Author Archives: David Reiss

3 Housing Riddles For De Blasio

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I wrote an op ed for Law360,com that was posted today. While it is behind a paywall on Law360, it reads in full as follows:

3 Housing Riddles For De Blasio

As Mayor-Elect Bill de Blasio is making the transition from campaigning to governing New York City, it is worth contemplating some of the fundamental riddles that perplex those who spend their time thinking about the city’s housing policy. I address three of the most perplexing below.

The Riddle of Mandatory But Not Sufficient

The housing policy centerpiece of the de Blasio campaign is to require developers to build some affordable housing units when they build on lots that have been upzoned, a policy known as mandatory inclusionary zoning. The campaign website states that this policy will create 50,000 new units of housing.

Let’s put aside the fact that this number appears to be very aggressive given the lack of significant upzonings on the horizon (see second riddle below). Just because the city mandates that affordable housing be part of any new construction, it cannot mandate that developers build any housing at all if the deal does not make economic sense for them.

The de Blasio administration will need to carefully calibrate the mandatory inclusionary zoning rules to ensure that builders are sufficiently incentivized to build in the first place. This may limit the amount of affordable housing that can be mandated as part of that new construction.

One key aspect of this policy is whether the mandatory affordable housing will be required to be on-site or if the developer can build it off-site. If it is the former, it will help achieve the progressive goal of increasing socio-economic diversity in a city that is rapidly losing it.

But each unit of on-site housing would likely be more expensive to construct than off-site affordable units. And the opposite is true if the mandatory affordable units are allowed to be off-site; they will be likely cheaper to construct and thus more housing could be built. But it would not work toward increasing socio-economic diversity in the city.

And thus, the riddle of mandatory but not sufficient poses two challenges to the administration. Can it incentivize the creation of a meaningful number of units? And should it favor socio-economic diversity or the maximum production of affordable units? No easy answers here.

The Riddle of Now Versus Later

Can you increase the supply of housing to address the needs of a growing population while also downzoning large swaths of the city to respond to the preferences of the city’s current residents?

The Michael Bloomberg administration wanted to have this both ways, but that can’t work. The Bloomberg administration had planned on an increase in population of roughly another million people by 2030 while at the same time downzoning a large swath of the city (and, to be fair, upzoning some other portions).

This downzoning made current residents happy as it kept big, modern, out-of-context buildings from popping up near their homes. But it also limited the opportunities for increasing the housing stock, particularly near transit hubs. This is the basis of the second riddle — what is seen as bad by current residents may be good for future residents.

It is a fundamental economic truth that if more and more people are flocking to New York City, housing costs will rise unless supply increases. But for city residents, there is a paradox. New Yorkers see gleaming towers rise in their neighborhoods along with the rents for their nearby apartments. There are two explanations for this paradox.

First, the supply of new housing may be increasing without keeping pace with rising demand. Historically, New York City has not had many new units of housing built each year, maybe 20,000 units or so in a good year. This modest increase in supply has been overwhelmed by the increase in population of a million people in the last 20 or so years. This disparity goes a long way to explain the high rents and the miniscule vacancy rates that are seen throughout the city.

Second, new housing in one community (Williamsburg, for example) may be causing or be part of a wave of local gentrification in the existing housing stock. So, even if the new housing is having a tendency to decrease housing costs in the city overall because it increases the supply, it can also be pushing rents higher in the communities in which it is situated.

Increasing the supply of housing has to be a key component of providing “safe affordable homes for all New Yorkers,” as de Blasio calls for on his campaign website. This has to mean zoning significantly more land for high-rise residential construction as well as incentivizing the construction of affordable housing units in that new construction.

At the same time, de Blasio must attend to the concerns of those negatively impacted by the new construction. Hence, the riddle of now versus later.

The Riddle of the Few Versus the Many

The de Blasio campaign website calls for “tighter standards that ensure subsidies meet the needs of lower-income families and are distributed equitably throughout the five boroughs.” Distributing affordable housing subsidies equitably throughout the city is important, but there is another equity issue — should the city heavily subsidize affordable housing for a small portion of those who are eligible or should it distribute resources more broadly and thinly among everyone who is eligible?

Fewer than 8 percent of low- and middle-income households receive a direct or indirect subsidy for an apartment (excluding public housing) while more than 20 percent live below the poverty line of $23,283 annually for a family of four.

Should the city’s limited resources be used to create a relatively small number of new affordable units or should some of them be used in ways that benefit a broader swath of low- and moderate-income New Yorkers, albeit more modestly?

Certain policies can address the needs of many, many more low- and moderate-income households than does heavily subsidized new construction that houses perhaps a few thousand low- and moderate-income households each year.

Examples of such policies include tax credits for low- and moderate-income households that put money in their pockets and increased enforcement directed against landlords who try to illegally drive their tenants out of rent-regulated units. On the other hand, without an affordable apartment, staying in NYC can just be untenable no matter what additional benefits the government may be able to provide through more broadly available programs.

Thus, the third riddle is — do you give a lot of help to a few or do you give a little help to the many? It’s like choosing between the rock and the hard place for policymakers and New Yorkers alike.

Mayor-Elect de Blasio and his team will have to struggle with these riddles, and more. The only thing that is clear is that there are no right answers and no easy answers when it comes to housing policy in New York City.

—By David Reiss, Brooklyn Law School

David Reiss is a professor of law at Brooklyn Law School. He concentrates on real estate finance and community development and writes about housing policy.

Fannie and Freddie in Play?

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Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac.  News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed.  The proposal, according to Fairholme,

  • Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
  • Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
  • Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
  • Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
  • Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
  • Ends the unsustainable Federal conservatorship. (Press Release, 1)

Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)

Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.

Reiss on Fannie and Freddie Buyout

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Law360 quoted me in Fairholme Changes The Game For Fannie And Freddie (behind a paywall).  It reads in part,

Fairholme Capital Management LLC’s plan to buy Fannie Mae’s and Freddie Mac’s insurance businesses will likely turn out to be more symbolic gesture than successful deal, experts say, but the hedge fund’s bold move could increase interest in privatization of the entities and potentially encourage other bidders to join the fray.

*     *     *

Some experts believe this emphasis on the ownership stakes of Fairholme and other hedge funds will be a major turnoff for the White House, the Federal Housing Finance Agency and the Treasury.

“It’s a very good idea, but the question is, will it keep the government and taxpayers off the hook? And will it bring in sufficient private capital to provide a vibrant residential mortgage market?” said David Reiss, a real estate finance professor at Brooklyn Law School. “Of course they’re looking to maximize their return, so the question has to be, what’s the angle that they’re playing?”

The angle, experts and analysts say, is likely connected to claims Fairholme and other hedge funds have made recently against the federal government, accusing it of devaluing their shares of Fannie and Freddie in order to reap all the GSEs’ mounting profits.

Fairholme and Perry Capital LLC both sued the government over its management of Fannie and Freddie this summer.

In July, Perry Capital accused the Treasury of wrongfully altering stock purchasing agreements with Fannie and Freddie, which allegedly allowed it to illegally speed up the liquidation of the companies and reap more than $200 billion over the next decade.

Two days later, Fairholme and insurance holding company W.R. Berkley Corp. sued the federal government, alleging it had acted unconstitutionally when it altered its bailout deal for the GSEs to keep the companies’ profits for itself.

Fairholme’s proposal assumes that their shares have the value they claim they have in their lawsuit, Reiss said. If the deal were to move forward, valuation of Fairholme’s stake could be a major sticking point.

*     *     *

“It begins the conversation as to whether you can have effectively a buyout of the federal government from Fannie and Freddie, which is a healthy thing, I think,” Reiss said.

Reiss on Future of Frannie at Urban Land Institute

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I will be on an Urban Land Institute panel on November 21st, The Future of Fannie Mae and Freddie Mac.  The panel

will seek to shed some more light on the road ahead for the GSEs and their impact on commercial real estate lending and residential mortgage securitization. Specifically, the panel will address questions such as:

• What will the GSEs’ roles be in the multi-family and single-family markets in the future?

• Will the GSEs remain in conservatorship? If not, what level of government support, if any, will they receive going forward?

The event will feature individuals speaking on behalf of the lending, investment, academic, and GSE communities.

The moderator is Katharine Briggs, a Managing Director at BlackRock. She is a member of BlackRock’s Financial Markets Advisory Group within BlackRock Solutions. Ms. Briggs is a member of the Commercial Real Estate Advisory Team within BlackRock Solutions’ Financial Market Advisory Group. Mrs. Briggs specializes in US and European commercial real estate and related analytics. Ms. Briggs was formerly the Vice President of Corporate Finance with Summit Properties, a multifamily developer and publicly traded REIT owning 60 communities valued at over $2 billion. At Summit, she was responsible for all capital markets activities, investor relations, financial forecasting and tax planning.

The other panelists are:

Robert E. Bostrom, Co-Chair of the Financial Regulatory and Compliance Practice at Greenberg Traurig. His legal career spans more than 30 years, where he has worked and advised at the highest levels of leadership in the banking sector, in private legal practice and inside a government sponsored enterprise (GSE). As general counsel of Freddie Mac, Bob played a pivotal role during the financial crisis and recovery directing Freddie Mac’s legal strategy through the conservatorship, investigations, enforcement actions and litigation. Bob has advised clients on financial institutions regulation, examination, compliance and supervision matters. He is experienced helping clients navigate the implementation of the Dodd-Frank Act, especially the Consumer Financial Protection Bureau.

David Brickman, the Senior Vice President, Multifamily,, at Freddie Mac.  He was named senior vice president of Multifamily in June 2011. As head of Multifamily, Mr.
Brickman is responsible for customer relations, product development, marketing, sales, loan purchase, asset management, capital markets, and securitization for the company’s multifamily business, which includes the flow mortgage, structured and affordable mortgage, CMBS and low-income housing tax credit portfolios. The total multifamily portfolio was $180 billion as of March 31, 2013. He is a member of the company’s senior operating committee and reports directly to CEO Don Layton.

Mike McRoberts, a Managing Director at Prudential Mortgage Capital Company.  He is responsible for growing and enhancing Prudential’s leadership position in multifamily lending as head of the company’s market rate Fannie Mae and Freddie Mac portfolio teams and agency production team. Prior to joining Prudential, Mike was a vice president and national head of sales and production for Freddie Mac, where he was responsible for the agency’s conventional multifamily business, structured transactions and senior’s housing teams, the national Freddie Mac Program Plus network and Freddie’s four regional production offices. Earlier, he was
national head of underwriting and credit and managing director of Freddie Mac’s southeast region.

Joanne Schehl, Vice President and Deputy General Counsel at Fannie Mae. She is Fannie Mae’s Vice President and Deputy General Counsel for the Multifamily
Mortgage Business. She reports to the Senior Vice President and Deputy General Counsel – Multifamily Mortgage Business. Ms. Schehl leads the team responsible for providing legal support for multifamily infrastructure and operations, lender relationships, operational risk, and regulatory compliance. Ms. Schehl was previously a partner at Arent Fox PLLC, where she was a member of the real estate and finance groups, and served on the firm’s executive committee and as its professional development counsel, founded and led the firm’s strategic technology initiative, and was a leader in the firm’s diversity efforts.

Alan H. Wiener, Group Head, Wells Fargo Multifamily Capital, at Wells Fargo & Company. He is the group head of Wells Fargo Multifamily Capital, based in New York. Wells Fargo Multifamily Capital specializes in government-sponsored enterprise (GSEs) financing through Fannie Mae and Freddie Mac programs and Federal Housing Administration (FHA)-insured financing. Alan’s career has focused on housing and community development in both the public and private
sectors. Prior to joining Wachovia, he was the chairman of American Property Financing Inc., which Wachovia acquired in 2006. Before that, he was executive vice president with Integrated Resources, Inc.

Brooklyn’s New Center for Urban Business Entrepreneurship

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Brooklyn Law School has announced a new venture, the Center for Urban Business Entrepreneurship (CUBE), that will encompass much of the work that Brad Borden and I do, including this very blog.  The press release reads:

Brooklyn has become a world magnet for new businesses. Today, the Brooklyn Tech Triangle (DUMBO, Downtown Brooklyn, and the Brooklyn Navy Yard) ranks second only to Silicon Alley as the largest technology hub in the nation. Brooklyn Law School is intent on playing an integral role in ensuring the borough’s promise as the home for future innovators and entrepreneurs.

The Center for Urban Business Entrepreneurship (CUBE) – an extraordinary venture launching in November – will harness this energy. CUBE will be the hub for exploring legal issues surrounding entrepreneurship, and for providing effective legal representation and support for new commercial and not-for-profit businesses – while also training the next generation of business lawyers to advise and participate in these sectors. CUBE’s express purpose is to offer the legal tools to support and help build the start-up successes of tomorrow and beyond. The Center will reinforce and capitalize on Brooklyn’s role as a haven for business, media, energy, technology, creative arts, and social enterprise innovators.

Marking CUBE’s launch will be the Entrepreneur Lawyers Showcase on Thursday, November 14. The event will bring together BLS alumni and students who are exploring new ways to represent innovative entrepreneurs; trailblazing paths for the entrepreneurial lawyer and the legally-trained entrepreneur; and embarking on ventures of their own.

In addition to its base at the Law School, CUBE will be headquartered at two locations: 55 Washington Street in the heart of DUMBO, and 15 MetroTech Center. Space has been generously provided by David and Jed Walentas, Principals of Two Trees Management Co., LLC., and Forest City Ratner Companies, respectively.

“Brooklyn has always been a place where great ideas are born and nurtured, from the start of the American Revolution up to today’s Digital Revolution,” said Dean Allard. “CUBE will be a home for the next generation of revolutionaries, pioneers, entrepreneurs, and leaders. It also reflects the very best of Brooklyn Law School. In the public sector, our pro bono, government, criminal and civil justice, and community work in the U.S. and abroad – such as through the Sparer Fellowship Program – is renowned. In the private sector, we lead in areas such as international business law, business regulation, bankruptcy, and compliance, among others. CUBE presents powerful new opportunities centered on the role of law for emerging commercial and not-for-profit businesses. It adds another component of our comprehensive curriculum for the 21st century.”

The curriculum will focus on advanced training in six specific areas: Real Estate Development; Technology; Cre­ative Arts and Media; Community Deal-Making; Energy; and Social Enterprise. A three-pronged approach will define the experience:

foundational courses focused on entrepreneurship;

in-house clinics and other skills-focused courses (including the successful Business Boot Camp) that allow hands-on training with expe­rienced attorneys; and,

industry-specific courses, workshops, pro bono opportunities, student organizations (Start-Up Club, Business Law Society, IP Law Society), panels, conferences, symposia, journals, and other activities for burgeoning entrepre­neurial attorneys.

Students completing CUBE’s coursework in all three categories will have the opportunity to graduate with an Entrepreneurship Certificate at graduation.

CUBE will also promote entrepreneurial thinking through one-year fellowships, supporting third-year students’ projects designed to improve legal representation and support of start-up companies and growing enterprises. Adding to this unique approach will be a CUBE Legal Project Competition to encourage innovation and entrepreneur­ship. Students will pitch their projects, with winners selected as Fellows by a panel of prominent judges, many of whom will be entrepreneurs themselves. Seed money will also be available to help jumpstart the winning proposals.

CUBE builds on a foundation of highly respected programs, such as the Brooklyn Law Incubator & Policy Clinic (BLIP), founded by Professor Jonathan Askin; the Corporate and Real Estate Clinic, founded by Professor Debra Bechtel; and the Community Development Clinic founded by Professor David Reiss. Earlier this year, Askin was tapped by the European Commission to help guide implementation of similar clinics world­wide, part of a European Union-funded pilot program. CUBE will serve as the U.S. “landing strip” for a European consortium of 16 academic partners, which includes Queen Mary University of London Centre for Commercial Law Studies in England, the KU Leuven Interdisciplinary Centre for Law and ICT in Belgium, and the University of Amsterdam, Institute for Information Law, in the Netherlands.

The launch of CUBE is made possible through the vision of BLS entrepreneurs: Evan B. Azriliant ’92, Partner, S & E Azriliant, P.C.; Robert B. Catell, Chairman, Advanced Energy Research & Technology Center, Stony Brook University and Former Chairman and CEO of KeySpan/National Grid; Lawrence I. Feldman ’74, Chief Executive Officer, Subway Development Corp., and Diane Feldman; Stanley M. Grossman ’67, Senior Counsel, Pomerantz, Grossman, Hufford, Dahlstrom, and Nancy Grossman; Debra G. Humphreys ’84, Founder and Chair of Board of Trustees, Thomas Jefferson Independent Day School, and David C. Humphreys, President and CEO, Tamko Building Products Inc.; and Gary M. Rosenberg ’74, Partner, Rosenberg & Estis P.C.

Wrongful Foreclosure Claim Survives Motion to Dismiss

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Judge Conti (N.D. Cal.) issued an order granting in part and denying in part a motion to dismiss in Subramani v. Wells Fargo Bank N.A. et al., No. 13-1605 (Oct. 30, 2013).

Plaintiff Subramani received a mortgage loan from Defendant Wells Fargo secured by a deed of trust (DOT).  Subramani alleges (and these allegations are taken to be true for the purposes of a motion to dismiss)  that Wells Fargo sold the loan in 2006 to an affiliate and that it was ultimately bundled with other mortgages into a mortgage-backed security.  Subramani later defaulted on the loan and the home was sold at foreclosure.

Subramani contends that documents relating to the foreclosure were void because Wells Fargo “was no longer the valid lender in the DOT, or even an agent of a successor beneficiary after it sold the Loan in 2006 . . .. Plaintiff therefore states that after Defendant sold the Loan, neither Defendant nor anyone else had any right to or interest in the Loan, so all legal notices associated with the note and DOT — including the SOTs [substitutions of trustee] , NODs [notice of defaults], and the foreclosure sale itself — are illegal and void.” (4, citations omitted)

The Court found that at the motion to dismiss stage, Subramani “has sufficiently stated a claim for wrongful foreclosure based on his allegations that Defendant’s 2006 sale of Plaintiff’s DOT precluded Defendant from retaining a beneficial interest in the DOT. Plaintiff has sufficiently alleged that Defendant directed the wrong party to issue Notices of Default, that Defendant is not the true beneficiary, and that Defendant failed to abide by the rules regarding transference of the Loan.” (8, citations omitted)

 

[HT April Charney]

Reiss on Risk Management

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Law360.com interviewed me in Banks Caught In Middle Of Regulators’ Fair-Lending Pursuits (behind a paywall).  The article reads in part,

Federal and state regulators are increasingly enlisting banks in their pursuit of fair-lending and other violations at payday and auto lenders and other financial services providers with which they do business, a tactic that has also increased banks’ risk of penalties for conduct by third parties.

In late October, the Office of the Comptroller of the Currency was the latest to put out new guidance for banks’ responsibility to monitor the activities of third-party vendors that perform operations on behalf of the bank. Other federal and state regulators have been calling on banks with growing frequency and force in recent years in order to ensure their vendors and clients comply with fair lending and other laws.

*     *     *

The increased use of pressure on banks to indirectly go after firms that may not be subject to federal or state laws or regulations comes after banks outsourced a great deal of their mortgage-lending operations and other services during the financial crisis, according to David Reiss, a professor at Brooklyn Law School.

While many of those vendors met high standards, others, particularly in the subprime loan context, did not. And banks didn’t monitor those failings, Reiss said.

“The crazy thing about that is you’d think banks would do this on their own,” Reiss said. “Why do they need their regulators to say, ‘Check on these things’?”