PropertyProf Blog

Crowdfunding for Real Estate Development

Businessweek reports this week that NYC real estate developer Prodigy Network is experimenting with crowdfunding as means of financing real estate development.  Rather than investing in a pool of funds that finance many developments, individual investors will purchase shares of a particular development, and be entitled to a share of rents and appreciation.  Prodigy used the model successfully in Colombia to develop the nation's tallest skyscraper, but it hasn't been tried in the United States until now.  Prodigy intends to use crowdfunding to raise $26M (of about $90M it needs) to buy and improve 84 William Street in Manhattan.

Crowdfunding is all the rage in the start-up world.  The mortgage and foreclosure crisis put a serious dent in the availablity of real estate financing in the United States.  It will be interesting to see whether the crisis has left a hole in the market that crowdfunding can fill, and whether it will be a durable solution.  Any thoughts?

Mark A. Edwards

 

You Can't "Buy" a Green Card, But....

...if you have $500,000 to invest in a commercial enterprise in a targeted employment area ($1,000,000 in a non-targeted area), and plan to create at least ten permanent full time jobs for qualified US workers, then you may be in luck.

The New York Times has a story about the EB-5 Immigrant Investor visa program today, and the investment that it has spurred in a remote part of Vermont, described by the developer as the "biggest economic development project Vermont has ever seen."  Promising to create 10,000 new jobs, the price tag on the construction spree is $865 million. 

What's really interesting is how the project got financed.  The lead developers are investing $90 million, and they have raised $275 million for the first phase of the project from 550 foreign investors in 60 countries.  Phase II will require an additional 1,000 investors willing to invest $550 million.  Those investors are seeking a green card through the EB-5 Immigrant Investor program. Around since 1990, the program has been particularly popular with hotel developers since the financial crisis put a crunch of commercial real estate loans in 2008.  Developers particularly appreciate that EB-5 investors are focused on more than the profitability of the project.  As one observer put it bluntly:  “Foreigners are buying visas and are much less concerned about the rate of return they earn on their investment,” said David Loeb, a senior analyst at Robert W. Baird.

Although the program is not limited to investments in real estate, investments in commercial real estate have been a popular mechanism for gaining the EB-5 visa.  Companies have sprung up to help vet real estate investments and assist potential investors in navigating the process.  For example, one company advertises on its website: "American Life offers secure real estate investments to local and immigrant investors ... You make an investment that also qualifies for an EB-5 immigrant visa and we provide the necessary services and information required to obtain your U.S. green card."

The creative financing employed by the Vermont developers is still fairly unusual, but the program that they are leveraging has been growing rapidly.  According to the Times, in 2006 the government issued 802 EB-5 visas.  In 2011, it issued 7,818.  There is an annual limit of 10,000 EB-5 visas.

So, if you have always wanted a U.S. green card and have an extra $500,000 or $1,000,000 lying around, you probably want to act quickly in 2013 before the EB-5 visas run out. 

Tanya Marsh

Backfilling Vacant Borders Stores

The Wall Street Journal has an interesting piece on the struggle of shopping center owners to backfill former Borders locations, a year after the book seller closed its doors.  In Winston-Salem's Thruway Shopping Center, the Borders space is being retooled for Trader Joe's to open in August.  While I miss having the book store, I welcome not having to drive to Charlotte for my favorite Trader Joe's items.  But as chains which occupy large boxes fail, backfilling those spaces becomes more problematic, particularly at the healthy rents the former tenants paid.  For example, the Circuit City location on Hanes Mall Boulevard remains empty, three years after it closed its doors.

Tanya Marsh

Keep a Very Close Eye on the Foreclosure Fraud Settlement

It seems as though every day for weeks now we've been told a settlement between state attorneys general and fraudulent foreclosers -- by which I mean the largest home mortgage lenders in the country -- is imminent.  The banks appear to be balking because they expected the type of suit filed by New York Attorney General Eric Schneiderman to be prohibited under the settlement -- but since Schneiderman is one of the key players in the settlement talks, there seems to have either been a serious misunderstanding or a serious play for leverage by Schneiderman.  For an excellent analysis of the negotiations, and of the foreclosure crisis generally, I can't recommend Yves Smith's blog Naked Capitalism highly enough.

One issue that MUST be non-negotiable is the ability of people who were wrongfully foreclosed upon to maintain civil suits against their foreclosers.  There is no indication that such suits will be barred under the settlement, but since the negotiations are not transparent we can't know until the settlement is announced.  My first year property students have now spent weeks studying the crisis -- in part because I'm hoping to ready these young lawyers-to-be to take up the fight to ensure that foreclosure fraud doesn't pay and that its victims receive restitution.  But if the state attorneys general negotiate away the only avenue victims of wrongful foreclosure have for relief, it will be the final injustice in a long, long line of them in this crisis.  Not to mention a defeat for the rule of law.

For a very good discussion of how we should assess the settlement, when it is finally arrived at and released to public scrutiny, see this article by Richard Eskow.

Mark A. Edwards

Nevada Gets Tough on Foreclosures

The LA Times reports that the number of Nevada properties that entered foreclosure fell by 75% in October, even as the rate climbed elsewhere in in the country.

That news, though, did not result from a reversal of fortune in the Nevada housing market. It was spawned by a new Nevada law that plays hardball with companies doing the foreclosing.  Assembly Bill 284, which took effect in October, requires those foreclosing on a home to file an affidavit proving they have the right to bring the action — and it increases civil and criminal penalties for using fraudulent documents in a foreclosure.

Steve Clowney

Mortgage Assignments and Mortgage Taxes

The New York Times on why people thinking about refinancing their home loans should look into mortgage assignments.  "Instead of granting and recording a new loan when a borrower refinances, the assignment process transfers a mortgage to a new lender, which then revises it."  The borrower then doesn't have to pay mortgage recording taxes on this amount.

Steve Clowney

When $625,500 Doesn't Cut It

The New York Times explores how new limits on federally guaranteed mortgages will have a disparate impact on the housing market in big cities:

On Oct. 1, when the limit on federally guaranteed loans drops to $625,500 from the current level of $729,750, hundreds of buyers in the city and nearby suburbs will either have to come up with larger down payments to stay under the new limit or face the prospect of applying for jumbo loans — anything above $625,500 — which have higher interest rates.   . . .  “Across the country this is not a big deal,” said David Maundrell, the president of aptsandlofts.com “but in New York, because our prices are where they are, it’s going to be an issue.”

Steve Clowney

Obama Administration Considering Plan to Encourage Mortgage Refinancing

Yesterday the New York Times reported that the Obama administration is considering a plan that would “allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent.”  If it gets the green light, the plan could save homeowners $85 billion a year and inject some needed stimulus into a sluggish economy.  Matt Yglesias argues that the scheme makes a lot of sense.  Ezra Klein does some digging and explains why the scheme is unlikely to work.  

Steve Clowney

Taxing Church Land, Ctd.

One the topic of taxing non-profits, here's an idea from LTVfan, one of our commentators:

I'm heartily in favor of taxing the land under nonprofit buildings; I'd favor exempting the buildings themselves from taxation.  Valuing land well and accurately is relatively easy; valuing buildings, particularly special-purpose buildings like churches, is much more difficult and expensive.

Many downtown churches sit on large pieces of land, bought decades or centuries ago, perhaps with the foresight of land speculators in the lay leadership.  Frequently, the land is underused, and currently no mechanism exists to nudge it into more use.

But I encourage you to consider the effects (and costs) of taxing ANY buildings, and submit that we'd be wiser to simply tax land value, and treat buildings and their contents as private property, not subject to taxation.  Land value, unlike the value of buildings and personal property, is created by the community, and is thus a logical and just base for taxation.

You might explore Henry George's Single Tax, best laid out in his landmark book, "Progress and Poverty," available online at its dot org.

Steve Clowney

Pavlov and Wachter on REITS

Andrey Pavlov (Simon Fraser) and Susan Wachter (Penn - Wharton) have posted REITS and Underlying Real Estate Markets: Is There a Link? on SSRN.  Here's the abstract:

This paper utilizes the Carlson, Titman, and Tiu (2010) model of REIT returns to estimate the strength of the relationship between REIT and underlying real estate returns. Our work further offers an innovative method for computing the returns of the real estate properties underlying each REIT using the Moody’s/REAL commercial property price indices by region and property type. We find a statistically significant relationship between REIT and real estate returns only in the office sector. Other property types offer only very weak and insignificant relationships. This finding suggests that direct real estate investment or investment through the property price index derivatives cannot be replicated using REITs.

Steve Clowney

Pottow on Consumers' Ability to Pay Mortgage Loans

John Pottow (Michigan) has posted Ability to Pay on SSRN.  Here's the abstract:

The landmark Dodd-Frank Act of 2010 transforms the landscape of consumer credit in the United States. Many of the changes have been high-profile and accordingly attracted considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau (CFPB). But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as CFPA did get into the law: imposing upon lenders a duty to assure borrowers’ ability to repay. Ensuring a borrower’s ability to repay is not an entirely unprecedented legal concept, to be sure, but its wholesale embrace by Dodd-Frank represents a sea change in U.S. consumer credit market regulation. This article does three things regarding this new duty to assess a consumer’s ability to pay mortgage loans. First, it tracks the multifaceted pedigree of this requirement, looking at fledgling strands in U.S. consumer law as well as other areas such as securities law; it compares too its more robust embrace in foreign systems. Second, it offers conjecture regarding just how this broadly stated principle might be put into practice by the federal regulators. Finally, it provides a brief normative comment, siding with the supporters of this new obligation on lenders.

Steve Clowney

Mayer et al. on Mortgage Modification and Strategic Behavior

Christopher J. Mayer (Columbia Business), Edward R. Morrison (Columbia Law), Tomasz Piskorski (Columbia Business) and Arpit Gupta (Columbia Business) have posted Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide on SSRN.  Here's the abstract:

We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.

Steve Clowney

 

FHA Loans Still the Best?

Kenneth Harney of the L.A. Times reports that although FHA has raised some fees, it still offers homebuyers many advantages over its private-sector rivals:

The FHA . . . continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won't touch.

Steve Clowney

Borden and Vattamala on Series LLCs in Real Estate Transactions

Bradley Borden (Brooklyn) and Mathews Vattamala (Student-Brooklyn) have posted Series LLCs in Real Estate Transactions (Real Property, Probate, and Trust Law Journal) on SSRN.  Here's the abstract:

Series limited liability companies are a fairly new form of business entity. Some observers worry that series limited liability companies are untested and business and property owners should wait to use them. Meanwhile, tax and business law practitioners are moving forward, recommending that their clients take advantage of the opportunities series limited liability companies present. This article reviews the growing popularity of series limited liability companies and the statutory framework of the Delaware series limited liability company statute. It suggests that any hesitancy to use series limited liability companies is unfounded and that they will continue to grow in popularity. The article then discusses the tax classification of series, concluding that recently proposed Treasury regulations provide property and business owners considerable latitude in choosing the tax classification of series. Finally, the article illustrates how property owners may use series limited liability companies to minimize the complexities of ownership and transactional structures.

Steve Clowney

Boyack on Regulating Fannie Mae and Freddie Mac

Andrea Boyack (George Washington) has posted Laudable Goals and Unintended Consequences: The Role and Control of Fannie Mae and Freddie Mac (American Law Review).  Here's the abstract:

The United States is struggling to emerge from an era of loose mortgage underwriting standards – lapses in credit analysis that led to origination and securitization of toxic loans. The fallout has been crippling, costing borrowers their homes, investors their money, and the government its taxes.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) passed last summer was the first comprehensive effort to address the problems in the system that led – in sequence – to the subprime crisis, the housing crisis, and the financial crisis. The Dodd-Frank Act, which contains over 2,300 pages of legislation, is very broad as well as very detailed – even though hundreds of rulemakings have yet to completely define its parameters. But this extensive legislation deliberately did not deal with the biggest elephant (or perhaps elephants) in the room: Fannie Mae and Freddie Mac. These government sponsored enterprises (GSEs), behemoths of the secondary mortgage market, are currently in conservatorship and have (so far) cost taxpayers over $130 billion. Yet our current residential mortgage market is utterly dependent upon them for credit and liquidity. With political pressures to stop taxpayer bailouts and the reality of a frozen mortgage market should Fannie Mae and Freddie Mac cease to exist, when it comes to the GSEs, the administration feels damned if they do and damned if they don’t.

For decades, the U.S. mortgage finance system was the envy of the world – the only industrialized nation to have a significant segment of housing costs covered by private capital through a securitization investment system. The United States is the only country to routinely offer homebuyers 30-year fixed-rate pre-payable mortgage loans. Better capital accessibility has made more homeownership opportunities more available to more Americans. The GSEs have performed a vital role in financing the production of rental housing as well. Our real estate capital markets set the gold standard worldwide for what is possible in freeing trapped asset values and increasing the wealth of borrowers and investors alike.

Over the past decade, this system undoubtedly became unhinged – and it is critical to reform its failings. But a complete wind-down of the government sponsored enterprises that are the linchpin of our housing finance system goes too far. Subtracting Fannie Mae and Freddie Mac from the finance equation may very well be market suicide, and the repercussions for borrowers, communities and investors would be dire indeed. Furthermore, this extreme step is unnecessary: the system’s failures can be adequately (and better) addressed within the GSE framework.

Undoubtedly there is still ample dirty “bathwater” to throw out as we reform the mortgage finance market system. But it would be an excruciating mistake to bow to political pressures and throw out the “baby” too. Current and future mortgage borrowers will only be adequately “protected” if they are empowered through access to capital, appropriately constrained by valid underwriting criteria. A well functioning market – rather than political scapegoating – is the best way to emerge from the recession and protect future buyers and investors alike.

This article first discusses the history and purposes of the GSEs and what went wrong with the system that led to the 2008 conservatorship and bailout. With reference to the Obama Administration’s February 2011 Report to Congress, “Reforming America’s Housing Finance Market,” Part II analyzes proposals to reform and wind down the GSEs in light of their likely legal and market impact. Part III offers some general suggestions on better approaches to crafting America’s future mortgage market and advocates for solutions more precisely tailored to remedy apparent systemic problems while achieving the identified policy goals.

Steve Clowney

White House Releases Plan for the Future of Housing Financing Market

The White House released a proposal today that would dramatically alter the long-term future of the American housing financing market, in ways that are almost as important and fundamental as the creation of the FNMA (later Fannie Mae) in 1938.

Starting in 1938, the U.S. government created and became the most important -- and often only -- player in the secondary mortgage market.  The FNMA bought loans and mortgages from banks, thereby allowing lenders to transfer the risk of default, but only if those loans met certain quality standards.  The secondary mortgage market was a great success and was responsible for much of the post-war housing boom in America.  The FNMA was semi-privatized in 1968, becoming Fannie Mae.  It helped created the mortgage-backed securities market, but when faced with competition from other players in the secondary mortgage market who captured market share by purchasing and securitizing loans that didn't meet its quality standards, Fannie Mae lowered its standards.  Because the appetite of investors for mortgage-backed securities was voracious, there was soon a race to the bottom through subprime lending.  Because Fannie Mae still had special privileges with regard to taxation and borrowing from the federal government, many investors assumed or gambled that Fannie Mae would be rescued by the federal government in the event it began to crash.  It did, and they were right.

The new plan's main objective is to release the United States from it's role as a de facto backstop for Fannie Mae, so that taxpayers aren't liable for reckless lending -- and presumably, so that reckless lending is less likely since liability for it will stay with lenders.  It offers 3 paths to that goal, essentially gradations of the same objective -- either (1) limiting its backstop role to certain targeted borrowers (such as lower income borrowers purchasing affordable housing), who meet the previously enforced Fannie Mae quality standards; (2) limiting its role to those borrowers during a time of crisis; or (3) eliminating its backstop role entirely. 

If implemented, any of these plans is likely to raise the cost of borrowing, since the risk of default must be priced into the private market system in ways that it may not have been previously.  I intend to write more about the plan's implications as I have more time to study it, but it is safe to say that what is envisioned is a reduced participatory role for the government in home lending; what isn't yet clear to me is whether the regulatory role of the government will increase or decrease correspondingly.

An apparently ideologically-distasteful truth in this mess is that the FNMA worked very well from 1938 to 1968.  But there is no stomach now for a government agency capturing an entire private market, even though it was able to impose quality standards that kept the market stable and functioning.  Since there is no stomach to dominate the market, the question is whether any participation is appropriate.  The plan's answer: perhaps, but only in the most limited sense.  My concern is that in the absence of significant particpation, quality assurance can only be achieved either by extensive oversight, or by rules that cause lenders to impose quality on themselves.

Given that, I still like my half-baked idea: lenders can make loans on whatever terms they choose, but they can't sell them all on the secondary market.  Instead some percentage -- let's say 20% -- must stay in-house in the portfolio of the originator.  But here's the key: that 20% is chosen randomly, by some computer sitting in a government agency that knows only the loan number.  It's lending Russian roulette.  Lenders can decide there own risk tolerance, but they can't fully escape it.  That should reduced the number of risky loans.

Meanwhile, the 80% of loans that enter the secondary market create capital for home lending.

Got another idea?  Speak up -- let's get in on the conversation about the future of housing finance in the United States.  If not us, who?

Mark A. Edwards

[comments are held for approval, so there will be some delay in posting]

Summary of State Foreclosure Laws

My colleague Juliet Moringiello pointed me to the National Consumer Law Center's handy summary of state foreclosure laws.  Lost of useful stuff in there.

Ben Barros

[Comments are held for approval, so there will be some delay in posting]

A Modest Proposal to Avert Another Mortgage-Backed Securities Disaster

At its core, the mortgage-backed securities crisis is the product of an inadequately regulated mortgage-industry system.  This inadequacy resulted in a massive transfer of wealth from you and me to lenders and investment banks, and an economic crisis that continues the plague the country.

So I've been playing a thought-game: what's the smallest amount of regulatory reform that would completely prevent this disaster from recurring? 

I've got a nominee.

Before I explain it, I need explain how we got to the point where we need it.  To that end, here's the mortgage-backed securities crisis, in 10 easy-to-understand steps!

(follow the bump)

 

OK, here's the mortgage-backed securities crisis in 10 easy-to-understand steps:

(1) At one time, lenders who made mortgage loans kept those loans in-house; they got the benefit from the loan payments, and they got the cost from default.  Their insurance against the cost of default was foreclosure and sale. 

(2) That system shut down during the Great Depression.  To get home lending working again, the federal government created a brilliantly-conceived secondary market for mortgage loans: lenders could make loans, and then rather than hold onto them, sell them to someone else.  This lessened lenders' risks, so they were more willing to make loans.

(3) The entity that purchased these loans from lenders was an newly created government agency called the Federal National Mortgage Association (FNMA).  But -- and this is critical -- the FNMA would only purchase loans that met certain quality standards.  The borrower had to produce a significant downpayment (usually 20%), borrow money at a fixed-rate, take a long-term loan, and could not take on debt that exceeded a modest debt-to-income ratio.  That meant that (a) the risk of default, and thus foreclosure, was quite small, and (b) the U.S. housing market was remarkably sound and stable.

(4) The FNMA eventually held over 80% of the mortgage loans in the United States.  It was ideologically distasteful to have a government agency hold such a huge portion of private loans in a capitalist economy, so FNMA was privatized and became the company known as Fannie Mae. 

(5) Investment banks and new lenders began to compete with Fannie Mae to purchase loans on the secondary market, because they could pool the loans together and sell securities in the pool to investors. 

(6) Investors loved these mortgage-backed securities, because they were perceived as a very safe and reliable investment: after all, the U.S. housing market had been remarkbaly sound and stable.

(7) Investment banks and lenders competed with Fannie Mae by purchasing loans that did not meet the FNMA's quality standards: no money down, no income-to-debt ratio, adjustable rates, short term loans.  Fannie Mae responded by lowering its standards.  A race to the bottom began.  Soon, Fannie Mae and the investment banks were securitizing pools of very,very low-quality mortgage loans. 

(8) Investors, relying on a historically stable U.S. housing market without considering that the conditions that created that stability (i.e., FNMA's quality standards) had been undermined, continued to buy up mortgage-backed securities.

(9) Lenders, who made their profits not by receiving a stream of payments on loans, but instead by making loans and instantly selling them on the secondary market, had every incentive to make as many low-quality loans as possible as quickly as possible.

(10) Borrowers took on loans they couldn't afford and would have to re-finance in short order.  They secured those loans with their homes.

It was a house of cards that couldn't possibly last, and both lenders and investment banks knew it.  Borrowers didn't know it.  Investors in mortgage-backed securities didn't know it.  But lenders and investment banks knew it.  It is bitterly ironic therefore that we, through the Bush Administration's TARP rescue program, saved lenders and investment banks, but not borrowers or investors.

Now we are caught in a continuous spiral.  Foreclosures flood the market, which drives down home values.  Home values fall below the amount outstanding on short term mortgage loans that need to be re-financed.  Those homes can't be re-financed, because their re-sale value in the event of foreclosure won't cover the amount borrowed.  The homeowner in need of re-financing now must either pay the entire principal on the loan, or go into foreclosure.  Foreclosures flood the market, which . . . . You get the grim picture. 

I don't know how to get us out of this mess, but I do have a modest proposal to help prevent it from recurring.  One solution would be to keep Fannie Mae nationalized, re-convert it to the FNMA, and re-impose its old quality standards on the secondary market.  But politically?  Ain't happening.  Apparently it's still, despite everything we've been through, too ideologically distasteful. 

So how about this?  From now on, lenders have to keep a certain percentage of their loans in-house.  Say 20%.  But here's the key: they don't get to choose which ones.  That's decided randomly.  No lender who has a 20% chance of having to bear the cost of a low-quality loan is likely to make one without some serious pause.  Think of it as forcing lenders to internalize some of the risk of their behavior. 

One regulation.  Call it the 'toxic-asset roulette' rule.  The rest of the de-regulated mortgage-backed securities system can stay in place. 

What do you think?  What are your ideas?

Mark A. Edwards

[Comments are held for approval, so there will be some delay in posting] 

 

 

A Government-Mandated Foreclosure Moratorium is a Popular (and Bad) Idea

I apologize for the shameless self-promotion, but I just had an op-ed published on Huffington Post.  The Washington Post reported today that over half of Americans support a mandatory moratorium.  In my piece, I defend the White House's resistence to popular calls for a government-mandated foreclosure moratorium.

I didn't delve into this point in the op-ed, but does anyone know what the proposed legal basis of a foreclosure moratorium might be?  I find the idea that the President or Congress could order state courts to halt hundreds of thousands of cases between private parties fairly mind-boggling.   

Tanya Marsh

[Comments are held for approval and may be delayed]

Sample Real Estate Financing Documents for Teaching?

I'm looking for forms of (a) a deed of trust; (b) a sale-leaseback; (c) an installement land contract; and (d) a subordination agreement from a real estate context to use with my students.  I have the Fannie Mae form deed of trust, but would like to see other samples.  Forms for notes and mortgages are pretty easy to come by, but if you have any that you really like, I'd love to see those as well.  If you have any such forms that you'd be willing to share, please e-mail me - propertyprof@gmail.com .

Thanks.

Ben Barros

[Comments are held for approval, so there will be some delay in posting]