REFinBlog

Editor: David Reiss
Brooklyn Law School

November 20, 2017

FHA Annual Check-up

By David Reiss

The Department of Housing and Urban Development released its Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund. The MMIF fund is the FHA’s main vehicle for insuring mortgages. As we saw last week, FHA reverse mortgage (formally known as “Home Equity Conversion Mortgage” or “HECM”) portfolio is not doing so well. FHA standard (sometimes referred to as “forward”) mortgages are doing better, although their performance is also slipping.

The MMIF declined from its 2.35 percent FY 2016 Capital Ratio to 2.09 percent. This still exceeds its statutorily-required level of 2.00 percent.  The Economic Net Worth of the MMIF was $25.6 billion while the MMIF Insurance-in-Force was approximately $1.23 trillion at the end of FY 2017. The decline was driven by the negative Economic Net Worth of the reverse mortgage portfolio, as the capital ratio for the forward mortgage portfolio on its own was 3.33%.

The report contains a multitude of useful tables and charts about the FHA’s mortgage portfolio. The FHA has an 18 percent share of the mortgage market, which is pretty high. (Table A-2) Indeed, it is in the same range of its market share during the financial crisis years (2008-2010). The FHA remains a strong force in the first-time homebuyer market, with an 82.2 percent share. (Table B-2)

The FHA’s objectives for FY 2018 are worth reviewing:

Play a Significant Role in Disaster Recovery. In the wake of Hurricanes Irma, Harvey, and Maria, and wildfires in California, in FY 2017 and the first part of FY 2018, FHA has played a significant role in relief and recovery efforts in affected areas, while taking immediate actions to protect its Single Family assets and financial exposure. (78)

Make Necessary Changes to the Home Equity Conversion Program (HECM). During FY 2017, FHA revised the HECM initial and annual Mortgage Insurance Premiums (MIPs), and Principal Limit Factors (PLFs). These revisions were necessary to enable FHA to continue to endorse HECM loans in FY 2018, protect the program for seniors, and balance serving FHA’s mission with taxpayer protection. (79)

No less important than these objectives is the FHA’s second-to-last one, Technology Modernization:

FHA is working to update its systems over the coming years to allow the Agency to work more effectively with lenders participating in the program, while operating FHA with greater efficiency and control. The technology systems that support FHA’s Single Family business have an average age of more than 18 years, with the Computerized Homes Underwriting Management System (CHUMS) exceeding 40 years. Similarly, the systems supporting the servicing, default, claims and REO areas have an average age of 14 years. FHA’s systems have been maintained, modified and enhanced over the years, but it has become fundamentally difficult and exceedingly expensive to maintain systems beyond their usable life. FHA’s outdated systems make it more difficult to work with lenders and to collect and manage important data. FHA remains a largely paper-processing entity while the rest of the industry has increasingly migrated to digital processes. FHA needs systems that can capture and effectively process the extensive volumes of data now in use, with enhanced storage and processing capabilities to handle the migration from paper forms to digital ones. Additionally, FHA requires the ability to analyze and manage insured loans comprehensively over the many phases of the mortgage life cycle. (80)

When you stop and think about how bad the state of the FHA’s technology is, you think that maybe this should be their top priority.

November 20, 2017 | Permalink | No Comments

Monday’s Adjudication Roundup

By Jamila Moore

  • Sunwood Condominium Association’s filed a summary judgment motion in a Washington federal court against National Surety Co. and St. Paul Fire & Marine Insurance Co. The condo association urged the Court to find the insurance companies liable for the $2.8 million dollars for 30 years of flood damage.
  • Katy Perry’s land dispute with a local developer, seemingly is over. A Los Angeles jury recently awarded $1.57 million to the world star regarding a developer’s intentional interference with her bid to purchase a convent from two nuns.
  • The city of Philadelphia were named defendants in two lawsuits. The city attempted to raise $118 million by taxing properties. To accomplish their goal, the city planned to revaluate the properties; however, Philadelphia homeowners would like the state courts to weigh in on the legality of the city’s new rule.

November 20, 2017 | Permalink | No Comments

November 17, 2017

Eminent Domain and Trump’s Wall

By David Reiss

photo by Sandeesledmere

Sucamore Gap on Hadrian’s Wall

Mashable quoted me in Sorry, Cards Against Humanity Can’t Stop Trump’s Wall. It opens,

As much as we may want to believe it, a card game company probably can’t save our country.

This week, owners of the irreverent (and kind of obnoxious, imo) Cards Against Humanity game unveiled their annual PR stunt and it has higher aspirations than last year’s pointless hole.

As part of the Cards Against Humanity Saves America campaign, it announced the purchase of “acres of land” on the U.S.-Mexico border and promised not to build a wall on it.

Going further, the company said that it had retained the services of legal representation specializing in property rights, “to make it as time-consuming and expensive as possible for the wall to get built.”

Sounds good, right? Guess there won’t be a wall!

Not so fast, patriots.

The government has a big ace up its sleeve when it comes to taking land from property owners. It’s called “eminent domain” and it’s right there in the constitution’s Fifth Amendment, below the part that people always talk about on lawyer shows. The Fifth Amendment states the government can’t take “private property be taken for public use, without just compensation.”

But it can still take land for public use, and it almost always does.

Government is mightier than the card game

The several law professors we talked to all came to the same forgone conclusion: the government will ultimately take that land from Cards Against Humanity.

“The power of eminent domain is considered to be a fundamental power of any government to use,” Professor of Law David Reiss at Brooklyn Law school said. And in this case, given the limited facts that were available to him, “ultimately the government would succeed.”

Over the past several decades, the judicial definition of eminent domain has expanded broadly. Historically, governmental use of eminent domain would fall under the umbrella of public use by using the acquired land to build a road or build a hospital. That’s changed in recent years, as the blanket phrase of “public use” has been used in eminent domain cases to include razing blighted urban areas or if the land could be seen as encouraging economic development.

Richard Epstein, Professor of Law at NYU, emphatically agreed that Cards Against Humanity would not stand much of a chance. Legally speaking, he saw, “the wall [will be seen] as a public good. There’s nothing you could do to resist them taking the land.”

Lynn E. Blais, Real Property Law Professor at the University of Texas at Austin, also thought that the government would easily win, but acknowledged how Cards Against Humanity could make an impact.

“They can’t stop the border wall for sure,” Blais said. Legally speaking, “it’s clearly for public use [but] they can challenge the process at every step if they want. That could take a long long time.”

And just as the company mentions in its announcement, it hopes to get in the way and meddle up Trump’s plans to build a wall, at least in that one plot of land it purchased. That delay tactic might prove exceptionally effective.

“They may not be looking to stop it, but merely to delay it. Delay can be very powerful. Sometimes delay can be as effective as winning the case,” Reiss said. “With enough money, it can be delayed for years.”

Did CAH fall down at the starting line? 

A few of the legal experts we talked to were adamant that Cards Against Humanity, in openly alluding to the fact that they hoped to make the wall construction “as time-consuming and expensive as possible,” invariably hurt their chances to gain favor with a judge. Basically, in flipping Trump off through a land buy, they exposed their bias and they might not receive a full case because of it.

“I wonder if they shot themselves in the foot if they admitted this was a delay tactic. Some judges might few that negatively,” Reiss said. “Judges wouldn’t look kindly on admitting delay.”

Epstein was very certain that the company’s promotion would hurt their chances of winning any case the federal government might bring against it.

“They are tacitly admitting that the goal is to block the president,” he said. “It’s one one of the dumber ideas I’ve heard of.”

He was certain that it would only invalidate any defense Cards Against Humanity tried to bring up, seeing as how the company already showed its actual intent. Still, he thought of it as a sign of the times, saying, “One of the consequences from the president acting like a crackpot means you get crackpot solutions.”

Blaise, however, believed the opposite side of this argument, and thought that land owners can do whatever they damn well please.

I don’t think it matters why you don’t want the government to take your land. As a property owner, you get to be as irrational as you want,” she said.

So you’re saying there’s a public use chance…

Even though a prospective case doesn’t look too promising for Cards Against Humanity, it still has avenues it can take to launch a defense of their new land. According to the legal experts we talked to, the most promising defense would be on whether the wall is really for public use. This is given that “public use” in the Fifth Amendment is not terribly defined and that arguments could readily be made that a border wall with Mexico might be more harmful than good.

“Public use is now often an incredibly broad term,” Reiss said. And, should the case go to federal court, the government’s potential case would invoke border security or immigration policy, which Reiss thought a judge would probably find compelling evidence.

November 17, 2017 | Permalink | No Comments

Friday’s Government Reports Roundup

By Jamila Moore

  • Thanks to the efforts of many across the U.S., the Senate released a ” modified chairman’s mark” as an edit to the their initial “Tax Cuts and Jobs Acts” proposal. Senate members busied themselves by making a number of changes to its initial proposal. For instance, the new version currently perseveres the  Low-Income Housing Tax Credit (Housing Credit) among other housing initiatives. The Senate’s “Tax Cuts and Jobs Acts” version two, attempts to support affordable housing while saving the country costs for such programs.
  • The United States Department of Housing and Urban Development (HUD) published its annual report to Congress regarding the state of the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance (MMI) Fund. The annual report notes the FHA’s funds fell by 2.09%, totaling $1.9 billion. The above mentioned evidence supports Obama’s proposal to reduce the “FHA’s annual mortgage insurance premium.

November 17, 2017 | Permalink | No Comments

November 16, 2017

Thank You, Director Cordray

By David Reiss

photo by Veronica V

Richard Cordray

Richard Cordray has announced that he will be stepping down as Director of the Consumer Financial Protection Bureau. He has been a lightning rod for critics of the Bureau. Those of us who believe that predatory behavior was endemic in consumer financial services markets like the mortgage market, think that he and the Bureau has done a great job in reducing that behavior. Cordray wrote, in an email to his staff,

Dear Colleagues,

I wanted to share with each of you directly what I have told the senior leadership in the past few days, which is that I expect to step down from my position here before the end of the month.

As I have said many times, but feel just as much today as I ever have, it has been a joy of my life to have the opportunity to serve our country as the first director of the Consumer Bureau by working alongside all of you here. Together we have made a real and lasting difference that has improved people’s lives, notably: $12 billion in relief recovered for nearly 30 million consumers; stronger safeguards against irresponsible mortgage practices that caused the financial crisis and hurt millions of Americans; giving people a voice by handling over 1.3 million complaints that led to problems getting fixed for vast numbers of individuals, and creating new ways to bring financial education to the public so that people can take more control over their economic lives. None of this could have happened without all of us being dedicated to pull together in supporting and protecting people and making every consumer count. I will always be immensely proud of you and what you have done.

At the same time, there is always more work that lies ahead. That would be true at any point, of course, and one thing I have tried to reinforce this year is that the Consumer Bureau is far more than its director. I am confident that you will continue to move forward, nurture this institution we have built together, and maintain its essential value to the American public. And I trust that new leadership will see that value also and work to preserve it – perhaps in different ways than before, but desiring, as I have done, to serve in ways that benefit and strengthen our economy and our country.

My gratitude and appreciation for what you mean to me and to our nation is deep and lasting, and I will be taking the opportunity to make that clear to you in person over the days ahead.

Thank you!

RC

As Cordray hints at, there will be a lot of jockeying over his replacement. Some of the leading names are ideologically opposed to some of the Bureau’s activist approaches to consumer protection. Potential successors, such as Vice President Pence’s Chief Economist Mark Calabria, George Mason Law Professor Todd Zywicki and retiring House Financial Services Committee Chair Jeb Hensarling (R-Tx), would likely severely curtail enforcement activity and pull back the Bureau’s regulatory agenda to give financial services companies more freedom to develop new products and more breathing room if they are accused of predatory behavior. I think this would be wrongheaded, particularly given our experience with the Subprime Boom and Bust in the 2000s.

But I am more worried by potential candidates such as Brian Brooks who was general counsel at OneWest when Secretary Mnuchin was the CEO there. Given OneWest’s treatment of mortgage borrowers, confirming a Director Brooks would be more like putting a fox put in charge of henhouse protection regulation.

Maybe now a commission structure for the Bureau does not look so bad to consumer protection advocates!

November 16, 2017 | Permalink | No Comments

November 15, 2017

The FHA’s Ailing Reverse Mortgage Program

By David Reiss

photo by aag.com

The Fiscal Year 2017 Independent Actuarial Review of the Mutual Mortgage Insurance Fund: Cash Flow Net Present Value from Home Equity Conversion Mortgage Insurance in Force has been released. It has some bad news:

FHA provides reverse mortgage insurance through the HECM program. HECMs enable senior homeowners to access the value of their homes. The program began as a pilot program in 1989 and became permanent in 1998. Between 2003 and 2008, the number of HECM endorsements grew because of increasingly widespread product awareness, lower interest rates, higher home values and higher FHA mortgage limits. Prior to fiscal year 2009, the HECM program was part of the General Insurance (GI) Fund. The FHA Modernization Act within the Housing and Economic Recovery Act of 2008 (HERA) moved all new HECM program endorsements into the MMIF effective October 1, 2008.

The Cranston-Gonzalez National Affordable Housing Act (NAHA), enacted in 1990, introduced a minimum capital requirement for MMIF. By 1992, the capital ratio was to be at least 1.25%, and by 2000 the capital ratio was to be no less than 2.0%. The capital ratio is defined by NAHA as the ratio of capital plus Cash Flow NPV to unamortized insurance‐in-force (IIF). NAHA also implemented the requirement that an independent actuarial study of the MMIF be completed annually. HERA also amended 12 USC 1708(a)(4) to include the requirement for the annual actuarial study. Accordingly, an actuarial review must be conducted on HECM mortgages within the MMIF. In this report, we analyze the HECM portion of the MMIF, which is mortgages endorsed in fiscal year 2009 and later.

Pinnacle projects that, as of the end of fiscal year 2017, the HECM Cash Flow NPV is negative $14.2 billion. (4, citation omitted, emphasis in the original)

With the housing market on the mend, Congress should ensure that essential infrastructure of the housing finance market is on solid footing. The HECM program should not have a negative cash flow (net present value) while the housing market is healthy as that will compound the bad news when the market takes a turn for the worse.

November 15, 2017 | Permalink | No Comments

November 14, 2017

The Future of Public Housing

By David Reiss

The Terner Center for Housing Innovation at UC Berkeley has posted Lessons for the Future of Public Housing: Assessing the Early Implementation of the Rental Assistance Demonstration Program. Housing policy analysts have bemoaned the chronic underfunding of public housing for decades to little effect. This study looks at a relatively new initiative, the Rental Assistance Demonstration program and evaluates how local public housing authorities have played the hand that they have been dealt by Congress, as weak as it may be. The study opens,

In its 2018 budget, the Trump Administration is proposing to slash public housing funding by $1.8 billion, a 29 percent decline from 2017. This is on top of nearly a decade of continued cuts to public housing, for both capital improvements and operations. The consequences of these perpetual funding shortfalls are dire for the 2.2 million residents who live in public housing, exposing them to significant health and safety hazards from the lack of maintenance, including exposure to mold and lead paint, rodent infestations, and outdated electrical and sewage systems.

While the Senate markup of the appropriations bill reverses some of the more drastic funding cuts proposed by the administration, the amount of funds allocated to the public housing operating and capital funds remains well below need. Nearly half (44%) of the nation’s public housing stock was built before 1970, resulting in significant need for maintenance and rehabilitation. However, federal funding for capital investments in public housing dropped by 50 percent between 2000 and 2015, generating a $26 billion backlog of capital repairs. The lack of maintenance is directly tied to the loss of public housing units: approximately 300,000 units— more than 20 percent of the total public housing stock—have been demolished over the past 20 years due exclusively to units being uninhabitable.

At the same time, the Senate markup lifts the current 225,000 unit cap on public housing conversions under the Rental Assistance Demonstration (RAD) program, signaling its support for the program. Congress passed RAD in 2012 to address the chronic underinvestment in public housing. Through the RAD program, public housing authorities (PHAs) can convert their portfolio of HUD-funded units to project-based Section 8 contracts, and in doing so, be positioned to tap into private sources of funding for real estate, including debt and equity. These funds can be leveraged to rehabilitate older buildings and protect units from obsolescence.

Though RAD may seem novel, most affordable housing built today is financed with multiple sources of funding. For example, the Low Income Housing Tax Credit (LIHTC) program, which helped finance 2.78 million units of affordable housing built between 1987 and 2014, has long used debt and equity financing to produce and preserve affordable housing. Debt financing is a powerful tool: it is the same principle that allows households to buy a home with only a down payment.

But debt financing also entails risks, including the risk of default. Ensuring that deals are appropriately underwritten—and have adequate gap funding support—is critical for the longterm financial viability of the properties. The introduction of debt financing also requires strong property and asset management skills, which do not always exist at the local level.

And RAD changes the governance and streams of funding for public housing, which has implications for housing authority capacity and sustainability over the long-term. Thus, mechanisms need to be in place for oversight and accountability, especially as it relates to tenants’ rights and well-being.

In this policy brief, we summarize findings from more than 25 interviews with staff at public housing authorities and other organizations across the country who have been engaged in the implementation of RAD at the local level. The goal of this brief is to highlight the challenges that housing authorities have faced in implementing RAD in their markets, and to share best practices that have emerged in RAD implementation. Future research will look at the impact of RAD from the perspective of residents.

The brief covers RAD implementation in a wide range of housing markets, including communities in Arizona, California, New York, North Carolina, Tennessee, and Texas, to highlight RAD’s flexibility and limitations in different market contexts. In San Francisco and New York, for example, RAD is being used as a tool to leverage funds needed to preserve public housing stock in the face of high housing costs and significant concerns over displacement. In Laurinburg, North Carolina, RAD is helping expand the capacity of the housing authority to manage its stock in a region hard-hit by the recession and ensuing job losses. In many of the markets that we studied, PHAs are converting all of their public housing under RAD –known as a “portfolio” conversion—allowing us to explore the implications of a changing institutional landscape for public housing at the local level.

Overall, respondents stressed the benefits of RAD, but also provided insights into how the program could be improved moving forward. Because many PHAs are still undergoing RAD conversion, and there are discussions at the federal level to lift the cap on the number of units that can be converted, these insights are particularly timely. Given political realities and federal budget constraints, RAD may well be the best prospect for preserving public housing going forward. The program could be made even more effective by drawing on the lessons learned on the ground in the first few years of the program. (2-3, citations omitted)

November 14, 2017 | Permalink | No Comments