REFinBlog

Editor: David Reiss
Brooklyn Law School

January 5, 2016

The Duty to Serve Underserved Markets

By David Reiss

Riverview Homes Inc

The Federal Housing Finance Agency has issued a Notice of Proposed Rulemaking and Request for Comments regarding Enterprise Duty to Serve Underserved Markets.  The “Enterprises” are Fannie and Freddie and this duty to serve is a highly contested one, with some on the right blaming it for pretty much the whole financial crisis and some on the left arguing that it is the key rationale for keeping the government involved in the mortgage market.

This debate is complicated by the fact that Fannie and Freddie are in conservatorship for the foreseeable future. Whatever one believes the duty to serve should be for the two companies if they were operating independently, one might have a different view of it while they are operating as government instrumentalities.

The Notice provides the following summary:

The Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) to establish a duty for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to serve three specified underserved markets—manufactured housing, affordable housing preservation, and rural markets—to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for very low-, low-, and moderate-income families in those markets. The Federal Housing Finance Agency (FHFA) is issuing and seeking comments on a proposed rule that would provide Duty to Serve credit for eligible Enterprise activities that facilitate a secondary market for mortgages related to: Manufactured homes titled as real property; blanket loans for certain categories of manufactured housing communities; preserving the affordability of housing for renters and homebuyers; and housing in rural markets. The proposed rule would establish a method for evaluating and rating the Enterprises’ compliance with the Duty to Serve each underserved market.

Written comments must be received on or before March 17, 2016, so get crackin’.

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January 5, 2016 | Permalink | No Comments

January 4, 2016

Foreclosure Body Count

By David Reiss

respres

Case Western’s Matt Rossman has posted Counting Casualties in Communities Hit Hardest by the Foreclosure Crisis (forthcoming in the Utah Law Review) to SSRN. The abstract reads,

Recent statistics suggest that the U.S. housing market has largely recovered from the Foreclosure Crisis. A closer look reveals that the country is composed not of one market, but of thousands of smaller, local housing markets that have experienced dramatically uneven levels of recovery. Repeated waves of home mortgage foreclosures inundated certain communities (the “Hardest Hit Communities”), causing their housing markets to break rather than bend and resulting in what amounts to a permanent transition to a lower value plateau. Homeowners in these predominantly low and middle income and/or minority communities who endured the Foreclosure Crisis lost significant equity in what is typically their principal asset. Public sector responses have largely ignored this collateral damage.

As the ten-year mark since the onset of the Foreclosure Crisis approaches, this Article argues that homeowners in the Hardest Hit Communities should be able to deduct the damage to their home values caused by the Crisis from their federal taxable income. This means overcoming the tax code’s usual normative assumption that a decline in a home’s value represents consumed wealth and, thus, is fully taxable. To do so, this Article likens the rapid, unusual and enduring plunge in home values experienced by homeowners in the Hardest Hit Communities to casualty losses – i.e. damages to personal property caused by a sudden force like a storm or a hurricane – which are deductible. The IRS and most courts have insisted this deduction is limited to physical damage. This Article carefully dissects the law and principles underlying the deduction to reveal that the physical damage requirement is overbroad and inequitable. When viewed in the larger context of other recent tax code interventions that allow those who have experienced personal financial harm due to a crisis to reduce their income tax base accordingly, home value damage in the Hardest Hit Communities actually fits comfortably within the concept of a casualty loss.

Notwithstanding its normative and equitable fit, the casualty loss deduction poses several administrative challenges in its application to the Foreclosure Crisis. This Article addresses each challenge in turn, explaining the extent to which the Treasury Department and the IRS, through administrative action and/or a careful application of case law precedent, can resolve it. The Article also identifies and grapples with the distributional reality that the casualty loss deduction, in its current form, provides a small or no return on lost home equity for a sizable number of low and middle income homeowners, which would make it a problematic method of recovery for homeowners in the Hardest Hit Communities. To make the deduction a better and more equitable fit under the circumstances, this Article identifies two, larger-scale modifications the federal government could adopt: (i) changing the method by which a casualty loss is valued for damage caused by the Foreclosure Crisis and/or (ii) lifting the floors and limits Congress has over time imposed on the deduction, as it has done for those taxpayers most heavily impacted by several recent hurricanes and droughts.

The article offers a creative response to ameliorate an aspect of the foreclosure crisis. Rossman concludes, “Once these homeowners are considered equally worthy of claiming a casualty loss, the question then shifts to how the IRS, the Treasury Department and/or Congress can best adapt and address the administrative and distributional challenges attendant to utilizing the casualty loss deduction in this context. These challenges are not insurmountable barriers, but rather issues to be carefully considered and strategically addressed.” (67)

I can certainly imagine some of those challenges, such as how to reliably identify a “permanent transition to a lower value plateau,” but articles of this type are just what we need as we try to figure out how to address housing crises of this magnitude.  While there was a big gap between the housing crises of the Great Depression and the Great Depression we can be sure that there will be another such event at some point in the 21st century.

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January 4, 2016 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

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January 4, 2016 | Permalink | No Comments

January 1, 2016

Auld Lang Syne

By David Reiss

Robert Burns Statue

To commemorate 2015, Robert Burns’ Old Lange Syne, translated into modern English, (thank you, Wikipedia!):

Should old acquaintance be forgot,
and never brought to mind?
Should old acquaintance be forgot,
and old lang syne?

CHORUS:
For auld lang syne, my dear,
for auld lang syne,
we’ll take a cup of kindness yet,
for auld lang syne.

And surely you’ll buy your pint cup!
and surely I’ll buy mine!
And we’ll take a cup o’ kindness yet,
for auld lang syne.

CHORUS

We two have run about the slopes,
and picked the daisies fine;
But we’ve wandered many a weary foot,
since auld lang syne.

CHORUS

We two have paddled in the stream,
from morning sun till dine;
But seas between us broad have roared
since auld lang syne.

CHORUS

And there’s a hand my trusty friend!
And give me a hand o’ thine!
And we’ll take a right good-will draught,
for auld lang syne.

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January 1, 2016 | Permalink | No Comments

Happy New Year!

By Shea Cunningham

“Approach the New Year with resolve to find the opportunities hidden in each new day.” — Michael Josephson

Happy 2016 everyone!

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January 1, 2016 | Permalink | No Comments

December 31, 2015

Thursday’s Advocacy & Think Tank Round-Up

By Serenna McCloud

  • Enterprise Community Partners’ latest blog post in the Spotlight on HOME Investment Partnership series highlights the experience of 22 year old Lani, a single mother of two boy’s, who was able to transition from homelessness to stability with the help of Project Independence, a program administered by Adobe Services in Alameda California, partially funded by HOME.  Enterprise is highlighting the effectiveness of the program because deep budget cuts threaten to reverse the success of HOME.
  • The Mortgage Bankers Association (MBA) released a letter sent to the Consumer Financial Protection Bureau (CFPB) expressing concerns that the recently implemented Know Before You Owe/Truth in Lending Act/Real Estate Settlement Procedures Acts (TILA/RESPA) regulations are causing widespread market disruptions in the mortgage industry, and that lenders are worried about mistakes and potential liability – causing a decline in loan approval rates and ultimately liquidity.  The CFPB’s Director, Corday, issued a letter in response, acknowledging that the new rules will require extensive operational adjustment and stating: “examiners will be squarely focused on whether companies have made good faith efforts to come into compliance” and that initial examinations will be “corrective and diagnostic, rather than punitive.”
  • The National Association of Realtors (NAR)’s Pending Home Sales Index (a forward looking index) is down slightly for November, the fourth straight monthly decline.  Year over year the metric is up, for the 15th straight month. According to NAR the decline is attributable to tight inventory and rising home prices.
  • NAR’s RealtorMag predicts the top cities for first time homebuyers in 2016, among the contenders are Orlando, Florida; DeMoines, Iowa; and Banton Rouge, Louisiana.

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December 31, 2015 | Permalink | No Comments

P2P, Mortgage Market Messiah?

By David Reiss

Monty Python's Life of Brian

As this is my last post of 2015, let me make a prediction about the 2016 mortgage market. Money’s Edge quoted me in Can P2P Lending Revive the Home Mortgage Market? It opens,

You just got turned down for a home mortgage – join the club. At one point the Mortgage Bankers Association estimated that about half of all applications were given the thumbs down. That was in the darkest housing days of 2008 but many still whisper that rejections remain plentiful as tougher qualifying rules – requiring more proof of income – stymie a lot of would be buyers.

And then there are the many millions who may not apply at all, out of fear of rejection.

Here’s the money question: is new-style P2P lending the solution for these would-be homeowners?

The question is easy, the answers are harder.

CPA Ravi Ramnarain pinpoints what’s going on: “Although it is well documented that banks and traditional mortgage lenders are extremely risk-averse in offering the average consumer an opportunity for a home loan, one must also consider that the recent Great Recession is still very fresh in the minds of a lot of people. Thus the fact that banks and traditional lenders are requiring regular customers to provide impeccable credit scores, low debt-to-income (DTI) ratios, and, in many cases, 20 percent down payments is not surprising. Person-to-person lending does indeed provide these potential customers with an alternate avenue to realize the ultimate dream of owning a home.”

Read that again: the CPA is saying that for some on whom traditional mortgage doors slammed shut there may be hope in the P2P, non-traditional route.

Meantime, David Reiss, a professor at Brooklyn Law, sounded a downer note: “I am pretty skeptical of the ability of P2P lending to bring lots of new capital to residential real estate market in the short term. As opposed to sharing economy leaders Uber and Airbnb which ignore and fight local and state regulation of their businesses, residential lending is heavily regulated by the federal government. It is hard to imagine that an innovative and large stream of capital can just flow into this market without complying with the many, many federal regulations that govern residential mortgage lending. These regulations will increase costs and slow the rate of growth of such a new stream of capital. That being said, as the P2P industry matures, it may figure out a cost-effective way down the line to compete with traditional lenders.”

From the Consumer Financial Protection Bureau (CFPB) to Fannie and Freddie, even the U.S. Treasury and the FDIC, a lot of federal fingers wrap around traditional mortgages. Much of it is well intended – the aims are heightened consumer protections while also controlling losses from defaults and foreclosures – but an upshot is a marketplace that is slow to embrace change.

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December 31, 2015 | Permalink | No Comments