December 17, 2013
Reiss on Myths of the Fed
Bankrate.com quoted me in a story, 5 Myths Debunked About The Federal Reserve. it reads in part,
Assassination, foreign control and money printing: the stuff of a motion picture thriller?
Not in this case. They’re all the fodder for wild and surprisingly popular myths surrounding the nation’s central bank, the Federal Reserve.
It does wield considerable power, evident in the extraordinary measures taken during and after the financial crisis. But it’s amazing the things that otherwise reasonable people say about this admittedly complex U.S. government institution.
David Reiss, professor at the Brooklyn Law School, says, “To most of us, the Federal Reserve is a riddle, wrapped in a mystery inside an enigma, to borrow Winston Churchill’s phrase.”
With the Fed celebrating its centennial, the time is right to tackle some of these myths head-on. There are many myths out there regarding the Fed. Here are just a handful.
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Myth 3: The Fed prints money
The notion is rooted in the Federal Reserve’s control of the nation’s money supply. The Bureau of Engraving and Printing, part of the U.S. Treasury, is responsible for printing currency.
“Although the Bureau of Printing and Engraving prints it, it delivers it to the Fed, and then the Fed gets to decide how much of it to put out into the economy,” says W. Michael Cox, director of the O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. He’s also former chief economist of the Federal Reserve Bank of Dallas.
In a way, Reiss of the Brooklyn Law School says, “the Fed can create money and does so in a variety of ways.” What he means is the Fed can increase the money supply through its monetary tools. Since the end of 2008, it has used “quantitative easing,” or QE, a term used to describe the Fed’s strategy to boost the supply of money. In the latest round of QE, the Fed has undertaken the monthly purchase of $85 billion in assets over the past year.
If you want to describe the process correctly, you might take a cue from St. Lawrence University’s Horwitz. The central bank isn’t in the printing business, but it has some control of the process.
“The money that the Fed creates is all done electronically in the form of bookkeeping entries that expand the deposit accounts that banks hold at the Fed,” he says.
December 17, 2013 | Permalink | No Comments
December 16, 2013
Reiss on “Sexy Tax Breaks” for Luxury Housing
MainStreet.com quoted me in Luxury Real Estate with Sexy Tax Breaks. The story reads in part,
Buying a high end property doesn’t always cost a fortune for the wealthy especially if there are tax breaks attached.
Property tax deductions and even exemptions exist for buyers of luxury properties under special incentives, such as New York City’s J-51 and 421a program.
“A J-51 unit in a luxury building will likely sell for more than a comparable condo without a tax break, because monthly expenses are lower due to reduced property taxes. It’s a deal but not dollar for dollar, and that’s true everywhere you look for tax breaks in luxury properties,” said David Reiss, professor of real estate law at Brooklyn Law School.Benefits include no tax by reducing the assessed value of the property to the pre-renovated price and secondly by capping property taxes.
“These benefits phase out typically over a 14 year period for market rate properties,” Reiss told MainStreet.
Most J-51 buildings in the borough of Manhattan are above 110 Street due to state restrictions.
For example, for interested buyers there’s a two-bedroom J-51 condominum on West 140th Street available for $620,000 advertised on condo-living-west.com.
“The tax reduction will be priced into the cost of the home,” said Reiss.
A back end strategy would be to buy and sell early rather than buy early and sell late to make a profit after purchase.
“Because the closer you are to the 14 year phase out when you sell, the less of a benefit the tax break is to the owners’ sale price,” Reiss said.
The 421a program is another tax break available for new construction not rehabilitation or conversion of existing buildings in Manhattan.
For example, an owner in a $90 million duplex penthouse in Midtown Manhattan would normally pay $230,000 in taxes without an abatement and $20,000 in taxes under an abatement program.
About 150,000 units in New York City receive partial tax exemptions under 421a.
The downside is that taxes gradually go up as the abatement is phased out.
December 16, 2013 | Permalink | No Comments
December 13, 2013
Non-QM Mortgages Risks and Best Practices
Moody’s issued a report, Non-QM US RMBS Face Higher Risk of Losses Than QM, but Impact on Transactions Will Vary, that discusses the risk that
US RMBS backed by non-qualified mortgages (those that do not meet a variety of underwriting criteria under new guidelines) will incur higher loss severities on defaulted loans than those backed by qualified mortgages. The key driver of the loss severities will be the higher legal costs and penalties for non-QM securitizations. In non-QM transactions, a defaulted borrower can more easily sue a securitization trust on the grounds that the loan violated the Ability-to-Repay (ATR) rule under the Dodd-Frank Act. . . . The extent of the risks for RMBS will vary, however, depending on the mortgage originators’ practices and documentation, the strength of the transactions’ representations and warranties, and whether the transactions include indemnifications that shield them from borrower lawsuits. (1)
The higher costs for non-QM investors may include longer foreclosure timelines and the resulting wear on the collateral.
If Moody’s analysis is right, however, the Dodd-Frank regime will be working as intended. It should incentivize mortgage originators to strengthen their compliance practices such as those relating to documentation, recordkeeping and third party due diligence. It should also incentivize securitizers to demand strong reps and warranties, put back and indemnification provisions. Sounds like a reasonable trade off to me.
December 13, 2013 | Permalink | No Comments
Court Dismisses Plaintiffs’ RESPA Claims Because Defendant Was Not Under Legal Obligation to Respond to Plaintiffs
The court in deciding Neroni v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 149190 ( E.D. Mich. Oct. 17, 2013) granted defendant’s motion to dismiss plaintiffs’ complaint pursuant to F.R.C.P. 12(b)(6).
Plaintiffs alleged several claims in their complaint against Defendant for infringement of the Real Estate Settlement Procedures Act (“RESPA“) (Counts I–IV), common law fraud (Count V), common law silent fraud (Count VI), and common law breach of contract (Count VII).
Defendant asserted that plaintiffs’ RESPA claims should be dismissed because (1) defendant had no legal obligation under RESPA to respond or, alternatively, (2) plaintiffs failed to plead any actual damages related to their RESPA claims.
Defendant further asserts that plaintiffs have failed to adequately plead claims for fraud or breach of contract relating to defendant’s legal standing to foreclose on plaintiffs’ Home. After considering both sides’ arguments, the court agreed with the defendant’s reasoning and dismissed the case.
December 13, 2013 | Permalink | No Comments
Plaintiffs Failed to Allege Facts Sufficient to Set Aside the Foreclosure Sale After the Expiration of the Statutory Redemption Period
The court in deciding Glover v. JPMorgan Chase Bank, N.A., 2013 U.S. Dist. LEXIS 149354 (E.D. Mich. 2013) granted defendant’s motion to dismiss plaintiffs’ complaint pursuant to F.R.C.P. 12(b)(6).
All of the plaintiffs’ claims stemmed from the defendant’s purported refusal to modify the plaintiffs’ mortgage obligations due to “title issues.” However, the plaintiffs’ allegations did not support their claims because the parties entered into a modification agreement in October of 2010. Consequently, since the defendant did in fact grant the plaintiffs a loan modification, the court found that their claim lacked any factual support suggesting that the defendant was liable to plaintiffs.
Additionally, the court noted that the plaintiffs had failed to allege facts sufficient to set aside the foreclosure sale after the expiration of the statutory redemption period. Once the redemption period following a foreclosure of a parcel of real property has expired, the former owner’s rights in and title to the property are extinguished.
The court dismissed the plaintiff’s claims.
December 13, 2013 | Permalink | No Comments
Michigan Court Finds That Defendants Were Not Acting Under Color of State Law
The court in deciding El-Jabazwe v. Wells Fargo Home Mortg., 2013 U.S. Dist. LEXIS 149854 ( E.D. Mich. Oct. 18, 2013) denied the plaintiff’s motions and granted the defendants’ motions.
Plaintiff’s complaint listed the following Counts: 42 U.S.C. §1983 (Count I); 42 U.S.C. § 1985(3) (Count II); 42 U.S.C. § 1983: refusing or neglecting to prevent (Count III); Malicious Abuse of Process (Count IV); 18 U.S.C. §§ 241 and 242 (Count V); Intentional Infliction of Emotional Distress (Count VI); and Mail Fraud (Count VIII). The Court dismissed Plaintiff’s state-law claims (Counts IV and VI) on March 6, 2013.
The court found that the plaintiff’s argument under Fed. R. Civ. P. 12(c) rested solely on conclusory statements. The court found plaintiff’s motion for summary judgment is similarly deficient. The court noted that plaintiff wholly failed to meet the evidentiary burdens required under Fed. R. Civ. P. 12(c) and 56(a), and thus the court denied both of Plaintiff’s motions. Lastly, the court found that even when construing the facts in a light most favorable to the plaintiff, Counts I and III must be dismissed against the defendants, as they were not acting under color of state law.
Consequently, pursuant to E.D. Mich. L.R. 7.1(f)(2), the court ordered that the motions be resolved on the briefs submitted, without oral argument. The court then denied the plaintiff’s motions and granted the defendants’ motions.
December 13, 2013 | Permalink | No Comments
December 12, 2013
Reiss on New Mortgage Rules
The Redding Record Searchlight interviewed me in Experts Worry New Loan Standards, Lending Limits Could Hurt Housing Market. It reads in part,
New mortgage qualification rules and lower FHA lending limits that take effect next year threaten to slow the housing market’s recovery.
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David Reiss, a law professor at Brooklyn Law School in New York, said there is nothing wrong with tying the price of a loan to the risk.
“There is some talk that if it’s not a Qualified Mortgage loan, the cost for the creditor or lender will be higher and the cost will be passed on to the homeowner. That will probably be true,” Reiss said.
But Lawrence of Silverado Mortgage said just because one in five loans written today wouldn’t pass Qualifying Mortgage muster doesn’t necessarily suggest the loan would not be approved and closed under the new standards.
“Making a minor adjustment such as using a different interest rate and closing cost combination may allow a loan to meet the standard that it wouldn’t otherwise,” Lawrence said.
Lawrence knows there will be some loans for which an alternative can be found to resolve a Qualifying Mortgage issue.
“But I think most buyers start with getting pre-qualified before they find the home they’re interested in purchasing,” Lawrence said.
December 12, 2013 | Permalink | No Comments
