Author Archives: David Reiss

Reiss on “Generation Rent”

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MSN Real Estate quoted me in ‘Generation Rent’ trend changes the housing game.

Tougher lending requirements, a transient lifestyle and seeing mortgages throw their
parents’ finances in turmoil are causing more millennials to rent instead of buy a
home.

“This attitude shift on homeownership and the rise in demand for rentals is directly influencing the growth of private firms looking to fill out real estate portfolios as well as property management groups that have scooped up business from investors who have no interest in the day-to-day of being a landlord,” said Don Lawby, president of Real Property Management in Utah.

Some 82% of consumers believe owning a home is a critical part of wealth building but 18% said they are not willing to assume the risk of a mortgage, according to a National Foundation for Credit Counseling (NFCC) survey.

“The unwillingness to take on a mortgage loan may be a smart decision for some, as many borrowers have learned the hard way that homeownership does not come with a guarantee of continually increasing equity,” said Gail Cunningham, spokesperson with the NFCC.

The “Generation Rent” phenomenon is not just about younger Americans. As a societal shift has slowly emerged to redefine the American Dream, many older Americans with empty nests are also exploring apartment living.

“Apartments are a maintenance-free alternative to single-family homes and retirement communities,” said Abe Tekippe, a spokesperson with Waterton Associates, a national apartment investor and operator. “They also allow residents to move closer to shopping, dining and entertainment venues, making them more accessible to aging Baby Boomers.”

For many years, homeownership was a policy objective of the federal government, which symbolized a level of achievement for a person or family but these days many are taking a closer look at whether the costs and benefits of home ownership outperforms the cost of renting.

“People are realizing that coming up with funds and motivation each month for maintenance and up-keep isn’t feasible for economic, medical, lifestyle or other
reasons,” said Dillon Baynes, co-founder and managing partner with Columbia Ventures in Atlanta.

If generation rent continues, a slow down in home sales is bound to have a ripple effect. “If renting remains a popular choice, it will certainly have an impact on the broader economy starting with the home building industry,” said David Reiss, professor with Brooklyn Law School.

“There would be a move away from single-family construction to multi-family.”

Reiss on History of Eminent Domain

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The Orlando Sentinel quoted me in History also Parts City, Church in Stadium Dispute  (sign in required). It reads in part,

It’s been said that you can’t fight City Hall. Still, tiny Faith Deliverance Temple is gonna try. The city of Orlando covets its property — now the final piece of the two square blocks upon which will bloom a $110 million soccer savanna for the Orlando City Lions to roam. Church officials balked. So city officials filed suit to seize the land. Goliath shoved. Now, David’s grabbed a sling.

The church has enlisted a Jacksonville property rights law firm to fight for its right to stay put. Any way you slice it, the church’s hopes rest with a judge who, in two previous eminent domain cases involving the soccer stadium, deemed that it fits the definition of a public use.

City Hall considers the stadium manna from Major League Soccer: It’ll nourish the greater community with economic development, jobs and tourism. Pastor Kinsey Shack, meanwhile, simply says her largely black flock “does not want and has not wanted to sell its property.”

It would be easy to reduce the dispute to simplistic terms: Seeing the writing on the wall, the church has fallen prey to the sin of avarice. Orlando offered $1.5 million for property worth less than half that, and most recently upped the ante to $4 million. Church leaders countered with $35 million (but later lowered it to $15 million).

To church officials, it’s simply a matter of fairness. In 2007, Orlando plunked $35 million in cash and other sweeteners into First United Methodist Church’s collection plate. It needed the land for the Dr. Phillips Center for the Performing Arts, and paid a small fortune to the largely white downtown church. In any case, church officials aren’t sweating the optics. Maybe that’s because money isn’t necessarily the root of its revolt.

An alternative motive seems rooted in history, personal and collective. In the late ’70s, Robert Lee Williams moved his wife Catherine, their four kids, and the church he’d incorporated in 1969 to West Church Street in Orlando’s mostly black Parramore neighborhood.

The teeny flock grew as he saved and collected souls through revivals. In the early ’80s, they moved to a West Church Street warehouse. With member donations, Williams bought the property, and largely through the sweat of local day laborers, they moved into a new church home in 1996. Williams died in 1997, but his wife carried on, before passing the mantle to Shack six years ago. For the Williams family, divesting the property divorces them from their community, their history.

Yet, through government strong-arming that very thing is — for blacks in particular — a sordid history as old as America. That’s according to Mindy Fullilove, a Columbia University clinical psychiatry professor in a recent report on the devastation eminent domain wreaks on black communities. “Eminent domain has become what the founding fathers sought to prevent: a tool that takes from the poor and the politically weak to give to the rich and politically powerful.”

David Reiss, a Brooklyn Law School professor, noted in an email that since early last century “local governments have a long history of using eminent domain in black communities, from so-called ‘slum clearance’ to ‘urban renewal’ to ‘blight removal.'”

S&P: Future of Private-Label RMBS Uncertain

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S&P has posted an Executive Comment, Lifted By Improving Economic Conditions, The U.S. Leads The Global Securitization Rebound–But Headwinds Remain. It concludes,

After surviving its first severe test, the market for securitization is slowly emerging from a sharp downturn, demonstrating its viability to efficiently distribute risk and expand credit availability. In this light, with many regulatory and economic uncertainties still present, we’re forecasting continuing slow growth going into next year.

The question is if, and when, securitization will register large issuance numbers again, contribute to the funding diversity and liquidity positions of banks, and improve the efficient allocation of resources to foster global economic growth.

For the U.S.–far and away the largest and most mature securitization market in the world–it’s clear, given the interconnectivity of the economy, the securitization market, and housing finance, that a continued economic recovery is necessary before the securitization market can fully recover. Economic growth will also encourage regulators, policymakers, and investors to work on the eventual return of private housing finance. But we believe that mortgage financing remains a concern for general credit availability and a continuing housing market recovery. The future of non-agency RMBS will remain in question so long as the GSEs dominate housing finance while enjoying exemptions from the qualified mortgage and risk-retention rules. (7)

I do not think that there is anything particularly new in this analysis, but it does highlight an important issue, one that I have touched on before. The gridlock on housing finance reform in DC has many effects. The GSEs are not on solid footing. The private-label industry does not know what part of the mortgage market it can operate in, whether with Qualified Mortgage (QM) or Non-QM products. And most importantly, homeowners are  not getting credit at a price that a stable and mature market would offer.

The conventional wisdom is that housing finance reform is off the table until after the mid-term elections or even until after the next presidential election. That is bad news for American households, the housing industry and the financial markets. And without some strong leadership in DC, it looks like the conventional will be right.

Promoting Affordable Housing, and the Winner Is . . .

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I had blogged about a competition to generate ideas to lower the cost of affordable housing, the Minnesota Challenge to Lower the Cost of Affordable Housing.  I was pretty excited about this challenge and was happy to see that a winner has been chosen:  the University of Minnesota’s Center for Urban and Regional Affairs (CURA).

CURA’s winning proposal is here.  Basically, they

propose a three-stage program for addressing the state and local regulatory cost driver. First, we will identify and summarize best practices at the state and local levels for reducing regulatory and permitting barriers to affordable housing. There is a significant national database of initiatives that can provide examples for possible implementation here, as well as the Affordable Housing Toolkit established by ULI Minnesota. Second, we will conduct an analysis of where a more complete adoption of best practices is likely to have the largest effect on the production of affordable housing, particularly those suburban cities with the largest future affordable housing goals. Finally, we will take advantage of the fact that the Metropolitan Council of the Twin Cities is currently drafting a Regional Housing Policy plan, which is a vehicle that could implement regulatory reforms and create incentives for local governments to adopt practices and policies to reduce development costs. (1)
These are all valuable things to do, but I have to say that I am disappointed that this is as good as it gets when it comes to innovation regarding reducing the cost of affordable housing construction. Perhaps the takeaway lesson is that building affordable housing is expensive and that we can only cut costs a bit at the margins. I am hoping, however, that I am wrong about that and that some innovative ideas are still out there. Are there big ideas about inclusionary zoning?  About modular construction? About public/private partnerships? We’ll have to wait and see.

Reiss on GSE Transfer Taxes

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Law360 quoted me in Fannie, Freddie Look Unstoppable In Transfer Tax Fight (behind a paywall).  It reads in part,

Class actions against Fannie Mae and Freddie Mac over hundreds of millions of dollars in unpaid transfer taxes in states and cities around the country continue to pile up, but experts say any attempt to challenge the housing giants’ exempt status is likely futile as court after court rules in their favor.

The Eighth Circuit on Friday joined the Third, Fourth, Sixth and Seventh circuits in ruling that Fannie Mae and Freddie Mac are exempt from local transfer taxes when it ruled in favor of the government-sponsored enterprises, or GSEs, after reviewing a suit brought by Swift County, Minnesota.

Swift County, as with a multitude of counties, municipalities and states before it, sought to dispute Fannie and Freddie’s claim that while they must pay property taxes, they are exempt from additional taxes on transfers of assets. But in what some experts say has come to seem like an inevitable answer, the Eighth Circuit found in favor of Fannie and Freddie.

“The federal statutes that set forth the charters of Fannie and Freddie are pretty clear that the two companies have a variety of regulatory privileges that other companies don’t,” David Reiss, a professor at Brooklyn Law School, said. “One of the privileges is an exemption from nearly all state and local taxation.”

The legal onslaught against the GSEs began in 2012 after U.S. District Judge Victoria A. Roberts ruled in March that they should not be considered federal agencies. In a suit filed by Oakland County, Michigan, over millions in unpaid transfer taxes, Judge Roberts rejected the charter exemption argument and, citing a 1988 U.S. Supreme Court ruling in U.S. v. Wells Fargo, found that “all taxation” refers only to direct taxes and not excise taxes like those imposed on asset transfers.

Counties, municipalities and states across the country were emboldened by the decision. Putative class actions soon followed in West Virginia, Illinois, Minnesota, Florida, Rhode Island, Georgia and elsewhere as plaintiffs rushed to see if they could elicit a similar ruling and recoup millions of dollars allegedly lost thanks to the inability to tax Fannie and Freddie’s mortgage foreclosure operations.

But Judge Roberts’ decision was later overturned by the Sixth Circuit, as were other similar orders, though many district judges found in favor of Fannie and Freddie from the start.

*     *    *

Many cases remain in the lower courts as well, but experts say the outcomes will likely echo those that played out in the Third, Fourth Sixth, Seventh and Eighth circuits, because the defendants’ chartered exemption defense appears waterproof.

“I find the circuit court decisions unsurprising and consistent with the letter and spirit of the law,” Reiss said. “I am guessing that other federal courts will follow this trend.”

Subprime Scriveners

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Milan Markovic has posted Subprime Scriveners to SSRN. The abstract reads,

Although mortgage-backed securities (“MBS”) and other financial products that nearly caused the collapse of the global financial system could not have been issued without attorneys, the legal profession’s role in the financial crisis has received relatively little scrutiny.

This Article focuses on lawyers’ preparation of MBS offering documents that misrepresented the lending practices of mortgage loan originators. While attorneys may not have known that many MBS would become toxic, they lacked incentives to inquire into the shoddy lending practices of prominent originators such as Washington Mutual Bank (“WaMu”) when they and their clients were reaping considerable profits from MBS offerings.

The subprime era illustrates that attorneys are unreliable gatekeepers of the financial markets because they will not necessarily acquire sufficient information to assess the legality of the transactions they are facilitating. The Article concludes by proposing that the Securities and Exchange Commission impose heightened investigative duties on attorneys who work on public offerings of securities.

The article addresses an important aspect of an important subject – which professionals could and should be held responsible for the rampant misrepresentation found throughout the MBS industry in the early 2000s. The prevailing wisdom is that no one can be held responsible, because no one did anything that made him or her personally culpable.  Markovic argues that lawyers can and should be held responsible for the misrepresentations found in MBS offering documents.  While I buy his argument that lawyers have been unreliable gatekeepers, I am not sure that I fully agree with diagnosis of the problem.

Markovic writes,

The large financial institutions that issued MBS presumably understood the implications of incorporating questionable representations from loan originators into MBS offering documents. They also would have been able to consult with their in-house counsel about the risks of securitizing poor quality mortgages. It is not self-evident that ethical rules should compel attorneys to investigate what sophisticated clients advised by in-house counsel do not believe needs investigating. (45)

In fact, sophisticated parties often use reps and warranties to allocate risk. For instance, a provision could require that an originating lender buy back mortgages that failed to comply with reps and warranties. This is not a situation where any of the parties would expect anyone to investigate the “representations from the loan originators.”  Rather, the parties assumed (rightly or wrongly) that the originator would stand behind the representation if and when it was proved to be false. And, indeed, solvent originators have had to do so.

As I do not fully agree with Markovic’s diagnosis of the problem, that leads me to have concerns with his proposed solution as well. But the article raises important questions that we have not yet answered even though the events leading to the financial crisis are nearly a decade behind us.

G-Fee Entreaty

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The FHFA has issued a Request for Input about Fannie Mae and Freddie Mac Guarantee Fees. The Request both provides a good explanation of g-fees and poses important questions about their appropriate role in the functioning of the housing finance system. The Request opens,

On December 9, 2013, the Federal Housing Finance Agency (FHFA) announced proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac (the Enterprises) charge lenders. The Enterprises receive these fees in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in Mortgage Backed Securities (MBS) if the borrower fails to pay. The MBS, in turn, are backed by mortgages that lenders sell to the Enterprises.

 The proposed changes included an across-the-board 10 basis point increase, an adjustment of up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states. On January 8, 2014, Director Melvin L. Watt suspended implementation of these changes pending further review. (1)

The Request asks for responses to 12 questions. The most important, as far as I am concerned, is the first: “Are there factors other than those described in section III – expected losses, unexpected losses, and general and administrative expenses that FHFA and the Enterprises should consider in setting g-fees? What goals should FHFA further in setting g-fees?” (7)

Setting the g-fee has far-reaching consequences not just for the financial health of the two companies, but also for the health of the overall housing market and the mortgage industry. It will also have predictable effects on the litigation over the conservatorships of the two companies. For instance, a high g-fee will make the two companies appear to be more valuable than a low one. The size of the g-fee may also impact the scope of federal affordable housing initiatives.

While this Request for Input is pretty technical (particularly the parts of it that I didn’t blog about), it touches on some of the most fundamental aspects of our system of housing finance. As such, it invites responses from more than just industry insiders. Input is due by August 4th.