Legal/Legislative Update – February 2, 2015

Published on: February 2, 2015

FORECLOSING TIMES. Foreclosure rates are declining nationally but foreclosure times aren’t, at least not much. It took an average of 604 days to process foreclosures in the fourth quarter, down only slightly from the record high of 615 days in the third quarter. Fourth quarter foreclosures were up 10 percent from the year-ago pace. That’s according to RealtyTrac’s Foreclosure Market Report, which found that lenders foreclosed on approximately 327,000 properties last year, nearly 30 percent fewer than the year before, almost 70 percent below the 20100 peak and the lowest foreclosure total since 2006.

RESCISION RIGHTS. You don’t often see “pro-consumer” linked to a U.S. Supreme Court decision, but that’s an apt description of the court’s unanimous ruling on the right of borrowers to rescind mortgage loans. Lower courts had split on whether consumers can simply notify lenders that they are exercising that right or must actually file suit within the three-year rescission period. The uncharacteristically short (five pages) opinion, written by Justice Antonin Scalia, said that simply notifying the lender is sufficient. “The [Truth-in-Lending] statutes does not also require [the borrower] to sue within three years.”

A COSTLY GAP. It would cost $11 trillion to close the worldwide affordable housing gap. That’s according to a soon-to-be-released report by McKinsey & Company, an international consulting company, which estimates the cost of replacing substandard housing with affordable alternatives. The biggest part of this enormous problem, the report says, is the cost and availability of land. “Where land is available at lower prices, on the fringes of the city, housing projects may fail due to lack of infrastructure,” the report notes.

A QUESTION OF VALUE. Since the economic downturn and well into the housing recovery, real estate industry executives have been blaming unduly conservative appraisals for scuttling home sales. But the gap between what owners think their homes are worth and the values appraisers are estimating is getting narrower. In fact, according to a Quicken Loans index of November sales, appraisers valued home more highly than owners in three-quarters of the metropolitan areas surveyed. Realtors responding to the National Association of Realtors’ October 2014 “Confidence Index” blamed low appraisals for only 2 percent of failed transactions compared with nearly 12 percent a year before.

UNINTENDED CONSEQUENCES. Stricter underwriting guidelines that are making it more difficult for prospective home buyers to qualify for mortgages are also leading more of them to lie on their loan applications. That is how industry analysts are interpreting statistics indicating that 74 percent of the mortgage fraud cases reported to LexisNexis Risk Solutions last year involved falsified loan applications, up from 61 percent in 2011. “It is not difficult to recognize the connection between tight credit approval guidelines, industry professionals looking to make a profit, and mortgage application fraud,” the LexisNexis 16th Annual Fraud Report noted. The statistics also reflected a “notable increase” in credit documentation fraud – where credit reports or credit history references are misrepresented, found in 17 percent of applications compared with only 5 percent the year before. Appraisal fraud, on the other hand, declined to a 5-year low, found in only 15 percent of loans reported, compared with 26 percent in 2012 and 31 percent in 2011.

RESPA_LogoA RESPA WARNING. The Consumer Financial Protection Bureau (CFPB), which has replaced the Department of Housing and Urban Development (HUD) as RESPA’s primary enforcer, recently socked banking giants Wells Fargo and JPMorgan Chase with hefty penalties for violating the anti-kickback provision of the law. The enforcement action, initiated jointly with the Maryland Attorney General, accused loan officers at the banks of referring business to Genuine Title, a now-defunct Maryland title company, in exchange for leads and marketing assistance. The complaint identified more than 100 Wells Fargo loan officers at 18 branches and 6 at JPMorgan, who participated in the referral schemes.

Both banks accepted consent agreements, requiring Wells to pay nearly $35 million and JPMorgan $900,000 in fines and customer compensation. Separately, a former Wells loan officer and his wife will have to pay a $30,000 civil penalty for accepting cash payments in addition to marketing assistance from the title company.
“These banks allowed their loan officers to focus on their own illegal financial gain rather than on treating consumers fairly,” CFPB Director Richard Cordray said in a press statement. “Our action today to address these practices should serve as a warning for all those in the mortgage market.”


TRAIL OF RIGHTS.   Time may heal wounds, but it doesn’t alter the rights established under condominium declarations. For that reason, among others, the Vermont Supreme Court rejected a condominium association’s bid to block the construction of additional units in the community, even though more than two decades had passed since the last units were added.

Time wasn’t the only complicating factor in this case (Highridge Condominium Owners Association v. Killington/Pico Ski Resort Partners), which also involved a foreclosure and the transfer of development rights from one developer to another.

The original developer (North Ridge Development Corporation) created Highridge in 1983. The condominium declaration filed at the time specified the developer’s intention to build no more than 250 units in phases, to be initiated on the developer’s timetable. The declaration also reserved to the developer the right to modify the construction plans, add another specified parcel and adjust the percentage interest allocation for individual units as needed to reflect the addition of new units – all without the consent of unit owners.

In 1991, the lender financing the development foreclosed on North Ridge’s remaining undeveloped parcel, conveying all of North Ridge’s rights title and interest to Killington, Ltd., which subsequently conveyed its interest to Killington/Pico Ski Resort Partners (K/P).

When K/P sought to construct additional condominium units, the Highridge community association objected. A trial court ruled that the declaration reserved only the developer’s right to adjust percentage interest allocations; it did not reserve for North Ridge and K/P did not inherit the right to construct new units without owner approval. K/P appealed to the state Supreme Court and prevailed.

The court identified two key questions: Whether the original developer had reserved the right to construct additional units unilaterally; and whether K/P had acquired those rights.

On the first question, the association argued that the wording of the declaration specified the developer’s right to adjust percentage interests, but did not specify the right to unilaterally construct new units. The court disagreed, finding the language in the declaration unambiguous in its assertion of the developer’s intention “to construct not more than 250 condominium units in phases…as and when determined by the Declarant.”

“An ordinary person reading this declaration would easily understand that it contemplates declarant’s addition of new units, and does not require the Association’s approval,” the court said.

The court also rejected the association’s argument that any reservation of construction rights applied only to the period before the developer transferred control to owners.
“Nothing in the declaration’s provisions concerning the power of the owners’ association suggests that when the Association assumes the enumerated powers listed in the declaration, the Association also acquires the right to develop, or block development, of the remaining units contemplated in the declaration.” The court found both the existence of the association and the timing of its creation “irrelevant” to the legal questions involved.

The time lapse between the last development activity and the new proposal was equally irrelevant, in the court’s view, because “the development rights established in the declaration were not time-limited.”

The court also found no merit in the association’s contention that even if the original developer reserved the right to construct additional units, K/P did not acquire those rights because the declaration simply specified that future construction could be undertaken “as and when determined by Declarant,” with no reference to the rights of the developer’s “successors and assigns.”

Notwithstanding the wording of that section, the court found “no difficulty” in concluding that the developer’s successors would acquire the development rights. The declaration states that the declaration itself is binding on “heirs, successors, or assigns,” the court noted. Even more telling, the court said, the declaration reserves the right to adjust common interest ratios to account for the construction of additional units to the declarant “and its successors and assigns.”

Finding that language “clear and unambiguous,” the court concluded, “we find that K/P is the successor in interest to North Ridge’s rights…and that those rights include the right to add units [as specified in the declaration] without the consent of the Association.”


“This is a pivotal moment. We’ve busted out of the great recession.”─ Bill McInturff, a Republican pollster, commenting on a bipartisan survey indicating a dramatic upturn in consumer confidence.