Author Archives: David Reiss

Reiss on “Sexy Tax Breaks” for Luxury Housing

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MainStreet.com quoted me in Luxury Real Estate with Sexy Tax Breaks. The story reads in part,

Buying a high end property doesn’t always cost a fortune for the wealthy especially if there are tax breaks attached.

Property tax deductions and even exemptions exist for buyers of luxury properties under special incentives, such as New York City’s J-51 and 421a program.

“A J-51 unit in a luxury building will likely sell for more than a comparable condo without a tax break, because monthly expenses are lower due to reduced property taxes. It’s a deal but not dollar for dollar, and that’s true everywhere you look for tax breaks in luxury properties,” said David Reiss, professor of real estate law at Brooklyn Law School.Benefits include no tax by reducing the assessed value of the property to the pre-renovated price and secondly by capping property taxes.

“These benefits phase out typically over a 14 year period for market rate properties,” Reiss told MainStreet.

Most J-51 buildings in the borough of Manhattan are above 110 Street due to state restrictions.

For example, for interested buyers there’s a two-bedroom J-51 condominum on West 140th Street available for $620,000 advertised on condo-living-west.com.

“The tax reduction will be priced into the cost of the home,” said Reiss.

A back end strategy would be to buy and sell early rather than buy early and sell late to make a profit after purchase.

“Because the closer you are to the 14 year phase out when you sell, the less of a benefit the tax break is to the owners’ sale price,” Reiss said.

The 421a program is another tax break available for new construction not rehabilitation or conversion of existing buildings in Manhattan.

For example, an owner in a $90 million duplex penthouse in Midtown Manhattan would normally pay $230,000 in taxes without an abatement and $20,000 in taxes under an abatement program.

About 150,000 units in New York City receive partial tax exemptions under 421a.

The downside is that taxes gradually go up as the abatement is phased out.

Non-QM Mortgages Risks and Best Practices

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Moody’s issued a report, Non-QM US RMBS Face Higher Risk of Losses Than QM, but Impact on Transactions Will Vary, that discusses the risk that

US RMBS backed by non-qualified mortgages (those that do not meet a variety of underwriting criteria under new guidelines) will incur higher loss severities on defaulted loans than those backed by qualified mortgages. The key driver of the loss severities will be the higher legal costs and penalties for non-QM securitizations. In non-QM transactions, a defaulted borrower can more easily sue a securitization trust on the grounds that the loan violated the Ability-to-Repay (ATR) rule under the Dodd-Frank Act. . . . The extent of the risks for RMBS will vary, however, depending on the mortgage originators’ practices and documentation, the strength of the transactions’ representations and warranties, and whether the transactions include indemnifications that shield them from borrower lawsuits. (1)

The higher costs for non-QM investors may include longer foreclosure timelines and the resulting wear on the collateral.

If Moody’s analysis is right, however, the Dodd-Frank regime will be working as intended. It should incentivize mortgage originators to strengthen their compliance practices such as those relating to documentation, recordkeeping and third party due diligence. It should also incentivize securitizers to demand strong reps and warranties, put back and indemnification provisions. Sounds like a reasonable trade off to  me.

Reiss on New Mortgage Rules

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The Redding Record Searchlight interviewed me in Experts Worry New Loan Standards, Lending Limits Could Hurt Housing Market. It reads in part,

New mortgage qualification rules and lower FHA lending limits that take effect next year threaten to slow the housing market’s recovery.

*     *     *

David Reiss, a law professor at Brooklyn Law School in New York, said there is nothing wrong with tying the price of a loan to the risk.

“There is some talk that if it’s not a Qualified Mortgage loan, the cost for the creditor or lender will be higher and the cost will be passed on to the homeowner. That will probably be true,” Reiss said.

But Lawrence of Silverado Mortgage said just because one in five loans written today wouldn’t pass Qualifying Mortgage muster doesn’t necessarily suggest the loan would not be approved and closed under the new standards.

“Making a minor adjustment such as using a different interest rate and closing cost combination may allow a loan to meet the standard that it wouldn’t otherwise,” Lawrence said.

Lawrence knows there will be some loans for which an alternative can be found to resolve a Qualifying Mortgage issue.

“But I think most buyers start with getting pre-qualified before they find the home they’re interested in purchasing,” Lawrence said.

Reiss on Watt Confirmation

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Law360 interviewed me about the Senate confirmation of Mel Watt as the Director of the Federal Housing Finance Agency in Fannie, Freddie’s Footprint Could Grow Under New FHFA Head. The article reads in part,

The U.S. mortgage industry is in for a sea change as Rep. Mel Watt, D-N.C., takes the helm of the Federal Housing Finance Agency, experts say, predicting Watt will seek to expand Fannie Mae and Freddie Mac, veering sharply from his predecessor’s plans but lining up more closely with President Barack Obama’s.

The confirmation came Tuesday in a 57-41 vote after months of delay ended by Senate Democrats’ implementation of the so-called “nuclear option” eliminating the filibuster of presidential nominees. Senate Republicans had expressed concern about the choice of a politician like Watt — as opposed to an academic or economist — to head the agency.

Members of the real estate finance community are also divided about whether Watt’s confirmation will have a positive or negative impact on the industry, but most agree that a major change is ahead.

“I think Watt, as director, could end up having a very big impact both in terms of reversing some changes that have been implemented, and also taking the agency in a very different direction,” said David Reiss, a professor at Brooklyn Law School.

Since 2009, interim FHFA head Ed DeMarco has made an effort to shrink the footprint of the regulator and its government-sponsored enterprises, Fannie and Freddie, in the U.S. residential mortgage market.

DeMarco faced pushback in these efforts from industry groups and lawmakers, causing him to backpedal a bit in November when the FHFA announced that it would hold off on reducing the size of mortgages that Fannie and Freddie can guarantee for at least the first half of next year.

Obama also did not share DeMarco’s ideology, but experts believe Watt’s plans for the GSEs are much more in line with those of the president. He appears cautious about allowing Fannie and Freddie to back away from the market entirely and may in fact favor policies that will increase the GSEs’ role in the mortgage market.

“My guess is that Watt will further enmesh Fannie and Freddie in the operations of the mortgage markets, whereas DeMarco was actually shrinking their footprint,” Reiss said.

*     *     *

The difference between the short-term and long-term impacts of Watt’s expected actions will be significant, experts say.

DeMarco’s moves made short-term waves, but supporters believed the aim was long-term equilibrium and an eventual balance of public and private capital in the mortgage market. Watt may have more potential for positive short-term results, but there will still be a question as to whether this will translate into a stable market for the next generation, Reiss said.

“Often when people are talking about government intervention, they want help for problems now, but they’re also setting up the rules of the game for once the crisis has passed,” he said.

Imposing Order on Recording Chaos

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Dale Whitman has posted A Proposal for a National Mortgage Registry: MERS Done Right. This is great timing because he will be touching on some of the issues raised in this article in tomorrow’s webinar. His proposal for a national mortgage registry also shares things in common with elements of Adam Levitin‘s recent proposal.

Whitman’s abstract reads:

In this Article, Professor Whitman analyzes the existing legal regime for transfers of notes and mortgages on the secondary market, and concludes that it is highly inconvenient and dysfunctional, with the result that large numbers of market participants simply did not observe its rules during the huge market run-up of the early and mid-2000s. He also considers Mortgage Electronic Registration System (MERS), which was designed to alleviate the inconveniences of repeatedly recording mortgage assignments, but concludes that it was conceptually flawed and has proven to be an inadequate response to the problem. For these reasons the legal system was ill-prepared for the avalanche of foreclosures that followed the collapse of the mortgage market in 2007, and continues to be beset by litigation and uncertainty. This Article then provides a conceptual outline for an alternative National Mortgage Registry, which would supplant the present legal system and would provide convenience, transparency, and efficiency for all market participants. He concludes with a draft of a statute that could be enacted by Congress to create such a registry.

The article concludes:

A national mortgage loan Registry structured along the lines outlined here would resolve all of the major legal problems that beset the secondary mortgage market today. To be specific, the following problems would be put to rest.

1. The lack of clarity in the distinction between negotiable and nonnegotiable notes that exists today would become irrelevant for purposes of loan transfer. Negotiable and nonnegotiable notes would be treated exactly alike and would be transferred in the same manner.

2. The need to physically deliver original notes in order to transfer the right of enforcement – an extremely burdensome and inconvenient requirement for negotiable notes in today’s market – would be eliminated. Transfers would take place electronically with assurance that they would be recognized by local law in all jurisdictions.

3. The necessity of recording mortgage assignments in local recording offices would be eliminated. MERS was designed to remove the need for such assignments (except at the point when foreclosure was necessary), but the national Registry would accomplish this without the artificiality and con-fusion engendered by MERS’ “nominee” status.

4. Borrowers would be protected against competing claims by purported mortgage holders because the Registry’s records of loan holdings would be conclusive. Whether in cases of loan modification, payoff and discharge, approval of a short sale, or foreclosure, a borrower would know with certainty whether a purported holder’s claim to the loan was authentic, and whether its purported servicer was authorized to act.

5. All foreclosures, both judicial and non-judicial, could be conducted with assurance that the correct party was foreclosing. The Registry’s certificate could be recorded under state law and become a part of the chain of title of property passing through foreclosure, thus permitting future title examiners to verify that the foreclosure was conducted by the person authorized to do so. Concerns of title insurers about the validity of titles coming through foreclosure, currently a major worry, would be largely eliminated.

6. The current confusion and litigation about separation of notes from their mortgages, and about what proof is needed to foreclose a mortgage, would be brought to an end. The Registry’s certificate would provide all of the documentary evidence necessary to foreclose.

7. The holder in due course doctrine, with its potential for unfair harm to borrowers, would probably disappear in the context of mortgage loans as secondary market participants abandoned the practice of physical delivery of mortgage notes.

The system for transferring mortgage loans with which we are saddled today is a shambles. The result has been enormous uncertainty and likely huge financial loss for investors, servicers, and title insurers. It is time for Congress to act to create a sensible, simple, and efficient alternative. (68-69)

Many (including Brad Borden and I) have argued that the current recording system is horribly flawed. It is unclear whether there is sufficient political will to engage in a structural reform at this time. If there is not, expect to see another foreclosure mess once the current one has played itself out.

National Mortgage Settlement Update

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Joseph A. Smith, Jr., the Monitor of the National Mortgage Settlement (NMS), has issued his Second Compliance Report (I blogged about an earlier report here) which has been filed in the District Court for the District of Columbia. According to the Monitor, Ally Financial and Wells Fargo were not in violation of the settlement at all during 2013 and BoA’s and Chase’s deficiencies were not widespread. Citi had a widespread deficiency.

The Monitor’s conclusion echoes his earlier report although his tone is more optimistic than last time:

It is clear to me that the servicers have additional work to do both in their efforts to fully comply with the NMS and to regain their customers’ trust. The Monitor Reports that I have just filed with the Court show, however, that the Settlement is addressing shortcomings in the treatment of distressed borrowers.

CAPs [corrective action plans], including remediation efforts when required, have been implemented or are in process. If the CAPs are not successful, the Monitoring Committee and I will take additional action, as dictated by the Settlement. In addition, we have applied what we have learned to enhance our oversight of the servicers by creating four new metrics to address persistent issues in the marketplace. (16)

The big five banks appear to be improving their compliance with the settlement, which is obviously a good thing. But there is still work to be done to improve loan servicing. The monitor notes the top ten complaints about servicers that were submitted by elected officials on behalf of their constituents:

1 Single point of contact was not provided, was difficult to deal with or was difficult to reach.

2 Single point of contact was non-responsive.

3 Servicer did not take appropriate action to remediate inaccuracies in borrower’s account.

4 Servicer failed to update the borrower’s contact information and/or account balance.

5 Servicer failed to correct errors in the borrower’s account information.

6 The borrower was “dual-tracked.” In other words, the borrower submitted an application for loss mitigation, and although it was in process or pending, the borrower was foreclosed upon.

7 Servicer did not accept payments or incorrectly applied them.

8 Servicer did not follow appropriate loss mitigation procedures.

9 The borrower received requests for financial statements they already provided.

10 The completed first lien modification request was not responded to within 30 days.

Total Executive Office complaints for all servicers: 44,570 (n.p.)

Obviously not every complaint is valid, but these numbers suggest that the settlement is not being fully complied with.

(Non-)Enforcement of Securitized Mortgage Loans

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Professors Neil Cohen and Dale Whitman, two important scholars who know their way around the UCC and mortgage law, will take on a highly contested topic in an upcoming ABA Professors’ Corner webinar: “Ownership, Transfer, and Enforcement of Securitized Mortgage Loans.” I blogged a bit about this topic a couple of days ago, in relation to Adam Levitin’s new article. There is a lot of misinformation floating around the blogosphere relating to this topic, so I encourage readers to register.

The full information on this program is as follows:

Professors’ Corner is a FREE monthly webinar, sponsored by the ABA Real Property, Trust and Estate Law Section’s Legal Education and Uniform Law Group.  On the second Wednesday of each month, a panel of law professors discusses recent cases or issues of interest to real estate practitioners and scholars.

December 2013 Professors’ Corner
“Ownership, Transfer, and Enforcement of Securitized Mortgage Loans”
Profs. Neil Cohen and Dale Whitman
Wednesday, December 11, 2013
12:30pm Eastern/11:30am Cental/9:30am Pacific
Register for this FREE program at https://ambar.org/ProfessorsCorner

Our nation’s courts have been swamped with litigation involving the foreclosure of securitized mortgage loans.  Much of this litigation involves the appropriate interaction of the Uniform Commercial Code and state foreclosure law. Because few foreclosure lawyers and judges are UCC experts, the outcomes of the reported cases have reflected a significant degree of uncertainty or confusion.

In addition, much litigation has been triggered by poor practices in the securitization of mortgage loans, such as robo-signing and the failure to transfer loans into a securitized trust within the time period required by the IRS REMIC rules.  This litigation has likewise produced conflicting case outcomes.  In particular, recent decisions have reflected some disagreement regarding whether a mortgagor — who is not a party to the Pooling and Servicing Agreement that governs the securitized trust that holds the mortgage — can successfully defend a foreclosure by challenging the validity of the assignment of the mortgage to a securitized trust.

Our speakers for the December program will bring some much-needed clarity to these issues.  Our speakers are Prof. Neil B. Cohen, the Jeffrey D. Forchelli Professor of Law at Brooklyn Law School, and Prof. Dale A. Whitman, the James E Campbell Missouri Endowed Professor Emeritus of Law at the University of Missouri School of Law.  Prof. Cohen is the Research Director of the Permanent Editorial Board for the Uniform Commercial Code, and a principal contributor to the November 2011 PEB Report, “Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes.” Prof. Whitman is the co-Reporter for the Restatement (Third) of Property — Mortgages, and the co-author of the pre-eminent treatise on Real Estate Finance Law.

Please join us for this program.  You may register at https://ambar.org/ProfessorsCorner.