Legal/Legislative Update – July 1, 2014

Published on: June 30, 2014

FEELING DOWN.   Feeling more upbeat about the economic outlook? We’ll take care of that right now. The International Monetary Fund has slashed its growth forecast for this year from 2.8 percent to 2 percent, and is now predicting that the U.S. won’t see full employment again until sometime near the end of 2017.

UNSETTLING OR OVERSTATED?   The severe economic restraints on young adults will create serious and long-term impediments to economic growth, Wall Street Journal columnists John Carney and Justin Lahart warn. Absent major improvements in the job prospects for this “lost generation,” they predict, “Banks will see tepid demand for mortgages. Home sales and single-family home construction will be stuck below historic norms. Demand for goods like furniture and appliances, as well as services such as home repairs, will grow only slowly. And housing will continue to add less to the economy than in the past.” That forecast is unsettling, to say the least. It is also incorrect, according to a recent study published by the Brookings Institute, which concludes that the level of student debt and concerns about it are exaggerated. “We are certainly not arguing that the state of the American economy and the higher education system is just great,” Matthew Chingos, a Brookings fellow and co-author of the study told the New York Times. “But we do think that the data undermine the prevailing sky-is-falling-type narrative around student debt.”

BANKS TO BLAME.   The City of Los Angeles is suing JP Morgan Chase, alleging that the bank’s “discriminatory” lending practices triggered a foreclosure wave that has reduced property values and deprived the city of revenues. “When banks engage in such discriminatory conduct, the misconduct has profound financial consequences for the cities in which mortgaged properties exist, and banks should be responsible for those financial consequences,” the city says in its complaint. A similar complaint filed the city filed against Wells Fargo, Bank of America and Citigroup is proceeding, after a judge recently refused a motion to dismiss it.

REFORM ODDS.   Conventional wisdom in Washington holds that restructuring of the home finance system is inevitable and will eliminate Fannie Mae and Freddie Mac. But analysts at Keefe Bruyette & Woods read the Congressional tea leaves differently. Notwithstanding regular headlines reporting support for reform, they say in a recent commentary, “We think legislation to unwind Fannie and Freddie will fail to pass Congress.”

NO RELIEF.    Siding with a borrower and against HUD, a federal district court ruled that a lender could not foreclose on the surviving spouse of a reverse mortgage borrower, even though HUD’s policy permitted the foreclosure. The court then ordered HUD to come up with a remedy for spouses harmed by that policy. HUD’s response, from Federal Housing Commissioner Carol Galante: The agency has “no legal authority” to correct the error, and “all other options for relief suffer from flaws rendering them inappropriate, impermissible and ultimately inequitable.”

FLIPPING OUT.      Investors are flipping homes less but profiting more from the transactions. A Realty Trac analysis found that 3.7 percent of single-family home sales in the first quarter were flips compared with 6.5 percent a year ago. But the gross profit per flip increased to $55,574 from $51,805 ― a gain of 30 percent vs. 28 percent a year ago.


How honest – and forthcoming – do sellers have to be in their discussions with buyers purchasing their home? An Arizona case (Lerner v. DMB Realty) produced an interesting and expansive answer to that question. The base line question was whether the sellers should have disclosed that a known sex offender had purchased the house next door, and the answer was clear: An Arizona statute says specifically that sellers are not required to disclose that information and an Appeals Court upheld a lower court ruling awarding summary judgment to the sellers for that reason. The Appeals Court also initially rejected the buyers’ allegation that the failure to disclose this critical information (critical to the buyers, at least) amounted to fraud, but the court then agreed to reconsider that question and reached a different conclusion.

In a new opinion, the court held that while the sellers were not required to disclose the presence of the sex offender, they did have an obligation to respond honestly to questions posed by the buyers, which they failed to do. When the buyer’s asked why they were moving, the sellers said they wanted to live close to friends, even though, in fact, they were moving because of the sex offender and were aware that the buyers had young children and were concerned about their safety.

“When one is asked a question that fairly calls for disclosure of a material fact, he or she commits fraud by concealing the truth or otherwise answering in a manner deliberately calculated to mislead,” the court noted. Quoting from the Restatement (Second) of Torts, the court added, “Unlike simple nondisclosure, a party may be liable for acts taken to conceal, mislead, or otherwise deceive, even in the absence of a fiduciary statutory, or other legal duty to disclose.”

The defendants had argued that reasonable buyers would not have accepted at face value a seller’s explanation of the reason for moving and, they had pointed out, the presence of a sex offender couldn’t have been all that crucial to the buyers, because they never asked about it. “These are fair points,” the court agreed, and this decision does not affirm either that “the alleged misrepresentation was material to the transaction or that the Lerners reasonably relied on it. We only hold that the complaint states facts that are ‘reasonably susceptible of proof’” and that a jury should decide.


“The reality is that the market is moving from one defined by distortions including high negative equity and constricted inventory, to one defined by fundamentals like household formation rates, jobs and income growth. Unfortunately, some of these fundamentals are still fairly weak. This is a multi-year process that we are far from done with. This ride is not for the faint of heart, but we are slowly getting back to normal.” — Zillow Chief Economist Stan Humphries