November 1, 2016
Clintons’ October Permitting Surprise
Realtor.com quoted me in Final October Surprise: Clintons Make Untimely Mistake Renovating Their New Home. It opens,
This is proving to be the year that redefines the notion of the presidential campaigns’ “October Surprise.” First Donald Trump‘s hot mic/hot mess “Access Hollywood” tape surfaced, followed by the ugly after affects. Then with just over a week to go before Election Day, Hillary Clinton‘s email woes returned, this time on Anthony Weiner‘s computer. Talk about lousy timing! Now, on the final day of October, one last surprise is rearing its head. Remember when the Clintons bought the home next door to their own in Chappaqua, NY, a few months back? Well, it turns out they renovated it without permits.
Breaking news alert!
According to public records, government officials received a complaint in early October about excavation happening at the Clintons’ new home. When an inspector arrived, he saw that a number of unpermitted upgrades were taking place, including a kitchen remodel and the installation of a new HVAC system.
Conspiracy theorists take note: Once the Clintons learned of this oversight, they took steps to fix it. And to be fair, the inspector on the case, William Maskiell, concedes that architects or contractors typically file for permits rather than the homeowners themselves. Still, he points out, “If you own the house, you’re responsible on everything that goes on with that house.”
In other words, the buck stops with the Clintons.
Granted, this blooper might seem small compared with the much larger problems on Hillary Clinton’s plate right now. Still, it can serve as an important lesson to all homeowners—many of whom might be tempted to sneakily sidestep those annoying permits before they start renovating. Honestly, are those little pieces of paperwork all that important?
It turns out they really are.
“I can’t believe a contractor working on a multimillion-dollar home wouldn’t pull permits,” says Mark Clements, a contractor at MyFixItUpLife.com. “It’s very much the contractor’s responsibility to gain those permits, and nearly unthinkably stupid not to.”
Here’s why: “On the surface, permits are inconvenient, but their value vastly outweighs what it takes to obtain them,” Clements explains. “They ensure everything from zoning variances to proper building practices are followed. And they make sure there is another set of expert eyes on the work being done, checking for everything from proper structure to code-approved electric to fire stops are safely installed.”
Once that’s done, a final inspection and certificate of occupancy, or “C of O,” is issued. The home may be reappraised—which could raise property taxes—”but it will also mean that when you list it for sale with three bathrooms, you can do so legally,” Clements adds.
A Stronger America, One Permit At A Time
So what’s the worst that could happen if you don’t bother with permits before you embark on a home improvement project? For one, if you’re caught, you could face fines.
“In some jurisdictions the penalties can be heavy, but it’s the stop-work order than can really hurt,” says David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com. “Not only does it delay the completion of the work, but it may lead to additional costs from the contractor and subcontractors working on the project. And to top it off, it may interfere with the homeowners’ plans to leave their current home and move into their new one. The cascade effect among the affected parties can be painful.”
And even if you’ve already completed your renovation off the radar, you aren’t in the clear. If you decide to sell your home one day, unpermitted renovations can discourage buyers from biting—if they’re discovered.
“When buying a home, you always want to pay attention to any signs that there was unpermitted work done on the house,” says Reiss. “Is the certificate of occupancy for a one-family home, but there is a mother-in-law unit in the back? Are all of the houses on the block one story but your house is two stories? In such cases, you definitely want to dig a little deeper so you are not left holding the bag.”
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November 1, 2016 | Permalink | No Comments
Tuesday’s Regulatory & Legislative Roundup
- A federal consumer finance watchdog agency on Thursday warned 44 mortgage lenders and brokers that they may be in violation of federal mortgage data reporting requirements.
- The U.S. Securities and Exchange Commission votes with near-constant harmony in choosing to bring federal cases against individuals and companies, according to internal records released by the agency.
- A divided U.S. Securities and Exchange Commission approved rule changes on Wednesday to make it easier for shareholders to vote for corporate board candidates nominated by activist investors, while unanimously agreeing to relax intrastate crowdfunding rules.
November 1, 2016 | Permalink | No Comments
Monday’s Adjudication Roundup
- Residential mortgage-backed securities trustee Wells Fargo urged a Manhattan judge Friday to order BlackRock Funds and other big investors suing it for more than $1 billion over faulty mortgage bundles to turn over their own internal modeling techniques, saying the information will undercut their case
October 31, 2016 | Permalink | No Comments
October 28, 2016
Mortgages from the Shadows
Realtor.com quoted me in ‘Shadow Banks’ Are on the Rise for Home Loans: Should We Be Afraid? It opens,
Where do home buyers go for a mortgage? To a bank, of course—or at least that’s what many might think. Yet a new force has taken over home financing, called “shadow banks.” So what are these non-banks exactly, and should we run for the hills?
In a nutshell, these are the less conventional places that don’t provide savings accounts, only loans to buy homes. They include companies like Quicken Loans, which is one of the nation’s largest mortgage providers, Caliber, and loanDepot.com.
But they can also be companies run by wealthy individuals using their personal fortunes to finance loans and then pocketing monthly interest payments, according to the Wall Street Journal. Or they could be funded by private equity, which is financed by pooled investor cash.
And, as a group, they’re no longer operating on the fringes of the housing industry. Instead, shadow banks “have overtaken U.S. commercial banks, to grab a record slice” of the market,” according to a recent housing report by ATTOM Data Solutions.
This group of nontraditional lenders now accounts for 48.3% of mortgages in 2016—compared to just 23.4% in 2008, according to the ATTOM report.
“The big banks got burned by the financial crisis, so they’ve become much more hesitant to make loans that are even close to being risky,” says Daren Blomquist, senior vice president at ATTOM.
These mortgage makers are very appealing to buyers without a 20%—or even 10%—down payment and therefore have trouble getting a loan from a regular old bank, says Blomquist. This might make sense for first-time buyers, or folks who have gone through a foreclosure.
But are they right for everyone? And, more to the point: Are they harbingers of the risky loaning behavior that help bring on the U.S. housing collapse?
Could shadow banks lead to another housing crisis?
As a group, these lenders are not subject to the same level of governmental scrutiny, regulations, and fees that drove many traditional financial institutions, like banks, out of the space after the housing bust. But they still come under a significant amount of federal oversight.
In short, regular banks retreated, so shadow banks moved in. What’s wrong with that?
As market media site Seeking Alpha has pointed out, shadow banks are “some of the same characters that played leading roles [in the last housing crisis].”
Not all experts believe we should be overly worried.
“While it’s true that so-called shadow banks played roles in the last housing crisis … the market itself is very different,” says David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com.
For one, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 in response to the housing meltdown of 2008, changed how all lenders—banks, shadow banks, and otherwise—make loans, to better ensure there isn’t another housing bust.
Another big difference: Lenders are now documenting the income of borrowers to make sure these new homeowners can afford to make their monthly payments.
“There’s no evidence out there that non-banks are lending in any sort of imprudent way and/or hurting consumers,” Guy Cecala, publisher and CEO of Inside Mortgage Finance, tells realtor.com®. “In fact, most non-banks are more competitive than banks when it comes to mortgage interest rates and fees.”
“But they don’t have the same level of capital [such as cash], assets, or liquidity as banks do,” he says.
What to consider before getting a shadow bank loan
Borrowers should just take care to tread carefully and examine the terms and conditions of the financing before signing on the dotted line, says Mark Greene, a longtime mortgage lender based in Hackensack, NJ.
He recommends looking for red flags like adjustable rate change terms, prepayment penalties, and other hidden fees.
Good ol’ common sense will come in handy too.
“If your loan is coming from a fishy-sounding company like Two Brothers Fly-by-Night Hard Money-Lenders, Inc., you may want to dig a bit deeper, to figure out what kind of lender it really is,” says law professor Reiss.
REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category. Please vote here if you like what you read.
October 28, 2016 | Permalink | No Comments
Friday’s Government Reports Roundup
- The Consumer Financial Protection Bureau warned 44 mortgage lenders and mortgage brokers regarding their compliance with the Home Mortgage Disclosure Act.
- Today, the Internal Revenue Service (IRS) stated their cap for their “low income housing tax credit (LIHTC) and private activity bond (PAB)”
- The U.S. Department of Housing and Urban Development proposed a new resilience standard to help communities that have been devastated by flooding.
REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category. Please vote here if you like what you read.
October 28, 2016 | Permalink | No Comments
October 27, 2016
Should Seniors Pay Off Their Mortgages?
TheStreet.com quoted me in Should Seniors Pay Off Their Mortgages? It opens,
Increasingly, seniors are going against the conventional retirement wisdom about mortgages which, always before, preached that a cornerstone of a good retirement was to enter it debt free. That meant without a mortgage.
And yet about one-third of homeowners 65 and older have a mortgage now. That’s up from 22% in 2001. Among seniors 75 and older, the rate jumped from 8.4% to 21.2%.
The appeal, of course, is that home mortgages are cheap; 30-year fixed-rate loans are going out under 3.7%, and 15-year fixed rates can be had for 3.1%.
That puts the question in sharp focus: is this good financial planning or is it reckless?
Understand: age discrimination is flatly illegal in home loans. But law does not dictate financial prudence and the question is: is it wiser to pay off a home mortgage if at all possible – which used to be the prevailing wisdom? That still brings a sense of relief, too. Tim Shanahan of Compass Securities Corporation in Braintree, Mass. said: “It’s a great feeling to have no debt and a significant accomplishment to be able to tear up the mortgage.”
True.
But is this still the smartest planning? As more seniors take on home mortgages, experts are re-opening the analysis.
“The short answer to the question is it depends,” said certified financial planner Kevin O’Brien of Peak Financial Services in Northborough, Mass. O’Brien is not being cute. So much of this is individual-centric. O’Brien continued: “It depends on how strong the person’s cash flow is or not. It depends on how much liquid savings and investments they have after they might pay it off. It also depends on the balance they need to pay off in relation to their sources of cash flow, and liquid assets.”
Keep in mind, too: today’s retirement is not yesteryear’s. About one senior in four has told researchers he plans to work past 70 years of age. That means they have income. Also, at age 70, a person has every reason to claim Social Security – there are no benefits in delaying – so that means many 70+ year-olds now have two checks coming in, plus what retirement savings and pensions they have accrued.
That complexity is why Pedro Silva of Provo Financial Services in Shrewsbury, Mass offered nuanced advice: “We like to see clients go into retirement without mortgage debt. This monthly payment can be troublesome in retirement if people are using pre-tax money, such as IRAs, to pay monthly mortgage. That means that they pay tax on every dollar coming from these accounts and use the net amount to pay the mortgage.”
“If clients will carry a mortgage, then the low rates are a great opportunity to lock in a low payment,” Silva continued. “We encourage those folks who don’t foresee paying off their home in retirement, to stretch the payments as long as possible for as low a rate as possible.”
David Reiss, a professor at Brooklyn Law and a housing expert, offered what may be the key question: “I think the right question is – what would you do with your money if you did not pay off the mortgage? Would it sit in a savings account earning 0.01% interest — and taxable interest, at that? Paying off your mortgage could give you a guaranteed rate that is equal to your mortgage’s interest rate. So if you are paying 4.5% on your mortgage and you take money from your savings account that is not spoken for — like your emergency fund — you would do way better than the 0.01% you are getting in that savings account, even after taxes are taken into account.”
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October 27, 2016 | Permalink | No Comments
October 31, 2016
Small Multifamilies and The Affordability Illusion
By David Reiss
Fannie Mae’s September Multifamily Market Commentary repeats a common misunderstanding about small multifamily properties that is worth addressing. By way of background, it opens,
Multifamily rental units can be found in high-rise structures or in garden-style buildings, but there are a number of properties that house between just five and 50 housing units. These properties are usually identified as small multifamily and can be found in many different metros across the country. In many places, they can also be a key source of affordable rental units. (1)
While the data is not definitive, there appears to be somewhere between “296,000 and 360,000 small multifamily properties” with between 2.3 million and 4.4 million units of housing among them. (1) These units appear to be concentrated in about ten states that contain three quarters of the stock. California and NY have the most small multifamilies by a wide margin and the cities with the most come as no surprise: LA, NYC, SF-Oakland, Chicago and San Diego.
Here’s where I have issues with the analysis:
Fewer Small Multifamily Properties in the Pipeline
According to data from the Dodge Data & Analytics Construction Pipeline, the number of new multifamily projects being started has been declining since peaking in the second quarter of 2015, falling to 678 projects during the first quarter of 2016 . . . . The average number of units rose, however, to about 117 units per project.
Given the high land acquisition and construction costs in most metros, this trend of maximizing square footage in multifamily development, rehabilitation, and renovation should not be surprising. Unfortunately, it does have implications for the small multifamily segment, which in many places tends to offer more affordable rents when compared to newer properties.
An Uncertain Future for Small Multifamily
Over the next decade, the nation’s multifamily stock will likely see an influx of higher unit count properties. As older small multifamily rental properties age and/or fall into disrepair, they will likely be replaced with properties with more density per square foot. Developers will likely create more, but much smaller, units on the same size lot. As a result, these small multifamily properties may end up moving out of the 5-50 unit category and push up into the 50+ unit category, making preservation of the existing stock of small multifamily rental properties offering more affordable rents even more critical.(6)
The logic of this last sentence is faulty, but it is also oft-repeated by sophisticated housing market commentators. Small multifamilies are not cheap because they are small, they are cheap because they are old. Old housing is generally cheaper than new housing. So this notion that we should preserve old housing for its own sake is faulty. Generally, we would want to see an expansion in the supply of housing, so replacing an aging small building with a bigger new one would generally be a positive development. We also would like to see investments in upgrades to the housing stock, either through rehabilitation or replacement. Effectively, this Fannie Mae Commentary is saying that we should preserve very old small multifamilies instead of upgrading those properties. That is short-sighted because while it may keep particular units affordable, it will also tend to raise rents more generally (by restricting supply) and lowering the overall quality of the housing stock (by disincentivizing investment).
The Commentary acknowledges that “it seems that there are a variety of financing sources available in the financing of small multifamily rental properties, indicating there is sufficient and ongoing liquidity for this property type. ” (5) Perhaps it is best to treat small multifamilies just like the bigger ones and let the market determine the highest and best use of each parcel zoned for multifamily construction.
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October 31, 2016 | Permalink | No Comments