September 11, 2014

Reiss on the $1M Parking Spot

By David Reiss

Law360 quoted me in NYC’s $1M Parking Spot Shows Appetite For Luxury (behind a paywall).It opens,

Atlas Capital Group LLC caused a buzz Wednesday with its listing of a parking space in a condominium building in SoHo for $1 million, more per square foot than the homes above it, but experts say in the context of a burgeoning luxury market such a price may just be the beginning.

That price for a 99-year license that allows the condominium resident to use the parking space — even one in its own condominium unit and tax lot — may sound wild, but experts say much of the attention this property has gotten may be a bit overblown, especially considering the level to which many are willing to go for comfort and convenience in New York City.

“It’s not really about $1 million for a parking space,” said Bruce Bronster of Windels Marx Lane & Mittendorf LLP. “If you were just going to condo a parking space, you couldn’t get $1 million for it. It has to do with having an amenity on a very expensive apartment.”

There aren’t many places to park in SoHo, making a convenient parking spot a hot commodity, but experts say the bigger message is that New York City’s luxury residential market is hotter than ever, creating new opportunities for developers to differentiate themselves with the right amenities.

The development is at 42 Crosby Street, near Broome Street, where Atlas Capital Group is turning what used to be a parking lot itself into a condominium building with three-bedroom units ranging from $8.7 million to $10.45 million, according to information gathered by The New York Times.

The eye-popping element comes when one looks at the price per square foot. Some of the parking spots — there are actually 10 being built under the condominiums — are expected to be up to 200 square feet, but they will reportedly all cost between $5,000 and $6,666 per square foot. The condominiums, on the other hand, are only going for about $3,150 per square foot.

But experts say this isn’t too surprising, considering the demand for luxury housing and amenities that has skyrocketed in recent years.

Prices for luxury residential properties have risen to pre-recession levels and surpassed them in some cases, with a few record-breaking penthouse deals passing the $90 million mark thanks to flush foreign investors.

More than anything, experts say, the $1 million parking spots are a way for Atlas Capital Group to distinguish 42 Crosby from other apartment buildings and draw in those investors willing to pay top dollar.

“The million-dollar spots do highlight how developers have seriously monetized amenity spaces,” said David Reiss, a real estate professor at Brooklyn Law School. “In all likelihood, the prices for amenities like parking spaces will follow the same trend line as those for the apartments to which they are attached.”

And it’s not just parking spaces; Reiss said he has seen similar setups with amenities such as storage facilities and rooftop cabanas commanding top dollar.

September 11, 2014 | Permalink | No Comments

September 10, 2014

Is NYC Rent Too Damn High?!?

By David Reiss

Husock and Armlovich of the Manhattan Institute for Policy Research have posted an Issue Brief, New York’s Rent Burdened Households: Recalculating the Total, Finding a Better Solution. The brief makes some important points, but they are almost lost because of its histrionic tone.

First, the good points. The authors write this brief in reaction to the de Blasio administration’s plan to build or preserve 200,000 units of affordable housing. They believe, however, that the administration has exaggerated the need. They write: “the housing needs of low-income New Yorkers must be acknowledged and addressed. Still, they should not be exaggerated by numbers that fail to reflect the income and in-kind assistance that benefit poor households.” (6)

They argue that the administration’s claim that more than 600,000 households are “severely rent-burdened” is flawed, resulting in an overestimate of the need for affordable housing. While I am not in a position to evaluate the underlying work, they make a reasonable case that the administration did not properly account for the impact of Section 8 housing subsidies and a variety of other programs that offer financial assistance to low-income households in arriving at their number.

They also argue that the administration’s proposed solution, permanent affordability, is flawed because some households that may be income-eligible at the commencement of their tenure in an affordable unit may end up with a significantly higher income down the line. Indeed, this has been a long-time issue with the Mitchell-Lama program.

These are some serious issues for the de Blasio administration to chew over. Clearly, we should be working from the best data we can about the extent to which households are severely burdened by housing costs. (Indeed, another recent study also indicates that the administration is working from too high of an number.) And just as clearly, the solution chosen by the administration should work as effectively as possible to reduce the rent burden for low- and moderate-income households.

But the brief’s tone, unfortunately, masks these insights. First, the brief opens by questioning the basis for the mayor’s affordable housing plan — that many New Yorker’s are severely rent burdened. But the authors acknowledge that at least 300,000 households are severely burdened, even after they make their adjustments to the administration’s numbers. That hardly undercuts the policy rationale for the Mayor’s affordable housing initiative.

Moreover, some of the adjustments made by the authors are themselves suspect. For instance, the authors exclude households “that report severe rent burdens while paying more than the 90th percentile citywide of per-capita” out-of-pocket rent. (5) They state that “Logic dictates that such households have significant existing savings or assets themselves, or they receive assistance from family or other sources.” (5) That seems like an extraordinary “logical” leap to me. While it may describe some households at the 90th percentile, I would think that it is also logical that it includes some people who barely have enough money to buy food.

As to the solution of permanent affordability, the authors write,

a household member could win the lottery, or sign a multimillion-dollar major league baseball contract, and an affordable unit’s rent would remain unchanged. Affordable units would be “permanently” affordable, creating what economists term a “lock-in effect,” limiting the likelihood that such units will be vacated. This is problematic for a city housing policy that seeks to decrease the overall number of severely rent-burdened households. (6)

This is just silly. Very few people have such windfalls. And very few of those who do have such windfalls live in small apartments afterwards. The more common problem is that young, educated people get affordable units when their earnings are low and then become middle-class or upper-middle class over the years. This is a serious program design issue and it means that the administration should think through what permanent affordability should mean over the lifetime of a typical household.

As I noted, this brief raises some serious issues amongst all of its heated rhetoric. One hopes that the administration can get through the hot air to the parts that are informed by cool reason.

 

September 10, 2014 | Permalink | No Comments

September 9, 2014

Reiss on FIRREA Penalties

By David Reiss

Bloomberg quoted me in S&P Faces Squeeze After $1.3 Billion Countrywide Fine. It opens,

Standard & Poor’s (MHFI)’ chances of settling the government’s lawsuit over mortgage-bond ratings for less than $1 billion may have slipped away after Bank of America Corp.’s Countrywide unit was socked with a $1.3 billion fine.

The Countrywide ruling was the first to lay out what penalties financial institutions could face under a 1989 bank-fraud law the Obama administration is using against alleged culprits of the subprime mortgage crisis. It has boosted the government’s hand against McGraw Hill Financial Inc.’s S&P, said Peter Henning, a law professor at Wayne State University.

“If the starting negotiation point for the Justice Department to settle was $1 billion before, that number has just gone up,” Henning said in a phone interview.

The U.S. sued S&P and Countrywide under the Financial Institutions Reform, Recovery and Enforcement Act, a law passed by Congress in the wake of the savings and loan crisis of the 1980s. The administration, which seeks as much as $5 billion from S&P, is using the law to punish alleged misconduct in the creation and sale of residential mortgage-backed securities blamed for the financial crisis two decades later.

For the Justice Department, the case against S&P goes to the heart of the financial crisis, attacking the company’s claims that its ratings — relied on by investors worldwide — were honest and neutral. S&P has countered that the case is really retribution for it downgrading the U.S. government’s own debt and it has subpoenaed officials including former Treasury Secretary Timothy Geithner in an effort to prove that.

Hearing Today

A hearing on the company’s request to force Geithner and the government to turn over records is scheduled for today in federal court in Santa Ana, California.

Countrywide was found liable by a federal jury in Manhattan for lying about the quality of the almost $3 billion in mortgages it sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) in 2007 and 2008. U.S. District Judge Jed Rakoff in Manhattan agreed with the Justice Department that the penalty should be based on how much money the mortgage lender fraudulently induced the companies to pay for the loans.

“The civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in accordance with those purposes,” the judge said in his July 30 ruling.

S&P is accused of defrauding institutions that relied on its credit ratings for residential mortgage-based securities and collateralized debt obligations that included those securities. The government claims S&P lied to investors about its ratings on trillions of dollars in securities being objective and free of conflicts of interest.

*     *     *

Appeal Probable

The judge’s analysis, using the nominal value of the transactions as a starting point to determine the penalty, was “out of whack” and will probably be appealed by Bank of America to the U.S. Court of Appeals for the Second Circuit in New York, said David Reiss, a professor at the Brooklyn Law School.

“The Second Circuit has no problem reversing Rakoff,” Reiss said in in a phone interview. “The ruling pushes the balance of power in favor of the government by expanding the definition of a civil penalty.”

While other judges aren’t obliged to follow Rakoff’s reasoning, they will pay close attention to the decision because the federal court in Manhattan is the leading business law jurisdiction in the country and the ruling was clearly explained, Reiss said.

September 9, 2014 | Permalink | No Comments

September 8, 2014

Industry City in Brooklyn

By David Reiss

Some readers of the blog may be interested in this upcoming event at Brooklyn Law School, sponsored by the Center for Urban Business Entrepreneurship (CUBE):

Presentation by Andrew Kimball

Director, Innovation Economy Initiatives, Jamestown
and CEO, Industry City

About the Presentation
Manufacturing is once again widely seen as an important and growing component of New York City’s economy. Andrew Kimball, CEO of Industry City in Sunset Park, Brooklyn, and former President and CEO of the Brooklyn Navy Yard Corporation, will discuss the strategies behind adaptively reusing and transforming these massive and long underutilized industrial complexes into creative communities that are now at the forefront of manufacturing’s rebirth in New York City and the evolution of the innovation economy.

The event is on Wednesday, September 17, 2014 from 6:30 — 8:30 pm

Location
Brooklyn Law School
Feil Hall
Forchelli Conference Center, 22nd Floor
205 State Street
Brooklyn, NY

RSVP online: www.brooklaw.edu/cubepresentation
before Monday, September 15, 2014

Directions
www.brooklaw.edu/directions

September 8, 2014 | Permalink | No Comments

September 5, 2014

Planning and Protesting at the Brooklyn Book Festival

By David Reiss

I will be moderating a panel at the 2014 Brooklyn Book Festival on Sunday, September 21st at 10am in the Brooklyn Law School Moot Courtroom.  The panel is

Planning and Protesting: Cities Evolve!
With the city constantly evolving, each major project has its supporters and protesters. Authors Gregory Smithsimon and Benjamin Shepard (The Beach Beneath The Streets – Contesting New York City’s Public Spaces) and Daniel Campo (The Accidental Playground: Brooklyn Waterfront Narratives of the Undesigned and Unplanned) and Peter Linebaugh (Stop, Thief! The Commons, Enclosures, and Resistance) discuss how public space is shaped through policy, perspective and protests, how to agree to disagree, and the dynamics of shaping a city’s growth and change. Moderator David Reiss, Professor, Brooklyn Law School.

September 5, 2014 | Permalink | No Comments

September 4, 2014

Hope for Housing Finance Reform?

By David Reiss

The former Acting Director of the Federal Housing Finance Agency, Edward Demarco, has issued a short policy brief from his new perch at the Milken Institute’s Center for Financial Markets.While there is nothing that is really new in this policy brief, Twelve Things You Need to Know About the Housing Market, it does set forth a lot of commonsensical views about the housing markets. I do take issue, however, with his optimism about the structural improvements in the housing finance sector. He writes,

The crisis showed that numerous structural improvements were needed in housing—and such improvements have been under way for several years. Poor data, misuse of specialty mortgage products, lagging technologies, weak servicing standards, and an inadequate securitization infrastructure became evident during the financial crisis. A multi-year effort to fix and rebuild this infrastructure has been quietly under way, with notable improvements already in place.The mortgage industry has been working since 2010 to overhaul mortgage data standards and the supporting technology. New data standards have emerged and are in use, with more on the way. These standards should improve risk management while lowering origination costs and barriers to entry.

*     *     *

Structural improvements will take several more years. A new securitization infrastructure has been in development for more than two years. This ongoing work should be a cornerstone for the future secondary mortgage market. Other structural improvements will include updated quality assurance (rep and warrant) systems for the Federal Housing Administration, Fannie and Freddie, revamped private mortgage insurance eligibility standards, and completion and implementation of remaining Dodd-Frank rulemakings. (2)

DeMarco himself had led the charge to develop a common securitization platform while at the FHFA, so I take care in critiquing his views about structural change. Nonetheless, I am worried that he is striking too optimistic of a note about the state of Fannie and Freddie. They have been in a state of limbo for far too long (which DeMarco acknowledges). All sorts of operational risks may be cropping up in the entities as employees sit around (or walk out the door) waiting for Congress to act. I think commentators should be striking a far more ominous tone about our housing finance system — something this big should not be treated as an afterthought by our elected officials.

September 4, 2014 | Permalink | No Comments

September 3, 2014

Top Ten Issues for Housing Finance Reform

By David Reiss

Laurie Goodman of the Urban Institute has posted A Realistic Assessment of Housing Finance Reform. This paper is quite helpful, given the incredible complexity of the topic. The paper includes a lot of background, but I assume that readers of this blog are familiar with that.  Rather, let me share her Top Ten Design Issues:

  1. What form will the private capital that absorbs the first loss take: A single guarantor (a utility), multiple guarantors, or multiple guarantors along with capital markets execution? How much capital will be required?
  2. Who will play what role in the system? Will the same entity be permitted to be an originator, aggregator, and guarantor?
  3. How will the system ensure that historically underserved borrowers and communities are well served? To what extent will the pricing be cross subsidized?
  4. Who will have access to the new government-backed system (loan limits)? How big should the credit box be, and how does that box relate to FHA?
  5. Will mortgage insurance be separate from the guarantor function? (It is separate under most proposals, but in reality both sets of institutions are guaranteeing credit risk. The separation is a relic of the present system, in which, by charter, the GSEs can’t take the first loss on any mortgage above 80 LTV. However, if you allow the mortgage insurers and the guarantors to be the same entity, capital requirements must be higher to adequately protect the government and, ultimately, the taxpayers.)
  6. How will small lenders access the system? (All proposals attempt to ensure access, some through an aggregator dedicated to smaller lenders—a role that the Home Loan Banks can play.)
  7. What countercyclical features should be included? If the insurance costs provided by the guarantors are “too high” should the regulatory authority be able to adjust capital levels down to bring down mortgage rates? Should the regulatory authority be able to step in as an insurance provider?
  8. Will multifamily finance be included? How will that system be designed? Will it be separate from the single-family business? (The multifamily features embedded in Johnson-Crapo had widespread bipartisan support, but the level of support for a stand-alone multifamily legislation is unclear.)
  9. The regulatory structure for any new system is inevitably complex. Who charters new guarantors? What are the approval standards? Who does the stress tests? How does the new regulator interact with existing regulators? What enforcement authority will it have concerning equal access goals? What is the extent of data collection and publication?
  10. What does the transition look like? How do we move from a duopoly to more guarantors? Will Fannie and Freddie turn back to private entities and operate as guarantors alongside the new entrants? How will the new entities be seeded? What is the “right” number of guarantors, and how do we achieve that? How quickly does the catastrophic insurance fund build? (16-17)

None of this is new, but it is nice to see it all in one place. These design issues need to thought about in the context of the politics of housing reform as well — what system is likely to maintain its long-term financial health and stay true to its mission, given the political realities of Washington, D.C.?

Speaking of politics, her prognosis for reform in the near term is not too hopeful:

The current state of the GSEs can best be summed up in a single word: limbo. Despite the fact that Fannie Mae and Freddie Mac were placed in conservatorship in 2008, with the clear intent that they not emerge, there is little progress on a new system, with a large role for private capital, to take their place. Legislators have realized it is easy to agree on a set of principles for a new system but much harder to agree on the system’s design. It is unclear whether any legislation will emerge from Congress before the 2016 election; there is a good chance there will be none. (26)

She does allow that the FHFA can administratively move housing finance reform forward to some extent on its own, but she rightly notes that reform is really the responsibility of Congress. Like Goodman, I am not too hopeful that Congress will act in the near term. But it is crystal clear that there is a cost of doing nothing. In all likelihood, it will be the taxpayer will pay that cost, one way or another.

September 3, 2014 | Permalink | No Comments