Author Archives: David Reiss

Be Careful What You Wish For GSEs

Posted on by

Genie Lamp

Jim Parrott and Mark Zandi have released a report, Privatizing Fannie and Freddie: Be Careful What You Ask For. The authors go through a very useful exercise in which they break down the cost of reprivatizing. The report opens,

Few are happy with the current housing finance system that has Fannie Mae and Freddie Mac in conservatorship and taxpayers backing most of the nation’s residential mortgage loans. Yet legislative efforts to replace the system have largely faltered, raising concern that we may not have the political will or competence to replace it any time soon.

This has created an opening for those who contend that we should not replace the system at all, but simply recapitalize the government-sponsored enterprises and release them from conservatorship. Fannie and Freddie were remarkably profitable prior to the financial crisis, after all, and have been consistently in the black recently. Why embark on the laborious, risky and now stalled process of fundamental reform when we can simply return to a model that we know can provide steady access to affordable, long-term fixed-rate lending?

While we both have serious concerns with the wisdom of releasing the duopoly back into the market, we thought it useful to set those concerns aside for the moment to explore the economics of the move. The discussion often takes for granted that this path would take us back to the world precrisis, but economic conditions and the regulatory environment have changed in ways that would significantly affect how Fannie and Freddie would function as reprivatized institutions. (2)

Parrott and Zandi conclude that

The debate over whether to recapitalize and release the GSEs into the private market is often framed as a choice of whether or not to return to a prior period in lending. For all its shortcomings, the argument goes, at least we know what to expect in the cost and availability of mortgage credit. But this is a misconception. In releasing the GSEs into the private market again, we would release them into a very different regulatory and economic environment, and they would respond, not surprisingly, by charging very different mortgage rates. (4)

I really have no argument with Parrott and Zandi’s paper, but I would note that their conclusions don’t differ so much from the pre-crisis academic papers that attempted to quantify the increase in mortgage rates that would result from privatizing the two companies — fifty basis points, give or take (see, for example, The GSE Implicit Subsidy and Value of Government Ambiguity).

I value Parrott and Zandi’s paper because it reminds us to keep pushing forward with real housing finance reform even though Congress has not yet made any progress on that front.

Reiss on SCOTUS Junior Lien Decision

Posted on by

US-Supreme-Court-room-SC

Bloomberg BNA quoted me in Nagging Economic and Credit Questions Dampen Bankruptcy Victory for Bankers (behind paywall). It reads, in part:

The U.S. Supreme Court delivered an important bankruptcy ruling for bankers that doesn’t, however, do anything about still-struggling homeowners (Bank of Am. N.A. v. Caulkett, 2015 BL 171240, U.S., No. 13-cv-01421, 6/1/15); (Bank of Am. N.A. v. Toledo-Cardona, 2015 BL 171240, U.S., No. 14-cv-00163, 6/1/15).

In a June 1 decision, the court said Chapter 7 debtors cannot void junior liens on their homes when first-lien debt exceeds the value of the property, as long as the senior debt is secured and allowed under the Bankruptcy Code.

The decision is a victory for Bank of America, which held both junior liens in the two related cases, and for banking groups that said a different result could have destabilized more than $40 billion in commercial loans secured by similar liens.

But Brooklyn Law School Professor David Reiss June 2 said the case highlights the need for a broad remedy for homeowners who have continued to struggle to make payments since the financial crisis.

“The bank’s position as a legal matter is a very reasonable one, but from a policy perspective we needed and still need a bigger and more systemic solution to the problems that households face,” Reiss told Bloomberg BNA.

*     *     *

[S]ome said the ruling highlights economic questions on several levels.

Reiss, who coedits a financial blog, June 2 said the case shows the federal government’s inability to deal head-on with the impact of financial turmoil in 2008 and 2009.

“Not enough is being done to move households beyond the crisis, and it’s bad for households and it’s bad for the financial sector,” Reiss said. “Here we are seven or eight years later and we’re sitting here with these valueless second mortgages. We’re just slogging through the muck and we’re not coming up with any good solutions to get past it.”

Saving on Utility Bills (en Español y Ingles)

Posted on by

Nest_Thermostat

Univision quoted me in  Estrategias para Ahorrar Dinero Cada Mes (Strategies to Save Money Each Month). It reads, in part (in English),

Save water and energy. You can monitor your heat/air conditioning services in simple ways, for example, by acquiring a programmable thermostat, which will allow you to maintain your home at a comfortable temperature while you are home and turn in it “energy efficient” when you go out, suggests David Reiss, Research Director, Center for Urban Business Entrepreneurship (NY).

Has your water bill gone up in the last few years? Check your toilet and make sure it’s not running or that your sink is not leaking.

Repairing your bathroom fixtures and keeping them in good working order will help you save money, added the expert.

 

Reiss on Lawsky Legacy

Posted on by

Benjamin_Lawsky_picture

Law360 quoted me in Lawsky’s Aggressive Tactics Provided Model For Regulators (behind a paywall). It reads, in part,

New York Superintendent of Financial Services Benjamin Lawsky’s frequent, aggressive and often creative enforcement actions generated billions of dollars for the state and put his agency at the forefront in financial services regulation, and observers expect a similar approach from Lawsky’s successor when he leaves his post next month.

Confirmed to lead the New York Department of Financial Services in May 2011, few expected the new agency, which combined the state’s banking and insurance regulators, to make much of a mark. But after collecting $3.3 billion in penalties and forcing several traders and top executives out of their positions, Lawsky’s agency has proven to be a powerful enforcer.

“His biggest legacy is simply that he stood up a brand new regulator in one of the global financial centers and made it matter almost immediately,” said Matthew L. Schwartz, a partner at Boies Schiller & Flexner LLP and a former federal prosecutor. Lawsky, who announced his departure from the agency on May 20, established a name for himself and for the Department of Financial Services when he jumped ahead of federal banking regulators and prosecutors in announcing a $340 million settlement with British bank Standard Chartered PLC over its alleged violation of U.S. sanctions against Iran and other countries in August 2012.

That a newly formed state regulatory agency would move ahead with a stiff penalty and threaten to wield the most powerful of weapons — the pulling of Standard Chartered’s license to operate in New York state — reportedly rankled his federal counterparts

*     *      *

“He made clear that consumer protection is integral to the mission of the agency,” Brooklyn Law School professor David Reiss said.

Despite Lawsky’s frequent reminders that he works for New York Gov. Andrew Cuomo — for whom he has also served as chief of staff — and the superintendent’s constant praise for his staff, there is fear among some reformers that the DFS won’t be the same without Lawsky at the helm.

“Lawsky proves that the character of individual regulators can make a crucial difference more than the letter of the law itself,” said Bartlett Naylor of Public Citizen.

“Ideally, he’ll inspire his successor and other regulators that honor awaits the vigilant and opprobrium will fall upon the indolent. More practically, however, the problems of regulatory capture by an enormously influential industry reliant on government favor can prove overwhelming,” Naylor added.

Others are more confident that the agency Lawsky set up will continue its work even after his move to the private sector.

In part, that’s because the penalties the DFS has wracked up have been a boon to New York’s budget.

Cuomo, the state’s former attorney general, has an interest in many of the issues Lawsky acted on, as well.

“I have every reason to expect that Cuomo would want to have a very vigorous enforcer to replace Lawsky,” Reiss said.

Facts and Myths About Rent Regulation

Posted on by

Polonius

Few topics are more fraught in NYC than rent regulation and stances about it are typically set by where people are financially and ideologically. It is always useful when someone tries to add some good old-fashioned facts to the debate in order to help craft good policies. That is particularly true now, given that NYC’s rent laws are supposed to expire on June 15th.

The Citizens Budget Commission has issued a report, 5 Myths About Rent Regulation in New York City. The CBC is hoping that that this report will inform the New York State legislature’s debates over the renewal of New York City’s rent laws (for those who don’t follow this carefully, NYS has jurisdiction over NYC’s rent regulation). Unfortunately, the report is ideologically skewed, which limits its usefulness for those trying to get their hands around this topic.

Here are the CBC’s five “Myths” and “Facts:”

Myth 1: A majority of tenant households in New York City are rent burdened.

Fact 1: 38 percent of tenant households in New York City are rent burdened.

Myth 2: Market-rate units in New York City are not affordable to most tenants.

Fact 2: In market-rate units, 54 percent of tenants have affordable rent.

Myth 3: A rent-regulated housing unit is an affordable unit.

Fact 3: Among tenants in rent-regulated units, 44 percent are rent-burdened.

Myth 4: Middle-income households cannot find affordable housing in New York City.

Fact 4: Outside of Manhattan, 96 percent of middle-income tenant households are not rent burdened.

Myth 5: The number of rent-regulated units is rapidly declining.

Fact 5: The number of rent-regulations is stabilizing.

The CBC claims that public officials and housing advocates are using “problematic” figures and characterizations. That is most certainly true in many cases, and par for the course for advocates. But the CBC does much the same, which should not be par for the course for a nonpartisan civic organization.

The second “Fact” is particularly laughable because CBC is doing exactly what it accuses advocates of doing — some form of rhetorical bait and switch. The second “Myth” is about tenants overall, while the second “Fact” is just about tenants who are currently in market-rate apartments. This is an apples to oranges comparison. Once you see the bait and switch, you see that CBC’s figures actually support the truth of this supposed second “Myth.” There are more problems contained in this document, but I leave it to you to find them for yourself.

I have no problem with CBC trying to make the debate over rent regulation more fact-based. But CBC should follow the wise advice of Polonius: “This above all: to thine own self be true.”

Picture: "Polonius" by https://www.oregonlink.com/elsinore/poveyglass/polonius.html.

Dos And Don’ts of Mixed-Use Development

Posted on by

Mixed Use Development

I was interviewed on Georgia Public Radio’s On Second Thought radio show about The Dos And Don’ts of Mixed-Use Developments. The segment was about John’s Creek,

an affluent suburb in northeast Atlanta. It’s fairly small — only about 80,000 people live there — but it has big dreams.

The city wants to transform some of its 728-acre office park into a town center with homes, shops and offices. John’s Creek mayor Michael Bodker calls the redevelopment project “The District,” referring to an area that would become the city’s downtown sector. Bodker believes this project will broaden the city’s tax base.

“John’s Creek does not have a healthy and sustainable tax digest,” Bodker said in his most recent State of the City address. “Homeowners are disproportionately supporting the load by covering 81 percent of the tax digest versus 19 percent for commercial.” Without doing something to change the current model, he says, there will be less money for public services like road repairs.

The segment was quite short, so it did not get to what I thought was the key issue — the appropriate role of mass transit in the design of urban centers. It appears that the mayor’s plan does not contemplate linking this new urban center to Atlanta-area mass transit. That seems like the kiss of death for what is supposed to be a walkable town center.

To be an attractive walkable environment, you need a critical mass of walkers. Mass transit brings walkers. Some walk by preference and some by necessity: young people without cars; senior citizens who have grown less comfortable driving; and people who might want to have a few drinks and enjoy the nightlife planned for The District.  Moreover, many retail and service jobs pay relatively low wages, so many workers rely on public transportation to get to work. John’s Creek should take a fresh look at the principles of Transit-Oriented Design and New Urbanism before finalizing its plan.

On Second Thought’s website also discusses some of my other thoughts on planning such a big project.

Seeking Justice Through Litigation

Posted on by

AbandonedHouseDelray

Judge Caproni (SDNY) issued an Opinion and Order in Adkins v. Morgan Stanley, No. 12-CV-7667 (May 14, 2015). It opens,

This is one of many cases arising out of the collapse of the housing market. This one comes with a twist: homeowners in Detroit who received subprime loans seek to hold a single investment bank responsible under the Fair Housing Act (“FHA”) for discriminating against African-American borrowers, based on their claim that African-Americans were more likely than similarly-situated white borrowers to receive so-called “Combined-Risk loans.” Plaintiffs allege that Morgan Stanley so infected the market for residential mortgages — and for mortgages written by New Century Mortgage Company, a now defunct loan originator, in particular — that it bears responsibility for the disparate impact of New Century’s lending practices. Although Plaintiffs advance creative theories, their class action lawsuit founders on the requirements of Federal Rule of Civil Procedure 23. (1-2, footnote omitted)

Judge Caproni notes that she is “not unsympathetic to Plaintiff’s claims,” she concludes that this class action lawsuit is an inappropriate vehicle to rectify the wrong that Plaintiffs allege Morgan Stanley perpetrated.” (2) I am not an expert on the law of class actions, but the opinion does seem to identify a number of ways in which the proposed class is “unworkable.” (2)

We are now nearly ten years in from the start of the financial crisis and it seems like we can get a broad sense of whether justice has been served.  My instinct is that many people would say “No,” a resounding “No!”

At first glance that might seem odd, particularly to the shareholders and management of financial institutions who have paid tens of billions of dollars in fines and judgments. But there is a strong sense that those who have been harmed have not been able to get their day in court with those who did the harming. A case like this reveals the limitations of litigation as a means for seeking justice. Not every injustice is capable of being remedied in a court of law.

What does this tell us about preparing for the aftermath of the next crisis? How can laws be changed now to ensure that the right people and institutions are held accountable when it hits? While there are no easy answers to these questions, lawmakers should consider whether the scope of organizational liability is properly defined, whether agents of organizations are properly held accountable and whether organizations working in tandem with each other can be properly held accountable for the harms that they cause collectively. Easier said than done, I know, but still worth the effort.