Author Archives: David Reiss

A Challenge To Lower the Cost of Affordable Housing

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Minnesota Housing, the McKnight Foundation, the Urban Land Institute of Minnesota (ULI-MN), the Regional Council of Mayors (RCM) and Enterprise Community Partners have thrown down the gauntlet with the MN Challenge to Lower the Cost of Affordable Housing. The challenge builds on recent research from Enterprise and the ULI Terwilliger Center for Housing, Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals.

The challenge is an idea competition intended to

support innovative problem solving from interdisciplinary teams of housing professionals resulting in a systematic concept that lowers the cost of developing affordable housing in Minnesota. Reducing both the hard and soft costs of rental housing will give the state and local communities additional options for providing a full range of housing choices for its low and moderate income residents.

The Challenge  will

  • Provide up to $100,000 for the development and implementation of ideas to lower the cost of affordable rental housing.
  • Cultivate and collect innovative strategies and ideas for lowering the per unit cost of financing, developing, and building affordable multi-family housing (preserved or new).

By February 28, teams will submit short concept papers outlining their cost reduction ideas. Submissions will be reviewed by a selection panel made up of members from the sponsoring organizations and an inter-disciplinary team of stakeholders involved in the delivery of affordable housing. In March, the panel will select three proposals as finalists, and these teams will each be awarded up to $10,000 to do the research and development needed to demonstrate that their idea should be implemented. The finalists will present their  work in May. In June,  when the panel will select one idea and commit up to $70,000 for the winning team to implement their idea.

While this challenge obviously has a Minnesota focus, the ideas it generates will likely have wider applicability. Given Mayor De Blasio’s focus on affordable housing, I would assume that New York’s affordable housing professionals will follow this challenge carefully. And maybe they should come up with an affordable housing challenge of their own!

Foreclosure Prevention: The Real McCoy

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Patricia McCoy has posted Barriers to Foreclosure Prevention During the Financial Crisis (also on SSRN). In the early 2000s, Pat was one of the first legal scholars to identify predatory behaviors in the secondary mortgage market. These behaviors resulted in homeowners being saddled with expensive loans that they had trouble paying off. As many unaffordable mortgages work themselves through the system, Pat has now turned her attention to the other end of the life cycle of many an abusive mortgage — foreclosure.

The article opens,

Since housing prices fell nationwide in 2007, triggering the financial crisis, the U.S. housing market has struggled to dispose of the huge ensuing inventory of foreclosed homes. In January 2013, 1.47 million homes were listed for sale. Another 2.3 million homes that were not yet on the market—the so-called “shadow inventory”—were in foreclosure, held as real estate owned or encumbered by seriously delinquent loans. Discouragingly, the size of the shadow inventory has not changed significantly since January 2009.

Reducing the shadow inventory is key to stabilizing home prices. One way to trim it is to accelerate the sale of foreclosed homes, thereby increasing the outflow on the back-end. Another way is to prevent homes from entering the shadow inventory to begin with, through loss mitigation methods designed to keep struggling borrowers in their homes. Not all distressed borrowers can avoid losing their homes, but in appropriate cases—where modifications can increase investors’ return compared to foreclosure and the borrowers can afford the new payments—loan modifications can be a winning proposition for all. (725)

The article then evaluates the various theories that are meant to explain the barriers to the loan modification and determines “that servicer compensation together with the high cost of loan workouts, accounting standards, and junior liens are the biggest impediments to efficient levels of loan modifications.” (726) It identifies “three pressing reasons to care about what the real barriers to foreclosure prevention are. First, foreclosures that could have been avoided inflict enormous, needless losses on borrowers, investors, and society at large. Second, overcoming artificial barriers to foreclosure prevention will result in loan modifications with higher rates of success. Finally, knowing what to fix is necessary to identify the right policy solution.” (726)

It seems to me that the federal government dealt with foreclosures much more effectively in the Great Depression, with the creation of the Home Owners’ Loan Corporation. In our crisis, we have muddled through and have failed to systematically deal with the foreclosure crisis. McCoy’s article does a real service in identifying what we have done wrong this time around. No doubt, we will have another foreclosure crisis at some point in our future. It is worth our while to identify the impediments to effective foreclosure prevention strategies so we can act more effectively when the time comes.

The Future of Fair Housing

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I attended an interesting discussion of the Mount Holly fair housing case today.  The question presented in the case was: “Are disparate impact claims cognizable under the Fair Housing Act?” The case was settled before the Supreme Court had an opportunity to hear it. The conventional wisdom is that a number of Justices on the Supreme Court would take a hard look at disparate impact claims generally if a case were ever to reach them.

Mount Holly happens to be next to Mount Laurel, home to another important fair housing dispute that is the subject of a recent book,  Climbing Mount Laurel.  Douglas Massey, one of the co-authors of Climbing Mount Laurel, is also the author of one of the best non-fiction books I have ever read, American Apartheid: Segregation and the Making of the Underclass. Massey’s new book takes a look at how the Mount Laurel dispute has played out over time:

Under the New Jersey State Constitution as interpreted by the State Supreme Court in 1975 and 1983, municipalities are required to use their zoning authority to create realistic opportunities for a fair share of affordable housing for low- and moderate-income households. Mount Laurel was the town at the center of the court decisions. As a result, Mount Laurel has become synonymous with the debate over affordable housing policy designed to create economically integrated communities. What was the impact of the Mount Laurel decision on those most affected by it? What does the case tell us about economic inequality?

Climbing Mount Laurel undertakes a systematic evaluation of the Ethel Lawrence Homes–a housing development produced as a result of the Mount Laurel decision. Douglas Massey and his colleagues assess the consequences for the surrounding neighborhoods and their inhabitants, the township of Mount Laurel, and the residents of the Ethel Lawrence Homes. Their analysis reveals what social scientists call neighborhood effects–the notion that neighborhoods can shape the life trajectories of their inhabitants. Climbing Mount Laurel proves that the building of affordable housing projects is an efficacious, cost-effective approach to integration and improving the lives of the poor, with reasonable cost and no drawbacks for the community at large.

The United States’ history of residential segregation is a tragedy that unfolds in slow motion from decade to decade. Fair housing lawsuits in places such as Mount Holly and Mount Laurel are obviously important, but also feel like drops in the bucket of a much, much bigger problem. Unfortunately, it is such a big problem that solutions that have been proposed appear to be mere band-aids on the one hand or Utopian on the other. Let’s hope that there is a middle path that can develop between those two approaches.

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