REFinBlog

Editor: David Reiss
Brooklyn Law School

February 14, 2018

The “Humbled” Consumer Financial Protection Bureau

By David Reiss

photo by Lilla Frerichs

The Consumer Financial Protection Bureau is changing directions in a big way under the leadership of Mick Mulvaney as seen in its Strategic Plan for FY 2018-2022. In his opening message to the Plan, Mulvaney writes that the Plan

presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau.

So how do we refocus the Bureau’s efforts to better protect consumers? How do we succinctly define the Bureau’s unique mission, goals, and objectives? Fortunately, the necessary tools are already set forth in statute. We have drawn the strategic plan’s mission statement directly from Sections 1011 and 1013 of the Dodd-Frank Act: “to regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to educate and empower consumers to make better informed financial decisions.” We have similarly drawn the strategic plan’s first two strategic goals and its five strategic objectives from Section 1021 of the Dodd-Frank Act. By hewing to the statute, this Strategic Plan provides the Bureau a ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers. Just as important, it provides clarity and certainty to market participants. (2)

The subtext of this change in direction is not that “sub” at all. The Trump Administration wants to rein in the Bureau after it aggressively pursued financial services companies for violating a broad range of consumer protection statutes.

The Plan says that the Bureau will now act “with humility and moderation.” What that means is that the it will now be cutting financial services firms a lot of slack. Let’s see how a humbled Bureau works out for consumers.

February 14, 2018 | Permalink | No Comments

February 13, 2018

Trump’s War on HUD

By David Reiss

Shots Across The Bow

President Trump’s budget for fiscal year 2019 offers these highlights for the Department of Housing and Urban Development:

  • The Budget reflects the President’s commitment to fiscal responsibility by reforming programs to encourage the dignity of work and self-sufficiency while supporting critical functions that provide assistance to vulnerable households. The Budget recognizes a greater role for State and local governments and the private sector to address community and economic development needs and affordable housing production.
  • The Budget requests $39.2 billion in gross discretionary funding for HUD, an $8.8 billion or 18.3-percent decrease from the 2017 enacted level. (63)

The specifics are somewhat unbelievable. For instance, the budget

  • “eliminates programs that are duplicative or have failed to demonstrate effectiveness, such as the Community Development Block Grant (CDBG) program . . .” (Id.) and
  • does not request funding for the Public Housing Capital Fund, as the provision of affordable housing should be a responsibility more fully shared with State and local governments. (64)

Similar to other Trump documents, the budget veers toward incoherence when it states that

The Budget proposes legislative reforms to encourage work and self-sufficiency across its core rental assistance programs, consistent with broader Administration goals. Currently, tenants generally pay 30 percent of their adjusted income toward rent. The Administration’s reforms require able-bodied individuals to shoulder more of their housing costs and provide an incentive to increase their earnings. (Id.)

Decreasing the housing subsidy will decrease, not increase, the incentive to work. All other things being equal, increasing a household’s rent the more they work will discourage additional work.

It is hard to know what to do with a budget like this. Already, the Administration is backtracking on some of the cuts, including some of those targeting HUD. It seems highly unlikely that Congressional Republicans will wipe out the CDBG program because those funds are spread across their districts as well. But this sally in the budget wars is more than a shot across HUD’s bow. Rather, it reflects a strategy of weakening the safety net for those most in need.

February 13, 2018 | Permalink | No Comments

February 12, 2018

Redefault Risk After the Mortgage Crisis

By David Reiss

 

A tower filled with shredded U.S. currency in the lobby of the Federal Reserve Bank of Philadelphia.

Paul Calem et al. of the Phillie Fed posted Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures? The abstract reads,

This paper examines the redefault rate of mortgages that were selected for modification during 2008–2011, compared with that of similarly situated self-cured mortgages during the same period. We find that while the performance of both modified and self-cured loans improved dramatically over this period, the decline in the redefault rate for modified loans was substantially larger, and we attribute this difference to a few key factors. First, the repayment terms provided by modifications became increasingly generous, including the more frequent offering of principal reduction, resulting in greater financial relief to borrowers. Second, the later modifications also benefited from improving economic conditions — modification became more effective as unemployment rates declined and home prices recovered. Third, we find that the difference in redefault rate improvement between modified loans and self-cured loans is not fully explained by observable risk and economic variables. We attribute this residual difference to the servicers’ learning process — so-called learning by doing. Early in the mortgage crisis, many servicers had limited experience selecting the best borrowers for modification. As modification activity increased, lenders became more adept at screening borrowers for modification eligibility and in selecting appropriate modification terms.

The big question, of course, is what does this all tell us about preparing for the next crisis? That crisis, no doubt, won’t be a repeat of the last one. But it will likely rhyme with it enough — falling home prices, increasing defaults — that we can draw some lessons. One is that we did not use principal reductions fast enough to make a big difference in how the crisis played out. There were a lot of reason for this, some legit and some not. But if it is good public policy overall, we should set up mechanisms to deploy principal reduction early in the next crisis so that we do not need to navigate all of the arguments about moral hazard while knee deep in it.

February 12, 2018 | Permalink | No Comments

February 9, 2018

Micro Apartments and The Housing Crisis

By David Reiss

photo by BalazsGlodi

The NYU Furman Center has posted 21st Century SROs: Can Small Housing Units Help Meet the Need for Affordable Housing in New York City? The policy brief opens,

Throughout much of the last century, single-room occupancy (SRO) housing was a commonly available type of low-rent housing in New York City, providing housing to people newly arrived in the city, low-income single New Yorkers, and people needing somewhere to live during life transitions. SRO units typically consisted of a private room with access to full bathroom and kitchen facilities that a renter shared with other building occupants. As the city fell onto hard times, so did SRO housing. During the second half of the last century, many SROs came to serve as housing of last resort, and policymakers enacted laws limiting their construction and discouraging the operation of SRO units. Many SROs were converted to other forms of housing, resulting in the loss of thousands of low-rent units in the city.

New research and analysis from the NYU Furman Center addresses the question of whether small housing units (self-contained micro units and efficiency units with shared facilities) can and should help meet the housing need previously served by SROs. In this policy brief, we present a summary of the paper, 21st Century SROs: Can Small Housing Units Help Meet the Need for Affordable Housing in New York City? We provide an overview of the potential demand for smaller, cheaper units, discuss the economics of building small units, analyze the main barriers to the creation of small units that exist in New York City, and suggest possible reforms that New York City can make to address these barriers. (1)

The policy brief makes a series of recommendations, including

  • reducing density limitations for micro units near transit hubs
  • permitting mixed-income and market-rate efficiency units
  • creating a government small unit program to promote the construction of micro apartments

There is no doubt that the lack of supply is a key driver of the affordable housing crisis across the country. Small units should be part of the response to that crisis, not just in New York City but in all high-cost cities.

February 9, 2018 | Permalink | No Comments

February 8, 2018

Loan Mods Amidst Rising Interest Rates

By David Reiss

photo by Chris Butterworth

The Urban Institute’s Laurie Goodman et al. have posted Government Loan Modifications: What Happens When Interest Rates Rise?. This brief is another product of the newly formed Mortgage Servicing Collaborative. This brief

examines the current loan modification product suite for government loans insured or guaranteed by the Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), or the US Department of Agriculture (USDA). When a delinquent borrower with a government loan obtains a modification, the mortgage rate is typically reset to the prevailing market rate, which can be higher or lower than the original note rate. When the market rate is below the original rate, providing payment reduction becomes inherently easier and less expensive for the investor. Conversely, when market rates are above the note rate, providing payment reduction becomes more expensive and challenging, making it more difficult to cure the delinquency. This can result in more redefaults and foreclosures, larger losses for government insurers, and greater distress for borrowers, communities, and neighborhoods. In addition, most government mortgage borrowers are first-time homebuyers and minorities, who tend to have limited incomes and savings, making loan modifications all the more important. (1)

Given the recent upward trend in interest rates, this is more than a theoretical exercise. And indeed, the brief “explains why FHA, VA, and USDA borrowers who fall behind on their payments are unlikely to receive adequate payment relief when the market interest rate is higher than the original note rate. ” (3)

The brief outlines some options that could increase payment relief for those borrowers, including deploying a 40-year extended term and principal forbearance to reduce the monthly mortgage payment. The brief acknowledges that there are barriers to implementing the options it has identified but it also proposes ways to overcome those barriers.

As I had stated previously, the Mortgage Servicing Collaborative is providing sorely needed guidance through some of the darker corners of the mortgage market. This brief sheds some welcome light on an obscured problem that may cause trouble in the years to come.

February 8, 2018 | Permalink | No Comments

February 7, 2018

The Fate of CFPB’s Civil Investigative Demands

By David Reiss

 

Mick Mulvaney’s Consumer Financial Protection Bureau issued a Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes:

The Bureau is using this request for information to seek public input regarding the exercise of its authority to issue CIDs, including from entities who have received one or more CIDs from the Bureau, or members of the bar who represent these entities.

The issuance of CIDs is an essential tool for fulfilling the Bureau’s statutory mission of enforcing Federal consumer financial law. The Bureau issues CIDs in accordance with the law and in furtherance of its investigatory objectives. The Bureau understands, however, that responding to a CID can impose burdens on the recipients. Entities who have received one or more CIDs, members of the bar who represent these entities, and members of the public are likely to have useful information and perspectives on the benefits and burdens of the Bureau’s existing processes related to CIDs. The Bureau is especially interested in better understanding how its processes related to CIDs may be updated, streamlined, or revised to better achieve the Bureau’s statutory and regulatory objectives, while minimizing burdens, consistent with applicable law, and how to align the Bureau’s CID processes with those of other agencies with similar authorities. Interested parties may also be well-positioned to identify those parts of the Bureau’s processes related to CIDs that are most in need of improvement, and, thus, assist the Bureau in prioritizing and properly tailoring its review process. In short, engaging CID recipients, potential CID recipients, and the public in an open, transparent process will help inform the Bureau’s review of its processes related to CIDs. (83 F.R. 3686 (Jan. 26, 2018))

There is a lot of subtext in this request, of course, because Mulvaney is set on hamstringing the Bureau which he has described as a “sick, sad” joke. A review of CIDs is likely to lead to a decrease in enforcement activity for the financial services companies regulated by the CFPB.

Be that as it may, the Bureau is seeking comments on “Specific suggestions regarding any potential updates or modifications to the Bureau’s practices regarding the formulation, issuance, or modification of CIDs consistent with the Bureau’s regulatory and statutory objectives, including, in as much detail as possible, the potential update or modification, supporting data or other information such as cost information or information concerning alignment with the processes of other agencies with similar authorities . . .” (Id.)

Comments are due by March 27, 2018.

February 7, 2018 | Permalink | No Comments

February 6, 2018

Investing in Small Commercial Real Estate

By David Reiss

photo by Nick

US News & World Report quoted me in How to Invest in Small Business Strength. It reads, in part,

Many indicators show the economy is strong, which in turn means small businesses are following suit.

Small business financials were at the strongest point in 2017 since data collection started in 2007, according to BizBuySell’s Q4 2017 Insights data. The median revenue of sold businesses grew more than 5 percent this year. There’s also a trend of home-based businesses moving to brick-and-mortar locations, says Danny Mulcahy, director of equity for Northstar Commercial Partners in Denver.

This bodes well for the landlords of the small office and retail commercial spaces they occupy, which have the potential to ride their success in the form of potential above-average returns.

But before investing in small commercial office, retail and industrial properties, which are fiercely different products than residential investment properties, it’s important to exercise adequate due diligence and heed the following advice, experts say.

Hire a good team of advisors. “Deciding to invest in commercial real estate is a large decision typically,” says Michael Marsh with real estate brokerage Lee & Associates in Phoenix. “There are many factors to potentially consider such as legal structures, financial evaluations, liability, loans, tax implications, and property management.”

A sales specialist in the type of commercial real estate you’re interested in will have the best available information for you to consider, he says.

“A commercial broker will be able to quickly work through a large set of properties as well as present off-market opportunities,” he says.

An investor should also have an idea of financing options from a competent commercial real estate banker. An experienced property attorney can help with setting up an adequate structure for holding the real estate and put bulletproof leases in place, Marsh adds.

Avoid empty buildings, at least to start. “The main criteria when selecting such a [commercial] property is to look for ones that have cash flow,” says Spencer Chambers, a general contractor and Realtor with The Chambers Organization in Newport Beach, California. “That is the reason you make any real estate investment. Avoid ones that don’t make money.” Properties with cash flow are more proven and it is easier to get financing to purchase them.

*     *     *

Do your research. Small commercial real estate is a trickier investment than residential. Before you buy, ask, “What are rents for comparable properties? How quickly are vacancies filled in the area? How much should you expect to spend on maintenance and repairs?” says David Reiss, a real estate professor at Brooklyn Law School. “You want to be able to predict the likely income and expenses the building will have.”

Evaluate any current tenants and their leases carefully as well: “There is a big difference between buying a building that is fully rented up with tenants who are paying their rent regularly and have a lot of time left on their lease and a building [that] has tenants with month-to-month leases who are behind on their rent,” he says.

That’s because the greatest costs for the landlord are vacancy and management. These aren’t often efficient with a limited economy of scale compared to larger landlords and real estate investment trusts, says Walt Batansky, chief financial officer of Avocat Group, a corporate real estate firm in Tampa, Florida.

Look at the capitalization rate. The building’s capitalization rate, based on its net operating income, is used to evaluate a commercial property. To arrive at the cap rate, the net operating income (or annual rental income minus expenses but before any mortgage payments are factored in) is divided by the average rate of return for similar properties in the area.

“You should go as big as your purchasing power allows, meaning whatever you’re able to get a loan for,” Chambers says. “As long as you’re buying a cash flow property from day one. You want to buy something with over 8 percent capitalization rate.”

February 6, 2018 | Permalink | No Comments