March 10, 2016
Risky Rent-to-Own
The Pittsburgh Tribune-Review quoted me in Rent-to-Own Option for Home Shoppers Rife with Pitfalls, Experts Caution. It opens,
Finding the right rental house was more difficult than Phyllis Lombardi anticipated.
“It’s hard to find a big enough house that allows pets, for the number of people we have in South Fayette,” said Lombardi, 45. She and her husband have four children living at home.
The Lombardis are moving because the owners of the house they are renting want to sell. But the couple isn’t ready to buy. The husband’s income was cut by more than half when they relocated to the Pittsburgh area several years ago, and they are repairing their finances after a short sale on a home.
Finding no rentals in South Fayette that meet her criteria and price, Lombardi is going with an option suggested by her real estate broker: Pick a house for sale on the market and do a rent-to-own contract with an investor who would buy it.
Rent-to-own agreements require prospective buyers to pay rent with an option to purchase the house at a later date, usually within two to five years. It can broaden the options for people with checkered credit histories who think they might soon be in a position to buy.
But it is an industry with a lot of shady operators and which can prove costly to prospective buyers who are not careful, said David Reiss, a professor of law at Brooklyn Law School.
“In some cases, these programs are based on the idea of hope springs eternal,” Reiss said. “But a large percentage of them are likely to fail.”
The terms of these contracts vary, but renters often pay a premium above market price, with a portion of that going toward the eventual cost to buy the home.
Many times, renters reach the end of the agreement and are still unable to buy, forfeiting everything they have paid — rent, fees and any premium toward the purchase price — to the owner and walk away with nothing, said Max Beier, a real estate attorney Downtown.
“Traditionally, what you’re going to have in these agreements is a default provision that’s pretty harsh,” he said. “Commonly, you’re going to lose 100 percent of the equity you’ve paid.”
And many don’t come with the same renter protections. For example, maintenance and upkeep costs are often the tenant’s responsibility — just as if they owned the home.
Also, the penalty for late rent payments tends to be more severe than the standard 5 percent for a late mortgage payment, and even cause someone to be kicked out of the home, Reiss said.
“The rights you have as a tenant in a rent-to-own situation are not as clear and not as good as if you were a homeowner,” Reiss said.
March 10, 2016 | Permalink | No Comments
Thursday’s Advocacy & Think Tank Roundup
- The National Housing conference (NHC) released report on anchor institutions finding that they offer support to communities and economic development, such as job opportunities, resources, and goods and services.
- The Center for American Progress released a report finding that discrimination continues to affect communities of color, specifically in housing, infrastructure, health, and education.
March 10, 2016 | Permalink | No Comments
March 9, 2016
Racial & Ethnic Change in NYC
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).
March 9, 2016 | Permalink | No Comments
Wednesday’s Academic Roundup
- Spillover Effects of Continuous Forbearance Mortgages, Kadiri Karamon, Douglas A. McManus & Elias Yannopoulos.
- Structure Depreciation and the Production of Real Estate Services, Jiro Yoshida.
- Decentralized, Disruptive, and On Demand: How the Sharing Economy Will Re-Shape Local Government, Stephen R. Miller, Ohio State Law Journal, Forthcoming.
- ‘Foaming the Runway’ for Homeowners: U.S. Bankruptcy Courts Preserving Homeownership in the Wake of the Affordable Modification Program, Linda E. Coco, American Bankruptcy Institute Law Review, Vol. 23, 2015.
- Community Lawyering: Introductory Thoughts on Theory and Practice, Michael Diamond, 22 Georgetown Journal on Poverty Law & Policy 395.
- Assessing the Effect of Airbnb on the Washington DC Housing Market, Nicholas Pairolero.
- Mitigating Climate Change by Zoning for Solar Energy Systems: Embracing Clean Energy Technology in Zoning’s Centennial Year, John R. Nolon, Zoning & Planning Law Report, Dec. 2015.
March 9, 2016 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- The ACTION Campaign submitted a letter to Congress requesting it expand the Low-Income Housing Tax Credit.
- Senators Patrick Leahy and Chris Coons, and Representative Marcia Fudge released Dear Colleague letters in support of robust funding for the HOME Investment Partnerships program.
- The Centers for Medicare & Medicaid Services, HUD and several other agencies announced targeted program support for State Medicaid-Housing Agency Partnerships.
March 8, 2016 | Permalink | No Comments
March 7, 2016
Keeping Cash on Hand
TheStreet.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.”
March 7, 2016 | Permalink | No Comments
March 8, 2016
The Future of Securitization
By David Reiss
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.
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March 8, 2016 | Permalink | No Comments