May 17, 2016
Inclusionary Housing: Fact and Fiction
The Center for Housing Policy has issued a policy brief, Separating Fact from Fiction to Design Effective Inclusionary Housing Programs. I am not sure fact was fully separated from fiction when I finished reading it. It opens,
Inclusionary housing programs generally refer to city and county planning ordinances that require or incentivize developers to build below-market-rate homes (affordable homes) as part of the process of developing market-rate housing developments. More than 500 local jurisdictions in the United States have implemented inclusionary housing policies, and inclusionary requirements have been adopted in a wide variety of places—big cities, suburban communities and small towns.
Despite the proliferation of inclusionary housing programs, the approach continues to draw criticism. There have been legal challenges around inclusionary housing requirements in California, Illinois, Idaho, Colorado and Wisconsin, among others. In addition to legal questions, critics have claimed inclusionary housing policies are not effective at producing affordable housing and have negative impacts on local housing markets.
While there have been numerous studies on inclusionary housing, they unfortunately do not provide conclusive evidence about the overall effectiveness of inclusionary housing programs. These studies vary substantially in terms of their research approaches and quality. In addition, it is difficult to generalize the findings from the existing research because researchers have examined policies in only a handful of places and at particular points in time when economic and housing market conditions might have been quite different. Given these limitations, however, the most highly regarded empirical evidence suggests that inclusionary housing programs can produce affordable housing and do not lead to significant declines in overall housing production or to increases in market-rate prices. However, the effectiveness of an inclusionary housing program depends critically on local economic and housing market characteristics, as well as specific elements of the program’s design and implementation. (1, endnotes omitted and emphasis in the original)
The brief concludes that, in general, ” mandatory programs in strong housing markets that have predictable rules, well-designed cost offsets, and flexible compliance alternatives tend to be the most effective types of inclusionary housing programs.” (11, emphasis removed)
I have to say that this research brief does not give me a great deal of confidence that mandatory inclusionary zoning programs are going to be all that effective. Indeed, the conclusion suggests that many ducks need to line up before we can count on them to make a real dent in affordable housing production. While this by no means should imply that they should be curtailed, we should continue to evaluate them carefully to see if they live up to their promise.
May 17, 2016 | Permalink | No Comments
May 16, 2016
Uses & Abuses of Online Marketplace Lending
The Department of the Treasury has issued a report, Opportunities and Challenges in Online Marketplace Lending. Online marketplace lending is still in its early stages, so it is great that regulators are paying attention to it before it has fully matured. This lending channel may greatly increase options for borrowers, but it can also present opportunities to fleece them. Treasury is looking at this issue from both sides. Some highlights of the report include,
- There is Opportunity to Expand Access to Credit: RFI [Request for Information] responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Although the majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
- New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.
- Small Business Borrowers Will Likely Require Enhanced Safeguards: RFI commenters drew attention to uneven protections and regulations currently in place for small business borrowers. RFI commenters across the stakeholder spectrum argued small business borrowers should receive enhanced protections.
- Greater Transparency Can Benefit Borrowers and Investors: RFI responses strongly supported and agreed on the need for greater transparency for all market participants. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.
* * *
- Regulatory Clarity Can Benefit the Market: RFI commenters had diverse views of the role government could play in the market. However, a large number argued that regulators could provide additional clarity around the roles and requirements for the various participants. (1-2)
As we move deeper and deeper into the gig economy, the distinction between a consumer and a small business owner gets murkier and murkier. Thus, this call for greater protections for small business borrowers makes a lot of sense.
Online marketplace lending is such a new lending channel, so it is appropriate that the report ends with a lot of questions:
- Will new credit scoring models prove robust as the credit cycle turns?
- Will higher overall interest rates change the competitiveness of online marketplace lenders or dampen appetite from their investors?
- Will this maturing industry successfully navigate cyber security challenges, and adapt to appropriately heightened regulatory expectations? (34)
We will have to live through a few credit cycles before we have a good sense of the answers to these questions.
May 16, 2016 | Permalink | No Comments
May 13, 2016
Affirmatively Furthering Neighborhood Choice
Professor Kelly
Jim Kelly has posted Affirmatively Furthering Neighborhood Choice: Vacant Property Strategies and Fair Housing to SSRN (forthcoming in the University of Memphis Law Review). He writes,
With the Supreme Court’s Inclusive Cmtys. Project decision in June 2015 and the Obama Administration’s adoption, the following month, of the Final Rule for Affirmatively Furthering Fair Housing, local government accountability for ending segregation and resolving the spatial mismatch between affordable housing and economic opportunity has been placed on a more solid footing. Instead of being responsible only for overt, conscious attempts to harm protected groups, jurisdictions that receive money from HUD will need to take a hard look at their policies that perpetuate the barriers to housing opportunity for economically marginalized protected groups. The duty to Affirmatively Further Fair Housing, although somewhat aspirational in its formulation, requires HUD grant recipients to engage with fair housing issues in a way that the threat of litigation, even disparate impact litigation, never has.
For cities struggling with soft residential real estate markets, HUD’s concerns about land use barriers to affordable housing may seem tone deaf. Advocates challenging exclusionary policies have often focused on cities with high housing costs. Even a city with large vacant problems, such as Baltimore, was sued primarily because of its location with a strong regional housing market. But, concerns about social equity in revitalizing communities make the Final Rule’s universal approach to AFFH very relevant to cities confronting housing abandonment in its older, disinvested neighborhoods. This Articles has shown that attention to the Final Rule’s new Assessment of Fair Housing (AFH) reporting system is warranted both as a protective measure and as an opportunity to advance core goals of creating and sustaining an attractive and inclusive network of residential urban communities. (30-31)
For those of us who have trouble parsing the contemporary state of fair housing law in general and the AFFH rule in particular, the article provides a nice overview. And it offers insight into how fair housing law can help increase “the supply of decent, affordable housing options to members of protected groups . . .” (2) Not a bad twofer for one article.
May 13, 2016 | Permalink | No Comments
May 12, 2016
The Single-Family Rental Revolution Continues
The Kroll Bond Rating Agency has released its Single-Borrower SFR: Comprehensive Surveillance Report:
Kroll Bond Rating Agency (KBRA) recently completed a comprehensive surveillance review of its rated universe of 23 single-borrower, single-family rental (SFR) securitizations. In connection with these transactions, 132 ratings are outstanding, all of which have been affirmed. The transactions have an aggregate outstanding principal balance of $13.0 billion, of which $12.6 billion is rated. These transactions have been issued by six sponsors, which own approximately 159,700 properties, 90,649 of which are included in the securitizations that are covered in this report. (3)
This business model took off during the depths of the Great Recession when capital-rich companies were able to buy up single-family homes on the cheap and in bulk. While the Kroll report is geared toward the interests of investors, it contains much of interest for those interested in housing policy more generally. I found two highlights to be particularly interesting:
- The 90,649 properties underlying the subject transactions have, on average, appreciated in value by 10.2% since the issuance dates of the respective transactions . . . (4)
- The underlying collateral has exhibited positive operating performance with the exception of expenses. Contractual rental rates have continued to increase, vacancy rates declined (but remain above issuance levels), tenant retention rates have remained relatively stable, and delinquency rates have remained low. (Id.)
KBRA’s overall sector outlook for deal performance is
positive given current rental rates, which have risen since institutional investors entered the SFR space, although the rate of increase has slowed. Future demand for single-family rental housing will be driven by the affordability of rents relative to home ownership costs as well as the availability of mortgage financing. In addition, homeownership rates are expected to continue to decline due to changing demographics. Recent data released by the Urban Institute shows the percentage of renters as a share of all households growing from 35% as of the 2010 US Decennial Census to 37% in 2020 and increasing to 39% by 2030. Furthermore, 59% of new household formations are expected to be renters. Against this backdrop, KBRA believes single-borrower SFR securitizations have limited term default risk. However, there has been limited seasoning across the sector, and no refinancing has occurred to date. As such, these transactions remain more exposed to refinance risk. (9)
Kroll concludes that things look good for players in this sector. It does seem that large companies have figured out how to make money notwithstanding the higher operating costs for single-family rentals compared to geographically concentrated multifamily units.
I am not sure what this all means for households themselves. Given long-term homeownership trends, it may very well be good for households to have another rental option out there, one that makes new housing stock available to them. Or it might mean that households will face more competition when shopping for a home. Both things are probably true, although not necessarily both for any particular household.
May 12, 2016 | Permalink | No Comments
May 10, 2016
Gentrification in NYC
The NYU Furman Center released its annual State of New York City’s Housing and Neighborhoods (2015). This year’s report focused on gentrification:
“Gentrification” has become the accepted term to describe neighborhoods that start off predominantly occupied by households of relatively low socioeconomic status, and then experience an inflow of higher socioeconomic status households. The British sociologist Ruth Glass coined the term in 1964 to describe changes she encountered in formerly working-class London neighborhoods, and sociologists first began applying the term to New York City (and elsewhere) in the 1970s. Since entering the mainstream lexicon, the word “gentrification” is applied broadly and interchangeably to describe a range of neighborhood changes, including rising incomes, changing racial composition, shifting commercial activity, and displacement of original residents. (4)
The reports main findings are
- While rents only increased modestly in the 1990s, they rose everywhere in the 2000s, most rapidly in the low-income neighborhoods surrounding central Manhattan.
- Most neighborhoods in New York City regained the population they lost during the 1970s and 1980s, while the population in the average gentrifying neighborhood in 2010 was still 16 percent below its 1970 level.
- One third of the housing units added in New York City from 2000 to 2010 were added in the city’s 15 gentrifying neighborhoods despite their accounting for only 26 percent of the city’s population.
- Gentrifying neighborhoods experienced the fastest growth citywide in the number of college graduates, young adults, childless families, non-family households, and white residents between 1990 and 2010-2014. They saw increases in average household income while most other neighborhoods did not.
- Rent burden has increased for households citywide since 2000, but particularly for low- and moderate-income households in gentrifying and non-gentrifying neighborhoods.
- The share of recently available rental units affordable to low-income households declined sharply in gentrifying neighborhoods between 2000 and 2010-2014.
- There was considerable variation among the SBAs [sub-borough areas] classified as gentrifying neighborhoods; for example, among the SBAs classified as gentrifying, the change in average household income between 2000 and 2010-2014 ranged from a decrease of 16 percent to an increase of 41 percent. (4)
The report provides a lot of facts for debates about gentrification that often reflect predetermined ideological viewpoints. The fact that jumped out to me was that a greater percentage of low-income households in non-gentrifying neighborhoods were rent burdened than in gentrifying neighborhoods. (14-15)
This highlights the fact that we face a very big supply problem in the NYC housing market — we need to build a lot more housing if we are going to make a serious dent in this problem. The De Blasio Administration is on board with this — the City Council needs to get on board too.
Lots more of interest in the Furman report — worth curling up with it on a rainy afternoon.
May 10, 2016 | Permalink | No Comments
May 9, 2016
Mortgage Servicers’ Unclean Hands
Judge Butchko
Judge Butchko, sitting in a Florida Circuit Court, granted a homeowner’s motion for involuntary dismissal of a foreclosure because of the servicer’s unclean hands. There is a lot of interest in the order, but it is worth quoting at length the Court’s discussion of the testimony of Sherry Keeley, the current servicer’s employee. Ms. Keeley is an employee of Ocwen, a servicer that has been in a lot of trouble recently.
Ms. Keeley was produced by the plaintiff to introduce Ocwen’s business records, including those of Litton Loan Servicing, a prior servicer:
30. Ms. Keeley testified the loan boarding process involved two steps. [“Loan boarding” refers to the process of moving loan information from the previous servicer’s system to the new servicer’s system.] First, Ocwen confirmed that the categories for each column of financial data from the prior servicer matched or corresponded to the same name Ocwen used for that same column of financial data. Second, Ocwen confirmed the figures from the prior servicer transferred over such that the top figure from Litton became the bottom figure for Ocwen. The court notes that when testifying about Ocwen’s boarding process, Ms. Keeley appeared to be merely repeating a mantra or parroting what she learned the so called boarding process is without being able to give specific details regarding the procedure itself. Her demeanor at trial although professional, was hesitant and lacking in confidence in this court’s estimation as the trier of fact.
32. Ms. Keeley admitted there was absolutely no math done to check the accuracy of the prior servicer’s records or numbers. The loan boarding process’ verification to ensure the trustworthiness of the prior servicer’s records is therefore a legal fiction. In this case, Ocwen simply accepted the prior servicer’s numbers as true without any effort to audit or confirm their accuracy. The only confirmation appears to have been the check a carryover of figures from one servicer’s columns to the columns of another.
33. Moreover, Ms. Keeley testified loans with “red flags” would never be allowed to board onto Ocwen’s system until the prior servicer resolved them. However, Ms. Keeley also admitted she has witnessed loans that went through the boarding process that had misapplied payments and substantially incomplete loan payment histories from the prior servicer.
34. The existence of misapplied payments and incomplete payment histories in loans that went through the loan boarding process contradicts any suggestion that the boarding process identifies red flags and/or clears them, such that Courts can trust the reliability of their records.
35. To support the court’s concern regarding the lack of foundation of the so called boarded records in this case, the Court takes Judicial Notice of the Consent Order entered in the matter of Ocwen Financial Corporation, Ocwen Loan Servicing, LLC by the New York State Department of Financial Services dated December 22, 2014. This Consent Order documents Ocwen’s practice of backdating business records that it failed to fully resolve “more than a year after its initial discovery.”
36. Therefore, the Court finds Plaintiff failed to inquire into the accuracy, reliability or trustworthiness of the prior servicer’s payment history. Ocwen’s own payment history merely accepts the prior servicer’s records as accurate without question unless the numbers were challenged at some point after the loan boarding process. That is simply not enough to for this court to accept the prior servicer’s records as trustworthy and admit them into evidence here. A mere reliance by a successor business on records created by others, although an important part of establishing trustworthiness, without more is insufficient. As such, this Court exercised its discretion to sustain Defendant’s objections to both payment histories as inadmissible hearsay. Therefore Plaintiff lacked evidence of an essential element of proof, damages, warranting an involuntary dismissal. (7-8, footnote and citation omitted, emphasis added)
This passage contains within it a microcosm of what is remains wrong with the servicing industry, notwithstanding massive settlements and increased regulatory attention being paid to this this hidden corner of the mortgage industry:
- employees who recite from scripts instead of understanding the records before them
- feeble attempts confirm the accuracy of the amounts that borrowers are told that they owe
- contradictory statements that tend to hide facts that benefit the servicer
- history of missapplied payments and incomplete payment histories
- backdated business records
- failure to resolve identified problems, such as backdated business records
Ultimately, the Court said that it found the servicer was not trustworthy. That is a big problem for homeowners. In this case, at least, it is also a big problem for a servicer. The servicer industry as a whole remains untrustworthy. Regulators have a lot more to do before distressed homeowners should feel that they are being treated fairly by them.
HT April Charney
May 9, 2016 | Permalink | No Comments
May 11, 2016
Consumer Protection’s Holy Grail
By David Reiss
The Federal Financial Institutions Examination Council (FFIEC) has issued a notice and request for comment regarding the Uniform Interagency Consumer Compliance Rating System (the CC Rating System). The FFIEC’s six members represent the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, State Liaison Committee and Consumer Financial Protection Bureau. This veritable roundtable of regulators is seeking to revise the CC Rating System “to reflect the regulatory, examination (supervisory), technological, and market changes that have occurred in the years since the current rating system was established.” (81 F.R. 26553)
I know, I know, this is a deeply technical issued and you are wondering why I am writing about it for a somewhat general audience. The answer is that I think this is a good thing for people to know about: the federal government is seeking to implement a consistent approach to consumer protection across a broad swath of the financial services industry.
One of the CC Rating System’s categories is Violations of Law and Consumer Harm. The request for comment notes that over the last few decades, the financial services
industry has become more complex, and the broad array of risks in the market that can cause consumer harm has become increasingly clear. Violations of various laws, including, for example, the Servicemembers Civil Relief Act 5 and Section 5 of the Federal Trade Commission Act, as well as fair lending violations, may potentially cause significant consumer harm and raise serious supervisory concerns. Recognizing this broad array of risks, the proposed guidance directs examiners to consider all violations of consumer laws, based on the root cause, severity, duration, and pervasiveness of the violation. This approach emphasizes the importance of a range of consumer protection laws and is intended to reflect the broader array of risks and the potential harm caused by consumer protection related violations. (81 F.R. 26556)
This is all to the good. A big part of the problem the last time around (pre-Subprime Crisis) was that financial services companies used regulatory arbitrage to avoid scrutiny. Lots of mortgage lending migrated to nonbanks. Nonbanks did not need to worry about unwanted attention from the regulators that scrutinized banks and other heavily regulated mortgage lenders. (To be clear, Alan Greenspan and other regulators did not do a good job of scrutinizing the banks. But let’s leave that for another post.) With the CFPB now regulating nonbanks and with this coordinated approach to consumer protection, we should expect that regulatory arbitrage will decrease.
If successful, this would amount to a regulatory equivalent of finding the Holy Grail. So, while this is a technical issue, it is something to feel good about.
Comments due July 4th, so get crackin’!
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May 11, 2016 | Permalink | No Comments