LEGAL/LEGISLATIVE UPDATE – SEPTEMBER 20, 2018

Published on: September 20, 2018

TRYING AGAIN

Rep. Jeb Hensarling, chairman of the House Financial Services Committee

Lawmakers, who have been talking about housing finance reform for years, are talking about it once again. With the 10-year anniversary of the conservatorship for Fannie Mae and Freddie Mac now logged, Rep. Jeb Hensarling, chairman of the House Financial Services Committee, has introduced two measures that would reduce the GSEs’ dominance, giving private capital a larger role in financing home mortgages. One of the measures is a refile of a bill Hensarling introduced five years ago – the PATH (Protecting American Taxpayers and Homeowners) Act ─ which hit a roadblock in the Senate and would likely meet the same fate today. Hensarling says he’s introducing this bill only because “it is the right thing to do and it will let me sleep better at night.”

Rep. John Delaney (D-MD)

He thinks the second measure has a better chance of being enacted, because it has bi-partisan support – , Rep. John Delaney (D-MD), another long-time advocate of housing finance reform, is one of several Democratic co-sponsors. Unlike PATH, this bill preserves a federal role in housing finance, albeit without Fannie Mae and Freddie Mac. The legislation completely overhauls the existing structure, beginning by repealing the Fannie Mae and Freddie Mac government charters, “eliminating any statutory advantages” their charters convey, and unwinding their “legacy business.” Key provisions would:

  • Separate Ginnie Mae from the Department of Housing and Urban Development and make it the primary government backer of residential mortgages.
  • Allow approved private sector successors to the GSEs to issue Ginnie Mae securities backed by conventional mortgages.
  • Require these Ginnie Mae issuers to purchase “private credit enhancement” to make their loans eligible for inclusion in the government-backed securities.
  • Require mortgage borrowers to put a minimum of 5 percent down, eliminating the 3 percent down payment programs Fannie and Freddie now offer.

Hensarling describes the measure as “a grand bargain” designed to overcome obstacles that have blocked reform in the past. “It does not necessarily represent my preferred policy or optimal policy, but I believe it represents an achievable policy and a good faith effort at bipartisan compromise,” he said in a press statement.

“Ten years after the financial crisis, our housing finance system remains broken,” Delaney added in a separate statement. “There’s still too much entity risk, not enough affordability, and we haven’t taken comprehensive action to make the system safer for taxpayers long-term.” The measure he is co-sponsoring represents “a bipartisan blueprint for how we can substantially increase our investment in affordable housing, make the housing finance system more stable, protect the thirty-year fixed-rate mortgage, and preserve the successful GSE multi-family business,” Delaney said.

PENDULUM SWING

The buy vs. rent debate, which has pointed definitively toward buying for the past decade or so, appears to be tilting toward renting. Reversing the forces that had made home ownership the better economic choice (home prices depressed by the fallout from the recession and record low mortgage rates), prices have been rising faster than incomes, shrinking inventories have been accelerating the price gains, and mortgage rates, also now on an upward curve, are exacerbating the affordability pressures.

Home ownership costs have increased by 14 percent over the past year, while rents have increased an average of 4 percent nationally, according to data compiled by Realtor.com. Only 41 percent of U.S. residents live in a county in which the median-income is large enough to purchase the median-priced home, this analysis shows.

“Even setting aside big upfront expenses like a down payment, rising month-by-month costs are likely keeping many people from purchasing,” Danielle Hale, Realtor.com’s chief economist, told CNBC.

Buying a home was less expensive than renting one in 44 percent of U.S. counties a year ago, according to the Realtor.com analysis. Last month, costs favored buying over renting in only 35 percent, as the buy vs. rent equation has shifted from buy to rent in 289 counties.

A separate study by Florida Atlantic University and Florida International University has concluded that renting a home is now a better investment than buying one in many major metropolitan areas, the first time that has been true in more than eight years.

Because home ownership has traditionally been a major source of household wealth creation for Americans, Hale noted, this trend “could become problematic” if it continues for too long.

HOUSING DISAPPOINTMENT

A strong economy, growing at its fastest rate in four years, couldn’t keep the housing market on track in July. Sales of both new and existing homes declined, disappointing analysts, who had expected rebounds in both segments.

Existing home sales shrank for the fourth consecutive month, falling 1.5 percent below the year-ago level. The annualized sales rate of 5.34 million units was the lowest it’s been in more than two years. Condominiums and co-ops, which have been outperforming detached homes, followed the same downward trend, ending up 3.3 percent off the July 2017 pace.

New home sales beat the year-ago rate by almost 13 percent, but that’s damning with faint praise, as the year-ago sales total was anemic, and the trend for this year has been heading steadily downward. The July sales rate was the lowest it has been in almost a year.

Scant inventories are the major problem, as they have been for the past year, the NAR’s Yun insists. He blames the paucity of new construction for the shortage of listings that is driving prices higher and sapping affordability even as incomes are beginning to grow. “Existing supply is still not at a healthy level, and new home construction is not keeping up to meet demand,” Yun complains.

New construction is clearly what the housing doctors are ordering as an antidote for inventory woes, but that prescription hasn’t been filled. Construction starts, which sank in June, increased by less than 1 percent in July, as builders continue to struggle with rising materials costs and a shortage of skilled labor. Permits increased by 1.5 percent, continuing a positive trend, but at a rate that analysts agree is too slow to make a dent in the inventory shortage.

The trend in permits is “flat, at best,” according to Ian Sheperdson, chief economist for Pantheon Macro, and the “downward trend” in homebuilder sentiment “suggests that no near-term recovery is likely,” he told MarketWatch. “Housing is the sole weak spot in the economy right now,” he added, and he predicts, “that’s probably not going to change.”

LINGERING PAIN

The Great Recession is in the national rearview mirror, but its effects linger, affecting the economic well-being of many Americans and the mindset of many others. The statistics indicate that the housing market has rebounded, pushing home prices close to or beyond their pre-recession levels in many communities. But Attom Data Solutions calculates that nearly one in 10 homes remain “seriously underwater” today, with prices 25 percent below the outstanding mortgages on them. “These are the housing markets that the recovery forgot,” Darren Blomquist, a senior vice president at ATTOM, told Reuters. This Reuters report found a stark contrast between the thriving housing markets in major metropolitan areas on the east and west coasts and the “bedroom communities” in the Midwest, mid-Atlantic and Southeast regions, where, the article notes, “income and job growth have been weaker than the national norm.”

Another study by Deutsche Bank economists, finds evidence of the recession’s bruises in a “large disconnect” between wealth and the household savings rate. In a strong economy – and the current one qualifies ─ the ratio would average about 6 percent, but it has remained closer to 1 percent. “It would not be surprising that the shock of the global financial crisis has led to a persistent shift in households’ perceptions of the riskiness of the economic environment and that this shift could lead households to demand a higher buffer of precautionary savings,” they suggest.

ANOTHER LOW

How low can the unemployment rate go? Lower than it is now, and that rate – 3.9 percent in August – is already at a generational low. Economists surveyed by the Wall Street Journal predict that the rate could fall to 3.6 percent by the middle of next year, as economic growth continues to drive demand for workers.

The August employment report seemed to support that theory. Employers added more than 200,000 workers to their payrolls; hourly earnings, a source of ongoing concern, increased by 2.9 percent – the largest increase in almost a decade.

There were some cautionary signals in the August report, among them: The labor force participation rate and the employment-to-population rate both declined; and the household survey indicated that the number of employed Americans declined by 423,000.

But the employment report was positive overall, and the Federal Reserve, which tracks it closely, is expected to stick with its current plan, which calls for two more rate hikes this year – one expected this month and the other in December.

IN CASE YOU MISSED THIS

The property damage from hurricane Florence has been portrayed starkly in newspaper photos and television images. But much of it won’t be covered by standard insurance policies, which exclude damage from storm surge and flooding. And the number of North and South Carolina property owners with flood insurance has been declining. As a result, risk management specialist Robert Hartwig warns, “Residents of these states are materially less prepared than they were in the past to deal with the financial consequences associated with major flooding events.”

Tax reform measures have had an impact on home values, but it hasn’t been as extensive or as negative as critics had predicted.

Genetics are destiny. Recent research indicates that the circumstances of their birth are the primary determinant of how far children will advance socially and economically.

This seems counterintuitive, but despite rising home prices, which are arguably increasing the demand for rental housing, rents appear to be easing in some major markets.

Although household income has increased and the poverty rate has declined, income gaps between men and women and between minorities and whites, have increased.

LEGAL BRIEF

ALL JOIN IN

Groucho Marx once observed famously that he wouldn’t want to be a member of any club that would accept him. If he lived in a Georgia condominium, he might not have any choice. A Georgia appeals court ruled recently that a condominium association had the power to require all residents to join a private club and pay for membership benefits. (Amberfield Homeowners Association, Inc. v. Young).

The subdivision governed by this homeowners association did not have recreational facilities, but residents could join a private club located nearby, which some did and some did not. Deciding that it had to increase its membership in order to remain financially viable, the club proposed that Amberfield residents be required to join. The association’s board proposed, and owners approved, an amendment to the HOA declaration authorizing the board to enter into an easement and cost-sharing arrangement with the club. Under that arrangement, the board would collect the required membership fee from owners as part of their association dues.

A group of owners sued, arguing that the board could not force them to join a private club that was not part of the association and over which the association had no legal control. A trial court agreed with them, granting summary judgment in their favor. The association appealed.

The plaintiffs’ core argument was that the easement mandating club membership was invalid for two reasons:

  • It was a “personal covenant” unrelated to their property or to property owned by the association; and
  • The plaintiffs had declined to accept the use of club facilities that the easement granted, negating the easement as it applied to them.

The court rejected both arguments. On the first point (personal covenant) the court found that the membership obligation the easement imposed “could be found to touch and concern land,” because the covenant it created “ran with the land” and was binding on subsequent owners.

On the second point (plaintiffs didn’t accept the easement) the court said the declaration, as amended, gave the association broad authority to accept an easement “on behalf of Amberfield homeowners as members of the Association, not merely on behalf of the Association itself. Certainly, a declaration could be drafted that would require the approval of a specified percentage of the members before the Association could accept such an easement,” the court acknowledged, “but the declaration in this case was not so drafted.”

 

Plaintiffs also argued that the procedures used to approve the declaration were flawed, but the court said that argument was moot. State laws grant homeowner associations broad authority and broad discretion to exercise it, the court noted, so the board did not need the authority granted by the declaration amendment to enter into the agreement with the club. As long as a declaration delegates general decision-making authority to the board, the court explained, “the only judicial issues are whether the exercise of that authority was procedurally fair and reasonable and whether the substantive decision was made in good faith and is reasonable and not arbitrary and capricious.”

The association met those tests, the court concluded, noting: “The appellees have not pointed to evidence showing that the Association’s determination that the specific easement at issue would benefit Amberfield homeowners collectively…was unreasonable, arbitrary, or not made in good faith…even if the appellees individually are unable or disinclined to take advantage of [those] benefits….”

WORTH QUOTING

“I remember thinking the American Dream was you could come to this country and, based upon your hard work and abilities, you could achieve great success. Suddenly, the American Dream became about home ownership and homes morphed from becoming shelter to becoming an investment vehicle…“What’s going to be done to change it?” ─ Former Treasury Secretary Henry Paulson, speaking at a Brookings Institution housing conference.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.