Tag Archives: real estate

En-Titled Insurance

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Benjamin M. Lawsky, the New York State Superintendent of Financial Services, has promulgated a proposed regulation regarding title insurance that is sure to shake up the title industry and, more importantly, reduce closing costs for NY homeowners.

The proposed regulation opens with a statement of its scope and purpose:

(a) The purpose of this Part is to promote the public welfare by proscribing practices that are not in accordance with Insurance Law section 2303, which provides that insurance rates shall not be excessive, inadequate, or unfairly discriminatory. This Part also interprets and implements Insurance Law section 6409(d), which prohibits giving any consideration or valuable thing as an inducement for title insurance business, as well as Insurance Law section 6409(e), which states that title insurance premiums shall reflect the anti-inducement prohibition of Insurance Law section 6409(d).

(b) This Part further protects consumers, pursuant to the authority of Insurance Law sections 2110 and 2119 and Article 24 and Financial Services Law sections 301 and 302, by ensuring that the title insurance industry provides valuable products and services to consumers at reasonable rates and fees and does not overcharge consumers or charge improper and excessive fees that constitute engaging in untrustworthy behavior and unfair and deceptive acts and practices. (Section 227.0 )

New York has long had some of the most expensive title insurance premiums in the country, so homeowners and other owners of real estate should welcome this development. Title insurance agents are not allowed to compete on price in NY, so they compete for business from real estate lawyers (who typically select the title insurance agent for any given transaction) by offering them all sorts of perks such as hard-to-get tickets to events and fancy meals. The proposed regulation attempts to rein in this behavior.

The NYS Department of Financial Services will be accepting comments for 45 days after the proposed regulation is published in the State Register, so get crackin’.

Mortgaging the Future

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The Federal Reserve Bank of San Francisco’s most recent Economic Letter is titled Mortgaging the Future? In it, Òscar Jordà, Moritz Schularick, and Alan M. Taylor evaluate the “Great Mortgaging” of the American economy:

In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles. (1)

I was particularly interested by the Letter’s Figure 2, which charted the ratio of mortgage debt to value of the U.S. housing stock over the last hundred years or so. The authors write,

The rise of mortgage lending exceeds what would be expected considering the increase in real estate values over the same time. Rather, it appears to also reflect an increase in household leverage. Although we cannot measure historical loan-to-value ratios directly, household mortgage debt appears to have risen faster than total real estate asset values in many countries including the United States. The resulting record-high leverage ratios can damage household balance sheets and therefore endanger the overall financial system. Figure 2 displays the ratio of household mortgage lending to the value of the total U.S. housing stock over the past 100 years. As the figure shows, that ratio has nearly quadrupled from about 0.15 in 1910 to about 0.5 today. (2)

An increase in leverage for households is not necessarily a bad thing. it allows households to make investments and to smooth their consumption over longer periods. But it can, of course, get to be too high. High leverage makes households less able to handle shocks such as unemployment, divorce and death. it would be helpful for economists to better model a socially optimal level of household leverage in order to guide regulators. The CFPB has taken a stab at this with its relatively new Ability-to-Repay regulation but we do not yet know if they got it right.

Wednesday’s Academic Roundup

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Reiss on Legal Snares for Entrepreneurs

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Inc.com quoted me in 6 Legal Snares All Entrepreneurs Should Be Ready to Dodge. It reads,

The last thing you want to do as an entrepreneur is pour through long dull documents written by lawyers for lawyers. But there’s a reason it’s called work and not fun. Miss taking care of this aspect of your business and you might find yourself being investigated by the federal government, on the hook for thousands in otherwise unnecessary costs, in a never- ending fight with others involved in the company, or stuck at the exact time you need to be moving.

I was speaking with David Reiss, a professor of law at the Brooklyn Law School and research director of its Center for Urban Business Entrepreneurship (CUBE). Entrepreneurs often lack the broad business experience that would help them avoid a number of traps on the way to growing a business, he said. Here are some of the most common.

Real estate contract snags

“You have a great idea but know nothing about the basics of being a small business person, so you sign the first lease [you’re offered],” he said. But a commercial property lease is a complex document that makes an apartment lease look like nothing in comparison. It typically is something to be negotiated, and getting help to understand the ramifications of various clauses is crucial. “Often there are pretty complicated rent increase provisions that entrepreneurs don’t get,” he said. The document as written might assign you a portion of the building’s increased operating expenses in addition to rent increases. Overly strong restrictions on the ability or reassign or sublease the lease’s obligations could mean an inability to move to a larger space when the business grows. “What are the use restrictions?” Reiss asked “What if the business morphs into something else? Does that violate the use limitations on the space? “

Pick the right corporate structure

You’ll likely have many choices of how to legally and financially structure the company. Some are an LLC, sole proprietorship, partnership, S-corp. , or C-corp. “They have different tax implications, different implications as you increase in size and revenues,” Reiss said. If you have the wrong structure in place, you might find yourself having to unwind it as the business expands. Not only might that be unnecessarily expensive, but you’ve potentially opened yourself to renegotiating some basic arrangements that could be troublesome.

Get a fitting partner agreement

If you need a reminder of how badly partnerships can go, look at Snapchat or Square. One day everything is fine. The next, former best friends are at each other’s throat. You have to consider how to allocate both profits and losses (some investors might like more of the latter).

“Some people are putting in time, some are putting in intellectual property, and some are putting in cash,” Reiss said. “People have different expectations for each of those contributions.” A thorough and well-constructed partner agreement provides a framework for addressing the important issues before everyone is at an impasse.

Have appropriate protection for intellectual property

All businesses have intellectual property. Getting protection on every aspect can burn through cash. For example, patents are great, but if you can’t lock down broad enough protection, competitors might be able to easily work around the walls you built, in which case you may have wasted money. Perhaps trade secrets might be more appropriate. Do you really need to trademark every single name and phrase? Maybe yes, maybe no. Talk to a professional to devise a useful strategy, keeping an eye on what you can afford and how much effort you might need to divert from getting business done.

Check insurance

You’ll need commercial general liability insurance and might also need property insurance. Might directors and officers liability insurance, also known as D&O, be advisable to protect principals in the company? Does your lease or contracts with clients demand particular levels of coverage?

Regulatory compliance

On one hand, anyone who says that regulations make it impossible to open a business is someone to be questioned. On the other, you can get badly tripped up in some common areas like taxes, handling inventory, or labor laws. “A little bit of planning can save you lots of headaches, money, and bandwidth,” Reiss said. “If you’re working 16 hours a day, you don’t want to be thinking about an investigation by the Department of Labor. You need someone to run through a checklist with you of the regulatory overlays on small businesses.”

Bringing lawyers, accountants, insurance brokers, and others in for reviews and discussions isn’t cheap, but it’s a lot less expensive than trying to solve problems after they’ve snared and tripped you.

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.

*     *     *

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.”

*     *     *

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.

Long-Term Homeownership Affordability

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Amnon Lehavi has posted Can the Resale Housing Market Be Split to Facilitate Long-Term Affordability? to SSRN.  The paper argues that

a comprehensive affordable housing policy requires the formal splitting of the homeownership market into (at least) two distinct segments: one designated for the general public and following a conventional pricing mechanism through free market supply and demand, and the other designated for eligible households and controlling both initial supply and subsequent resale of housing units through regulated affordability-oriented pricing mechanisms.

While regulation of the pricing of affordable housing units during their initial allocation is a standard feature of housing policy–whether such affordable units are produced by a public authority or a private developer–regulation of pricing upon resale to subsequent buyers has received less attention as a matter of both theory and practice, thus leaving a substantial gap in

design mechanisms aimed at promoting a sustainable affordable housing policy.(1)

This is not really a new argument, but the paper takes the position that existing efforts to regulate resales of affordable housing in the homeownership market can be scaled up significantly. The paper does not take on some of the bigger questions that this position implicates — for instance, should scarce homeownership dollars be spent on rental housing instead — but it does develop a concrete proposal:

This paper seeks to enrich policy design options by introducing two alternative cap-on-resale mechanisms for the affordable housing segment: “Mixed Indexed Cap” (MIC) and “Pure Indexed Cap” (PIC). It explains how such models could be utilized to attain a policy goal of promoting long-term social mobility, allowing multiple low- and modest-income households to engage in capital building by sequentially enjoying increments of appreciation of properties in the affordable housing segment.

In so doing, the paper addresses a series of challenges posed by the design of a cap-on-resale mechanism: Could such a mechanism ensure that the homeowner is granted a fair return upon resale, providing the owner with proper incentives to invest efficiently in the property during the tenure, while setting up a resale rate that would make the unit truly affordable for future homebuyers? (1)

New York Ciy has experimented with affordable homeownership and has not come up with an ideal solution to the problem of affordability upon resale. Given the renewed focus on affordable housing policy in NYC, this attention to affordable homeownership policy is most welcome.

U.S. District Court for the Eastern District of Texas Rules in Favor of MERS in Foreclosure Proceeding, Upholding its Power of Sale Over the Plaintiff’s Property

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In Richardson v. Citimortgage, No. 6:10cv119, 2010 WL 4818556, at 1-6 (E.D. Tex. November 22, 2010) the U.S. District Court for the Eastern District of Texas, Tyler Division, granted the Defendants’, Citimortgage and MERS, motion for summary judgment against the Plaintiff, Richardson, in a foreclosure proceeding. The Court reiterated MERS’s power of sale and its role as an “electronic registration system and clearinghouse that tracks beneficial ownerships in mortgage loans.”

Plaintiff purchased his home from Southside Bank with a Note. As the Lender, Southside Bank could transfer the Note and it, or any transferee, could collect payments as the Note Holder. In the agreement, Plaintiff acknowledged that Citimortgage, the loan servicer, could also receive payments. A Deed of Trust secured the Note by a lien payable to the Lender.

Under a provision in the deed, Southside Bank secured repayment of the Loan and Plaintiff irrevocably granted and conveyed the power of sale over the property. The Deed of Trust also explained MERS’s role as its beneficiary, acting as nominee for the Lender and Lender’s and MERS’s successors and assigns. MERS “[held] only legal title to the interests granted by the Borrower but, if necessary to comply with law or custom, [had] the right to exercise any and all of the interests [of the Lender and its successors and assigns], including the right to foreclose and sell the property.”

Plaintiff signed the Deed of Trust but eventually stopped making mortgage payments to CitiMortgage and filed for bankruptcy protection. As a result, “MERS assigned the beneficial interest in the Deed of Trust to Citimortgage.” Citimortgage posted the property for foreclosure after receiving authorization from the United States Bankruptcy Court. Plaintiff brought suit, seeking declaratory and injunctive relief and challenging Citimortgage’s authority to foreclose on the property.

In granting Citimortgage and MERS’s motion for summary judgment, the court explained that Citimortgage could enforce the loan agreements, including the power of foreclosure, after it received the Note from Southside Bank. Furthermore, under the doctrine of judicial estoppel, Plaintiff could not challenge Citimortgage’s right to enforce the Note after he “represented that it was [his] intention to surrender [the] property to Citimortgage,” in bankruptcy court. Citimortgage subsequently acquired a “valid, undisputed lien on the property for the remaining balance of the Note.”

Plaintiff also challenged MERS’s role with “respect to the enforcement of the Note and Deed of Trust.” In response, the court explained that “[u]nder Texas law, where a deed of trust expressly provides for MERS to have the power of sale, as here, MERS has the power of sale,” and that the Plaintiff’s argument lacked merit.

The court described MERS as a “[book entry system] designed to track transfers and avoid recording and other transfer fees that are otherwise associated with,” property sales. It concluded that MERS’s role in the instant foreclosure “was consistent with the Note and the Deed of Trust,” and that Citimortgage had the right to sell the Plaintiff’s property and schedule another foreclosure.