Author Archives: David Reiss

Racial & Ethnic Change in NYC

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Brooklyn's poet, Walt Whitman

Brooklyn’s poet, Walt Whitman

Michael Bader and Siri Warkentien have posted an interesting mapping tool, Neighborhood Racial & Ethnic Change Trajectories, 1970-2010. They had set out to answer the question:

how have neighborhoods changed since the Civil Rights Movement outlawed discriminatory housing? We study how neighborhood racial integration has changed during the four decades after the legislative successes of the Civil Rights Movement. We were unsatisfied with previous studies that focused mostly on defining “integrated” and “segregated” neighborhoods based on only on whether groups were present. We thought that the most interesting and important changes occur within “integrated” neighborhoods, and we set out to identify the common patterns of those changes.

We used a sophisticated statistical method to identify the most common types of change among Blacks, Latinos, Asians and Whites in the metropolitan neighborhoods of the four largest cities in the U.S.: New York, Los Angeles, Chicago, and Houston. We were disappointed to learn that many integrated neighborhoods were actually experiencing slow, but steady resegregation — a process that we call “gradual succession.” The process tended to concentrate Blacks into small areas of cities and inner-ring suburbs while scattering many Latinos and Asians into segregating neighborhoods throughout the metropolitan area.

While we reserve a healthy dose of pessimism about long-term integration, we also find neighborhoods experiencing long-term integration among Blacks, Latinos, Asians, and Whites. We call these “quadrivial” neighborhoods, which derives from Latin for the intersection of four paths. We thought that seemed appropriate given the often different paths different racial groups took to these neighborhoods. (emphasis in the original)

I was, of course, interested in the New York City map. While NYC is highly segregated, it was interesting to see the prevalence of these so-called quadrivial neighborhoods. The authors find that

About 20 million people call the New York metropolitan area home. The metro area is one of the most segregated in the United States and, as a result, New York has a large proportion of neighborhoods following stable Black and stable White trajectories. Some of the segregation came about because of White flight during the 1970s. Black segregation following this path clusters in the Lower Bronx, North Brooklyn, and in and around Newark, New Jersey.

Large-scale Latino immigration to the New York metro area has been relatively recent, and the number of recent Latino enclaves bears out that pattern. Neighborhoods experiencing recent Latino growth are scattered throughout suburban New Jersey, Long Island and northern New York neighborhoods. New York also experienced high levels of Asian immigration relative to other metropolitan areas. Neighborhoods experiencing recent Asian growth are scattered throughout the metropolitan region.

New York also contains a large number of quadrivial neighborhood and the highest proportion of White re-entry neighborhoods. The latter are found near transportation to Manhattan in the gentrifying areas of Jersey City and Weehawken, New Jersey and the Brooklyn terminals of the Manhattan and Williamsburg Bridges.

New York, therefore, contains the contradiction of containing a large number of segregating neighborhoods along with a distinct trend toward integration.

I am not sure that I have any insight to explain that contradiction, although Walt Whitman, Brooklyn’s poet, notes:

Do I contradict myself?

Very well, then I contradict myself,

(I am large, I contain multitudes).

The Future of Securitization

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SEC Commissioner Piwowar

SEC Commissioner Piwowar

SEC Commissioner Michael Piwowar’s Remarks at ABS Vegas 2016 are worth a look for all of those interested in the future of the mortgage-backed securities market. I have interspersed selections of his remarks with my comments:

As our country’s capital markets regulator, the SEC’s tripartite mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.  Securitization can transform illiquid assets like mortgages, auto loans, credit card receivables, and future sales of David Bowie albums into marketable securities.  By serving as an efficient means of allocating scarce capital, securitization supports economic growth, business development, and job creation.  Securitization further fosters resiliency by diversifying the funding base of our economy.

There are many other benefits associated with securitization, including the potential for reduced costs of, and expanded access to, credit for borrowers, the ability to match risk profiles for specific investor demands, and increased secondary market liquidity.  Because banks and other originators can move loans off of their balance sheets into asset-backed securities (ABS), securitization can increase the availability of credit for both businesses and individuals.  In many instances, securitization can allow a person to obtain more favorable terms than can be obtained from a bank or other financial institution.

Thus, the ABS market serves as a critical source of capital, providing funding for home and automobile loans, credit cards, and many other purposes.  Yet, as shown during the recent financial crisis, investors may abandon the ABS market if they do not believe they possess sufficient information to evaluate the risks associated with a particular asset-backed security and to price it accordingly.

While I generally agree with Piwowar’s assessment of securitization’s value, it is worth noting that he does not acknowledge how important robust consumer protection is to maintaining a healthy securitization market over the long run.

I found his discussion of the Dodd-Frank credit risk retention rules particularly interesting:

For the record, I voted against the credit risk retention rules.  These rules require a securitizer to retain a minimum 5% credit risk of any securitization transaction and generally prohibit the sponsor from hedging its retained interest.  I was particularly dismayed by the “one-size-fits-all” approach taken by the regulators to create a flat 5% risk retention requirement for all asset classes, except for securitizations involving so-called “qualified residential mortgages” (QRMs) for which the risk retention level is zero.  These were arbitrary choices.

Residential mortgages, commercial mortgages, credit card receivables, and automobile loans each have distinct and different attributes associated with their underlying borrowers.  Rather than carefully examining these attributes to determine an optimal credit risk retention rate for each asset class, prudential regulators in Washington, D.C., took the easy way out – they simply set it at the maximum statutory rate and ignored the authorization from Congress to create lower risk retention requirements or use alternative methods to align interests.

Perhaps the prudential bureaucrats had their own conflict of interests in setting these requirements.  After all, a prudential bureaucrat has a strong interest in self-preservation.  Will a prudential bureaucrat get credit if optimally tailored risk retention rates increase economic growth and provide additional opportunities to families and businesses across America?  No.  Will a prudential bureaucrat take the blame if the next financial crisis – and there will be one eventually – relates at all to securitizations?  Probably.  Hence, what better way to side step responsibility than to refrain from using reasoned judgment and rely solely on the most risk-averse interpretation of statute instead?

Bureaucratic self-preservation might also explain the decision to adopt as broad of an exemption for QRMs as possible, so as to minimize any political fallout from the real estate and housing industries.  Few will disagree that residential mortgage-backed securities played an important role in the 2008 financial crisis.  For those in the audience involved in RMBS offerings, you must be quite happy with the broad exemption from the risk retention rules.  For those of you in the audience who are involved in other types of securitizations that had little, if any, part in causing the financial crisis, you are probably wondering why you were unfairly targeted.  Unfortunately, unlike Las Vegas, what happens in Washington does not stay in Washington. (footnotes omitted)

Piwowar gives short shrift to the benefits of clear and simple rules, but it is still worth paying attention to his critique of the “one size fits all” risk retention rules. If researchers can demonstrate that these rules are not optimally tailored, perhaps that would provide a reason to reconsider them. This is, of course, a long shot, given that the rules have been finalized, but Piwowar is right to shine light on the issue nonetheless.

Candid and thoughtful remarks from regulators are always refreshing. These make the grade.

Keeping Cash on Hand

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1127px-American_CashTheStreet.com quoted me in Why Some Investors Are Keeping Large Sums of Money in Cash. It reads, in part,

Investors are still holding large positions in cash amid the continued volatility in the stock market since they remain uncertain about the outlook of the economy.

After being spooked by the markets this year — evinced by the 21 times the Dow gained or lost 200 or more points through March 1 compared to only nine in 2015 — investors are finding a large cash reserve to be a reassuring cushion.

A report by Capgemini and RBC Wealth Management in 2015 cites the total cash held by high net households or those who have $1 million or more investable assets in North America as $3.8 trillion. Out of that total, $3 trillion to 3.5 trillion of those assets are estimated to be in the U.S., said Gary Zimmerman, CEO of MaxMyInterest, a New York-based company that maximizes cash balances for savers.

One reason cash remains popular among all age groups is because the sentiment of the economy, job growth and markets is viewed unfavorably. Data on the amount of cash that consumers keep in checking or savings accounts or CDs are not tracked.

“Cash is still a favored asset for investors, because frankly, people are nervous about the economy,” said Sean Stein Smith, a CPA in Hackensack, N.J.

Even wealthy people are allocating large sums of their assets in cash, with 23.7% of high net worth people keeping their portfolios in cash in 2015, according to the report.

 *     *     *

Homeowners should also consider starting a repair fund in addition to having emergency savings to cover household expenses, said David Reiss, a law professor at Brooklyn Law School in N.Y. Some repairs need to be made immediately such as a roof leaking during the rainy season or the boiler during winter months.

“A homeowner who wanted to be conservative could put an amount equal to 10% of his or her mortgage payment into a comparable fund for home repairs,” he said. “There is probably not one right answer for everyone. Some people are handy and can do all sorts of repairs themselves, others can’t.”

Why Doctors Buy Bigger Homes Than Lawyers

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photo by Ben Jacobson

Realtor.com quoted me in Why Doctors Buy Bigger Homes Than Lawyers (and What It Means to You). It reads, in part,

Take that, Alan Dershowitz: Although both doctors and lawyers can typically afford better-than-decent-sized homes, a new working paper from the National Bureau of Economic Research found that in states with a certain legal provision, physicians’ houses are bigger. Often much bigger.

So what’s the deal? It seems to come down to two factors: First, the skyrocketing costs of financially devastating medical malpractice suits; second, a once-obscure provision called “homestead exception” which can protect the assets of doctors in some states from being wiped out by those suits when they invest their cash in their homes.

“We have been interested in understanding how does that pervasive aspect of a physician’s career influence the decisions they make … whether it means they invest more in houses to protect themselves against liability,” Anupam Jena, an associate professor of health care policy at Harvard Medical School and a co-author of the paper, tells the Washington Post.

Here’s how homestead exception works: If creditors are hounding you for unsecured debts—as opposed to secure ones, like your mortgage—they can’t take your home as collateral, as long as you declare bankruptcy. In fact, they can’t even place a lien on the property to collect when you sell. These exemptions vary by state: Some, such as New Jersey, have no such safeguard; in California, individuals’ homes are protected up to $75,000 (which generally won’t get you past the front porch).

Yet a handful of states—Arkansas, Florida, Iowa, Kansas, Oklahoma, and Texas, as well as the District of Columbia—have unlimited homestead exemption. Doctors in those states bought homes that were 13% more expensive than the homes of doctors elsewhere. The homes of medical doctors (and dentists, who are essentially in the same medical malpractice boat) were markedly more expensive than the homes of professionals making similar salaries—even lawyers, who know a thing or two about malpractice suits. The authors drew from U.S. Census Bureau data on 3 million households about profession, household income, and home value.

So why should you care? Because homestead exemptions apply to you, too—even if the closest you come to the medical profession is annual checkups and late night reruns of “ER.”

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But don’t get the wrong idea: The homestead exemption isn’t a bulletproof way to ward off foreclosure. Remember, it applies only to unsecured debt such as credit cards—not secured debt like your mortgage.

“If you borrow money for a home, the homestead exemption typically does not apply,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. In other words, if you don’t pay your mortgage and default on your loan, your lender can foreclose and seize your home.

And we’re not saying you should run from your creditors, because eventually they’ll catch up to you. But if you are in financial straits and scared sick of losing your house, check your local homestead exemption laws first—you might be safer than you think.

The State of Moderate-Income Housing

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photo by Jaksmata

The Center for Housing Policy’s most recent issue of Housing Landscape gives its 2016 Annual Look at The Housing Affordability Challenges of America’s Working Households (my discussion of the Center’s 2015 report is here). it opens,

Millions of working households face big challenges in finding affordable housing, particularly in areas with strong economic growth. In 2014, more than 9.6 million low- and moderate-income working households were severely housing cost burdened. Severely cost burdened households are those that spend more than half of their income on housing costs. Overall, 15 percent of all U.S. households (17.6 million households) had a severe housing cost burden in 2014, with renters facing the biggest affordability challenges. In 2014, 24.2 percent of all renter households were severely burdened compared to 9.7 percent of all owner households. These percentages were even higher for working households, of whom 25.1 percent of renters and 16.2 percent of owners had a severe housing cost burden.

Housing costs continue to rise, particularly for working renters, who saw their median housing costs grow by more than six percent from 2011 to 2014. And for the first time since 2011, housing costs increased for working owner households as well, marking the end of a three-year downward trajectory. Additionally, more working households were renting their homes as opposed to buying—52.6 percent of working households were renters in 2014, up nearly two percentage points from 2011, when the share was 50.8 percent.

With more working households renting their homes, demand for rental housing continues to grow, pushing rents even higher in already high-cost rental markets. And although incomes are growing for many working households, this growth is not always sufficient to offset rising rents, meaning that working renter households are increasingly having to spend a higher proportion of their incomes on housing costs each month. (1)

The report outlines a series of good policy proposals (many of which are politically unfeasible in the current environment) to address this situation. But my main takeaway is that the wages of working-class households “are not sufficient for meeting the cost of adequate housing.” (5) Their housing problem is an income problem.

Hillary’s Housing Agenda

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United States Department of State

Hillary Clinton’s housing policy platform is included in her Breaking Every Barrier Agenda. I quote the key passages below and provide my two cents on them. Overall, the proposals strike me as reasonable, progressive ones.

  • Support families as they save for sustainable homeownership. Clinton will support initiatives to match up to $10,000 in savings for a down payment for those who earn less than area median income.

I like that this down payment assistance proposal because it requires that homebuyers have skin in the game (and $10,000 is a lot of skin for many first-time homebuyers). Down payment assistance programs that do not require skin in the game can turn out to be unmitigated fiascoes for homebuyers and government programs alike (for instance, see my discussion of the American Dream Down Payment Act of 2003 here).

  • Easing local barriers. Clinton will encourage communities to implement land use strategies that make it easier to build affordable rental housing near good jobs by increasing funding available to those that do through both her infrastructure bank and competitive grant programs, like the Department of Transportation’s TIGER initiative.
  • Build more affordable rental housing near good jobs and good schools. Clinton will increase support for affordable rental housing in the areas that need it most and encourage communities to implement land use strategies that make it easier to build affordable rental housing near good jobs.

I like these proposals because they acknowledges the outsized effect that local land use policies can have on housing construction. The federal government can use its considerable set of incentives to push local governments to allow for housing where it is needed.

  • Overcome pockets of distress. Clinton will provide the resources necessary to overcome blight, giving communities a chance to rebuild and renew with new businesses, new homeowners, and new hope. And she will connect housing support in high-poverty neighborhoods to economic opportunity.

I am not sure if this proposal is specific enough to respond to, but I am concerned that it does not account for the fact that some communities are blighted because the local economy has failed. Decisions to address blight must be made without sentimentality or we will just be throwing good money after bad.

  • Connecting housing assistance to community development. Clinton will build on the Choice Neighborhoods and Neighborhood Revitalization Initiative programs, both of which provide communities with support for housing as part of a multifaceted strategy to address the complex challenges of poverty. She will make resources available for economic development, health care, environmental improvement, and more.

Housing policy is clearly just one aspect of social policy, so it makes sense for Clinton to treat it as one thread in a broader fabric. This proposal is also a little short on details, so it is hard to see what she is intending to do, other than continuing current Obama policies.

  • Giving recipients of assistance more choice. Clinton will work to expand the choices that recipients of housing vouchers have in deciding where to live. Today those with vouchers must often choose among the very pockets of poverty the vouchers are intended to allow them to leave. Clinton believe we should expand their range of options to include neighborhoods with more jobs and better schools.

I am a big fan of giving low- and moderate-income households more choice when it comes to their housing options, so I think it is great that Clinton wants to expand the voucher program.

  • Support counseling programs for the significant financial commitment of homeownership. Clinton will increase funding and broaden credit terms for housing counseling programs shown to help borrowers become sustainable homeowners.

I am not sure that the evidence is there that homeownership counseling works, so I would caution the Clinton campaign to look at the research on this topic.

  • Enforce fair housing and fair lending laws. Clinton will make sure that the Department of Justice enforces fair lending and fair housing laws and will work closely with regulators to make sure that Fannie Mae, Freddie Mac and the nation’s lenders meet their responsibility to provide lending in communities that have been historically underserved.

No question, fair housing and fair lending enforcement should be a priority for the DoJ. I would like more details about Clinton’s expectations for Fannie and Freddie though. It is important that any policies implemented through Fannie and Freddie are designed to encourage sustainable homeownership, not just homeownership that can end up being a part of a cycle of purchase and default.

  • Reducing the cost. Clinton will defend the current supply of Low Income Housing Tax Credits and provide additional credits in communities where the demand for these credits far exceeds the supply. The additional credits will be allocated through a competitive process to those cities and states that are in the best position to use them effectively.

The Low Income Housing Tax Credit has bipartisan support as an engine of housing construction for low-income households, so it seems reasonable that Clinton would want to expand it in the current political environment.

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I will review the other candidate’s housing platforms in the coming weeks.

Your Neighbor’s Dog

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SheltieBoy

Realtor.com quoted me in Salma Hayek’s Dog Shot by Neighbor: Was He Right? It reads, in part,

Actress Salma Hayek is mourning the death of her dog Mozart—a dog she nurtured from birth, according to her Instagram post. The 9-year-old pooch, a Belgian Malinois, was found dead on her Washington state ranch on Friday with a visible wound close to his heart. And this sad story only got worse once police discovered the culprit: Hayek’s neighbor.

According to TMZ, the neighbor was sick of Hayek’s dogs, several of whom regularly trespassed on his territory and attacked his dogs. So on that fateful Friday, this neighbor responded to a dogfight in his garage by shooting an air rifle just to scare off the one attacking his dog, the Associated Press reports. Mozart, who was hit, ran off and died from internal bleeding. In fact, the shooter’s wife Kim Lund told the AP, “We didn’t even know we killed a dog. I’m in shock.”

Claiming a pellet gun would normally not be deadly, the police ruled the shooting justified, but plan to send the case to prosecutors for additional review.

*     *     *

According to “When Killing a Dog Is Legally Justified” on Nolo.com, most state laws do not allow homeowners to shoot dogs that are merely running loose on their property. And even if they’re attacking your own dog or cat, you’re not off the hook.

“Someone who does injure a dog that’s chasing another dog … may be liable for damages to the dog’s owner,” writes . “And the killer may also be guilty of cruelty to animals.”

In other words, Hayek’s neighbor could pay for pulling the trigger. Plus there’s the bigger picture, points out David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School: “How’s it going to be to continue living next door to your neighbors after you shot their dog?”

Imagine how awkward it will be for this guy to run into Hayek from now until the end of his days there. Maybe he could have tried to fix the problem earlier with something other than rubber bullets.

“There certainly are steps you could take before shooting the dog,” Reiss says. “You could call animal control or law enforcement. In some places, if a dog owner has received a warning about his or her pet, he or she could face liability for allowing it to roam free.” 

Bottom line: Talk first, shoot only as a last resort.