Published on: January 14, 2015
OFF TO A GOOD START. The year began with a strong jolt of positive news: Employers added 252,000 jobs in December, beating estimates, and the unemployment rate declined to 5.6 percent, its lowest level since June, 2008. But wages declined for the first time in more than a year and the labor participation rate slumped, as well, casting a “yes-but” shadow over the otherwise encouraging report, and leading some analysts to predict that the Federal Reserve will delay its plans to begin raising interest rates – this despite a robust third quarter rate of economic growth (5 percent) that was the fastest in more than a decade.
THAT WAS THEN. It wasn’t so long ago that lawmakers were railing at the FHA to strengthen its reserves and reduce the out-sized risks for taxpayers. But that was then. Last week, President Barack Obama announced that the FHA is going to reduce the insurance premiums on FHA loans by 0.5 percent – to 0.85 percent from 1.35 percent ― in order to expand home financing opportunities to lower-income buyers. “Too many creditworthy families who can afford — and want to purchase — a home are shut out of home-ownership opportunities due to today’s tight lending market,” a White House press statement said.
Supporters, including consumer advocacy organizations and housing industry trade groups, applauded the move. “This is a win-win,” David Stevens, president and CEO of the Mortgage Bankers Association said. “It’s good for borrowers and good for FHA, helping the agency stabilize its market share and continue to rebuild the MMI fund.”
Critics, led by Republican lawmakers, warned that reducing FHA premiums moves in the wrong direction, threatening to further weaken the agency’s finances and increasing the risk of another taxpayer bailout. “A fiscally sound FHA, with a clearly defined mission, ensures homeownership opportunities for creditworthy first-time homebuyers and low-income families,” Rep. Jeb Hensarling (R-TX) chairman of the House Financial Services Committee, stated. “Any effort to lower FHA premiums would be counterproductive to achieving these goals and would place the U.S. taxpayer at greater risk,” he warned.
TRIA RESTORED. Congress acted quickly as its news session began to approve a six-year extension of the Terrorism Risk Insurance (TRIA). Authorizing legislation for the federal program had expired at the end of last year when the Senate failed to vote on a measure the House had approved. President Obama signed the law immediately, restoring the federal government backstop covering outsized insurance losses resulting from catastrophic terrorist attacks. Insurance companies had warned that they would not provide the coverage without the guarantee of federal support. The measure contains couple of little-noticed amendments:
One gradually doubles the trigger for federal aid to $200 million from $100 million. The other establishes a National Association of Registered Agents and Brokers (NARAB) to streamline licensing requirements for agents selling insurance in multiple states.
INTERPRETING RULES OR CHANGING THEM? Federal regulatory agencies regularly interpret their regulations through guidance, letters, and memoranda explaining how the rules will be applied. But just how much interpreting and re-interpreting of those rules are the agencies allowed to do? The U.S. Supreme Court is considering that question and its answer could have sweeping implications for the rule-making process – potentially requiring a new set of hearings and public comments before agencies can significantly reinterpret an existing rule.
The underlying suit (Perez v. Mortgage Bankers Association) involves a Department of Labor advisory opinion issued in 2006 (during the administration of former President George Bush) holding that mortgage loan officers qualified as “exempt” employees who were not entitled to overtime pay. Six years later, under the Obama Administration, the DOL issued an opinion letter reaching the opposite conclusion and withdrawing the 2006 interpretive letter. During oral arguments before the High Court, justices on both ends of the liberal/conservative spectrum appeared troubled by the issues raised.
“What is motivating [this] in a sense is that agencies more and more are using interpretive rules and guidance documents to make law…it is essentially an end run around the notice and comment provisions,” Justice Elena Kagan observed.
Noting that the different interpretations were issued during different Administrations, Justice Antonin Scalia suggested that the courts should look more closely and less deferentially at how agencies interpret their rules. “Maybe we shouldn’t give deference to [an] agency’s interpretations of its own regulations,” he suggested. “That would solve this.”
BUYING VS. RENTING. The financial pendulum has swung again, making buying a home more affordable than renting in a majority of major housing markets for the first time in nearly a decade. That assessment comes from a RealtyTrac analysis of rental cost data compiled by HUD covering 543 counties nationwide. The analysis showed that in 68 percent of the counties, renting a three-bedroom property required 27 percent of median household income while buying the median-priced home required 25 percent. Realty Trac also found a significant blip in that pattern: In the markets most attractive to “millenials,” renting absorbs 30 percent of income and buying 36 percent, indicating that in those markets, prospective home buyers are having a harder than average time both saving for a down payment, affording a home. “First-time buyers and potential boomerang homebuyers are stuck between a rock and a hard place in today’s housing market,” Daren Blomquist, vice president at RealtyTrac, said in a press statement. “Many of the markets with the jobs and amenities they want have hard-to-afford rents and even harder-to-afford home prices; while the more affordable markets have fewer well-paying jobs and tend to be off the beaten path.”
LOOKS SELL. Forget curb appeal: It’s the attractiveness of the real estate agent that matters. A recent study has found that attractive agents on average list homes and sell them for higher prices than less appealing competitors.
A FAIR REQUIREMENT. The fiduciary duty of condominium board members to put the community’s interests ahead of their own is undisputed, if not always well understood by board members themselves. Developers (and financial institutions) that control the association may not have the same fiduciary obligation to owners, but they do have an obligation to treat them fairly. In a recent case (The Arbors at Sugar Creek Homeowners Association, Inc. v. Jefferson Bank & Trust Company, Inc.), a Missouri Appeals Court found that a financial institution failed to meet that requirement.
A developer (Evolution) obtained financing from Jefferson Bank & Trust to develop The Arbors at Sugar Creek – a homeowners association to consist of 18 single-family homes. Evolution filed a declaration creating the association and establishing architectural design criteria for the community but never appointed officers or directors, held meetings or submitted annual reports, as required by law. So the Secretary of State dissolved the association. Evolution defaulted on its loan after selling 5 of the lots, and Jefferson took possession of the remaining 13 lots through foreclosure
The bank subsequently gave another developer (McKelvey), an option to purchase and construct homes on the remaining lots. Owners who had purchased homes in the community objected to McKelvey’s design plans, saying they violated the architectural requirements specified in the declaration. When McKelvey refused to revise the plans, the owners sued the builder and Jefferson.
Jefferson, meanwhile, had created a new neighborhood association (ASC) to replace the one that had been dissolved, and named three bank executives to serve on the board. A few months later, owners tried to replace the bank directors, noting that the declaration allowed only homeowners to serve on the board after the declarant’s control period had ended. But the bank casts its 13 votes (72 percent of the total) against the owners’ nominees and then voted to amend the declaration to eliminate the residency requirement. The bank-appointed directors subsequently voted to approve McKelvey’s building plans, and litigation followed.
The trial court sided with Jefferson, ruling that the bank had voted properly to eliminate the residency requirement in the declaration; that the bank’s appointees were eligible to serve on the board; and that they had the authority to approve the builder’s plans.
On appeal, the court ruled that the ASC was properly constituted as the governing body for the association (owners had argued that it was not), but it found the bank’s actions unacceptable in other key respects. Although the bank had the right to cast the 13 votes for the lots it owned, the court agreed, voting to eliminate the residency requirement for directors violated “an implied covenant of good faith and fair dealing” with owners, because it contravened their reasonable expectation that they would make decisions governing their community.
“The original Declaration provided Homeowners the significant benefit of self-governance of the Subdivision by establishing that only residents could hold office on the neighborhood
association‘s board of directors,” the court noted. Given the terms of the declaration, the court said, “all parties held a reasonable expectation that the neighborhood association would ultimately be governed by a board composed solely of the Subdivision‘s residents.” Although the declaration also allows a two-thirds majority vote to amend the declaration, the court agreed, “we do not believe that the original parties to the Declaration intended that a lot owner could unilaterally circumvent the requirement that those who actually reside in the Subdivision govern the Subdivision‘s affairs. Nor do we believe that Homeowners could reasonably have foreseen the instant turn of events.”
In the court’s view, the bank used its majority position “to advance its own financial interest in redeveloping the subdivision,” contrary to the wishes and interests of resident owners.
Jefferson argued that notwithstanding the residency requirement for elected board members, the bank had exercised its right as a successor to the original declarant to appoint a governing board before control of the association was transferred to homeowners. And those three appointed board members had the authority to approve the developer’s plans.
The Appeals Court didn’t agree. The declaration defines “declarant” narrowly to mean the original developer, including “successors and assigns,” the court noted, only if they acquire lots for the purpose of building homes on them. The bank’s acknowledged goal after foreclosing on the first developer, the court said, was to recoup its losses by selling the lots to other developers who would construct homes on them. “As there is no evidence that Bank acquire[d] more than one unimproved Lot from the Declarant for the purpose of constructing a Dwelling Unit thereon,” the court ruled, “we cannot conclude that Bank is the Declarant, with powers to unilaterally appoint directors to the neighborhood association.”
“We are in a slow march back to normal.” ─ David Crowe, chief economist, National Association of Home Builders.