Tag Archives: North Carolina

Supply and Demand in a Hot Market

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photo by Subman758

The Asheville Citizen-Times quoted me in Apartment Occupancy Dropping, but Rents Not Budging Yet. It reads, in part,

Tell Marie Kerwin the city’s apartment vacancy rate has dropped a few notches – meaning a lot more units should be available – and she may beg to differ.

“There’s not a lot of options,” said Kerwin, “It took me months to find an apartment. I actually was calling every complex, every day.”

Kerwin and her husband, Christian, relocated to Asheville a year ago from Jacksonville, Florida, both taking jobs with the Earth Fare supermarket. Kerwin said they “got lucky” in finding a place at The Palisades, a 224-unit complex off Mills Gap Road in Arden that opened last summer.

For renters like the Kerwins, it might not seem like it, but the city’s apartment vacancy rate — famously pegged at 1 percent in a consultant’s report published a year-and-a-half ago that looked at Buncombe and three other counties — is dropping, meaning more units are available. That also should mean, theoretically, rents will decline, but that hasn’t happened.

A tight apartment market has dominated local discussions about affordable housing and livability in the Asheville area for nearly two years. But while that vacancy rate is dropping to a more livable range of around 6 percent, rents likely won’t fall over the next couple of years, experts say.

‘A very tight market’

“Typically, Asheville is a very tight market,” said Marc Robinson, vice chairman of Cushman & Wakefield, a global company that tracks apartment trends, including occupancy and rents.

Whether rents will drop with new apartments being built is “a hard call,” he added, “because on the one hand there is a supply entering the system, and that market has really seen lot of supply at one time — more supply than it would have historically seen. But in many markets, including Raleigh, Charlotte and Atlanta, absorption (of new units) has been better than expected.”

Robinson’s company, Multi Housing Advisors, now part of Cushman & Wakefield, issues quarterly reports on the apartment market. Its “MHA Market Insight” first quarter report for Asheville noted:

• “Properties built from the 1980s to the 2000s are maintaining an average vacancy rate in the 6 percent range, compared to 3 percent for properties built in 1970s or earlier.”

• “The average vacancy for properties built after 2009 is approximately 19 percent, which is skewing the vacancy rate upward,” in part because in a smaller market “additions to supply have an amplified effect.”

Robinson said his company’s figures from about two months ago show the Asheville area has “about a 3 percent vacancy, and in real time it may be a little higher.” In North Carolina, the rental vacancy in the first quarter stood at 8.2 percent, according to U.S. Census data.

By some estimates, the Asheville area, including surrounding Buncombe County and Fletcher, has had or will have in coming months about 2,200 new units coming online, well short of the 5,600 units the consultant recommended be built to meet demand.

“The pipeline of new construction (of rental properties) over the next three to five years will still not meet the forecasted demand so for the short-term we can expect to see the rental rates remain high, vacancy rates to remain at record lows,” said Greg Stephens, chief appraiser and senior vice president of compliance for Detroit-based Metro-West Appraisal Company.

Several firms track such information, including Real Data, a Charlotte-based real estate research firm. Using market surveys rather than sample data to compile its statistics, Real Data found the vacancy rate among apartment complexes with at least 30 units in Asheville, Buncombe County and Hendersonville was 6.9 percent in December.

Theoretically, all this should mean rents will come down, as people move from older apartments to newer ones, and apartment companies have to make concessions, such as lowering rents.

Apartments under construction has been a common sight in the Asheville area in the last two years, and that has eased vacancy rates some, experts say. This complex, the Avalon, went up in 2014 off Sweeten Creek Road and is now open.

But this is Asheville, where millennials keep moving in and retirees are drawn to great weather, arts and restaurants. From March 2015 to March 2016, Asheville saw the highest spike statewide in the average cost of renting an apartment, a 7.6 percent jump.

For the first quarter of 2016, MHA Market Insight found the average rent for one-bedroom apartments in Buncombe, Henderson, Haywood and Madison counties was $821, representing a 6.2 percent one-year growth in rent. A two-bedroom went for $964, 4.3 percent growth.

Kerwin said she and her husband are paying $1,095 a month for their two-bedroom, two-bath, 1,125-square-foot apartment. In Florida they paid $1,100 a month for an 1,800-square-foot three-bedroom.

“It’s definitely more expensive to live here,” she said.

Rising vacancy rates combined with rising rents is a national phenomenon, said Jonathan Miller, the New York-based co-founder of Miller Samuel, a residential real estate appraisal company, and the commercial valuation firm Miller Cicero.

“New development that skews to high-end rentals has been overplayed,” Miller said. But moderate rental development stock “has remained largely static.”

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Solutions far off

That is not what some members of Asheville City Council want to hear right now. Councilman Gordon Smith, who’s on the city’s Housing and Community Development Committee, said the city has formulated a comprehensive affordable housing strategy and has talked about an “all of the above approach.”

That includes increasing zoning density to allow more units per acre and encouraging developers to use city-backed incentives to build apartments.

The city is also in the midst of calling for a voter referendum on a $74 million bond issue, with $25 million of that potentially earmarked for affordable housing. If passed, it could include a $5 million addition to the existing revolving loan fund for private developers to build affordable rental housing, and $10 million for land banking or repurposing city-owned land, which would involve offering that land to developers for construction of affordable housing.

Rusty Pulliam heads Pulliam Properties, a commercial real estate firm that has become active in the apartment industry in recent years, building the 280-unit Weirbridge Village in Skyland and the 180-unit Retreat at Hunt Hill. This year the company also received approval to build a 272-unit complex on Mills Gap Road in Arden, which will include 41 units designated as “affordable,” a number Pulliam agreed to bump up at council’s urging.

Pulliam said he can still make money at the Mills Gap site because demand is so high that he can build a “premium complex” and charge high enough rents to make it work. But in the long run, he said, solving the apartment crunch does not require a Ph.D.

“If we were building middle-of-the-road apartments, we couldn’t do it. But until we put out there, as the Bowen report stated, 5,600 units in the marketplace, I don’t see that rents are going to come down, especially when see we’ve got a (3.5) percent unemployment rate and rents went up 7.6 percent, even when a lot of units did come on line.”

Unemployment in Buncombe County dropped to 3.5 percent in May, the lowest in the state.

People have always loved moving to Asheville, a trend that essentially never abates. Our region continues to grow not because of the birth rate but because of in-migration.

The U.S. Census Bureau projects Buncombe County’s population to grow to 300,000 by 2030, up from 253,178 in 2015. While the mountains are known as a retirement haven, millennials are coming here, too, with growth in that segment over the past five years outpacing that of baby boomers, people of ages 50 to 69, and Generation X, which includes ages 35 to 49.

In short, that’s a lot of apartment demand.

Other cities the challenge facing Asheville, said David Reiss, a professor of law and the research director at the Center for Urban Business  Entrepreneurship at Brooklyn Law School in New York.

“During the Great Recession nothing got built,” Reiss said. “The same thing happened in New York.”

Some economists believe that “when vacancy rates are below 5 percent, you have the ability to raise rents significantly,” he said.

The MHA Market Insight first quarter report noted that “fewer than 700 units are currently under construction at five properties” in Asheville, so we’re still a long way from that 5,600 units figure.

Reiss said a full-court approach such as the one Asheville is taking can be useful, but he also urged caution.

“Whatever they decide the solution is, it takes years to implement those ideas,” Reiss said. “Whether it’s a developer or the city government, it takes a long time to get a solution in place.”

Smoldering FIRREA

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Jens Buurgaard Nielsen

American Banker quoted me in Banks Take Losses in MBS Case Appeals; Is Supreme Court Next? (behind a paywall) The story reads, in part,

Banks that sold faulty mortgage-backed securities right before the crisis have suffered a string of legal defeats over the timing of government lawsuits, but some experts believe the industry may still have a shot in the Supreme Court.

Since the crisis regulators have brought a slew of actions against big banks for assets they sold to acquirers that ultimately failed. But in some cases, the parties have tussled over whether the government missed the statutory deadline for bringing a claim.

Appeals courts lately have disagreed with banks that plaintiffs missed court filing deadlines imposed by state law and other regimes, which are stricter than deadlines in federal law. Most recently, the U.S. Court of Appeals for the 5th Circuit ruled in favor of the Federal Deposit Insurance Corp. in the agency’s case against RBS Securities and other issuers related to the 2009 failure of Guaranty Bank.

Still, other cases are pending and some say banks may be emboldened after the Supreme Court last year favored state-mandated timelines in an environmental case.

“I would expect that [banks] would continue to try to pursue the issue and get relief from the Supreme Court,” said Paul Rugani, a partner at Orrick, Herrington & Sutcliffe LLP based in Seattle.

The government has sought billions from MBS issuers that officials say misrepresented the quality of securities leading up to the crisis. The FDIC and National Credit Union Administration sued companies that had sold assets to institutions that ultimately failed, and the Federal Housing Finance Agency brought claims over securities sold to Fannie Mae and Freddie Mac.

But many banks have fought the agencies over whether they could bring the suits in the first place. Defendants seemed to gain ground in the lower courts and when the Supreme Court handed down its decision last year in a North Carolina environmental case.

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“The Supreme Court generally does not take a case where there isn’t a split among different circuit appeals courts, and the 5th and 10th circuits are in agreement,” said an attorney familiar with the situation.

But other decisions are still pending. Rulings have yet to come from the 9th circuit as well as a separate case still to be decided in the 2nd circuit. Both involve the FDIC’s extender statute related to MBS losses at the failed Colonial Bank.

“I would think that the parties that lost the case would wait for the 2nd and 9th circuits to decide and then hope that either of them disagrees with the 5th circuit before deciding to take the case up to the Supreme Court,” said Sanford “Sandy” Brown, a partner at Bracewell & Giuliani LLP.

Others said the extender statute in the law at issue in the Supreme Court’s environmental decision – the Comprehensive Environmental Response, Compensation, and Liability Act – is different enough from the extender statute in FIRREA that the justices on the high court may want to weigh in.

The 5th circuit decision “is a well-reasoned opinion, but there is no question that such an interpretation could be challenged in an appeal to the Supreme Court,” said David Reiss, a professor at Brooklyn Law School. “While circuit courts have had a consistent interpretation of the FIRREA extender statute, there is enough interpretation going on that the Supreme Court could come up with a reasonable alternative to the courts of appeal that have ruled on this issue.”

Reiss on Avoiding War

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MaintStreet quoted me in How to Avoid War Between Homeowner Associations and Residents. It reads in part,

When Robert Stern moved into the Sedgefield retirement community in Ocean Isle Beach, N.C. four years ago, all he could see was four golf courses, a pool and club house on multiple wooded acres.

“Our home is on the 14th hole of Lion’s Paw golf course where there is beautiful water lining the green,” Stern told MainStreet. “It is common to see egrets, herons, geese, turtles and other wildlife coming in and out of the area.”

But lurking under the beautiful scenery was the Homeowners Association, which Stern discovered when he left for six months to live in his Nevada retirement home. Stern is among the 63 million Americans living in communities across the country under the jurisdiction of an HOA, according to the Community Association Institute.

“Our property was being neglected and is currently a mess and the dysfunctional Sedgefield Committee won’t take responsibility for not having performed contractual compliance inspections,” said Stern.

“An HOA is a double edged sword,” said David Reiss, professor of real estate with the Brooklyn Law School. “HOAs allow residents to have a lot of sway over their environments but they also make decisions that individual residents don’t like. If you don’t agree with the decision, whether it be over a big or small issue, it can grate no matter what the decision is.”

How to Resolve Disputes

Resolving a dispute with an HOA can involve litigation or joining the club.

“When it comes to the tyranny of the board, we have met the enemy and it is us,” Reiss told MainStreet. “A very effective technique to contest a decision with which you disagree is to run for the board.”

Under most HOAs, boards are elected by residents.

“Those who are willing to do the work end up calling the shots,” Reiss said.

Reiss on FIRREA Storm

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Law360 quoted me in Bold 10th Circ. Opinion Muddies FIRREA Challenges. The article opens,

The Tenth Circuit last week gave a strong argument as to why a recent U.S. Supreme Court decision has no bearing on one federal agency’s ability to sue over soured mortgage-backed securities, but that won’t stop big banks from trying to convince different courts otherwise, legal experts say.

The appeals court’s opinion said a June high court ruling did not alter its original ruling that the National Credit Union Administration Board’s suit against Nomura Home Equity Loan Inc. and a number of other MBS originators was not time-barred.

The Supreme Court had found that a lawsuit by North Carolina residents under the federal Comprehensive Environmental Response, Compensation and Liability Act was time-barred by the state’s statute of repose

But the regulator of federally chartered credit unions is bringing its claim under the Financial Institutions Reform, Recovery and Enforcement Act, and the appeals court said that law’s so-called extender statute was not subject to the same limitations the Supreme Court had found in the Superfund pollution cleanup law at the heart of CTS Corp. v. Waldburger.

Rather, the language of FIRREA and its legislative history made it clear Congress had intended the law to have its own statute of limitations and not be bound by other statutes of repose, the appeals panel wrote, responding to a Supreme Court order that it take a second look at its earlier decision.

Before the Tenth Circuit issued its decision, defense attorneys had looked to the Supreme Court’s remand as a chance to give banks some relief from the lingering hangover of government lawsuits, many of which have ended with banks coughing up hundreds of millions, if not billions, of dollars in damages.

And it’s clear banks will still fight for that relief. In a motion for summary judgment Friday, attorneys for RBS told a Connecticut district court judge he should toss an FHFA suit brought under the extender statute of the Housing and Economic Recovery Act, in light of the time bar established by the Supreme Court in Waldburger.

In doing so, the attorneys also urged the judge to disregard the Tenth Circuit’s opinion, arguing it was flawed.

“Nomura, of course, is not controlling in this circuit, and the opinion on remand fails to faithfully apply the analytical framework established in Waldburger, instead sidestepping Waldburger by focusing on superficial distinctions between the CERCLA and NCUA extender statutes,” the attorneys wrote.

Experts say such disputes will continue on.

“The debate is not over by any stretch of the imagination,” David Reiss, a professor at Brooklyn Law School, said. “There’s enough at stake for powerful and well-financed institutions that this will be played out to the fullest.”

While legal experts say they can’t predict how other jurisdictions will move on similar questions about timeliness under FIRREA, they say the Tenth Circuit approached the task of reaffirming its earlier opinion in a way that appeared designed to withstand high court scrutiny.

“It is a thorough opinion. I think that other courts will take this opinion very seriously,” Reiss said.

Reiss on Dimming of FIRREA

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Inside MBS & ABS quoted me in Judge Recommends Dismissal of DOJ’s Fraud Case Against BofA, But It May Not End FIRREA Claims (behind paywall). It reads,

A North Carolina federal magistrate has recommended that a Justice Department fraud case against Bank of America be dismissed, but he also said a separate Securities and Exchange Commission lawsuit against the bank based on a different federal law should proceed.

The DOJ last August filed suit against BofA under the Financial Institutions Reform, Recovery and Enforcement Act, accusing the bank of defrauding investors in the sale of $855 million of nonagency MBS. Last week, U.S. Magistrate David Cayer of the U.S. District Court for the Western District of North Carolina found that the government failed to prove the bank made “material” false statements to the former Federal Housing Finance Board.

The DOJ claimed that BofA “willfully” misled investors, including the Federal Home Loan Bank of San Francisco and Wachovia Corp. – now owned by Wells Fargo – about the risks in the 2008 offering by failing to fully disclose the risk of 1,191 jumbo adjustable-rate mortgages backing the deal.

FIRREA allows the government to seek civil penalties equal to losses suffered by federally insured financial institutions, with a maximum of $1.1 million per violation. The 1989 law was a little used relic of the savings and loan aftermath until government lawyers began recently to invoke it widely in addition to other charges.

The law gives agency lawyers the ability to tap grand jury material and to subpoena documents. FIRREA also has a 10-year statute of limitations, longer than the typical five years for fraud cases, allowing government lawyers more time to pursue cases related to the 2007-2008 financial crisis.

The magistrate rejected the government’s claim that BofA’s statements were in violation of FIRREA because the FHLBank of San Francisco was within the jurisdiction of the FHFB. Cayer found that policing such statements did not fall within the agency’s purview and there was no indication that either the FHFB or the FHLBank ever complained about the MBS.

The magistrate recommended the DOJ’s case be dismissed without prejudice, although District Judge Max Cogburn will have the final word. Cayer allowed a parallel complaint filed by the SEC to move forward.

David Reiss, a professor at Brooklyn Law School, noted that U.S. district judges often give deference to reports from magistrate judges. But even if Cogburn opts to dismiss the DOJ’s case, it’s less an indictment against the use of FIRREA and more an indication that the government filed its case incorrectly, he said.

“Is it a harbinger that all other judges are going to change their minds about the broad reading of FIRREA? I don’t see that at all,” Reiss told Inside MBS & ABS. “I see judges in New York and in other jurisdictions continuing to allow the government to broadly interpret FIRREA based on its plain language. They are reading the text of the statute and saying the government can act.”

Reiss on Snuffing out FIRREA

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

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

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

*     *     *

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

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

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

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

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

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

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

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

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

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

Reiss on Predatory Online Lending

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E-Commerce Times quoted me in CFPB Suit Targets Predatory Online Lending Practices. It reads in part:

The Consumer Finance Protection Bureau this week put online finance companies on notice that it will not overlook them merely because they operate in cyberspace. Specifically, the bureau sued CashCall for collecting money consumers allegedly did not owe.  In its suit, the bureau charged that CashCall and its affiliates engaged in unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void.

CashCall and the associated companies are reportedly owned by J. Paul Reddam, a race-horse owner and philosophy professor-turned-businessman.

The Background

Beginning in late 2009, CashCall and its subsidiary, WS Funding, entered into an arrangement with online lender Western Sky Financial, according to the CFPB. Western Sky Financial has asserted that the laws in the state in which it is based — South Dakota — did not apply to it because it was based on an Indian reservation and owned by a member of the Cheyenne River Sioux Tribe.

The CFPB maintains Western Sky still must comply with state laws when it makes loans over the Internet to people in other states.

The loans ranged from US$850 to $10,000 and came with upfront fees, lengthy repayment terms and annual interest rates from nearly 90 percent to 343 percent, the CFPB said. Many of the loan agreements allowed payments to be debited directly from the borrower’s bank account.

By September 2013, Western Sky had become the subject of several states’ investigations and court actions, and it began to shut down its business. CashCall and its collection agency, Delbert Services, continued to take monthly installment payments from consumers’ bank accounts or otherwise sought to collect money from borrowers.

After its own investigation, the bureau concluded that the high-cost loans violated either licensing requirements or interest-rate caps, or both, in Arizona, Arkansas, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina, meaning the consumers did not owe that money that was being collected.

As part of its suit, the CFPB is seeking monetary relief, damages, and civil penalties.

The CFPB did not respond to our request for further details.

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‘Particularly Weak’

 

While there might not be much controversy over the CFPB’s suit against an online lender, CashCall is certainly defending itself using other arguments.

Clearly, the action falls within the CFPB’s broad mission of protecting consumers from predatory behaviors in the financial services industry, asserted David Reiss, a professor of Law at Brooklyn Law School.

However, CashCall’s attorneys, Neil Barofsky and Katya Jestin, have said that the CFPB does not have a mandate to impose rate caps.

“Of all of CashCall’s arguments, this one seems particularly weak,” Reiss concluded, “as the CFPB is just seeking to enforce existing state laws that have been allegedly violated across the country.”