban living is proximity to other people. Open spaces reduce urban densities, increase commuting times, and foster sprawl. I advance the heretical view that a metropolitan area can suffer from having too much open space, and briefly suggest some reforms, particularly in zoning and conservation-easement policy.

This brief essay is thought-provoking, particularly for those of us in NYC. Mayor De Blasio is embarking on an ambitious plan to build or preserve 200,000 units of affordable housing and there are all sorts of land use debates raging over the appropriate level of density in the city. This essay suggests that we should model the costs and benefits of open space in order to work toward a more optimal amount of it in each community. As Ellickson notes, “Development displaced by the setting aside of open space could be pushed in one of three directions: toward the center city, toward the periphery, and beyond the region in question.” (8) This dynamic plays out differently in a city that is built up as much as NYC. But it is reflected in our discussions about density: low density in the central city pushes development outward, one way or another.

Ellickson’s insights are also relevant to the analysis of the overall land use regimes of broader regions: “Open space provides essential relief from urban asphalt and concrete. But debates over the merits of open space tend to understate the opportunity costs and negative externalities of protecting land from development.” (19) He argues that the archetypal bedroom community near NYC is “ideally situated to house commuters. Its large-lot zoning and unstinting acquisitions of open space have contributed to the further sprawl of Greater New York. There can be too much of a good thing.” (19) The essay does not give too much guidance as to how regions such as Greater New York can best address these issues, but it does raise important questions that policy makers should seek to answer.

HELOC vs. Cash-out Refinance for Card Debt Repayment

CreditCards.com quoted me in HELOC vs. Cash-out Refinance for Card Debt Repayment. It reads, in part,

On paper, it may look as if it makes a lot of sense to replace high interest card debt with a low interest payment if you have home equity you can tap into. If it’s available and will ease your pay-off pain, why not use it, right?

While using a home equity line of credit (HELOC) or cash-out refinance (in which you refinance your mortgage, but tack on an additional cash payout) to rectify your debt woes might seem like a no-brainer, there are lots of factors to consider to determine which avenue is right for you or if you should go that route at all.

“One size doesn’t fit all,” says Malcolm Hollensteiner, director of retail lending sales at TD Bank. “Utilizing equity to pay down or eliminate higher interest rate consumer debt can be a very beneficial strategy, but it should be done in moderation, accessing some — not all — of your equity,” he says.

Gone are the days when banks allowed homeowners to tap into 125 percent of their home value (thanks to the lessons learned during the real estate market meltdown, which left many people “underwater,” owing more on their home loans than the value of the home). And, you’ll need to have a respectable credit score to qualify. But even with more restrictions in place now than in years past, borrowers still should tread carefully if they’re contemplating borrowing against their home.

“Although the interest rates are much lower on a HELOC or cash-out, the issue becomes that you’re taking your short-term debt and turning it into something you’re going to be paying back for 30 years,” says John Walsh, CEO of Total Mortgage Services.

And then there’s the risk factor. Before you jump on that lower rate, you have to understand that if you cannot keep up with your new payments, you risk going into foreclosure, warns David Reiss, professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, who also writes the REFinBlog. “In other words, you are getting the lower rate in exchange for putting up your house as collateral for the debt,” he says.

With stakes this high, it’s not as simple as using a HELOC or cash-out refinance as your “get out of debt free” card. Here are the factors you need to consider.

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As you consider your options, think about both the short-term and long-term benefits and costs, says Reiss. “You can’t think of home equity as free money. That’s your retirement, money you may leave to your children or use for an emergency. It’s money that your future self may need,” he says. If you do decide to move forward, make sure you’re using your home equity wisely — paying off your debt would fall into that category, as long as you commit to smart spending habits moving forward.

Take an honest assessment of where you are in life, and think through your ability to pay off the debt in whatever form it may take. “Run some numbers, and talk this through with someone whose financial judgment you trust,” says Reiss. By being honest with yourself and becoming an educated consumer, you can figure out which option makes the most sense for you.

What Do People Do When Mortgage Payments Drop?

I went to an interesting presentation today on a technical paper, Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging. While the paper (by Marco Di Maggio, Amir Kermani & Rodney Ramcharan) itself is tough for the non-expert, it has some important implications that I discuss below. The abstract reads,

Do households benefit from expansionary monetary policy? We investigate how indebted households’ consumption and saving decisions are affected by anticipated changes in monthly interest payments. We focus on borrowers with adjustable rate mortgages originated between 2005 and 2007 featuring an automatic reset of the interest rate after five years. The monthly payment due from the average borrower falls by 52 percent ($900) upon reset, resulting in an increase in disposable income totaling tens of thousands of dollars over the remaining life of the mortgage. We uncover three patterns. First, the average household increases monthly car purchases by 40 percent ($150) upon reset. Second, this expansionary effect is attenuated by the borrowers’ voluntary deleveraging, as a significant fraction of the increased income is deployed to accelerate debt repayment. Third, the marginal propensity to consume is significantly higher for low income and underwater borrowers. To complement these household-level findings, we employ county-level data to provide evidence that consumption responded more to a reduction in short-term interest rates in counties with a larger fraction of adjustable rate mortgage debt. Our results shed light on the income channel of monetary policy as well as the role of debt rigidity in reducing the effectiveness of monetary policy. (1)

The paper cleverly exploits

the anticipated changes in monthly payments of borrowers with adjustable rate mortgages (ARMs) originated between 2005 and 2007, with a fixed interest rate for the first 5 years, which is automatically adjusted at the end of this initial period. These cohorts experience a sudden and substantial drop in the interest rates they pay upon reset, regardless of their financial position or credit worthiness and without refinancing. These cohorts are of particular interest because the interest rate reduction they experienced is sizeable: the ARMs originated in 2005 benefited from an average reduction of 3 percentage points in the reference interest rate in 2010. (3)

I will leave it to individual readers to work through how they designed this research project and move on to its implications:

The magnitude of the positive income shock for these households is large indeed: the monthly payment falls on average by $900 at the moment of the interest rate adjustment. Potentially, this could free up important resources for these indebted and mainly underwater households. We show that households increase their car purchase spending by more than $150 per month, equivalent to a 40 percent increase compared to the period immediately before the adjustment. Their monthly credit card balances also increase substantially, by almost $200 a month within the first year after the adjustment. Moreover, there is not any sign of intertemporal substitution or reversal within two years of the adjustment. . . . However, we also show that households use 15% of their increase in income to repay their debts faster, almost doubling the extent of this effort. (38-39)

There are all sorts of interesting implications that follow from this study, but I am particularly intrigued by its implications for “debt rigidity — the responsiveness of loan contracts to interest rate changes.” (6) While the authors are interested in how debt rigidity can impact monetary policy, I am interested in how it can impact households. There is much in the American housing finance system that keeps households from refinancing — high title insurance charges and other fees, for instance — but we do not often focus on the impact that rigid mortgage contracts have on the broader economy. This paper demonstrates that the effects are not borne by consumers alone. This paper quantifies the effects on the consumer economy to some extent and reveals that they are quite significant. Policy makers should take note of just how significant they can be.

Abusive Non-Rent Fees for Rent Stabilized Tenants

The Urban Justice Center’s Community Development Project has issued a report, The Burden of Fees: How Affordable Housing is Made Unaffordable. The introduction reads,

Tenants in New York City’s poorest neighborhoods are under attack. Despite the existence of laws such as rent stabilization to protect tenants from high rents, landlords are creating new ways to push rent stabilized tenants out of their homes. One such tactic is the use of non-rent fees, a confusing and often times unwarranted set of charges that are added to a monthly rent statement . . .. These include fees on appliances (air conditioner, washing machine, dryer, and dishwasher), legal fees, damage fees, Major Capital Improvement (MCI) rent increases and other miscellaneous fees. Often these fees appear on a tenant’s rent bill without any explanation. If a tenant fails to pay, even if they are unaware of why the fee was imposed, they are sent letters that make them feel that they are being harassed and are threatened with eviction by the landlord. Most tenants have a right to object to many of these fees, and landlords are legally prohibited from taking tenants to Housing Court solely for non-payment of additional fees. But many tenants don’t know their rights about the fees and often pay them when they shouldn’t. For low-income and working class tenants who struggle each month to pay rent, these fees add up and make their housing costs unaffordable. While some of the fees are legal, many of them are not, and the consistency and pattern of the way the fees are being charged and collected suggests that some landlords are intentionally increasing tenants’ rent burdens to push out long- term, rent stabilized tenants.

This problem is proliferating in the Bronx, where New Settlement’s Community Action for Safe Apartments (CASA) works to improve living conditions and maintain affordable housing. This is particularly apparent in buildings owned by Chestnut Holdings, a company that is fast becoming one of the biggest landlords of rent stabilized buildings in the Bronx.

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All survey respondents live in rent stabilized buildings owned by Chestnut Holdings. In total, the coalition collected 172 surveys from 23 buildings, representing 13% of the number of apartments in those buildings. The research sample accounts for 4% of all the apartments that Chestnut Holdings owns, and 28% of the buildings. Researchers also collected rent bills and other supplemental materials (including letters to and from landlords, housing court decisions, and more) from 196 Chestnut Holdings tenants. Coalition members chose to focus on these buildings because they are rent stabilized and located in the neighborhoods where each organization is actively working. Data in this report comes from surveys, recent rent bills collected from Chestnut Holdings’ tenants and interviews with tenants.

Overall, we found that the problem of non-rent fees is serious and widespread in the Bronx. 81% of the tenants we surveyed had been charged some sort of fee. From the rent bills we reviewed for this report, the average tenant had $671.13 in non-rent fees on their most recent rent bill. (1-2)

This document is obviously an advocacy document and not a piece of objective scholarship. Moreover, its methodology may not be rigorous enough to allow us to extrapolate much from its findings. That being said, the survey responses themselves reveal a serious problem: alleged average non-rent fees of nearly $700 for each survey respondent seems very, very high, even if we limit the findings to the respondents themselves.

In the 1970s, predatory landlords hired bruisers with bats and pit bulls to frighten tenants into leaving their homes. In the 2000s, a new generation of predatory landlords used abusive court filings to achieve the same purpose. There is a very real risk that high non-rent fees represent a new tactic for predatory landlords to drive out rent-regulated tenants with under-market rents. To the extent that non-rent fees represent a new tactic to harass tenants, government regulators should actively seek to end it and punish those who employ it.

Fannie & Freddie and Multifamily

The Urban Institute has posted a Housing Finance Policy Center Brief, The GSEs’ Shrinking Role in the Multifamily Market. It opens,

Though the two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—are best known for their dominant role in the single-family mortgage market, they have also been major providers of multifamily housing financing for more than 25 years. Their role in the multifamily market, however, has declined substantially since the housing crisis and has reverted to more normalized levels. In addition, even as the GSEs continue to meet or exceed their multifamily affordable housing goals, their financing for certain underserved segments of the market has fallen steeply in recent years.

Given recent declines, policymakers and regulators should consider maintaining or increasing the GSEs’ footprint in the multifamily market, especially in underserved segments. The scorecard cap increases and exemptions recently employed by the Federal Housing Finance Agency (FHFA) to slow the decline in GSE multifamily volume have been somewhat effective, but they may not be enough to prevent the GSEs’ role from shrinking further. (1)

The policy brief’s main takeaway is that “policymakers and regulators should consider maintaining or increasing GSEs’ role in the multifamily market.” (8) I was struck by the fact that this policy brief pretty much took for granted that it is good for the GSEs to have such a big (and increasing) role in the multifamily market:

Though the multifamily market continues to remain strong and private financing is readily available today, it is also poised to grow significantly because of rising property prices and higher future demand. This raises the question of whether the GSEs should continue to shrink their multifamily footprint even further below the level of early 2000s, a period of relatively stable housing market. (8)

Government intervention in markets is usually called for when there is a market failure. The policy brief indicates the opposite — “private financing is readily available today.” The brief does argue that financing “backed by pure private capital is likely to be concentrated within the more profitable mid-to-high end of the market.” (9) That does not indicate that there is a market failure, just that borrowing costs should be cheaper for such projects. If the federal government is going to effectively subsidize a functioning credit market through the GSEs, it should make sure that it is getting something concrete in return, like affordable housing. Just supporting a credit market generally because it tends to support affordable housing is an inefficient way to achieve public goods like affordable housing. It also is a recipe for special interest capture and a future housing finance crisis. To the extent that this private credit market can function on its own, the government should limit its role to safety and soundness regulation and affordable housing creation.

The Good, Bad & Ugly of Real Estate

U.S. News & World Report quoted me in The Good, Bad and Ugly of Real Estate Investments. It reads, in part,

While many investors get a rise when it comes to the potential profits in real estate, that doesn’t mean all properties rise enough in value to justify the commitment.

“Some people buy real estate expecting it to appreciate a lot over time,” says David Reiss, a professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School. “But it can be risky – or even foolish – to pay so much for a property that you’re losing money on an operating basis just because you think it will appreciate.”

The wisdom in real estate, then, applies just as it would with stocks, commodities or any other investment class: The variables are many, the can’t-miss propositions few. So where should the savvy money go? And how does real estate fit into your overall portfolio?

Here, experts and observers weigh in on the essentials that should guide your decisions, as well as the ways to guide your financial forays toward success.

Know your market well. If you pay market price for an investment property, you probably won’t see particularly robust returns. “It will make a market return, and if you want to do better than that, you have to pound the pavement,” Reiss says. “Look for deals that are underpriced for one reason or another. And you won’t know which deals are underpriced unless you have a good sense of how properties are priced.”

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Increase your profit potential with an investment of time. Property development, management and administration often require an army of specialists. But if you’re adept at repairs, accounting or showing a vacancy to prospective renters, you can forego the fees associated with hired help. “Depending on your availability and your skills, these could be trade-offs that are worth making for you,” Reiss says.