Author Archives: David Reiss

FHFA’s $500MM Win

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Bloomberg quoted me in Nomura, RBS Defective-Bond Suit Loss Seen Spurring Deals. It reads, in part,

Nomura Holdings Inc. and Royal Bank of Scotland Group Plc may face $500 million in damages for what a judge called an “enormous” deception in the sale of defective mortgage-backed securities, a ruling that may spur other banks to settle similar claims tied to the 2008 financial crisis.

Nomura and RBS were excoriated in a 361-page opinion by U.S. District Judge Denise Cote in Manhattan, whose ruling followed the first trial of claims that banks sold flawed securities to government-owned mortgage companies. After a three-week trial, Cote said they misled Fannie Mae and Freddie Mac and set a damages formula that may result in the government winning about half its original claim of $1 billion.

“The offering documents did not correctly describe the mortgage loans,” Cote, who heard the case without a jury, wrote Monday. “The magnitude of falsity, conservatively measured, is enormous.”

Before the trial, FHFA had reached $17.9 billion in settlements with other banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. The ruling against Nomura and RBS may encourage other banks to settle mortgage-related suits brought by regulators and private investors rather than face the bad publicity and cost of an adverse judgment, said Robert C. Hockett, a professor at Cornell Law School.

“They look pretty bad,” Hockett said in an interview. “They look like the strategy has blown up in their faces.”

Cote ordered the Federal Housing Finance Agency, which filed the case, to propose how much the banks should pay as a result of her ruling.

*     *     *

Cote rejected the banks’ claim that the housing crash, and not defects in the loans, was responsible for the collapse of the mortgage-backed securities.

David Reiss, a professor at Brooklyn Law School, called Cote’s ruling “incredibly thorough.” The judge included detailed factual rulings that may make it difficult for Nomura and RBS to win on appeal, he said.

Best Real Estate Investing Advice Ever

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I was interviewed on the Best Real Estate Investing Advice Ever with Joe Fairless podcast. The interview, How to Negotiate the Interest Rate on Your Mortgage Down…A LOT, went live today. The teaser for the show reads,

Today’s Best Ever guest shares just how important it is to do you due diligence with everything. From negotiating the interest rate on your mortgage rate down to an unheard of number, to learning about different zoning codes and what they mean to you.

The interview runs about half an hour. I always like to be invited to speak on a long-form program because I can go into greater depth about things that I think are important. I also got a chance to discuss some topics that usually only come up in my Real Estate Practice class.

The Best Ever Real Estate Investing Advice Ever show is one of the highest rated investing podcasts on iTunes, up there with Suze Orman, Jim Cramer, Marketplace, Motley Fool, NPR and the Wall Street Journal. The show is sold with some hype, but it was a substantive discussion, geared to the newish real estate investor. All in all, this was a fun interview to do.

 

 

Myths About Money

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Chase.com quoted me in 5 Myths About Your Money. It opens,

There’s no shortage of money advice out there, but each person’s financial situation is unique. So there are times when conventional wisdom can be just plain unhelpful.

With that in mind, here are five money myths that experts say deserve to be reconsidered.

Myth #1: Your Home Is Primarily an Investment

A house can be an excellent investment, but David Reiss, professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York, cautions against thinking of it only that way.

After all, he says, the housing market can be hard to predict, so it’s better to make decisions based on your own needs. You’re not just owning the house; you’re living in it.

“Make decisions about buying, remodeling, and refinancing your home because it makes sense for you and your family,” says Reiss. “If you make decisions based upon your guesses about the future and about what other people will do, there is a good chance that you will end up frustrated.”

Should you upgrade that bathroom? Is it solely an investment decision? Or is there also value in improving your quality of life?

Borrowing from Yourself

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MainStreet.com quoted me in Dipping Into Your 401(k) to Finance the Purchase of a Home is a Tricky Decision. It reads, in part,

Dipping into the funds she had amassed in her 401(k) account to make up the remaining difference for her down payment was not a decision that Alyson O’Mahoney embarked on lightly.

After contemplating the benefits and disadvantages of borrowing $40,000 from her retirement account to use for a down payment on her mortgage, the marketing executive for Robin Leedy & Associates in Mount Kisco, N.Y. was certain that she making the right choice.

O’Mahoney was undaunted by the prospect of having another bill each month, even though she opted out of discussing this critical decision with her financial advisor — as she knew he would discourage her.

“It all fit into my debt and income ratio and the bank was fine with it,” she said. “I pay it back automatically with each paycheck and the 5% interest goes to me. It was the easiest process.”

Many financial advisors steer their clients away from borrowing from their retirement, because employers will typically demand that you repay the loan within a short period if you leave your job or get fired. If you can’t pay it back from your savings, then the loan will be treated as a distribution that is subject to federal and state income tax, as well as an early withdrawal penalty of 10% if you’re under the age of 59.5, said Shomari Hearn, a certified financial planner and vice president at Palisades Hudson Financial Group in the Fort Lauderdale, Fla. office.

“If you’re contemplating leaving your company within the next few years or are concerned about job security, I would advise against taking out a loan from your 401(k),” he said.

*     *     *

If you accept another job offer, refinancing your mortgage may be difficult when you are facing a time crunch, said David Reiss, a law professor at Brooklyn Law School.

“If you leave your job, the loan will come due, and you will have to figure out how to repay it – potentially just at the time it would be hardest to do so,” he said. “Given that it might be hard to refinance the property on such short notice, you might find yourself stuck between a rock and a hard place.”

LawProfs in MERS Litigation

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The Legal Services Center of Harvard Law School (through Max Weinstein et al.); Melanie Leslie, Benjamin N. Cardozo School of Law; Joseph William Singer, Harvard Law School; Rebecca Tushnet, Georgetown University Law Center and I filed an amicus brief in County of Montgomery Recorder v. MERSCorp Inc, et al. (3rd Cir. No. 14-4315). The brief argues,

MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.

The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.

Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times. (2-3)

Connecting Housing to Health

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The Center for Housing Policy’s latest issue of Insights from Housing Policy Research featured a research summary on The Impacts of Affordable Housing on Health:

the authors examined recent research on the various ways in which the production, rehabilitation, or other provision of affordable housing may affect health outcomes for children, adults, and older adults. This report is organized around ten hypotheses on the contribution of affordable housing to supporting positive health outcomes. Overall, the research supports the critical link between stable, decent, and affordable housing and positive health outcomes. (1, footnote omitted, emphasis in the original)

The authors conclude that “providing affordable housing is a valuable strategy to support and improve wellbeing. It is important for policymakers to understand that safe, adequate, and affordable housing is not just shelter but also an investment in good health for low-income households.” (8)

The article seems pretty result-driven, so I am not sure how reliable it is as a research summary. I was particularly struck by its frequent conflating of causation and correlation. This conflation is seen in the conclusion above: there is surely a link between housing and health, but what is causing what?

Take the first hypothesis: “Affordable Housing Can Improve Health Outcomes by Freeing Up Family Resources for Nutritious Food and Health Care Expenditures.” (2) Sure, but so can increased income or decreased expenses in other parts of a budget. This first hypothesis isn’t really a story about affordable housing, but about poverty. So a better question might be — what is the most efficient way to increase resources for food and health care? The research cited does not appear to make the case that affordable housing is the right answer to that question.

There is no question that this is first and foremost an advocacy document. This should come as no surprise, given that the Center for Housing Policy is the research division of the National Housing Conference. That being said, the footnotes do provide an overview of the research in this area. Some readers might find it useful in that regard.

 

Who Knows The ABCs of Finance?

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Annamaria Lusardi recently posted a working paper, Financial Literacy: Do People Know the ABCs of FInance? to SSRN. The abstract reads,

Increasingly, individuals are in charge of their own financial security and are confronted with ever more complex financial instruments. However, there is evidence that many individuals are not well-equipped to make sound saving decisions. This paper looks at financial literacy, which is defined as the ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts. Financial literacy impacts financial decision-making, with implications that apply to individuals, communities, countries, and society as a whole. Given the lack of financial literacy among the population, it may be important to remedy it by adding financial literacy to the school curriculum.

As I have stated previously, not only is financial literacy in bad shape, but efforts to improve it have not proven to be very effective. Lusardi’s paper has some sobering findings:

most individuals in the United States and in other countries cannot
perform simple calculations and do not understand basic financial concepts such as interest compounding, the difference between nominal and real values, and risk diversification. Knowledge of more complex concepts, such as the difference between bonds and stocks, the workings of mutual funds, and basic asset pricing, is even scarcer. Financial illiteracy is widespread among the general population and particularly acute among specific demographic groups, such as women, the young and the old, and those with low educational attainment. (3)

Because evidence does not demonstrate that additional financial education is all that effective, I take a different lesson from Lusardi’s review of survey results. The government should take an active role in regulating financial markets to protect consumers from abusive behavior and to encourage them to make good financial decisions. Financial education is no replacement for consumer protection.