Legal/Legislative Update – February 15, 2016

Published on: February 15, 2016

AMENDING FHA CONDO RULES

fha_logoThe U.S. House of Representatives has approved legislation requiring the Federal Housing Administration (FHA) to revise several requirements for FHA-insured condominium loans. The changes, included in a broader housing measure (the Housing Opportunity Through Modernization Act), should make it easier for condo associations to obtain the FHA certification needed to make homes in the community eligible for FHA financing, said Dawn Bauman, senior vice president for Government and Public Affairs at the Community Associations Institute (CAI), which supported the measure. The key provisions:

  • Require the Department of HUD to streamline the re-certification process for condominiums to make it less extensive and less burdensome than the initial certification process.
  • Reduce from 50 percent to 35 percent the proportion of units that must be occupied by owners as a primary or secondary residence, unless HUD acts within 90 days after the legislation is enacted to set a different limit on investor ownership.
  • Directs HUD to consider granting exceptions to the 25 percent cap on the amount of commercial space allowed in condo communities.
  • Directs HUD to adopt the Federal Housing Finance Agency (FHFA) policy on transfer fees, allowing the FHA, like Fannie Mae and Freddie Mac, to approve loans on units in condominiums that impose those fees.

The statutory changes incorporated in this measure echo temporary revisions in the FHA condo certification rules that HUD announced earlier this year, but go well beyond them. The transfer fee exemption for condominiums, which was not included in HUD’s announcement, represents a significant victory for CAI, which has been lobbying for it for several years.

The housing bill received bipartisan support in the House and now goes to the Senate, which must also approve it. If it passes that final legislative hurdle, the measure “will not only help condominium projects maintain their FHA approval,” a CAI press statement notes, “it will also ease the burden on condominium projects and put ownership [within] reach for more families.”

DURABLE DISCRIMINATION

discriminationFew entities can match the durability of cockroaches, which, alone, are expected to survive a nuclear calamity. But lending discrimination apparently comes close in its ability to withstand decades of concerted regulatory and legislative efforts to eliminate it.

The latest in a series of annual studies published by the University of Massachusetts-Boston found that minority borrowers continue to receive fewer disproportionately fewer mortgage loans and are rejected more often than whites with comparable income and credit profiles. The study analyzed mortgage lending statistics in Boston and 36 other large Massachusetts cities. Among the key disparities:

  • Loan approval rates for minorities did not match their share of the population. Blacks represent 7.3 percent of households in Greater Boston but received only 2 percent of conventional home purchase loans. For Latinos, the ratios were 6.8 percent of households vs. 3.2 percent of the loans.
  • Denial rates for minorities far exceeded those for whites. In Greater Boston, the rejection rate was 17 percent for Blacks vs. 6 percent for whites; statewide, it was 17 percent vs. 7 percent. Latino rejection rates were approximately twice those for whites. The discrepancies can’t be explained by income differences, according to the report, which notes that even at upper income levels l($71,000 – $90,000), rejection rates for Blacks and Latinos were 3.6 times greater than for whites in Boston and 2.4 times greater statewide.  Perhaps most discouraging, the report found that these disparities have not changed much over the past decade, with one exception: In Boston, the “historically high” black/white disparity ratio of 3.6 in 014 was well above the 2.6 gap recorded 10 years earlier.

“It’s a combination of a lot of things,” the study’s author, Jim Campen, economics professor emeritus at U-Mass, told the Boston Globe. Income and employment disparities, tougher lending standards and “a tinge of racism” all play a role, he said. “It’s very discouraging,” he added. “It’s all about the long legacy of historical discrimination.”

HOME BUYERS TURN GLUM

Recent employment reports have been consistently upbeat, but prospective homebuyers are anything but. Fannie Mae’s most recent survey of home buying sentiment found that Americans are feeling less optimistic about the housing market than they were a few months ago. Fannie’s Home Purchase Sentiment Index fell from 83.2 in December to 81.5 in January, on a yardstick that ranges from -36.5 to 163.5. Only 31 percent of the 1000 respondents said they think now is a good time to buy, down from 35 percent in December. Income seems to be a major concern: The percentage of respondents saying their income is “significantly higher” than it was a year ago declined by 3 percentage points to 12 percent, after rising by 10 percentage points in December.

“Housing affordability is being constrained because the pace of growth in real income has not kept up with gains in real home prices as demand has grown faster than supply,” Doug Duncan, senior vice president and Fannie Mae’s chief economist, said in a press statement. “On the bright side,” he added, “consumers have been increasingly positive about their ability to get a mortgage, suggesting that credit tightness is not the main issue limiting housing market activity today.” But lagging incomes will remain an obstacle, he said, exacerbated by a continuing inventory shortage. “We expect further progress in the [sentiment index] to be limited,” he said, “income growth picks up or supply, particularly in lower-priced homes, expands more rapidly.”

SELF-SELECTING OUT OF HOME OWNERSHIP

loan-application-1240982-1279x1705Housing analysts are fretting that financial constraints are putting home ownership beyond reach for an increasing number of prospective buyers. But it may be their incorrect assumptions about financing requirements rather than the requirements themselves that are keeping many would-be buyers on the sidelines. Nearly 30 percent of the 3,250 renters responding to a Bankrate survey said they can’t afford the down payment they need to obtain a mortgage; but 20 percent of them over-estimated the size of the down payment they need – assuming a minimum of 24 percent of the purchase price. In fact, average down payments on mortgages originated last year were closer to 15 percent, according to Realty Trac. For borrowers obtaining FHA loans, the average was 7 percent.

“A little education about down payments might change the minds of the renters who are putting off homeownership because they have wrong information,” Real Estate Economy Watch notes in an article summarizing the survey results. “Getting out the right information about down payments could potentially increase annual home sales by 50 percent,” the article estimates.

Another analysis, by Urban Institute economist John Zhu, looks at financing issues in a less positive light. He notes that credit standards today are not only more restrictive than they were at the peak of the housing bubble (appropriate, he agrees); they are also tighter than in 2001, before the housing crisis. According to his calculations, unduly restrictive credit kept 1.2 million borrowers out of the housing market in 2014 and denied credit to an equal number the previous year.

The factors creating this overly tight “credit box” are complicated, Zhu agrees, but policy makers need to address them. “Because as long as these conditions persist,” he cautions in his study, “fewer families will become homeowners at an opportune point in the housing market cycle, depriving them of a critical wealth-building opportunity. It slows the housing market recovery by limiting the pool of potential borrowers,” Zhu continues, “[and] ultimately, excessively tight credit hinders the economy, as it slows all the associated economic activity that comes with home buying…”

TAKING MANDATORY OUT OF ARBITRATION AGREEMENTS

Congress is considering legislation that would restrict the use of mandatory arbitration agreements by lenders and other businesses. The measure, introduced by Sen. Patrick Leahy (D-VT) and co-sponsored by Sen. Al Franken (D-MN), would make several changes in the Federal Arbitration Act (FAA), among them:

  • Exempt from the mandatory arbitration requirement claims brought by individuals or small businesses “arising from the alleged violation of a Federal or State statute, the Constitution of the United States, or a constitution of a State”;
  • Require a court to determine whether the FAA applies to a contested arbitration agreement; and
  • Specify that the grounds for rejecting an arbitration agreement include a federal or state statute or a federal or state court ruling that deems the agreement to be “unconscionable [or] invalid because there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy.”

“When Americans sign cell phone agreements, rent an apartment, or accept a contract for a job, most of us focus on the service we are about to receive or that we are about to provide. What Americans do not realize—until it is too late—is that too often we are also signing away crucial legal rights,” Leahy said in a press release. “Legal fine print tips the scales against us,” he added. “It is forcing consumers into private arbitration, denying us of our Constitutional right to protect ourselves in court.”

While Congress is considering the statutory changes Leahy is proposing, the Consumer Financial Protection Board (CFPB) is drafting regulations that will restrict the use of mandatory arbitration provisions in a wide array of consumer financial services contracts. Industry observers don’t expect any movement on the Leahy bill until after the CFPB announces its proposed rules, later this year.

IN CASE YOU MISSED THIS

Subprime loan originations have been increasing steadily, an indication, analysts say, that credit standards are becoming “more accommodating” as housing demand increases.

Home builders were responsible for a significant number of the new jobs created in December, the third consecutive month for employment growth in this sector.

Soaring rents are creating “severe” housing cost burdens for a growing number of U.S. households. A recent report estimates that close to 15 million of them could be paying more than half their income for rent 10 years from now.

Institutional investors, gun shy about their potential liability under the new mortgage disclosure regulations, are rejecting lenders’ offerings at an unprecedented rate, according to industry analysts, who say the trend could inhibit efforts to create a broader secondary mortgage market that doesn’t rely on the government-sponsored entities – Fannie Mae and Freddie Mac.

Aggregate home value in the U.S. increased by more than 4 percent last year, bringing the value of the nation’s housing stock to $28.5 trillion, according to Zillow, Inc. Housing has now regained $5.3 trillion of the value lost during the financial meltdown, but remains more than $780 billion below the pre-crash peak.

LEGAL BRIEF

A SATISFIED CUSTOMER?

“Have it your way” can reflect an admirable commitment to customer service. But following the instructions of customers, who are not always right, can bring serious and costly legal consequences. A recent Massachusetts Appeals Court decision in Downey v. Chutehall Construction Co. Ltd., illustrates the point.

The client in this case (Downey) hired Chutehall to replace the roof on his townhouse. Downey assured the contractor that there was only one roofing layer, but refused to let him strip the surface to verify that. Based on that assurance, the contractor followed Downey’s instructions and installed a new rubber membrane over the existing roof. A few years later, a contractor installing new heating and air conditioning equipment, discovered that there were actually three roofing layers under the top one – a violation of the building code, which permits only two layers. He also found evidence of a leak. To address those problems, Downey hired a new contractor, who stripped the old roofing layer, installed a new roof and re-installed the deck.

Downey then sued Chutehall, seeking the cost of the repairs. Because a building code violation is also an “unfair or deceptive act or practice” under the Massachusetts Consumer Protection Act (Chapter 93A), Downey also demanded up to treble damages plus court costs and legal fees.

A jury found that Chutehall had violated the building code, but, following the judge’s instructions, concluded that because he did so at Downey’s insistence, the violation was not “knowing and intentional” and did not make him liable for the resulting damages.

On appeal, the Downeys argued that the trial court erred in instructing the jury that the Downeys could in fact, waive the consumer protection requirements of the Building Code, and had they done so, Chutehall could cite that waiver as a defense against the Consumer Protection Act claims.

flat_roofThe Appeals Court noted that this raised questions the Massachusetts courts had not previously addressed: Whether contractual provisions and waivers of liability could operate as a defense to Chapter 93A claim and “whether even in a consumer context, there may be instances where an informed, consensual, and clear allocation of risk and responsibility could preclude recovery by the consumer under c. 93A for an unintentional statutory violation by a contractor, incurred at the consumer’s request and in reliance upon the consumer’s representations.”

The court noted that while consumers may waive some statutory rights under some circumstances, waivers are not permitted if they would ‘do violence to the public policy underlying the legislative enactment.'”

Because the purpose of the Building Code is to protect public health and safety, the court said, permitting a waiver would “do violence” to public policy, because “it would permit, even encourage, contractors, and perhaps consumers, to waive provisions of the building code on an ad hoc basis, in the hope of saving money in the short-run, but endangering future homeowners, first responders, and the public in general.”

In this case, the court concluded, “where Chutehall’s violation of the building code is clear, where the written agreements specify that the “existing roof system” would be “strip[ped] off and dispose[d] of,” and where there are possible consequences for the safety of the homeowner and others, a consumer’s oral waiver of a building code requirement cannot defeat the contractor’s liability….”

WORTH QUOTING

“At this point, landlords are charging a lot because the market will bear it. But in certain places, we’re probably getting close to the breaking point for a lot of folks, and I don’t know how that plays out.” — Andrew Jakabovics, senior director for policy development and research at Enterprise Community Partners and co-author of a report on how rising rents are increasing the number of “cost-burdened” consumers.