Author Archives: David Reiss

Reiss on de Blasio Housing Plan

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Law360.com quoted me in Developers, Attys Embrace De Blasio’s $41B Housing Plan (behind a paywall). It reads in part,

Real estate attorneys and their developer clients are cautiously optimistic about New York City Mayor Bill de Blasio’s new affordable housing plan, lauding its concrete objectives while noting that regulatory and financial hurdles could stall some of the most ambitious elements.

The mayor unveiled Monday the highly anticipated plan [you can find the plan here], which presents a $41 billion investment in affordable housing. He pledged to encourage affordable housing development by breaking down existing barriers to density, from adding efficiencies to the land use review process, to making better use of subsidies and tax incentives, to changing the multiple dwellings law to allow for higher floor area ratios at residential buildings.

The multifaceted approach appeared to appeal to many in the development community, who are eager to build across the city but have been uncertain in recent months about how the mayor’s plans to create or preserve 200,000 units of affordable housing would align — or compete — with their interests.

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While de Blasio’s new housing plan is mum on details, Deputy Mayor Alicia Glen said during the press conference Monday that the administration also planned to “take a hard look at where we are able to rezone or upzone to create more opportunities for affordable housing.”

During the last administration, more than 30 percent of the city underwent rezoning, opening up scores of new lots for developers but enraging many community groups and local residents who feared that new market-rate towers would bring with them skyrocketing prices and gentrification.

De Blasio said Monday, however, that while Bloomberg had changed the rules of land use in much of the city, many opportunities remain to increase density — and therefore affordable housing, with mandatory inclusionary zoning — by upzoning additional neighborhoods.

Experts say this may well be one of the most controversial aspects of the plan, though developers and their attorneys generally welcome it. For the most part, they are pleased with the administration’s direction, but the question remains as to whether the plans will be borne out in the face of opposition, said David Reiss, a professor at Brooklyn Law School who blogs about commercial real estate and housing issues.

“The big debate is: Are we going to have a real commitment to increased density in parts of New York City? And if we don’t, it’s hard to imagine we can really reduce the cost of housing,” he said.

The Second Frannie Bailout: Who Could’ve Known?

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There is a good chance that five or so years from now, Fannie and Freddie will be in the midst of another bailout. This next crisis will be directly caused by the Executive and Legislative branches of the federal government. But members of those branches will say, “Nobody could have known that this crisis was going to happen, nobody is at fault.” That won’t be true, but nobody will be punished in any case. That’s because the crisis will result from inaction, that most fearsome of government flaws.

Who is the Cassandra, warning us of this impending crisis? None other than Donald Layton, the CEO of Freddie. You may think that he is speaking merely from self-interest and you would probably be right. But his self-interest happens to align with the truth in this matter.

In a letter to FHFA Director Watt, Layton writes:

the ability of Freddie Mac to continue to support the mortgage markets and the U.S. economy duling an unprecedentedly lengthy transition period should be one of the most important objectives of a housing finance reform proposal, such as the Johnson-Crapo Bill. The existing Bill draft does not focus on this issue and so, in my personal but experienced opinion, leaves the risk of a failure in Freddie Mac’ss Core Policy Function unacceptably high. With certain specific changes, none of which alter the fundamental nature of the future state envisioned or even the key aspects of the transition, l believe this risk can be reduced, although it would still remain high. (7)

Layton highlights the extraordinary complexity of Freddie’s activities in an appendix to the letter. The highlights include the fact that Freddie Mac guarantees  “about  17% of all U.S. mortgage debt outstanding;” 1,400 Servicers and 2,000 Sellers work with Freddie; and Freddie manages 44,600 REO properties. (8)

Layton states that “It goes without saying that Freddie Mac cannot deliver upon its Core Policy Function, its support of the transition to a future state, or its support of Conservatorship initiatives without experienced and knowledgeable people in place at the executive level, at the Subject matter expert level and at the “been-here-a-long-time-to-know-how-everything-works level.” (3) He believes that departures are likely to cripple the company as experienced staff move on to other, more stable opportunities, leaving behind the quagmire that life in a GSE has become.

The Executive and Legislative branches are not really moving toward some kind of resolution of the Fannie and Freddie conservatorships, although we are now five years past the initial crisis. There is a good chance that the federal government will not move us to the next phase of housing finance in the next couple of years. Operations at the two GSEs will thus continue to suffer and will likely build up to a new crisis. And it will be a totally predictable crisis.

I am the kind of person who likes to say, “I told you so.” But the stakes here are so humungous and so important for the health of the economy, that I could take no pleasure in saying I told you in 2014 that our entire housing finance edifice was going to crumble a second time in a decade. But it will, if nothing is done to prevent it today.

Real Affordability for All New Yorkers?

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The Real Affordability for All campaign has issued An Affordable Housing Policy Platform for Mayor de Blasio. A stated goal of the campaign “is to ensure that Mayor de Blasio’s housing policies prioritize and deliver real affordability for the most economically vulnerable households” in the CIty. (1) As with many such studies (this one, for instance), it does a good job of identifying the problem — incomes are not sufficient to keep housing costs affordable — but its solutions do not match the identified problem.

I am not going to focus on all of the good things in the report (for instance, enhancing enforcement of housing laws to protect tenants), but on fundamental flaws in its proposal that the City implement a 50/50 model for increasing the supply of new affordable housing units. The report states that

Affordable housing developers, private sector developers and housing experts agree on two broad 50/50 scenarios that are viable and pragmatic, based on existing developments, current real-estate market assumptions, and the latest mathematical modeling:

1) For high-cost areas of the city (particularly Manhattan), depending on the level of up-zoning, new developments can ensure that 50 percent of the units are market rate and 50 percent are real affordable units targeted to low-income households: specifically, households of four earning 30-60 percent of Area Median Income.

2) For the outer boroughs, where land costs are lower, 100% of new developments can be affordable: 50 percent of the units can be for low-income households (those earning 30-60 percent of Area Median Income) and 50 percent for moderate income households (those earning up to 100 percent of Area Median Income). 100% real affordability can be achieved by increasing current per unit subsidies in the outer boroughs and applying those subsidies to real affordable housing units for low-and moderate-income households. (3)

The first fundamental flaw is an assumption that if the government requires something of developers, developers will do it. For-profit developers will only build if they can make a profit. Otherwise they will just not build.  Given the low rates of new housing construction that we have seen in NYC over long periods of time, this is just a fact of life.

This leads to a second flaw — the proposal leaves fewer market rate units to cross-subsidize more affordable units. Given that the costs of development are relatively fixed, this proposal would have to come up with some real new cost-cutting measures for new developments or new sources of revenue to add to the existing subsidies. But the recommendations put forward by the report don’t really do either of those things. Their recommendations are

  1. Use Subsidies More Wisely to Drive Real Affordability.
  2. Implement a New Low-Income Real Affordability Framework Across All Housing Programs.
  3. Enable Not-for-Profit Developers and Owners to Play a Strong and Active Role in the City’s Housing Agenda.
  4. Prioritize Permanent Affordability for All City-owned Land Dispositions.
  5. Require that Developers and Investors Receiving Any Type of City Subsidy Provide a Reserve Fund that Creates a Safety Net for Excessively Rent-Burdened Tenants.
  6. Flip Tax.
  7. Non-Occupancy Tax.
  8. Water and Sewer Tax Reform
  9. Property Tax Overhaul.
  10. Density Bonuses.(4-5)

Many of these recommendations amount to moving things around, not to reducing costs or increasing subsidies. The ones that do raise revenues, raise relatively small amounts. For instance, the flip tax proposal is estimated to generate between $100 million and $150 million per year.  Using a conservative cost estimate of $200,000 per unit of new housing, $150 million in new revenue would only produce 750 new units of real affordable housing per year, a drop in the bucket.

Many have been trying to shape the Mayor’s housing agenda in recent days (here for instance). But few have seriously faced the real market and political constraints that the City faces as it attempts to increase the supply of affordable housing. There is reason to think that the Mayor’s housing team will grapple with these issues seriously, so let’s wait patiently for their plan to be released . . ..

 

Stressing out on Fannie and Freddie

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The Federal Housing Finance Agency issued Projections of the Enterprises’ Financial Performance (Stress Tests) (Apr. 30, 2014). This is a pretty technical, but important, document. The Background section provides some needed context:

This report provides updated information on possible ranges of future financial results of Fannie Mae and Freddie Mac (the “Enterprises”) under specified scenarios, using consistent economic conditions for both Enterprises.

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. . . the Dodd-Frank Act requires certain financial companies with total consolidated assets of more than $10 billion, and which are regulated by a primary Federal financial regulatory agency, to conduct annual stress tests to determine whether the companies have the capital necessary to absorb losses as a result of adverse economic conditions. This year is the initial implementation of the Dodd-Frank Act Stress Tests.

In addition to stress tests required per the Dodd-Frank Act, this year as in previous years, FHFA worked with the Enterprises to develop forward-looking financial projections across three possible house price paths (the “FHFA scenarios”). The Enterprises were required to conduct the FHFA scenarios as they have in the past, in conjunction with the initial implementation of the Dodd-Frank Act Stress Tests.

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The projections reported here are not expected outcomes. They are modeled projections in response to “what if” exercises based on assumptions about Enterprise operations, loan performance, macroeconomic and financial market conditions, and house prices. The projections do not define the full range of possible outcomes. Actual outcomes may be very different. (4, emphasis in the original)

 The stress test results are as follows:

Dodd-Frank Act Stress Tests Severely Adverse Scenario

  • As of September 30, 2013, the Enterprises have drawn $187.5 billion from the U.S. Treasury under the terms of the Senior Preferred Stock Purchase Agreements (the “PSPAs”).
  • The combined remaining funding commitment under the PSPAs as of September 30, 2013 was $258.1 billion.
  • In the Severely Adverse scenario, incremental Treasury Draws range between $84.4 billion and $190.0 billion depending on the treatment of deferred tax assets.
  • The remaining funding commitment under the PSPAs ranges between $173.7 billion and $68.0 billion. (3)

FHFA Scenarios

  • In the FHFA scenarios, cumulative, combined Treasury draws at the end of 2015 remain unchanged at $187.5 billion as neither Enterprise requires additional Treasury draws in any of the three scenarios.
  • The combined remaining commitment under the PSPAs is unchanged at $258.1 billion.
  • In the three scenarios the Enterprises pay additional senior preferred dividends to the US Treasury ranging between $54.0 billion to $36.3 billion. (3)

There are a number of important points to keep in mind when reviewing this report. First, it addresses just four scenarios out of the the multitude of possible ones. But hopefully the Severely Adverse Scenario gives us a sense of the outer limits of what a crisis could do to the Enterprises and the taxpayers who backstop them.

Second, the report is another corrective to arguments that the federal government’s bailout of the Enterprises can be measured by the amount of money that they actually advanced to the two companies, as opposed to a measure that also accounts for the additional amount that the federal government is committed to provide them if their financial situation takes a turn for the worse.

Finally, as I have noted before, there is an important political battle for control of the narrative of the bailout of the Enterprises. The only narrative during the crisis itself was that the federal government bailed out the two companies because they were insolvent. Revisionist histories, put forward in the main by private shareholders of the two Enterprises, challenge that narrative. The shareholders put forth another version of history: the federal government effectively stole  solvent, viable Fannie and Freddie from them. It will be important for objective third parties to document the truth about this in accordance with Generally Accepted Accounting Principles. From my understanding of the facts, however, it is clear that the two companies were as good as dead when the federal government put them into conservatorship in 2008 and started advancing them tens of billions of dollars year after year until their fortunes turned around in 2012.

Reiss on Abandoned Homes

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Interest.com quoted me in How to Deal with An Abandoned Home. It reads in part,

5 places to look for help

An abandoned home in an otherwise thriving neighborhood can be an eyesore – or worse.

What happens if the lawn goes uncut for weeks or months? If a pipe bursts inside? If a squatter takes up residence?

This abandoned property can quickly move from nuisance to become a real hazard. And if you’re trying to sell your home, an empty property next door can scare away potential buyers, or lead to lower bids than if your neighbor maintained that property.

You don’t need to fight this battle alone, though.

There are resources available to help turn that property around, whether you just want to cut the lawn, or try to get it out of the hands of an owner who is trying to squeeze every dime out of the property, at the expense of your street. Here’s who to call in what situation.

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Call the homeowner’s association

If you’re part of a homeowner’s association, it can help, too.

“HOAs have broad powers to enforce standards for homeowners,” says David Reiss, professor of law at the Brooklyn Law School in New York, where he teaches courses on real estate practice.

How much power they have depends on the HOA’s bylaws, rules and regulations, but HOAs can impose fines for non-compliance with standards laid out in those rules.

“Some might go further and allow and HOA to enter onto a property to conduct maintenance,” Reiss says, which can take care of immediate problems.

He warns, though, that an HOA should consult a lawyer before taking that step, not only to make sure what they’re doing is allowed according to its bylaws, but also because, even if the owner is delinquent on maintenance, they could still accuse the HOA of trespassing or stealing for entering the property.

Reiss on Supreme Court Mortgage Case

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Law360 quoted me in Supreme Court Takes Up Mortgage Rescission Timing Case (behind a paywall). It reads in part,

The U.S. Supreme Court agreed Monday to weigh in on whether federal law requires borrowers to notify creditors in writing of their intention to rescind their mortgages or file a lawsuit making a similar claim within three years.

The petitioners in the case, Larry and Cheryle Jesinoski of Eagan, Minn., are seeking to overturn a September ruling in the Eighth Circuit that they were required to sue Countrywide Home Loans Inc. to have their mortgage financing rescinded within three years of the transaction closing. The Jesinoskis argue that the Truth In Lending Act only requires that they provide notice of rescission in writing within those three years.

But the case goes beyond a ruling in the Eighth Circuit. A Supreme Court ruling would resolve a circuit split that has seen the Third, Fourth and Eleventh circuits rule that borrowers have three years from closing to notify lenders in writing within three years of their intention to cancel their mortgages, while the First, Sixth, Eighth, Ninth and Tenth circuits have found that a lawsuit must be filed within that three-year period, according to the Jesinoskis’ December petition for certiorari.

“The resulting rule does violence to the statutory text, manufactures legal obstacle for homeowners seeking to vindicate their rights under a law that was enacted to protect them, and risks flooding the federal courts with thousands of needless lawsuits to accomplish rescissions that Congress intended to be completed privately and without litigation,” the petition said.

TILA provides two different rescission rights to borrowers who apply for and receive a mortgage refinancing. The more common process allows such borrowers to rescind their mortgage within three days of closing and before any money is disbursed.

The law also provides a more expanded rescission right in situations where borrowers do not receive mandated disclosures. There, the law provides three years from the closing date to provide such notice, but with proof that the documents were not provided.

Prior to the 2007 financial crisis, such expanded rescission claims were rare, said Reed Smith LLP partner Robert Jaworski.

“A lot more people were in trouble on their mortgages and couldn’t make payments and were subject to foreclosure. That caused a lot of these claims to be made, much more than previously,” he said.

And that has made the need for resolving the circuit split that much more important.

“It’s kind of ambiguous. It’s not stated as a statute of limitations,” said Brooklyn Law School professor David Reiss.

Premature End to Foreclosure Review

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Congressman Cummings (D), the ranking minority member of the House Committee on Oversight and Government Reform, has sent a letter to Congressman Issa, the Chairman of the Committee, regarding the Independent Foreclosure Review. It opens,

I am writing to request that the Committee hold a hearing on widespread foreclosure abuses and illegal activities engaged in by mortgage servicing companies.  I request that the hearing also examine why the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) appear to have prematurely ended the Independent Foreclosure Review (IFR) and entered into a major settlement agreement with most of the servicers just as the full extent of their harm was beginning to be revealed. (1)

It goes on to assert that “some mortgage servicing companies engaged in widespread and systemic foreclosure abuses, including charging improper and excessive fees, failing to process loan modifications in accordance with federal guidelines, and violating automatic stays after borrowers filed for bankruptcy.” (2) It concludes that it “remains unclear why the regulators terminated the IFR prematurely, how regulators determined the compensation amounts servicers were required to pay under the settlement, and how regulators could  claim that borrowers who were harmed by these servicers would benefit more from the settlement . . . than by allowing the IFR to be completed.” (2)

The letter raises a number of important concerns, but I will focus on just one — “how did the regulators arrive at the compensation amounts in the settlement?” (9) This particular settlement was for billions of dollars from BoA, PNC, JPMorgan and Citibank. This is an extraordinarily large sum, but the public is left with no sense of whether this sum is proportional to the harm done. I have raised this concern with other billion dollar settlements. As the federal government moves forward with these large settlements, it should carefully consider their expressive function — does the penalty fit the wrongdoing?  And if so, how was that calculated? People want to know.