Legal/Legislative Update – December 1, 2014

Published on: December 1, 2014

PULLING TEETH. What’s worse than a trip to the dentist? Spending time with a financial adviser, according to respondents to a recent survey, 17 percent of whom said that given the choice, they’d rather spend the time in a dentist’s chair. The poll results suggest that their finances need as much work, if not more, than their teeth. Nearly 60 percent of the respondents said they are barely making it from paycheck to pay check; 19 percent said they couldn’t afford to miss a single check and nearly one-quarter said they have less than $250 left in the bank when their paycheck arrives. “We know full well that with rising costs and unexpected expenses, consumers may have a tough time making ends meet,” said Dave Hogan, vice president of marketing and analytics at Springleaf Financial, which sponsored the study. “[But] we are concerned that so many Americans aren’t willing to take the time to learn the skills they need to make better financial decisions. The study serves as an eye-opener to just how critical financial education is among today’s adults — and how far we still have to go.”

DAMNING WITH FAINT PRAISE. New home sales hit a six-year high in September, but given the anemic sales figures posted since 2008, that qualifies as damning with very faint praise. The 18 percent sales surge reported in August had stirred hopes that an erratic housing recovery was becoming sustainable, but the August figures were revised substantially downward, throwing buckets of cold water on those hopes. “The underlying trend is down,” Ian Shepherdson, an analyst at Pantheon Macro, told Business Insider. Despite periodic reports that sales are improving, he noted, “the details are less impressive than the headlines.” The reality is, new home sales haven’t exceeded 63 percent of what had been the national average since 2008. “The [housing] story remains unchanged,” Lindsey Piegza, chief economist for Sterne Agee, agreed. The only clear message the statistics convey, he told Housing Wire, “is volatility.”

RETHINKING CREDIT SCORES. Lawmakers are considering changes in the Fair Credit Reporting Act that would reduce the time negative information remains on borrowers’’ credit profiles. Rep. Maxine Waters (D-Los Angeles) is sponsoring a bill that would erase most adverse reports, including delinquencies on credit cards and mortgages, foreclosures and short sales, after four years instead of seven. She says the changes would treat borrowers more fairly without harming lenders, because “the predictive value of most negative information….gradually diminishes after two years.” Lenders disagree. Delinquencies and foreclosures remain relevant to credit evaluations for much longer than four years, they say; erasing it too soon would lead to poorer underwriting and increase the risk of delinquencies and defaults.

INCOME GAP. The number of Americans working now exceeds pre-recession levels, but income growth has remained stagnant overall – restraining consumer spending generally, weakening the housing recovery, and widening the income gap between the most and least affluent Americans according to a recent Financial Times report. Trulia compared the 10th and 90th most expensive housing markets and found the income disparity between them at its widest point since 1969. An analysis by the National Employment Law Project casts a little more light on that gap. Higher-wage industries — such as accounting and legal work — shed 3.6 million positions during the recession and have added only 2.6 million during the recovery, according to this analysis, but lower-wage industries, which lost 2million jobs, have added 3.8 million since the recovery began.

NO SAVING GRACE. Despite continuing harangues from finance professionals about the importance of emergency savings, and ever-increasing estimates of the funds people should accumulate before they retire – not to mention the financial bruises the downturn inflicted on millions of families, Americans still aren’t doing a very good job of saving for rainy days – or anything else. A BankRate survey found that about a quarter of all Americans have no emergency savings at all, and only about one third have saved enough to cover six months of expenses and fewer than half (40 percent) have accumulated a three-month cushion. That’s down from 45 percent a year ago.

BACK TO NORMAL. In the continuing debate between optimists, who think the housing recovery is solid and strengthening, and pessimists, who aren’t so sure, Freddie Mac’s chief economist, Frank Nothaft, has sided squarely with the optimists. He sees improving fundamentals driving housing specifically and the economy generally toward a “new” and sustainable “normal. In a recent report, he explained: “Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back towards its potential.”


REJECTED. The law suit Massachusetts attorney general Martha Coakley filed against Fannie Mae and Freddie Mac began with a bang several months ago but ended, at least for now, with a whimper. A federal district court has dismissed the suit, which claimed that the two secondary market giants violated state laws by enforcing pre-and post-foreclosure policies that discouraged efforts to help struggling homeowners remain in their homes.

A state law enacted in 2012 requires lenders to consider offers from non-profit organizations to purchase homes in foreclosure and resell them, under more favorable financial terms, to the former owners. But Federal District Judge Richard Sterns found that federal law (the Housing and Economic Recovery Act of 2008) allows the Federal Housing Finance Agency, as conservator for Fannie and Freddie, to enforce policies designed to protect their assets.

federal-housing-finance-agency1-300x300Coakley had argued among other things, that the FHFA was acting as a regulator, not as a conservator, and thus “cannot evade judicial scrutiny merely by labeling its actions with a conservator stamp.” Judge Sterns agreed – to a limited point. The key issue, he said, was whether the no-buyback policy targeted perceived or potential risks to the GSEs. Courts have held consistently, he noted, that the FHFA is acting as a conservator “when it evaluates the risks of certain business transactions and takes prudential action to avoid those that it deems undesirable.”

The FHFA had contended that its policy was motivated by concerns that some borrowers might opt for foreclosure over modifications for which they qualified, in order to repurchase their home from a nonprofit “at a larger discount” and without second liens or other encumbrances that would remain in place with a modification. “This would run counter to federal and state efforts to provide homeowners an ‘affordable’ alternative to foreclosure,” the FHFA argued.
Judge Sterns found that argument to be persuasive. The FHFA, he said has “articulated a potential risk of financial loss” as the basis for its policy, consistent with the agency’s role as a conservator, as defined by HERA. By enacting that law, Judge Sterns said, Congress “expressly removed such conservatorship decisions from the courts’ oversight. Given the jurisdictional bar, this court does not have the authority to reach the merits of the Commonwealth’s claims.”
News reports indicate that Coakley likely to appeal the decision.


“Federal housing policies today are simply out of sync with current market realities…Meeting this country’s considerable housing needs must not be an afterthought, but a top priority—a matter of urgent and continuous national concern.” ─ Ron Terwilliger, former CEO of Trammell Crow Residential, speaking at a conference of affordable housing developers.