Editor: David Reiss
Brooklyn Law School

September 15, 2015

Gentrification and Displacement

By David Reiss

Joe Wolf

Miriam Zuk et al. have posted a Federal Reserve Bank of San Francisco Working Paper, Gentrification, Displacement and The Role of Public Investment: A Literature Review. The paper opens,

The United States’ metropolitan areas’ ever-changing economies, demographics, and morphologies have fostered opportunity for some and hardship for others. These differential experiences “land” in place, and specifically in neighborhoods. Generally, three dynamic processes can be identified as important determinants of neighborhood change: movement of people, public policies and investments, and flows of private capital. These influences are by no means mutually exclusive – in fact they are very much mutually dependent – and they each are mediated by conceptions of race, class, place, and scale. How scholars approach the study of neighborhood change and the relative emphasis that they place on these three influences shapes the questions asked and attendant interventions proposed.

These catalysts result in a range of transformations – physical, demographic, political, economic – along upward, downward, or flat trajectories. In urban studies and policy, scholars have devoted volumes to analyzing neighborhood decline and subsequent revitalization at the hands of government, market, and individual interventions. One particular category of neighborhood change is gentrification, definitions and impacts of which have been debated for at least fifty years. Central to these debates is confronting and documenting the differential impacts on incumbent and new residents, and questions of who bears the burden and who reaps the benefits of changes. Few studies have addressed the role of public investment, and more specifically transit investment, in gentrification. Moreover, little has been written about how transit investment may spur neighborhood disinvestment and decline. Yet, at a time when so many U.S. regions are considering how best to accommodate future growth via public investment, developing a better understanding of its relationship with neighborhood change is critical to crafting more effective public policy.

This literature review will document the vast bodies of scholarship that have sought to examine these issues. First, we contextualize the concept and study of neighborhood change. Second, we delve into the literature on neighborhood decline and ascent (gentrification). The third section examines the role of public investment, specifically transit investment, on neighborhood change. Next, we examine the range of studies that have tried to define and measure one of gentrification’s most pronounced negative impacts: displacement. After describing the evolution of urban simulation models and their ability to incorporate racial and income transition, we conclude with an examination of gentrification and displacement assessment tools. (2, footnote omitted)

Because gentrification is such a contested topic both within and without the academy, this literature review is very useful. Notwithstanding the fact that the results of many of the studies mentioned are mixed, the authors were able to identify certain findings that emerge from the literature. These include,

  • Neighborhoods change slowly, but over time are becoming more segregated by income, due in part to macro-level increases in income inequality.
  • Racial segregation harms life chances and persists due to patterns of in-migration, “tipping points,” and other processes; however, racial integration is increasing, particularly in growing cities.
  • Despite severe data and analytic challenges in measuring the extent of displacement, most studies agree that gentrification at a minimum leads to exclusionary displacement and may push out some renters as well. (44-45)

As hot cities like New York and San Francisco struggle with their changing housing markets, policy makers should make decisions based on the best available research on gentrification and displacement. This literature review provides a guide.

September 15, 2015 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Round-Up

By Serenna McCloud

  • The U.S. Department of Housing and Urban Development (HUD) held a policy conference to commemorate the 50 year anniversary of the Fair Housing Act.  Among the conference materials is a report from the Government Accountability Office (GAO) which states the the Internal Revenue Service’s (IRS) oversight over compliance with the Low Income Housing Tax Credit Program (LIHTC) has been lax and proposes joint IRS/HUD oversight.  The NMTC has been used to create affordable housing through Housing finance Agencies (HFAs).  According to the GAO report the IRS has only conducted seven audits of the 56 HFA since 1986. The GAO report states, “Joint administration with HUD could better align program responsibilities with each agency’s mission and more efficiently address existing oversight challenges.”
  • The U.S. Treasury has awarded awarded $202 million dollars to 195 Community Development Financial Institutions (CDFIs) through the Community Development Financial Institutions Fund (CDFI Fund).  The CDFI Fund was established in 1994 to provide capital and access to credit in underserved communities through CDFIs. CDFIs are mission driven financial institutions which work on the local level to revitalize neighborhoods and create economic change.  The CDFI Program invests in and builds the capacity of community credit unions, banks, loan funds, and other financial institutions serving rural and urban communities.
  • The Seattle Mayor has proposed new legislation to build 6,000 new affordable housing units. The proposal has been dubbed a “grand bargain” between affordable housing advocates and real estate developers. This grand bargain will require all new development in Seattle pay for affordable housing creation.
  • Not to be outdone, the Mayor of Denver has also been mulling over a policy (mentioned in his inaugural address) which would tax new development and also raise the property taxes.  Both Seattle and Denver are reacting to a situation in which lower paid professionals including teachers, restaurant and healthcare workers are increasingly difficult to attract and recruit because they are unable to find housing they can afford.

September 15, 2015 | Permalink | No Comments

September 14, 2015

Low Down Payment or Low Interest Rate?

By David Reiss

dollars.0 quoted me in Consumers Should Not Assume a Lower Down Payment Is a Better Option. It reads, in part

First-time homeowners are often caught in a conundrum when they are faced with tantalizing offers of either lower mortgage rates or a smaller down payment.

The decision is much harder to make than it appears because of many variables such as the stability of your profession, the likelihood of buying another home within a few years and the long-term costs of higher payments.

While at first glance paying a smaller down payment sounds like the obvious choice for many Millennials and Gen X-ers who want to own a home, but are also saddled with student loans and credit card debt, the decision has other ramifications. A higher mortgage rate means paying thousands of extra dollars in interest alone over time.

A recent study conducted by the Federal Reserve Bank of New York found that when a lower down payment is required, it affects the demand on housing more as additional consumers are eager or able financially to purchase a house. Changes in the mortgage rate have a “modest” effect, wrote Andreas Fuster and Basit Zafar, both senior economists at the Federal Reserve Bank of New York’s research and statistics group. The study asked 1,000 households what would affect their willingness to buy a home if they were to move to a similar city and a comparable home.

When the households were offered either a 20% down payment compared to a 5% down payment, the number of people willing to pay for a house rose by 15% when the lower amount was an option.

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Advantages of Lower Interest Rates

While a lower down payment might be more appealing for a first time homebuyer, it can often result in paying more money just on the interest alone, said David Reiss, a law professor at Brooklyn Law School in N.Y. Lenders offer mortgage rates largely based on the credit score of the homeowner, so a cheaper interest rate may not always be available.

Let’s say the homebuyer is considering a $100,000 property that is paid for with a $90,000 interest-only mortgage with a 4% interest rate and a $10,000 down payment or with a $95,000 interest-only mortgage with a 5% interest rate and a $5,000 down payment.

The first mortgage means the consumer would pay $3,600 a year in interest. However, the second mortgage results in the consumer paying $4,750 a year in interest.

“That is not an apples-to-apples comparison, because the second mortgage interest payment reflects the higher loan to value ratio and the higher interest rate and it also does not take into account the tax treatment of interest payments,” he said.

Homeowners need to decide if paying additional money in interest is “worth it,” since a consumer would pay about $1,000 a year more in interest for the “privilege of paying the lower down payment,” Reiss said.

“I think that it is smart to figure out how to pay as low of an interest rate as possible, given the other financial constraints you face,” he said.

Many consumers believe there is not much of a difference between a 3.5% or 4% mortgage rate, but it can result in another few hundred dollars each month in mortgage payments, which can add up easily in 30 years.

Refinancing a mortgage in the current market conditions means your rate is not likely to decline much, so receiving a lower rate now will have a larger impact over the next 30 years, he said. After paying closing costs, many homeowners do not see the impact of the lower rates until the fourth year after the refinancing occurred.

“Since refinancing requires a large upfront cost of thousands of dollars, you need to live there long enough for it to make sense if you are only saving less than 1% on your mortgage rate,” he said.

September 14, 2015 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

September 14, 2015 | Permalink | No Comments

September 12, 2015

Banks Should Know Their Investment Risks

By David Reiss

Nathaniel Zumbach

The latest issue of the Federal Deposit Insurance Corporation’s Supervisory Insights (Devoted to Advancing the Practice of Bank Supervision) has an esoteric, but important article on Bank Investment in Securitizations: The New Regulatory Landscape in Brief (starting on page 13). The article opens,

The recent financial crisis provided a reminder of the risks that can be embedded in securitizations and other complex investment instruments. Many investment grade securitizations previously believed by many to be among the lowest risk investment alternatives suffered significant losses during the crisis. Prior to the crisis, the marketplace provided hints about the embedded risks in these securitizations, but many of these hints were ignored. For example, highly rated securitization tranches were yielding significantly greater returns than similarly rated non-securitization investments. Investors found highly rated, high yielding securitization structures to be “too good to pass up,” and many investors, including community banks, invested heavily in these instruments. Unfortunately, when the financial crisis hit, the credit ratings of these investments proved “too good to be true;” credit downgrades and financial losses ensued.

In the aftermath of the financial crisis, interest rates have remained at historic lows, and the allure of highly rated, high-yielding securitization structures remains. Much has been done to mitigate the problems experienced during the financial crisis with respect to securitizations. Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and regulators developed and issued regulations and other guidance designed to increase investment management standards and capital requirements.

The gist of these new requirements is simple: banks should understand the risks associated with the securities they buy and should have reasonable assurance of receiving scheduled payments of principal and interest. This article summarizes the most pertinent of these requirements and provides practical advice on how the investment decision process can be structured so the bank complies with the requirements.

The guidance and regulations applicable to bank investment activities reviewed in this article are: „

  • Office of the Comptroller of the Currency (OCC): 12 CFR, Parts 1, 5, 16, 28, 60; Alternatives to the Use of External Credit Ratings in the Regulations of the OCC;
  • OCC: Guidance on Due Diligence Requirements to determine eligibility of an investment (OCC Guidance);
  • Federal Deposit Insurance Corporation (FDIC): 12 CFR Part 362, Permissible Investments for Federal and State Savings Associations: Corporate Debt Securities;
  • FDIC: 12 CFR Part 324, Regulatory Capital Rules; Implementation of Basel III (Basel III); and  „
  • FDIC: 12 CFR Part 351, Prohibitions on certain investments (The Volcker Rule).

As financial institutions move into an investment world where relying on credit ratings from third party providers is not longer sufficient, the advice in this article is welcome. One wonders though what the consequences will be, if any, for those who do not follow it.

September 12, 2015 | Permalink | No Comments

September 11, 2015

Friday’s Government Reports Roundup

By Shea Cunningham

September 11, 2015 | Permalink | No Comments

September 10, 2015

Buying in a Boom

By David Reiss

Marcin Wichary quoted me in How Consumers Can Buy Houses in a Booming Market. The story reads, in part,

Home prices have also risen compared to last year as the number of homes sold rose in all parts of the country except for the Midwest, according to a recent report from PNC, the Pittsburgh-based financial institution. The median sale price for an existing single-family home was $288,300 in July, up from $279,700 in June.

“The housing market continues to gradually recover from the Great Recession, supporting economic growth,” Stuart Hoffman, chief economist for PNC. “Stronger demand and good affordability are supporting home sales and pushing up house prices.”

Many economists are predicting that home prices will continue to increase this year. PNC said prices will rise by 3.7% in 2015 and 2.7% in 2016, down from 6.6% in 2014.

“This year we [saw] inventory continue to grow in August and while overall demand is strong, the trend in median days on market is suggesting that the market is finding more of a balance,” said Jonathan Smoke, chief economist of, the San Jose, Calif. real estate service company. “This bodes well for would-be buyers who have been discouraged by the inability to find a home to buy this spring and summer.”

Consumers who are still eager to purchase a home still have many opportunities left to negotiate a deal within their price range. While it is tougher to buy a house in a tight market, here are some tips to give homebuyers a head start.

Looking for a house in the fall is generally a better bet. Even though there are fewer homes on the market right now, there are “definitely less buyers, so there’s less competition,” said Mark Lesses, a broker with Coldwell Banker in Lexington, Mass.

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Renters Who Wait Can Benefit

Buying a house during a tight market could prove to be an expensive endeavor. Staying out of the market might be a good option, because housing prices could level off and decline, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Sometimes it is cheaper to rent,” he said. “Don’t try to time the real estate market. Look at your needs and what you could afford, and consider if it is a good choice.”

September 10, 2015 | Permalink | No Comments