REFinBlog

Editor: David Reiss
Brooklyn Law School

May 20, 2016

White-Segregated Subsidized Housing

By David Reiss

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The  University of Minnesota Law School’s Institute on Metropolitan Opportunity has issued a report, The Rise of White-Segregated Subsidized Housing. While the report is focused on Minnesota, it raises important issues about affordable housing program demographics throughout the country:

  • To what extent do the populations served by programs match those of their catchment areas?
  • To what extent do the served populations match the eligible populations of their catchment areas?
  • To what extent do the served populations match the demographics of those who have applied for the programs?
  • To what extent do variants among those metrics matter?

The Executive Summary opens,

Subsidized housing in Minneapolis and Saint Paul is segregated, and this segregation takes two forms – one well-known, and the other virtually unknown.

At this point it is widely recognized that most Minneapolis and Saint Paul subsidized housing is concentrated in racially diverse or segregated neighborhoods, with few subsidized or otherwise-affordable units in affluent, predominately white areas. Because subsidized units are very likely to be occupied by families of color, this pattern increases the region’s overall degree of segregation.

But what has been overlooked until today, at least publicly, is that a small but important minority of subsidized projects are located in integrated or even-predominately white areas. Unlike typical subsidized housing, however, the residents of these buildings are primarily white – in many instances, at a higher percentage than even the surrounding neighborhood. These buildings thus reinforce white residential enclaves within the urban landscape, and intensify segregation even further.

What’s more, occupancy is not the only thing distinguishing these buildings from the average subsidized housing project. They are often visually spectacular, offering superior amenities – underground parking, yoga and exercise studios, rooftop clubrooms – and soaring architecture. Very often, these white-segregated subsidized projects are created by converting historic buildings into housing, with the help of federal low-income housing tax credits, historic tax credits, and other sources of public funding. Frequently, these places are designated artist housing, and – using a special exemption obtained from Congress by Minnesota developers in 2008 – screen applicants on the basis of their artistic portfolio or commitment to an artistic craft.

These places cost far more to create than traditional subsidized housing, and include what are likely the most expensive subsidized housing developments in Minnesota history, both in terms of overall cost and per unit cost. These include four prominent historic conversions, all managed by the same Minneapolis-based developer – the Carleton Place Lofts ($430,000 per unit), the Schmidt Artist Lofts ($470,000 per unit), the upcoming Fort Snelling housing conversion ($525,000 per unit), and the A-Mill Artist lofts ($665,000 per unit). The combined development cost of these four projects alone exceeds $460 million. For reference, this is significantly more than the public contribution to most of the region’s sports stadiums; it is $40 million less than the public contribution to the controversial downtown football stadium.

These four buildings contained a total of 870 units of subsidized housing, most of which is either studio apartments or single-bedroom. For the same expense, using 2014 median home prices, approximately 1,590 houses could have been purchased in the affluent western suburb of Minnetonka.

In short, Minneapolis and Saint Paul are currently operating what is, in effect, a dual subsidized housing system. In this system, the majority of units are available in lower-cost, utilitarian developments located in racially segregated or diverse neighborhoods. These units are mostly occupied by families of color. But an important subset of units are located in predominately white neighborhoods, in attractive, expensive buildings. These units, which frequently are subject to special screening requirements, are mostly occupied by white tenants.

As a matter of policy, these buildings are troubling: they capture resources intended for the region’s most disadvantaged, lowest-income families, and repurpose those resources towards the creation of greater segregation – which in turn causes even more harm to those same families.

Legally, they may well run afoul of the Fair Housing Act and other civil rights law. Recent developments have established that the Fair Housing Act forbids public or private entities from discriminating in the provision of housing by taking actions that create a disparate impact on protected classes of people, including racial classes. Moreover, recipients of HUD funding, such as the state and local entities which contribute to the development of these buildings, have an affirmative obligation to reduce segregation and promote integration in housing.  (1-2)

No doubt, this report will spur a lot of soul searching in Minnesota. It may also spur some litigation. Other communities with subsidized housing programs should take a look at themselves in the mirror and ask if they like what they see. They should also ask whether federal judges would like it.

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May 20, 2016 | Permalink | No Comments

May 19, 2016

Divvying up The Mortgage Market

By David Reiss

photo by Evan-Amos

S&P Capital IQ has posted some Structured Finance Research: The Conforming Loan Limit And Its Effect On The U.S. Private­-Label Mortgage Market. It contains interesting thoughts on how a stabilized secondary mortgage market should be split between government-backed and private-label securitizations. More particularly, it finds that

  • The U.S. private­-label mortgage market has failed to recapture the market share that it ceded to the agency [Fannie & Freddie] market after the financial crisis of 2007–2009.
  • Partly because of changes in underwriting requirements, the private­-label market is synonymous with jumbo collateral: loans that exceed the conforming loan limit set by the Federal Housing Finance Agency (FHFA).
  • As a result, the conforming limit now acts as a gateway, controlling how much financing and securitization volume is accommodated by the agency channel relative to that of the private­-label market. (1)

It notes, “As rising home prices restore the historical relationship between the conforming limit and median home price, it will be interesting to see if there is a corresponding return to the pre­-2003 market share split between agency and private­-label securitization.” (Id.)

S&P further explains that

For the last 10 years, the conforming limit (which herein excludes dwellings with more than one unit) has remained at $417,000. Historically, the ratio of the median new home sale price to the conforming loan limit has been near 50%. When the housing market crashed, the ratio dropped to near 40%. However, the recovering housing market is restoring the historical relationship. Because the conforming loan limit acts as mechanism to regulate the market share breakdown between the private­-label and agency markets, it is likely to be a determinant in the future growth of the struggling private­-label sector.

Private-Label/Agency Market Share

Prior to 2003, the market share of the agency sector was a bit greater than 80%, with the remainder being private­-label issuance. After 2008, however, the agency share rose to over 95%. So while a new equilibrium appears to have been achieved, it is one in which a good deal of market share has been shifted away from the private-­label market and absorbed by the agencies. While the general market consensus seems to be that the private­-label share might not reach 2005–2007 levels again, the question remains as to when (if at all) the private­-label mortgage market will recover to the levels of issuance prior to 2003.” (1-2, chart omitted)

Implicit in all of this is that the pre-2003 state of affairs reflects some kind of natural state of equilibrium. This ignores the fact the national mortgage market has always been one that the government has shaped. While it is worth considering what balance between government and private-label securitization is best, historical precedent in itself is an insufficient guide.

I would rather focus on fundamentals. Should the government subsidize residential mortgages? How much exposure should the government have to credit risk? How much credit risk can the private sector handle? Should the government incentivize the origination of mortgage products (like the 30 year FRM) that private-label investors might not find so attractive? I care about the answers to these questions a whole lot more than I care about how the secondary mortgage market was divvied up one or two decades ago.

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May 19, 2016 | Permalink | No Comments

May 18, 2016

Calculating Closing Costs

By David Reiss

image by www.lumaxart.com/

Realtor.com quoted me in How Much Are Closing Costs? What Home Buyers and Sellers Can Expect. It reads, in part,

Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. But as a rule, you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. Yep that’s one heck of a wide range. More on that below.

Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.

*     *     *

Why Closing Costs Vary

The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called ‘flip taxes’ that condos charge sellers.”

To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your Realtor, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their Realtor outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.

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May 18, 2016 | Permalink | No Comments

May 17, 2016

Inclusionary Housing: Fact and Fiction

By David Reiss

photo by Bart Everson

The Center for Housing Policy has issued a policy brief, Separating Fact from Fiction to Design Effective Inclusionary Housing Programs. I am not sure fact was fully separated from fiction when I finished reading it.  It opens,

Inclusionary housing programs generally refer to city and county planning ordinances that require or incentivize developers to build below-market-rate homes (affordable homes) as part of the process of developing market-rate housing developments. More than 500 local jurisdictions in the United States have implemented inclusionary housing policies, and inclusionary requirements have been adopted in a wide variety of places—big cities, suburban communities and small towns.

Despite the proliferation of inclusionary housing programs, the approach continues to draw criticism. There have been legal challenges around inclusionary housing requirements in California, Illinois, Idaho, Colorado and Wisconsin, among others. In addition to legal questions, critics have claimed inclusionary housing policies are not effective at producing affordable housing and have negative impacts on local housing markets.

While there have been numerous studies on inclusionary housing, they unfortunately do not provide conclusive evidence about the overall effectiveness of inclusionary housing programs. These studies vary substantially in terms of their research approaches and quality. In addition, it is difficult to generalize the findings from the existing research because researchers have examined policies in only a handful of places and at particular points in time when economic and housing market conditions might have been quite different. Given these limitations, however, the most highly regarded empirical evidence suggests that inclusionary housing programs can produce affordable housing and do not lead to significant declines in overall housing production or to increases in market-rate prices. However, the effectiveness of an inclusionary housing program depends critically on local economic and housing market characteristics, as well as specific elements of the program’s design and implementation. (1, endnotes omitted and emphasis in the original)

The brief concludes that, in general, ” mandatory programs in strong housing markets that have predictable rules, well-designed cost offsets, and flexible compliance alternatives tend to be the most effective types of inclusionary housing programs.” (11, emphasis removed)

I have to say that this research brief does not give me a great deal of confidence that mandatory inclusionary zoning programs are going to be all that effective.  Indeed, the conclusion suggests that many ducks need to line up before we can count on them to make a real dent in affordable housing production. While this by no means should imply that they should be curtailed, we should continue to evaluate them carefully to see if they live up to their promise.

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May 17, 2016 | Permalink | No Comments

May 16, 2016

Uses & Abuses of Online Marketplace Lending

By David Reiss

photo by Kim Traynor

 

The Department of the Treasury has issued a report, Opportunities and Challenges in Online Marketplace Lending. Online marketplace lending is still in its early stages, so it is great that regulators are paying attention to it before it has fully matured. This lending channel may greatly increase options for borrowers, but it can also present opportunities to fleece them. Treasury is looking at this issue from both sides. Some highlights of the report include,

 

 

  • There is Opportunity to Expand Access to Credit: RFI [Request for Information] responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Although the majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
  • New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.
  • Small Business Borrowers Will Likely Require Enhanced Safeguards: RFI commenters drew attention to uneven protections and regulations currently in place for small business borrowers. RFI commenters across the stakeholder spectrum argued small business borrowers should receive enhanced protections.
  • Greater Transparency Can Benefit Borrowers and Investors: RFI responses strongly supported and agreed on the need for greater transparency for all market participants. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.

*     *     *

  • Regulatory Clarity Can Benefit the Market: RFI commenters had diverse views of the role government could play in the market. However, a large number argued that regulators could provide additional clarity around the roles and requirements for the various participants. (1-2)

As we move deeper and deeper into the gig economy, the distinction between a consumer and a small business owner gets murkier and murkier. Thus, this call for greater protections for small business borrowers makes a lot of sense.

Online marketplace lending is such a new lending channel, so it is appropriate that the report ends with a lot of questions:

  • Will new credit scoring models prove robust as the credit cycle turns?
  • Will higher overall interest rates change the competitiveness of online marketplace lenders or dampen appetite from their investors?
  • Will this maturing industry successfully navigate cyber security challenges, and adapt to appropriately heightened regulatory expectations? (34)

We will have to live through a few credit cycles before we have a good sense of the answers to these questions.

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May 16, 2016 | Permalink | No Comments

May 13, 2016

Affirmatively Furthering Neighborhood Choice

By David Reiss

Professor Kelly

Professor Kelly

Jim Kelly has posted Affirmatively Furthering Neighborhood Choice: Vacant Property Strategies and Fair Housing to SSRN (forthcoming in the University of Memphis Law Review). He writes,

With the Supreme Court’s Inclusive Cmtys. Project decision in June 2015 and the Obama Administration’s adoption, the following month, of the Final Rule for Affirmatively Furthering Fair Housing, local government accountability for ending segregation and resolving the spatial mismatch between affordable housing and economic opportunity has been placed on a more solid footing. Instead of being responsible only for overt, conscious attempts to harm protected groups, jurisdictions that receive money from HUD will need to take a hard look at their policies that perpetuate the barriers to housing opportunity for economically marginalized protected groups. The duty to Affirmatively Further Fair Housing, although somewhat aspirational in its formulation, requires HUD grant recipients to engage with fair housing issues in a way that the threat of litigation, even disparate impact litigation, never has.

For cities struggling with soft residential real estate markets, HUD’s concerns about land use barriers to affordable housing may seem tone deaf. Advocates challenging exclusionary policies have often focused on cities with high housing costs. Even a city with large vacant problems, such as Baltimore, was sued primarily because of its location with a strong regional housing market. But, concerns about social equity in revitalizing communities make the Final Rule’s universal approach to AFFH very relevant to cities confronting housing abandonment in its older, disinvested neighborhoods. This Articles has shown that attention to the Final Rule’s new Assessment of Fair Housing (AFH) reporting system is warranted both as a protective measure and as an opportunity to advance core goals of creating and sustaining an attractive and inclusive network of residential urban communities. (30-31)

For those of us who have trouble parsing the contemporary state of fair housing law in general and the AFFH rule in particular, the article provides a nice overview. And it offers insight into how fair housing law can help increase “the supply of decent, affordable housing options to members of protected groups . . .” (2) Not a bad twofer for one article.

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May 13, 2016 | Permalink | No Comments

May 12, 2016

The Single-Family Rental Revolution Continues

By David Reiss

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The Kroll Bond Rating Agency has released its Single-Borrower SFR: Comprehensive Surveillance Report:

Kroll Bond Rating Agency (KBRA) recently completed a comprehensive surveillance review of its rated universe of 23 single-borrower, single-family rental (SFR) securitizations. In connection with these transactions, 132 ratings are outstanding, all of which have been affirmed. The transactions have an aggregate outstanding principal balance of $13.0 billion, of which $12.6 billion is rated. These transactions have been issued by six sponsors, which own approximately 159,700 properties, 90,649 of which are included in the securitizations that are covered in this report. (3)

This business model took off during the depths of the Great Recession when capital-rich companies were able to buy up single-family homes on the cheap and in bulk. While the Kroll report is geared toward the interests of investors, it contains much of interest for those interested in housing policy more generally. I found two highlights to be particularly interesting:

  • The 90,649 properties underlying the subject transactions have, on average, appreciated in value by 10.2% since the issuance dates of the respective transactions . . . (4)
  • The underlying collateral has exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy rates declined (but remain above issuance levels), tenant retention rates have remained relatively stable, and delinquency rates have remained low. (Id.)

KBRA’s overall sector outlook for deal performance is

positive given current rental rates, which have risen since institutional investors entered the SFR space, although the rate of increase has slowed. Future demand for single-family rental housing will be driven by the affordability of rents relative to home ownership costs as well as the availability of mortgage financing. In addition, homeownership rates are expected to continue to decline due to changing demographics. Recent data released by the Urban Institute shows the percentage of renters as a share of all households growing from 35% as of the 2010 US Decennial Census to 37% in 2020 and increasing to 39% by 2030. Furthermore, 59% of new household formations are expected to be renters. Against this backdrop, KBRA believes single-borrower SFR securitizations have limited term default risk. However, there has been limited seasoning across the sector, and no refinancing has occurred to date. As such, these transactions remain more exposed to refinance risk. (9)

Kroll concludes that things look good for players in this sector. It does seem that large companies have figured out how to make money notwithstanding the higher operating costs for single-family rentals compared to geographically concentrated multifamily units.

I am not sure what this all means for households themselves. Given long-term homeownership trends, it may very well be good for households to have another rental option out there, one that makes new housing stock available to them. Or it might mean that households will face more competition when shopping for a home. Both things are probably true, although not necessarily both for any particular household.

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May 12, 2016 | Permalink | No Comments