Optionality and anti-optionality: Part 2, Loan + Insurance = Lower risk

July 28, 2014 | Banks, Economics, Finance, Foreclosure, Homeownership, Housing, Lending, Loans, Optionality, Rental, Saving, Theory, US News | No comments 138 views

[Continued from last week's Part 1.]

By: David A. Smith

When you’ve got enough to take care of yourself, more claim checks don’t do you any good. But they can do a lot of good for all kinds of other people.

Warren Buffett

As we saw in yesterday’s Part 1, the Economist’s (May 17, 2014) review of a new book by two economists (Mian and Sufi), expounding on a theory that the Great Recession was caused by household over-indebtedness more than by bank collapse, explored the risk profile of debt and concluded, imprudently in my view, that replacing debt with equity would solve homeowners problems.

However, if the capital provider has both downside and upside, the capital provider must reinvent its business model, because the post-borrowing asset management decisions affect the lender (and of course, the borrower will soon come to resent the bank “taking a piece of my profits” in a rising market).

If risk-sharing is added to a pure debt instrument to make it more equity-like, the cost (both up front and over time) will rise, and that is anti-affordability.

Moreover, banks’ difficulties, as measured by the [risk] spread between yields on their short-term debt and that of the government, peaked in late 2008. Yet banks’ lending to business was actually expanding at the time.


Actually, the markets went kaflooey in early 2007: it just took 1½ years to manifest

This implied absence of correlation mixes the Monday-morning wisdom of post hoc analysis with the problem of phase delay: loans take time to originate, and once they are in process, the organization develops a momentum to close them.  It takes an ocean liner up to fifteen miles to stop dead, and just because short-term spreads widened wouldn’t automatically cause the ship’s captain to order all back full.

APTOPIX Italy Cruise Aground

Didn’t allow enough sea room

By the end of the year the spread had returned to normal thanks to the Fed’s vigorous intervention, but bank lending began to contract (see chart).

Again, that could easily be explained by phase delay: the Fed acted fast because it saw the armada of banks slowing down.


Are these things correlated?  Couldn’t prove it by me.

Messrs Mian and Sufi think bank lending has an unseemly hold on contemporary thought. They fault the Fed and the Treasury for lavishing money on banks to boost the supply of credit when the problem was demand.

When the crunch hit in 2008, there were too problems: liquidity and cost.  If the banks had not been given both ample liquidity and ample capital ratios (via TARP), then they would have had to reprice all their debt rollovers at higher rates.  Meanwhile, if the banks had been forced (by FAS 157 or otherwise) to write their assets down based on a higher-interest-rate environment, then there would have been a cascade of defaults, and the global financial system really could have collapsed. 

Poor households’ wealth had evaporated, and with it their desire to borrow, which would have been better dealt with by writing down their mortgages.

It wasn’t just poorer households’ desire to borrow, they had to borrow because they were overlevered and had lost all their optionality.  They had no capacity to borrow, and they had no cash.

The poorest households generally have the least equity in their homes, and are thus more likely to be wiped out when prices decline.

That’s an oversimplification – price declines make no difference so long as the borrower is able to keep making the payments (and in that, Bernanke’s bargain-basement interest rates played an essential stabilizing role). 


No downside if you keep taking the same steps every month

This imposes externalities on those with no debt: foreclosures prompt fire sales that drive down house prices more broadly, while falling net worth induces consumers to cut back, wiping out jobs.

Obviously, if a borrower can’t make the payments (because of a disruption in household income), then the borrowers with little home equity suffer a much greater loss-given-default than if the home had enough equity to be worth its mortgage at the foreclosure sale.  All of that traces back to faulty underwriting, not a flaw in the debt instrument itself.

Courts should be able to write down the principal of mortgages as an alternative to foreclosure.

This idea was hot five years ago, and discredited back then.  Why restore it now?


All that talk about ‘moral hazard’

They recommend “shared-responsibility mortgages” whose principal would decline along with local house prices.

Yes, all those loans could theoretically have been written down, but as I posted throughout the crisis, authorizing and even encouraging ‘strategic mortgage default’ would have been a terrible idea: the moral hazard and securitization-contract obligation problems were immense; and the long-term ecosystemic damage would have been brutal.

There are some flaws to this argument. Falling house prices and net worth help explain why employment started sinking in early 2008, but not why it went into free fall after the failure of Lehman Brothers.


Lehman’s gone down!

What causes a cloudburst?  More prosaically, what panics the herd?  Both are often signaled by a loud noise, and Lehman’s sudden and total collapse was a global signal that a world drunk on risk had had too much.  It was time for a global asset revaluation, and that meant global defaults.


After a world drunk on risk, a world of global-regulatory hangovers

By examining only loans from banks to business, they ignore the contraction in consumer credit and in lending by other financial institutions. And had more banks been allowed to fail, the supply of credit would undoubtedly have shrunk further.

Yes, it would have.  TARP worked because it was fast and it was balance-sheet equity.

But their broader point about the danger of debt is correct.

“Debt is the anti-insurance,” they assert.

The authors’ point is correct, but their description of it is wrong: debt isn’t anti-insurance, it’s anti-optionality.

When expressed as a series of payments, insurance looks just like savings: The saver (person who buys the policy) makes periodic regular payments, which accumulate value to the saver.  Only the payoff rules are different: where the saver is always entitled to the total earnings from his or her investments, the policy holder is entitled to a lower payment at the end (surrender value), but higher conditional payments if something bad happens. 


Has she got driver’s insurance?

So if we pair insurance (a series of payments with a conditional positive payout) with high-leverage borrowing (a series of payments with a conditional big negative payment if the loan goes into default), it’s evident that the resulting synthetic product reduces the borrower’s losses given a default, because the insurance payment mitigates the mortgage risks.  That’s why so many lenders require insurance of one form or another – life insurance, health insurance, hazard insurance – in the aggregated loan product or package.

Insurance + loan = Lower risk in exchange for higher periodic cost.

“Instead of helping to share the risks associated with home ownership, it concentrates the risks on those least able to bear it.”

That’s simply wrong.  Insurance doesn’t concentrate risk, it transfers risk from the policy buyer to the insurance company – or from someone poorly able to bear the risk to an institution with tremendous capacity to bear risk. 

Of course, in shifting the risk (see yesterday’s Part 1), the aggregate risk is increased, so much so that sudden death after a recent insurance policy has become a staple of noir films.


“It’s just like the first time I came here, isn’t it?

We were talking about automobile insurance, only you were thinking about murder.”

What is needed, they argue, is to make debt contracts more flexible, and where possible, replace them with equity.

Debt and equity are the endpoints on a continuum of risk and collateral choices.  Some debt instruments (e.g. mezzanine, participating, subordinated debentures) have equity-like characteristics.  One can slide up and down the risk curve anywhere one wants.

To compensate for the risk of loss, lenders, they reckon, would have to charge a fee equal to 1.4% of the mortgage, or receive 5% of any increase in the value of the property.

Borrowers wouldn’t pay the 140 basis points a year; the markets would compete it out.  And calculating a 5% of equity buildup would be insanely complicated to calculate (even assuming the two parties were of good faith and had perfect information), and when we add the principal-agent risk and the risk of fraudulent or incomplete certification by the borrower, the increase in known administrative costs will surely outweigh the value of the decrease in foreclosure risk.


Yes; yes, I have plenty of money in the bank

The authors also endorse a proposal by Mark Kamstra and Robert Shiller to link interest on sovereign bonds to gross domestic product.  


It just trills from the tongue

Though Dr. Shiller’s no dummy, I wonder how the markets would price that risk, as well as the potential for (say) gaming the GDP calculations. 

Such an arrangement would have made it easier for the governments of Spain, Greece and Ireland to keep servicing their debts when their economies imploded.

Not that the ECB would ever allow no-longer-sovereign nations to play with risk spreads in that way.  File this one in the realm of intriguing-but-impossible.


In the Game of Coins, whoever rules the Draghi rules the realm

University education is also ripe for more equity-like financing, since students do not know how much they will eventually earn.

Now that makes sense, because a university education is an asset whose economic value is both hard to determine and entirely dependent on post-loan decisions by the unreliable borrower (a/k/a the student) –

In Australia and Britain, they pay a fixed percentage of their income; the authors recommend instead linking repayment to the health of the job market, an idea first proposed by Milton Friedman.

– but what makes even more sense is forcing universities to bear first-loss risk on their students who fail academically, and first-loss risk on their students who fail economically.


Time to rethink that degree

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Optionality and anti-optionality: Part 1, reward later or reward now?

July 25, 2014 | Banks, Economics, Finance, Foreclosure, Homeownership, Housing, Lending, Loans, Optionality, Rental, Saving, Theory, US News | No comments 244 views

By: David A. Smith

Money is a claim check on other people’s products and services.

Warren Buffett

Once a month, Mrs. Guggenheim sends the bank the same amount of money. 


Darling, if you have to ask the price, you can’t afford it

Is she saving for herself, or repaying a debt?

Either way, her actions are identical.  Either way, the payments are the same, the timing is the same. 

Yet the scenarios, saving and lending, differ in two greatly profound ways:

1. When is the payoff?  When Mrs. Guggenheim is saving, she receives a lump sum at the end, an accumulated nest egg that is the reward for all her thrift and dedication.


A little nest egg to house all my purchases

When Mrs. Guggenheim was borrowing, she receives the lump sum at the beginning, and she now has cash she did not have before – Buffett’s claim checks redeemable immediately for other people’s products and services.

2. Who has the optionality?  When Mrs. Guggenheim is saving, she has complete optionality: she chooses how much to save, how frequently to make deposits, when she will withdraw savings, and what she will do with the savings.  Mrs. Guggenheim need consult no banker, no financier about these decisions.  It is her money and she does what she will with it.

Optionality defined

Financially, ‘optionality’ means the ability to change strategy without suffering harm.  Optionality includes:

·         Timing of actions.  Save now or save later?

·         Choice of actions.  Buy stocks or bonds?

·         Scale of actions.  Concentrate or diversity?

Once she borrows, however, Mrs. Guggenheim’s optionality is all gone.  The choices of all her tomorrows are condensed into a single big-bang point source today, and whatever whims or inspirations or bonanzas she might have pursued she must now pass by.  Worse, her positive optionality has been replaced with negative optionality: now she must make the payments, on penalty of losing her posted collateral. 


The art is priceless, but try telling that to a banker

Hence the instant of borrowing is a plunge from high positive optionality into a self-dug trough of anti-optionality – in exchange for a pile of cash. 

All of us know that – the moment of signing on the line which is dotted fills us with dread, and that dread is healthy. 

(Here is why credit cards can be insidious, because the line which is dotted is a dozen or a hundred lines each of small purchases whose cost our psyche swiftly devalues.)

Without vocalizing it, all of us know the optionality chasm between saving and borrowing, and yet despite this, most of us borrow rather than save, because we devalue optionality and overvalue immediacy – and that, more than any other single cause, may be the real reason behind the Great Recession, if one is to believe a new book reviewed in the Economist (May 17, 2014):

House of Debt: How They (and You) caused the Great Recession, and How We Can Prevent It from Happening Again”, by A. Mian and A. Sufi.


A new book argues that household debt, not broken banks, fuelled the recent recession

Before Ben Bernanke found himself trying to prevent a second Great Depression as chairman of the Federal Reserve, he had become well known in economic circles for explaining why the first one happened. In a paper published in 1983, Mr Bernanke blamed the collapse of the banking system for constricting the supply of credit, which “helped convert the severe but not unprecedented downturn of 1929-30 into a protracted depression”.

Of course, when one owes money, aside from losing one’s own optionality, we subject ourselves to the optionality of others, and when the financial or economic markets are heading south at speed, naturally enough the creditors run for their own lifeboats.


It’s never good when your lifeboat itself is underwater

Hence a central bank must be a source of continuing liquidity, countercyclical liquidity, and for many years that was thought to be enough.


Everybody needs continuing liquidity

The notion that financial crises are transmitted to the broader economy by the “bank-lending channel” has dominated subsequent policymaking. It is why Mr Bernanke fought so hard to stop the panic in 2008 and to recapitalise the banking system afterwards.

In this, he was entirely right to do so, although his decision to hold interest rates deliberately at minuscule levels, albeit fueled by Chinese and other global willingness to buy US paper as the best post in the global capital storm, has slowly and steadily drained savings wealth from America’s elderly and the near-elderly Baby Boomers.

Tim Geithner, who was at the Fed with Mr Bernanke and then became Barack Obama’s treasury secretary, spends much of his new memoir reiterating their argument (see article): “When the financial system stops working, credit freezes, savings evaporate and demand for goods and services disappears, which leads to lay-offs and poverty and pain.”

On the other hand … any given number of payments can be expressed as a big principal with low interest or vice versa.  So of course lowering interest rates increases buying power now, but that places you in the wrong spot for later macroeconomic interest rate movements.

A new book, by Atif Mian of Princeton University and Amir Sufiof the University of Chicago, challenges this orthodoxy. The real cause of the post-crisis slump, they argue, was not the damage to the banks, but the run-up in household debt that came before, which became an anchor on consumption when home prices subsequently collapsed.

That is true enough, yet it’s only one aspect of the damage done by overleverage – the greater damage is in loss of householder optionality (to cut expenses, say, or to downsize by moving to another house).

By analysing the relationship between consumption, employment, home equity and other debts and assets by county, Messrs Mian and Sufi find that consumption fell most sharply in counties that experienced the biggest drop in residents’ net worth. 

By itself, that insight falls into the category of “It is indubitably so, Socrates” findings: true but admitting of many possible explanations.


No man of sense could dispute that

This, they argue, would not be the case if the primary restraint on consumption was damage to the banks brought on by the collapse of Lehman Brothers.

For most people, housing is their large-purchase piggy back, one that they can tap only with some effort and trouble, so in the short and intermediate run, people do not refinance their homes just because they need cash; instead they run up current or credit-card debt, figuring (rightly, at least most of the time) that if the debt becomes large enough to be burdensome, they will refinance the house into a lower interest rate. 

But that model of spending close to one’s monthly budget depends on two beliefs: (a) that my house has meaningful equity buildup, and (b) that I can liquefy that equity buildup through access to a home mortgage financing.  If either belief is shaken, consumer spending drops.

They found similar evidence in county-level employment. In counties where net worth fell most, jobs were slashed not by small companies, which depend most on banks, but big ones—because sales were slumping.

Throughout the Economist’s review, I find myself agreeing with their analyses and seriously questioning the prescription (though not having read the book, I could easily be missing relevant analysis).


A Mian great at describing, not so great at prescribing?

Shifting focus from banks to households, leads [the authors] to very different remedies, the most radical of which is to replace many loans with equity-like contracts in which lenders share losses with borrowers.

There are many practical obstacles to these ideas.

While that’s natural enough to propose in the abstract, the Economist is usefully skeptical and analytical:

There are many practical obstacles to these ideas.

The problems aren’t just practical ones, as it seems Messrs. Sufi and Mian misunderstand or fail to appreciate properly the differences between debt and equity. 


They’ll notice me now

Equity is not debt.  Equity is harder to underwrite because it is riskier for the capital provider.  Equity is much harder to administer and share.  Equity costs more than debt.

While debt may be dangerous for the borrower, it is the opposite for the lender.

Moving from debt to equity shifts risk from the borrower to the lender, and in so doing, it shifts risk from the person who has person to the person who lacks control.  Almost by definition, such a shift increases aggregate risk (risk taken by the two parties combined), so if the borrower’s risk is reduced by some quantum, the lender’s risk is increased by a greater quantum.  Risk-shifting away from control is entropic – which has consequences for savers as well, since they are the real counterparty to borrowers (banks being just an intermediary money store).


Savers prefer the safety and predictability of a debt contract, which is why they accept lower returns on bonds over time than on equities. Many debt contracts exist primarily to satisfy this desire for safe assets—most notably bank deposits

In debt, the borrower – who has control of the asset – takes all of the gains, and all of the losses up to the point of default, whereupon the lender takes all the remaining losses.  When the capital provided is via pure debt, and assuming the borrower has hard equity in the property, then the lender can be comfortable giving the borrower full unmonitored control over the property.  If the borrower makes improvements to the asset (adding a porch, repainting), those improvements are being paid by the borrower’s cash, and as long as they do not diminish the asset’s value, they will improve the lender’s security even as they improve the borrower’s embedded equity.

Borrowers may prefer debt, because it allows them to capture the upside of their investment.

In general, borrowers always prefer debt because they want to see the lowest required payment/ stated interest rate, and they go into a borrowing under-estimating their own risks.

Most of the time that optimism is justified.

Those dynamics change dramatically if the capital provider has both downside and upside –


Which of us is at risk here?

[Continued next week in Part 2.]

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Groundhog Day at the Rent Guidelines Board: Part 8, “How the duck did this happen?”

July 24, 2014 | Affordability, Apartments, de Blasio, democracy, Housing, Markets, mobs, New York City, Politics, Rent control, Rent Guidelines Board, Rent Stabilization, Rental, Takings | No comments 157 views

[Continued from yesterday's Part 7 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, and Part 6.]

By:David A. Smith


Phil: Do you know what today is?

Rita: No, what?

Phil: Today is tomorrow. It happened.

– Groundhog Day

Candidate Bill de Blasio, as we saw in yesterday’s Part 7, had campaigned for a freeze on Rent Stabilized rents as part of his overall posture as the most anti-Bloomberg of all the anti-Bloomberg candidates vying for Gracie Mansion.

Sources for this post

The Indypendent (May 11, 2005; powder-blue font)

New York Post (June 24, 2009; brown font)

New York Times (June 24, 2010; violet font)

New York Times (June 27, 2011; yellow font)

The Real Deal (December, 2011; navy blue font)

Rent Stabilization Association blog post (October 11, 2013; sepia font)

New York Observer guest editorial (May 14, 2014; peach font)

New York Daily News (June 11, 2014; emerald font)

New York Daily News (June 13, 2014; blue font)

New York Daily News (June 17, 2014; olive font)

New York Daily News (June 23, 2014; black font)

New York Post (June 23, 2014; teal font)

New York Post (June 24, 2014; orange font)

Curbed New York (June 24, 2014; lavender font)

New York Post (June 25, 2014; gray font)

Rent Stabilization Association blog (June 26, 2014; red font)

Crain’s New York (July 9, 2014; magenta font)


I connive, you connive, we connive together

Though candidate de Blasio claimed that the Bloomberg Administration was in cahoots with owners, one cannot find it in the numbers.  Going back through the Bloomberg Administration, we find this:


Ranging from 2.0% to 4.25%

Thus under the first eight years of Mayor Bloomberg’s historic tenure, the one-year increases (ignore the two-year, they’re a distraction) ranged from 2.00% to 4.25% — and the lowest rent increases ever approved since 1969 were 2%.

The smallest increases enacted since the board’s inception in 1969 were 2% for one-year leases and 4% for two-year deals.


Giveaways not visible, but perhaps that the implicit bias of statistics

Throughout this period, rent stabilized rents have always lagged market, and the market lag appears to have been widening:


Rent stabilized $1,150, market $1,500

Those statistics can also be aligned with these from a Wall Street Journal chart:


Housing in NYC gets more expensive for everybody

That chart proves several things, only one of which the Journal chose to highlight:

1. Rent Stabilized rent increases have largely tracked market increases.  Whether that should be its objective is another question (beaten insensible in Section 1 of this seemingly endless post), but if the RGB is supposed to shadow the market, neither ‘relatively’ improving tenants or landlords, then it has done so.

“The bottom line is the Rent Guidelines Board has been stacked against tenants for many, many years,” said Comptroller Stringer. 

If the board was stacked against tenants, where is the evidence in past rent increases? 


Oh man, evidence is way, way over-rated

“When fuel prices were low, when expenses were low, tenants got hit,” Stringer said at an unrelated event at City Hall.

He’s wrong on that too – they may have seen their income drop, but they didn’t see their rents soar.


Say, Eliot, thanks for those tips on telling whoppers

2. New York is becoming more expensive to live in.  For a decade-plus, living in New York City is becoming more expensive.  By strong inference, that means the city isn’t producing enough housing of any kind to keep up with the potential aggregate demand.

3. Rent Stabilized residents are only a bit less affluent than market renters.  If we use $1,150 for the stabilized rents and $1,500 for the market, and we use 33.4% of income for market and 34.9% for stabilized, then the median income of a stabilized renter household is $39,500, while the market households are $53,900, versus New York City’s 2011 median income of $73,700.  Hence rent stabilized tenants averaged 53% of area median income, while market renters averages 73%.  Both sets of renters are low income by HUD standards (80% of AMI or below).

This last point is interesting evidence, and it’s remarkable to me that nobody’s bothered to figure it out or to present it.  Perhaps that’s because that would lead to proposals for means-testing or income eligibility requirements, and upset too many cozy apple carts.

4B. It has all happened before

Phil: Well, what if there is no tomorrow? There wasn’t one today.

– Groundhog Day

Because the supply of rent-stabilized buildings is finite, and slowly shrinking –

The number of rent-stabilized apartments in the city continues to fall. About 10,000 such units were lost in 2009, according to a study by the Rent Guidelines Board that was released this month; it was the largest net loss since at least 2003.

– and no one with any sense will develop property subject to them, landlords become tethered targets for annual political floggings.

In [New York City], vilifying landlords is a common pastime, and politicians curry favor with tenants by pleading for rent freezes.

And after all the sturm und drang, after the absence of airborne chairs, the presence of earplugs and stage-storming tenants, of off-the-wall mayoral reactions, they voted within the range the staff recommended.


Not quite

[2010] The city’s nine-person Rent Guidelines Board approved rent increases, criticized as too large by tenants and too small by landlords, that could have been higher.

Might as well have that sentence on auto-fill as it could be written every year, like this one too:

Several board members said that landlords, too, were faced with increased costs.  According to another study by the board, the overall price of running rent-stabilized buildings rose 3.4% from May 2009 to March 2010.

And this one [2011]:

For their part, tenants — citing the lasting impact of the recession — pleaded for a freeze in rent increases –

And this one:

– and an end to the practice of allowing landlords to charge the market rate once the rent at a vacant apartment hits a threshold.

That, as the tenant advocates know, is a decision beyond New York City’s reach; it resides in Albany, where Speaker Sheldon Silver and the mayor’s BFF, Governor Andrew Cuomo, currently hold sway, and will likely do so a year from now when rent control comes up for its quadrennial last-minute reprieve.

4C. See you next year


The moment before Mr. Flax voted (go to 51:00 in the YouTube video)

After all the sturm und drang, after the absence of airborne chairs, the presence of earplugs and stage-storming tenants, of off-the-wall mayoral reactions, the Rent Guidelines Board voted 5-4 for the 1% rent increase, with Mr. Flax casting the decisive vote:

“This moment is a nightmare.  Unlike anyone else on this board, I’ve had intense, intense pressure from both the right and from the left.  Some of it dirty, some of it principled.”

He added (you can hear it on the YouTube at 52:15), “But again, I have to vote my conscience.  This is my proposal.  I apologize, but I vote in favor of the motion.”

After he voted “yes,” the crowd erupted in a chorus boos and shouts of “sellout.” Mr. Flax could be heard on the microphone asking one of his colleagues [Chair Godsil], “How the [expletive] did this happen?”

Whatever it was, you get to do it all over again next year – and New York’s courts still think this is Constitutional.


Rent guidelines Board hearing, NYC, 1943 – back then, there was a war on

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Groundhog Day at the Rent Guidelines Board: Part 7, “Some of it dirty”

July 23, 2014 | Affordability, Apartments, de Blasio, democracy, Housing, Markets, mobs, New York City, Politics, Rent control, Rent Guidelines Board, Rent Stabilization, Rental, Takings | No comments 210 views

[Continued from yesterday's Part 6 and the preceding Part 1, Part 2, Part 3, Part 4, and Part 5.]

By:David A. Smith


Phil: There is no way that this winter is *ever* going to end as long as this groundhog keeps seeing his shadow. I don’t see any other way out. He’s got to be stopped. And I have to stop him.

– Groundhog Day

Yesterday’s Part 6 of the Rent Stabilization epic brought us the vote, but not the full story of how it happened.

Sources for this post

The Indypendent (May 11, 2005; powder-blue font)

New York Post (June 24, 2009; brown font)

New York Times (June 24, 2010; violet font)

New York Times (June 27, 2011; yellow font)

The Real Deal (December, 2011; navy blue font)

Rent Stabilization Association blog post (October 11, 2013; sepia font)

New York Observer guest editorial (May 14, 2014; peach font)

New York Daily News (June 11, 2014; emerald font)

New York Daily News (June 13, 2014; blue font)

New York Daily News (June 17, 2014; olive font)

New York Daily News (June 23, 2014; black font)

New York Post (June 23, 2014; teal font)

New York Post (June 24, 2014; orange font)

Curbed New York (June 24, 2014; lavender font)

New York Post (June 25, 2014; gray font)

Rent Stabilization Association blog (June 26, 2014; red font)

Crain’s New York (July 9, 2014; magenta font)

The event was indeed a circus:

The anger (perhaps some genuine hate) was palpable. In addition to chants of “What do we want? Rent freeze!  When do we want it? Now!” there was “Make history” (which technically happened), “Tenants united will never be defeated,” and “Rollback” (rent adjustments of negative 6% and negative 4% respectively were in a proposal that was not voted on).

3D. A profile in courage

[Mayor de Blasio] named six of the board’s nine members, including Steven Flax, a vice president at M & T Bank.

After all the hearings, all the chanting and shouting, all the intimidation and political position-taking, and with a board six of whose members were appointed by the mayor, it should have been a done deal.  Courageously, it wasn’t:

In a surprising act of independence, the board voted 5-4 to raise rents on nearly 1 million rent-stabilized apartments by 1% for new one-year leases and 2.75 percent for two-year leases.

As Mr. Flax said in the hearing, just before his vote:

“This moment is a nightmare,” Mr. Flax said amid a cacophony of shouts from both tenant and landlord advocates in the audience.

Unlike anyone else on this board, I’ve had intense, intense pressure from both the right and from the left. Some of it dirty, some of it principled.”


A man who faced even worse pressure, some of it dirty, some of it principled

Despite this pressure, similar to that faced by Reconstruction Kansas Senator Edmund G. Ross, Mr. Flax did the one thing that flabbergasted the audience:

In the end, he explained, “I have to vote my conscience.”

Mr. Flax, who understandably has categorically refused to be interviewed after the vote, is well qualified to look at things from the public perspective. 

Mr. Flax left town immediately after the vote. In response to an email message seeking comment, he said, “I apologize but I am not making myself available to the press.”


Flax earned his vacation

Mr. Flax is thoroughly qualified for his role.  He’s the downstate (i.e. metro NYC) regional Community Reinvestment Act (CRA) officer for M&T Bank, where he’s worked for 21 years, after graduating with a BA in Labor Studies (Penn State 1982) and an MS in City and Regional Planning (Pratt Institute).  And he cares about New York City.

St Nicks alliance fundraiser at Wythe Hotel Williamsburg Brooklyn NY

Mr. Flax being recognized by the St. Nick’s Alliance

“I have to say this moment is a nightmare,” he said before voting “yes” on the hikes.  [Mr. Flax has a three-year term ending in December, 2016; I suspect it will now be eventful. – Ed.]


Raquel de Anda waves a sign protesting a hike during the final vote in the hearing Monday night.

In a room full of people who just wanted an answer, Mr. Flax actually did his job:

“It costs money to run buildings and I do believe that my proposal is sincerely a historic change,” Flax said at a raucous meeting at Cooper Union in the East Village.

Furious tenants, witnessing an unprecedented freeze slipping away, began screaming that Flax was a “sellout.”

Isn’t it typical that when a person does something based on his conscience and not for self-interest, the only smear people can think of is that he’s a sellout?

It’s not clear what de Blasio will do with his own appointee, Steve Flax, who proved to be the swing vote in favor of the small increases.


Fredo, you’re nothing to me

“We will look at the future when the time comes in terms of the RGB,” de Blasio said at a press conference Tuesday.

The mayor described Flax as a “person of integrity,” but added, “I disagree with his vote.”

I doubt Mr. Flax will be invited to any more mayoral events


Can he sleep with the political fishes?

4. Those who forget the past

Phil: What would you do if you were stuck in one place and every day was exactly the same, and nothing that you did mattered?

Ralph: That about sums it up for me.

4A. Who says there have been giveaways, anyway?

To hear the various advocates, the last few years have been the landlord’s pig fest:


Does this look like landlords have been gouging?

“The range being considered is the lowest in history, and that’s a reflection of the affordability crisis we are facing as a city,” City Hall spokesman Wiley Norvell said when asked whether de Blasio still supports a rent freeze.  “Tenants are clearly struggling after so many years of significant rent increases.”

Either Mr. Norvell’s simply wrong or he has an unusual definition of ‘significant’. 


If my boss says it’s significant, it’s significant, okay?

Only hours before the meeting, de Blasio told reporters at a Queens bill signing that his predecessor, Mike Bloomberg, had been too generous to landlords.

As Mayor de Blasio’s loathing for Mr. Bloomberg is manifest in everything he says and does, it can lead him astray, “not knowing when the campaign ends and the administration begins.” 


Not ‘for’ mayor, ‘is’ mayor … and there’s a big difference between the two

I went back through the newspaper accounts and this is what I’ve found for year on year CPI (I used May-to-May as approximating what the Board would have available) versus rent guidelines board annual increases:






















“We need a course correction — a one-time action to clearly rectify the mistakes of the past,” de Blasio said, urging a freeze.

Make-up calls?  What is this, middle-school soccer?

[Continued tomorrow in Part 8.]

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Groundhog Day at the Rent Guidelines Board: Part 6, “A different situation by law”

July 22, 2014 | Affordability, Apartments, de Blasio, democracy, Housing, Markets, mobs, New York City, Politics, Rent control, Rent Guidelines Board, Rent Stabilization, Rental, Takings | No comments 189 views

[Continued from yesterday's Part 5 and the preceding Part 1, Part 2, Part 3 and Part 4.]

By:David A. Smith


Phil: You want a prediction about the weather, you’re asking the wrong Phil. I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey, and it’s gonna last you for the rest of your life.

– Groundhog Day

In Part 5 we saw that the behavioral tactics of residents and owners differ remarkably, with residents and their advocates willing to shout, chant, disrupt and otherwise intimidate and smear anyone who disagrees with them, versus the owners, who as unwilling participants are functionally put on trial by the uninvested, to be judged by the unaccountable.

Sources for this post

The Indypendent (May 11, 2005; powder-blue font)

New York Post (June 24, 2009; brown font)

New York Times (June 24, 2010; violet font)

New York Times (June 27, 2011; yellow font)

The Real Deal (December, 2011; navy blue font)

Rent Stabilization Association blog post (October 11, 2013; sepia font)

New York Observer guest editorial (May 14, 2014; peach font)

New York Daily News (June 11, 2014; emerald font)

New York Daily News (June 13, 2014; blue font)

New York Daily News (June 17, 2014; olive font)

New York Daily News (June 23, 2014; black font)

New York Post (June 23, 2014; teal font)

New York Post (June 24, 2014; orange font)

Curbed New York (June 24, 2014; lavender font)

New York Post (June 25, 2014; gray font)

Rent Stabilization Association blog (June 26, 2014; red font)

Crain’s New York (July 9, 2014; magenta font)

3B. By the unaccountable

In addition to the mayor giving his strong views, other elected officials decided to weigh in, knowing they could freely grandstand without being held accountable for it:


Mark-Viverito: “Two years ago, landlords enjoyed their largest year-to-year increase in operating income since the Giuliani era. Yet tenants’ median household income fell by three percent from 2007 to 2010.”

But loud calls for a rent freeze dominated a hearing Monday — from elected officials who included City Council Speaker Melissa Mark-Viverito, Public Advocate Letitia James and Comptroller Scott Stringer.


Stringer’s for bagel freezes too

Like the others, Ms. Mark-Viverito expects that resident affordability should figure in rent-setting (CBS New York; gray font)

”This is a challenge we must face head on — it cannot be solved unless we commit to ending the distressing loss of our existing stock of affordable housing. This means not just preventing further deregulation of apartments, but also ensuring that rent stabilized apartments are in fact affordable,” Mark-Viverito said in a prepared statement.

Naturally, she’s unwilling to appropriate any money for this purpose

The mayor may not be able to freeze property taxes and water charges to help keep rent increases low, but a revamp of the property tax system to reduce the relative burden on rental properties should be in the housing plan.

Nor did Ms. Mark-Viverito or the others endorse an offset of government charges on housing that the government has economically suppressed:

The mayor could also reduce costly government mandates and provide relief from nuisance administrative fees and penalties as he has promised to do for other small businesses.

The mayor too failed to mention any changes to make property more affordable, such as these:

Regulation causes a lot of [the city’s] housing problems. The solution would be to have a system of step-by-step deregulation of housing stock. You’d see things ease up, and you’d see more housing being built, even in this economy [2011]. When you have apartments with regulation, you see landlords having to make up the shortfall in other apartments by raising those rents.


The moment of triumph: Election Night

Bill De Blasio is a smart man [Not since his election – Ed.] and his initial position on rent increases probably recognized the fact that most property owners would need a rent increase as long as city taxes, oil, insurance and other operating costs continue to escalate.

Landlords said they would fight a rent freeze. Jack Freund, vice president of the Rent Stabilization Association, an organization that represents thousands of city landlords, said a rent freeze should be accompanied by a freeze on municipal sewer and water charges and no increases in property taxes. (Messrs. de Blasio and Lhota have pledged to not raise property taxes.)


Offering Fruendian analysis of the mayor’s political miscalculation

“Bill is not too smart backing this,” Mr. Freund said. “I’m not sure if this is campaign rhetoric but he will recognize the reality if and when he takes office.”

As referenced earlier, I think the mayor did recognize the reality, felt himself backed into a corner where he had a political debt to pay (endorsing a one-time rent freeze). 

Six days earlier, he had urged board members to decidewhat makes sense” based on “the actual numbers.”

And he took the position as late as he could:

But Mr. de Blasio’s first public statement as mayor in favor of a one-year freeze came on the morning of the vote.


Tenants and Mayor de Blasio favored a first-ever rent freeze, which the board rejected.

Unfortunately for the mayor, having thus reversed for political reasons, he then suffered the political ignominy of not even getting what he had endorsed.

“We’ve never had a situation where you have a mayor in place that campaigned on a zero Rent Guidelines Board increase, so I think they’re certainly shooting for zero — and they could possibly get it, because the mayor has appointed a majority of the members,” said Jack Freund, vice president of the Rent Stabilization Association, which represent 25,000 property owners.

“We’re looking to keep owners whole and keep them in business, and what that requires is a rent increase above the range this board is considering,” he added.

Further, the mayor demonstrated his personal unaccountability by expecting others to do what he himself will not:

Meanwhile, de Blasio danced around the issue of whether he was going to raise the rent on his own apartments, which are not covered by the guidelines.

“I have a different situation by law,” he said, adding: “It depends ….”

Mister mayor, what does it depend on?

Mayor de Blasio, who is preparing to move into Gracie Mansion, is planning on renting out his Park Slope home while he lives on the taxpayer’s tab for at least the next three and a half years.


This looks to me like a candidate for gander-sauce rent stabilization: Mayor de Blasio’s 11th Street home in Park Slope.

According to a source, de Blasio could receive at least $5,000 per month while renting his home and possibly much more.

Not only will de Blasio collect rent payments on his actual home, he will also continue to collect rent on a two-family rental that he owns.

So candidate de Blasio saw the economic and social value of becoming a landlord.

According to the article, annual rental income on that property rose from $47,500 in previous years to $52,000 last year. For at least the next year, owners of rent stabilized units will struggle to preserve the City’s affordable housing stock with 1% increases while the Mayor continues to benefit from unlimited market rents.

Other NYC landlords saw the mayor’s answer as hypocritical:

“Sometimes there’s no increase, sometimes there is,” de Blasio said of his units.

His answer didn’t sit well with landlords fuming over the loss of a rent hike for a year.

“I think it’s completely outrageous,” said West Village landlord Jimmy Silber. “To be the champion of affordable housing and not promote it in your own building is completely hypocritical.”


Jimmy Silber (far left), in 2011

3C. For the uninvested

As I’ve posted before, rent stabilization residents have no stake in anything: not the property’s physical condition, not its cost of operations, not their overconsumption of housing that displaces others who might be more needy.  Feeling themselves entitled by luck, they become perpetually aggrieved against …well, against somebody.

Angry tenants stormed up to the stage after the vote, chanting and yelling.

The board members scurried off to the sound of boos and hisses, and one man carrying a pro-tenant sign who climbed onstage was hauled off by cops.

“We feel like the rug was snatched from beneath us,” said disappointed Brooklyn resident Donna Mossman, 56.


Rug about to be snatched away?  Ms. Mossman testifying

[Continued tomorrow in Part 7.]

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