Author Archives: David Reiss

Outrage

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photo by Dmitry Kalinin

A federal judge has held that a mortgage servicer committed “the tort of outrage when it charged attorney’s fees and costs to plaintiff’s mortgage account and refused to explain the charges upon request.” (1) Lucero v. Cenlar FSB, No. C13-0602RSL (W.D. Wash. Jan. 28, 2016) (Lasnik, J.) The case has an all-too-typical story of servicer misbehavior — the repeated phone calls that went nowhere, the absence of any servicer representative with actual knowledge of why the servicer was acting the way that it was, the unjustified fees that just kept compounding into five-figure nightmares.

The Court found that under Washington law,

The elements of the tort of outrage are “(1) extreme and outrageous conduct, (2) intentional or reckless infliction of emotional distress, and (3) severe emotional distress on the part of plaintiff.” Rice v. Janovich, 109 Wn.2d 48, 61 (1987). Based on the evidence submitted at trial, plaintiff has raised a reasonable inference and the Court finds that Cenlar, annoyed that plaintiff had sued it after obtaining a loan modification and looking for leverage to force her to abandon this litigation, adopted a strained and unprincipled analysis of the to justify the imposition of unpredictable and enormous charges directly onto plaintiff’s mortgage statements as “Amounts Due.” Cenlar, having reviewed plaintiff’s financial situation less than a year before and being fully aware that plaintiff was paying late charges every month, had no reason to believe that she could cope with these charges. Cenlar reasonably should have known (and was likely counting on the fact) that these charges would cause immense emotional distress, which they did. Cenlar compounded the distress by denying plaintiff information about these charges or the justification therefore. The first notice of the charges stated that they were charged “in keeping with Washington law.” This assertion is wholly unsupported: Cenlar’s witness acknowledges that the letter was a form into which the reference to “Washington law” was inserted simply because the loan originated in Washington. No Washington case law, statute, or regulation has been identified that authorize the charges levied against plaintiff’s mortgage account. When plaintiff requested information regarding the charges, she was ignored for months. Eventually various contract provisions were identified, and Cenlar asserted that it was simply keeping track of charges it might eventually seek to recover from plaintiff. Regardless of whether Cenlar was demanding immediate payment or was simply threatening to collect them in the future, the message was clear: continue this litigation and we will take your home. Such conduct is beyond the bounds of decency and is utterly intolerable. (14-15, footnotes omitted)

Decisions like this tend to give us a warm feeling in our stomach — justice has been done! But the truth is that for every case like this, there are thousands of homeowners who were severely mistreated and had to just take it on the chin. Federal regulation of the housing finance system should get to the point where these situations are the rare, rare exception. We have a long way to go.

 

HT Steve Morberg

Race, Poverty and Housing Policy

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Signing of the Housing and Urban Development Act

Signing of the Housing and Urban Development Act of 1965

Ingrid Gould Ellen and Jessica Yager of NYU’s Furman Center contributed a chapter on Race, Poverty, and Federal Rental Housing Policy to the HUD at 50 volume I have been blogging about. It opens,

For the last 50 years, HUD has been tasked with the complex, at times contradictory, goals of creating and preserving high-quality affordable rental housing, spurring community development, facilitating access to opportunity, combating racial discrimination, and furthering integration through federal housing and urban development policy. This chapter shows that, over HUD’s first 5 decades, statutes and rules related to rental housing (for example, rules governing which tenants get priority to live in assisted housing and where assisted housing should be developed) have vacillated, reflecting shifting views about the relative benefits of these sometimes-competing objectives and the best approach to addressing racial and economic disparities. Also, HUD’s mixed success in fair housing enforcement—another core part of its mission—likely reflects a range of challenges including the limits of the legal tools available to the agency, resource limitations, and the difficulty of balancing the agency’s multiple roles in the housing market. This exploration of HUD’s history in these areas uncovers five key tensions that run through HUD’s work.

The first tension emerges from the fact that housing markets are local in nature. HUD has to balance this variation, and the need for local jurisdictions to tailor programs and policies to address their particular market conditions, with the need to establish and enforce consistent rules with respect to fair housing and the use of federal subsidy dollars.

The second tension is between serving the neediest households and achieving economic integration. In the case of place-based housing, if local housing authorities choose to serve the very poorest households in their developments, then those developments risk becoming islands of concentrated poverty. Further, by serving only the poorest households, HUD likely narrows political support for its programs.

The third tension is between serving as many households as possible and supporting housing in high-opportunity neighborhoods. Unfortunately, in many metropolitan areas, land—and consequently housing construction—is significantly more expensive in the higher-income neighborhoods that typically offer safer streets, more extensive job networks and opportunities, and higher-performing schools. As a result, a given level of resources can typically house fewer families in higher-income areas than in lower-income ones.

The fourth tension is between revitalizing communities and facilitating access to high-opportunity neighborhoods. Research shows that, in some circumstances, investments in subsidized housing can help revitalize distressed communities and attract private investment. Yet, in other circumstances, such investments do not trigger broader revitalization and instead may simply constrain families and children in subsidized housing to live in areas that offer limited opportunities.

The final apparent tension is between facilitating integration and combating racial discrimination. Despite the Fair Housing Act’s (FHA’s) integration goal, legal decisions, which are discussed further in this chapter, have determined that the act’s prohibition on discrimination limits the use of some race-conscious approaches to maintaining integrated neighborhoods.

To be sure, these tensions are not always insurmountable. But addressing all of them at once requires a careful balancing act. The bulk of this chapter reviews how HUD programs and policies have struck this balance in the area of rental housing during the agency’s first 50 years. The chapter ends with a look to the challenges HUD is likely to face in its next 50 years. (103-104, citation omitted)

The chapter does a great job of outlining the tensions inherent in HUD’s broad mandate. It made me wonder, though, whether HUD would benefit from narrowing its mission for the next 50 years. If it focused on assisting more low-income households with their housing expenses (for example, by dramatically expanding the Section 8 housing voucher program and scaling back other programs), it might do that one thing well rather than doing many things less well.

Failure to Refinance

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photo by GotCredit

Benjamin Keys, Devin Pope and Jaren Pope have recently had their Failure to Refinance paper accepted in the Journal of Financial Economics.  A version of the paper can be found on SSRN. This academic paper has a lot of relevance to many a homeowner. The abstract reads,

Households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings. Based on a large random sample of outstanding U.S. mortgages in December of 2010, we estimate that approximately 20% of households for whom refinancing would be optimal and who appeared unconstrained to do so, had not taken advantage of the lower rates. We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake. To shed light on possible mechanisms and corroborate our main findings, we also provide results from a mail campaign targeted at a sample of homeowners that could benefit from refinancing.

 The authors conclude,

Our results suggest the presence of information barriers regarding the potential benefits and costs of refinancing. Expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision is a potential direction for policy to alleviate these barriers for the population most in need of financial education.

In addition, the magnitude of the financial mistakes that households make suggest that psychological factors such as procrastination, trust, and the inability to understand complex decisions are likely barriers to refinancing. One policy that has been suggested to overcome the need for active household participation would require mortgages to have fixed interest rates that adjust downward automatically when rates decline To the extent that it is undesirable to reward only those households that are able to overcome the computational and behavioral barriers of the refinance process, policies such as an automatically-refinancing mortgage may be beneficial. Although an automatically-refinancing mortgage contract would be more expensive up-front for all borrowers in equilibrium, it would remove the cross-subsidization in the current mortgage finance system, where savvier homeowners who use their refinancing option when rates decline are subsidized by those households who fail to do so. (20, citation omitted)

I have heard a number of proposals that call for automatically refinancing mortgages. Such a mortgage product would shake up the mortgage market in its current form and require a transition period to figure out how it should be priced. But the net result would certainly benefit homeowners in the aggregate.

Airbnbigbusiness

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photo by Adam Jones

Researchers at Penn State have posted a report, From Air Mattresses to Unregulated Business: An Analysis of the Other Side of Airbnb. The Executive Summary reads,

As the popularity—and controversy—over short-term rental platforms grows in the public arena, this report takes a closer look at the hosts dominating one of the most trafficked platforms, Airbnb. The company, valued at some $24 billion dollars, has a reported 2 million listings worldwide. In media interviews and public materials, Airbnb suggests that its hosts are largely using the platform to make some additional money on the side. It states that “a typical listing earns $5,110 a year, and is typically shared less than 4 nights per month.”

But that does not represent the full picture.

This report represents the first comprehensive look at the commercial activity being conducted on Airbnb. By analyzing hundreds of thousands of data points, the report reveals an alarming trend with respect to two overlapping groups of hosts, multiple-unit operators who are renting out two or more units, and full-time operators who are renting their unit(s) 360 or more days per year. These two subsets of operators are generating a substantial amount of Airbnb’s revenue. Hosts who rent fewer than 360 days, but still far more than occasionally (for instance, more than 180 days), also contribute greatly to Airbnb’s bottom line. (2, footnote omitted)

The authors clearly have an ax to grind with Airbnb, but their findings are interesting nonetheless. One of my takeaways from the report is how differently Airbnb operates in different markets.

In Miami, for instance, 61% of Airbnb’s revenues was derived from full-time hosts who made up 7% of its operators there. That is more than twice as much revenue (in percentage terms) from full-time hosts as Airbnb’s national average.  Nationally, full-time hosts represented 3% of all hosts, less than half (in percentage terms) of the number in Miami. Clearly local conditions will drive local governments to regulate Airbnb differently. It will be interesting to watch it all unfold.

Hidden Home Costs

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Faulty Wiring

TeleMundo quoted me in 15 Hidden Home Costs When Buying a Home (the original is in Spanish: 15 gastos escondidos al comprar una casa). It reads, in part,

There are many other things to consider when buying a house, besides the fact that it looks nice. Pay attention to these details and avoid unpleasant surprises.

*     *     *

Taxes for the following year — Although you were notified about your current taxes, they could go up from one year to the next says David Reiss, Research Director of the Center for Urban Business Entrepreneurship (Brooklyn).

Bad electrical wiring –when purchasing a house many expenses may be hidden behind the walls and you will not realize it until the light switch stops working, adds Professor Reiss.

Thanks to Ana Puello for the translation.

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.