The Housing Market Since the Great Recession

photo by Robert J Heath

CoreLogic has posted a special report on Evaluating the Housing Market Since the Great Recession. It opens,

From December 2007 to June 2009, the U.S. economy lost over 8.7 million jobs. In the months after the recession began, the unemployment rate peaked at 10 percent, reaching double digits for the first time since September 1982, and American households lost over $16 trillion in net worth.

After a number of economic stimulus measures, the economy began to grow in 2010. GDP grew 19 percent from 2010 to 2017; the economy added jobs for 88 consecutive months – the longest period on record – and as of December 2017, unemployment was down to 4 percent.

The economy has widely recovered and so, too, has the housing market. After falling 33 percent during the recession, housing prices have returned to peak levels, growing 51 percent since hitting the bottom of the market. The average house price is now 1 percent higher than it was at the peak in 2006, and the average annual equity gain was $14,888 in the third quarter of 2017.

However, in some states – including Illinois, Nevada, Arizona, and Florida – housing prices have failed to reach pre-recession levels, and today nearly 2.5 million residential properties with a mortgage are still in negative equity. (4, footnotes omitted)

By the end of 2017, ” the most populated metro areas in the U.S. remained at an almost even split between markets that are undervalued, overvalued and at value, indicating that while housing markets have recovered, many homes have surpassed the at-value [supported by local market fundamentals] price.” (10) This even split between undervalued and overvalued metro areas is hiding all sorts of ups and downs in what looks like a stable national average.  You can get a sense of this by comparing the current situation to what existing at the beginning of 2000, when 87% of metro areas were at-value.

And what does this all mean for housing finance reform? I think it means that we should not get complacent about the state of our housing markets just because the national average looks okay. Congress should continue working on a bipartisan fix for a broken system.


The Economics of Housing Supply

chart by Smallman12q

Housing economists Edward L. Glaeser and Joseph Gyourko have posted The Economic Implications of Housing Supply to SSRN (behind a paywall but you can find a slightly older version of the paper here). The abstract reads,

In this essay, we review the basic economics of housing supply and the functioning of US housing markets to better understand the distribution of home prices, household wealth and the spatial distribution of people across markets. We employ a cost-based approach to gauge whether a housing market is delivering appropriately priced units. Specifically, we investigate whether market prices (roughly) equal the costs of producing the housing unit. If so, the market is well-functioning in the sense that it efficiently delivers housing units at their production cost. Of course, poorer households still may have very high housing cost burdens that society may wish to address via transfers. But if housing prices are above this cost in a given area, then the housing market is not functioning well – and housing is too expensive for all households in the market, not just for poorer ones. The gap between price and production cost can be understood as a regulatory tax, which might be efficiently incorporating the negative externalities of new production, but typical estimates find that the implicit tax is far higher than most reasonable estimates of those externalities.

The paper’s conclusions, while a bit technical for a lay audience, are worth highlighting:

When housing supply is highly regulated in a certain area, housing prices are higher and population growth is smaller relative to the level of demand. While most of America has experienced little growth in housing wealth over the past 30 years, the older, richer buyers in America’s most regulated areas have experienced significant increases in housing equity. The regulation of America’s most productive places seems to have led labor to locate in places where wages and prices are lower, reducing America’s overall economic output in the process.

Advocates of land use restrictions emphasize the negative externalities of building. Certainly, new construction can lead to more crowded schools and roads, and it is costly to create new infrastructure to lower congestion. Hence, the optimal tax on new building is positive, not zero. However, there is as yet no consensus about the overall welfare implications of heightened land use controls. Any model-based assessment inevitably relies on various assumptions about the different aspects of regulation and how they are valued in agents’ utility functions.

Empirical investigations of the local costs and benefits of restricting building generally conclude that the negative externalities are not nearly large enough to justify the costs of regulation. Adding the costs from substitute building in other markets generally strengthens this conclusion, as Glaeser and Kahn (2010) show that America restricts building more in places that have lower carbon emissions per household. If California’s restrictions induce more building in Texas and Arizona, then their net environmental could be negative in aggregate. If restrictions on building limit an efficient geographical reallocation of labor, then estimates based on local externalities would miss this effect, too.

If the welfare and output gains from reducing regulation of housing construction are large, then why don’t we see more policy interventions to permit more building in markets such as San Francisco? The great challenge facing attempts to loosen local housing restrictions is that existing homeowners do not want more affordable homes: they want the value of their asset to cost more, not less. They also may not like the idea that new housing will bring in more people, including those from different socio-economic groups.

There have been some attempts at the state level to soften severe local land use restrictions, but they have not been successful. Massachusetts is particularly instructive because it has used both top-down regulatory reform and incentives to encourage local building. Massachusetts Chapter 40B provides builders with a tool to bypass local rules. If developers are building enough formally-defined affordable units in unaffordable areas, they can bypass local zoning rules. Yet localities still are able to find tools to limit local construction, and the cost of providing price-controlled affordable units lowers the incentive for developers to build. It is difficult to assess the overall impact of 40B, especially since both builder and community often face incentives to avoid building “affordable” units. Standard game theoretic arguments suggest that 40B should never itself be used, but rather work primarily by changing the fallback option of the developer. Massachusetts has also tried to create stronger incentives for local building with Chapters 40R and 40S. These parts of their law allow for transfers to the localities themselves, so builders are not capturing all the benefits. Even so, the Boston market and other high cost areas in the state have not seen meaningful surges in new housing development.

This suggests that more fiscal resources will be needed to convince local residents to bear the costs arising from new development. On purely efficiency grounds, one could argue that the federal government provide sufficient resources, but the political economy of the median taxpayer in the nation effectively transferring resources to much wealthier residents of metropolitan areas like San Francisco seems challenging to say the least. However daunting the task, the potential benefits look to be large enough that economists and policymakers should keep trying to devise a workable policy intervention. (19-20)

Millennials and Luxury Housing


photo by Jeremy Levine

The Phoenix Business Journal quoted me in Avilla Homes Finds Millennial Niche in Luxury Rental Market (behind a paywall). It opens, 

As home ownership rates declined in the past decade, more and more people have opted to rent homes. This provided a niche market for young professionals: luxury rental home communities.
Arizona-based NexMetro Communities has developed Avilla Homes, which COO Josh Hartmann calls a “hybrid between single-family living and apartment living,” with communities in the Phoenix and Tucson areas, as well as recent expansion into Denver and Dallas suburbs.
Hartmann said the draw of Avilla Homes is it is a unique hybrid: providing the feel of living in your own house without the responsibilities of being a homeowner. It incorporates some aspects of apartment living, such as on-call maintenance, but focuses on the draw of living in a single-family home, such as four-walled individual units with one’s own yard space.
“I think (owning a home) is less of a draw for investment’s sakes and if you take that away, owning a home is a lot of work,” Hartmann said. “You have to be constantly fixing things. What the real draw of our product is that you don’t have to worry about all those things but you still get to live in a home.”
When the project first began in Tucson in 2011, the board of directors thought its main consumer would be people who lost their homes in the recession and were looking to rent. But the project ended up being a success with an unexpected demographic-the millennials.
Hartmann attributes millennials’ attitude toward homeownership and how they spend their money as a factor in the communities’ success. He estimates that about 65 percent of Avilla Homes’ customers are early in their career, between the ages of 25 and 34.
“I just think what they want to spend the dollars they make on is different than what my generation or the generation before me did,” Hartmann said.
David Reiss, a professor of law at Brooklyn Law School says lifestyle changes coupled with the recession caused many people to turn to renting. The nation’s home ownership was down to 63.7 percent in the first quarter of 2015 from about 69 percent in 2004, according to census data.
“Another piece of it is kind of long term trends: Household formation, student loans that millennials have, another thing is income and job security,” said Reiss. ” A lot of things people have in place before they want to be a homeowner are not in many households.”

Arizona’s “Unholy” Foreclosure Mess

Professor Dale Whitman posted a commentary about Steinberger v. McVey ex rel. County of Maricopa, 2014 WL 333575 (Ariz. Court of Appeals, Jan. 30, 2014) on the Dirt listserv:

A defaulting borrower may defend against foreclosure on ground that the chain of assignments of the deed of trust is defective, and also on a variety of other theories.

The residential mortgage loan in this case was originally made in 2005 to Steinberger’s 87-year-old father, who died two years later, leaving her the property. By 2008, she was having difficulty making the payments, and asked IndyMac FSB to consider a loan modification. She was advised that she must first default, and she did so. There followed a period of more than two years during which she was “jerked around” by IndyMac, with successive promises to consider a loan modification, the setting of (and then vacating of) foreclosure dates, and assertions by IndyMac that she had not properly submitted all of the paperwork required for a modification.

In November 2010 she filed an action seeking a declaratory judgment that IndyMac had no authority to foreclose on the house, and upon filing a $7,000 bond, she obtained a TRO against foreclosure. The following summarizes the theories on which she obtained a favorable result.

1. Lack of a proper chain of title to the deed of trust. The Court of Appeals seems to have assumed that no foreclosure would be permissible without the foreclosing party having a chain of assignments from the originator of the loan. If one accepts this assumption, IndyMac was in trouble. The first assignment, made in 2009, was from MERS, acting as nominee of IndyMac Bank, to IndyMac Federal FSB, but it was made before IndyMac Federal FSB even existed!

A second assignment was made in 2010 by IndyMac Federal FSB to DBNTC, the trustee of a securitized trust. But Steinberger alleged that by this date, IndyMac Federal FSB no longer existed, so this assignment was void as well. She also made the familiar allegation that this assignment was too late to comply with the 90-day transfer period required by the trust’s Pooling and Servicing Agreement, but the court did not pursue this theory.

The court’s opinion is significant for its treatment of Hogan v. Wash. Mut. Sav. Bank, the 2012 case in which the Arizona Supreme Court held that “Arizona’s non-judicial foreclosure statutes do not require the beneficiary [of a deed of trust] to prove its authority.² The Court of Appeals, in Steinberger, read this statement to mean that the beneficiary need not prove its authority unless the borrower alleges a lack of authority in her complaint. There was no such allegation in Hogan, but there was in Steinberger. Hence, the Court of Appeals concluded that Steinberger could contest IndyMac’s right to foreclose. And it felt that Steinberger’s allegations about the defects in the chain of title to the deed of trust, if proven, could constitute a successful attack on IndyMac’s authority to foreclose.

It’s important to realize what the Court of Appeals did not do. It did not disagree with Hogan’s holding that the beneficiary need not show possession of the promissory note in order to foreclose. Several commentators (including me) have criticized Hogan for this holding, but the Steinberger opinion leaves it intact. Indeed, in Steinberger, the borrower raised no issue as to whether IndyMac had the note, and seems to have conceded that it did. The discussion focuses on the legitimacy of the chain of title to the deed of trust, not on possession of the note.

Is the court correct that a valid chain of title to the deed of trust is necessary to foreclose under Arizona law? As a general proposition, one would think not. Arizona not only has adopted the common law rule that the mortgage follows the note, but even has a statute saying so: Ariz. Rev. Stat.§ 33 817:  “The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts.” So if the note is transferred, no separate assignment of the deed of trust would be needed at all. And a recent unreported Court of Appeals case, Varbel v. Bank of America Nat. Ass’n, 2013 WL 817290 (Ariz. App. 2013), quotes the Bankruptcy Court as reaching the same conclusion: In re Weisband, 427 B.R. 13, 22 (Bankr. D. Ariz. 2010) (“Arizona’s deed of trust statute does not require a beneficiary of a deed of trust to produce the underlying note (or its chain of assignment) in order to conduct a Trustee’s Sale.”).

By the way, that’s the rule with respect to mortgages in virtually every state. A chain of assignments, recorded or not, is completely unnecessary to proof of the right to foreclose. The power to foreclose comes from having the right to enforce the note, not from having a chain of assignments of the mortgage or deed of trust.

However, since Hogan has told us that no showing of holding the note is necessary in order to foreclose, what is necessary? It defies common sense to suppose that a party can foreclose a deed of trust in Arizona without at least alleging some connection to the original loan documents. If that allegation is not that one holds the note, perhaps it must be the allegation that one has a chain of assignments of the deed of trust. If this is true, then the opinion in Steinberger, written on the assumption that the assignments must be valid ones, makes sense.

The ultimate problem here is the weakness of the foreclosure statute itself. Ariz. Stat. 33-807 provides, “The beneficiary or trustee shall constitute the proper and complete party plaintiff in any action to foreclose a deed of trust.” Fine, but when the loan has been sold on the secondary market, who is the “beneficiary?” The statute simply doesn’t say. The normal answer would be the party to whom the right to enforce the note has been transferred, but Hogan seems to have deprived us of that answer. An alternative answer (though one that forces us to disregard the theory that the mortgage follows the note) is to say that the “beneficiary” is now the party to whom the deed of trust has been assigned. But the Arizona courts don’t seem to be willing to come out and say that forthrightly, either. Instead, as in the Steinberger opinion, it’s an unstated assumption.

As Wilson Freyermuth put it, after graciously reading an earlier version of this comment, “The Steinberger court couldn’t accept the fact that a lender could literally foreclose with no connection to the loan documents — so if Hogan says the note is irrelevant, well then it has to be the deed of trust (which would presumably then require proof of a chain of assignments).  It’s totally backwards — right through the looking glass.  And totally inconsistent with Ariz. Stat. 33-817.”

To say that this is an unsatisfactory situation is an understatement; it’s an unholy mess. The statute was written with no recognition that any such thing as the secondary mortgage market exists, and the Arizona courts have utterly failed to reinterpret the statute in a way that makes sense. It’s sad, indeed.

There are a number of other theories in the Steinberger opinion on which the borrower prevailed. Some of these are quite striking, and should give a good deal of comfort to foreclosure defense counsel. In quick summary form, they are:

2. The tort of negligent performance of an undertaking (the “Good Samaritan” tort). This applies, apparently, to IndyMac’s incompetent and vacillating administration of its loan modification program.

3. Negligence per se, in IndyMac’s recording of defective assignments of the deed of trust in violation of the Arizona statute criminalizing the recording of a false or forged legal instrument.

4. Breach of contract, in IndyMac’s failure to follow the procedures set out in the deed of trust in pursuing its foreclosure.

5. Procedural unconscionability, in IndyMac’s making the original loan to her elderly father without explaining its unusual and onerous terms, particularly in light of his failing mental health.

6. Substantive unconscionability, based on the terms of the loan itself. It was an ARM with an initial interest rate of 1%, but which could be (and apparently was) adjusted upward in each succeeding month. This resulted in an initial period of negative amortization, and once the amortization cap was reached, a large and rapid increase in monthly payments. At the same time, some of Steinberger’s other theories were rejected, including an argument that, because IndyMac had intentionally destroyed the note, it had cancelled the debt. The court concluded that, in the absence of proof of intent to cancel the debt, it remained collectible.



Reiss on Predatory Online Lending

E-Commerce Times quoted me in CFPB Suit Targets Predatory Online Lending Practices. It reads in part:

The Consumer Finance Protection Bureau this week put online finance companies on notice that it will not overlook them merely because they operate in cyberspace. Specifically, the bureau sued CashCall for collecting money consumers allegedly did not owe.  In its suit, the bureau charged that CashCall and its affiliates engaged in unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void.

CashCall and the associated companies are reportedly owned by J. Paul Reddam, a race-horse owner and philosophy professor-turned-businessman.

The Background

Beginning in late 2009, CashCall and its subsidiary, WS Funding, entered into an arrangement with online lender Western Sky Financial, according to the CFPB. Western Sky Financial has asserted that the laws in the state in which it is based — South Dakota — did not apply to it because it was based on an Indian reservation and owned by a member of the Cheyenne River Sioux Tribe.

The CFPB maintains Western Sky still must comply with state laws when it makes loans over the Internet to people in other states.

The loans ranged from US$850 to $10,000 and came with upfront fees, lengthy repayment terms and annual interest rates from nearly 90 percent to 343 percent, the CFPB said. Many of the loan agreements allowed payments to be debited directly from the borrower’s bank account.

By September 2013, Western Sky had become the subject of several states’ investigations and court actions, and it began to shut down its business. CashCall and its collection agency, Delbert Services, continued to take monthly installment payments from consumers’ bank accounts or otherwise sought to collect money from borrowers.

After its own investigation, the bureau concluded that the high-cost loans violated either licensing requirements or interest-rate caps, or both, in Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina, meaning the consumers did not owe that money that was being collected.

As part of its suit, the CFPB is seeking monetary relief, damages, and civil penalties.

The CFPB did not respond to our request for further details.

*     *     *

‘Particularly Weak’


While there might not be much controversy over the CFPB’s suit against an online lender, CashCall is certainly defending itself using other arguments.

Clearly, the action falls within the CFPB’s broad mission of protecting consumers from predatory behaviors in the financial services industry, asserted David Reiss, a professor of Law at Brooklyn Law School.

However, CashCall’s attorneys, Neil Barofsky and Katya Jestin, have said that the CFPB does not have a mandate to impose rate caps.

“Of all of CashCall’s arguments, this one seems particularly weak,” Reiss concluded, “as the CFPB is just seeking to enforce existing state laws that have been allegedly violated across the country.”

NJF and UCC and Contract Law, Oh My!

Parsing how a court should approach a particular deed of trust foreclosure case can put you to sleep faster than crossing the poppy fields next to the yellow brick road.  Does the Non-Judicial Foreclosure (NJF) statute govern? Does the state’s Uniform Commercial Code (UCC) govern? Does the contract terms of the deed of trust itself govern? Or, more likely, do all three govern? And, if so, how do they interact with each other?

Brad Borden and I have recently noted that while

“show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  [T]he courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

Zadrozny v. Bank of New York Mellon, No. 11-16597 (June 28, 2013), a recent 9th Circuit case demonstrates the problem of an incomplete analysis in an Arizona non-judicial foreclosure case.  The Court notes that

The PEB [Permanent Editorial Board] Report [] clarifies:

the UCC does not resolve all issues in this field. Most particularly, the enforcement of real estate mortgages by foreclosure is primarily the province of a state’s real property law (although determinations made pursuant to the UCC are typically relevant under that law).

Given the PEB Report’s recognition that state law is typically controlling on foreclosure issues, the Zadroznys are unable to allege a cause of action premised on the PEB Report . . ..(14-15, citation omitted)

This is confusing in a few ways.  First, the UCC is state law, adopted with variants by all of the states’ legislatures.  What the PEB is calling for is for courts to apply state UCC law as appropriate.

Second, state foreclosure law does not “control” foreclosure issues in some inchoate and expansive way. It governs it to the extent that it governs it and not one bit more. So if state UCC law governs one facet of a foreclosure case, it is not trumped by the states’ foreclosure law. Or if the terms of the deed of trust were to govern, it would not be trumped by the foreclosure law either (so long as it did not violate it).

Finally, it is just plain weird to say that the Zadroznys would have a “cause of action premised on the PEB report.” How would that work?!?  The PEB report is merely an interpretation of general UCC principles. The Court should be asking how the Arizona UCC applies to this case.

I am not saying that the Court reached the wrong result under Arizona law in this regard, but the Court’s incomplete analysis offers no clarity to litigants, no more than the Wizard of Oz offered real solutions to his supplicants’ pleas. But judges decide the cases, not me and not you . . ..