June 17, 2015
Wednesday’s Academic Roundup
- An Extrapolative Model of House Price Dynamics, Edward L. Glaeser & Charles Nathanson, HKS Working Paper No. RWP15-012.
- Old Suburbs Meets New Urbanism, Nicole Stelle Garnett, Notre Dame Legal Studies Paper No. 1512.
- Credit Scoring and Loan Default, Rajdeep Sengupta & Geetesh Bhardwaj, International Review of Finance Vol. 15, Issue 2, pg. 139-167, 2015. (Paid access).
- Product Market Effects of Real Estate Collateral, Azizjon Alimov.
- Reforming REIT Taxation (Or Not), Bradley T. Borden, Houston Law Review, Vol. 52, 2015, Forthcoming; Brooklyn Law School, Legal Studies Paper No. 416.
- Age, Demographics, and the Demand for Housing, Revisited, Richard K. Green & Hyojung Lee, June 4, 2015.
June 17, 2015 | Permalink | No Comments
June 16, 2015
NYC’s 421-Abyss
New York City’s 421-a tax exemption has lapsed as of yesterday because of disagreements at the state level (NYS has a lot of control over NYC’s laws and policies, for those of you who don’t follow the topic closely). 421-a subsidizes a range of residential development from affordable to luxury. In the main, though, it subsidizes market-rate units.
This subsidy for residential development is heavily supported by the real estate industry. Many others think that the program provides an inefficient tax subsidy for residential development, particularly affordable housing development.
I fall into the latter camp. I would note, however, that NYC’s dysfunctional property tax system is highly inequitable because it taxes different types of housing units (single family, coop and condo, rental) so very differently.
With that in mind, let me turn to a policy brief from the Community Service Society, Why We Need to End New York City’s Most Expensive Housing Program. The reports key conclusions are,
At $1.07 billion a year, 421-a is the largest single housing expenditure that the city undertakes, larger than the city’s annual contribution of funds for Mayor de Blasio’s Housing New York plan.
The annual cost of 421-a to the city exploded during the recent housing boom as a result of market changes, not because of any intentional policy decision to increase the amount of tax incentives for housing construction.
Half of the total 421-a expenditure is devoted to Manhattan.
The 421-a tax exemption is a general investment subsidy that has been only superficially modified to contribute to affordability goals.
The 421-a tax exemption is extremely inefficient as an affordable housing program, costing the city well over a million dollars per affordable housing unit created.
The reforms made to 421-a in 2006 and 2007 have not resulted in a significant improvement of 421-a’s efficiency as an affordable housing program.
A large share of buildings that receive 421-a and include affordable housing also receive other subsidies, such as tax-exempt bond financing. Affordable units in these buildings cannot be credited entirely to the 421-a program.
The great majority of the tax revenue forgone through 421-a is subsidizing buildings that would have been developed without the tax exemption. (3-4)
The brief argues that 421-a should be allowed to expire and be replaced “with a targeted tax credit or other new incentive that is structured to provide benefits only in proportion with a building’s contribution to the affordable housing supply.” (4)
I don’t have any real disagreement with the thrust of this brief. I would just add that the fight over 421-should be expanded to include an overhaul of the City’s property tax regime. It is unclear, of course, whether Governor Cuomo and NYS legislators have the stomach for a battle so large.
June 16, 2015 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Round-Up
- 2016 Transportation Housing and Urban Development Bill passed in the House of Representatives – funding for certain programs, such as section 8 has been increased, however according to Enterprise Community partners (see Budget chart), it underfunds other critical federal housing and community development programs by as much as $1.5 billion.
- The U.S. Treasury’s Community Development Financial Institutions Fund recently completed its final round of New Market Tax Credit (NMTC) allocations. NMTC are used to stimulate investment in low-income communities. Legislation is currently pending in both the House and the Senate to permanently extend this successful and popular program. A bipartisan dear colleague letter urging permanent extension of NMTC is currently circulating – CDFI Fund’s recent report highlights the effectiveness of the program between 2003 and 20013.
June 16, 2015 | Permalink | No Comments
June 15, 2015
AIG’s “Victory” and the GSE Litigation
Court of Federal Claims Judge Wheeler issued an Opinion and Order in Starr International Company, Inc. v. United States, No. 11-779C (June 15, 2015), the case that Hank Greenberg brought against the government over the terms of the bailout of AIG during the financial crisis. The judge found that the government exceeded its authority in taking an equity interest in AIG, but did not award the plaintiffs any damages. Many will read the tea leaves of this opinion to see what they tell us about the litigation brought against the federal government by shareholders in Fannie and Freddie arising from the bailout of those two companies. I think it offers little guidance as to liability but lots as to damages.
My most important takeaway from the opinion (which seems well-reasoned to me) is that the holding is based on a close reading of the Federal Reserve Act. The Act enumerates the powers and limitations of the Fed. The Court held that the Act does not authorize the Fed to take equity in a company as part of a bailout.
Fannie and Freddie are regulated by the Federal Housing Finance Administration (FHFA). The FHFA’s powers and limitations, in contrast, derive from the Housing and Economic Recovery Act of 2008 (HERA), passed during the financial crisis itself. HERA explicitly granted the FHFA broad powers as conservator. Section 1117 of HERA authorized the Secretary of the Treasury to make unlimited equity and debt investments in the two companies’ securities through December 31, 2009. (There is a disagreement as to whether the the Third Amendment to the Preferred Stock Purchase Agreement, discussed here, created new securities after that date, but the more general point is that HERA authorized equity investments in a way that the Federal Reserve Act did not.)
In sum, I would not read too much into the GSE litigation from the AIG litigation as it relates to the government’s ability to take equity in Fannie and Freddie. The two cases arise under two completely different statutes.
As to the damages component of the opinion, there are many cases when a court finds for a plaintiff but only awards nominal damages. Thus, the Court’s opinion is not particularly out of the ordinary in this regard. Here, the Court relied on the reasoning of the Court of Appeals for the Federal Circuit in a TARP case, A&D Auto Sales, Inc. v. United States, 748 F.3d 1142 (Fed. Cir. 2014). In that case, the Federal Circuit found that absent allegations that “GM and Chrysler would have avoided bankruptcy but for the Government’s intervention and that the franchises would have had value in that scenario,” there was no basis to argue that the government caused “a net negative economic impact” on the plaintiffs (Starr at 66, quoting A&D at 1158).
It would appear that to prove damages, the GSE litigation plaintiffs will need to overcome that bar too, even if they were to succeed in proving that the government had acted improperly in bailing out Fannie and Freddie.
June 15, 2015 | Permalink | No Comments
June 12, 2015
Reiss on Big Kickback Penalty
Law360 quoted me in CFPB Ruling Adds New Front In Administrative Law Fight (behind a paywall). The story opens,
Consumer Financial Protection Bureau Director Richard Cordray’s decision last week upholding an administrative ruling against PHH Mortgage Corp. and jacking up the firm’s penalty highlights concerns industry has about the bureau’s appeals process, and it adds to a growing battle over federal agencies’ administrative proceedings.
Cordray’s June 4 decision in the PHH case marked the first time the bureau’s administrative appeals process was put to the test. And the result highlighted both the power that Cordray has as sole adjudicator in such an appeal and his willingness to review a decision independently and go against his enforcement team, at least in part, experts say.
But because PHH has already vowed to appeal the decision, the structure of the CFPB’s appeals process could be put in play, and it could be forced to change — a battle that comes as the U.S. Securities and Exchange Commission is also facing challenges to its administrative proceedings.
The way the CFPB handles administrative appeals “might be one of the issues that the court of appeals might be asked to consider,” said Benjamin Diehl, special counsel at Stroock & Stroock & Lavan LLP.
In the case before Cordray, PHH had been seeking to overturn an administrative law judge’s November 2014 decision that found it had engaged in a mortgage insurance kickback scheme under the Real Estate Settlement Procedures Act, or RESPA.
Cordray agreed with the underlying decision, but he found that Administrative Law Judge Cameron Elliot incorrectly applied the law’s provisions when assessing the penalty PHH should face.
And when Cordray applied those provisions in a way that he found to be correct, PHH’s penalty soared from around $6.4 million to $109 million, according to the ruling.
The reasoning behind Cordray’s decision irked lenders, which say the CFPB director dismissed precedent on mortgage reinsurance, including policies from the U.S. Department of Housing and Urban Development and judicial interpretations of the statute of limitations on RESPA claims.
“If the rules are going to change because an agency can wave a magic wand and change them, that’s disconcerting,” Foley & Lardner LLP partner Jay N. Varon said.
The rise in penalties highlighted both the risk that firms face in an appeal before the CFPB and Cordray’s desire to send a message to companies that he believes violate the law, said David Reiss, a professor at Brooklyn Law School.
“It is unsurprising that Cordray would take a position that is intended to have a significant deterrent effect on those who violate RESPA, and I expect that he wanted to signal as much in this, his first decision in an appeal of an administrative enforcement proceeding,” Reiss said.
June 12, 2015 | Permalink | No Comments
Friday’s Government Reports
- Consumer Financial Protection Bureau (CFPB) recently released a report entitled A Closer Look a Reverse Mortgage Advertisements and Consumer Risks which discusses its findings regarding the failure of reverse mortgage ads to mention the considerable risks involved in reverse mortgage loans (while extolling their virtues). The CFPB also released a consumer advisory to warn seniors about the potential pitfalls of reverse mortgages.
- A new rule requiring a Three Day Review Period for Mortgage applications submitted after August 1st, 2015 will only apply if certain (3) changes are made before closing: 1. Changes in Annual Percentage Rate (APR); 2) Prepayment terms; 3) Basic loan product changes (i.e. from fixed at adjustable rate). The CFPB has released a factsheet detailing how the new rule functions.
- The Federal Housing Finance Agency unveiled an interactive online map to help “in the money borrowers” identify the opportunity (those eligible for The Home Affordable Refinance Program aka HARP).
June 12, 2015 | Permalink | No Comments
