Legal/Legislative Update – December 3, 2013

Published on: December 3, 2013

NO WORRIES.  Painful resets of adjustable rate mortgages forced thousands of homeowners into default during the housing downturn. But Lender Processing Services sees no risk that scenario will be repeated in the current cycle. The company’s self-described “in depth analysis” found that 63 percent of hybrid ARMs have already reset and three-quarters of the remaining 37 percent were originated after the downturn, under tighter underwriting standards. Most borrowers with ARMs originated during the bubble years are likely to see their rates decline, not rise, LPS concludes.

MIXED MESSAGES.  Home prices are still rising, but: Sales of existing homes and pending sales both slid in November. Although permits for new construction hit their highest level in five years, all of the increase was in the multi-family sector. Permits for single-family homes declined.

FORCING THE ISSUE. Regulations proposed by New York Gov. Andrew Cuomo would prohibit insurers from issuing ‘force-placed’ insurance on properties with loans serviced by a financial institution or other entity affiliated with the insurer. The rules would also prohibit the payment of commissions on force-placed insurance. Separately, Fannie Mae and Freddie Mac have ordered their servicers to end captive reinsurance arrangements, under which they are reimbursed for purchasing forced placed homeowners insurance policies for owners who have not maintained that insurance on their own.


FOR BETTER OR WORSE?   Consumer confidence declined by two points in November – a much smaller dip than the nine-point plunge in November, but still heading in the wrong direction at the beginning of the Christmas shopping season. That’s according to the Conference Board’s index. You’ll find a cheerier reading in the Thomson/Reuters University of Michigan index, which rose almost two points in November.

RURAL SKEW.  Consumers may be more upbeat than major confidence measures suggest. Drilling down in the data, the new HPS-CivicScience Economic Sentiment Index finds that exceptionally gloomy rural residents are dragging down the much more optimistic residents of urban and suburban areas.

STILL AT HOME.   More than one-third (36 percent) of young adults —between the ages of 18 and 31 – are living with their parents, according to a Pew Research Center report. That’s the highest number in four decades. It also helps to explain why household formation rates – and SOME estimates of future housing demand – have been declining.



DISPARATE DUCKED AGAIN.    Critics of disparate impact almost got the Supreme Court hearing they’ve been seeking – but not quite. For the second time in two years, an out-of court settlement ended pending litigation just a few weeks before oral arguments were to have been presented.

In the recent case, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., plaintiffs contended that a plan to raze low-income housing in a neighborhood deemed blighted and replace it with largely market-rate housing violated the Fair Housing Act, because it had a discriminatory impact on the neighborhood’s predominantly minority residents. The settlement agreement will allocate a portion of the new housing units for minority residents.

SJCPoster1214Plaintiffs in the earlier case –Magner v. Gallagher – also invoked the Fair Housing Act in their argument that the strict enforcement of building codes in a low-income community in Minneapolis would have a disproportionately negative impact on minority residents, who would not be able to afford the resulting rent increases. As in Mount Holly, a last-minute agreement resolved the dispute, which the Supreme Court had agreed to hear.

Housing and financial industry trade groups, who have long argued that disparate impact has no statutory basis, have accused the Obama Administration generally and the Justice Department specifically of improperly engineering out-of-court settlements in both cases to avoid a Supreme Court decision that they assume, given the current conservative majority, would go against them. A court ruling rejecting disparate impact in fair housing enforcement would undermine its use in fair lending cases as well, where the Justice Department has been applying it aggressively under the Equal Credit Opportunity Act. The Consumer Financial Protection Bureau has indicated that it also intends to use the theory in its fair lending enforcement actions and the Department of Housing and Urban Development (HUD) recently published guidance re-emphasizing its use of the theory in fair housing enforcement.

The key question that industry trade groups want the High Court to decide is whether fair housing and fair lending laws require a showing of discriminatory intent, or whether, as supporters of disparate impact contend, evidence that a policy has a discriminatory impact is sufficient grounds for an enforcement action, even if the discrimination isn’t intentional.

For critics hoping for a Supreme Court ruling, the third time may be the charm. The American Insurance Association and the National Association of Mutual Insurance Companies – both representing companies that sell homeowners insurance – have challenged HUD’s newly published fair housing regulations. Parties to this suit agreed to a temporary stay, pending the Supreme Court’s decision in the Mount Holly case. With that suit now off the docket, it appears that the insurance industry challenge to disparate impact will proceed.



“I don’t think that the Fed ever can be or should be a prisoner of the markets.” ―Janet Yellen, President Obama’s nominee for chairman of the Federal Reserve Board, in her confirmation hearing before the Senate Banking Committee.