Legal/Legislative Update –August 21, 2014

Published on: August 21, 2014

GUILTY OF MURDER.  The Dodd-Frank Financial Reform law killed the housing market! That is the less-than-subtle conclusion of an article written by two Bank of America Merrill Lynch analysts, who blame the myriad mortgage-related rules spawned by the legislation for the sluggish housing recovery. “We think persistently low mortgage application volumes and [the] extremely weak new home sales reports for May and June are natural outcomes of the legislation,” analysts Chris Flanagan and Adam Katz, contend. A separate report from DBRS similarly blames federal mortgage rules in part for the “historically low” volume of mortgage loan originations, despite attractive interest rates and strengthening home prices. But a somewhat more nuanced survey by Fannie Mae found that the new mortgage rules (mainly the Qualified Mortgage standards) have not reduced mortgage approvals at most (78 percent) of the nation’s largest banks; only about 20 percent said their approval rates for prime mortgages were lower than they would have been absent the QM restrictions. And half of the banks reporting an impact on their approval rates said their credit standards would have been tighter if not for the “safe harbor” (liability protection) created for loans that meet the QM guidelines.

RATE FEARS.  Economists are betting ― and many are worrying — about the timing of the Fed’s inevitable move to release its grip on interest rates. Analysts who expect the move to come later rather than sooner may have the edge. Recent reports indicate that Fed Chairman Janet Yellen will use the still high under-employment rate – reflecting part-time workers who want full-time jobs but can’t find them – as a rationale for keeping rates low. “We still have quite a long ways to go,” Aneta Markowska, chief U.S. economist at Societe Generale SA, told Bloomberg News in advance of an upcoming Yellen speech “I’d be surprised if the message is anything other than dovish,” Markowska added.

HUD IS UGLY!  This isn’t a reaction to the agency’s enforcement of the Fair Housing law. It’s a comment on HUD’s headquarters, which ranked as one of the seven least attractive buildings in Washington. Only the FBI building was deemed uglier in a list compiled by Buzzfeed contributor Benny Johnson. Also on the list: The U.S. Post Office Building, the Department of Energy, the Department of Labor, the Department of Education, and the Department of Health and Human Services. Johnson suggests that the HUD building’s flying saucer-like elements and “pod-like” structures “could have been designed by Buzz Lightyear.”

HOUSING RECOVERY IS FALTERING.  That Bloomberg News headline pretty much summarizes the growing consensus – and concern – of industry economists and policy makers, who have been watching home sales and home construction activity trending mainly downward for the past several months. The Bloomberg article noted the most recent example of lowered expectations: The Mortgage Bankers Association has slashed its home sales forecast for this year to 5.28 million units – more than 4 percent below the 2013 total and, if correct, the first year-over-year decline in four years.

PERVERSELY CONFIDENT.  Home builders are either prescient or perverse. Housing industry analysts ― the Mortgage Bankers Association (see above), Freddie Mac and Fannie Mae economists among them ─ have been scaling back their housing forecasts for the year, citing sub-par household formation rates, cautious homebuyers and restrictive underwriting criteria, as the key problems. But builder confidence levels, measured by a National Association of Home Builders index, are higher than they’ve been since January. “Sustained job growth, historically low mortgage rates and affordable home prices…are helping to unleash pent-up demand,” the NAHB’s chief economist, David Crowe, said in a press statement, explaining August’s third consecutive monthly increase in the index.

LIVING AT HOME.  Analysts blame recent college graduates who are still living at home with their parents instead of forming households of their own for depriving the housing market of the first-time buyers needed to fuel sales. But researchers at Harvard’s Center for Housing Studies have this advice for those fretting about the housing market outlook: Relax! Young adults still living at home won’t stay there forever. (Presumably, they’ve been talking to the parents.) “When the job market recovers and their income recovers, they are going make their mark on this housing market,” Christopher Herbert, research director for the Harvard center, said of its recent “State of the Nation’s Housing” report.


CONSTRUCTION DEFECTS 1:  DUELING INSURERS.   The Meriwether Condominium Owners Association in Oregon had an undisputed construction defects claim: There were multiple verified defects in the condominium – deficiencies in the roof, fire extinguishers, windows and doors, among others, resulting in damages of $3.6 million. The question before the district court in Chartis Specialty Ins. Co. v. American Contractors Ins. Co. Risk Retention Group, et al. was not whether those defects existed, but whether an excess general liability policy should pay a portion of the damage claim against the developer.

Chartis had issued an umbrella policy to the developer, agreeing to pay damages in excess of $2 million per occurrence up to an aggregate total of $4 million. The developer’s primary insurer, American Contractors Insurance Company Risk Retention Group (ACIC), covered $2 million per occurrence with a $4 million aggregate limit of liability, including any retentions owed by the insured. ACIC paid $1.8 million and Chartis paid $1.6 million to settle the claim. Chartis then sued ACIC to recover part of that payment, arguing that the damages resulted from multiple defects constituting separate occurrences that were subject to at least two retentions.

The court didn’t buy that analysis. Although multiple defects caused the damages, the court agreed, the underlying cause was the developer’s failure to perform its duties properly – a single occurrence, in the court’s view. The community association sued the developers “only for their failure as developers and not as contractors or subcontractors,” the court ruled. “The lawsuit did not include any allegations that the developers were vicariously liable for the actions of the contractors or subcontractors…” Given that analysis, the court concluded, “the only plausible interpretation of the language in the Chartis Policy is that the property damage at the Meriwether Condominium Complex was caused by a single occurrence as a matter of law.”

CONSTRUCTION DEFECTS 2:  ARCHITECTS’ “DUTY OF CARE.”   Construction defect litigation creates a vast field in which to explore interesting legal questions. The California Supreme Court tackled another one recently, in Beacon Residential Community Association v. Skidmore Owings & Merrill, LLP. The key question: To what extent, if at all, do architects who provide design services to a contractor owe a duty of care to the homeowners who purchase dwellings from the contractor?

In addition to providing pre-construction design and engineering services for a San Francisco condominium development, the architects in this case also oversaw the construction, altering design components during the process and ensuring that the contractors followed the design plans. They received more than $5 million for those services.

When owners who had purchased units in the community discovered that solar heat gain made their homes virtually uninhabitable for large portions of the day, the homeowners’ association sued the architectural firms as well as the contractors. A trial court held that the owners had no contract with the architects and thus no grounds for suing them. When an appeals court ruled otherwise, the architects appealed to the state Supreme Court – and lost. The court found that there are some circumstances in which architects and contractors may owe a common law duty of care to individuals with whom they have no contract. The determining factors in this case, the court said, were:

  • The closeness of the connection between the defendant architects and the homeowners suing them;
  • The “limited and wholly evident” class of persons and transactions affected by the architects’ actions;
  • The absence of other options that would have more effectively protected the homeowners from design defects and the damage resulting from them; and, critically in the court’s view,
  • The fact that the architects were the “principal architects” on the project, and were not “subordinates to” other design professionals. “We hold that an architect owes a duty of care to future homeowners where the architect is a principal architect on the project…. even if the architect does not actually build the project or exercise ultimate control over construction decisions,” the court said.

“Even if an architect does not actually build the project or make final decisions on construction, a property owner typically employs an architect in order to rely on the architect‘s specialized training, technical expertise, and professional judgment,” the court noted, adding, “The architects uniquely possessed architectural expertise. There is no suggestion that the owner or anyone else had special competence or exercised professional judgment on architectural issues….”

The court rejected the architects’ contention that the homeowners had other avenues of redress available to them, including suing the developer for design defects, or seeking an assignment of the developer’s rights against the architects. “It is questionable whether this more attenuated form of liability will consistently provide adequate redress,” the court concluded. “[And] more importantly, the chief interest of prospective homeowners is to avoid purchasing a defective home, not to have adequate redress after the fact. The long-established common law rule holding architects as independent professionals directly accountable to third party homeowners is most likely to vindicate that interest.”


“While recent housing activity suggests that the worst of the housing slump may be behind us, [the] caution among consumers supports our expectation that the rebound in home sales will likely be too modest to pull sales for all of 2014 ahead of last year.” ─Doug Duncan, Fannie Mae chief economist, commenting on the results of a recent National Housing Survey.