Tag Archives: Law360

Reiss on NY RE Regulation

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Law360 quoted me in What’s Up Next In NYC Real Estate Legislation (behind a paywall). It reads in part,

New York City lawmakers have introduced a slew of new bills in recent months that could impact commercial real estate owners and developers with changes like new protections for rent-regulated tenants and more public review for zoning changes. Here are explanations and some experts’ thoughts about the proposed laws.

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Fighting Alleged Double Standards for Regulated and Market-Rate Tenants

City Council members Mark Levine and Corey Johnson are drafting a bill to combat what they claim is a trend of property owners unfairly discriminating against their rent-regulated tenants, preventing them from taking advantage of amenities that market-rate tenants can enjoy.

The issue gained a lot of attention last year when news broke that Extell Development Co.’s project at 40 Riverside Drive might have two separate entrances: one for owners of its condominiums and one for those living in the affordable units.

The “poor door” arrangement, which has reportedly been used at several buildings around the city, sparked outrage from tenants, who argued that developers were abusing the 421-a subsidy program, which gives tax abatements in exchange for affordable housing.

Levine and Johnson’s new bill would alter the city’s rental bias code, which protects tenants from discrimination based on race, gender or age, to include rent-regulated as a protected status.

Under de Blasio’s plan for mandatory inclusionary zoning at all new development projects, the bill appears to be an effort to establish actual integrated communities, said Brooklyn Law School professor David Reiss.

“Mandatory inclusionary zoning is not just about affordable housing; to a large extent it’s about socioeconomic integration,” Reiss said. “I think this bill about double standards is really not about protecting affordable housing as much as it is about respecting socioeconomic diversity.”

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Requiring Two Years of Experience for a Crane Operation License

In April, Manhattan Councilman Benjamin Kallos introduced a bill that would require crane operators to have at least two years of experience working in New York City in order to obtain licenses.

Industry insiders note that the licensing process is effectively controlled by a local union, and many are concerned that this new bill would give the union even more power, essentially blocking the use of any crane contractors that are not affiliated with it.

“There’s a spat between developers and unions, and the bill is firmly taking the side of the unions,” Reiss said. But he added that the real question is what is actually in the public interest. “What is the level of safety that we need?”

The Bloomberg administration had a more developer-friendly approach, creating a plan to allow operators to get licenses if they had worked in a similarly dense city before. But the crane operators’ union sued over those rules, and the litigation remains pending.

Reiss on Snuffing out FIRREA

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Law360 quoting me in BofA Fight Won’t Blunt DOJ’s Favorite Bank Fraud Weapon (behind a paywall). It reads in part,

A federal magistrate judge on Thursday put a Justice Department case against Bank of America Corp. using a fraud statute from the 1980s in peril, but the case’s limited scope means the government is not likely to abandon its favorite financial fraud fighting tool, attorneys say.

Federal prosecutors have increasingly leaned on the Financial Institutions Reform, Recovery and Enforcement Act, a relic of the 1980s savings and loan crisis, as a vehicle for taking on banks and other financial institutions over alleged violations perpetrated during the housing bubble years.

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Some banking analysts hailed the ruling as potentially the beginning of the end of the government’s pursuit of housing bubble-era violations.

“If the judge’s recommendation is accepted by the federal district court judge, then this development will represent a significant setback for the government’s legal efforts and likely mark the beginning of the end for crisis-era litigation,” Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC, said in a client note.

However, others say the government’s case was brought under relatively narrow claims that Bank of America did not properly value the securities to induce regulated banks to purchase securities they otherwise might not have.

That is a tougher case to bring than the broad wire fraud and mail fraud claims that were available to the government under FIRREA. The government has employed those tools with great success against Bank of America and Standard & Poor’s Financial Services LLC in other cases in far-flung jurisdictions, said Peter Vinella, a director at Berkeley Research Group.

“There was no issue about whether BofA did anything wrong or not. It’s just that the case was filed incorrectly. It was very narrowly defined,” he said.

It is not entirely clear that Bank of America is in the clear in this case, either.

U.S. district judges tend to give great deference to reports from magistrate judges, according to David Reiss, a professor at Brooklyn Law School.

But even if U.S. District Judge Max O. Cogburn Jr. accepts the recommendation, the Justice Department has already lodged a notice of appeal related to the report. And in the worst-case scenario, the government could amend its complaint.

A victory for Bank of America in the North Carolina case is unlikely to have a widespread impact, given the claims that are at stake. The government will still be able to bring its broader, and more powerful claims, under a law with a 10-year statute of limitations.

“It is one opinion that is going against a number of FIRREA precedents that have been decided in others parts of the country,” Reiss said. “It also appears that this case was brought and decided on much narrower grounds than those other cases, so I don’t think that it will halt the government’s use of the law.”

Reiss on Frannie Reform

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Law360.com quoted me in Capital Rules To Spread Beyond Banks Under Housing Bill (behind a paywall). The story reads in part,

Mortgage servicers, aggregators and other actors in the U.S. housing finance market would for the first time be subject to the same capital requirements that apply to banks under a new bipartisan bill aimed at replacing Fannie Mae and Freddie Mac, potentially eliminating an advantage nonbank firms currently enjoy.

The elimination of Fannie Mae and Freddie Mac is the centerpiece of S. 1217, the Housing Finance Reform and Taxpayer Protection Act of 2014, introduced by Senate Banking Committee Chairman Tim Johnson, D-S.D., and the committee’s ranking Republican, Sen. Mike Crapo, R-Wyo. The government-sponsored entities would be replaced by a proposed Federal Mortgage Insurance Corp. that would backstop the housing finance market in a manner similar to the Federal Deposit Insurance Corp.’s backing of the banking system.

Among the details in the 442-page bill released Sunday are provisions that would allow the FMIC to impose capital standards and other “safety and soundness” rules to mortgage servicers, firms that package mortgages into securities and guarantors that provide the private capital backing to mortgage-backed securities. Compliance with these standards would be required for access to a government guarantee.

Previously those types of institutions have not been subject to safety and soundness rules, unless they were part of a bank. If the Johnson-Crapo bill moves forward as currently written, those firms could be in for a big change, said David Reiss, a professor at Brooklyn Law School.

“Historically, nonbanks have had a lot less regulation than banks. So, by giving them a safety and soundness regulator you are taking away a regulatory advantage – that is, less regulation – that they have had as financial institutions,” he said.

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“What it effectively does is create safety and soundness standards for guarantors, aggregators and servicers, as if they were banks. There’s been this long debate about what you do about the nondepository institutions, and this would empower FMIC to supervise private-party participants like banks,” said Laurence Platt, a partner with K&L Gates LLP.

Specifically, the potential rules would apply to aggregators, which serve to collect mortgages and pack them into securities, and guarantors, or firms that provide the private capital to back those securities. Mortgage servicers that process payments and provide other services to mortgages inside those securities would also be included under the FMIC’s regulatory umbrella, according to the bill.

The FMIC would also have the power to force the largest guarantors and aggregators to maintain higher capital standards than their smaller competitors as a way to mitigate the risk of any such market player becoming too big to fail, and will be able to limit such firms’ market share if they get too big, according to the bill.

Underwriting standards for mortgages that would be backed by the FMIC would match, as much as possible, the Consumer Financial Protection Bureau’s qualified mortgage standards, which went into effect in January, according to the legislation.

Moreover, the FMIC would be able to write regulations for force-placed insurance that is applied to mortgages where borrowers do not purchase their own private mortgage insurance under the legislation. The CFPB and other regulators have tackled perceived problems in the force-placed insurance market in recent months.

Extending those capital and other safety and soundness requirements to nonbank firms would be akin to extending supervision authority of nonbank mortgage servicers and other firms to the CFPB, a power granted by the Dodd-Frank Act, Reiss said.

“It can be described as part of the effort since the passage of Dodd-Frank to regulate the breadth of the financial services industry instead of one part of it, the banking sector,” he said.

Reiss on NYC Development

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Law360 quoted me in Domino Deal Shows De Blasio Can Play Nice With RE Cos. (behind a paywall). The story reads in part,

New York City Mayor Bill de Blasio’s affordable housing deal with the developer of the Domino Sugar factory, despite being for a unique project, may be a harbinger of how the mayor will implement his affordable housing goals without hampering the market, experts say.

When De Blasio first took office, many in the real estate community, and their attorneys,were concerned that the new mayor’s “tale of two cities” approach to governing might elevate the development of affordable housing to the detriment of other types of projects.

While his administration is still young and the Domino Sugar project is a unique one that had previously been approved in a different form under former Mayor Michael Bloomberg, experts say the way De Blasio handled negotiations that led to the project’s City Planning Commission approval on Wednesday may be a positive sign for the future.

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But the mayor’s willingness to reach out directly to a developer and negotiate for terms that fit his goals — De Blasio wants to add or retain 200,000 affordable units over the next 10 years — without harming the deal will be noted by developers.

“One data point does not make a trend, but as a symbol at the beginning of the administration, I think it’s a pretty powerful one,” said David Reiss, a real estate professor at Brooklyn Law School.

Community Preservation Corp. and Kattan Group LLC had originally planned to build a $2.2 billion, 2,200-unit residential project in place of the Domino Sugar factory, but the plan stalled in 2012, and the partners began looking for a new buyer.

When Two Trees Management Co. was chosen in June 2012, the developer purchased the property for $185 million after a long court battle with Katan. The approvals process then began anew, and Two Trees’ revised plan — for 2.3 million square feet of residential space, plus office and retail components — was certified for review in November.

This week, as the City Planning Commission was poised to cast its vote on Two Trees’ plan, De Blasio stepped in to ask for a larger affordable housing component. The project called for about 660 units, but the mayor wanted about 60 more in exchange for zoning changes Two Trees would need to construct the development.

Two Trees Principal Jed Walentas told the New York Times that the mayor’s request was “not workable,” and onlookers worried that the mayor’s relationship with the real estate industry, which had thawed after a Real Estate Board of New York speech in which he assured developers that he wanted them to “build aggressively,” might again be chilling.

But the fears were premature; the mayor and developer reached a deal late Monday that would yield an additional 110,000 square feet of affordable housing at the development.

In connection with the deal, Two Trees agreed to construct 700 permanently affordable units ranging in size to accommodate small and large families that will be integrated throughout the complex.

“This agreement is a win for all sides, and it shows that we can ensure the public’s needs are met, while also being responsive to the private sector’s objectives,” Deputy Mayor of Housing and Economic Development Alicia Glen said in a statement.

That balance will not be lost in the city’s development community, even if another project of this size and complexity doesn’t come around any time soon, experts say. There are many developers looking to do deals in the city, and many of them may now feel at least a bit more comfortable that their needs will be understood by a mayor with an ambitious affordable housing plan.

“He took a line and stuck to it and got what he wanted, without killing the deal,” Reiss said. “That’s a good thing from the development perspective.”

Reiss on Single Family Rental-Backed Bonds

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Law360 Quoted me in Newest Property-Secured Bonds Invite Scrutiny (behind a paywall). It reads in part,

The Blackstone Group LP’s recent groundbreaking move to sell bonds secured by single-family rental homes may have created the next securitization blockbuster, but attorneys say the product could attract the same type of litigation that has plagued the commercial and residential mortgage-backed securities markets.

Blackstone is among a growing group of entities that amassed large numbers of foreclosed homes after the crisis and are turning them into profitable rentals. Now some are hoping to take that profitability one step further, extending loans secured by these single-family homes and securitizing them.

This process offers benefits both to players like Blackstone and to smaller landlords that own groups of single-family rentals and can’t get traditional lenders to lend against their assets. Blackstone’s debut product — sold to a syndicate led by Deutsche Bank AG — has been very well-received, but attorneys caution that many questions remain unanswered, and REO-to-rental-backed bonds could pose litigation risks.

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Blackstone’s $480 million deal, in which it pooled 3,200 homes owned by its portfolio company Invitation Homes and used them to secured a single loan that it then securitized, made waves as the first of its kind.

Several other opportunistic real estate investment companies, including American Homes 4 Rent and Colony Capital LLC, are expected to follow suit, but they are treading lightly as the new product is assessed by the market and investors.

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The homes themselves may also be subject to condemnation or landlord-tenant litigation that could encumber the overall loan indirectly by affecting the value of the collateral, according to David Reiss, a real estate finance professor at Brooklyn Law School.

Before the recession, single-family homes were considered too expensive to be managed by a large institution like Blackstone or American Homes 4 Rent because of their geographic diversity and because it was hard to control property management on so many different homes, according to Reiss.

The financial crisis made distressed single-family homes cheaper and more attractive to opportunistic investors, and the low price may compensate for the other issues, he said.

“This is a new asset class, and it is not yet clear whether Blackstone has properly evaluated its risks,” Reiss said.  “Time will tell whether these bonds will become a significant new category of asset-backed securities or whether the financial crisis presented a one-time financial opportunity for some firms.”

Reiss on Risk Management

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Law360.com interviewed me in Banks Caught In Middle Of Regulators’ Fair-Lending Pursuits (behind a paywall).  The article reads in part,

Federal and state regulators are increasingly enlisting banks in their pursuit of fair-lending and other violations at payday and auto lenders and other financial services providers with which they do business, a tactic that has also increased banks’ risk of penalties for conduct by third parties.

In late October, the Office of the Comptroller of the Currency was the latest to put out new guidance for banks’ responsibility to monitor the activities of third-party vendors that perform operations on behalf of the bank. Other federal and state regulators have been calling on banks with growing frequency and force in recent years in order to ensure their vendors and clients comply with fair lending and other laws.

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The increased use of pressure on banks to indirectly go after firms that may not be subject to federal or state laws or regulations comes after banks outsourced a great deal of their mortgage-lending operations and other services during the financial crisis, according to David Reiss, a professor at Brooklyn Law School.

While many of those vendors met high standards, others, particularly in the subprime loan context, did not. And banks didn’t monitor those failings, Reiss said.

“The crazy thing about that is you’d think banks would do this on their own,” Reiss said. “Why do they need their regulators to say, ‘Check on these things’?”

Reiss on Mayor De Blasio’s Plans for Mandatory Inclusionary Zoning

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Law360.com interviewed me about Mayor-Elect de Blasio’s plans for mandatory inclusionary zoning in NYC Real Estate Faces Less Friendly Market Under De Blasio (behind a paywall). It reads in part:

One of the biggest and most controversial pieces of de Blasio’s affordable housing platform is a plan to mandate inclusionary zoning — requiring developers to build affordable housing as part of their market-rate multifamily projects — when developments are being constructed in areas rezoned by the city.

Mandatory inclusionary zoning is meant to be a “hard-and-fast rule” to replace the incentives de Blasio plans to end for big developers, and he predicted on his campaign website that the strategy would create up to 50,000 new affordable housing units during the next 10 years.

But “mandatory” anything is considered an added cost when developers are weighing their options in deciding where to build, and requiring that residential developments include affordable housing could push some developers elsewhere, experts say.

“The devil is in the details,” said Brooklyn Law School professor David Reiss, noting that the way the de Blasio administration writes and implements the rule will make a big difference, either encouraging more development of affordable housing or shutting down the market to new developers.

And while de Blasio has emphasized that inclusionary zoning would only be mandatory for projects taking place in areas specifically rezoned for new development, Learner points out that the Bloomberg administration rezoned more than 30 percent of the city, so the new rule could likely affect many developers.

“When the program is designed, a lot of thought needs to go into what impact mandatory inclusionary zoning will have on the bottom line of developers,” Reiss said. “If it’s too significant of an impact, a less than optimal amount of housing will be built.”