Tag Archives: Reiss

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 State Enforcement of Dodd Frank

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Auto Finance News quoted me in The Mess at Condor Capital Signals Stiffer State Oversight. It opens,

Legal action brought by New York State last month against Condor Capital Corp., a Long Island subprime lender accused of bilking customers out of millions of dollars, could signal an increase in state prosecution under Dodd-Frank federal laws.

Legal experts say the case, even though it involves wildly egregious practices by Condor, could be the first of many by states against auto lenders, even if the lender’s nefarious actions are more modest than Condor’s.

In April, New York’s Department of Financial Services (www.dfs.ny.gov) obtained a temporary restraining order in federal court against Hauppauge, N.Y.-based subprime auto lender Condor Capital Corp. (www.condorcap.com) and owner Stephen Baron. The case is being handled in U.S. District Court for the Southern District of New York.

The state’s complaint paints a picture of a company run with disregard for compliance. However, a former senior Condor employee told Auto Finance News that Condor’s practices might have been even worse than what was described in the state’s complaint. The former manager of Condor’s collection department told Auto Finance News that management thumbed its nose at the very notion of compliance.

Plain and simple, the federal law provides state regulators with a new tool according to Law Professor David Reiss from Brooklyn Law School.

“States have historically identified new forms of unfair, deceptive, or abusive acts and practices before they get on the radar of national regulators, so states are likely to be quicker to take action than their federal counterparts,” Reiss said. “In all likelihood, the New York case, as well as a case from the attorney general in Illinois, are just the tip of a burgeoning enforcement iceberg.”

Stealing Fannie and Freddie?

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Jonathan Macey and Logan Beirne have posted a short working paper, Stealing Fannie and Freddie, to SSRN. It advocates a position similar to that taken by the plaintiffs in the GSE shareholder litigation. They argue,

Politicians are running rough-shod over the rule of law as they seek to rob private citizens of their assets to achieve their own amorphous political objectives. If we were speaking of some banana republic, this would be par for the course – but this is unfolding in the United States today.

“The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last,” declares the Senate Banking Committee Leaders’ Bipartisan Housing Finance Reform Draft. The proposed legislation’s first step towards this laudable goal, however, is to liquidate the government sponsored enterprises Fannie Mae and Freddie Mac – in defiance of the rule of law. This paper analyzes the current House and Senate housing finance reform proposals and faults their modes of liquidation for departing from legal norms, thereby harming investors and creditors, taxpayers, and the broader economy.

Under proposals before Congress, virtually everyone loses. First, the GSEs’ shareholders’ property rights are violated. Second, taxpayers face the potential burden of the GSEs’ trillions in liabilities without dispensing via the orderly and known processes of a traditional bankruptcy proceeding or keeping the debts segregated as the now-profitable GSEs seek to pay them down. Finally, the rule of law is subverted, thereby making lending and business in general a riskier proposition when the country and global economy are left to the political whims of the federal government. (1)

I found a number of unsupported assertions throughout the piece. For instance, they assert, without support, that Fannie and Freddie “never reached the point of insolvency.” (3)  Badawi & Casey convincingly argue that without “government intervention, [Fannie and Freddie] would have defaulted on their guaranty obligations and more generally on obligations to all creditors.” (Badawi & Casey at 5) All in all, I don’t find this short working paper to be compelling reading — perhaps a more comprehensive one is in the works.

Reiss on High Loan Fees

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CRM Buyer quoted me in On-Premises Banks Stick It to Walmart Customers. It opens,

Walmart customers who use the banking services provided inside the chain’s stores are among the highest payers of fees — especially overdraft fees — in the U.S., a Wall Street Journal analysis of federal filings concluded.

The five banks with the most Walmart branches ranked among the top 10 U.S. banks in fee income as a percentage of deposits last year, the paper reported, compared to other U.S. banks that earn most of their income through lending.

It is a notable finding, especially given Walmart’s brand: First and foremost, the company has built a reputation for providing low-cost products at significant savings compared to other stores.

Walmart cannot be held completely responsible for the banks’ practices, of course. The financial sector is highly regulated, and no third-party retailer is in a position to set standards or make policies.

However, Walmart told the Journal that it has a thorough process for vetting banks to make sure they are in line with its philosophy.

Financial Reform? What Financial Reform?

Apart from the Walmart branding issue, the report highlights some other concerns. In spite of curbs on financial industry practices in the last few years, it still is possible for providers to levy high fees on consumers in the lowest economic brackets, making it more difficult for them to work their way out of debt. A new government agency, the Consumer Finance Protection Bureau, was established to curtail such activities. Why do they still occur?

The Wall Street Journal leads off its article with the story of a consumer who knowingly overdraws her checking account to pay for a needed car repair. The US$30 fee, which translated into an APR of more than 300 percent, was actually cheaper than a payday loan, the borrower said.

In the bank’s defense, there are certain financial, market, regulatory and business realities that cannot be ignored.

“While I am not going to defend high-cost fees for financial products, I would say that the lenders often have high fixed costs for each transaction that can work out to a higher percentage of the amount borrowed than they would be for larger transactions,” David Reiss, a professor at Brooklyn Law School, told CRM Buyer.

“So, I would say that there is some gouging going on in this market, but also some basic business reality,” he remarked.

Reiss on FHFA Leadership of Housing Finance Reform

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Law360.com quoted me in FHFA Set To Take The Lead In Housing Finance Reform (behind a paywall). It reads in part,

With hopes for a legislative fix for the U.S. housing finance market fading after six key Democrats reportedly refused to support a reform bill pending in the Senate Banking Committee, the Federal Housing Finance Agency will become the central player in reshaping the market and set the terms for any future changes.

The Banking Committee’s leaders — Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho — were unable to scare up the overwhelming support their housing finance reform bill needed in a last-gasp effort at getting a vote from the full Senate. That leaves the bill’s prospects of getting to President Barack Obama prior to the midterm elections at near zero and the FHFA, the conservator for Fannie Mae and Freddie Mac since 2008, as the biggest player in reshaping the U.S. housing market.

“It was always my operating assumption that it was going to be exceedingly difficult to get congressional consensus. Most of the action was going to take place by way of the actions at the FHFA,” said former Republican Rep. Rick Lazio, now a partner at Jones Walker LLP.

The lack of legislation also throws a wild card into the equation, since FHFA head Mel Watt has essentially been silent about his intentions for the FHFA since he won Senate confirmation in December.

“Hopefully, Watt will have a positive vision of the future of the two companies,” said Brooklyn Law School professor David Reiss.

More than five years after Fannie Mae and Freddie Mac were placed under FHFA conservatorship after receiving a more-than-$187 billion taxpayer bailout in the fall of 2008, Congress has yet to act on creating a new system for home purchases and eliminating the two companies.

And then, beginning last spring, Congress kicked into gear.

First, Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., introduced a bill that Johnson and Crapo would use as the basis for their own legislation, leaving a limited role for government in guaranteeing the mortgage market.

Soon after, the House Financial Services Committee passed its own housing finance reform bill looking to eliminate the government’s role in the housing market entirely.

Johnson and Crapo released their bill, which would eliminate Fannie and Freddie within five years and replace it with a mortgage insurance agency modeled on the Federal Deposit Insurance Corp., in March. They scheduled a markup and vote on the bill for late April.

But the two senators delayed the vote at the last minute when it became clear that while they had the 12 votes needed to pass the bill out of the 22-member committee, they lacked the 16 to 18 votes needed to force Senate Majority Leader Harry Reid to bring it up for a vote.

Johnson and Crapo said they would continue negotiations with six undecided Democrats, but according to media reports, those negotiations foundered on worries about access to affordable housing in the bill.

Undeterred, Johnson vowed to bring the bill up for a vote next week.

“Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week,” Sean Oblack, a Democratic spokesman for the committee, said in a Thursday statement.

Still, the failure to get overwhelming support for the Johnson-Crapo bill essentially dooms the prospects for housing finance legislation this year, Lazio said.

“The administration will probably wait until early next Congress to make a decision about whether they think reform is possible,” he said.

But reform efforts will not stop, since the FHFA has a large amount of discretion over the futures of Fannie Mae and Freddie Mac.

“The regulator here is very powerful,” Reiss said.

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Reiss on Bloomberg Terminals regarding GSE Litigation

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I was quoted on the Bloomberg Terminals (behind a very expensive paywall!) on May 6th about the Fannie and Freddie litigation:

Even if the Junior Preferred Shareholders get the Court to void the Third Amendment to the PSPA, they cannot force the companies to issue dividends so that shareholders receive a payoff. And if the government were to lower the guarantee fee that the two companies can charge or if it were to remove the government’s guarantee of the two companies, Fannie and Freddie’s profits would dissipate altogether.

Given that junior preferred shareholders have developed a multi-pronged strategy to squeeze as much value out of their shares as possible, it is worth attempting to determine the possible endgames that they have in mind. It is hard for me to identify a litigation outcome that results in money in their pockets for the reasons stated above. So the litigation strategy must be part of a broader strategy that involves lobbying over housing finance reform in Congress, lobbying the FHFA and other regulators or negotiating with the two companies. Given the amount of money at stake and the depth of the pockets of the junior preferred shareholders, one can imagine that they are playing a very long-term game, one that might last longer than all of the current decision-makers in DC right now. Some disputes arising out of the S&L crisis took many, many years to resolve so there is reason to think that the junior preferred shareholders have a multi-year or even decades-long perspective on this. And the farther away we are from the events of the 2000s and the emotions that they elicit from decisionmakers, the more likely it is that the junior preferred shareholders can negotiate a favorable result for themselves.

Reiss on de Blasio Housing Plan

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Law360.com quoted me in Developers, Attys Embrace De Blasio’s $41B Housing Plan (behind a paywall). It reads in part,

Real estate attorneys and their developer clients are cautiously optimistic about New York City Mayor Bill de Blasio’s new affordable housing plan, lauding its concrete objectives while noting that regulatory and financial hurdles could stall some of the most ambitious elements.

The mayor unveiled Monday the highly anticipated plan [you can find the plan here], which presents a $41 billion investment in affordable housing. He pledged to encourage affordable housing development by breaking down existing barriers to density, from adding efficiencies to the land use review process, to making better use of subsidies and tax incentives, to changing the multiple dwellings law to allow for higher floor area ratios at residential buildings.

The multifaceted approach appeared to appeal to many in the development community, who are eager to build across the city but have been uncertain in recent months about how the mayor’s plans to create or preserve 200,000 units of affordable housing would align — or compete — with their interests.

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While de Blasio’s new housing plan is mum on details, Deputy Mayor Alicia Glen said during the press conference Monday that the administration also planned to “take a hard look at where we are able to rezone or upzone to create more opportunities for affordable housing.”

During the last administration, more than 30 percent of the city underwent rezoning, opening up scores of new lots for developers but enraging many community groups and local residents who feared that new market-rate towers would bring with them skyrocketing prices and gentrification.

De Blasio said Monday, however, that while Bloomberg had changed the rules of land use in much of the city, many opportunities remain to increase density — and therefore affordable housing, with mandatory inclusionary zoning — by upzoning additional neighborhoods.

Experts say this may well be one of the most controversial aspects of the plan, though developers and their attorneys generally welcome it. For the most part, they are pleased with the administration’s direction, but the question remains as to whether the plans will be borne out in the face of opposition, said David Reiss, a professor at Brooklyn Law School who blogs about commercial real estate and housing issues.

“The big debate is: Are we going to have a real commitment to increased density in parts of New York City? And if we don’t, it’s hard to imagine we can really reduce the cost of housing,” he said.