Published on: December 1, 2020
HOUSING STILL RISING
The housing market continues to largely ignore the pandemic, if not rising above it, then at least navigating successfully around its downward pull. Existing home sales increased by 4.3 percent in October, the fifth consecutive monthly gain, with no signs of the pause that typically begins in the fall. Year-over-year sales were up by almost 27 percent, the National Association of Realtors (NAR) reported. New home sales also soared, slipping slightly (0.3 percent) below the September pace, but beating the year-ago total by more than 40 percent, producing what industry executives termed “the strongest three-month stretch” in nearly 15 years.
Lawrence Yun, the NAR’s chief economist, attributed the uncharacteristic seasonal strength to interest rates (which remain near record lows), interest in vacation homes fueled by the work-from-home option available to many workers, and a desire for more space resulting from the enforced household togetherness the pandemic has forged.
Inventory levels remain anemic, however, and the chronic shortage of listings is pushing prices higher, undercutting affordability for first-time buyers and discouraging many existing owners from selling their homes, because they aren’t certain they will be able to afford a replacement.
The National Association of Home Builders (NAHB) reports that 58.3 percent of the new and existing homes sold between the beginning of July and the end of September were affordable to families earning the median income ($73,900), the lowest affordability reading since the fourth quarter of 2018.
“Favorable mortgage rates will continue to bring fresh buyers to the market,” the NAR’s Yun predicts. “But the affordability situation will not improve even with low-interest rates because housing prices are increasing much too fast.”
DOJ HITS REALTORS
The National Association of Realtors has agreed to eliminate or modify a number of practices deemed anti-competitive and anti-consumer as part of a negotiated settlement to end a law suit filed by the Department of Justice. The proposed settlement was filed simultaneously with the law suit, which accused the NAR of condoning practices that misrepresent the fees charged by some brokers and impede competition in the residential real estate industry.
The suit alleged specifically that the NAR:
- Allowed brokers to claim that buyer brokers provide their services for free, when in fact they typically share the fee with the listing broker; and
- Allowed brokers using the NAR’s Multiple Listing Service (MLS) to filter out listings on which sellers offered a lower fee to brokers; and
The settlement requires “traditional” brokers (defined as those who belong to the NAR) “to provide greater transparency to consumers about broker fees,” Assistant Attorney General Makana Dereham, chief of the DOJ’s antitrust division, said in a press statement. “This will increase price competition among brokers and lead to better quality of services for American home buyers and sellers,” he added.
The settlement also requires the NAR to end a policy that allowed access to the lockboxes (through which brokers gain entry to homes they are selling) only to brokers who are members of the national trade association.
While agreeing to the required changes in its policies and procedures, the NAR did not admit any wrongdoing, insisting rather that the changes simply “clarified what is already the spirit and intent” of the association’s code of ethics, and underscore the association’s commitment to promote fair and competitive real estate markets.
The NAR “disagrees with the DOJ’s characterization of our rules and policies, and admits no liability, wrongdoing or truth of any allegations by the DOJ,” Mantill Williams, the association’s vice president in charge of communications, said in a statement, “[but] we have agreed to make certain changes to the Code of Ethics and MLS Policies, while we remain focused on supporting our members as they preserve, protect and advance the American dream of homeownership.
CYBER SECURITY CONCERNS
A decade ago, cyber-crime barely registered on the radar of corporate risk managers. Today, it ranks among their most serious concerns; and cyber insurance, once dismissed as a luxury, is now classified as a necessity, every bit as important as property and casualty insurance. Nearly 80 percent of the risk managers responding to an annual survey conducted by Zurich North America and Advisen said they now purchase some amount of cyber insurance. That’s up from only 34 percent in 2011. For the managers who haven’t purchased the insurance or aren’t considering it, cost and lack of support from upper management were the primary obstacles. The survey also found that pandemic-induced work-from-home arrangements are heightening concerns about cyber-crime. Managers cited employees “unintentionally infecting the company’s network with malware” and unintentionally divulging sensitive or confidential information to third parties as major concerns. Ransomware and business interruption also ranked high on the list of mangers’ worries. More than 70 percent said they specifically want coverage for electronic equipment damaged or disabled by a cyberattack, and contingent business interruption and system failures resulting from it. More than 60 percent identified coverage for funds transfer and social engineering fraud, internet media liability and reputational harm as essential.
FLOOD INSURANCE RELIEF
The Federal Housing Administration (FHA) has eased regulations requiring homeowners with FHA-insured mortgages to satisfy the requirement for flood insurance only with policies purchased from the National Flood Insurance Program (NFIP). The revised rules will allow owners to purchase private flood policies as long as they provide coverage at least comparable to that afforded by federal insurance. Housing industry executives welcomed the revision, which they say will end a policy that for decades has inhibited the development of a private flood insurance market.
“America’s 1.4 million Realtors are grateful to see the FHA take steps to make more private flood insurance options available to U.S. consumers,” NAR President Vince Malta said in a press statement. “Outdated federal regulations have for too long prohibited lenders from accepting private flood insurance that is often more affordable and more comprehensive than NFIP policies,” he added.
The revised FHA rules, which have not yet been finalized, would allow lenders to begin accepting private flood insurance policies for single-family insured loans for homes located in federally designated flood hazard areas.
“Our proposal would expand the options for obtaining flood insurance, rather than continuing to lock in borrowers to one federal option without any ability to comparison shop,” Federal Housing Commissioner Dana Wade said. “Allowing participation by private insurers should generate the competition needed to ultimately reduce costs for consumers,” Joe Gormley, deputy assistant secretary for single family housing, added.
FHA officials estimate that between 3 percent and 5 percent of homeowners with FHA mortgages would be eligible to purchase private insurance under the revised rules. However, they also emphasized that the proposed rule change at this point is only a proposal and “current flood insurance policies remain unchanged at this time, including the requirement that minimum flood insurance be obtained through the NFIP.”
Small business executives welcomed the federal Paycheck Protection Program (PPP) as a lifesaver, helping them sustain their businesses and retain employees during the pandemic. But preliminary oversight reports suggest that the program may also be a super spreader of fraud. More than 5.2 million companies received a combined total of $525.5 billion in potentially forgivable government loans between April 3 and August 8. In the interests of distributing the money quickly, the Small Business Administration SBA) relaxed many of the restrictions and eliminated much of the paperwork that often entangles government assistance programs. But the SBA’s inspector general said recently that his office has seen “strong indicators of widespread potential abuse and fraud” in the program. Among the problems the watchdog cited, many of the business that received loans were ineligible for them because:
- They were created after the pandemic began;
- Had more than 500 employees (the maximum allowed); or
- Were listed on a ‘do not pay’ data base of companies that owed back taxes.
Investigators have also identified “thousands” of companies that appear to have received more assistance than they were allowed, because they miscalculated – or misrepresented – the number of employees on their payroll.
The Justice Department has charged 73 defendants thus far in PPP-related fraud cases and investigators report open investigations involving more than 500 suspects. But industry experts note that proving fraud in these cases will be difficult, because the standards for PPP loans were broad and vague.
“The scandal is what’s legal, not what’s illegal,” Tarek Helou, a former Justice Department prosecutor, told the Wall Street Journal.
Separately, a federal district court has ordered the SBA to release detailed information on the individuals and companies that have received PPP loans and loans under the SBA’s Economic Injury Disaster Loan Program. The agency had insisted that divulging that information would violate the privacy of borrowers, but U.S. District Judge James Boasberg ruled that “the significant public interest in shedding light on SBA’s administration of [those programs] dramatically outweighs any limited private interest in nondisclosure,” “.
IN CASE YOU MISSED THIS
Household debt levels increased and delinquency rates fell during the third quarter of this year, as the pandemic continued to produce odd and sometimes oddly disparate economic impacts.
Insurance losses related to the pandemic will exceed the industry’s estimates, probably equaling the record-setting $144 billion in insured losses resulting from multiple hurricanes in 2017. “Unlike many events,” Bruce Carnegie-Brown, chairman of Lloyd’s of London told reporters, “a pandemic is everywhere at the same time.”
It seems you can go home again, and an unprecedented number of young adults have done just that. More than half of young adults between the ages of 18 and 29 are currently living with their parents – the largest percentage since the Great Depression.
Save the economy or slay Covid-19? Economists and public health experts say it is not only possible but essential to do both simultaneously.
A federal district judge in Atlanta refused to issue an injunction blocking the national moratorium on evictions issued by the Centers for Disease Control. New Civil Liberties Alliance, a nonprofit organization representing rental property owners, had brought the suit on behalf of a Virginia landlord. Judge J.P. Boulee ruled that public health concerns outweighed the economic harm the moratorium would create.
Researchers have found that Covid-19 infection rates soared when local and state eviction bans were lifted, underscoring one of the major arguments supporting the CDC’s national moratorium. (See above.)
Standing was the threshold issue in this dispute between condominium owners, members of the association’s governing board and the association’s management company. Did the owners have the right to file a derivative action on behalf of the association? The trial court said no but the Texas Appeals Court disagreed. (Carmichael v. Tarantino Properties, Inc.).
The developer of Premier Towers (Tarantino Properties) appointed two of the three board members (Vickers and Frese), both of whom were officers of Tarantino. which still controlled the property and managed it. The third board member, Carmichael, was elected by the owners.
Carmichael and 10 owners (the Carmichael members) sued the developer and the developer’s board members on their own behalf and on behalf of the association. Their derivative action cited a laundry-list of complaints, primary among them: That the developer’s directors exceeded their authority by negotiating contracts in which the directors had an interest that were not approved by the independent director; and they acted in ways that were inconsistent with the stated purposes of the association, which included protecting the interests of its members. The trial court dismissed the action, agreeing with Tarantino that the Carmichael Members did not have standing to bring this suit for two reasons:
- The Texas Business Organization Code (TBOC) permits derivative actions only for shareholders of for-profit corporations; it does not allow members of a nonprofit corporation to initiate derivate actions on the corporation’s behalf;
- The state condominium statute does not authorize owners to file derivative actions; and
- The association’s governing documents authorized derivative actions only to enforce provisions of the community’s declaration.
On appeal, the Carmichael Members argued that while the TBOC does not authorize derivative actions for non-profits, it does allow their members to sue directors and officers for exceeding their authority, which the Carmichael Members alleged the developer’s board members had done by failing to disclose material terms of the management agreement and by failing to have the independent board member approve the management contract in which the two trustees and the management company had a material interest.
Tarantino contended that the board members had acted within the scope of their authority “to exercise any and all powers rights and privileges” granted under the state non-profit act and the state condominium act.
But the applicable principle here, the Appeals Court said, was not the powers conferred on the directors by the two state statutes, but the powers conferred on them by the association’s declaration. The declaration, the court noted, authorizes directors to use their authority to benefit the association, “not to benefit association affiliates, particularly at the expense of the Association’s members.” Moreover, the court pointed out, the TBOC specifically authorizes the members of a nonprofit corporation to challenge the ultra vires actions of directors (actions exceeding their authority undertaken for unauthorized purposes, “and this is what the Carmichael Members have alleged.”
The Carmichael Members agreed that the association’s articles incorporation permit the directors to enter into agreements with affiliates of directors or officers, but only if those relationships are disclosed and approved by a majority of the disinterested directors. The Tarrantino directors did not comply with either requirement, the plaintiffs claimed.
Tarantino argued that because the developer has the right to appoint two members of the three-member board until 75 percent of the units are sold, until that point is reached, those two board members will constitute a majority of the board, with the authority to approve agreements in which they and the developer have an interest.
“The [Tarantino] officers are mistaken,” the court observed, noting that while the two directors constituted a majority of the board, they did not constitute a disinterested majority. “Under the terms of the declaration, the court said, “Carmichael, as the sole disinterested director, arguably should have approved the arrangements.” The plaintiffs’ assertions that the Tarantino directors failed to disclose their financial interests, failed to hold a meeting to discuss the management agreement or hold a vote on it “provided sufficient evidence of conduct “exceeding the explicit limitations on the authority of officers and directors,” the court concluded.
Tarantino argued that under the TBOC, even if otherwise enforceable contracts aren’t approved by disinterested directors, the contracts are allowable as long as the agreements “are fair to the corporation.” The plaintiffs contended that provisions requiring the association to pay full time benefits to management company employees who worked only part time for the association, and requiring the association to pay for the maintenance of retail space that was not part of the condominium were hardly fair to the association.
The Appeals Court agreed, ruling that the Carmichael members had standing to bring the derivative action against the Tarantino directors for actions that exceeded their authority and that were inconsistent with the expressed purposes of the association. The trial court erred, the Appeals Court said, in concluding otherwise.
But the court found that the trial court had concluded correctly that the Carmichael Members did not have derivative standing to bring other claims alleging breach of fiduciary duty, unjust enrichment, failure to create an appropriate reserve account and a variety of other management failures. The Carmichael Members argued that while the TBCO permits members of nonprofits to file derivative actions against directors only for exceeding their authority, they had a common law right to file derivative actions for other claims.
But the Appeals Court agreed with Tarantino that the plaintiffs could not infer a common law right the statute specifically precluded. Because lawmakers could have provided broader derivative-action authority for non-profits had they wanted to, the court noted, their decision to apply the general derivative-standing provision only to for-profit corporations “must be seen as deliberate.”
The plaintiffs have statutory derivative authority to challenge only ‘ultra vires’ actions, the court concluded. “They cannot claim common law standing to assert claims for actions that are not authorized by the statute.”
“A lack of action or an inadequate one presents a very significant downside risk to the economy today.” ─Charles Evans, president of the Federal Reserve Bank of Chicago, emphasizing the need for Congress to provide adequate pandemic relief for businesses and consumers.