Editor: David Reiss
Brooklyn Law School

November 12, 2015

RMBS 3.0 and the Public Good

By David Reiss

The Car Spy

The Structured Finance Industry Group has issued RMBS 3.0: A Comprehensive Set of Proposed Industry Standards to Promote Growth in the Private Label Securities Market. RMBS 3.0 is SFIG’s initiative to reinvigorate the “private label” residential mortgage-backed securities (“RMBS”) market:

In order to improve the RMBS market as the industry moves beyond the legacy of the housing crisis, members must tackle the difficult but critical task of creating standardized representations, warranties and repurchase enforcement mechanisms, and address other integral parts of the RMBS issuance process.

Post-crisis, a very small “RMBS 2.0” market has emerged. A review of RMBS 2.0 practices indicates that post-crisis transactions have utilized varying approaches as investors and issuers continue to explore how to best design the structural elements of an RMBS transaction. In a number of cases, divergence among the various approaches has significantly influenced rating agency decisions and limited investor participation. Most industry participants seem to believe that, without a targeted effort at establishing generally accepted best practices, the RMBS market will continue to reflect disparate standards. (1)

In particular,

By identifying, analyzing, explaining and creating solutions for the legal, operational and risk-related issues that concern post-crisis RMBS industry participants, and presenting the work in a centralized, user-friendly manner, RMBS 3.0 seeks to:

1. Create standardization where possible, in a manner that reflects widely agreed upon best practices and procedures.

2. Clarify differences in alternative standards in a centralized and easily comprehendible manner to improve transparency across RMBS transactions.

3. Develop new solutions to the challenges that impede the emergence of a sustainable, scalable and fluid post-crisis RMBS market.

4. Draft or endorse model contractual provisions, or alternative “benchmark” structural approaches, where appropriate to reflect the foregoing.

While SFIG cannot create legally enforceable standards, we strongly believe that the adoption of a set of common standards that are driven by industry participants will be more successful than those dictated by regulation. The project also aims for increased transparency in the practices of participating members. Accordingly, we encourage issuers to either adopt one or more of the “alternative benchmark” RMBS 3.0 standards or utilize alternative approaches in a manner that increases transparency and promotes a better functioning marketplace. (1-2)

Given the rotten state of the private label market, this is an important attempt at self-regulation by this trade group. The push for transparency is, of course, important for investors. They must have confidence in what they are buying if the RMBS market is to grow.

But these decisions will also have impacts on homeowners. For instance, the scope of “materiality” in the context of a fraud representation could impact lender behavior at origination. The public does not have an opportunity to provide input on these model representations. Perhaps it should.

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Thursday’s Advocacy & Think Tank Round-Up

By Serenna McCloud

  • The Center on Budget and Policy Priorities has released a report Realizing the Housing Voucher Program’s Potential to Enable Families to Move to Better Neighborhoods in which it recommends key changes which would lead to long term upward mobility for families using housing vouchers – chief among their goals is encouraging recipients relocation to lower poverty neighborhoods.
  • Corelogic’s September 2015 National Foreclosure Report in which it finds the number of foreclosures down 1.3% since August, and foreclosure inventory is down 23.4% since September 2014.
  • The Mercatus Center at George Mason University’s How Land Use Regulation Undermines Affordable Housing concludes that most regulation lead to higher costs (over free market prices) which disproportionately accrues to lower income citizens.
  • Seeking Alpha blogger proposes that rather than a QE4 the Fed should arrange Student Loan Property Bond to restore growth.  This is how it would work: “The Fed would convert that loan into a Property Bond that pays off the $29,000 loan and advances an additional $29,000 to the student for the home deposit in return for taking a 10% stake in the acquired property. There would be no dividend attached to the Property Bond – the Fed’s return would come from the home price appreciation… The main owner of the property could later choose when the Fed realizes [sic] its return – it could be at the sale of the first home or rolled over onto subsequent purchases until, ultimately, the death of the main owner.”

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November 11, 2015

Property Tax Exemptions in Wonderland

By David Reiss



NYU’s Furman Center has released a policy brief, The Latest Legislative Reform of the 421-a Tax Exemption: A Look at Possible Outcomes. This brief is part of a series on affordable housing strategies for a high-cost city. It opens,

Since the early 1970s, New York City has provided a state-authorized, partial property tax exemption for the construction of new residential buildings. In the 1980s, the New York City Council amended the program to require that participating residential buildings in certain portions of Manhattan also provide affordable housing. Most recently, New York State extended the existing program through the end of 2015 and created a new 421-a framework for 2016 onward. However, for the program to continue beyond December, the legislation requires that representatives of residential real estate developers and construction labor unions reach a memorandum of understanding regarding wages of construction workers building 421-a program developments that contain more than 15 units.

This brief explores the possible impacts of the new 421-a legislation on residential development across a range of different neighborhoods in New York City, including neighborhoods where rents and sale prices are far lower than in the Manhattan Core and where the tax exemption or other subsidy may be necessary to spur new residential construction under current market conditions. We assess what could happen to new market rate and affordable housing production if the 421-a program were allowed to expire or if it were to continue past 2015 in the form contemplated by recently passed legislation. Our analysis shows that changes to the 421-a program could significantly affect the development of both market rate and affordable housing in the city (1, footnote omitted)

The 421-a program operates against the backdrop of a crazy quilt real property tax regime where similar buildings are taxed at wildly different rates because of various historical oddities and thinly-sliced legal distinctions. Like the Queen of Hearts, the rationale given by the Department of Finance for this unequal treatment amounts to no more than — And the reason is…because I say so, that’s why!

The brief concludes,

Our financial analysis of the possible outcomes from the 421-a legislation offers some insights into its potential impact on new construction. First, if the 421-a benefit expires in 2016, residential developers would lower the amount they would be willing to pay for land in many parts of the city. The result could be a pause in new residential developments in areas outside of the Manhattan Core as both buyers and sellers of land adjust to the new market.

*     *     *

Second, if the newly revised 421-a program with its higher affordability requirements and longer exemption period goes into effect in 2016 without any increase in construction costs, the city is likely to have more affordable rental units developed in many parts of the city compared to what the existing 421-a program would have created. Condominium development without the 421-a program may still continue to dominate in certain portions of Manhattan, though the program appears to make rentals more attractive. (12)

The first outcome — lower land prices if 421-a expires — is not that bad for anyone, except current landowners. And it is hard to feel bad for them, given that they should not have expected that 421-a would remain in effect forever (and not to mention the rapid increases in NYC land prices). The second outcome — the new 421-a framework — sounds like better public policy than the existing program.

But one wonders — what would it take for NYC to develop a rational real property tax regime to replace our notoriously inequitable one, one that treats like properties so differently from each other. Can we escape from Wonderland?

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Wednesday’s Academic Roundup

By Shea Cunningham

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November 10, 2015

Home Buyers & Home Sellers

By David Reiss


The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that

Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)

This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.

I was particularly intrigued by one finding about sellers,

Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)

This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.

The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.


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Tuesday’s Regulatory & Legislative Round-Up

By Serenna McCloud

  • The Federal Housing Finance Agency has released for public comment its proposed information collection National Survey of Existing Mortgage Borrowers which would survey first time mortgage borrowers purchasing single family homes. The survey will collect information on the mortgaged property and the borrowers financial knowledge and resources, among other things.
  • The Department of Housing and Urban Development (HUD) and the Department of Justice (DOJ) have released a funding notice Pay for Success Supportive Housing Demonstration is a grant opportunity offering up to $1.3 million in awards to create supportive housing for formerly incarcerated individuals.  Pay for success programs are contracts between the service provider and the government in which agreed on outcomes are compensated with success payments when results are achieved.
  • Portland, Oregon has declared a state of emergency with regard to the housing situation.  The city has plans to spend $67 million in tax dollars to develop affordable housing.

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November 9, 2015

CFPB Mortgage Highlights Fall ’15

By David Reiss

Mike Licht

The Consumer Financial Protection Bureau released its Fall 2015 Supervisory Highlights. In the context of mortgage origination, the CFPB found that

supervised entities, in general, effectively implemented and demonstrated compliance with the rule changes, there were instances of non-compliance with certain [rules] . . .. There were also findings of violations of disclosure requirements pursuant to the Real Estate Settlement Procedures Act (RESPA), implemented by Regulation X; the Truth in Lending Act (TILA), implemented by Regulation Z; and consumer financial privacy rules, implemented by Regulation P. (9, footnotes and sources omitted).

Specifically, it found that one or more entities failed to

  • “fully comply with the requirement that charges at settlement not exceed amounts on the good faith estimate by more than specified tolerances.” (10)
  • comply with the regulations governing HUD-1 settlement statements because of fees on the HUD-1 did match those on invoices; improper calculations on the HUD-1; and fees charged for services that were not provided, among other things.
  • provide required disclosures.
  • reimburse borrowers for understated APRs and finance charges, as required by Regulation Z.

In the context of mortgage servicing, the CFPB found that while it

continues to be concerned about the range of legal violations identified at various mortgage servicers, it also recognizes efforts made by certain servicers to develop an adequate compliance position through increased resources devoted to compliance. . . . Supervision continues to see that the inadequacies of outdated or deficient systems pose considerable compliance risk for mortgage servicers, and that improvements and investments in these systems can be essential to achieving an adequate compliance position. (15)

This is all well and good, but as I have noted before, it is hard to estimate how much of a problem exists from such a report — one or more entities did this, we are concerned about a range of legal violations of that . . .. I understand that the CFPB’s primary audience for this report are CFPB-supervised entities concerned with the CFPB’s regulatory focus, but this approach barely rises to the level of anecdote for the rest of us.

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