Legal & Legislative Update – September 3, 2013

Published on: September 2, 2013

COVER UP. Fannie Mae and Freddie Mac are disguising billions of dollars in losses, delaying a day of financial reckoning that the Inspector General for the Federal Housing Finance Agency says they should confront now.

NOT MAKING IT EASY. Speaking (more positively) of the GSEs, Fannie and Freddie both reported their seventh consecutive profitable quarters, posting second quarter gains of $10.1 billion and $5 billion, respectively. Fannie will pay another $10.2 billion in dividends to the Treasury and Freddie will pay $4.4 billion. With those payments, the GSEs will have repaid $136 billion of the $186 billion they have received in federal bailout assistance since being placed in conservatorship about five years ago. Their strong performance and the critical role they have played in shoring up the housing market are clashing with arguments that they should be eliminated.

KILLER PREDICTIONS. If you accept new research that the Tax Foundation ─ a nonprofit that focuses on tax reform ─ released recently, the end of the mortgage interest deduction will stifle economic growth, causing the economy to shrink by $254 billion and the nation to lose 659,000 jobs. Wages also would fall at least 1.1%, the agency suggests ─ all resulting, this analysis contends, because eliminating the deduction would kill consumer spending power and curtail economic growth. The study fails to note that the most likely move would not be to eliminate the deduction but rather to cap the amount of interest that homeowners could deduct.

RELAPSE. This certainly isn’t good news. More than half of the underwater borrowers whose loans were modified under the federal government’s HAMP program have re-defaulted. About 10 percent of the currently active HAMP participants have missed at least one mortgage payment and are at risk of re-defaulting, according to a report by the TARP inspector general.

NO BARRIER. A study by Cleveland Fed economists has challenged the assumption that negative equity exacerbated unemployment by preventing underwater borrowers from relocating to accept jobs elsewhere. On the contrary, the study concludes, “If an unemployed homeowner with negative equity is able to find a job in another region, he or she is likely to accept the job because the benefits of earning a higher income outweigh the costs associated with selling an underwater home.”

RECOVERY ROAD. Continuing the recovery theme, Trulia’s Housing Barometer, charting the housing recovery, puts it 61 percent of the way toward “normal”, using construction starts, existing home sales and delinquency and foreclosure rates as the benchmarks. A separate report by Home.com finds 14 of the top 100 housing markets now “fully recovered.”

A NEW FORCE. There’s a new advocacy group on the block. America’s Homeowner Alliance, a coalition of mortgage and real estate industry executives, community development, fair housing and consumer groups, aims to be for housing consumers what AARP is for seniors – a huge and hugely influential lobbying force promoting the interests of home owners, home buyers, prospective buyers and tenants. The fledgling organization describes its mission as “protect[ing] and promot[ing] sustainable home ownership for all segments” of the population.

 

LEGAL BRIEFS

 

UNDER COVER. Here are two phrases no condominium association wants to hear: “You’re being sued” and “It’s not covered.” They certainly don’t want to hear them in the same sentence. But that was the unpleasant message a Wisconsin board received from an appeals court, which ruled that the association’s directors’ and officers’ policy would not cover the board’s litigation costs, because the victorious plaintiff had not sought monetary damages. (Hunt v. Beach Club Condominium Association, Inc., No. 2012AP2197-FT (Wis. Ct. App. June 4, 2013).

The plaintiffs (the Hunts), who were the developers of the Beach Club Condominium, had included a provision in the condominium declaration preserving their right to continue using the beachfront area. When the condominium association amended the declaration to eliminate that provision, the Hunts sued, asking a court to restore their usage rights. Significantly, for purposes of this decision, the Hunts sought only a court ruling recognizing their continued interest in the beach area.

The association asked its insurer, Auto-Owners Insurance Company, to defend it, but the company balked and obtained a court order dismissing it from the suit. The association then sued Auto-Owners, arguing that the insurance policy required coverage of the defense costs. The company countered that the policy language requiring payment of “those sums the insured becomes legally obligated to pay as damages,” let it off the hook, because the Hunts were not seeking actual “damages.” The association argued that because the policy was ambiguous, the court should define “damages” broadly to favor the association.

But the Appeals Court found that the policy wasn’t ambiguous at all, concluding that the concept of “legal damages,” as defined in commercial liability policies, should apply. The court noted that prior decisions have interpreted “legal damages” narrowly to mean “compensation for past wrongs or injuries, consisting of money or something that has monetary value.” The Hunts clearly were not seeking a financial remedy, the court concluded, and the policy did not provide coverage for the non-monetary compensation they sought.

A South Carolina condominium association fared better in its effort to obtain coverage under its D&O liability policy for a breach of fiduciary duty suit. (Pulliam v. Travelers Indemnity Company, No. 2012-211939 (S.C. Ct. App. May 8, 2013).

Owners at Kensington Place sued the then developer-controlled board, alleging (among other failings) the failure to repair the property, failure to establish appropriate reserves and failure to notify owners of a potential conflict of interest. They filed a separate suit against the association’s insurer, Travelers, asking the court to determine that the association’s D&O policy covered the claims. A trial court found that the policy covered the “economic loss” related to the inadequate repair/construction defect allegations but did not cover the property damage component of that claim. Travelers appealed that decision.

An appeals court agreed that the policy excluded property damage, but found that the breach of fiduciary duty claims (for failing to establish a reserve fund and failing to disclose a potential conflict of interest) caused economic loss, which the policy did cover. On the reserve fund in particular, the court noted that while related to the condition of the property, the lack of funds for essential repairs caused economic loss rather than property damage, by forcing owners to finance the repair costs.

 

WORTH QUOTING: “Not everybody is going to be able to get a mortgage or buy a home. We need to recognize that as a country.” HUD Secretary Shaun Donovan, in an interview on “Squawk Box.”