October 6, 2014

Are the FHA’s Losses Heartbreaking?

By David Reiss

The Inspector General of the Department of of Housing and Urban Development issued an audit of FHA’s Loss Mitigation Program (2014-KC-0004).  The Office of the Inspector General (the OIG) did the audit because of its “concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans. Our audit objective was to determine the extent to which loans modified under the FHA program generated gains for the lenders.” (1)

The OIG found that

Lenders generated an estimated $428 million in gains from the sale of Government National Mortgage Association securities when modifying defaulted FHA loans in fiscal year 2013. These loan modifications were completed as part of FHA’s loss mitigation program. None of these lender generated gains were used to offset FHA’s insurance fund costs. As a result, FHA missed opportunities to strengthen its insurance fund. (1)

Given that the FHA had to be bailed out for the first time in its 80 year history, the findings of this audit are a bit heartbreaking, at least for a housing finance nerd like me.  $428 million would cover more than a quarter of the amount that Treasury had to advance to the FHA, no small potatoes.

The OIG found that the FHA “may have missed opportunities to strengthen its insurance fund. Lenders could be required to offset gains they obtained from the sale of securities for incentive fees and claims for modified loans that redefault.” (5)

The Auditee Comments and the OIG’s Evaluation of Auditee Comments make it clear that the extent of the gains had by lenders is very contested because the OIG did not “know the costs of the lenders.” (17) This seems like a pretty important missing piece of the story. Nonetheless, I hope that HUD, as the parent of both the FHA and Ginnie Mae, takes questions raised by this audit seriously to ensure that public monies are being put to their best use.

October 6, 2014 | Permalink | No Comments

October 3, 2014

Reiss on NYC Development Rules

By David Reiss

Law 360 quoted me in Looser Rules Pave Way For NYC Affordable Housing Projects (behind a paywall). It opens,

The commissioner of New York City’s Department of Housing Preservation and Development detailed Wednesday how the agency will streamline the development process for affordable housing projects, allowing developers faced with new mandatory inclusionary zoning rules to breathe easier.

Since Mayor Bill de Blasio announced his ambitious plan to create or preserve 200,000 units of affordable housing in the city over the next 10 years, developers and their attorneys have been cautiously optimistic.

Many have seen the positive side of residential projects being allowed in places where they would not have been previously, thanks to planned zoning changes. But with those zoning changes comes a mandate to build an affordable component with any new development, and the administration has been adamant that there will be few — if any — new monetary incentives.

So when HPD Commissioner Vicki Been told attendees at a Citizens Budget Commission event Wednesday that sweeping changes are coming to the way the agency does business that will cut a lot of red tape and speed up the process, many developers and their attorneys were pleased.

“It was great to hear,” said John Kelly, an affordable housing expert and partner at Nixon Peabody LLP. “I think it’s the right first step, and it’s necessary if they’re really going to carry out the plan they want to do.”

Included in that first step will be significant changes to the two elements of the development process that experts say create the biggest bottlenecks: design review and clearance.

The design and architecture review will likely be completely overhauled, Been told the attendants at Wednesday’s meeting, and the HPD will shift to the self-certification system backed up by random audits that has seen success elsewhere in city government, including at the Department of Buildings.

These changes are expected to cut down on the waiting time that many developers often suffer through as they try to get a project off the ground, adding unnecessary costs and — perhaps most importantly for Been’s purposes — dissuading some from seeking out affordable housing opportunities.

HPD staff will still have a hand in reviewing projects, but the changes — which Been said will be explained in more detail soon — are expected to be significant.

“It’s exciting to start to see specifics of the plan, we’ve all been kind of waiting for that,” said Jennifer Dickson, senior planning and development specialist at Herrick Feinstein LLP.

But she noted that the process, even with the proposed tweaks, is extremely complex. As the city attempts to make affordable housing development more attractive and expand inclusionary zoning districts, a growing number of architects and developers with little experience in this arena will be joining the fray.

“I think they will be looking to the city agencies to continue to guide them,” Dickson said.

The specific extent to which HPD officials will remain involved in the process is one of many questions that remain unanswered. Another is exactly how the agency will ensure compliance with a new self-certification process, outside of random audits.

“The risk of self-certification is: What if people don’t certify well? There’s always a balance of government regulation between reducing red tape on one hand, and assuring people live up to the appropriate standards on the other,” said David Reiss, a real estate professor at Brooklyn Law School.

October 3, 2014 | Permalink | No Comments

October 2, 2014

The Divided City — New York Edition

By David Reiss

Richard Florida and colleagues at the Martin Prosperity Institute have posted a report, The Divided City:  And the Shape of the New Metropolis. The executive summary explains that

To better understand the relationship between class and geography, this report charts the residential locations of the three major workforce classes: the knowledge-based creative class which makes up roughly a third of the U.S. workforce; the fast-growing service class of lower-skill, lower-wage occupations in food preparation, retail sales, personal services, and clerical and administrative work that makes up slightly more than 45 percent of the workforce; and the once-dominant but now dwindling blue-collar working class of factory, construction, and transportation workers who make up roughly 20 percent of the workforce.

 The study tracks their residential locations by Census tract, areas that are smaller than many neighborhoods, based on data from the 2010 American Community Survey. The study covers 12 of America’s largest metro areas and their center cities: New York, Los Angeles, Chicago, Washington, DC, Atlanta, Miami, Dallas, Houston, Philadelphia, Boston, San Francisco, and Detroit. It examines these patterns of class division in light of the classic models of urban form developed in the first half of the 20th century. These models suggest an outward-oriented model of urban growth and development with industry and commerce at the center of the city surrounded by lower-income working class housing, with more affluent groups located in less dense areas further out at the periphery. It also considers these patterns in light of more recent theories of a back-to-the-city movement and of a so-called “Great Inversion,” in which an increasingly advantaged core is surrounded by less advantaged suburbs.

 The study finds a clear and striking pattern of class division across each and every city and metro area with the affluent creative class occupying the most economically functional and desirable locations. Although the pattern is expressed differently, each city and metro area in our analysis has evident clusters of the creative class in and around the urban core. While this pattern is most pronounced in post-industrial metros like San Francisco, Boston, Washington, DC, and New York, a similar but less developed pattern can be discerned in every metro area we covered, including older industrial metros like Detroit, sprawling Sunbelt metros like Atlanta, Houston, and Dallas, and service-driven economies like Miami. In some metros, these class-based clusters embrace large spans of territory. In others, the pattern is more fractured, fragmented, or tessellated.

 The locations of the other two classes are structured and shaped by the locational prerogatives of the creative class. The service class either surrounds the creative class, being concentrated in areas of urban disadvantage, or pushed far off into the suburban fringe. There are strikingly few working class concentrations left in America’s major cities and metros. (iv)

As a New Yorker, I was particularly struck by the map of New York City on page 12. It is striking to see how few blue-collar communities are left in the City and how starkly divided the rest of the City is between the “creative” and “service” classes. This is not particularly surprising, but striking nonetheless.

October 2, 2014 | Permalink | No Comments

October 1, 2014

Big Decision in GSE Litigation

By David Reiss

Regular readers of this blog know that I have written a lot about the shareholder suits arising from the conservatorships of Fannie and Freddie. One of the main cases is being presided over by Judge Lamberth in the District Court for the District of Columbia. This case raises a range of challenges to the government’s action: violations of the Administrative Procedures Act, violations of the Housing and Economic Recovery Act of 2008 and more. Judge Lamberth has issued an opinion that dismissed all of the plaintiffs’ claims, dealing a severe (but not fatal) blow to their cause. His conclusion captures the tenor of the whole opinion:

It is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease over the defendants’ conduct is not enough to overcome the plain meaning of HERA’s text. Here, the plaintiffs’ true gripe is with the language of a statute that enabled FHFA and, consequently, Treasury, to take unprecedented steps to salvage the largest players in the mortgage finance industry before their looming collapse triggered a systemic panic. Indeed, the plaintiffs’ grievance is really with Congress itself. It was Congress, after all, that parted the legal seas so that FHFA and Treasury could effectively do whatever they thought was needed to stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system, this Court does not seek to evaluate the merits of whether the Third Amendment is sound financial — or even moral — policy. The Court does, however, find that HERA’s unambiguous statutory provisions, coupled with the unequivocal language of the plaintiffs’ original GSE stock certificates, compels the dismissal of all of the plaintiffs’ claims. (52)
Not one to typically say “I told you so” (or at least not on the blog), I will say that I had predicted that deference to the Executive during a time of national crisis was going to be hard for the plaintiffs to overcome. That being said, this is an extraordinarily complex cases both legally and factually so we can expect appeals up to the Supreme Court (and perhaps a return to the District Court), so it is premature to say that the plaintiffs’ claims are DOA just yet.

October 1, 2014 | Permalink | No Comments

September 30, 2014

Cool Mortgage Tool

By David Reiss

The Urban Institute has created a cool interactive tool to map mortgages in the United States. Enterprise describes the tool as follows: it

maps 12 years of data on more than 100 million mortgage originations throughout the U.S. by race and ethnicity, illustrating how the housing boom and bust affected borrowers of different backgrounds by metropolitan area. According to the data, not only were African-American and Hispanic communities particularly damaged by the housing bust, but they have also been the least likely to recover since the recession. The map also shows how geographically uneven the housing recovery has been. For instance, while mortgage originations have only decreased 18 percent in San Francisco and San Jose since 2005, they have fallen by 39 percent in Detroit.

The Urban Institute argues that

For a full mortgage market recovery, we need to expand the credit box again. A number of reforms can be undertaken to encourage lending to creditworthy borrowers who would have qualified before the housing boom. A return to 2005 and 2006 lending practices would be ill-fated, but the pendulum has unquestionably swung too far. Today’s tight standards have locked out many prospective borrowers from homeownership, disproportionately preventing African American and Hispanic families from building wealth and benefiting from the recovery.

There is a growing outcry to loosen credit. It is important that those calling for that loosening also support reforms that ensure that new credit is sustainable credit.  The last thing that people need is a mortgage that has a high likelihood of ending up in default. The Urban Institute acknowledges this point, but it can get lost in the political fight over the future of housing finance.

Policy folk also need to better understand how homeownership helps households build wealth, particularly given the rapid changes in the mortgage market. If households can readily access the equity in their homes through home equity loans, homeownership’s wealth-building function becomes more of a consumption spreading one.  That is, if homeowners access equity in the present in order to supplement current income, they will not be building wealth over the long term.

The robust Consumer Financial Protection Bureau should protect consumers from predatory attempts to get them to refinance, but people may not protect their future selves from their current desires. This may just be the way it goes, but we should not make claims about wealth building until we know more about how homeownership in the 21st century actually promotes it.

September 30, 2014 | Permalink | No Comments

September 29, 2014

Reiss on Green Bonds

By David Reiss

Law360 quoted me in Green Bond Bandwagon Promises Cash Returns For NYC (behind a paywall). It opens,

A New York City proposal to market billions in so-called green bonds could reduce debt costs for the city by enticing investors who have stampeded toward guilt-free returns elsewhere, but buyers must tread carefully lest their money ends up funding projects not seen as environmentally relevant.

New York City Comptroller Scott M. Stringer put forth a plan last week that would see the city’s capital spending program add municipal bonds for financing environmentally friendly projects to its plans to issue $30 billion in new debt over four years.

The proposal, which Mayor Bill de Blasio’s administration is studying, suggests moving quickly while there this still a focus on reinforcing the city after Superstorm Sandy and amid the strong demand for green bonds in the private sector as well as in California, Massachusetts and Washington, D.C. As soon as next year, the city could being to convert a large portion of its Municipal Water Finance Authority debt — some $1.5 billion per year — into green bonds and could allocate up to $200 million per year in Transitional Finance Authority and general obligation bonds to similar use.

“Green bonds should be another example of how New York City leads the nation in finding solutions that work,” Stringer said.

While experts in public debt investment largely see the proposal as a promotional bid to market New York City debt, they note that the city’s high national profile could make such a move profitable amid investor hunger to capitalize environmentally friendly projects.

“The big question is: How much demand would this create? One of the main points of the green bonds would be to increase demand,” said Brooklyn Law School professor David Reiss, an expert in real estate finance and community development. “If there really is pent-up demand, and New York City acts as an early mover, it might get a short-term benefit in the cost of borrowing.”

Stringer’s prediction that New York City could spark others to follow suit would also likely come true, Reiss said.

“If this is demonstrated to materially drive down borrowing costs, you’ll see others doing the same thing,” he said. “I’m a little skeptical, over the long term, that you’d have serious savings. But in the shorter term, you might.”

September 29, 2014 | Permalink | No Comments

September 26, 2014

Weaker Reps and Warranties on the Horizon

By David Reiss

Inside Mortgage Finance highlighted a DBRS Presale Report for J.P. Morgan Mortgage Trust, Series 2014-IV3.  This securitization contains prime jumbo ARMS, some with interest only features. So, these are not plain vanilla mortgages.

The report raises some concerns about loosening standards in the residential mortgage-backed securities market, particularly relating to standards for the representations and warranties that securitizers make to investors in the securities:

Relatively Weak Representations and Warranties Framework. Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers, as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting as compared with the traditional lifetime representations and warranties standard in previous DBRS-rated securitizations. (4)

 DBRS noted, however, that there were various mitigating factors.  They included:
Representations and warranties for fraud involving multiple parties that collaborated in committing fraud with respect to multiple mortgage loans will not be allowed to sunset.

Underwriting and fraud (other than the above-described fraud) representations and warranties are only allowed to sunset if certain performance tests are satisfied. . . .

Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.

Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent, any loan that has incurred a cumulative loss or any loan for which the servicers have stopped advancing funds.

Pentalpha Surveillance LLC (Pentalpha Surveillance) acts as breach reviewer (Reviewer) required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes. . . .

Notwithstanding the above,DBRS reduced the origination scores, assigned additional penalties and adjusted certain loan attributes based on third-party due diligence results in its analysis which resulted in higher loss expectations. (4-5)
All in all, this does not sound so terrible. But it is worth noting that the tight restrictions in the jumbo RMBS market appears to be loosening up. As the market cycles from fear to greed, as it always does, it is worth keeping track of each step that it takes toward greed. We can always hope to identify early on when it has taken one step too many.

September 26, 2014 | Permalink | No Comments