November 11, 2015
Property Tax Exemptions in Wonderland
NYU’s Furman Center has released a policy brief, The Latest Legislative Reform of the 421-a Tax Exemption: A Look at Possible Outcomes. This brief is part of a series on affordable housing strategies for a high-cost city. It opens,
Since the early 1970s, New York City has provided a state-authorized, partial property tax exemption for the construction of new residential buildings. In the 1980s, the New York City Council amended the program to require that participating residential buildings in certain portions of Manhattan also provide affordable housing. Most recently, New York State extended the existing program through the end of 2015 and created a new 421-a framework for 2016 onward. However, for the program to continue beyond December, the legislation requires that representatives of residential real estate developers and construction labor unions reach a memorandum of understanding regarding wages of construction workers building 421-a program developments that contain more than 15 units.
This brief explores the possible impacts of the new 421-a legislation on residential development across a range of different neighborhoods in New York City, including neighborhoods where rents and sale prices are far lower than in the Manhattan Core and where the tax exemption or other subsidy may be necessary to spur new residential construction under current market conditions. We assess what could happen to new market rate and affordable housing production if the 421-a program were allowed to expire or if it were to continue past 2015 in the form contemplated by recently passed legislation. Our analysis shows that changes to the 421-a program could significantly affect the development of both market rate and affordable housing in the city (1, footnote omitted)
The 421-a program operates against the backdrop of a crazy quilt real property tax regime where similar buildings are taxed at wildly different rates because of various historical oddities and thinly-sliced legal distinctions. Like the Queen of Hearts, the rationale given by the Department of Finance for this unequal treatment amounts to no more than — And the reason is…because I say so, that’s why!
The brief concludes,
Our financial analysis of the possible outcomes from the 421-a legislation offers some insights into its potential impact on new construction. First, if the 421-a benefit expires in 2016, residential developers would lower the amount they would be willing to pay for land in many parts of the city. The result could be a pause in new residential developments in areas outside of the Manhattan Core as both buyers and sellers of land adjust to the new market.
* * *
Second, if the newly revised 421-a program with its higher affordability requirements and longer exemption period goes into effect in 2016 without any increase in construction costs, the city is likely to have more affordable rental units developed in many parts of the city compared to what the existing 421-a program would have created. Condominium development without the 421-a program may still continue to dominate in certain portions of Manhattan, though the program appears to make rentals more attractive. (12)
The first outcome — lower land prices if 421-a expires — is not that bad for anyone, except current landowners. And it is hard to feel bad for them, given that they should not have expected that 421-a would remain in effect forever (and not to mention the rapid increases in NYC land prices). The second outcome — the new 421-a framework — sounds like better public policy than the existing program.
But one wonders — what would it take for NYC to develop a rational real property tax regime to replace our notoriously inequitable one, one that treats like properties so differently from each other. Can we escape from Wonderland?
November 11, 2015 | Permalink | No Comments
Wednesday’s Academic Roundup
- The Value of Manufactured Housing Communities: A Dual-Ownership Model, Charles Becker & Ashley Yea, Economic Research Initiatives at Duke (ERID) Working Paper No. 196.
- Liquidity Provision, Credit Risk and the Bond Spread: New Evidence from the Subprime Mortgage Market, Xudong An & Timothy J. Riddiough.
- Mortgage Market Flexibility and the Transmission of House Price Shocks: A Multi-Country Study, Peter Reusens.
- Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?, Andra C. Ghent, Ruben Hernandez-Murillo, & Michael Owyang, Real Estate Economics, Vol. 43, Issue 4, pp. 820-854, 2015 (Paid Access).
- Introduction to Special Issue: Government Involvement in Residential Mortgage Markets, W. Scott Frame, Real Estate Economics, Vol. 43, Issue 4, pp. 807-819, 2015 (Paid Access).
- No Parking Anytime: The Legality and Wisdom of Maximum Parking and Minimum Density Requirements, Michael Lewyn & Judd Schechtman Rosenman, 54 Washburn L.J. 285 (2015).
- Defining Power Property Expectations, Michael Pappas, 45 Environmental Law Reporter 10542 (2015).
- The Nonprime Mortgage Crisis and Positive Feedback Lending, Bernard S. Black, Charles K. Whitehead & Jennifer Mitchell Coupland, Northwestern Law & Econ Research Paper, Cornell Legal Studies Research Paper, & ECGI – Law Working Paper.
- Longitudinal Analysis of Violence and Housing Insecurity, Timothy M. Diette & David Ribar, IZA Discussion Paper No. 9452.
- Strategies Aimed at Mitigating Liquidity Risk in the Aftermath of the Recent Financial Crisis, Johnson Owusu-Amoako, 5th International Conference on Engaged Management Scholarship: Baltimore, Maryland, September 10-13, 2015.
- American Dreams, American Realities, Michael Lewyn, 44 Real Est. L.J. 292 (2015).
- House Prices and Consumer Spending, David Berger, Veronica Guerrieri, Guido Lorenzoni & Joseph Vavra, NBER Working Paper No. w21667 (Paid Access).
November 11, 2015 | Permalink | No Comments
November 10, 2015
Home Buyers & Home Sellers
The National Association of Realtors has issued its 2015 Profile of Home Buyers and Sellers (highlights only at this link). The profile derives from NAR’s annual survey of recent home buyers and sellers. NAR found that
Demographics continue to shift as the share of first-time home buyers dropped further from last year’s report to 32 percent of the market. This is second only to the lowest share reported in 1987 of 30 percent. Last year’s report had a share of first-time buyers of 33 percent. First-time home buyers are traditionally more likely to be single male or female home buyers and traditionally have lower incomes. As the share of repeat buyers continues to rise, the number of married couples increases and the income of home buyers purchasing homes is higher. Married couples have double the buying power of single home buyers in the market and may be better able to meet the price increases of the housing market. (5)
This adds to the findings of a variety of earlier studies that have described long-term demographic trends that will affect the housing market in very big ways.
I was particularly intrigued by one finding about sellers,
Increased prices are also impacting sellers. Tenure in the home had risen to a peak of 10 years, but in this year’s report it has eased back to nine years. Historically, tenure in the home has been six to seven years. Sellers may now have the equity and buyer demand to sell their home after stalling or delaying their home sale. (5)
This is a dramatic change and reflects the the long-term effects of the Great Recession — just as people delayed buying a new car after the financial crisis, they also delayed purchasing a new home. It’s just that they delay takes longer to see.
The report also has a series of highlights about houses, brokers and mortgages that are worth a looksee.
November 10, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- The Federal Housing Finance Agency has released for public comment its proposed information collection National Survey of Existing Mortgage Borrowers which would survey first time mortgage borrowers purchasing single family homes. The survey will collect information on the mortgaged property and the borrowers financial knowledge and resources, among other things.
- The Department of Housing and Urban Development (HUD) and the Department of Justice (DOJ) have released a funding notice Pay for Success Supportive Housing Demonstration is a grant opportunity offering up to $1.3 million in awards to create supportive housing for formerly incarcerated individuals. Pay for success programs are contracts between the service provider and the government in which agreed on outcomes are compensated with success payments when results are achieved.
- Portland, Oregon has declared a state of emergency with regard to the housing situation. The city has plans to spend $67 million in tax dollars to develop affordable housing.
November 10, 2015 | Permalink | No Comments
November 9, 2015
CFPB Mortgage Highlights Fall ’15
The Consumer Financial Protection Bureau released its Fall 2015 Supervisory Highlights. In the context of mortgage origination, the CFPB found that
supervised entities, in general, effectively implemented and demonstrated compliance with the rule changes, there were instances of non-compliance with certain [rules] . . .. There were also findings of violations of disclosure requirements pursuant to the Real Estate Settlement Procedures Act (RESPA), implemented by Regulation X; the Truth in Lending Act (TILA), implemented by Regulation Z; and consumer financial privacy rules, implemented by Regulation P. (9, footnotes and sources omitted).
Specifically, it found that one or more entities failed to
- “fully comply with the requirement that charges at settlement not exceed amounts on the good faith estimate by more than specified tolerances.” (10)
- comply with the regulations governing HUD-1 settlement statements because of fees on the HUD-1 did match those on invoices; improper calculations on the HUD-1; and fees charged for services that were not provided, among other things.
- provide required disclosures.
- reimburse borrowers for understated APRs and finance charges, as required by Regulation Z.
In the context of mortgage servicing, the CFPB found that while it
continues to be concerned about the range of legal violations identified at various mortgage servicers, it also recognizes efforts made by certain servicers to develop an adequate compliance position through increased resources devoted to compliance. . . . Supervision continues to see that the inadequacies of outdated or deficient systems pose considerable compliance risk for mortgage servicers, and that improvements and investments in these systems can be essential to achieving an adequate compliance position. (15)
This is all well and good, but as I have noted before, it is hard to estimate how much of a problem exists from such a report — one or more entities did this, we are concerned about a range of legal violations of that . . .. I understand that the CFPB’s primary audience for this report are CFPB-supervised entities concerned with the CFPB’s regulatory focus, but this approach barely rises to the level of anecdote for the rest of us.
November 9, 2015 | Permalink | No Comments
Monday’s Adjudication Roundup
- The US Supreme Court denied cert without comment in class action against McGraw-Hill Cos. for false statements made by its S&P rating agency about mortgage-backed securities. The finding from the judge stands that S&P’s ratings were “mere commercial puffery.”
- The US Supreme Court denied cert without comment in case that wanted the Court to consider whether property owners had standing to sue BNY Mellon, and other banks. The banks claimed ownership over mortgage-backed securities, which were then transferred to trusts of the banks.
- The Second Circuit will not rehear Bedford CMBS Acquisition LLC’s case where the company is attempting to pickup $200 million worth of defaulted commercial mortgage-backed securities from a Wells Fargo trust.
- The US Securities and Exchange Commission files suit against developer in Florida for claiming their investments would be under the EB-5 visa program, but were rather used to purchase luxury cars, a boat and a residence.
- Dodona, a hedge fund, settles with Goldman Sachs Group Inc. in mortgage-backed securities class action for breach of contract and fraud.
- The Consumer Financial Protection Bureau filed a brief in the D.C. Circuit claiming that PHH Corp. had interpreted the Real Estate Settlement Procedures Act incorrectly in its $109 million disgorgement order.
- Wells Fargo settles with Ch. 13 bankrupt homeowners for $81.6 million for failing to give proper notice for changing monthly payment amounts.
November 9, 2015 | Permalink | No Comments
November 6, 2015
The End of Private-Label Securities?
By David Reiss
Jamie Dimon, CEO of JPMorgan Chase
J.P. Morgan’s Securitized Products Weekly has a report, Proposed FRTB Ruling Endangers ABS, CMBS and Non-Agency RMBS Markets. This is one of those technical studies that have a lot of real world relevance to those of us concerned about the housing markets more generally.
The report analyzes proposed capital rules contained in the Fundamental Review of the Trading Book (FRTB). JPMorgan believes that these proposed rules would make the secondary trading in residential mortgage-backed securities unprofitable. It also believes that “there is no sector that escapes unscathed; capital will rise dramatically across all securitized product sectors, except agency MBS.” (1) It concludes that “[u]ltimately, in its current form, the FRTB would damage the availability of credit to consumers, reduce lending activity in the form of commercial mortgage and set back private securitization, entrenching the GSEs as the primary securitization vehicle in the residential mortgage market.” (1)
JPMorgan finds that the the impact of these proposed regulations on non-agency residential-mortgage backed securities (jumbos and otherwise) “is so onerous that we wonder if this was the actual intent of the regulators.” Without getting too technical, the authors thought “that the regulators simply had a mathematical mistake in their calculation (and were off by a factor of 100, but unfortunately this is what was intended.” (4) Because these capital rules “would make it highly unattractive for dealers to hold inventory in non-agency securities,” JPMorgan believes that they threaten the entire non-agency RMBS market. (5)
The report concludes with a policy takeaway:
Policymakers have at various times advocated for GSE reform in which the private sector (and private capital) would play a larger role. However, with such high capital requirements under the proposal — compared with capital advantages for GSE securities and a negligible amount of capital for the GSEs themselves — we believe this proposal would significantly set back private securitization, entrenching the GSEs as the primary securitization vehicle in the mortgage market. (5, emphasis removed)
I am not aware if JPMorgan’s concerns are broadly held, so it would important to hear others weigh in on this topic.
If the proposed rule is adopted, it is likely not to be implemented for a few years. As a result, there is plenty of time to get the right balance between safety and soundness on the one hand and credit availability on the other. While the private-label sector has been a source of trouble in the past, particularly during the subprime boom, it is not in the public interest to put an end to it: it has provided capital to the jumbo sector and provides much needed competition to Fannie, Freddie and Ginnie.
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November 6, 2015 | Permalink | No Comments