January 2, 2015

Reiss on Real Estate Cases To Watch In 2015

By David Reiss

Law360 quoted me in Real Estate Cases To Watch In 2015 (behind a paywall). It reads, in part,

As the real estate deals market has heated up, so have litigation dockets. And several cases with national or regional importance for developers and lenders on foreclosure practices, land use rights and housing finance reform are primed to see major developments in 2015, experts say.

A number of real estate cases wending their way through the court system – from state appeals courts to the U.S. Supreme Court – could affect how apartment owners, developers and lenders do business. And with the real estate market heating up, experts are also expecting a new wave of litigation to pop up in connection with an increasing pipeline of public-private partnership projects.

The cases are as varied as a high court suit that could throw open an avenue of Fair Housing Act litigation and a New Jersey matter that could give developers leverage to push forward on blocked projects. Here are a few cases and trends to watch in 2015:

*     *    *

Hedge fund Fairholme Capital Management LLC’s challenge to the government’s directing all the profits from Fannie Mae and Freddie Mac toward the U.S. Department of the Treasury has been closely watched for more than a year, and it is expected to come to a head in 2015.

The company alleges the government acted unconstitutionally when it altered its bailout deal for the government-sponsored enterprises to keep the companies’ profits for itself.

“If the plaintiffs win, it could have a dramatic impact on how housing finance reform plays out,” said David Reiss, a professor at Brooklyn Law School. “And even if they don’t win, the case can have a negative impact on housing finance reform if it casts a cloud over the whole project.”

Shareholders lost a related case in the D.C. district court, “but if they win the Fairholme case, things will get complicated,” Reiss said.

The case is Fairholme Funds Inc. v. U.S., case number 13-cv-00465, in the U.S. Court of Federal Claims.

January 2, 2015 | Permalink | No Comments

January 1, 2015

New Year’s Morning

By David Reiss

New Year’s Morning
Helen Hunt Jackson

Only a night from old to new!
Only a night, and so much wrought!
The Old Year’s heart all weary grew,
But said: “The New Year rest has brought.”
The Old Year’s hopes its heart laid down,
As in a grave; but trusting, said:
“The blossoms of the New Year’s crown
Bloom from the ashes of the dead.”
The Old Year’s heart was full of greed;
With selfishness it longed and ached,
And cried: “I have not half I need.
My thirst is bitter and unslaked.
But to the New Year’s generous hand
All gifts in plenty shall return;
True love it shall understand;
By all my failures it shall learn.
I have been reckless; it shall be
Quiet and calm and pure of life.
I was a slave; it shall go free,
And find sweet peace where I leave strife.”

Only a night from old to new!
Never a night such changes brought.
The Old Year had its work to do;
No New Year miracles are wrought.
Always a night from old to new!
Night and the healing balm of sleep!
Each morn is New Year’s morn come true,
Morn of a festival to keep.
All nights are sacred nights to make
Confession and resolve and prayer;
All days are sacred days to wake
New gladness in the sunny air.
Only a night from old to new;
Only a sleep from night to morn.
The new is but the old come true;
Each sunrise sees a new year born.

January 1, 2015 | Permalink | No Comments

December 31, 2014

Reiss on Housing Unaffordability

By David Reiss

TheStreet.com quoted me in Homeownership Unaffordable For Most Americans in Major Cities. It reads in part,

Homeownership remains unaffordable for most Americans who are living in major cities.

A median-income household can only afford a median-priced home in 10 of the 25 largest U.S. metropolitan areas, which is actually an improvement from 2013, according to a report by Interest.com, the Chicago-based consumer financial information website.

The most affordable metro areas area Atlanta, Minneapolis and St. Louis while San Francisco is the least affordable since the median income in the city is 46% less than what is required to buy a median-priced home in the area. Median-income households in San Diego, New York and Los Angeles don’t fare much better.

*     *     *

Many potential homeowners should evaluate what kind of mortgage they really need, said David Reiss, a law professor at Brooklyn Law School. Since most homeowners only stay in their house for an average of seven years, getting a traditional 30-year mortgage may not be the solution and an adjustable rate mortgage which resets after a period of years could be more affordable.

“This advice holds particularly true for families that are thinking about having more kids, since they may move sooner than they think if they come to realize that they want more space,” he said.

December 31, 2014 | Permalink | No Comments

December 30, 2014

Reforming Fannie & Freddie’s Multifamily Business

By David Reiss

Mark Willis & Andrew Neidhardt’s article, Reforming the National Housing Finance System: What’s at Risk for the Multifamily Rental Market if Fannie Mae and Freddie Mac Go Away?, was recently published in a special issue of the NYU Journal of Law & Business. Most of the ink spilled about the reform of Fannie and Freddie addresses their single-family lines of business. The single-family business is much bigger, but the multifamily business is also an important part of what they do.

The author’s conclude that

Reform of the nation’s housing finance system needs to be careful not to disrupt unnecessarily the existing multifamily housing market. The near collapse of Fannie and Freddie’s single-family business over five years ago resulted in conservatorship and has spawned calls for their termination. While a general consensus has since emerged that Fannie and Freddie should be phased out over time, no consensus exists as to which, if any, of their functions need to be replaced in order to preserve the affordability and availability of housing in general, and multifamily rentals in particular.

On the multifamily side, Fannie and Freddie have built specialized units using financing models that involve private sector risk-sharing (i.e., DUS lender capital at risk or investors holding subordinate tranches of K-series securities) and that have resulted in low default rates and limited credit losses. These units have benefited from an implicit government guarantee of their corporate debt, which has expanded their access to capital and lowered its cost. As a result of the implicit guarantee, Fannie and Freddie have been able to: 1) offer longer term mortgages than generally available from banks, 2) provide countercyclical support to the rental market by funding new mortgages throughout the recent housing and economic downturn, and 3) ensure that the vast majority of the mortgages they fund offer rents affordable to households earning less than even 80% of area median income.

The potential for moral hazard can be reduced without disrupting the multifamily housing market simply by separating out and nationalizing the government guarantee It would then be possible to: 1) spin off the multifamily businesses of Fannie and Freddie into self-contained entities and 2) create an explicit government guarantee, offered by a government entity, and paid for through premiums on the insured MBS. The first step could happen now with FHFA authorization. These new subsidiaries could also begin to pay their respective holding companies for providing the guarantee on their MBS. The second step requires Congressional legislation. Once the public guarantor is up and running, the guarantee would be purchased from it and these subsidiaries could then be sold to private investors. As for other reforms that would explicitly restrict market access to the government guarantee, the best approach would be to first test the private sector’s appetite for risk on higher-end deals. (539-40)

This article has a lot to offer in terms of analyzing how Fannie and Freddie’s multifamily business is distinct from their single-family business. But I do not think that it fully makes the case that the multifamily sector suffers from some sort of market failure that requires so much government intervention as it advocates. I suspect that private capital could be put into a first loss position for much more of the lending in this sector. The government could continue to support the low- and moderate-income rental market without being on the hook for the rest of the multifamily market.

December 30, 2014 | Permalink | No Comments

December 29, 2014

GSE Shareholder Litigation Issue

By David Reiss

The NYU Journal of Law & Business has posted a special issue devoted to the GSE shareholder litigation. Here are the links for the the individual articles:

The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards
Richard A. Epstein
The Fannie and Freddie Bailouts Through the Corporate Lens
Adam B. Badawi & Anthony J. Casey
An Overview of the Fannie and Freddie Conservatorship Litigation
Davis Reiss
Back to the Future: Returning to Private-Sector Residential Mortgage Finance
Lawrence J. White
Reforming the National Housing Finance System: What’s at Risk for the Multifamily Rental Market if Fannie Mae and Freddie Mac Go Away?
Mark Willis & Andrew Neidhardt

I have blogged about drafts of some of the articles here (Epstein), here (Badawi and Casey) and here (my contribution) and I may very well blog about the rest of them over the next few weeks. Given the nature of legal scholarship, these articles were written well before many of this year’s developments in the GSE shareholder litigations (such as Judge Lamberth’s ruling in the District Court for the District of Columbia case).  Nonetheless, these articles have a lot to offer in terms of understanding the broader issues at stake in the ongoing litigation (the first three articles) and in terms of reform efforts going forward (the last two articles).

December 29, 2014 | Permalink | No Comments

December 26, 2014

SEC Update on Rating Agency Industry

By David Reiss

The staff of the U.S. Securities and Exchange Commission has issued its Annual Report on Nationally Recognized Statistical Rating Organizations. The report documents some significant problems with the rating agency industry as it is currently structured. The report highlights competition, transparency and conflicts of interest as three important areas of concern.

Competition. There are some of the interesting insights to be culled from the report. It notes that “some of the smaller NRSROs [Nationally Recognized Statistical Rating Organizations] had built significant market share in the asset-backed securities rating category.” (16) That being said, the report also finds that despite “the notable progress made by smaller NRSROs in gaining market share in some of the ratings classes . . . , economic and regulatory barriers to entry continue to exist in the credit ratings industry, making it difficult for the smaller NRSROs to compete with the larger NRSROs.” (21)

Transparency. The report also notes that “there is a trend of NRSROs issuing unsolicited commentaries on solicited ratings issued by other NRSROs, which has increased the level of transparency within the credit ratings industry. The commentaries highlight differences in opinions and ratings criteria among rating agencies regarding certain structured finance transactions, concerning matters such as the sufficiency of the credit enhancement for the transactions. Such commentaries can serve to enhance investors’ understanding of the ratings criteria and differences in ratings approaches used by the different NRSROs.” (23) The report acknowledges that this is no cure-all for what ails the rating industry, it is a positive development.

Conflicts of Interest.Conflicts of interest have been central to the problems in the ratings industry, and were one of the factors that led to the subprime bubble and then bust of the 2000s.  The report notes that the “potential for conflicts of interest involving an NRSRO may continue to be particularly acute in structured finance products, where issuers are created and operated by a relatively concentrated group of sponsors, underwriters and managers, and rating fees are particularly lucrative.” (25) There is no easy solution to this problem and it is important to carefully study it on an ongoing basis.

The staff report is valuable because it offers an annual overview of structural changes in the ratings industry. This year’s report continues to highlight that the structure of the industry is far from ideal. As the business cycle heats up, it is important to keep an eye on this critical component of the financial system to ensure that rating agencies are not being driven by short term profits for themselves at the expense of long-term systemic stability for the rest of us.

December 26, 2014 | Permalink | No Comments

December 25, 2014

The True Christmas

By David Reiss

The True Christmas, Henry Vaughan (1678)

So stick up ivy and the bays,
And then restore the heathen ways.
Green will remind you of the spring,
Though this great day denies the thing.
And mortifies the earth and all
But your wild revels, and loose hall.
Could you wear flowers, and roses strow
Blushing upon your breasts’ warm snow,
That very dress your lightness will
Rebuke, and wither at the ill.
The brightness of this day we owe
Not unto music, masque, nor show:
Nor gallant furniture, nor plate;
But to the manger’s mean estate.
His life while here, as well as birth,
Was but a check to pomp and mirth;
And all man’s greatness you may see
Condemned by His humility.
Then leave your open house and noise,
To welcome Him with holy joys,
And the poor shepherd’s watchfulness:
Whom light and hymns from heaven did bless.
What you abound with, cast abroad
To those that want, and ease your load.
Who empties thus, will bring more in;
But riot is both loss and sin.
Dress finely what comes not in sight,
And then you keep your Christmas right.

December 25, 2014 | Permalink | No Comments