Author Archives: David Reiss

The Low Cost of Homeownership

Posted on by

plumbing-840835_1920

TheStreet.com quoted me in Why the Extra Costs of Owning a Home Are Lower Than Consumer Expectations. It reads, in part,

First-time homebuyers are often apprehensive about the extra costs of owning a house, fearful that routine maintenance and repairs will add up quickly, exceeding their original budget.

But their estimates about replacing air filters, mowing the lawn and conducting minor repairs are often much higher than average costs. Consumers have trouble estimating the actual amount and said it would cost $15,070 for home maintenance repairs each year, according to a recent survey by NeighborWorks America, a Washington, D.C-based organization focused on affordable housing.

The actual amount is more likely to be in the range of 1% to 3% of a home’s value or $2,000 to $6,000 nationwide, said Douglas Robinson, a spokesman for NeighborWorks America. Even some current homeowners’ estimates were above the average amount and predicted repairs to cost $12,360. The perception among current renters was even worse with a prediction of $20,503.

“The important thing to remember about buying a home is that there are costs after the purchase that go beyond the monthly mortgage,” he said. “By setting up a savings plan and budget for these costs – items such as landscaping, air conditioning and heating system maintenance – a homeowner will be better equipped to take on the expenses without having to use a credit card or worse, a high-cost emergency loan.”

*      *     *

Home Emergencies

While they might appear to be rare, homeowners annually should prepare themselves to handle at least one unexpected major emergency such as replacing the boiler or roof in the aftermath of a major storm or flooding in the basement where water needs to be pumped out immediately to protect the foundation, said David Reiss, a law professor at Brooklyn Law School. Establishing an emergency fund would help protect a homeowner when these problems arise so consumers are not forced to turn to more expensive options of debt such as credit cards.

“If a homeowner has an emergency fund, he or she will feel like a genius when it comes time to use it,” he said. “The next step, of course, is to start saving up immediately for the next problem because as most homeowners know – there will be a next problem.”

Some homeowners might find that chronic problems such as the leaky roof are worse than the “acute ones such as the boiler giving out in the winter,” Reiss said.

“This is because we will do whatever it takes to turn the heat back on,” he said. “But we learn to live with the occasional leak and end up feeling like we can ignore it. However, water damage is bad for a house and always gets worse.”

Buy-To-Rent Investing

Posted on by

"Foreclosedhome" by User:Brendel

James Mills, Raven Molloy and Rebecca Zarutskie have posted Large-Scale Buy-to-Rent Investors in the Single-Family Housing Market: The Emergence of a New Asset Class? to SSRN. The abstract reads,

In 2012, several large firms began purchasing single-family homes with the stated intention of creating large portfolios of rental property. We present the first systematic evidence on how this new investor activity differs from that of other investors in the housing market. Many aspects of buy-to-rent investor behavior are consistent with holding property for rent rather than reselling quickly. Additionally, the large size of these investors imparts a few important advantages. In the short run, this investment activity appears to have supported house prices in the areas where it is concentrated. The longer-run impacts remain to be seen.

I had been very skeptical of this asset class when it first appeared, thinking that the housing crisis presented a one-time opportunity for investors to profit from this type of investment. The conventional wisdom had been that it was too hard to manage so many units scattered over so much territory. The authors identify reasons to think that that conventional wisdom is now outdated:

To the extent that technological improvements, economies of scale, and lower financing costs have substantially reduced the operating costs of buy-to-rent investors relative to smaller investors, large portfolios of single-family rental property may become a permanent feature of the real estate market. As such, the events of the past three years may signal the emergence of a new class of real estate asset. A similar transformation occurred in the market for multifamily structures in the 1990s, when large firms began to purchase multifamily property and created portfolios of professionally-managed multifamily units that were traded on public stock exchanges as REITs. (32-33)

Nonetheless, the authors are cautious (rightfully so, as far as I am concerned) in their predictions: “only time will tell whether the recent purchases of large-scale buy-to-rent investors reflect the emergence of a new asset class or whether the business model will fail to be viable over the longer-term.” (33, footnote omitted)

Hypothetically Reforming Fannie and Freddie

Posted on by

Ben Turner

S&P issued a report, Fannie, Freddie, and the FHLB System: Plus Ca Change . . . The report opens, “Despite reform talk in the years since the U.S. housing crisis, Standard & Poor’s Ratings Services believes the likelihood of extraordinary government support for key U.S. housing government­-related entities (GREs) Fannie Mae, Freddie Mac, and the Federal Home Loan Bank (FHLB) system remains “almost certain” in case of need.” (1) Notwithstanding the fact that S&P expects that this extraordinary support will last well into the next presidential administration, S&P “can envisage three “tail risk” scenarios in which such support could become less likely under certain conditions, but view each of these scenarios as improbable.” (1) The three scenarios, which S&P characterizes as plausible, albeit improbable, are

  • An electoral sweep, with favorable macroeconomic conditions and few competing legislative priorities;
  • Court judgments, pursuant to shareholder lawsuits, forcing the legislators’ hand; or
  • A renewed housing market crisis, with one or more of these GREs viewed as more cause than cure. (4)

In the first scenario, “an election gives one party control of all three legislative actors (the president, House of Representatives, and Senate), precluding the need for bipartisan compromise to enact major reforms to Fannie and Freddie via legislation.” (4)

In the second, Fannie and Freddie shareholders win lawsuits that stem from the “U.S. Treasury’s decision to modify, in 2012, the Preferred Stock Purchase Agreements (PSPAs) governing the terms of its financial support to Fannie and Freddie . . ..” (4)

The final scenario,

is a renewed housing market crisis, on a scale at least similar to that of 2008. Like the other two scenarios, we don’t view this as likely, at least in the coming few years . . . perhaps as a result of the unfortunate confluence of several negative surprises- ­­including, for example, overreaction to Federal Reserve monetary policy normalization, terms­-of­-trade shocks (geopolitical conflicts that cause a rapid and dramatic spike in energy costs, perhaps), fresh financial sector  problems that suddenly tighten the sector’s funding costs, and an abnormally long spell of bad weather. (5)

This seems like a pretty reasonable analysis of the likelihood of reform for Fannie and Freddie. But that should not stop us from bemoaning Congressional inaction on this topic. Obviously, Congress is too ideologically driven to bridge the gap between the left and right, but the likelihood that we are building toward some new kind of crisis increases with time. I can’t improve on S&P’s analysis in this report, but I’m sure unhappy about what it means for the long-term health of our housing finance system.

”

 

 

 

Kickbacks in Residential Transactions

Posted on by

Flazingo Photos

The Consumer Financial Protection Bureau has issued Compliance Bulletin 2015-05, RESPA Compliance and Marketing Servicing Agreements. The Bulletin opens,

The Consumer Financial Protection Bureau (CFPB or the Bureau) issues this compliance bulletin to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601, et seq.) and describe the substantial risks posed by entering into marketing services agreements (MSAs). The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefits either consumers or industry. Based on the Bureau’s investigative efforts, it appears that many MSAs are designed to evade RESPA’s prohibition on the payment and acceptance of kickbacks and referral fees. This bulletin provides an overview of RESPA’s prohibitions against kickbacks and unearned fees and general information on MSAs, describes examples of market behavior gleaned from CFPB’s enforcement experience in this area, and describes the legal and compliance risks we have observed from such arrangements. (1, footnote omitted)

RESPA had been enacted to curb industry abuses in residential closings. Segments of the industry have been very creative in developing new strategies to avoid RESPA liability, with MSAs a relatively new twist. MSAs are often “framed as payments for advertising or promotional services” but in some cases the providers “fail to provide some or all of the services required under their agreements.” (2,3)

This Bulletin is a shot across the bow of industry participants that are using MSAs, reminding them of the significant penalties that can result from RESPA violations. It seems to me that the Bureau is right to warn industry participants to “consider carefully RESPA’s requirements and restrictions and the adverse consequences that can follow from non-compliance.” (4)

Enhancing Mortgage Data and Litigation Risk

Posted on by

caution-454360_1920

Law360 quoted me in CFPB Data Collection Boost May Bring More Lending Cases (behind a paywall). It reads, in part,

The Consumer Financial Protection Bureau has given lenders more time to prepare for its new mortgage data reporting rule and streamlined some of the information lenders will have to provide to regulators, but worries persist that the new data will be used to bring more fair-lending enforcement actions.

The federal consumer finance watchdog on Thursday released a final version of its update  to the Home Mortgage Disclosure Act — a key tool that regulators for decades have used to determine which populations were receiving home loans and which were being shut out — that more than doubles the amount of information that lenders will have to provide about the mortgages they issue.

That alone will make for a major technical overhaul of lenders’ operations, an overhaul that is likely to be expensive both in purchasing and developing new technology but also in the number of hours lenders will have to spend to get up to speed. But a second concern revolves around the vast new amount of information that the CFPB will have, and how it could use that information to review lenders’ compliance with fair-lending laws, said Donald C. Lampe, a partner with Morrison & Foerster LLP.

“I don’t think the full cost has yet been established, and I think what you’re seeing here are that there are concerns that this level of granular data can be misinterpreted,” he said. “There’s enough information here from a practical standpoint to re-underwrite the loan.”

*     *      *

“My position is that collecting more data about the mortgage market is a very good thing for consumers,” said David Reiss, a professor at Brooklyn Law School. “The more data [lenders] provide, the more likely it is that academics or the feds could find patterns of discriminatory lending.”

The added litigation risks do not come solely from the CFPB. The HMDA data is released publicly each year, meaning that activist groups, state regulators and plaintiffs attorneys will be able to comb through the vastly more comprehensive information, said Warren Traiger, counsel at BuckleySandler LLP.

“This is public data, so in addition to bank examiners and the [U.S. Department of Justice utilizing the data, there’s nothing preventing state attorneys general from using it as well,” he said.

And when state regulators, private plaintiffs or other parties come along with new complaints, the expanded data set will allow them to make far more specific discrimination claims than the current HMDA data makes possible.

“There will be a number of additional fields that will be out there that will allow regulators and the public to make more specific allegations regarding discrimination in mortgage lending than the current HMDA data allows,” Traiger said.

Millennials, Paycheck to Paycheck

Posted on by

Grace

The National Housing Conference and the Center for Housing Policy issued a report, Paycheck to Paycheck: A Snapshot of Housing Affordability for Millennial Workers. The report opens,

Public perception of millennials tends to paint a picture of highly educated hipsters living in city micro-units, or perpetual youth living in their parents’ basements. However, those stereotypes do not adequately portray the diversity of race, education, income, family types, living arrangements and employment among millennials.

In fact, most millennials do not live in micro-units or with their parents. Many are getting married and starting families. Even though millennials are more highly educated than previous generations, many face limited job prospects. And many millennial workers are in relatively low-paying jobs and have difficulty finding housing they can afford. As a result, they spend a burdensome share of their paycheck on housing, leaving little for other expenses, including student debt payments, savings for a mortgage down payment and childcare. (1)

The report makes a variety of conservative assumptions. For instance, it assumes that a loan to value ratio of 28% of income and it assumes that households have only one worker. It proposes a variety of policies to expand mortgage credit, affordable housing subsidies and zoning reforms to increase the supply of housing.

Given that the report comes from two affordable housing advocacy groups, its policy proposals to increase the supply of affordable housing for millenials are not surprising. But I do think it is worth thinking about household formation a bit more in this context.

Many of us do not give much thought to how households form.  When we think about our own experience, we might conclude that when we had enough money to get our own place we did just that. But, in fact, the rate of household formation is significantly affected by broader economic forces, namely the state of the job market. If an individual does not believe that her income is stable, she will delay creating her own household. Thus, she might live with her parents or share an apartment with others. Reports like this one assume that there is a natural rate of household formation just as many people assume that there is a natural rate of homeownership. As a general rule, those people generally assume that higher is better.

It might be worth considering that household formation and homeownership rates are driven by the interplay of much larger forces. Instead of trying to move those rates for their own sake, it might be more important to look at fundamentals in the economy, like the unemployment rate and wage growth, and let household formation and homeownership rates take care of themselves.

Neighborhood Change and Public Housing

Posted on by

H.L.I.T.

The Effects of Neighborhood Change on NYCHA Residents, a report released to little notice in May, has received a lot of attention after the NY Daily News wrote a disparaging article about it. I will leave it to others to decide if this report was worth its six figure price tag, but I do think that there are some interesting findings. The report was prepared by Abt Associates and NYU’s Furman Center, two leading housing research entities. The Findings at a Glance state that

In this study, Abt finds statistically significant differences in earnings for NYCHA residents living in different neighborhood types. Annual household earnings average $4,500 higher for public housing residents in persistently high‐income neighborhoods as compared to persistently low‐income neighborhoods. Earnings are $3,000 higher for those in increasing income neighborhoods. Moreover, these findings are not attributable to any selection bias of residents choosing to live in either persistently high or low income neighborhoods. (1)

This is a pretty big deal, given that the average family income for NYCHA residents is $23,311. If this increased income is attributable to neighborhood characteristics, we would want to take that into account when formulating housing policy.

There were some other interesting findings that were also not highlighted by the Daily News:

  • Developments surrounded by persistently high‐income neighborhoods have lower violent crime rates (5.7 violent crimes per 1,000 residents) than those surrounded by persistently low‐income neighborhoods (8.3 violent crimes per 1,000 residents).
  • Developments in persistently high‐income neighborhoods are zoned for public elementary schools with higher standardized test scores than developments in persistently low‐income neighborhoods; 72% of NYCHA households in low‐income neighborhoods are zoned for schools in the bottom quartile for math proficiency (cf. 41% for those in high‐income neighborhoods).
  • Among public elementary and middle school students living in NYCHA housing, those living in developments surrounded by persistently high—and increasing—income neighborhoods score higher on standardized math and reading tests. (Findings at a Glance, 2)

Before this report is dismissed as a boondoggle, we should try to understand its implications for developing a housing policy that promotes socioeconomic diversity. This is a city of extremes of wealth and poverty and there has been a very negative reaction to policies, such as poor doors, that seem to reinforce that state of affairs. But it may turn out that public housing is a useful tool for creating the more equitable city that so many New Yorkers strive for. Let’s not shoot the messengers before we hear what they have to say.