Author Archives: David Reiss

Disney-fied Homeownership Policy

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The Census Bureau just released a report indicating that the homeownership rate is 65 percent, which is its lowest in since 1995. (5)  While some will greet this news with dismay, it provides an opportunity to ask — what are we trying to do with homeownership policy anyway?  For the longest time, both Democratic and Republican Administrations acted as if more homeownership was always better.  More recently, commentators on the Left and Right have begun to question that unthinking devotion to such a goal.

I have previously argued that federal housing policy should work toward ensuring that all Americans live in a safe, well-maintained and affordable housing unit.  Note that such a goal does not require homeownership, just a home.  For too long rental housing, which is more appropriate for all sorts of people, has been treated as the Cinderella of housing, with all the perks (for example, the mortgage interest deduction and property tax deduction) going to single family homeowners (Drizella?) and owners of coop and condo units (Anastasia?).

Politicians make all sorts of claims about the benefits of homeownership to justify this special treatment for the mostly upper-middle class households that benefit from these perks.  After our experience with the Boom and Bust of the 2000s, the financial benefits of homeownership must be evaluated with the financial risks that it poses in mind as well as its upside.

There is also a significant amount of scholarship that argues that there are a range of non-economic benefits that result from homeownership. Supposed benefits include better outcomes for homeowners and their families in education, health and employment. The supposed benefits also include increased civic engagement, as demonstrated through higher levels of volunteerism and participation in community activities. Homeownership policy is thereby often justified by the claim that it helps to achieve better outcomes for residents regarding these non-economic benefits. But the connection between homeownership and these benefits has not been clearly demonstrated.

The bottom line:  let’s develop a housing — not homeownership — policy that would make old Walt proud. That would be one where everyone can live stably ever after in a “castle” of their own, not just the upper middle class homeowners who get a bunch of tax breaks for living in a big, expensive house.

Empire State Building IPO To Proceed

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Justice Sherwood ruled in favor of the proponents of the Empire State Building IPO a few hours ago.  I discussed the case on Fox Business earlier today.  The clip is here:

https://video.foxbusiness.com/v/2341127767001/want-your-own-piece-of-the-empire-state-building/?playlist_id=933116624001.

The Servicing Field Is Wide Open

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The CFPB has proposed an additional comment to Regulation X to emphasize that that regulation does not preempt state regulation of mortgage servicing:

Proposed comment 5(c)(1)-1 would state further that nothing in RESPA or Regulation X, including the provisions in subpart C with respect to mortgage servicers or mortgage servicing, should be construed to preempt the entire field of regulation of the covered practices. The Bureau believes that this proposed addition to the commentary would clarify that RESPA and Regulation X do not effectuate field preemption of States’ regulation of mortgage servicers or mortgage servicing. The comment also makes clear that RESPA and Regulation X do not preempt State laws that give greater protection to consumers than they do. (12)

This proposed comment is pretty belts-and-suspenders given that preamble to the 2013 RESPA Servicing Final Rule said as much.  But it is still worth noting how different this approach is from the Bush years when large swaths of state consumer protection regimes were preempted by federal regulators. As the mortgage industry takes its post-Bust shape, states may begin to flex their muscles to address servicing practices that concern their residents. It will be interesting to see how this all plays out in the long game.

Empire State of IPO

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Bloomberg interviewed me and others about the litigation over the proposed IPO for the Empire State Realty Trust Inc. (which would include the Empire State Building and a few other properties):

A 15-month effort to take New York’s Empire State Building public is approaching a crucial ruling in a legal challenge by investors who oppose the deal put together by the family that controls the iconic skyscraper.

On April 29, New York State Supreme Court Justice O. Peter Sherwood may decide whether unit-holders who object to the transaction can be bought out for $100 a share, as proposed in the plan. He previously said he could throw out the votes the Malkin family has already received approving the plan if he determines the provision is illegal. Sherwood is also set to hold a hearing on a $55 million class-action settlement that is opposed by some of the tower’s more than 2,800-plus investors.

“This represents a kind of watershed moment for the case,” David Reiss, a professor of real estate finance law at Brooklyn Law School, said in an interview.

The rest of the story is here.

S&P Myth #1: No One Could Have Known

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S&P filed its Memorandum in Support of Defendants’ Motion To Dismiss the DoJ lawsuit filed back in February. The memorandum states that S&P’s inability, along with other market participants, “to predict the extent of the most catastrophic meltdown since the Great Depression reveals” only “a lack of prescience” and “not fraud.” (1) This short phrase requires some serious unpacking.

First, it ignores the fact that many of the analysts who engaged in fact-based investigations of the rated securities were sounding warnings but were overruled by higher ups who demanded that market share be maintained.  So if S&P and “other market participants” is defined to exclude all of those analysts, risk officers, underwriters and due diligence providers that worked for all of those market participants, then S&P is certainly right.  But if plaintiffs can demonstrate that facts were ignored to the extent that short term profits would be hurt by them, then S&P’s characterization is less compelling.

A second related point is that S&P’s argument that “its views were consistent with those of virtually every other market participant” is not compelling if plaintiffs can demonstrate that it ignored the facts before it and the findings of its own models.

Finally, its characterization of the Subprime Bust as “the most catastrophic meltdown since the Great Depression” fails to acknowledge that an S&P AAA rating offers quite the stamp of approval:  “An issuer or obligation rated ‘AAA’ should be able to withstand an extreme level of stress and still meet its financial obligations. A historical example of such a scenario is the Great Depression in the U.S.”  (The quote is from S&P’s website and can be accessed here on page 58.) But mortgage-backed securities with that S&P triple A did not quite live up to their promise.

This is not to say that S&P has not raised serious legal issues with Justice’s complaint in its motion to dismiss, but just that its rationalizations of its own behavior (which echo those of Dick Fuld and many others at the helm of various “market participants”) don’t stand up against the record.

No Scarlet Letter for Robo-Signing

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An “admitted robo-signer” and her bank were let off the hook in Grullon v. Bank of America et al.  (Mar. 28, 2013, No. 10-5427 (KSH) (PS)) (D.N.J.). (19)  Grullon, a homeowner, alleged that he, and others similarly situated, was entitled to relief under New Jersey’s Consumer Fraud Act because of BoA’s “bad practices, including: robo-signing, foreclosure documents, concealing the true owner of loans from the borrowers, and initiating foreclosure proceedings before it had the right too, resulted in unreliable and unfair foreclosure proceedings and ascertainable losses.” (1)

Grullon alleged a variety of fraudulent robo-signing practices, including for affidavits and assignments.  The Court found that in “light of the lack of- or de minimis nature of- the errors found on the documents said to have been “robo-signed,” and Grullon’s lack of standing to challenge the Assignment, the Court is not satisfied that Grullon has proffered sufficient evidence to support his NJCFA claim on this basis.” (21) The Court was also not satisfied that Grullon “has adequately shown that he suffered any ascertainable loss as a result of the 2009 NOI [Notice of Intention to Foreclosure] or the ‘robo-signed’ documents.” (24)  The Court also appears to find that the “robo-signing” of assignments presents no problem as the signer is not attesting to the truth of such a document. (20-21)

Bottom line:  one needs to demonstrate that there was a wrong and that harm resulted from it. Scatter shot allegations of robo-signing don’t work.

imcsnet.org/gfetw/www/

 

Cherryland, Very Strange

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I looked at the Cherryland decision yesterday. Law360 ran a story (behind a paywall) about it today, quoting me and others.  To recap, the original Cherryland case appeared to unexpectedly open up many commercial borrowers in Michigan to personal liability. The most recent Cherryland opinion reversed this result as a result of Michigan’s newly passed Nonrecourse Mortgage Loan Act.

The story reads in part:

Cherryland and Schostak reaped the benefits of the NMLA. But many CMBS loan documents are similarly written, and other borrowers and guarantors “may not have the saving grace of a politically connected developer getting a law passed very rapidly,” said Brooklyn Law School professor David Reiss.

“If I was an existing borrower [or borrower’s counsel], I would look at this very carefully,” Reiss told Law360. “And new borrowers should try to negotiate new language that protects for this, saying that becoming insolvent is not something that is going to trigger the bad boy guarantee.”

After the initial decision was handed down last year, attorneys say they and their colleagues all took a hard look at the language in their clients’ nonrecourse loan documents to be sure that if they found themselves in a similar situation they would be protected without the cover of a law like Michigan’s NMLA or Ohio’s Legacy Trust Act, which followed shortly thereafter.

In fact, experts say they don’t believe many other states will likely follow suit with their own guarantor-protecting statutes. So even though Wells Fargo lost out in the Cherryland row, lenders will likely keep the case in mind when considering deals.

Although “most people believe that the [pre-NMLA] decision in Cherryland was not what was intended by virtue of the documents,” said Schulte Roth & Zabel LLP real estate partner Jeff Lenobel, the solvency covenant was drafted in a way that allowed it to be read as a bad boy trigger.

This has led many who represent borrowers and guarantors to seek more due diligence and spend more time making sure loan language is just right.

More than $1 trillion in CMBS loans are coming due over the next several years, and Lenobel said he wouldn’t be surprised to see the issue come up again in a different court.

While the Cherryland case is all but over, another similar suit — Gratiot Avenue Holdings LLC v. Chesterfield Development Co. LLC — is making its way through Michigan’s federal courts. And attorneys aren’t ruling out the possibility of an appeal to the U.S. Supreme Court to ultimately determine the responsibilities of a guarantor in a nonrecourse loan.

“It may be a very smart move by the lending industry to appeal to the Supreme Court,” Reiss said.