Published on: July 2, 2015
SUPER LIEN STRUGGLE CONTINUES
The tug-of-war over the condominium superlien is becoming more intense and more complicated. In Nevada, the current center of the struggle, within the span of about two weeks:
- A federal district court ruled that an HOA’s suprelien could not extinguish the interests of a lender holding a first mortgage on the property; and
- The Nevada state Senate approved legislation retaining the super priority position of a condo lien, but establishing a variety of notice requirements and adding a post-foreclosure redemption period that were not part of the original law.
The district court decision in Skylights v. Byron, held that federal law (the Federal Housing and Economic Recovery Act) prohibits an HOA foreclosure that extinguishes a lien held by a federal entity, unless the entity (Fannie Mae in this case) approves the action. That is the argument the Federal Housing Finance Agency (FHFA) has been advancing aggressively since the Nevada Supreme Court affirmed the superpriority position of the condominium superlien in a decision issued last year.
“The “plain meaning of [12 U.S.C. § 4617(j)] is that when FHFA is acting as a conservator, none of the property sought to be conserved by FHFA may be subject to a foreclosure without its consent,” Chief Judge Gloria Navarro ruled.” But she added an observation that may be significant, noting, “It is undisputed that the Deed of Trust was assigned to Fannie Mae several months before the HOA conducted its foreclosure sale,” suggesting that the HOA’s prior notice of Fannie’s position may have been a factor in her decision. If so, analysts have noted, the decision may apply only in the relatively rare situations when a mortgage has been assigned to Fannie Mae or Freddie Mac before a foreclosure.
Two similar cases argued simultaneously with Skylight may clarify the scope of Judge Navarro’s ruling: Both involved HOA foreclosures initiated before Fannie or Freddie had been recorded as beneficiaries of the deed of trust. Judge Navarro is expected to rule on both within the next month.
Meanwhile, the Nevada state legislature has addressed the superlien issue in a measure approved by the state Senate just before the legislative session ended. Key provisions of this bipartisan measure:
- Require HOAs to notify mortgagees of an impending foreclosure and to specify in that notice the amount of the delinquency, including the amount of back fees and costs subject to the superpriority;
- Prohibits HOAs from extinguishing the first lien if the deficiency is cured within five days of the foreclosure sale;
- Sets a $1,350 cap on the fees that can be included in the HOA’s priority lien and prohibits the inclusion of attorneys’ fees in that amount.
- Gives the property owner and the first lien holder a right of redemption for 60 days following a foreclosure sale.
Testifying at a hearing on the bill, the FHFA’s general counsel, Alfred Pollard, said the agency found that “most” provisions of the bill “improve the situation for lenders and secondary market participants in Nevada and support common interest communities, while we continue to have concerns with other sections of the existing law and practices under that law.”
During his testimony, Pollard repeated the FHFA’s warning that the agency would challenge foreclosure actions in which the priority lien affected a security interest held by Fannie or Freddie. He also noted that if the legislature did not revoke or significantly amend the law, lenders might be unwilling to originate mortgages in the state.
TRID COMPLIANCE DEADLINE DELAYED
Industry executives are going to have more time to adjust to the new integrated consumer disclosure requirements (TRID). Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), announced recently that he has decided to delay the implementation date, scheduled for August 1, for two months, until October 1.
This marks a sharp change in position for Cordray, who had insisted that the August 1 deadline was firm and refused to guarantee the clear enforcement “grace period” industry trade groups and lawmakers had urged.
In his announcement, Cordray said CFPB officials had discovered an “administrative error” that would have required a two week delay in the implementation date. “We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition.”
Cordray indicated that proposal to delay the TRID deadline will be open for public comment before it becomes final.
Although Cordray attributed the TRID delay to an “administrative error,” increasing pressure from industry executives and lawmakers likely played a large role in his decision.
Nearly 300 legislators from the House and Senate have signed bipartisan letters asking Cordray to approve an enforcement “grace period” after the rules take effect, to give lenders and settlement service providers more time to implement and adjust to the sweeping changes in technology, lending and closing procedures the new disclosure rules will require.
Most of the major financial industry trade associations, including the American Land Title Association, have made the same request for a period of restrained enforcement through the end of this year, during which those making good faith efforts to comply with the new rules would not be punished for violations. Additionally, bipartisan legislation sponsored by Reps. Steve Pearce (R-NM) and Brad Sherman (D-CA) would mandate a TRID “hold-harmless period) extending through the end of this year.
Until his surprise announcement of the extended TRID deadline, Cordray had held firm, telling real estate professionals just a few weeks ago that the industry should “take the August 1 date seriously” and should not expect a “hold harmless” period.
Although he seemed to soften that position after meeting with lawmakers to discuss their concerns, many industry executives found his promise to be “sensitive” to good faith compliance efforts less definitive than they wanted. The delayed deadline Cordray announced recently provides the breathing room the industry had sought.
Location, location, location – doesn’t apply only to real estate values. It also has much to do with your earnings prospects. A recent study found that children who move to neighborhoods with lower poverty rates are likely to earn 30 percent more as adults than children who don’t make that move. The study by Harvard economists tracked the experience of 4,600 low-income families who moved from public to private housing in the 1990s.
“We think there are really large causal effects of local communities on children’s long-term success,” the study’s authors concluded.
A separate study by the same economists found that the younger children are when they relocate, the better their long-term earnings prospects. “That suggests that your ability to climb isn’t just an inherent, in-born trait but a function of your surroundings — and it matters how long you’re exposed to that environment,” the economists noted.
Building on earlier studies indicating that social mobility in this country hasn’t improved much in the past 30 years, the economists are trying to identify the factors that will help people climb the economic ladder. And they are trying to determine why mobility rates are significantly higher in some other countries. Children born in the bottom fifth of the income scale in America have a 7.5 percent chance of getting to the top fifth; for children born in Canada, the odds rise to 13.5 percent.
A NEGATIVE ISSUE
Housing industry analysts have been trumpeting the steady decline in negative equity rates as home prices have climbed during the past two years. But despite those gains, 4 million homeowners remain underwater, with homes worth at least 20 percent less than their outstanding mortgages, according to Zillow’s first quarter “Negative Equity Report.”
That represents a serious problem not just for these homeowners but for the housing market as a whole, Stan Humphries, Zillow’s chief economist and the report’s author, explained.
“It’s great news that the level of negative equity is falling, but what really worries me is the depth of negative equity,” Humphries said in a press statement. “[But] millions of Americans are so far underwater, it’s likely they may not re-gain equity for up to a decade or more at these rates,” “And because negative equity is concentrated so heavily at the lower end, it throws a real wrench in the traditional housing market conveyor belt.”
The negative equity rate now stands at 16.9 percent, down from 18.8 percent a year ago; but more than 25 percent of homes at the low end of the price range are underwater compared with only 8 percent of homes in the top end.
Demand is highest at the low end, Humphries noted, from first-time buyers trying to enter the market. And this is creating a roadblock affecting the market as a whole. “Potential first-time buyers have difficulty finding affordable homes for sale because those homes are stuck in negative equity. And owners of those homes can’t move up the chain because they’re stuck underwater in the entry-level home they bought years ago,” Humphries explained. “The logjam at the bottom is having ripple effects throughout the market, and as home value growth slows, it will be years before it gets cleared up. In the meantime, we’ll be left with volatile prices, limited inventory, tepid demand, elevated foreclosures, and a whole lot of frustration.”
With an eye on the more than 6 million homeowners who are still upside down on their mortgages (see above), U.S. Sen. Bob Menendez (D-NJ) is sponsoring legislation that will help these owners avoid foreclosure by providing incentives to lenders to restructure their loans.
The “Preserving American Homeownership Act” would create a shared equity structure, under which lenders who reduce the principal balance on a mortgage would be entitled to a portion of the borrower’s equity when the home is sold.
Although negative equity problems afflict borrowers nationwide, New Jersey homeowners have been particularly hard-hit; the state ranks near the top in number of foreclosures, with 5.1 percent of homes with mortgages somewhere in the foreclosure process – a point Menendez emphasized in introducing his bill.
“Far too many New Jerseyans are underwater on their mortgages and are all too familiar with the burden this brings,” he said. “My bill aims to give homeowners the break they need by working with banks to find acceptable solutions for everyone. Not only can we help families stay in their homes, we can mitigate the impact zombie foreclosures have on our communities and our economy.” (Zombie foreclosures are homes that have been abandoned by the owners, but on which the lenders have not yet completed the foreclosure process.)
Housing advocates, who have long-supported principal reduction as the most effective strategy for preventing foreclosures, applauded the legislation.
“The sad fact is that millions of homeowners still have underwater FHA and FHFA mortgages and many are facing foreclosure,” Phyllis Salowe Kaye, executive director of New Jersey Citizen Action, noted in the press announcement. “Principal reduction is the most effective way to keep people in their homes, to prevent foreclosures and to stabilize neighborhoods that have been decimated by vacant and abandoned properties.”
A DISTURBING DECLINE
Although the housing market seems to be improving, the homeownership rate continues to decline. The most recent estimate from the U.S. Census Bureau put the national ownership rate at 63.7 percent in the first quarter, 0.3 percent below the fourth quarter of last year, and more than 1 percent lower than a year ago.
Perhaps of most concern to housing industry executives, the decline has been particularly steep for younger people, creating a gap in the entry-level segment of the market. The ownership rate for people younger than 35 sank to 34.6 percent in the first quarter, according to the Census Department data, down from 35.3 percent in the fourth quarter of 2014 and down steeply from the peak of 40.4 percent in the fourth quarter of 2009.
The rental occupancy rate, by contrast, has been increasing steadily as an increasing proportion of Americans have been choosing – or have been forced to choose – that option, pushing the rental vacancy rate down. Although that rate ticked up a bit (0.1 percent) between the end of last year and the beginning of this one, at 7.1 percent, it was 1.2 percentage points lower than a year ago and the lowest first quarter rate in almost two decades.
The Urban Institute predicts that the ownership rate will continue to decline for the next 20 years, as household formation rates stall, millenials increasingly opt for renting over buying, and minorities, who will represent a growing share of the population, continue to lag in income gains.
Based on those predictions, a recent Urban Institute study concludes, “We do not have adequate policies in place to support the rental surge and adequate affordable rental housing and homeownership for all, regardless of race and ethnicity.”
DISPARATE IMPACT SURPRISE
The Supreme Court narrowly upheld the “disparate impact” theory, agreeing (with some qualifications) that policies may be discriminatory under the Fair Housing Act if they have a discriminatory impact, even if there is no intent to discriminate. The decision surprised most industry analysts, who had expected the court to come down on the other side of an issue that has come under withering criticism from lenders, and local housing agencies that have been on the receiving end of many Fair Housing enforcement actions.
The condominium industry has also been following this case because of concerns that the disparate impact theory, broadly construed, might create potential liability for a condo association that failed to obtain FHA certification, thus precluding purchases by lower income borrowers who need FHA-insured loans.
The underlying case involved the allocation of federal tax credits by the Texas Department of Housing and Community affairs. Plaintiffs (the Inclusive Communities Project, Inc.) alleged that the department’s policy had a discriminatory impact, because the credits were issued disproportionately in inner-city neighborhoods, continuing a pattern of racially segregated housing. A federal district court agreed that the plaintiffs had demonstrated a discriminatory impact and that the department had not identified less discriminatory alternatives for allocating the credits.
The Supreme Court concurred that disparate impact claims are “cognizable” under the Fair Housing Act. “The FHA, like Title VII and the ADEA, was enacted to eradicate discriminatory practices within a sector of the Nation’s economy,” the court noted. “Suits targeting unlawful zoning laws and other housing restrictions that unfairly exclude minorities from certain neighborhoods without sufficient justification are at the heartland of disparate-impact liability.” Quoting from one of the amicus briefs, the court added, “Without disparate impact claims, states and others will be left with fewer crucial tools to combat the kinds of systemic discrimination that the FHA was in¬tended to address.”
But the 5-4 decision, written by Justice Anthony Kennedy, also includes important qualifiers, noting that remedial orders imposing racial targets or quotas could be unconstitutional and emphasizing the need to limit those risks by avoiding decisions based entirely on statistical analysis.
“Disparate-impact liability has always been properly limited in key respects that avoid the serious constitutional questions that might arise under the FHA, for instance, if such liability were imposed based solely on a showing of a statistical disparity,” Justice Kennedy notes. He goes on to caution: “Courts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision. These limitations are also necessary to protect defendants against abusive disparate-impact claims….A disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity,” Justice Kennedy argues. “A robust causality requirement ensures that “[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact and thus protects defend¬ants from being held liable for racial disparities they did not create.”
Disparate-impact liability man¬dates the ‘removal of artificial, arbitrary, and unnecessary barriers,’ not the displacement of valid governmental policies,” the opinion continues, adding: “The FHA is not an instrument to force housing authorities to reorder their priorities. Rather, the FHA aims to ensure that those priorities can be achieved without arbitrarily creating discriminatory effects or perpetuating segregation.”
Using language some analysts think will limit its impact, Justice Kennedy emphasizes that re-medial orders issued in disparate-impact cases “should concentrate on the elimination of the offending practice, and courts should strive to design race-neutral remedies. Remedial orders that impose racial targets or quotas might raise difficult constitutional questions…
But while acknowledging the “special dangers” created by inserting racial considerations into the evaluation of transactions regulated by the FHA, Justice Kennedy also emphasizes that housing authorities should be free to use “race-neutral” efforts to encourage the revitalization of communities and combat “racial isolation.” Race may be considered “in certain circumstances and in proper fashion,” Justice Kennedy notes. “Mere awareness of race in attempting to solve the problems facing inner cities does not doom that endeavor at the outset.”
In a strongly worded dissent, Justice Samuel Alito argues that the Fair Housing Act contains no language supporting the disparate impact theory. “The FHA does not authorize disparate-impact claims. No such liability was created when the law was enacted in 1968. And nothing has happened since then to change the law’s meaning,” he contends, adding, “the text of the FHA simply cannot be twisted to authorize disparate-impact claims…. The FHA is not ambiguous. The FHA prohibits only disparate treatment, not disparate impact. It is a bedrock rule that an agency can never “rewrite clear statutory terms to suit its own sense of how the statute should operate…”
Critics of disparate impact were disappointed by the decision but relieved by the caveats in which the majority opinion was couched. “While we are disappointed in today’s decision upholding disparate impact liability under the Fair Housing Act, we are pleased by the limits the court placed on plaintiffs’ ability to bring disparate impact claims – and the constitutional restraints the Court recognized on remedies available for such claims,” David Hirschmann, president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, said in a press statement. “Today’s decision acknowledges the threat of unfettered disparate impact liability makes it harder rather than easier to develop and finance affordable housing,” he added. “The Court’s assessment in placing severe limitations on the use of disparate impact is correct, and we hope that courts will implement today’s decision in a way that avoids adverse outcomes.”
“We do think we’re in the later stages of a rebalancing between owning and renting.” ― Fannie Mae Chief Economist Doug Duncan.