Author Archives: David Reiss

Lawyering up for Housing Affordability

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The New York City Independent Budget Office issued an estimate of the cost of providing “free legal representation to individuals with incomes at or below 125 percent of the federal poverty level who are facing eviction and foreclosure proceedings in court . . ..” (1) The IBO nets the cost of this proposal against the potential savings that the City would reap by reducing admissions to homeless shelters. The IBO concludes that this proposal would have a net cost of roughly 100 million to 200 million dollars.

The IBO notes that “there are benefits to reducing evictions that extend beyond the city’s budget, such as the potential for reducing turnovers of rent-regulated apartments, which would slow rent increases for those units, as well as avoiding the long term physical and mental health consequences associated with homelessness.” (1-2)

Seems to me that this is money well spent in 21st century New York City. Market forces are such that landlords can frequently raise rents significantly whenever a tenant leaves.  Unscrupulous landlords harass their tenants in a variety of ways in order to encourage them to leave sooner.  This might be done through the abuse of legal process, with a landlord trying to evict a tenant multiple times when the tenant has not violated the terms of the lease. Or it might be done through improperly maintaining the property, for instance, cutting off the water repeatedly. In either case, though, tenants are being subject to a lot of illegal behavior in this hot real estate market.

Housing court is a mess for both tenants and landlords, but typically only landlords have lawyers to help them navigate it. This proposal would even the field a bit. Mayor de Blasio’s affordable housing goals would be greatly augmented by this proposal.

Perhaps housing court reform should also be put on the table so that these cases are adjudicated equitably, but that is a topic for another day . . ..

Lederman, Rahman & Reiss on CFPB No-Action Policy

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Jeff Lederman, Sabeel Rahman and I submitted a comment on the Consumer Financial Protection Bureau’s proposed policy on No-Action Letters. Basically,

This is a comment on the Consumer Financial Protection Bureau’s (the “Bureau”) proposed Policy on No-Action Letters (the “Policy”).  The Policy is a step in the right direction, but a more robust Policy could better help the Bureau achieve its statutory purposes.

The Bureau recognizes that there are situations in which consumer financial service businesses (“Businesses”) are uncertain as to the applicability of laws and rules related to new financial products (“Products”); how regulatory provisions might be applied to their Products; and what potential enforcement actions could be brought against them by regulatory agencies for noncompliance.  Businesses could therefore benefit from the issuance of a No-Action Letter to reduce that uncertainty.

There is very little scholarly literature on the use of No-Action Letters by administrative agencies.  In the absence of comprehensive studies, it is hard to precisely determine how to allocate agency resources to informal guidance as opposed to other types of regulatory action.  Notwithstanding this, an agency should attempt to determine the optimal amount of its resources that should be devoted to informal guidance as opposed to the alternatives and then refine that initial estimate as experience dictates.

A rapidly changing field like consumer finance can benefit from the availability of quick and informal feedback for Businesses so long as the process is properly designed.  Because the Policy would use a relatively small amount of Bureau resources compared to other types of regulatory action, a well-designed No-Action Letter Policy would be a win-win-win for Businesses, for the Bureau and for consumers.

Reiss on Fair Housing Falsehood

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The Providence (R.I.) Journal quoted me in its Truth-O-Meter column:  Mike Stenhouse: According to HUD, It’s Unfair, Unjust for Wealthy to Live in Exclusive Neighborhoods. The column reads, in part,

For more than three years, the Rhode Island Division of Planning has been working on RhodeMap RI, a long-term economic development plan meant to help guide efforts to improve the state’s economy.

The process, partly financed by a $1.9-million grant from the U.S. Department of Housing and Urban Development (HUD),  didn’t get much notice until a nearly 200-page draft of the plan was released in mid-September, igniting a firestorm of controversy.

Critics of the plan denounced it as a thinly disguised blueprint for social engineering. If it is implemented, they say, local communities will be forced to cede authority to the federal government on issues such as affordable housing and land use, and individual property rights will be under threat.

Supporters, including Governor Chafee and the planners and community leaders who drafted the plan, say it’s a well crafted, comprehensive guide that will help move the state’s economy forward over the decades ahead. They say there’s nothing in the plan that would infringe on individual property rights or local home rule.

The debate grew so heated at one meeting a shouting match broke out, with charges of racism and bigotry hurled. And last week, at a meeting of the Statewide Planning Council, opponents called it unconstitutional, socialist and even treasonous. Nonetheless, the council voted unanimously to adopt it.

Mike Stenhouse, CEO of the Rhode Island Center for Freedom and Prosperity, a conservative research group, has led the opposition. A few weeks ago, he talked about the plan on WPRO-AM’s “The Dan Yorke Show.”

Yorke asked Stenhouse to cite a component of the plan “that highlights what you think is problematic.”

“I’m going to give you my interpretation,” Stenhouse responded. “I don’t have their plan in front of me. What we believe, for instance, take Poppasquash Point in Bristol. According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”

We wondered whether Stenhouse was right about HUD’s view of wealthy neighborhoods such as Poppasquash Point, one of the state’s priciest enclaves.

When we asked Stenhouse about his statement, he told us he was not directly quoting HUD, but said that his statement was “an accurate interpretation of HUD’s openly stated intent.” He provided links to multiple documents to support his position.

While we don’t view Stenhouse’s statement as a direct quote of HUD policy, we do  believe that listeners who heard Stenhouse’s preface — “according to HUD” — would assume he was summarizing HUD’s policy.

Stenhouse’s backup is comprised primarily of links to a news story and an editorial in Investor’s Business Daily and links to various legal  documents and HUD regulations.

*    *    *

According to David Reiss, a professor of real estate and housing policy at Brooklyn Law School, “HUD does not interpret the FHA [Fair Housing Act] to mean that `wealthy people’ can’t `live in an exclusive neighborhood.’”

“An exclusive neighborhood is an expensive one – the FHA does not ban expensive neighborhoods.” Reiss continued in an email statement. “What it does do is ban exclusionary practices.  Exclusionary practices are those that exclude people based on certain of their characteristics such as their race, sex or religion.  To my knowledge, HUD has never taken the position that merely living in an exclusive – that is, expensive — neighborhood violates the FHA.”

We also asked HUD whether Stenhouse had accurately characterized its rules.

“There are simply no policies, practices, regulations or anything that can validate such hyper hyperbole,” Brian Sullivan, a public affairs officer with HUD, said in an email statement.

Our ruling

Mike Stenhouse said “According to HUD, it is patently unfair and socially unjust that wealthy people can live in an exclusive neighborhood.”

There’s no doubt that HUD has challenged what it considers to be discriminatory practices at the community level, including exclusionary zoning ordinances.

But that’s not nearly the same as objecting to the right of wealthy people to live in expensive neighborhoods.

We rule Stenhouse’s claim False.

Hockett on NYC Eminent Domain

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Bob Hockett has posted ‘We Don’t Follow, We Lead’: How New York City Will Save Mortgage Loans by Condemning Them to SSRN. The abstract reads,

This brief invited essay lays out in summary form the eminent domain plan for securitized underwater mortgage loans that the author has been advocating and helping to implement for some years now. It does so with particular attention in this case to New York City, which is now actively considering the plan. The essay’s first part addresses the plan’s necessity. Its second part lays out the plan’s basic mechanics. The third part then systematically addresses and dispatches the battery of remarkably weak legal and policy arguments commonly proffered by opponents of the plan.

Hockett has been advocating this plan for some time in the face of concerted opposition from the financial industry. One industry argument that I have found to be over the top is that lenders will refuse to lend in communities that employ eminent domain to address the foreclosure crisis. Hockett writes,

Another policy argument made by some members of the securitization industry is that using eminent domain to purchase loans will dry up the sources of mortgage credit, rendering the American dream of homeownership unattainable. The financial services industry and its legislative supporters have made this kind of claim against regulatory and consumer protection proposals emerging from national, state, or municipal legislatures.

One problem with this argument is that private credit has not flowed to non-wealthy mortgage borrowers since the crash. Federal lenders and guarantors are nearly the only game in town, and they are likely to remain so until the underwater PLS loan logjam is cleared.

Another problem with the credit withdrawal argument is that it characterizes a benefit as a burden. The housing bubble was, like most of the more devastating bubbles through history, the upshot of an over-extension of credit. Lenders extended excess credit through reverse redlining and other predatory lending practices perpetrated or aided and abetted by participants in the securitization industry itself. Hence the securitization industry’s warning that credit might not be overextended in the future is a warning of something that might well be desirable. (142-43, footnotes omitted)

Given that lenders always rush to lend to countries that have recently defaulted on their sovereign debt, I don’t find the credit withdrawal argument to be particularly convincing here. But it may succeed in convincing some local governments not to proceed with their eminent domain strategies. I do hope, however, that at least one locality will follow through during the current foreclosure crisis. That way, we will at least have a proof of concept for the next foreclosure crisis.

 

Fannie and Freddie Begin a New Stage

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The Federal Housing Finance Agency has ordered Fannie and Freddie to begin making contributions to the Housing Trust Fund and to the Capital Magnet Fund.  These two funds were created pursuant to the Housing and Economic Recovery Act of 2008, the same statute that authorized placing the two companies in conservatorship. In 2008, FHFA Acting Director DeMarco suspended payments into the two funds because the two companies were being bailed out by the federal government. Now that the two companies are on firmer financial footing, the FHFA has lifted the suspension. The suspension will go back into effect for a company if it has to make a draw from Treasury under the Senior Preferred Stock Purchase Agreement, that is if the company does not have enough excess monies to make the payments into the two funds from its own income.

This action is not so surprising, given Watt’s past statements. It does, however, have some interesting implications. In terms of the GSE shareholder litigation, these allocations reduce the enterprises’ capital by a not insignificant amount; if shareholders were to win one of their lawsuits, monies placed in these two funds would be unavailable to them. In terms of housing finance reform, this action signals that the companies have moved beyond their crisis stage into a more stable one. It also emphasizes that the FHFA can take big steps on its own when it comes to housing finance reform, notwithstanding Congressional gridlock. All in all, it feels like the beginning of a new stage in the lives of the two companies.

The FHFA has issued an Interim Final Rule and Request for Comments relating to the payments into the two funds. The rule “implements a statutory prohibition against the Enterprises passing the cost of such allocations through to the originators of loans they purchase or securitize.” (1) Comments are due 30 days after the interim final rule is published in the Federal Register.

Mortgage Leverage and Bubbles

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Albert Alex Zevelev has posted Regulating Mortgage Leverage: Fire Sales, Foreclosure Spirals and Pecuniary Externalities to SSRN. The abstract reads,

The US housing boom was accompanied by a rise in mortgage leverage. The subsequent bust was accompanied by a rise in foreclosure. This paper introduces a dynamic general equilibrium model to study how leverage and foreclosure affect house prices. The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration to match the bust shows consumption and housing need to be sufficiently complementary to fit the data. Since leverage plays a key role in foreclosure, a regulator can reduce systemic risk by placing a cap on leverage. Counterfactual experiments show that in a world with less leverage, the same economic shock leads to less foreclosure and less severe, shorter busts in house prices. A 90% cap on loan-to-value ratios in 2006 predicts house prices would have fallen 12% rather than 18% as in the data. The regulator faces a trade-off in that less leverage means less housing for constrained households, but also fewer foreclosures and less severe busts in house prices. A regulator with reasonable preference parameters would choose a cap of 95%.

This is pretty important stuff as it attempts to model the impact of different LTV ratios on prices and foreclosure rates. Now Zevelev is not the first to see these interactions, but it is important to  model how consumer finance regulation (for instance, loan to value ratios) can impact systemic risk. This is particularly important because many commentators downplay that relationship.

I am not in a position to evaluate the model in this paper, but its conclusion is certainly right: “Leverage makes our economy fragile by increasing the risk of default. It is clear that
foreclosure has many externalities and they are quantitatively significant. Since borrowers
and lenders do not fully internalize these externalities, there is a case for regulating mortgage leverage.” (31)

Transit-Oriented Development No Panacea

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The Government Accountability Office issued a report, Multiple Factors Influence Extent of Transit-Oriented Development. The GAO writes that

From 2004 to 2014, FTA [Federal Transit Administration] allocated $18.9 billion to build new or expanded transit systems through the Capital Investment Grant program. One of the key goals for many local governments when planning major capital-transit projects is to encourage transit-oriented development as a way to focus future regional population growth along transit corridors. Transit-oriented development is generally described as a compact and “walkable” neighborhood near transit with a mix of residential and commercial uses.
GAO was asked to examine transit-oriented development. This report addresses (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and the factors and local policies that affect transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects and the extent to which FTA’s assessment of these factors is consistent with the factors that local stakeholders told GAO affect a project’s results. To address these issues, GAO reviewed relevant literature and visited six federally funded case study transit projects in Baltimore, MD; Washington, DC; Charlotte, NC; Santa Clara County, CA; San Francisco, CA; and Houston, TX, selected for diversity in local programs, markets, and geography. During these visits, GAO met with stakeholders, such as local officials and developers. GAO also interviewed FTA officials. In commenting on a draft of this report, DOT noted FTA’s longstanding commitment to encourage transit-oriented development.
The GAO’s findings are quite mixed, but it did note that “many of the factors or local government policies that supported or hindered transit-oriented development are generally consistent with FTA’s summary assessment for economic development and land use.” Some promote transit-oriented design as a panacea for what ails American communities and others argue that we are too developed and too dispersed for it to make much of a difference in how we live and work. This report does not really move the debate one way or the other, but it does provide some interesting case studies that can help to inform the debate.