January 18, 2016
Happy Martin Luther King, Jr. Day!
“Injustice anywhere is a threat to justice everywhere.”
Martin Luther King, Jr.
January 18, 2016 | Permalink | No Comments
January 15, 2016
Rent-to-Own Risks
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.
January 15, 2016 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Federal Housing Finance Agency released its 2016 Scorecard outlining conservatorship priorities for Fannie Mae and Freddie Mac, and Common Securitization Solutions.
- The Joint Center for Housing Studies released its Rental Housing Report and created an interactive map series that shows where renters are experiencing housing cost burdens.
- The Labor Department’s latest report finds that there were 292,000 jobs created in December, particularly in temporary-help services, health care, transportation and construction.
January 15, 2016 | Permalink | No Comments
January 14, 2016
Why Have a Complaint Window?
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.
January 14, 2016 | Permalink | No Comments
January 13, 2016
Zoning Rules and Income Inequality
Bill Fischel
William Fischel, a preeminent land use scholar, has recently published Zoning Rules!: The Economics of Land Use Regulation. The abstract for the book reads,
Zoning has for a century enabled cities to chart their own course. It is a useful and popular institution, enabling homeowners to protect their main investment and provide safe neighborhoods. As home values have soared in recent years, however, this protection has accelerated to the degree that new housing development has become unreasonably difficult and costly. The widespread Not In My Backyard (NIMBY) syndrome is driven by voters’ excessive concern about their home values and creates barriers to growth that reach beyond individual communities. The barriers contribute to suburban sprawl, entrench income and racial segregation, retard regional immigration to the most productive cities, add to national wealth inequality, and slow the growth of the American economy. Some state, federal, and judicial interventions to control local zoning have done more harm than good. More effective approaches would moderate voters’ demand for local-land use regulation—by, for example, curtailing federal tax subsidies to owner-occupied housing.
The book engages with many other leading land use scholars like Edward Glaeser, Robert Ellickson and Vicki Been so the reader gets a good sense of what is at stake in contemporary land use debates.
I was particularly intrigued by Fischel’s discussion of the relationship between land use policies and income inequality. He writes that, “Moving to opportunity was an important source of income equalization for the first two-thirds of the twentieth century. That migration trend has nearly stopped as a result of increased land use regulation in the high-productivity areas” on the coasts. (166-67). The book carefully parses out how such changes in land use regulation had such a big effect on people’s choices.
You can find the first chapter of Zoning Rules! here if you want to give the book a test run.
January 13, 2016 | Permalink | No Comments
Wednesday’s Academic Roundup
- Civil Forfeiture and the Constitution, Caleb Nelson, Yale Law Journal, Forthcoming; Virginia Public Law and Legal Theory Research Paper No. 2.
- Cohabitants, Choice, and the Public Interest, Robert Leckey, Philosophical Foundations of Children’s and Family Law (OUP), Elizabeth Brake and Lucinda Ferguson (eds), forthcoming.
- Are Foreigners Entitled to a Right to Housing?, Luca Ettore Perrello, 1(2) The Italian Law Journal, 365–388 (2015).
- How Genetics Might Affect Real Property Rights, Mark A. Rothstein & Laura Rothstein, Journal of Law, Medicine and Ethics, Vol. 44, No. 1, 2016.
- Climate Change and Long-Run Discount Rates: Evidence from Real Estate, Stefano W. Giglio, Matteo Maggiori, Johannes Stroebel & Andreas Weber, CESifo Working Paper Series No. 5608.
- Mortgage Risk and the Yield Curve, Aytek Malkhozov, Philippe Mueller, Andrea Vedolin & Gyuri Venter, BIS Working Paper No. 532.
- The Abuse of MBS: A Monster Bigger than the Federal Government, Hak Choi.
- Market Concentration and the Recovery of Mortgage Credit, Adonis Antoniades.
- Green Clientele Effects in the Housing Market, Franz Fuerst, Elias Oikarinen & Oskari Harjunen.
- Rental Yields and HPA: The Returns to Single Family Rentals, Andrea L. Eisfeldt & Andrew Demers, NBER Working Paper No. w21804 (Paid Access).
January 13, 2016 | Permalink | No Comments
January 12, 2016
Reading the EB-5 TEA Leaves
Jeanne Calderon and Gary Friedland at the NYU Stern School of Business have posted What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data. For those of you who are unfamiliar with the EB-5 program, the authors provide some background:
Under the EB-5 Program, enacted in 1990, an immigrant who invests at least $500,000 or $1,000,000 in a specific U.S. business project is eligible for permanent residency, if the investment creates at least 10 American jobs.
These invested funds became an inexpensive source of patient, flexible capital for real estate development projects after the Great Recession in 2008. More recently, EB-5 capital has blossomed into a mainstream source of capital for real estate development projects. The immigrants’ pooled equity capital is contributed to an entity (known under the EB-5 law as a “New Commercial Enterprise” or “NCE”) typically created by an affiliated government-approved regional center. The proceeds are most commonly deployed as a mezzanine loan to a real estate project development entity (known under the EB-5 law as a “Job Creating Entity” or “JCE”). The immigrant’s motivation to make the investment is to qualify for the visa, and thus, he accepts interest rates well below market.
The original purpose of the EB-5 law was to create investments and jobs in rural areas, as well as high unemployment areas, referred to as “Targeted Employment Areas” (“TEA”). To encourage investments in these areas, the minimum investment in a project located in a TEA was set at a discounted level of $500,000, compared to $1,000,000 for a project not located in a TEA. Developers strive to have the location of their projects qualify as a TEA because immigrants seeking the EB-5 visa strongly prefer to invest in areas where the lesser minimum investment level applies, especially if they believe the investment will result in their receipt of a visa and a return of their capital investment.
Some members of Congress and other critics had become outraged by the growing trend of projects qualifying as TEAs that are located in thriving urban areas and commanding the lion’s share of EB-5 investment dollars. With the approval delegated to individual states, each of which was authorized to set its own rules and motivated to retain economic development within its own borders, projects in even the most affluent parts of the country were able to routinely qualify for the discounted investment level by combining contiguous census tracts (starting with the project site and often extending in unnatural configurations to remote sites miles away) until the weighted average met or exceeded the high unemployment threshold required by the law. This census tract aggregation is referred to pejoratively as “gerrymandering.” Thus, gerrymandering rendered the two level investment threshold meaningless and immigrants flocked to invest in luxury projects by major developers in urban areas. (4-5)
The authors conclude,
Congress should focus more attention on visa reserves and the types of projects that merit any special visa priority. As explained in the visa reserves section of this paper, immigrant investors are likely to place increasing importance on this issue in the near future as visa waiting periods rise. A project’s qualification for visa reserves might become as important a factor in the immigrant’s investment decision as the TEA status of a particular project. (48)
This type of program rubs many people the wrong way — Green Cards for Sale! — so it is important that is designed and implemented properly. As such, the authors make some valuable suggestions as to what EB-5 2.0 should look like.
January 12, 2016 | Permalink | No Comments
