March 18, 2015

Reiss on Foreign Buyers in NYC

By David Reiss

MainStreet.com quoted me in Foreign Buyers Driving Up Rental Prices Impacts New York Residents. The story opens,

Emir Bahadir, a native of Turkey, purchased two apartments in Manhattan for the purpose of renting them out. The 24-year-old paid a total of $9 million for the apartments in the West Village and Chelsea and earns some $40,000 a month in rental income.

”Entry into the real estate market in Manhattan by the foreign buyer has become easier because of technology,” Bahadir told MainStreet.

As a result, foreign buyers are increasingly coming into the Manhattan market and buying properties worth $2 to $5 million for the benefit of rental income. That can push rental prices higher for those on Main Street.

“[Foreign buyers] are not keeping them empty but filling them with tenants,” said Tamir Shemesh, a Realtor at the Corcoran Group. “A $2 million apartment can be rented out for as much as $8,500 a month, while a $3 million apartment can go for $11,000 to $12,000 a month.”

The tenants who can afford to pay thousands a month in rent are largely foreign as well.

“The reason we invest in real estate in New York is because of the exorbitant amount of rent that people are willing to pay,” Bahadir said. “That doesn’t happen anywhere else except in the U.K., but because of complications in the Middle East, London is not so popular these days.”

The downside for Americans is that escalating prices impact the overall rental market.

“It lets landlords know what the ceiling is and may encourage them to reach for it,” said David Reiss, professor with Brooklyn Law School.

March 18, 2015 | Permalink | No Comments

Wednesday’s Academic Roundup

By Shea Cunningham

March 18, 2015 | Permalink | No Comments

March 17, 2015

CFPB Mortgage Supervision Highlights

By David Reiss

The Consumer Financial Protection Bureau issued its Supervisory Highlights for Winter 2015. The highlights include a section on Mortgage Origination and “largely focuses on Supervision’s examination findings and observations from July 2014 to December 2014.” (9)

The headings of this section give a sense of the CFPB’s work in this area:

  • Loan originators cannot receive compensation based on a term of a transaction
  • Improper use of lender credit absent changed circumstances
  • Failing to provide the Good Faith Estimate in a timely manner
  • Improperly using advertisements with triggering terms without the required additional disclosures
  • Adverse action notice deficiencies and failure to provide the notice in a timely manner
  • Deficiencies in compliance management systems

For good or for ill, these are pretty modest examination findings. They certainly don’t reveal the fire-breathing regulator that some had prophesied. I was particularly interested in the last finding:

an effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program. The board of directors and senior management should, among other things, adopt clear policy statements concerning consumer compliance, establish a compliance function to set policies and procedures, and assign resources to the compliance function commensurate with the size and complexity of the supervised entity’s practices and operations. A compliance program should include policies and procedures, training, and monitoring and corrective action processes. A compliance audit program should assist the board of directors or board committees in determining whether policies and standards adopted by the board are being implemented, and should also identify any significant gaps in board policies and standards. (13)

Compliance management systems are intended to create a culture of compliance within an organization, from top to bottom. The CFPB found that one or more financial institutions had weak compliance management systems that would allow for numerous violations of federal regulations governing mortgage lending. It is important for the CFPB to focus on these compliance issues now, before the mortgage market really froths up and carries mortgage professionals away from appropriate underwriting and servicing.

March 17, 2015 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Round-Up

By Serenna McCloud

March 17, 2015 | Permalink | No Comments

March 16, 2015

Arbitration and The Common Mortgage

By David Reiss

The Consumer Financial Protection Bureau posted its Arbitration Study. This is a report to Congress that was required by Dodd-Frank. By way of background, the study states that

Companies provide almost all consumer financial products and services subject to the terms of a written contract. Whenever a consumer obtains a consumer financial product such as a credit card, a checking account, or a payday loan, he or she typically receives the company’s standard form, written legal contract.

*     *     *

As a general rule, the parties to a dispute can agree, after the dispute arises, to submit the dispute for resolution to a forum other than a court — for example, to submit a particular dispute that has arisen to resolution by an arbitrator. (3)

Arbitration provisions typically do not directly apply to residential mortgages because Dodd-Frank “prohibited the use of ‘arbitration or any other nonjudicial procedure’ for resolving disputes arising from residential mortgage loans or extensions of credit under an open-end consumer credit plan secured by the principal dwelling of the consumer. 15 U.S.C. § 1639c.” (Arbitration Study § 5.4, n.34) But they can apply in mortgage-related contracts, such as those for title insurance, mortgage insurance and forced-place flood insurance. (§ 8.3, n.24 & Appendix S, § 8)

The Study thus holds some interest for those of us interested housing finance. The Executive Summary (§ 1.4) provides an overview of the CFPB’s research findings about arbitrations and other proceedings.

My overall impression after having reviewed the report is that consumers do not often raise claims against consumer finance companies in any forum, whether with an arbitrator or with a judge. The Study does not provide any information that would allow one to conclude what the socially optimal level of formalized disputes would be. It would be helpful for the CFPB to try to model that.

March 16, 2015 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

March 16, 2015 | Permalink | No Comments

March 13, 2015

Reiss on Toxic Debt Claims

By David Reiss

Bloomberg quoted me in Nomura First to Fight U.S. Toxic Debt Claims at Trial. The article reads in part,

Nomura Holdings Inc. will defend claims by a U.S. regulator that it sold defective mortgage-backed securities to Fannie Mae and Freddie Mac before the 2008 financial crisis, becoming the first bank to take such a case to trial.

The Federal Housing Finance Agency, suing on behalf of the two government-owned companies, claims Nomura sold them $2 billion of bonds backed by faulty mortgages. The agency seeks more than $1 billion in damages in the trial, which is set to start Monday in Manhattan federal court.

Nomura, the Tokyo-based investment bank, is choosing to fight claims that 16 other banks settled after the blow-up of toxic mortgage bonds led to the global credit crunch. FHFA has reached $17.9 billion in settlements from banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co. If Nomura prevails at trial, it may embolden other firms facing mortgage-related suits to defend themselves rather than settle.

*     *     *

For Nomura and RBS to succeed, they will have to overcome Cote’s rulings as well as the widely held perception that banks packaged toxic debt and pushed it off on unsuspecting investors, said David Reiss, a professor at Brooklyn Law School.

Reiss said Nomura may believe it can show it was more careful than other banks in structuring mortgage-backed bonds and stands a good chance of winning.

As the trial approaches, a settlement becomes less likely, Bloomberg Intelligence analysts Elliott Stein and Alison Williams said yesterday. Stein said a resolution this late in the proceedings may exceed his earlier estimate of $100 million to $300 million, particularly if Cote’s rulings continue to favor FHFA.

March 13, 2015 | Permalink | No Comments