Published on: August 1, 2017
COMING SOON BUT NOT YET
The Federal Reserve has implemented two consecutive interest rate increases (in March and June) and is planning to boost rates at least once more before year-end – but not quite yet. Citing “realized and expected labor market conditions and inflation” after its July meeting, the Federal Open Market Committee, Fed’s rate-setting arm, left the federal funds rate unchanged at 1-1/4 percent.
The committee also signaled its intention to begin paring its $4 trillion securities portfolio “relatively soon” by slowing the reinvestment of maturing Treasury and mortgage-backed securities. Analysts are expecting moves in that direction to begin this fall.
“The Fed is embarking on a new course,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, told National Mortgage Professional.
Some analysts are predicting that the sluggish inflation rate, which remains below the Fed’s 2 percent target, may argue against another rate hike this year. But if Fed officials are concerned about the lack of inflation, they haven’t expressed those concerns publicly. In fact, the FOMC’s post-meeting statement suggested that they remain convinced that continued labor market strength will produce the inflation they are expecting.
“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to two percent inflation,” the FOMC statement said.
UP SIDE OF A DOWN TREND
The shrinking inventory of homes for sale that is frustrating prospective buyers and worrying housing industry executives is producing a boom in the housing renovation business, as owners unable to find homes they want to buy are fixing up the ones they own. Harvard’s Joint Center for Housing Studies is predicting that owners will spend $316 billion on home remodeling projects this year compared with $296 billion in 2016. The trend is producing intense demand for contractors and subcontractors and stellar earnings for large home improvement companies, such as Home Depot and Lowes.
What is good for the renovation market is not good for the housing market overall, however. Industry executives blame the inventory shortage for the continuing upward pressure on home prices and the unexpected decline in existing home sales in June.
“There’s no inventory, and that’s what’s really kicking the market in the teeth,” Nela Richardson, chief economist at Redfin, told the Wall street Journal.
Existing home sold at an annual rate of 5.52 million units in June – almost 2 percent below the May pace and the second-lowest rate for this year. Median prices increased another 6.5 percent in June, to $263,800, the 64th consecutive year-over-year price gain, according to the National Association of Realtors.
First-time buyers continue to struggle against these market headwinds. They were responsible for just 32 percent of all purchase transactions in June, down only slightly from the previous month, but well below their historical average of 40 percent.
HOUSING FINANCE REFORM
Reform of the housing finance system has been on the political agenda for some time, prompting a lot of talk but not much in the way of action. The issue may be gaining traction now. It took (almost) center stage in Treasury Secretary Steven Mnuchin’s report on financial regulation a few weeks ago, and now it has attracted the attention of Federal Reserve Governor Jerome Powell, who has termed the current structure – with both Fannie Mae and Freddie Mac in receivership, “unsustainable.”
Speaking recently at the American Enterprise Institute, Powell said fundamental housing finance reform “the great unfinished business of most-financial crisis reform.”
Powell described five key goals that should be incorporated in the reforms, all reflecting “lessons learned” from the financial meltdown. The reforms, he said, should:
- Do as much as possible to avoid future housing bailouts.
- Make any government guarantee of mortgage financing “transparent” and apply it only to securities, not to the institutions issuing them.
- Promote greater competition.
- Keep it simple. Restructure the existing financing framework rather than attempting to redesign it.
- Seek bipartisan agreement. “We should be looking for the best, feasible plan to escape the unacceptable status quo,” Powell said.
ALL FALL DOWN
Echoing a much-derided Vietnam-era strategy (destroying villages in order to “save” them), some insurance companies are arguing that their homeowners’ policies won’t cover damage to foundations unless the structures actually collapse.
Thousands of detached homes and condominiums built in central and northeastern Connecticut over the past 30 years are suffering from serious foundation damage resulting from the addition of the mineral pyrrhotite to the concrete the builders used. The mineral reacts naturally with air and water to create a chemical reaction that erodes foundations. Homeowners have filed a class action suit against more than two dozen insurance companies, which, they say, are illegally denying coverage for damage that can cost an average of $200,000 per home to repair.
In court documents filed recently, the insurers contend that the language in their policies, affirmed by several court decisions, defines “collapse” to mean an “abrupt” or “sudden” event. The foundation damage at issue here, they say, occurred over many years. “Policies are envisioned to cover accidents,” Eric George, president of the Insurance Association of Connecticut, a trade association representing insures in the state, told the Insurance Journal.
Not surprisingly, the owners demanding coverage disagree. “These houses are in a state of collapse,” Ryan Barry, an attorney representing the owners, said. “You shouldn’t have to wait for the house to fall into rubble – to cave into itself – -in order to qualify for coverage.”
The Consumer Financial Protection Bureau (CFPB), which has essentially declared war on affiliated business arrangements among the professionals (real estate agents, mortgage lenders, and title insurers) involved in home purchase transactions, has lost a major battle in that long-running conflict. A federal district court in Kentucky has ruled that joint ventures, in which a law firm (Borders & Borders) was involved, did not violate the Real Estate Settlement Practices Act (RESPA), as the CFPB had claimed in a suit filed against the law firm.
RESPA prohibits referral arrangements in which the fees paid are not based on tangible services. The CFPB had argued that the fees paid in Border’s “affiliated business arrangements” were illegal kickbacks, because the participants were not “bona fide providers of settlement services” that would qualify for a safe harbor under the statute. But the court ruled that the arrangements met the statutory requirements for the safe harbor, primary among them: Participants had an operating agreement and provided something of value for the fees they received.
This represents a rare RESPA-related defeat for the CFPB, which has levied multi-million-dollar fines against several lenders and title insurance companies. Borders in fact, was one of the few entities targeted by the CFPB to fight a RESPA complaint in court.
Industry observers point out that this is one of the few RESPA battles the CFPB has lost. The agency, they note, may still appeal the decision, and is unlikely in any event, to abandon its assault on what it views as improper RESPA referrals.
IN CASE YOU MISSED THIS
McMansions, which became a symbol of the dangerous excesses that triggered the housing market’s collapse, seem to be making a comeback.
Nearly half of all Americans are struggling to meet their expenses. Erratic income resulting from increased reliance on freelance employment is a major cause of the problem. More than one-third (36 percent) of workers are independent contractors today; analysts predict the percentage will rise to 43 percent by 2020.
Minorities, who were hit hardest by the “Great Recession” and suffered longer from its effects, are finally beginning to recover.
Home builders say the tariffs imposed and proposed on Canadian lumber are already boosting the cost of building materials.
Conventional wisdom among critics of the Consumer Financial Protection Bureau holds that the agency wouldn’t win any popularity contests. A recent poll suggests otherwise.
Condo attorneys regularly warn association clients about the risks of ignoring rules and regulations and/or enforcing them inconsistently. They also emphasize the responsibility of owners to be informed about and participate actively in the governance of their communities. This dispute over quorum requirements at a Kansas condominium association illustrates both points.
The association’s bylaws required the presence of half the owners in this 40-unit community to establish a quorum. Boards ignored that requirement for years, regularly holding annual meetings, approving changes in the governing documents, and electing board members without a quorum.
The practice became problematic at the May, 2013 meeting, at which new board members were elected. Only 12 owners attended the meeting, but the board counted 8 absentee ballots toward the quorum requirement, a practice that was not clearly authorized by the bylaws. Barbara and Bob Williams, who did not attend the meeting, complained that the election was invalid because there was no quorum at the meeting.
Responding to the criticism, the board proposed amendments to the bylaws reducing the quorum requirement to two-thirds of owners and changing the assessment process, which the Williams’ had also contested. Those changes were adopted at the next annual meeting (March, 2014), even though the new quorum requirement wasn’t met. The board signed and recorded the amendment, which was not signed by 75 percent of owners, as the bylaws also required.
When the board charged the Williams’ interest on their 2014 assessment, claiming that they had paid a previous assessment late, the Williams’ sued, claiming that board’s actions at the 2013 meeting and the meetings following it – including the a election of board officers and the approval of bylaw amendments – were invalid because the quorum requirement hadn’t been met and the board had not followed the proper procedures for recording amendments.
While agreeing that the quorum requirement had been ignored, the trial court declined to invalidate board elections or actions, ruling that the Williams’ had waived their right to object by failing to attend the meetings. The trial court concluded that both sides were equally responsible for creating what it termed a “mess,” and refused to award attorneys’ fees to either side. The Williams appealed, but found no sympathy in the Appeals Court, which agreed with the lower court’s conclusion that:
“Both sides have made a mess of this corporation. Both have not followed the governing documents. I am not sure that they have even referred to them since they put in place, until the suit was filed….Both have admittedly, by mistake, applied the wrong calculation for a quorum. Both have treated the corporate activity with disregard to purpose and procedures of the corporation. Both have then tried to use the letter of the law against the other when the dispute arose. Both come to court with unclean hands and present the Court with a mess to untangle. Therefore, both bear the cost of fixing their joint mess.”
In upholding the lower court’s ruling, the Appeals Court noted, among other details, that the association had operated for years without adhering to the quorum requirements and that the Williams (one of whom had served on the board) never objected, until they clashed with the board over interest charges on an allegedly late dues payment. “Plaintiffs have been active members in the Association through the years, serving on the Board and as officers. They attended meetings, and didn’t attend meetings. They objected to a quorum, and they didn’t object to quorum….” Both the plaintiffs and the board waived the quorum requirement, the court said, “by their continued disregard of the provision.
The Williams’’ based their argument for attorneys’ fees in part on the allegation that the board had breached its fiduciary duty by failing to follow the required procedures for approving and recording amendments to the bylaws. But the Appeals Court agreed with the lower court that the plaintiffs had failed to present evidence that the board had acted in bad faith. Also undermining the claim, the court said, the plaintiffs failed to complain about the procedural issues before filing suit, and the association acknowledged the problem before the trial began. “It does not seem appropriate to award attorney fees to the Williams,” the court said, “when this issue could have been resolved without litigation.”
The court also rejected the plaintiffs’ argument that they were entitled to attorneys’ fees under the state’s Common Interest Ownership statute, which gives courts the discretion to award legal fees and court costs to owners who initiate a derivative action to enforce the law or the association’s bylaws. The operative word is “may,” the court said. The statute allows courts to grant attorneys’ fees, but does not require them to do so.
While acknowledging that the Williams’ legal action did prompt the board to change its procedures, the court said, “we realize, too, that litigation may have been avoided,” and that “the quorum issue was caused by all parties.”
The plaintiffs did not demonstrate how the lower court had erred or abused its discretion by failing to approve their demand for attorneys’ fees, the court said, concluding: “Based on the facts, we cannot say that no reasonable person would have taken the district court’s position, [and] there is no reason to set aside the trial court’s holding and award attorney fees on this point.
“The bad guys haven’t found the top end of what people will pay.” Kevin Haley, Director of Security Response for Symantec, describing the increase in ransomware attacks perpetrated by computer hackers.