Author Archives: David Reiss

Reforming NYC’s Property Tax Regime

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Andrew Hayashi has posted Property Taxes and Their Limits: Evidence from New York City to SSRN. There probably could not be a more obscure and dull topic than this to the general reader (and coming from me, as the author of this blog, that is saying something!). But for those of us who think about such things, this is an incredibly important topic that is at its heart fundamentally about fairness and treating like people alike.

Hayashi argues that

The property tax is the largest source of tax revenue for local governments. It is also an almost irresistible policy instrument for municipalities, which typically do not have control over any other tax with which to influence the urban landscape and the local distribution of income and wealth. The widespread use of the property tax for planning and redistribution means that virtually no jurisdiction straightforwardly calculates the tax liability for a property as a fixed percentage of its market value. Instead, property tax rates tend to vary with the use to which a property is put or the identity of its owner. As a consequence, many of the potential benefits of the property tax, such as ease of administration, transparency, the clear reflection of the costs and benefits of local services, and the intuitive fairness of imposing taxes in proportion to property wealth, are lost. (2, footnotes omitted)

He concludes

The property tax is a hated tax, but attempts to curtail its most offensive feature, the rapid increase in taxes that can accompany paper gains in property value, have had unintended distributional consequences that are hard to justify on policy grounds. In New York City, the caps are regressive and tend to benefit new homebuyers and sellers rather than current homeowners on fixed incomes. The caps should be replaced with a property tax circuit breaker [that limits increases for lower-income homeowners] or deferral system [that delays full payment until the property is conveyed]. (27)

This issue is even bigger than these selections suggest as there are big disparities in the tax burden among different types of property. For example similarly priced single family homes have a lower tax burden than coops or condos in multifamily properties. NYU’s Furman Center (with which Hayashi is affiliated) has studied these issues and, even better, has highlighted them as part of the De Blasio transition.

Property tax fairness is not a Republican or a Democratic issue — it is a good government issue. Hopefully, the De Blasio  Department of Finance will take up this obscure but important issue. Fairness demands it.

Reiss on Remodeling

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RealtorMag quoted me in Stay Put and Remodel — or Move? about the relative advantages of renovating and moving. It reads in part:

A New Year ushers in new resolutions, which often includes changes on the home front, but deciding what to do with it can be tough for home owners, financially and emotionally.

As the real estate market rebounds and buyers increase in number, help your contacts make a well-informed decision on the direction they should take with their home. Your insight is valuable when customers are torn between selling in order to upgrade and remodeling their current space to add value and meet their needs. Even those who don’t list and sell with you now may do so later, and even refer friends and family because of your attentive service.

Here are seven key steps to help clients arrive at the best solution:

*     *     *

6. Compare the appraisal and remodeling costs with other neighborhood homes for future resale.

Even though home owners should base decisions in large measure on enjoyment and not wholly on resale value, it’s smart to have an idea of how changes will affect the house compared with others nearby, says real estate attorney and Brooklyn Law School Professor David Reiss.

It’s never smart to overbuild for an area. The type of improvement can also affect the value. Remodeling changes may add to the house’s worth without changing real estate taxes, while an addition will probably cause an uptick in taxes.

Reforming the Fed

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Peter Conti-Brown and Simon Johnson posted their policy brief, Governing the Federal Reserve System after the Dodd-Frank Act, on SSRN (also on the Peterson Institute for International Economics website). I have said before that the Fed is a “riddle, wrapped in a mystery inside an enigma” and I stand by that characterization. This policy brief is very helpful, however, in identifying the legal structure of the Federal Reserve System as well as the practical constraints and political forces that affect the workings of that legal structure.

The authors write that by statute, the chair of the Fed

decides almost nothing herself: The Federal Reserve System is supervised by a Board of seven presidentially appointed, Senate-confirmed governors, of whom the chair is but one. In practice, the chair has frequently had a disproportionate influence on the monetary policy agenda and also the potential to predominate on regulatory matters—working closely with the Fed Board’s senior staff. Even so, for the most significant decisions, the Board must vote, and the chair must rely on the votes of the other six governors (for Board matters) and in addition, on a rotating basis, the votes of five of the twelve Reserve Bank presidents (for monetary policy). On regulation and supervision issues, the chair can do little of consequence without the support of at least three other governors. (1)

The brief goes on to document other aspects of the Fed’s organizational structure and the practical politics of Fed decisionmaking. For those of us who have a hard time parsing how the Fed acts, this is a useful document.

The brief also argues for a new approach to Fed governance:

The Fed chair is arguably the most important economic appointment any president makes. After the crises, new statute, and bold decisions of recent years, this job has become even more important.

During its first 100 years of existence, the position of Fed chair has risen to exercise great potential power. By statute, an appointee can remain in office 20 years or more. A perceived “maestro” effect in which insiders and outsiders are discouraged from challenging the chair is no longer a model with broad appeal, if it ever was.

The Board of Governors could provide an effective counterweight to the chair. Indeed, such a counterweight is what Congress intended by requiring presidential appointment and Senate confirmation of the entire Board. In order to break the tradition of a chair-dominated board, governors need sufficient expertise and experience to engage with and in some instances counteract the chair and Fed staff.

A president’s choice for Fed chair matters enormously, but the choice for members of the Board also matters a great deal. Monetary policy remains a crucial criterion but not at the exclusion of regulatory policy. The Board is second to none—in the nation and indeed arguably in the world—in its responsibility for regulatory oversight over the financial system. The president, members of the Senate, and the general public ignore these considerations at significant peril to the financial system and the economy. (9)

The brief presents a powerful alternative to business as usual at the Fed.  Hopefully, it will gain some traction.

New and Improved Rating Agencies!

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The SEC issued its 2013 Summary Report of Commission Staff’s Examinations of Each Nationally Recognized Statistical Rating Organization. I had noted that the 2012 report was not an impressive document. Much the same can be said for the 2013 version of this statutorily required document (it is required to be produced pursuant the 1934 Securities Exchange Act). It seems, to my mind, to focus on the trees at the expense of the forest.

The report is overall positive, with the staff noting “five general areas of improvement among the NRSROs [rating agencies]” from the previous reporting period:

(i) Enhanced documentation, disclosure, and Board oversight of criteria and methodologies. The Staff has observed that many NRSROs have developed and publicly disclosed ratings criteria and methodologies that better describe ratings inputs and processes. Some NRSROs have also increased Board oversight of rating processes and methodologies.

(ii) Investment in software or computer systems. The Staff found that some NRSROs have made investments in software and information technology infrastructure by, for example, implementing systems for electronic recordkeeping and for monitoring employee securities trading. One NRSRO has implemented systems that enable it to operate in a nearly paperless environment, so as to minimize the inadvertent dissemination of confidential information and to ensure preservation of all records required by Rule 17g-2.

(iii) Increased prominence of the role of the DCO within NRSROs. The Staff has found that the role of the DCO [designated compliance officer] has taken on more prominence within many NRSROs. The Staff has noticed that certain DCOs have increased reporting obligations to, and more interaction with, the NRSRO’s Board. At these NRSROs, the DCO meets with the Board to discuss compliance matters, quarterly or more frequently.

(iv) Implementation or enhancement of internal controls. The Staff has recognized that all NRSROs have added or improved internal controls over the rating process. More NRSROs are using audits and other testing to verify compliance with federal securities law, and NRSROs have generally improved employee training on compliance matters.

(v) Adherence to internal policies and procedures. The Staff has noticed a general improvement in NRSROs’ adherence to internal rating policies and procedures, which improvement appears to be attributable, in part, to improvements in the internal control structure at NRSROs. (8)

Hard to complain about any of these findings, but I have a sinking feeling that improvements such as these won’t add up to enough of a change to the culture that put profits ahead of objective ratings. Hopefully I am wrong about that

Preserving Low-Income Housing

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NYC Mayor De Blasio announced an aggressive goal of producing and preserving 200,000 units of affordable housing over the next ten years. New York City will need to be as creative as possible to achieve this goal and will need to look to all of the resources that it has at its disposal to achieve it. Enterprise Community Partners released Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons Learned for the Extended Use Period. This report looks at important component of a preservation agenda: Low-Income Housing Tax Credit buildings that “reach the end of their initial 15-year compliance period.” (4) The report presents data about LIHTC buildings during the 15-year “extended use period” that follow the compliance period

and shares how some state and local housing agencies around the country are addressing the post-Year 15 Housing Credit properties. While the condition of the Housing Credit portfolio at Year 15 is strong, as properties age into a second 15-year period of rent restrictions and beyond, the ability for some of those properties to be able to afford to make improvements while maintaining affordability is clearly a challenge. Some of these local best practices point to solutions demonstrating programmatic and regulatory flexibility, new resources as well as resyndication where appropriate. (4)

Across the nation, roughly 100,000 units of housing age out of the initial compliance period each year, so we are talking about a lot of housing.  New York has a significant portion of that housing stock. While these properties are in pretty good condition overall, the report found that

very limited financing choices exist throughout the extended use period for properties with modest recapitalization or capital improvement needs. Currently, the best choice seems to be a resyndication with a new Housing Credit allocation. However, the use of Housing Credits to preserve and extend the affordability of existing affordable housing competes with other Housing Credit properties, including public housing revitalization and new projects (both as adaptive reuse of existing buildings and new construction). The Housing Credit was created to address affordable housing needs that the private market could not effectively serve. It incentivized a public-private partnership that includes affordability for 30 years. In order to preserve this inventory, more investment will be required. Ensuring the physical and economic stability of these assets through their extended use periods will require innovative uses of limited public subsidy by states and municipalities. (5)

New York City will certainly want to plan for the modest recapitalization of its LIHTC properties as part of its affordable housing strategy. And it will be better to plan for it now than pay too much for deferred maintenance down the line.

U.S. Dismissive of Frannie Suits

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The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:

The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.

Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)

While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.

S&P’s Fightin’ Words

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S&P filed a memorandum in support of its motion to compel discovery in the FIRREA case that the United States brought against S&P last year. S&P comes out fighting in this memorandum, arguing that the “lawsuit is retaliation for S&P’s decision to downgrade the credit rating of the United states in August 2011.” (1)

S&P argues that the “most obvious explanation” for the United States’ “decision to pursue a FIRREA action against S&P alone” among the major rating agencies “is apparent:”   “S&P alone among the major rating agencies downgraded the securities issued by the United States.” (17) This is not obvious to me, particularly given the various explanations for this disparate treatment that have appeared in outlets like the WSJ over the last couple of years. But it may be true nonetheless.

In any case, I do not find the “chronology of events relating to the downgrade and the commencement of this lawsuit” to provide “powerful evidence linking the two.” (17) The chronology ends with the following entries:

  • S&P’s downgrade of the United States occurred on Friday, August 5, 2011. That Sunday, August 7, Harold McGraw III, the Chairman, Chief Executive Officer and President of McGraw Hill (of which S&P was a unit), received a telephone message from a high-ranking official of the New York Federal Reserve Bank; when the call was returned, the official conveyed the personal displeasure of the Secretary of the Treasury with S&P’s rating action.
  • This was followed on Monday by a call to Mr. McGraw from the Secretary of the Treasury, Timothy Geithner, in which Secretary Geithner stated that S&P had made a “huge error” for which it was “accountable.” He said that S&P had done “an enormous disservice to yourselves and your country,” that S&P’s conduct would be “looked at very carefully,” and that such behavior could not occur without a response.
  • The McClatchy Newspapers subsequently reported in a piece authored by Kevin G. Hall and Greg Gordon that while the United States’ original investigation included S&P and Moody’s, “[i]nvestigator interest in Moody’s apparently dropped off around the summer of 2011, about the same time S&P issued the historic downgrade of the United States’ creditworthiness because of mounting debt and deficits.” A source familiar with the investigations was quoted as stating: “After the U.S. downgrade, Moody’s is no longer part of this.”
  • In the year preceding S&P’s downgrade of the United States, two states, Mississippi and Connecticut, had initiated proceedings alleging deceptive practices based specifically on an alleged lack of independence. Each of those states named both Moody’s and S&P as defendants. After the downgrade, additional state lawsuits were commenced, with allegations nearly identical to those of the Connecticut and Mississippi complaints. Drafted after coordination and consultation with the U.S. Department of Justice, none of those lawsuits named Moody’s. (19, footnotes omitted)

This is surely no smoking gun and lots of dots remain to be connected.  How did DoJ get involved? Are the state Attorneys General in on the conspiracy? Why would DoJ stop an investigation of Moody’s to punish S&P? Sounds a bit like cutting off your nose to spite your face?

That being said, S&P might be right about the motivation for this suit and their allegations may be enough to win this motion to compel discovery. But whoever wins this round, this should be a fight worth watching.