Tag Archives: Brooklyn Law School

The Housing Market Under Trump

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TheStreet.com quoted me in Interest Rates Likely to Rise Under Trump, Could Affect Confidence of Homebuyers. It opens,

Interest rates should increase gradually during the next four years under a Donald Trump administration, which could dampen growth in the housing industry, economists and housing experts predict.

The 10-year Treasury rose over the 2% threshold on Wednesday for the first time in several months, driving mortgage rates higher with the 30-year conventional rate rising to 3.73% according to Bankrate.com. Mortgage pricing is tied to the 10-year Treasury.

Housing demand will remain flat with a rise in interest rates as many first-time homebuyers will be saddled with more debt, said Peter Nigro, a finance professor at Bryant University in Smithfield, R.I.

“With first-time homebuyers more in debt due to student loans, I don’t expect much growth in home purchasing,” he said.

Interest rates will also be affected by the size of the fiscal stimulus since additional infrastructure spending and associated debt “could push interest rates up through the issuance of more government debt,” Nigro said.

Even if interest rates spike in the next year, banks will not benefit, because there is a lack of demand, said Peter Borish, chief strategist with Quad Group, a New York-based financial firm. The economy is slowing down, and consumers have already borrowed money at very “cheap” interest rates, he said.

The policies set forth by a Trump administration will lead to contractionary results and will not spur additional growth in the housing market.

“I prefer to listen to the markets,” Borish said. “This will put downward pressure on the prices in the market. Everyone complained about Dodd-Frank, but why is JPMorgan Chase’s stock at all time highs?”

An interest rate increase could still occur in December, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. With nearly five weeks before the December Federal Open Market Committee (FOMC) meeting, the market can contemplate the potential outcomes.

“While the market is now indicating a reduced probability of a short-term rate hike at that meeting, the Fed has repeatedly indicated that they would be data-driven in their decision,” he said in a written statement. “If the markets calm down and November employment data look solid on December 2, a rate hike could still happen. The market moves yesterday are already indicating that financial markets are pondering that the Trump effect could be positive for the economy.

“The Fed is likely to start increasing the federal funds rate at a “much faster pace starting next year,” said K.C. Sanjay, chief economist for Axiometrics, a Dallas-based apartment market and student housing research firm. “This will cause single-family mortgage rates to increase slightly, however they will remain well below the long-term average.”

Since Trump has remained mum on many topics, including housing, predicting a short-term outlook is challenging. One key factor is the future of Fannie Mae and Freddie Mac, who are the main players in the mortgage market, because they own or guarantee over $4 trillion in mortgages, remain in conservatorship and “play a critical role in keeping mortgage rates down through the now explicit subsidy or government backing which allows them to raise funds more cheaply,” Nigro said.

It is unlikely any changes will occur with them, because “Trump has not articulated a plan to deal with them and coming up with a plan to deal with these giants is unlikely,” he said.

Trump could attempt to take on government sponsored enterprises such as Fannie Mae and Freddie Mac, said Ralph McLaughlin, chief economist for Trulia, a San Francisco-based real estate website.

“If he does, it’s going to be a hairy endeavor for him, because he’ll need bipartisan support to do so,” he said.

Since he has alluded to ending government conservatorship and allowing government sponsored enterprises to “recapitalize by allowing retention of their own profits instead of passing them on to the Treasury,” the result is that banks could have their liquidity and lending activity increase, which could help boost demand for homes, McLaughlin said.

“We caution President-elect Trump that he would also need to simultaneously help address housing supply, which has been at a low point over the past few years,” he said. “The difficulty for him is that most of the impediments to new housing supply rest and the state and local levels, not the federal.”

Even on Trump’s campaign website, there is “next to nothing” about his ideas on housing, said David Reiss, a law professor at the Brooklyn Law School in New York. The platform of the Republican Party and Vice President-elect Mike Pence could mean that the federal government will have a smaller footprint in the mortgage market.

“There will be a reduction in the federal government’s guaranty of mortgages, and this will likely increase the interest rates charged on mortgages, but will reduce the likelihood of taxpayer bailouts,” he said. “Fannie and Freddie will likely have fewer ties to the federal government and the FHA is likely to be limited to the lower end of the mortgage market.”

Miami Vice?

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by Roberlan Borges

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.

The BNA Banking Report quoted me in BofA, Wells Fargo Try to Squelch High-Risk City Bias Suits (behind a paywall). It opens,

Bank of America and Wells Fargo are hoping an Election-Day U.S. Supreme Court argument will help them sidestep allegations of biased lending practices and the massive liability that could follow (Bank of Am. Corp. v. Miami, U.S., No. 15-cv-01111, argument scheduled 11/8/16).

At issue is a 2015 federal appeals court ruling that reinstated a Fair Housing Act lawsuit by the city of Miami. The suit said Bank of America and Wells Fargo made discriminatory home loans that spurred widespread foreclosures while driving tax revenues down and city expenditures skyward.

The U.S. Supreme Court is set to hear arguments Nov. 8, with a focus on two questions – whether Miami has the right to assert such claims, and whether it can establish the critical “causal link” by tracing its problems to actions by the banks.

The case is high on the “must-watch” list of banks and consumer advocates. The court’s decision will affect a series of separate lawsuits against Bank of America and Wells Fargo by other cities that are now on hold and awaiting a decision in this case, as well as lawsuits against JPMorgan, Citigroup, and HSBC.

“There are suits all over the country raising these issues,” said Karen McDonald Henning, associate professor at the University of Detroit Mercy School of Law. “The potential exposure to banks could be enormous.”

The case also could clarify how the law is applied to address societal wrongs, Henning added in an assessment echoed by Mehrsa Baradaran, associate professor of law at the University of Georgia School of Law in Athens, Ga.

“This could really give the Fair Housing Act some teeth to do away with problems it was meant to remedy,” she said.

Fair Housing Act

According to Miami, Bank of America and Wells Fargo violated the Fair Housing Act in two ways. The city said the banks intentionally discriminated against minority borrowers by targeting them for loans with burdensome terms.

Miami also said the banks’ practices had a disparate impact on minority borrowers that resulted in a disproportionate number of foreclosures and exploitive loans in minority neighborhoods.

Bank of America did not immediately respond to a request for comment ahead of the argument. Wells Fargo spokesman Tom Goyda declined to comment.

Both banks have consistently defended their lending practices, citing efforts to boost community development and trying in some cases to take what Wells Fargo has called “a collaborative approach” when it comes to disputes.

But both banks say the lawsuits are off-base as a matter of law. In its petition to the U.S. Supreme Court in June, Bank of America said the plaintiffs are making demands “based on a multi-step theory of causation that would have made Rube Goldberg proud.”

Risk Goes Local

Even so, if Miami’s suit is allowed to go forward, it could expose global financial institutions to liability from local governments across the nation, said Professor David Reiss of Brooklyn Law School in New York.

That’s new, he said. Although the federal government and state attorneys general have reached multi-billion settlements with banks in the wake of the financial crisis, local governments haven’t had much of a role in those battles, Reiss told Bloomberg BNA.

But if Miami’s suit goes ahead, mortgage lenders could face significant litigation costs and monetary judgments under new theories of liability. “These new theories are independent of the theories relied upon by the federal government and the states and could therefore expand the overall liability of financial institutions from the same underlying set of facts,” Reiss said.

Are Month-to-Month Rentals Good Deals?

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Zillow.com quoted me in Are Month-to-Month Rentals Good for Landlords? It opens,

Your tenant’s lease is up, and they ask about switching to a month-to-month arrangement. Assuming they’re a good tenant — they pay rent on time, keep the place clean, don’t host loud parties — you might be tempted to accommodate the request. But before you do, be sure to understand the relevant landlord-tenant laws.

The Appeal Of Month-To-Month Renting

From the tenant’’ perspective, the benefit of month-to-month renting — also known as tenancy at will — is its flexibility compared to a standard long-term lease. Whether they’re pursuing out-of-town job opportunities, considering relocation to a different neighborhood or just thinking about moving up to a more spacious abode, the elasticity of month-to-month renting is appealing to a potentially footloose tenant.

From your point of view as a landlord, the appeal centers on cash flow and convenience — of not having the property stand vacant while you hassle with finding a new renter. In addition, a month-to-month rental can give you some added flexibility, too.

The Terms Of The Original Lease Generally Remain In Effect

There is no overarching federal law regarding tenancy at will; the rules are typically state-specific. Or, as Matthew Kreitzer an attorney with Booth and McCarthy in Winchester, Virginia, notes, “Tenancy-at-will is largely a creature of local law.” If and when there is no formal written agreement in place, local case law usually comes into play to fill the gap, he explains.

Michael Vraa, managing attorney at HOME Line, a tenant hotline based in Minnesota, says that in his state, as well as many others, the terms of the initial rental agreement carry forward into the month-to-month rental period.

Assuming rent is paid on a monthly basis, “unless the lease has some provision that describes what would happen if a new lease is not agreed to, the law would default to the notion that the agreement becomes month to month,” says Vraa. “If the lease ends July 31 and the tenant pays the next month’s rent (August), and the landlord accepts it, the agreement probably shifts to a month-to-month agreement.”

Tom Simeone, attorney at Simeone and Miller in Washington, D.C., adds that even a verbal contract or agreement to carry forth on a month-to-month basis is legally enforceable in most states. “If the parties previously had a written lease that expired, those terms will remain in effect in the tenancy at will. If not, the court will enforce what it finds to be the parties’ intentions and fill in any contract terms with what it deems to be reasonable,” Simeone says.

As Vraa noted, landlords sometimes include provisions in the original lease describing what can or will happen if a new lease is not agreed to at the end of the set term. Some management companies, for example, include a statement in the original lease saying the landlord or management company can or will raise the rent if a new lease is not signed. This may be by a certain dollar amount, such as “increased by $50 per month,” or by a specified percentage rate, as in “up to 5 percent per month.”

Rules About Tenant Privacy And Intent To Vacate Still Apply

Vraa and Simeone say that, generally, the rules regarding a tenant’s right to privacy are the same under tenancy at will as under a lease. Thus the amount of notice you have to give a tenant before entering their premises remains the same — typically 24 hours, as dictated by law in many states.

In regard to the notice required for intent to vacate, Simeone says this, too, is determined by the original lease. “If not,” he adds, “a court will likely require the lease to be month to month, especially if rent is paid on a monthly basis, which is typical. If so, thirty days’ notice is required to terminate — by either [the] landlord or tenant.”

However, Vraa says, in a month-to-month rental term, neither the landlord nor tenant are required to provide a specific reason for discontinuing the contract. That means you can give the tenant a notice to vacate the property, regardless of whether you plan to sell the property, rent to someone else, or simply do not wish to continue leasing to that specific tenant. But David Reiss, professor at Brooklyn Law School, notes, “The big risk, for both parties, is that the other party wants to terminate [the tenancy] at a time that is inconvenient for the other party. In that case, the parties can agree to a longer term (a year-to-year lease or one for a specific term of years).”

Reiss also stresses that although most state laws regarding tenancy at will derive from common law, “each jurisdiction may have variations from these common law principles that result from court decisions or statute. For instance, the meaning of one month’s notice to terminate a month-to-month lease can have small, but legally significant variations among jurisdictions.”

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.

Clintons’ October Permitting Surprise

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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.”

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.

Mortgages from the Shadows

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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.

Should Seniors Pay Off Their Mortgages?

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photo by Andreas Lehner

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.”

 

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.

High Times for New REIT

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Realtor.com quoted me in Could This Marijuana REIT Make Millions, or Are They Just High? It opens,

Investing in real estate just got waaay more interesting, dudes! That’s because amid all that stuffy stock-market buzz, a wacky new REIT (real estate investment trust) has just gone public—and it’s the first in the country to focus on funding marijuana growers.

REITs, for you rookies out there, are funds that specialize in real estate. So, they use their investors’ money to build shopping malls, hotels, and condo complexes with the hope that their value will rise over time. This new pot-friendly REIT, owned by San Diego investment firm Innovative Industrial Properties (IIP), works exactly the same way, only by investing in facilities that grow, store, and distribute cannabis.

Granted, IIP is concentrating exclusively on medicinal marijuana facilities—so no one’s getting high for fun off investor money.

Nonetheless, this REIT could provide a much-needed infusion of capital for marijuana growers. Currently, although cannabis is legal for medicinal purposes in 24 states and for recreational use in four (which could rise to nine after Election Day), under federal law, marijuana is still illegal—and that keeps most banks from loaning these companies money.

REITs, however, aren’t bound by the same strict principles as big banks. So, IIP can shower ganja growers with cash—and could stand to make huge piles of money for its investors, right?

It could … but this whole scheme could also implode in a funky cloud of smoke.

“With limited information due to the newness of cannabis legalization, there’s not much of a track record or history to determine a cannabis REIT’s future performance,” says real estate and economic advisor Jack McCabe of McCabe Research & Consulting. McCabe also concedes that he hasn’t scrutinized this particular firm’s investment criteria, methodology, or fees.

“The early results show a new and flourishing industry,” McCabe says. “My opinion is that marijuana REITs and investors could see triple-digit profits and growth that could be historic and surpass profits generated by most all established industries.”

Whoa, triple-digit returns! That’s pretty impressive performance for any investment.

“A typical REIT is viewed as a fixed-income vehicle that competes with bonds,” says Paul Habibi, a real estate entrepreneur and professor at UCLA. “The range of REIT dividends are in the mid-single digits, like 5% to 6%.”

But there’s another caveat: No one knows how the federal government might decide to deal with semilegal cannabis down the road.

“Given medical-use marijuana is illegal under federal law, how could that play out with federal regulation of IIP?” points out David Reiss, a professor of Law at Brooklyn [Law School] and editor of REFinBlog.com.

The IIP (which could not comment), admits that much is still unknown in one of its SEC filings:

“Although the federal government currently has a relaxed enforcement position as it relates to states that have legalized medical-use cannabis, it remains illegal under federal law, and therefore, strict enforcement of federal laws regarding medical-use cannabis would likely result in our inability and the inability of our tenants to execute our respective business plans.”