Tag Archives: Brooklyn Law School

Reiss on Homes as Investments

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US News and World Report quoted me in Is Your Home a Sound Investment? It reads in part,

Whether it’s beautiful new construction or a rehabbed fixer-upper, the place we call home demands time, attention and upkeep over the years. All this can enhance its value, and to be sure, Rich Arzaga inhabits a fabulous residence in San Ramon, California. The founder and CEO of Cornerstone Wealth Management estimates that its value approaches $1.9 million. The 5,400 square-foot abode boasts a swimming pool and a built-in barbecue, and has undergone more than a half-million dollars in improvements since he purchased it in 2005.

He considers the money well-spent: But does his home a double as a sound financial investment? As much as Arzaga loves his lodgings, he’d also argue that homeownership doesn’t translate into a smart addition to his portfolio – or anyone else’s, for that matter.

“We have seen many scenarios where a family would be much better off today, and in the future, renting,” Arzaga says. “Most people who insist that owning is a great investment are purely emotional on the matter and have not done any serious overall calculation. They are blinded by a feeling.”

Arzaga says he’s got the statistical analyses to back up his assertions. Yet expert opinion varies greatly as to whether a home represents a great investment. No single answer reflects a one-size-fits-all scenario any more than a cute brick bungalow resembles a sprawling suburban mansion.

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Still, others pit themselves on both sides of the debate over the value of homeownership from an investment angle. “My view is that a home is not an investment, but it can certainly be a profitable noninvestment,” says David Reiss, a professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Reiss maintains that the notion of “value” should revolve around financially intangible factors, although certainly, those could increase a home’s value over time. “Are there good schools and playgrounds for your kids? Is it near your job and your social network? If the answer is no, that’s a good reason to pass on a house that seems like a good deal,” he says.

Reiss on FHA Mortgages for First Timers

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MainStreet quoted me in FHA Loans Can Be A Good Option for First-Time Homebuyers. It opens,

FHA loans can be an attractive option for consumers purchasing their first home, because they require much smaller down payments.

First-time homebuyers often consider these Federal Housing Administration loans, because they do not require a large down payment or high FICO scores unlike traditional 30-year fixed mortgages. Given that young households tend not to have the savings for a substantial down payment, they can be an attractive option, David Reiss, a law professor at Brooklyn Law School.

Because FHA loans are mortgages insured by the Federal Housing Administration, this guarantee reduces the risk of “loss of principal for lenders, which is advantageous for borrowers,” said Joseph Cahoon, director of the Folsom Institute for Real Estate at Southern Methodist University’s Cox School of Business School in Dallas.

This results in some consumers being able to put down as little as 3.5% for a down payment towards the purchase of a new home. For many first-time Millennial homebuyers, the prospect of saving 20% for a standard down payment has been challenging during the past several years because of a combination of low growth in wages and high student loan debt.

“For those borrowers with good credit, FHA insured loans offer a good pathway to home ownership, he said.

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“Homebuyers should compare all of their options before going with an FHA mortgage,” Reiss said.

Reiss on Mortgage Lingo

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MainStreet.com quoted me in 10 Terms of Mortgage Industry Lingo for Potential Homeowners to Learn. It reads, in part,

The mortgage industry is no different from the rest of the financial or tech world and is fraught with odd terminology, tons of acronyms and other confusing jargon.

While it appears to be a great deal of inaccessible blather, learning what these terms really mean can save homeowners thousands of dollars as they are negotiating the terms of their mortgage.

Unpacking the lingo is the first step as you sink your hard-earned money into a house for the next 30 years. Pretty soon you can banter about points and closings just like the rest of the experts.

Here are ten terms that we demystify as you prepare you as you embark on one of the largest commitments in your lifetime.

Freddie Mac, Fannie Mae and Ginnie Mae – Is There a Family Connection?

Just who exactly are Freddie Mac and Fannie Mae? What about Ginnie Mae? This trio was created by the federal government to support a national market for mortgage credit, said David Reiss, a law professor at Brooklyn Law School in New York. None of these entities interacts directly with homebuyers. Instead, all have the goal to make it easier for mortgage lenders to sell mortgages to investors by promising “those in mortgage-backed securities that they will receive their payments of interest and principal in a timely manner in case borrowers default on their payments,” he said.

After a wave of foreclosures following the Great Depression, Ginnie Mae was created by the government to support affordable housing in the U.S. Now it provides funding for all government-insured or government-guaranteed mortgage loans.

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Points

Real estate brokers and mortgage lenders discuss points quite often, especially as you get closer to finalizing the terms of your mortgage, since they are negotiable. This refers to the percentage points of the loan amount that a lender charges to a borrower for a loan, Reiss said. For instance, if a lender charges 1 point on a $200,000 loan, the borrower will owe an additional $2,000 to the lender at the time the loan is closed.

Foreclosures and the Fair Debt Collection Practices Act

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Bloomberg BNA quoted me in Third Circuit Says Foreclosure Complaint May Serve as Basis for Claims Under FDCPA (behind a paywall). The article opens,

A foreclosure complaint may form the basis of a Fair Debt Collection Practices Act (FDCPA) claim, the U.S. Court of Appeals for the Third Circuit held, saying foreclosure meets the broad definition of “debt collection” under the statute (Kaymark v. Bank of Am. N.A., 2015 BL 97853, 3d Cir., No. 14-cv-01816, 4/7/15).

Dale Kaymark filed a class suit against Bank of America and Udren Law Offices, P.C., a Cherry Hill, N.J., law firm, including in its claims an allegation that Udren violated the FDCPA by listing in a foreclosure complaint not-yet-incurred fees as due and owing.

Kaymark also said the firm violated the statute by trying to collect fees not authorized by the mortgage agreement.

A district court dismissed those and other claims by Kaymark, but the Third Circuit reversed April 7, allowing all but one of his FDCPA claims against Udren.

According to the court, a 2014 Third Circuit ruling on debt collection letters also applies to foreclosure complaints.

“We conclude that a communication cannot be uniquely exempted from the FDCPA because it is a formal pleading or, in particular, a complaint,” Judge D. Michael Fisher said. “This principle is widely accepted by our sister Circuits,” he said.

Wide Impact Seen

Udren Law Offices did not immediately respond to a request for comment on the case. In separate briefs filed in August 2014 and December 2014, lawyers for the firm predicted that application of the FDCPA to foreclosure complaints might allow any state foreclosure action to spark an FDCPA suit, with ill effects for legal practice.

A Bank of America spokeswoman April 8 declined to comment on the ruling. The FDCPA claim was directed only at the law firm, not the bank. Lawyers for Kaymark also did not immediately respond to a request for comment.

Brooklyn Law School Professor David Reiss, the Research Director of the Center for Urban Business Entrepreneurship, said the decision highlights increased judicial sensitivity in some areas of the law.

“It’s a well-reasoned ruling that clarifies application of the statute in the foreclosure context and that will affect contacts that lawyers have with alleged debtors,” said Reiss, who maintains a real estate finance blog. “In terms of practical effects, it won’t necessarily mean thousands of new lawsuits, but it does mean that lawyers will have to be very careful about how they communicate fees and estimates. It’s going to mean, to some extent, a cleaning-up of informal practices in the foreclosure bar, such as treating not-yet-accrued costs as accrued costs,” Reiss told Bloomberg BNA.

A Call to ARMs

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MainStreet.com quoted me in A Call to ARMs As Homeowners Opt for Lower Interest Rates. It opens,

Some homeowners are choosing adjustable rate mortgages instead of the traditional 30-year mortgages to take advantage of lower interest rates for several years.

The biggest benefit of an ARM is that they have lower interest rates than the more common 30-year fixed rate mortgage. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, said David Reiss, a law professor at Brooklyn Law School. The new rate is based on an index, perhaps LIBOR, as well as a margin on top of that index.

The main disadvantage is that the rate is not fixed for as long as the interest rate of a 30-year fixed rate mortgage, but younger homeowners may not consider that a negative factor.

Younger Owners Should Consider ARMs

While many homeowners gravitate toward a 30-year mortgage, younger owners “should seriously consider getting an ARM if they think that they might move sooner rather than later,” he said. If you are single and buying a one-bedroom condo, it is likely you could enter into a long-term relationship and have kids.

The 30-year fixed mortgage rate is 3.50% as of April 7 while a 5/1 ARM is 2.83% as of April 7, according to Bankrate’s national survey of large lenders.

While ARMs expose the borrower to rising interest rates, they typically come with some protection. Interest rates often cannot rise more than a certain amount from year to year, and there is also typically a cap in the increase of interest rates over the life of the loan, said Reiss. During the height of the housing boom, lenders were originating 1/1 ARMs that reset after the first year, but now they reset frequently after the fifth and seventh year.

An ARM might have a two-point cap for one-year increases; that means, an introductory rate of 4% could only increase to 6% tops in the sixth year of a 5/1 ARM, Reiss said. That ARM might have a six-point cap over the life of the loan, which means a 4% introductory rate can go to no higher than 10% over the life of the loan.

Reiss on Foreign Buyers in NYC

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MainStreet.com quoted me in Foreign Buyers Driving Up Rental Prices Impacts New York Residents. The story opens,

Emir Bahadir, a native of Turkey, purchased two apartments in Manhattan for the purpose of renting them out. The 24-year-old paid a total of $9 million for the apartments in the West Village and Chelsea and earns some $40,000 a month in rental income.

”Entry into the real estate market in Manhattan by the foreign buyer has become easier because of technology,” Bahadir told MainStreet.

As a result, foreign buyers are increasingly coming into the Manhattan market and buying properties worth $2 to $5 million for the benefit of rental income. That can push rental prices higher for those on Main Street.

“[Foreign buyers] are not keeping them empty but filling them with tenants,” said Tamir Shemesh, a Realtor at the Corcoran Group. “A $2 million apartment can be rented out for as much as $8,500 a month, while a $3 million apartment can go for $11,000 to $12,000 a month.”

The tenants who can afford to pay thousands a month in rent are largely foreign as well.

“The reason we invest in real estate in New York is because of the exorbitant amount of rent that people are willing to pay,” Bahadir said. “That doesn’t happen anywhere else except in the U.K., but because of complications in the Middle East, London is not so popular these days.”

The downside for Americans is that escalating prices impact the overall rental market.

“It lets landlords know what the ceiling is and may encourage them to reach for it,” said David Reiss, professor with Brooklyn Law School.

Reiss on Toxic Debt Claims

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Bloomberg quoted me in Nomura First to Fight U.S. Toxic Debt Claims at Trial. The article reads in part,

Nomura Holdings Inc. will defend claims by a U.S. regulator that it sold defective mortgage-backed securities to Fannie Mae and Freddie Mac before the 2008 financial crisis, becoming the first bank to take such a case to trial.

The Federal Housing Finance Agency, suing on behalf of the two government-owned companies, claims Nomura sold them $2 billion of bonds backed by faulty mortgages. The agency seeks more than $1 billion in damages in the trial, which is set to start Monday in Manhattan federal court.

Nomura, the Tokyo-based investment bank, is choosing to fight claims that 16 other banks settled after the blow-up of toxic mortgage bonds led to the global credit crunch. FHFA has reached $17.9 billion in settlements from banks including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs & Co. If Nomura prevails at trial, it may embolden other firms facing mortgage-related suits to defend themselves rather than settle.

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For Nomura and RBS to succeed, they will have to overcome Cote’s rulings as well as the widely held perception that banks packaged toxic debt and pushed it off on unsuspecting investors, said David Reiss, a professor at Brooklyn Law School.

Reiss said Nomura may believe it can show it was more careful than other banks in structuring mortgage-backed bonds and stands a good chance of winning.

As the trial approaches, a settlement becomes less likely, Bloomberg Intelligence analysts Elliott Stein and Alison Williams said yesterday. Stein said a resolution this late in the proceedings may exceed his earlier estimate of $100 million to $300 million, particularly if Cote’s rulings continue to favor FHFA.