Tag Archives: debt

Foreign Funding for Real Estate Projects

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Jeanne Calderon and Gary Friedland have posted A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects. The paper provides a great overview of a relatively new source of funding for real estate deals. The introduction opens,

From an immigrant’s perspective, the EB-5 Immigrant Investor Program (“EB-5” or the “Program”) represents merely one of several paths to obtain a visa.  The EB-5 visa is based on the immigrant’s investment of capital in a business that creates new jobs. However, from a real estate developer’s perspective, the immigrant’s investment to qualify for the visa creates an alternative capital source for the developer’s project (“EB-5 capital” or “EB-5 financing”).

Despite the Program’s enactment by Congress in 1990, for many years EB-5 was not a common path followed by immigrants to seek a visa. However, when the traditional capital markets evaporated during the Great Recession, developers’ demand for alternate capital sources rejuvenated the Program. Since 2008, the number of EB-5 visas sought, and hence the use of EB-5 capital, has skyrocketed. EB-5 capital has become a capital source providing extraordinary flexibility and attractive terms, especially to finance commercial real estate projects. Consequently, many developers routinely consider EB-5 capital as a potential source to fill a major space in the capital stack. As the financing tool becomes more widely known and understood, this source of capital should become even more popular.

The EB-5 investor’s motivation for making the investment accounts for the relative flexibility and favorable terms afforded by EB-5 capital compared to conventional capital sources. Unlike that of the conventional capital providers (such as banks, private equity funds, REITs, life insurance companies and pension funds), the EB-5 investor’s reason for making the investment is to secure a visa. Thus, his primary objective at the time of making the investment is to satisfy the EB-5 visa requirements. Consequently, so long as the investor believes that the investment will qualify for the visa and result in the safe return of his capital, he is willing to accept a below market, if not minimal, return on the investment. Furthermore, the investor might not require some of the other protections that more sophisticated, conventional real estate investors typically seek.

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Simply stated, the Program requires that the immigrant make a capital investment of $500,000 or $1,000,000 (depending on whether the project is located in a “Targeted Employment Area”) in a business located within the United States. The business must directly create 10 new, full-time jobs per investor. Thus, the number of jobs that a project will create is a key determinant of the amount of the potential EB-5 capital raise. (3-4)

This once exotic funding technique is now becoming quite mainstream. Of interest to some readers of this blog, the paper describes at various points how EB-5 funds have been used in residential projects. The paper is a useful introduction for those who want to know more about this program.

Reiss on Being Financially Overextended

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US News & World Report quoted me in 5 Signs You’re Financially Overextended. It reads in part,

 Are you managing your debt? Or is it managing you? If you’re stuck in a money quicksand trap, you may not even realize at first that you’re in a financial predicament, especially if you’re sinking slowly and have been poorly managing your cash for a long time.

But if you suspect your debt is a disaster in the making, there’s no need to wait and see if your financial life will someday implode. If you’re pushing your finances to the limit, the signs are already there that you’re overextended. Just look for them. And if you spot one, don’t ignore it. Here are five of the biggest clues that trouble is coming.

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5. You’ve created opportunities that could make you overextended. If you have a lot credit cards or lines of credit you rarely use, you could, in theory, end up spending a lot of money and getting yourself into trouble that way, but having those lines open isn’t itself a bad sign. It’s a sign that you have good credit, and your creditors trust you. Still, it’s good to remember that if you aren’t monitoring yourself, you could ultimately max out and find yourself buried in credit card debt.

At least in that scenario, you have control over what may or may not happen. Some homeowners, however, put themselves at risk for becoming overextended when they get an adjustable rate mortgage or a home equity line of credit in which the interest rate “may float with some kind of index like the prime rate or [London Interbank Offered Rate],” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School in Brooklyn, New York.

“So if interest rates rise dramatically, the home equity line of credit can become unaffordable,” he says. “Interest rates have been very low for some time, so homeowners are not focusing on this risk, but if they were to rise – and they can rise suddenly – homeowners may face a rude awakening.”

In which case, you may want to refinance and position yourself to avoid becoming financially overextended if the interest rates someday jump. Because what happens to anything when it’s stretched beyond its limits? It – or you – will snap.

Hockett on NYC Eminent Domain

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Bob Hockett has posted ‘We Don’t Follow, We Lead’: How New York City Will Save Mortgage Loans by Condemning Them to SSRN. The abstract reads,

This brief invited essay lays out in summary form the eminent domain plan for securitized underwater mortgage loans that the author has been advocating and helping to implement for some years now. It does so with particular attention in this case to New York City, which is now actively considering the plan. The essay’s first part addresses the plan’s necessity. Its second part lays out the plan’s basic mechanics. The third part then systematically addresses and dispatches the battery of remarkably weak legal and policy arguments commonly proffered by opponents of the plan.

Hockett has been advocating this plan for some time in the face of concerted opposition from the financial industry. One industry argument that I have found to be over the top is that lenders will refuse to lend in communities that employ eminent domain to address the foreclosure crisis. Hockett writes,

Another policy argument made by some members of the securitization industry is that using eminent domain to purchase loans will dry up the sources of mortgage credit, rendering the American dream of homeownership unattainable. The financial services industry and its legislative supporters have made this kind of claim against regulatory and consumer protection proposals emerging from national, state, or municipal legislatures.

One problem with this argument is that private credit has not flowed to non-wealthy mortgage borrowers since the crash. Federal lenders and guarantors are nearly the only game in town, and they are likely to remain so until the underwater PLS loan logjam is cleared.

Another problem with the credit withdrawal argument is that it characterizes a benefit as a burden. The housing bubble was, like most of the more devastating bubbles through history, the upshot of an over-extension of credit. Lenders extended excess credit through reverse redlining and other predatory lending practices perpetrated or aided and abetted by participants in the securitization industry itself. Hence the securitization industry’s warning that credit might not be overextended in the future is a warning of something that might well be desirable. (142-43, footnotes omitted)

Given that lenders always rush to lend to countries that have recently defaulted on their sovereign debt, I don’t find the credit withdrawal argument to be particularly convincing here. But it may succeed in convincing some local governments not to proceed with their eminent domain strategies. I do hope, however, that at least one locality will follow through during the current foreclosure crisis. That way, we will at least have a proof of concept for the next foreclosure crisis.

 

The Ghosts of the Housing Bubble

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NYC Councilmember Daniel Garodnick has released a report, The Ghosts of the Housing Bubble: How Debt, Deterioration, and Foreclosure Continue to Haunt New York after the Crash. The report opens,

New York continues to have the highest rents in the country and a housing crisis that has lasted for decades. Many residential rents are below market value – a result of the myriad of state and local laws that have been implemented to protect working and middle class tenants from being forced out of their homes. This gap between the current affordable rent and potential fair market value can fuel the imaginations of investors and owners who dream of squeezing out the unrealized value hidden in these properties. This leads some developers to make riskier and riskier decisions following visions of real estate fortune, only to find themselves tilting at windmills, stuck with unpayable mortgages and escalating maintenance costs. (1)

The report proposes a number of interesting solutions to the problems it identifies, all of which should be looked into further. I am particularly intrigued by the proposal that Community Reinvestment Act exams should include a review of “the quality of the investments being made, measuring if banks are lending mortgages to landlords with portfolios of distressed housing. Were their bad loans to be reflected in their CRA ratings, banks might change their behavior.” (8)

But as with a similar ANHD report, the magnitude of the proposed solutions does not seem to match that of the identified problems. Market forces are extraordinarily powerful in NYC right now. It is unclear whether initiatives such as the “First Look Program,” which gives “good developers the first opportunity to buy” properties in foreclosure, can do anything when valuations are so frothy and predatory equity is on the prowl. (1)

That being said, the report is still quite valuable for shining light once again on the problem of owners who seek to illegally force rent regulated tenants out of their homes.

 

Washington Court Dismisses Fair Debt Collection Practices Act and Washington Deed of Trust Act Violation Claims

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The court in deciding Dietz v. Quality Loan Serv. Corp., 2014 U.S. Dist. (W.D. Wash. Jan. 3, 2014) granted Wells Fargo and MERS’ motion to dismiss.

This action involved is a post-sale wrongful foreclosure case. Plaintiff Timothy Dietz alleged causes of action for violation of the Fair Debt Collection Practices Act (FDCPA)(Counts I and IV) and violation of the Washington Deed of Trust Act (DTA)(Counts II and III).

The court in deciding this case noted that Dietz’s first and fourth causes of action were for violation of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692g(b) and 1692e(5) respectively. These causes of action did not mention MERS  and there was no allegation in the complaint that MERS engaged in any activities that could be construed as a “debt collection.” As such, this court dismissed the FDCPA causes of action against MERS.

Similarly, the court found that Dietz had not alleged facts that gave rise to a violation of the debt validation notice requirements. Dietz’s claim that that Wells Fargo violated 15 U.S.C. § 1641(g) by failing to notify him within 30 days after it purchased the Loan. Wells Fargo purchased the Loan in 2008 and the assignment was recorded in 2011. The court found that under either date, the claim was barred by FDCPA‘s one year statute of limitations, 15 U.S.C. § 1640(e), as this lawsuit was not filed until 2013.

Visualizing The Residential Mortgage Market

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Compass Point Research & Trading, LLC has a nice graph, The Mortgage Market Overview, that helps to make sense of the massive U.S. residential mortgage market. It breaks down the $20 trillion dollar U.S. residential housing market into debt and equity and then further breaks down debt into the various available types, by market share: GSE; portfolio; private-label MBS; etc.  A picture can be worth twenty trillion words . . ..