REFinBlog

Editor: David Reiss
Brooklyn Law School

May 25, 2016

Evicted by Homeowners Association

By David Reiss

photo by respres

Realtor.com quoted me in Homeowner Evicted for Not Paying HOA Dues: Can This Happen to You? It opens,

Who knew? Even if you pay your mortgage on time every month, your home can still be foreclosed on and sold from under your feet. That, at least, is what Triss McQuiston from Tomball, TX, learned recently when she was notified that she’d have to vacate her place. Why? It turns out she was evicted for not paying her HOA dues.

According to ABC13, McQuiston admits that she was guilty of procrastinating on paying her HOA fees to the Canyon Gate at Northpointe Owners Association in 2014 and 2015. Because she was opening a new business, her HOA bills slipped through the cracks, for a grand total of $1,800 in unpaid dues.

An attorney for the HOA claims that since March 2014, they’d sent McQuiston 12 notices by first-class certified mail to collect these assessments, warning her what would happen if she didn’t. When they received no response, they proceeded with the foreclosure, and sold the home at auction back in September.

Yet McQuiston argues that she’d received no warnings, and was made aware of her dire straits only when she received an eviction notice on her doorstep on May 20. She has since hired an attorney to help fight the case and remain in her home.

“I would never have thought in my wildest dreams that an HOA … would go to these lengths and they’d have this much power,” McQuiston told ABC13.

If this story has you viewing HOAs in a harsh (and terrifying) new light, we don’t blame you. And while the laws vary by state, it turns out that in most cases, HOAs really do have the power to foreclose on your home for unpaid dues, as do condo owners associations.

“Contrary to common perceptions, even if a person is current on a mortgage, the HOA or COA may foreclose,” says Bob Tankel, a Florida attorney specializing in HOA law. “What’s the moral of the story? Pay your assessments. These are not huge amounts. People apparently think that just because assessments are small there’s nothing bad that can happen. But that’s not true.”

To know specifically how your HOA or COA handles late payments, homeowners should “check the Declaration of Covenants, Conditions & Restrictions (CC&Rs),” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. You should check not only what constitutes a late payment, but also how you’ll be penalized; additional fees could include late charges, fines, interest, as well as attorneys’ fees.

It’s also smart to check what rights and recourse you have in your state if you end up unable to pay these assessments. “Some states have enacted some procedural protections for homeowners,” says Reiss. “It’s worth figuring those out if you are not able to pay off your HOA right away.”

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May 25, 2016 | Permalink | No Comments

May 24, 2016

FIRREA Blanks

By David Reiss

photo by Mike Cumpston

The Court of Appeals for the Second Circuit reversed the District Court’s judgment (SDNY, Rakoff, J.) against Bank of America defendants for actions arising from Countrywide’s infamous “Hustle” mortgage origination program. The case has a lot of interesting aspects to it, not the least of which is that it does away with more than one billion dollar in civil penalties levied against the defendants.

The opinion itself answers the narrow question, when “can a breach of contract also support a claim for fraud?” (2) The Court concluded that “the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises.” (3)

I think the most important aspect of the opinion is how it limits the reach of the Financial Institutions Reform, Recover, and Enforcement Act of 1989 (FIRREA). Courts have have been reading FIRREA very broadly to give the federal government immense power to go after financial institutions accused of wrongdoing.

FIRREA provides for civil penalties for violations of federal mail or wire fraud statutes, but the Court found that there was no fraud at all. It made its point with a hypothetical:

Imagine that two parties—A and B—execute a contract, in which A agrees to provide widgets periodically to B during the five-year term of the agreement. A represents that each delivery of widgets, “as of” the date of delivery, complies with a set of standards identified as “widget specifications” in the contract. At the time of contracting, A intends to fulfill the bargain and provide conforming widgets. Later, after several successful and conforming deliveries to B, A’s production process experiences difficulties, and the quality of A’s widgets falls below the specified standards. Despite knowing the widgets are subpar, A decides to ship these nonconforming widgets to B without saying anything about their quality. When these widgets begin to break down, B complains, alleging that A has not only breached its agreement but also has committed a fraud. B’s fraud theory is that A knowingly and intentionally provided substandard widgets in violation of the contractual promise—a promise A made at the time of contract execution about the quality of widgets at the time of future delivery. Is A’s willful but silent noncompliance a fraud—a knowingly false statement, made with intent to defraud—or is it simply an intentional breach of contract? (10)

This case emphasizes that “a representation is fraudulent only if made with the contemporaneous intent to defraud . . .” (14) While this is not really new law, it is a clear statement as to the limits of FIRREA. This will act as a limit on how the government can deploy this powerful tool as new cases crop up. Unless, of course, the Supreme Court were to reverse it on appeal.

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May 24, 2016 | Permalink | No Comments

May 23, 2016

Why Are There Real Estate Agents?

By David Reiss

photo by Mark Moz

Realtor.com (admittedly not a neutral source on this topic) quoted me in 6 Reasons Real Estate Agents Aren’t Extinct. It opens,

It’s 2016, and it seems our need for real live people is ever-diminishing. There’s self-checkout instead of cashiers, selfie sticks instead of photographers, self-driving cars, self-watering plants, self-administered colonoscopies … well, you get the idea. Given that technology has become so important to buying and selling homes, you’d also think real estate agents would be a dying breed — yet they aren’t showing any signs of slowing down, with approximately 2 million active real estate agents throughout the country.

So why did real estate agents make the technology transition fully intact as opposed to, say, travel agents? We asked some experts to weigh in.

Reason No. 1: Selling is complicated

For many people, “a real estate transaction is financially momentous and complex — the most complex transaction people do in their life,” explains David Reiss, a law professor and academic program director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Comparatively, personal travel agents — the kind where you’d walk in their office and have them book you a hotel and a flight — have gone the way of the dodo, because now that’s all simple DIY stuff (to be fair, not all travel agents are out of a job — there’s still a healthy travel agency sector that thrives on corporate and luxury bookings).

“People like having an expert when dealing with large, complicated transactions,” says Jeff Tomasul, founder of Vespula Capital LLC, an investment management company based in Greenwich, CT. “Why do people still have financial advisers? They want someone who does it full-time to make sure they are not doing anything wrong.” Same with real estate agents.

And real estate transactions are often anything but straightforward. Some deals, like short sales, can be “much more intricate than a regular transaction,” Reiss says, with lenders who have requirements that “a regular person would have no idea about.”

Reason No. 2: Buying ain’t easy, either

Buying a home, even if you come in with all cash, is not a cookie-cutter task, and you can find yourself drowning in paperwork and stressed out juggling things like meeting buyers, and dealing with the seller’s agent, lender, and title companies. Agents ease the whole transaction, and it’s something that has kept their profession alive.

“They can hold your hand through the process,” Reiss explains. “They might say, ‘This lender takes a long time, so put in your contract immediately and sign this and that paper and get all this stuff ready before you’re walking over hot coals with the lender for money.”

Reason No. 3: It’s their top priority

Your own interests and priorities will very likely always be split — because of those pesky little things like, say, job and family — but a Realtor can be laser-focused on getting the deal done. “A Realtor has a singular aim: to sell houses,” Reiss says.

Simply put, having a real estate agent can make your life easier. Tomasul found himself in a frustrating position when he tried to sell his apartment in Manhattan without an agent. “Showing it was so tough with my schedule, and it was hard having a full-time job and keeping up in a timely matter with potential buyers,” he recalls.

That means the less you make time for buyers, the longer your place will stay on the market — and that’s not good for your bottom line.

Reason No. 4: They know the market, and the players, better than you

“The agent knows the market intimately, even more than a pretty informed resident,” Reiss says. And all that knowledge saves time. “Tracking sales, knowing listings, spending a lot of shoe leather on houses already for sale — right off the bat, they know more than the ordinary Joe and Jane. They understand condo boards and title companies. As a player in the game, they know what the other players are looking for and how to deliver.”

Reason No. 5: They’re objective

Without an agent showing your house for you, you have no shield from criticisms that can — and will — be made about your house from prospective buyers. Your favorite room in the home might be described as “tacky,” “needing a renovation,” or much worse. Sometimes such comments are negotiating tactics. Sometimes they are heartfelt, off-the-cuff opinions. But either way, they can lead to problems.

“It impacts objectivity for a seller to hear negative things about their own place,” Reiss explains. ” Realtors aren’t emotionally invested. They don’t take comments personally. It’s not ‘Oh, you don’t like my chandelier? Then get out of my house.’”

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May 23, 2016 | Permalink | No Comments

May 20, 2016

White-Segregated Subsidized Housing

By David Reiss

children-while-they-play-725x483

The  University of Minnesota Law School’s Institute on Metropolitan Opportunity has issued a report, The Rise of White-Segregated Subsidized Housing. While the report is focused on Minnesota, it raises important issues about affordable housing program demographics throughout the country:

  • To what extent do the populations served by programs match those of their catchment areas?
  • To what extent do the served populations match the eligible populations of their catchment areas?
  • To what extent do the served populations match the demographics of those who have applied for the programs?
  • To what extent do variants among those metrics matter?

The Executive Summary opens,

Subsidized housing in Minneapolis and Saint Paul is segregated, and this segregation takes two forms – one well-known, and the other virtually unknown.

At this point it is widely recognized that most Minneapolis and Saint Paul subsidized housing is concentrated in racially diverse or segregated neighborhoods, with few subsidized or otherwise-affordable units in affluent, predominately white areas. Because subsidized units are very likely to be occupied by families of color, this pattern increases the region’s overall degree of segregation.

But what has been overlooked until today, at least publicly, is that a small but important minority of subsidized projects are located in integrated or even-predominately white areas. Unlike typical subsidized housing, however, the residents of these buildings are primarily white – in many instances, at a higher percentage than even the surrounding neighborhood. These buildings thus reinforce white residential enclaves within the urban landscape, and intensify segregation even further.

What’s more, occupancy is not the only thing distinguishing these buildings from the average subsidized housing project. They are often visually spectacular, offering superior amenities – underground parking, yoga and exercise studios, rooftop clubrooms – and soaring architecture. Very often, these white-segregated subsidized projects are created by converting historic buildings into housing, with the help of federal low-income housing tax credits, historic tax credits, and other sources of public funding. Frequently, these places are designated artist housing, and – using a special exemption obtained from Congress by Minnesota developers in 2008 – screen applicants on the basis of their artistic portfolio or commitment to an artistic craft.

These places cost far more to create than traditional subsidized housing, and include what are likely the most expensive subsidized housing developments in Minnesota history, both in terms of overall cost and per unit cost. These include four prominent historic conversions, all managed by the same Minneapolis-based developer – the Carleton Place Lofts ($430,000 per unit), the Schmidt Artist Lofts ($470,000 per unit), the upcoming Fort Snelling housing conversion ($525,000 per unit), and the A-Mill Artist lofts ($665,000 per unit). The combined development cost of these four projects alone exceeds $460 million. For reference, this is significantly more than the public contribution to most of the region’s sports stadiums; it is $40 million less than the public contribution to the controversial downtown football stadium.

These four buildings contained a total of 870 units of subsidized housing, most of which is either studio apartments or single-bedroom. For the same expense, using 2014 median home prices, approximately 1,590 houses could have been purchased in the affluent western suburb of Minnetonka.

In short, Minneapolis and Saint Paul are currently operating what is, in effect, a dual subsidized housing system. In this system, the majority of units are available in lower-cost, utilitarian developments located in racially segregated or diverse neighborhoods. These units are mostly occupied by families of color. But an important subset of units are located in predominately white neighborhoods, in attractive, expensive buildings. These units, which frequently are subject to special screening requirements, are mostly occupied by white tenants.

As a matter of policy, these buildings are troubling: they capture resources intended for the region’s most disadvantaged, lowest-income families, and repurpose those resources towards the creation of greater segregation – which in turn causes even more harm to those same families.

Legally, they may well run afoul of the Fair Housing Act and other civil rights law. Recent developments have established that the Fair Housing Act forbids public or private entities from discriminating in the provision of housing by taking actions that create a disparate impact on protected classes of people, including racial classes. Moreover, recipients of HUD funding, such as the state and local entities which contribute to the development of these buildings, have an affirmative obligation to reduce segregation and promote integration in housing.  (1-2)

No doubt, this report will spur a lot of soul searching in Minnesota. It may also spur some litigation. Other communities with subsidized housing programs should take a look at themselves in the mirror and ask if they like what they see. They should also ask whether federal judges would like it.

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May 20, 2016 | Permalink | No Comments

May 19, 2016

Divvying up The Mortgage Market

By David Reiss

photo by Evan-Amos

S&P Capital IQ has posted some Structured Finance Research: The Conforming Loan Limit And Its Effect On The U.S. Private­-Label Mortgage Market. It contains interesting thoughts on how a stabilized secondary mortgage market should be split between government-backed and private-label securitizations. More particularly, it finds that

  • The U.S. private­-label mortgage market has failed to recapture the market share that it ceded to the agency [Fannie & Freddie] market after the financial crisis of 2007–2009.
  • Partly because of changes in underwriting requirements, the private­-label market is synonymous with jumbo collateral: loans that exceed the conforming loan limit set by the Federal Housing Finance Agency (FHFA).
  • As a result, the conforming limit now acts as a gateway, controlling how much financing and securitization volume is accommodated by the agency channel relative to that of the private­-label market. (1)

It notes, “As rising home prices restore the historical relationship between the conforming limit and median home price, it will be interesting to see if there is a corresponding return to the pre­-2003 market share split between agency and private­-label securitization.” (Id.)

S&P further explains that

For the last 10 years, the conforming limit (which herein excludes dwellings with more than one unit) has remained at $417,000. Historically, the ratio of the median new home sale price to the conforming loan limit has been near 50%. When the housing market crashed, the ratio dropped to near 40%. However, the recovering housing market is restoring the historical relationship. Because the conforming loan limit acts as mechanism to regulate the market share breakdown between the private­-label and agency markets, it is likely to be a determinant in the future growth of the struggling private­-label sector.

Private-Label/Agency Market Share

Prior to 2003, the market share of the agency sector was a bit greater than 80%, with the remainder being private­-label issuance. After 2008, however, the agency share rose to over 95%. So while a new equilibrium appears to have been achieved, it is one in which a good deal of market share has been shifted away from the private-­label market and absorbed by the agencies. While the general market consensus seems to be that the private­-label share might not reach 2005–2007 levels again, the question remains as to when (if at all) the private­-label mortgage market will recover to the levels of issuance prior to 2003.” (1-2, chart omitted)

Implicit in all of this is that the pre-2003 state of affairs reflects some kind of natural state of equilibrium. This ignores the fact the national mortgage market has always been one that the government has shaped. While it is worth considering what balance between government and private-label securitization is best, historical precedent in itself is an insufficient guide.

I would rather focus on fundamentals. Should the government subsidize residential mortgages? How much exposure should the government have to credit risk? How much credit risk can the private sector handle? Should the government incentivize the origination of mortgage products (like the 30 year FRM) that private-label investors might not find so attractive? I care about the answers to these questions a whole lot more than I care about how the secondary mortgage market was divvied up one or two decades ago.

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May 19, 2016 | Permalink | No Comments

May 18, 2016

Calculating Closing Costs

By David Reiss

image by www.lumaxart.com/

Realtor.com quoted me in How Much Are Closing Costs? What Home Buyers and Sellers Can Expect. It reads, in part,

Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. But as a rule, you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. Yep that’s one heck of a wide range. More on that below.

Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.

*     *     *

Why Closing Costs Vary

The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called ‘flip taxes’ that condos charge sellers.”

To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your Realtor, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their Realtor outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.

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May 18, 2016 | Permalink | No Comments

May 17, 2016

Inclusionary Housing: Fact and Fiction

By David Reiss

photo by Bart Everson

The Center for Housing Policy has issued a policy brief, Separating Fact from Fiction to Design Effective Inclusionary Housing Programs. I am not sure fact was fully separated from fiction when I finished reading it.  It opens,

Inclusionary housing programs generally refer to city and county planning ordinances that require or incentivize developers to build below-market-rate homes (affordable homes) as part of the process of developing market-rate housing developments. More than 500 local jurisdictions in the United States have implemented inclusionary housing policies, and inclusionary requirements have been adopted in a wide variety of places—big cities, suburban communities and small towns.

Despite the proliferation of inclusionary housing programs, the approach continues to draw criticism. There have been legal challenges around inclusionary housing requirements in California, Illinois, Idaho, Colorado and Wisconsin, among others. In addition to legal questions, critics have claimed inclusionary housing policies are not effective at producing affordable housing and have negative impacts on local housing markets.

While there have been numerous studies on inclusionary housing, they unfortunately do not provide conclusive evidence about the overall effectiveness of inclusionary housing programs. These studies vary substantially in terms of their research approaches and quality. In addition, it is difficult to generalize the findings from the existing research because researchers have examined policies in only a handful of places and at particular points in time when economic and housing market conditions might have been quite different. Given these limitations, however, the most highly regarded empirical evidence suggests that inclusionary housing programs can produce affordable housing and do not lead to significant declines in overall housing production or to increases in market-rate prices. However, the effectiveness of an inclusionary housing program depends critically on local economic and housing market characteristics, as well as specific elements of the program’s design and implementation. (1, endnotes omitted and emphasis in the original)

The brief concludes that, in general, ” mandatory programs in strong housing markets that have predictable rules, well-designed cost offsets, and flexible compliance alternatives tend to be the most effective types of inclusionary housing programs.” (11, emphasis removed)

I have to say that this research brief does not give me a great deal of confidence that mandatory inclusionary zoning programs are going to be all that effective.  Indeed, the conclusion suggests that many ducks need to line up before we can count on them to make a real dent in affordable housing production. While this by no means should imply that they should be curtailed, we should continue to evaluate them carefully to see if they live up to their promise.

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May 17, 2016 | Permalink | No Comments