Legal/Legislative Update – December 16, 2014

Published on: December 16, 2014

NEW ESCROW REQUIREMENT.  Federal bank regulators have proposed regulations that would require automatic escrowing of the premium payments on flood insurance policies. Federally regulated mortgage lenders are already required to make sure borrowers living in designated flood hazard areas purchase and maintain flood insurance. The new regulations would intensify efforts to ensure that borrowers don’t let their policies lapse. The Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Farm Credit Administration and the National Credit Union Administration have jointly proposed the rules, which, if finalized, would apply to loans originated after July 1, 2016. The proposal includes another change that homeowners will probably like a lot more than the escrow requirement. It would eliminate the requirement for flood insurance on buildings that are detached from the main residential structure as long as they are not used for residential purchases. There is a potential escape hatch for lenders, however. The new rules would allow them to require insurance on detached structures if necessary to protect the collateral securing the mortgage.

DUBIOUS ACHIEVEMENT.  The U.S. may have fallen behind other countries in some categories, but it remains the leader in at least one: It has more ‘unbanked’ citizens than any other “Group of Seven” countries except Italy. According to the World Bank, 9 percent of Americans 25 and older had no savings or checking accounts, compared with 2 percent in Britain and Canada and only 1 percent in Australia. This is not a good thing. People with formal banking relationships generally pay more for financial services (obtained from pay day lenders and check cashing services) and have a harder time building assets and establishing a credit history, industry analysts agree. Lack of access to mainstream banking “is one piece constraining growth and opportunity in this country,” Andrea Levere, president of the Corporation for Enterprise Development, a Washington-based nonprofit , told Bloomberg News. “Without financial security, you’re not going to take the leap to fund an education or buy a home,” she added.

COINCIDENCE?   The Federal Housing Finance Agency has announced a new policy allowing owners who have lost their homes to foreclosure to buy them back at fair market value, to be determined by Fannie Mae and Freddie Mac. This marks a shift from the prior policy, which required former owners or anyone purchasing a foreclosed property on their behalf, to pay the entire outstanding amount due on the mortgage. Massachusetts Attorney General Martha Coakley had challenged the policy, claiming it violated a state law requiring 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. A Federal District Court judge dismissed the suit, ruling that the Housing and Economic Recovery Act of 2008 allows the FHFA, acting as conservator for Fannie and Freddie, to enforce policies designed to protect their assets.

“This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods,” FHFA director Melvin Watt said in announcing the revised policy. “It expands the number of potential buyers of REO properties and is consistent with the Enterprises’ practice of requiring fair-market value for those properties.”

Existing rules still require former owners to wait a minimum of three years after a foreclosure before they can obtain another loan purchased by Fannie or Freddie, and owners who repurchase homes they lost through foreclosure must occupy them as their primary residence.

   It’s getting harder for pessimists to support their view that the economy is stalling or moving in the wrong direction. Employers added 321,000 jobs in November, beating expectations and marking the tenth consecutive month job gains have exceeded the 200,000 mark. Tying a holiday bow on those numbers, the September and October figures were revised upward. Although the unemployment rate didn’t budge from 5.8 percent, average hourly earnings increased by 0.4 percent, doubling the anticipated gain and adding a crucial positive data point that has been missing from the recovery thus far. Analysts have blamed flat income growth in part for the inconsistent consumer spending pattern and the less than robust housing recovery.

The November labor report made many of those analysts feel much better. “Spectacular and believable,” is how Ian Shepardson, chief economist at Pantheon Macroeconomics, described the report. “We’ve had strong hiring indicators in a number of surveys and lower jobless claims, so sooner or later, we were going to get a blockbuster number,” he told the New York Times. Former Treasury Secretary Lawrence Summers was more restrained, refusing to back away much from his earlier warning that the economy could be stuck in a prolonged period of exceptionally slow growth, which he described as “secular stagnation.” In an interview with Bloomberg News, Summers conceded that the economy “certainly does not appear to be stagnant at the moment. [But] whether growth can be sustained at rapid rates at normal type interest rates conducive to financial stability is certainly not yet fully established.”

MORE ENCOURAGING WORDS.   Existing home sales in October were certainly encouraging. The 5.26 million annual sales pace was 1.5 percent higher than the previous month and beat the year-ago pace for the first time in more than a year. Pending sales for November slipped a bit (by 1.1 percent compared with October) but they were still higher than the same month last year. The pace of contract signings remains “healthy,” Lawrence Yun, chief economist for the National Association of Realtors, told reporters.

New single-family home starts reached a 6-year high in October, rising more than 4.2 percent above the September rate and contrasting with a 28 percent plunge in the volatile multi-family sector. Single family permits also increased by nearly 5 percent.

The pace of new home sales increased, as well, but the 0.7 percent gain was below analysts’ expectations, and the September rate was revised downward.

Some industry executives still viewed the overall trend as positive. “The underlying drivers of demand – population growth, job growth, affordability, and household formations – are strong arguments for growth to continue,” one builder, quoted in a National Mortgage News report, insisted. But others noted that most of the purchasing strength has been at the higher end of the market, where buyers are finding credit readily available.

“Even as conditions improve for buyers overall, it remains a tough row to hoe for first-time buyers and lower-income buyers, especially compared to their more well-off contemporaries,” Stan Humphries, chief economist for Zillow, observed in that National Mortgage News report.

.  en. Elizabeth Warren (D-MA) has introduced legislation that would allow consumers to refinance approximately $460 billion in student loans. The measure (unlikely to move in this session of Congress and facing uncertain prospects, at best, in the next one) responds to growing concern that the outsized debt levels many borrowers incurred to finance their education are making it impossible for them to qualify for mortgages, eliminating a large component of the first-time buyer market. Nearly half the respondents to a recent National Association of Realtors survey agreed that student debt represents a “huge obstacle” to home ownership. Student loan debt, which represented 22 percent of consumer debt outstanding in 2006, has more than doubled since then to 40 percent, according to data compiled by the Federal Reserve. The $1.3 trillion total now exceeds aggregate credit card debt ($839 billion) and the amount owed on automobile loans ($919 billion).


The ‘business judgment rule’ provides a layer of necessary protection for board members, insulating them from the otherwise limitless liability risks they would face for the decisions they make. The rule says, essentially, that board members can act stupidly; they just can’t act recklessly or in their own self-interest. A recent decision by a New Jersey appeals court (Anklowitz v. Greenbriar at Whittlingham Community Association) illustrates how the courts in many jurisdictions apply that rule.
The plaintiffs in this case (the Anklowitzes) sought permission to install a screen enclosure on their deck. The association’s covenants committee, which had approved the addition of the deck several years before, rejected this request, because, in their view, it would exceed the township’s density limits and impervious coverage requirements. The plaintiffs submitted a new application a year later, pointing out that the addition would be built on an existing concrete patio and so would conform to the township’s requirements. But the committee again rejected the request, citing an association policy to reject all such additions to ensure compliance with the township’s regulations.

The Anklowitzes sued, claiming that the blanket policy was “unconscionable, arbitrary and capricious” and deceptive, because they had no knowledge of this blanket prohibition when they purchased their home. Claiming protection under the business judgment rule, the association sought summary judgment on that point.

The trial court rejected that motion, concluding that there was a legitimate question about whether the association had a blanket policy to deny all requests for structural additions. If so, the judge said, the review process for additions would be “a nullity, constitute an artifice, and [would be] devoid of any good faith…. [and] actions based on this undisclosed policy are unconscionable.”

The case was transferred to the Chancery Division, where a judge ruled that the Business Judgment Rule did apply and granted summary judgment to the association based on it.

That was the central question before the Appeals Court, which said the rule would apply if two conditions were met: The association’s actions must be authorized by statute or by the association’s governing documents; and the actions must not be “fraudulent, self-dealing, or unconscionable.”

Focusing first on the association’s architectural rules, the court agreed with the Chancery Court ruling that they were “rooted in sound reasoning and the desire and duty to maintain Greenbriar in a common scheme for the benefit of all owners.” The court also concluded that the Site Review Committee rejected the plaintiffs’ proposed addition because they assumed municipal zoning authorities would not allow it. “Whether Greenbriar was mistaken or correct in that belief does not vitiate its business judgment in denying the…application,” the court said.

As for the plaintiffs’ contention that the association’s “blanket policy” was unconscionable, the court pointed out that the policy did not prohibit all additions; it barred a particular type of addition. “A blanket policy on certain types of additions or improvements is not unconscionable as a matter of law,” the court stated.

The court also found that the association’s policy on these additions was not in place when the plaintiff’s purchase their home, but developed over time. As a result, the court said, “there was no unconscionable deception of plaintiffs as home buyers in the 1990s.”


“Like a coiled spring, all of these doubled-up households represent tremendous potential energy for the market. If and when these compressed households begin to unwind and these millions of Americans do start to create their own households, demand will bounce back, possibly even causing household growth to outpace population growth.” ― Stan Humphries, chief economist, Zillow.