Cornell has just formally announced the creation of its first NYC law clinic, a branch of the law school’s Entrepreneurship Law Clinic, to be located on the Cornell Tech campus. You can read more here.
Tag Archives: Reiss
Why Does a Bank Sell Your Mortgage?
Loan servicer by Nick Youngson CC BY-SA 3.0 Pix4free
I was quoted in Marketplace’s story, Why Does a Bank Sell Your Mortgage? You can listen to it here. The transcript opens,
Right after Marc Hill bought his first home, a townhouse north of Chicago, in the summer of 2019, he got a letter telling him his mortgage had been sold. He didn’t think much of it after Googling around.
“I read that was kind of normal. And then it happened again. And then again. And I was like, ‘Well, what’s going on here?’” he said with a laugh.
Recently, less than five years after his purchase, the mortgage on Hill’s townhouse changed hands for the fourth time.
“Welcome to the 21st century housing market,” said David Reiss, a professor of real estate finance and housing policy at Brooklyn Law School. Today, upward of 70% of mortgages are sold into the secondary market.
“A lot of people have a sense that mortgages work like they did maybe in ‘It’s a Wonderful Life,’” he said. “Where you walk into your bank and if they think you’re a good risk, they’re going to give you some mortgage, and that’s going to come from money that they have from deposits.”
Sometimes that is how it works. But for the most part, Reiss said, “instead of banks lending you money that they have in deposit, once the bank makes the mortgage they then sell it to investors.”
When the bank or lender that originated your mortgage sells it, they get back all the money they lent you right away, plus a chunk of the interest you’re expected to pay over the life of your mortgage. They also get some of your closing costs.
Debranding Trump
Dano CC BY 2.0 DEED
Agence France-Presse (AFP) quoted me in Posts Falsely Say Trump Name Erased from New York Properties. It reads, in part,
“We have already seen cases where Trump’s name has been removed from a property because the owner no longer thought it benefited the property,” David Reiss, professor at Brooklyn Law School, confirmed to AFP on October 4.
In September 2023, it was also reported that Trump would sell his multimillion-dollar lease on a public golf course in the Bronx to the Bally’s casino chain . . . “naming rights are often a separately negotiated item. For instance, companies pay millions of dollars to get naming rights to stadiums,” Reiss explained.
Both the Trump Tower and Trump Park Avenue, for example, still bear the former president’s name and remain under his ownership, as of this writing, a member of buildings staff confirmed to AFP by telephone.
AFP contacted the Trump Organization for further comment, but a response was not forthcoming.
While exceptions happen, Reiss noted that “generally when a party gives up ownership or control of a property, their name goes with them.”
How to Fake-Own the New Yorker Hotel
Reinhold Möller, CC BY-SA 4.0
New York magazine’s Curbed interviewed me for their explainer, How to Fake-Own the New Yorker Hotel. It reads:
The story of how a guy named Mickey Barreto came to own, at least on paper, the New Yorker hotel is a weird one. It started in June 2018, when Barreto first booked a night at the Art Deco landmark for $149. He had plans to stay a while: Using an obscure clause in the city’s rent-stabilization law, Barreto requested a six-month lease to live at the hotel. The gambit worked. Even as the owner of the hotel, which happens to be the Unification Church despite the fact that it operates as a Wyndham, tried to boot him, the judge ordered them to let him back in.
Around the same time he requested the lease, and despite the fact that he did not own the New Yorker, Barreto filed a deed transferring ownership of the hotel from himself to something called Mickey Barreto Missions. Why did Barreto believe he owned the building? As he told a judge in 2019, the “building was never subdivided. It’s all one lot. It’s all one parcel.” Which meant, at least to him, that because he had a legal claim to room 2565, he had a legal claim to the whole thing: “What affects that part of the building called 2565, whatever happens in there, happens to the whole lot, the whole parcel.” He then went around presenting himself as the owner, attempting to collect rent from the building’s street-level businesses and at one point calling the Fire Department to have the building evacuated and, per court documents, identifying “himself as the owner of the subject property.” In the end, the judge found Barreto’s deed, which was extremely fraudulent, to be extremely fraudulent.
But Barreto wasn’t done! The Commercial Observer reports that Barreto made another play at ownership this month, with a 2021 deed transfer from Mickey Barreto Missions to … Mickey Barreto Missions. (Barreto only signed the document earlier this month, and the Department of Finance made it public shortly after.) All of which raises some important questions: Why is it so easy to fake-own a building in New York City? And what is this rent-stabilization law Barreto took advantage of? To help make sense of everything, and potentially try it myself, I reached out to David Reiss, a professor at Brooklyn Law School, who explained everything.
This interview has been edited and condensed for clarity.
Can we start with fake-owning a hotel? Barreto managed to file documents transferring ownership of the hotel to himself. Can someone just … do that?
The government looks at deeds and says: Do they meet our technical requirements for a deed? Is it on the right kind of paper, is it the right size? Does it have a notary stamp on it? If it meets all those technical requirements, then it is recordable. The way you sell a property is based on the fact that most people are doing the right thing and they’re not doing shenanigans. But if you record something that is fraudulent, that doesn’t make it real. A fraudulent deed conveys nothing, and really nobody’s going to be misled by this. It just needs cleaning up. The true owner has to go to court and get this deed declared fraudulent so that it could be removed from the recording documents.
You may not remember this famous headline some 20 years ago when the New York Daily News transferred ownership of the Empire State Building to itself. The notary was Willie Sutton, the famous bank robber, and one of the witnesses of the deed was Fay Wray from King Kong. They got a big headline, but it’s less interesting than the headline suggests.
They were trying to prove a point.
I believe what they were trying to demonstrate is that regular people can have their properties swept away from them through deeded theft, which is another name for this. And this can be a serious problem for people living in relatively modest homes, typically in the outer boroughs. And typically the victims are elderly people, and it’s a way to steal people’s property. This is a horrific fraud.
Barreto’s fraud was more like the Empire State Building fraud. Barreto told the restaurant to pay rent to him and all these things, but no sophisticated person is going to fall for this. They’re going to call the property manager and say, “What’s going on?” It’s not going to change anything.
So it’s mostly a hassle.
If this happened to you, you’d be miserable and you’d probably have to hire a lawyer. It would be a pain in the butt. But it doesn’t happen that often. And when you think about all of the transactions that happen whenever you design a government system like the recording system, you want to balance ease of use versus potential for fraud. Maybe it’s a cost we accept as a government because it doesn’t happen very much.
It was also funny to me that he transferred the deed from Mickey Barreto Missions to Mickey Barreto Missions.
I mean, his deed was really weird because the deed was from himself to himself. So that’s even more fraudulent on its face. If David Reiss transfers to David Reiss, that doesn’t really even do anything. This is just nonsense, right?
Right.
I mean maybe he was magically thinking that this would give him ownership of the building or just wanted to gunk up the works for them or is just a little wacky. Whatever his reasoning, trying to interpret it as a legal matter doesn’t get you anywhere because he had no rights and he kind of made it up. It’s like if your kid was writing a deed.
Okay, so he was not using magical thinking when it came to claiming a lease at the New Yorker Hotel. Can you tell me about that clause?
So, this is part of the rent-stabilization law that allows guests at single-room occupancy (SRO) hotels to become tenants, usually by living there continuously for six months or by staying there for one night and requesting a lease. They’re a very specialized, small part of the New York City housing stock that are very complex. Most of them are in very bad condition. They’re kind of a holdover from an earlier era — after World War II a lot of them filled up with single men who would come to New York City to make their way in the world. They fell on very hard times in the ’70s and ’80s and kind of phased out. Then the government came up with a supportive SRO model where it had a similar type of housing space with services on-site. But we’re not talking about very many units.
But the New Yorker Hotel is kind of nice. Is it an anomaly?
The New Yorker Hotel is owned by the Unification Church, the Moonies church. I’m guessing it’s a complicated story. It’s not your typical hotel owner.
And Barreto knew about this odd little provision on rent-stabilized hotels.
He clearly knew what he was doing. He was either advised by somebody or had done his own research and realized that he was able to request a lease. Some not-for-profit legal entities will even provide form letters to tenants so that they can do this, because for some people this is a very attractive housing option. It’s very reliable compared to being in a men’s shelter or a women’s shelter or something like that. So it’s obscure, but it’s doable. There have been other cases about this, and owners will often fight with a tenant about it because they would rather use it as a hotel unit where they can rent it out at a higher nightly rate. But that’s not complying with the law. So what he did in regards to rent stabilization and getting the lease is not extraordinary, although it’s rare.
And he paid $149 for one night at the hotel, but I assume once the court said he could stay, he would have paid a much lower rent?
That’s right. It can’t be higher than the legal rent. And the legal rent is set by a combination of what the initial rent was back in the day, and then whatever increases had been allowed over time under the rent-stabilization law.
So if someone gets a six-month lease, can they stay indefinitely because it’s a rent-stabilized lease?
Effectively, yes.
Are there similarly obscure laws tenants or people can use to try to get leases from properties like this?
If you become a family member of a rent-stabilized tenant, you can succeed tenancy upon their death, but that’s really well known. You can’t be evicted without a court process if you’re a resident for more than 30 days in an apartment, and you sometimes hear horror stories of a roommate who doesn’t leave and gets tenancy rights. But I don’t know if I’m familiar with a thing that’s so similar to this.
The DAO of Real Estate
Joseph Bizub and I posted The DAO of Real Estate to SSRN (and BePress). The abstract reads,
Real Estate Investment Trusts (REITs) have long proven their worth as liquid securities that give investors access to many real estate asset classes. Decentralized Autonomous Organizations (“DAOs”) are one of several blockchain real estate innovations seeking to provide a new path to those searching to invest in real estate. While the success of the DAO model of real estate investment is far from assured, these new investment options could offer real competition to REITs one day.
Housing Supply and The Housing Crisis
Opportunity Now interviewed me about how limited housing construction impacts the housing crisis:
Dynamic metropolitan areas like the Bay Area, LA, and New York City suffer from longstanding mismatches between the supply of housing and demand for it. Local communities control the zoning, and local voters (typically existing homeowners) have little incentive to increase the supply of housing. After all, more supply will likely increase the tax burden as new residents increase the demand for services (more schools, more infrastructure, more public safety). Homeowners are already in the market and generally like the way things are, notwithstanding their political views about the high cost of living for others and the epidemic of desperate homelessness that plagues all of these areas. The result of all of these local land use decisions is that very few units of housing are built in these communities, given the size and growth of the population.
Many coastal cities are high-opportunity areas, offering jobs to immigrants, young adults, and strivers of all stripes. They drive up the demand for housing even hours from urban centers, living in overcrowded units in many cases.
When demand outpaces supply, prices rise. Government can try to limit the effect of this pressure through a variety of means: rent controls, housing subsidies, right-to-shelter legislation. All of these interventions can assist certain segments of the housing burdened — current renters, new renters, homeless people — but to a large extent, they just reallocate scarce housing from one burdened group to another. That is not necessarily bad public policy given the current political realities, but it does not address the fundamental problem these communities face: There is not enough housing for all of the people who live in them. A broad coalition of decision-makers needs to face this reality and develop long-term strategies to build a lot more housing where all of these people want to live — for access to economic opportunity, for proximity to family, for all of the reasons that people want to relocate and build a life for themselves and their loved ones.
Rent-to-Ow!
Insider quoted me in Private Equity Sold Them a Dream of Home Ownership. They Got Evicted Instead. It reads, in part,
Erica Hines-Denson had no idea how bad the odds against her were.
Student loans and a recent divorce had dinged her credit score. But she and her new husband, Elquinton Denson, were building a blended family and they dreamed of buying a home in the greater Atlanta area. After lenders turned them down for a traditional mortgage, a realtor told her there might be another way. Something called a lease-purchase, or rent-to-own, agreement.
“This was our way to own a home finally,” Hines-Denson said. “It was like we found a loophole.”
It took just a weekend of house hunting to find a house they loved: a stately four-bedroom, 30 miles southeast of Atlanta, with a built-in bar in the basement where they pictured hosting family and friends. Listed at $275,000, it was in their price range.
There was a catch. The couple wouldn’t be buying. Instead, a Chicago-based company called Home Partners of America would make a cash offer and rent the house back to them, with an option to buy within five years.
Home Partners supplied a lengthy agreement detailing the terms, including built-in annual increases to their rent and to the eventual purchase price. The document was more than 50 pages long; Hines-Denson said the company gave them just 24 hours to review it and sign. But the opportunity seemed too good to pass up. “You’re like, ‘Oh Lord, this is my chance,'” she said. “So you’re moving quick.”
The deal quickly turned sour. The company locked her out of the online payment portal after she missed a single month’s rent, adding hefty fees that made it impossible to catch up. After she missed a second month, the company swiftly filed for an eviction.
While a judge stayed her legal case under the federal COVID-19 eviction moratorium, the company’s management agency continued to call, Hines-Denson said, threatening to remove her belongings. In a final insult, the company kept their two-month security deposit when she and her family finally moved out.
Private Equity Moves In
Home Partners, which launched in 2012, now owns more than 28,000 homes nationwide. It is the largest of a handful of new companies promising “a clear path to homeownership” for families not yet ready or able to buy.
The company’s success has inspired startup competitors such as the New York-based company Landis, which boasts of investments from entertainers Will Smith and Jay-Z. Once dominated by fly-by-night operators, rent-to-own is now attracting some of the biggest players from Wall Street and Silicon Valley. Andreessen Horowitz led a Series A funding round for a rent-to-own competitor, Divvy Homes, in 2018. BlackRock and KKR purchased a majority stake in Home Partners by 2014, before private-equity giant Blackstone Group bought the company in 2021 for $6 billion.
In its marketing, Home Partners emphasizes that it offers “flexibility, choice and transparency,” providing the opportunity to “rent your dream home” without making a long-term commitment. “Home Partners has created a path to home ownership for tens of thousands of people who may not otherwise have had one,” a company spokesperson told Insider. “We are tremendously proud of our business.”
Yet Home Partners tenants, in interviews and court documents, say they got stuck in barely livable dwellings, with leaking sewage, broken air conditioners, filthy carpets, or nonworking electrical outlets. They describe being blocked from seeing home-inspection reports and facing swift eviction filings for a single late payment. One tenant filed a lawsuit claiming she suffered injuries when the ceiling of her home collapsed.
Hines-Denson said she felt like she’d been “set up to fail.”
More than 4,000 Home Partners tenants have purchased their homes over the past decade, according to a July 2022 paper from Moody’s Analytics, coauthored by an advisor to the company. But over the same time, nearly four times as many tenants — roughly 15,000 — moved out without buying.
An analysis of contracts and sales and eviction data shows that rent-to-own tenants are often left with the worst of all worlds. They have to shoulder many of the costs and responsibilities of homeownership, and the financial odds are stacked against them to end up as owners. Meanwhile, many are paying above-market rent.
“I’m very sympathetic when someone says they’ve identified a large segment of the population not being served by the current housing and mortgage landscape,” said David Reiss, the research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“What you don’t want to hear next is, ‘Therefore, we can do whatever we want to them.'”
*. *. *
“Rent-to-own has this really sordid history,” said Reiss. “It’s an area of the housing market that remains underregulated. That’s part of the attraction for many operators.”
