Author Archives: David Reiss

Tough Edge for Financial Services

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Maria T. Vullo %>

Maria Vullo

 

 

 

 

 

 

 

Law360 quoted me in Cuomo’s DFS Nominee Likely To Keep Tough Edge (behind a paywall). It reads, in part,

Although New York Gov. Andrew Cuomo turned to a longtime BigLaw attorney to lead the New York State Department of Financial Services, observers say the agency is likely to continue taking the aggressive regulatory and enforcement stance that has become its calling card.

The governor tapped Paul Weiss Rifkind Wharton & Garrison LLP’s Maria T. Vullo to lead the DFS, completing a monthslong search to replace former New York Superintendent of Financial Services Benjamin M. Lawsky. In turning to Vullo, Cuomo brings on a litigator and former prosecutor with 25 years of experience in the law, including two decades of representing banks.

But given the reputation that the DFS has built up since it burst onto the scene with its $340 million sanctions violation settlement with the U.K.’s Standard Chartered PLC in 2012, advocates and observers believe that if confirmed, Vullo will continue to push for tough enforcement and big penalties against the banks, insurers and other financial firms that the DFS oversees.

 *     *     *

However, because Vullo comes from a BigLaw background with extensive experience representing financial firms, some have raised concerns that the agency will become less aggressive in enforcing New York state’s financial regulations.But observers who spoke to Law360 said her noncorporate experience gives a clearer picture of how she might run the DFS.

Vullo has been an advocate for women in the legal profession and represented women who sued for damages after being raped during the war in Bosnia between 1992 and 1995, helping secure a $745 million verdict in that case.

And in her work for Cuomo during his tenure as New York’s attorney general, Vullo oversaw a staff of around 200 that worked in the office’s investor protection, antitrust, real estate finance, consumer fraud and Internet bureaus.

In that position, she took action against Ezra Merkin and Ivy Asset Management for their roles in defrauding investors in Bernard L. Madoff’s $65 billion Ponzi scheme, as well as launching an investigation and action against Ernst & Young for investor losses in Lehman Brothers Holdings Inc.’s 2008 bankruptcy.

Those past experiences should allay any fears that Wall Street’s critics might have, said David Reiss, a professor at Brooklyn Law School.

“I thought that Governor Cuomo would seek an aggressive replacement for Lawsky,” Reiss said. “Vullo fits the bill.”

To that point, financial reform and other advocates said in interviews that they knew little about her, but were encouraged by what they did know.

“What we’re hoping is that the reputation that the department has established will continue through the new leadership,” said Andy Morrison of the New Economy Project, a New York-based advocacy group.

Indeed, Cuomo has an interest in maintaining an aggressive DFS.

The billions of dollars in fines it collected from banks have gone to fund state infrastructure projects, including the construction of a new Tappan Zee Bridge across the Hudson River north of New York City.

And that get-tough approach has also been a way to attract voters.

“My sense is he benefits from the halo effects of an aggressive DFS,” Reiss said.

Dollar Homes

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Packmatt

Realtor.com quoted me in Buy a House for a Buck? The Real Story Behind $1 Listings. The story reads, in part,

Hidden deep within the bowels of real estate listings are a few head-scratchers that would no doubt catch any bargain hunter’s eye. They’re homes for sale for the grand total of one crisp American dollar. So what’s the deal? Are they for real?

I decided to find out by actually clicking, and calling, and learning the stories behind these tempting facades. And it turns out, $1 listings can mean many things. Here’s what this lowball price is actually all about.

*     *     *

Possibility No. 3: It truly is for sale for $1, but…

The next four places for $1 that I check out are all rundown properties in Detroit. They range in description from “fire damage sold as is” (translation: a charred pile of lumber—pic below) to “bungalow with three bedrooms, one bathroom, basement and much more” (translation: “more” means plywood for windows and doors).

Still, some houses sit on decent lot sizes of 3,000+ square feet in neighborhoods that seem habitable at first glance. The listing agent won’t return my call, but I track down an agent willing to show me the various rundown homes. Though back taxes or liens on the property may jack up the price, I ask whether the house will really sell for $1. “Sure,” he says. “This is Detroit.”

Now that I’ve found a true $1 listing, should I hand over a George Washington for one of these fixer-uppers?

“When a house is being sold for a dollar, it means that the local real estate market has cratered,” says David Reiss, professor of law at Brooklyn Law School who focuses on real estate issues and community development. “Land has no value. Or even worse, it has negative value and buyers of $1 homes will end up getting snookered. Owning land comes with various mandatory expenses like real property taxes. It’s possible the true value is even lower than a dollar. In that case, you will see a lot of $1 houses staying on the market, as hard as that is to believe.”

Reiss further explains how the Motor City’s market cratered so deeply: “Real estate’s value typically comes down to location. If jobs have disappeared, if residents have disappeared, if services have disappeared—then value disappears.”

Beyond having zero worth, a $1 home is likely a gaping money pit. When the New York Times ran a piece on the subject in 2007, it found that “the houses often require hundreds of thousands of dollars in renovations.”

Though my search for $1 properties was a bust in the end, there once were $1 homes worth buying. “Think of New York City,” says Reiss. “Homes that were abandoned in the 1970s are now selling for seven figures.”

Bottom line? One-dollar listings may be a risky gamble, but, hey, you never know.

 

The Founding & Evolution of HUD

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Omer Wazir

I had previously blogged about HUD at 50, a hefty tome filled with a lot of interesting chapters. Today, I focus on Chapter 1, written byJill Khadduri, The Founding and Evolution of HUD: 50 Years, 1965-2015 (starting at page 5). The abstract for the chapter reads,

This is an institutional history of the U.S. Department of Housing and Urban Development (HUD), focused on the development of HUD’s major policies and programs over the 50 years from its founding in 1965 to 2015. The chapter emphasizes how the successive secretaries of HUD and the political administrations they operated within shaped the agency and its programmatic responses to housing and urban issues. It attempts to place the evolution of HUD within the contexts of the housing, housing finance, and community development industries; other governmental institutions, including the U.S. Congress and other levels of government; and the most urgent housing and urban problems perceived during each secretary’s tenure. This chapter benefits from hindsight on which policies and programs appear to have had lasting importance. However, it does not focus on the outcomes of HUD policies and is not an assessment of HUD’s effectiveness in dealing with the issues of poverty, urban distress, housing quality and affordability, and fair housing over the past 50 years. (5)

There will be a lot that is familiar to housing nerds in this chapter, but its real value lies in putting all of the pieces together in a coherent narrative, charting the big changes in federal housing policy. How was federal housing policy related to urban policy? How was housing policy related to housing finance policy?  Where do Community Development Block Grants fit in?  How about housing vouchers? Fair housing policy? Enterprise Zones and Empowerment Zones? How important was homeownership vis-à-vis rental housing policy? When did special needs populations and the homeless get more resources? How did large-scale disaster relief fit into HUD’s mission? These issues, and more, are addressed and placed in broader context. Bottom line for housing nerds and aspiring housing nerds: read it, or at least skim it.

Know How to Get a Mortgage?

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"Einstein blackboard" by decltype

Fannie Mae’s Economic & Strategy Research Group posted research findings titled What Do Consumers Know About The Mortgage Qualification Criteria. The findings are sobering:

When asked to identify accurate key mortgage qualification criteria (down payment, credit score, and DTI ratio), about one half of consumers were unable to provide an answer.

o The lack of understanding is more pronounced among those with less education and lower income as well as among renters (as opposed to homeowners with mortgages), African-Americans, and Hispanics.

o Regression analysis shows that education, income, and age are most highly associated with mortgage qualification understanding. Lower-income consumers, less-educated consumers, and seniors are more likely to say “don’t know.” Ethnicity accounts for 2 to 9 percent of model explanation.

o Only 23 percent are aware of the 3 percent and 5 percent down payment programs.

o Although more than eight in 10 consumers (81 percent) indicate that they have seen their credit score, when asked what their score is, nearly half consumers (49 percent) say “don’t know” or provide a number outside of the score range (300-850).

And, among those who did provide an answer, only 5 to 16 percent of them chose an answer with the correct range.

o The “over-estimate” is more pronounced among less-educated and lower-income consumers, African-Americans, and Hispanics. When asked about the maximum DTI ratio, these consumer groups are more likely to “under-estimate” the ratio.

o Their mean responses about the minimum down payment and credit score requirements are higher than Fannie Mae requirements.

Lenders are cited as the most influential source of information for getting mortgage advice (33 percent most influential; 64 percent top three most influential), followed by family and friends (20 percent most influential; 47 percent top three most influential).

Regression analysis shows that ethnicity and age are most highly associated with differences in the influence of various information sources. For example:

o Older and Caucasian consumers are more likely to cite lenders as the most influential source of information.

o African-Americans and Hispanics are more likely to cite real estate agents, government agencies, and non-profit housing counselors.

o Younger consumers and Asian-Americans are more likely to cite family and friends as the most influential source of information. (5, emphasis in the original)

The authors identify a lot of important implications that arise from this study, the main one being — “Do not take consumer confidence at face value — there is a need and opening for educational efforts surrounding primary underwriting principles (credit score, down payment/LTV, DTI ratos, and low down payment mortgage programs.” (6)

The big open question is, however, does financial education really work?

The Golden Rule of Conduct

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Dick DeMarsicoGandhi (1)

In honor of the Reverend Martin Luther King, Jr., a quotation from Mahatma Gandhi, one of his heroes:

The golden rule of conduct…is mutual toleration, seeing that we will never all think alike and we shall see Truth in fragments and from different angles of vision. Conscience is not the same thing for all. Whilst, therefore, it is a good guide for individual conduct, imposition of that conduct upon all will be an insufferable interference with everybody’s freedom of conscience.

Democracy is not a state in which people act like sheep.

Truth resides in every human heart, and one has to search for it there, and to be guided by truth as one see it. But no one has a right to coerce others to act according to his own truth.

Rent-to-Own Risks

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"Numbers 341 to 385 Lordship Lane N17" by A R Driver

Kroll Bond Rating Agency has released a CMBS Commentary, Rent-to-Own Deals Present More Risk than SFR [Single-Family Rental]. The commentary addresses the first rent-to-own securitization, one that Kroll is not rating. With rent-to-own, ” the tenant has the right to purchase the property it is currently renting in the future at a specified exercise price.” (1) With single-family rental, the tenant is currently renting a property from a large institutional investor without a right to purchase.

Kroll has identified a variety of risks that are specific to R2O deals. While some are specific to potential investors, others will also impact the tenants in these properties:

A primary concern was that the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/ or predatory lending laws. If this occurred, it could result in considerable litigation costs for the securitization trust, as well as a cessation of advancing by the servicer. For example, if it was determined that the purchase option violated consumer protection laws, tenants in the applicable jurisdiction could potentially cease making rental payments under their leases, potentially causing a shortfall in the funds available for the borrower to make debt service payments under the mortgage loan and if the servicer failed to advance such amounts because it determined that advances were non-recoverable, this could result in a shortfall in the amounts available for distribution to the bondholders. Another risk present in the rent-to-own structure is a delay in the ability to foreclose on mortgaged properties that are subject to purchase options because the mortgages are subordinate to the purchase option right. As a result, the servicer may not be able to foreclose following an event of default under the loan unless the related purchase option period has expired. These risks are not applicable in standard SFR deals because the tenants do not hold purchase options with respect to the rental properties. (1)

I was somewhat skeptical that these types of securitizations would have much of a life once the housing bust worked itself out. It looks, however, like they might. Kroll is right to alert potential investors to the concerns outlined above. The CFPB and state regulators should also be looking at these cutting-edge transactions to ensure that residents of these homes are appropriately protected.

Why Have a Complaint Window?

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Angela Littwin of the the University of Texas School of Law has posted Why Process Complaints? Then and Now to SSRN. The abstract reads,

The creation of the Consumer Financial Protection Bureau (CFPB) established the first comprehensive federal forum for processing consumer complaints about financial products and services. The CFPB not only handles consumers complaints; it also publishes a database that includes most complaints and their initial resolutions. For a symposium honoring the scholarship of Professor William C. Whitford, I analyze the CFPB’s complaint system and database using a framework he developed to explore the reasons why government agencies process consumer complaints and whether these reasons justify the resources that complaint processing entails. Whitford and his co-author proposed three “obvious” reasons to process consumer complaints: to settle consumer disputes; to inform the agency’s regulatory activities; and to generate good will for the agency among constituencies such as consumers, government actors, and the companies the CFPB regulates.

I find that the CFPB has mixed success in providing an alternative dispute resolution forum for consumers. I am, however, missing key information for this evaluation. The CFPB Consumer Complaint Database contains the financial institutions’ responses to consumer complaints but there is almost no information available about any follow up actions the CFPB takes. The CFPB is particularly strong on the regulatory function. It makes significant use of complaint data in its regulatory roles and evinces a commitment to ensuring that companies are handling complaints well. Last comes good will. With respect to public good will, I was unable to find much evidence one way or the other. As for good will among government actors, the CFPB appropriately appears not to apply different treatment to complaints referred by government entities or officials. Finally, the CFPB’s complaint data reveal an intriguing possibility that the process may provide some legitimization of financial institutions’ complaint resolutions. But given that consumer financial companies are pushing for the CFPB’s elimination, working to generate good will among financial institutions in this way may be entirely reasonable on the CFPB’s part. This is especially true because the CFPB has made important complaints decisions – such as publishing the database without redacting company names – despite financial companies’ vociferous objections.

I was interested by the “argument regarding bureaucratic companies . . . that a complaint process can find and resolve violations of the bureaucracy’s own rules.” (944) But Littwin also notes that the key issue is the “ineffectiveness in handling the harder cases, such as those raising issues of fact or law.” (Id.) We are still a long way off from figuring out the optimal system for addressing consumer complaints, but this article helps to frame the issue nicely.