Sunday, August 28, 2011
At the SEALS conference a few weeks ago, I was introduced to a great, free resource for law professors and law students: Practical Law (http://us.practicallaw.com). Designed as a paid, subscription service for law firms and libraries, those of us in law schools can get free access.
Click on a practice area of interest to access an organized list of practice notes, form documents, clauses, checklists, and articles. Materials about corporate & securities, employee benefits, finance, and labor & employment are well developed. Of interest to those of us who teach property and real estate courses is the “real estate” practice section. There are some good practice notes on commercial real estate, including workouts, REITs, mezzanine financing, and international real estate. The form documents (with notes) available to date mostly concern office leasing.
The real estate section is still under development, but this is a resource that I plan to keep an eye on as it becomes more robust.
Monday, August 15, 2011
Monday, August 8, 2011
According to the LA Times, an unusually large number of home purchase contracts are falling through. Lawrence Yun, chief economist of the National Association of Realtors, thinks that low-ball appraisals and tough mortgage underwriting are the main culprits. Interviews with realtors, however, suggest another cause:
Buyer confidence about the direction of the national economy has been badly rattled in the last six to eight weeks by the gridlock in Congress over raising the national debt ceiling and cutting the deficit. That is making buyers less willing to take a risk on a major purchase, brokers say. It's also making them pickier and more demanding when defects are found in home inspections and frequently is leading to contract cancellations for relatively minor reasons.
Monday, July 11, 2011
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.
Friday, May 20, 2011
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.
Thursday, May 19, 2011
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.
Thursday, May 12, 2011
Over at the Conglomerate, David Zaring is trying to get to the bottom of a mystery. Why are Real Estate Companies called organizations?
New York City alone has the Durst Organization, the Brodsky Organization, the Trump Organization, &c. Why are these called organizations? It's not that they aren't also limited liability companies as well. And it is the case that many non real estate firms will set up internal "real estate organizations" to manage their property. But my quick search on Westlaw and through the websites of these companies didn't reveal the reason for the fashion for the "organization" moniker. The question isn't easy to resolve via text searching ("organization" isn't very unique). So I thought I might crowd-source the question. Do our readers know the answer?
Monday, May 9, 2011
Friday, May 6, 2011
Brian Shannon (Texas Tech) has posted The Reach for Repose: Have the Texas Courts Gone Awry? (Texas Tech Law Journal) on SSRN. Here's the abstract:
What do lawsuits filed against building contractors or repairers, other construction professionals, and manufacturers or suppliers of products such as furnaces, elevators, garage door openers, underground storage tanks, and spray-on ceiling materials have in common? All of these actions, provided they have been initiated ten or more years after either the completion of the building project or the manufacture of the item in question, are potentially subject to a statute of repose enacted by the Texas Legislature in 1975. Although the language of this statute is couched in terms of providing repose protection to persons who construct or repair improvements to real property, Texas courts and federal courts applying Texas law have not limited the reach of the statute to cases involving construction professionals. Instead, the courts have greatly expanded the statute's range of applicability to cover off-site manufacturers of products that have become improvements to real property. In this regard, the courts are in error. With respect to persons other than construction professionals, the Texas courts have both misconstrued the statute of repose and virtually ignored the legislative history of the act. Accordingly, this article will examine the Texas statute of repose relating to persons who construct or repair improvements to real property in the context of both the decided cases and with regard to the intentions of the legislature in enacting the repose protections.
Thursday, May 5, 2011
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.
Wednesday, May 4, 2011
Henry Rose (Loyola Chicago) has posted The Due Process Rights of Residential Tenants in Mortgage Foreclosure Cases (New Mexico Law Review) on SSRN. Here's the abstract:
The purpose of this article is to explore the rights of tenants who reside in buildings undergoing foreclosure to receive notice and an opportunity to be heard when foreclosures threaten to terminate their tenancies. The federal Protecting Tenants at Foreclosure Act of 2009 (PTFA) will significantly reduce the incidence of residential tenancies being terminated as a result of foreclosure. However, PTFA offers weak procedural protections if the mortgagee or the person who acquires ownership pursuant to a foreclosure seeks to terminate the tenancies of residents in the foreclosed building. In those states that require judicial foreclosures, the Due Process Clause of the Fourteenth Amendment to the United States Constitution should afford tenants faced with termination of their tenancies due to foreclosure with notice and an opportunity to be heard before their tenancies are terminated. In states that allow non-judicial foreclosures, Due Process protections are not likely to be available to tenants due to a lack of state action in the foreclosure process. PTFA should be amended to afford all tenants, including those who reside in non-judicial foreclosure states, with notice and an opportunity to be heard before their tenancies are terminated pursuant to a foreclosure.
Tuesday, May 3, 2011
The NY Times proflies a number of new high-end developments that are building "maid's rooms" into their larger apartments. A gilded age, indeed:
Maid’s rooms built in the 1910s and 1920s tended to be barely six to seven feet wide. Apartments that came equipped with them have three or more family bedrooms and might originally have had more than one maid’s room. At 905 West End, the developer Samson Management took a Classic 8 — which had three bedrooms, a living room, a dining room, a kitchen and two maid’s rooms off of the kitchen — and shifted and expanded the bathroom that had been shared by the maid’s rooms, combining the remaining space to create one larger room.
“This way, for people who can have live-in help, they don’t need to fit them in a tiny box; they can have a proper bedroom,” said Louise Phillips Forbes, an executive vice president at Halstead Property who is heading up sales for the building. Listed as four-bedroom apartments, they range from $2.74 million to $2.925 million.
Wednesday, April 27, 2011
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.
Tuesday, April 26, 2011
The Wall Street Journal Reports that if you're in the market to buy a new home there's a "slew of new smartphone apps aim to make the job easier and save you time." Again, why do we still need realtors?
Tuesday, April 5, 2011
The New York times ran a story on Sunday about a "psychologically impacted" home in Windsor Terrace, Brooklyn. Four months ago, the owner was stabbed to death by her son. The article asks whether, "[i]n a city with a relative shortage of good housing, [does] the fact that someone has recently died in a home barely elicits a shrug from buyers"?
According to James Larson and Joseph Coleman, the answer is probably, "Yes." Laresen and Coleman, business professors at Wright State, conducted a study of 100 psycologicall impacted homes - places that had been the site of a murder, suicide or illness. They found that such properties take 50 percent longer to sell than comparable homes and bring in an average of 2.4 percent less. All good facts for the next time I teach Stambovsky.
Christopher Odinet (Phelps Dunbar) has posed Towards a Convention for the International Sale of Real Property: Challenges, Commonalities, and Possibilities (Quinnipiac Law Review) on SSRN. Here's the abstract:
In a world that is increasingly global in scope, society has come to view the ever-growing body of international commercial laws as being exceptionally important. This is evidenced through the adoption of several high profile pieces of legislation over the past several decades: International Interest in Mobile Equipment - Study LXXI, the EU’s Draft Common Frame of Reference, the EU Directives on Consumer Protection, and, most noteworthy of all, the Convention for the International Sale of Goods (CISG).
As raised by Professors Sprankling, Coletta, and Mirow, what has been conspicuously absent from this growing body of laws is an international framework for the sale of real property across national borders. This absence is not surprising, considering the way society has historically conceptualized property law. Real property is local and individualistic in nature. The laws governing real property vary from country to country and even region to region. Property law is both rigid and inflexible, thus there is very little opportunity for the parties to a real estate transaction to materially modify or shape the contract. However, times have changed and so has the way people think about real property transactions. The sale of real property increasingly reaches across these national borders. The purchasing of vacation homes in other countries, the acquisition of real property for those who live near border areas, and the acquiring of real property by multi-national and international companies is an undeniable part of the global economy. Society has come to realize the integral part that real estate transactions play in a robust global economy.
The time has come for a rethinking of the way society views real property. This involves a questioning of the current legal patchwork governing real estate transactions that an international buyer must navigate in order to consummate the sale. In so doing, jurisdictions should take the next step on the road toward an ever-more vibrant global economy: the creation and global adoption of a framework for the international sale of real property.
This article begins a discussion of whether a convention for the international sale of real property, akin to the highly successful and somewhat similar CISG, could realistically be developed and, in doing so, hopes that future scholars and policy-makers will continue to explore the possibility of such a system. This is accomplished by reviewing three common features of all real property contracts - contract formalities, warranties of title, and security financing - and discusses their importance to an international investor. It further examines how three different countries currently which are highly engaged in international business and investment - the U.S., China, and France - view contract formation requirements, warranties, and security financing, and determines, based on general comparisons, whether a convention for the international sale of real property could be developed for each basic real property contract provision. Finally, this Article concludes by arguing the many existing shared contract principles in each of the subject countries makes an international framework, at least with regards to these particular provisions, very promising.
Monday, March 7, 2011
I have posted Too Big to Fail vs. Too Small to Notice: Addressing the Commercial Real Estate Debt Crisis on SSRN. (This is the bigger article that I teased earlier.)
I have directed this article to policymakers and scholars, but I hope that it may also be useful for those teaching Real Estate Transactions, to supplement textbooks by providing a current snapshot of the state of the commercial real estate industry.
Many thanks to Jim Durham of Dayton for taking time out of his vacation to read and comment on this piece!
Here's my abstract:
The commercial real estate industry has been devastated by the current economic crisis, losing 40% in value since the end of 2007. As a result, commercial real estate borrowers owe lenders $1 trillion more than their properties are worth. Although the federal government has been warned that the commercial real estate debt crisis may cause a double-dip recession, the government’s response thus far has been to allow the market to work itself out. This Article argues that this laissez faire response rests upon flawed assumptions about the structure of the commercial real estate industry. Compounding the problem, policymakers are incorrectly interpreting increased lending and transactions in the upper echelons of the market as a signal that their policies are working. Instead, the current approach has forced sales at distressed prices, numerous foreclosures, and, perhaps most importantly, significant small bank failures without any systemic benefits. Policymakers have seen these losses as an unfortunate but unavoidable cost of the recovery process, and dismissed these small actors as not “systemically important.” In fact, this Article argues that in the aggregate, small commercial real estate borrowers and small banks are vital to fueling job creation and economic recovery. By focusing primarily on the health of large financial institutions, borrowers, and properties without due consideration for the smaller players, the current policy may lengthen the economic crisis by placing further stress and uncertainty on some of the most vulnerable segments of the economy.
As always, comments are much appreciated!
[Comments will be held for approval and may be delayed]
Tuesday, February 22, 2011
It can in New York, according to the 2010 decision in Naldi v. Grunberg, 80 A.D.3d 1, 908 N.Y.S.2d 639 (N.Y.A.D. 2010). In the opinion, the court wrote that "[W]e would conclude that the terms "writing" and "subscribed" in General Obligations Law §5-703 should now be construed to include, respectively, records of electronic communications and electronic signatures, notwithstanding the limited scope of the 1994 amendment of the general statute of frauds."
This case concerned a dispute over whether a binding right of first refusal for real property could be created via e-mail. It is interesting because although the court rejected the argument that the e-mail did not satisfy the statute of frauds, it held that the right of first refusal was not created because there was no meeting of the minds.
[Comments are held for approval and may be delayed]
Friday, February 11, 2011
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]
Wednesday, December 8, 2010
I have been a total blogging slacker, for which I apologize. I've been fairly obsessed with commercial real estate debt for the past month or so and reading documents with lots of numbers. One such document is the Mortgage Bankers Association report on delinquency rates in the third quarter of 2010. Not good news. I have made a nifty chart to illustrate this data which I will hopefully attach to this post without incident:
The best estimates are that $1.4 trillion of commercial real estate debt will mature before 2014, and the estimated equity gap (difference between refinancing proceeds and payoff amounts for prior debt) will exceed $800 billion. I'm working on an article that attempts to describe how this problem came to be and what we might be able to do to solve it. If you have any thoughts on the subject, please share.
[Comments will be held for approval and may be delayed]