Author Archives: David Reiss

Reiss on Mayor De Blasio’s Plans for Mandatory Inclusionary Zoning

Posted on by

Law360.com interviewed me about Mayor-Elect de Blasio’s plans for mandatory inclusionary zoning in NYC Real Estate Faces Less Friendly Market Under De Blasio (behind a paywall). It reads in part:

One of the biggest and most controversial pieces of de Blasio’s affordable housing platform is a plan to mandate inclusionary zoning — requiring developers to build affordable housing as part of their market-rate multifamily projects — when developments are being constructed in areas rezoned by the city.

Mandatory inclusionary zoning is meant to be a “hard-and-fast rule” to replace the incentives de Blasio plans to end for big developers, and he predicted on his campaign website that the strategy would create up to 50,000 new affordable housing units during the next 10 years.

But “mandatory” anything is considered an added cost when developers are weighing their options in deciding where to build, and requiring that residential developments include affordable housing could push some developers elsewhere, experts say.

“The devil is in the details,” said Brooklyn Law School professor David Reiss, noting that the way the de Blasio administration writes and implements the rule will make a big difference, either encouraging more development of affordable housing or shutting down the market to new developers.

And while de Blasio has emphasized that inclusionary zoning would only be mandatory for projects taking place in areas specifically rezoned for new development, Learner points out that the Bloomberg administration rezoned more than 30 percent of the city, so the new rule could likely affect many developers.

“When the program is designed, a lot of thought needs to go into what impact mandatory inclusionary zoning will have on the bottom line of developers,” Reiss said. “If it’s too significant of an impact, a less than optimal amount of housing will be built.”

FHA’s Net Cost of $15 Billion

Posted on by

The Congressional Budget Office posted FHA’s Single-Family Mortgage Guarantee Program: Budgetary Cost or Savings? In response to the question, “Has FHA’s Guarantee Program for Single-Family Mortgages Produced Net Savings to Taxpayers,” the CBO responds,

No. Collectively, the single-family mortgage guarantees made by FHA between 1992 and 2012 have had a net federal budgetary cost of about $15 billion, according to the most recent estimates by FHA. In contrast, FHA’s initial estimates of the budgetary impact of those guarantees sum to savings of $45 billion . . .. That swing of $60 billion from savings to cost primarily reflects higher-than-expected defaults by borrowers and lower-than-expected recoveries when the houses of defaulted borrowers have been sold—especially for loans made over the 2004-2009 period. (1)

The document contains a chart of estimates of the budgetary impact of the FHA’s single-family mortgage guarantees by year. It shows that the 2008 vintage was particularly bad, accounting for over $15 billion in losses by itself (the other years’ savings and costs would thus net out).

There are some disturbing aspects of this finding and some that are not. First, the disturbing ones. The FHA has not been transparent about its potential for losses and bailouts (see here for instance). Second, its own financial projections have been overly optimistic.

That being said, the mere fact that the FHA is expected to have losses is not in itself an indictment of the government’s strategy of using the FHA to provide liquidity to the mortgage markets during the financial crisis. If only this were done forthrightly . . . but perhaps that is too much to ask in the midst of the crisis itself.

Balancing Consumer Protection and Access to Credit

Posted on by

S&P posted U.S. RMBS Roundtable: Originators, Aggregators, and Counsel Discuss New Qualified Mortgage Rules. In summarizing the roundtable, S&P notes that

The ability-to-repay rule, ostensibly to prevent defaults and another housing crisis, is still very much open to interpretation. To that end, Standard & Poor’s Ratings Services recently held a private roundtable with several market participants. The confidential discussion offered the attendees an opportunity to share their views and interpretations of these rules, offer opinions on how to operate efficiently within the scope of the rules, and highlight perceived conflicts the rules still present.

In our view, the discussion identified some common themes, notably:

    • Most originators will focus on QM-Safe Harbor loans to avoid liability and achieve the best execution.
    • Many originators will also find attractive opportunities to originate non-QM loans.
    • Non-agency originations of QM or non-QM loans will continue to focus on super-prime borrowers as lenders find that the best defense is to limit the potential for default.
    • The documentation standards used by originators will be the key to compliance with the rule. (2)

There are a lot of interesting tidbits in this document, including speculation about the role of technology in the brave new world of mortgage lending.  The summary ended on a guardedly optimistic note:

While the rule leaves significant room for interpretation, originators generally felt that the final rule to be implemented in January 2014 is better than expected. They expressed hope that regulators will be vigilant in pursuing violations that are reasonable. Originators still see challenges for originations of non-QM loans, but they don’t believe they are insurmountable, and many expect that non-QM loans will be represented in origination volume throughout 2014. The challenges that remain are the market’s pricing of QM safe harbor, rebuttable presumption, and non-QM loans; required credit enhancement levels; the effects of risk retention rules, which have yet to be finalized; and the ultimate costs associated with the assignee liability provisions in the rule. (7)

If these industry participants are right, it will look like regulators did a pretty good job of balancing consumer protection and access to credit. Let’s hope!

Measuring Progress at the CFPB

Posted on by

The Bipartisan Policy Center issued a white paper, The Consumer Financial Protection Bureau: Measuring the Progress of a New Agency:

This paper measures the agency’s actions against its mandate.  It analyzes the start-up and operational challenges the Bureau has faced and the critical choices it has made. Throughout this process, the Task Force met with leading consumer advocates, federal and state bank regulators and their staffs, and regulated industry participants in the bank and nonbank space. (5)

I was particularly intrigued by the external metrics that the Bipartisan Policy Center recommends for the CFPB:

  • Are there quality, safe products available in both the bank and nonbank space?
  •  Is the CFPB identifying and responding promptly to problems in both the bank and nonbank space?
  • Does the Bureau engage consumers in a meaningful way? For example, specific metrics should track its regulatory and outreach efforts to growing minority populations.
  • Is the CFPB collaborating effectively with other regulators in both the bank and nonbank space, to ensure a high level of consumer protection?
  • Is there a healthy amount of quality product innovation in the financial services marketplace the Bureau regulates? (10)

These are all reasonable metrics, but most importantly, the white paper “recommends that the CFPB measure success as it relates to consumer behavior by finding demonstrable evidence of improved consumer decision-making with regard to consumer products.” (10) I think that this is perhaps the most important of the metrics and one that the CFPB has made the least progress in measuring. It will be interesting to see how the CFPB makes progress in this regard.

The rest of their findings are organized as follows:

  • Guidance vs. Rule-Making
  • Supervisory and Examination Process
  • Data Requests and Collection
  • Consumer Complaint Portal
  • Civil Penalty Fund
  • CFPB Consultation with Other Agencies
  • CFPB’s Authority to Cover Lending Activities of Auto-Dealers
  • CFPB Funding and Accountability
  • Performance Metrics
  • [External Metrics]
  • Internal Metrics

Qualified Residential Mortgage Comments

Posted on by

The agencies responsible for the Qualified Residential Mortgage rules that address the issue of credit risk retention for mortgage-backed securities requested that comments on the proposed rulemaking be submitted by yesterday.  And comments there were.  Here is a sampling:

The Urban Institute argues that

In formulating their QRM recommendations, the Agencies have done an admirable job balancing these considerations: on one hand, they wanted QRM loans to have a low default rate; on the other hand, if QRM is too tight, it will impede efforts to bring private capital back into the market and will further restrict credit availability. The right balance would thus appear to be precisely where they have landed with their main proposal: that QRM equal QM. (2)

The Securities Industry and Financial Markets Association effectively agrees with this and argues that

QM should be adopted as the standard for QRM, rather than QM-plus. QM is a meaningful standard for high quality loans. The characteristics of QM-plus, particularly the 70 percent LTV ratio, would exclude most borrowers from these loans. We believe the adoption of QM-plus would reduce the competitiveness of private mortgage originators and delay the transition of the housing finance system away from the GSEs. (vi)

The American Enterprise Institute, on the other hand, argues that

The preferred response, in our opinion, is to implement the Dodd-Frank Act by creating a combination of the QM and a standard for a traditional prime mortgage that Congress intended for the QRM. For this reason, we have filed this comment with the agencies, detailing how it is possible to comply with the clear language and intent of the act and still provide a flexible set of standards for prime mortgages — which have low credit risk even under stress. (4)

My thoughts on the proposed QRM rule can be found here, here, here and here.

Reiss (and Others) on Post-Bloomberg Brooklyn

Posted on by

The NY Daily News ran a story on a panel I moderated last night at Brooklyn Law School, The Fab Four! Brooklyn Heights Councilmen Since 1975 Share Stage and Talk About Past, Future, Bloomberg.  The speakers gave their thoughts on a variety of topics, including what’s next for New York City:

David Reiss: What are your predictions for a post-Bloomberg Brooklyn?

Levin: The likely mayor is going to be very far to the left. (Bill de Blasio) has been more engaged with people that are not elite and he has a greater vision of equity. It’s a big challenge because it’s a big city, like steering a gigantic ocean liner. I don’t think there will be lots of changes on day one but there will be policy changes that can be shifted that will cause a big change, like universal pre-kindergarten and mandatory inclusionary zoning. His goal is to decrease the economic disparity in the city and it’s a big challenge.

Yassky: A lot of the changes you’ve seen are here to say. There’s a much bigger swatch of Brooklyn that will be professional office workers, people who are working in Manhattan and not in traditional blue collar jobs. That spread throughout Brooklyn is here to stay. So many neighborhoods have excellent public spaces which is ameliorating inequality in the near term. It’s taking better public goods, like parks, to do it, and you don’t need rose colored glasses to see that. These changes don’t reverse very quickly and easily.

Fisher: He’ll be a mayor from Brooklyn, so it’s got to be a good thing for all of us. The nostalgia here is over; Brooklyn is the world again. When I grew up, people were nostalgic for the good old days. No one is nostalgic for those days now. Brooklyn has really reached a turning point. The bar has been raised in post-Bloomberg Brooklyn. So many people in Brooklyn now expect government to function and be responsive. As long as people feel invested in the borough, they’ll make it possible for Steve and whoever comes after to keep the progress going.

Eminent Distraction?

Posted on by

The Urban Institute posted Eminent Domain:  The Debate Distracts from Pressing Problems. The issue brief concludes

The negative indicators shared by municipalities that have considered the eminent domain solution (e.g., high unemployment, low incomes, high proportions of underwater homeowners, slower HPI recovery, etc.) indicate that their shared problems extend beyond housing. These cities have traditionally suffered from lack of investment, high crime rates, concentrated poverty, and other general barriers to opportunity. These factors contributed to their poor performance during and after the housing crash, and the relief efforts to date, both from lenders and policymakers, have been modest relative to the scale of the problem.

Yet it is unclear that seizing loans through eminent domain will produce the desired outcomes: preventing foreclosures and, thus, ensuring that the community fabric and the municipality’s economy remain intact. For example, Richmond is targeting performing loans in PLS, and while the eminent domain plan is designed to help underwater mortgage holders, investors assert that nearly a third of target loans are above water. In contrast, a much wider universe of nonperforming, underwater loans is in private-label and agency securities that are, arguably, at more immediate risk of default. Additionally, implementing eminent domain will likely have repercussions in the housing finance markets that will lead to higher interest rates and down payments.(14)

www.crackerjackcharters.com/images/gallery/data/

The conclusion then outlines “some less disruptive alternatives.” (14) I am not sure that I agree with all of the conclusions of the report.  For instance, I doubt that there would be higher interest rates and down payments as a result of the use of eminent domain by municipalities.  Lenders have notoriously short memories (for a survey of short lender memories, see This Time Is Different.) But this issue brief is important because it is not looking at the legality of the use of eminent domain — others have done that — but at the practicality of this approach. And it raises serious concerns that will need to be addressed by its proponents.