Legal/Legislative Update – July 18, 2014

Published on: July 18, 2014

Attorney-General-Martha-CoakleyNO IDLE THREAT.   Massachusetts Attorney General Martha Coakley, who had threatened to sue Fannie Mae and Freddie mac, has made good on that threat. She recently filed suit against the two GSEs and the Federal Housing Finance Agency, which oversees them, for violating a state law designed to help troubled borrowers remain in homes they are losing to foreclosure. The law prohibits provisions, which Fannie and Freddie include in foreclosure sales, barring purchasers of foreclosed properties from re-selling them or renting them back to the former owners. That provision conflicts with a Massachusetts law that allows nonprofits to purchase REO properties and then sell them to the former owner at a lower price and with more favorable financing terms. “To date, the GSEs have not complied with this provision, which has unfortunately impeded the ability of buyback programs to maximize the number of borrowers they can assist — which in turn has hindered the broader goals of neighborhood stabilization and revitalization,” Coakley wrote in a letter to Mel Watt, director of the Federal Housing Finance Agency (FHFA), warning him of the impending suit. The AG is seeking a court order enjoining Fannie and Freddie from pursuing policies that violate the state’s foreclosure law and is seeking $5,000 for each violation.

STORM DAMAGE.   Batten down the hatches! A CoreLogic report estimates that 6.5 million homes on the Atlantic and Gulf coasts could be damaged by future hurricanes – representing $1.5 trillion in reconstruction costs. “This exposure could constitute significant risk for home owners and financial services companies, as many at-risk homes lack protection from insurance coverage,” the report notes.

OUTDATED?   Has the 30-year, fixed-rate mortgage outlived its usefulness, or is it still the bedrock of the U.S. housing finance system? Fortune Magazine cites three reasons for keeping it, among them, “It helps limit macroeconomic instability.”

BAD REP.   Reputation counts and it is counting heavily against banks these days. Eighty percent of the communications, marketing and investor relations professionals responding to a recent survey agreed that the financial crisis and its aftermath continue to cast dark shadows over their companies. They estimate that lingering ill will has reduced their revenues by more than 27 percent over the past two years.

SAY WHAT?   “Without a real acceleration in wages it is hard to get a meaningful pickup in consumer spending.” That observation comes not, as you might expect, from a left-leaning think tank but from Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch ─one of many economists quoted in a recent Wall Street Journal article, fretting publicly that wage levels are too low.

POLITICAL RECALCULATION.   Scaling back housing related tax breaks (the mortgage interest deduction would be the biggest target) might make economic sense to anyone trying to reduce the budget deficit, but the politics clearly dictate otherwise. Rep. Dave Camp (R-MI), the chairman of the House Ways and Means Committee, has signaled his plan to propose several measures aimed at protecting the mortgage interest deduction and other tax breaks that favor home ownership. The bipartisan support that seemed to be emerging for dramatic changes in the tax code has faded as the economic recovery a recent article in Roll Call notes. Now, “both parties are looking to reassure the nation’s 50 million homeowners in a real estate market still looking for equilibrium.”

LEGAL BRIEFS

The attorney-client privilege that protects discussions between an association’s attorney and its board members may also extend to discussions in group meetings attended by owners, a California Appeals Court has ruled. That decision (Seahaus La Jolla Owner Association v. The Superior Court of San Diego County) grew out of a construction defect suit the association was pursuing against the condominium developer and builder. Owners were pursuing separate actions alleging “stigma” damages to their units.

The association’s attorneys met with owners to discuss the purpose and status of the litigation and to obtain authorization to file the suit, which a majority of owners were required by the governing documents to approve. Attorneys for the defendants sought to compel the owners to disclose information discussed at that meeting, arguing that assumptions the owners were making about potential damages and the basis for their assumptions were relevant to the defense against the owners’ claims and essential to it.

The Superior Court ruled that the attorney-client privilege did not extend to the owners because the association’s attorney did not represent them and the association appealed. The Appeals Court identified two key questions: Was there sufficient commonality of interests between the association and owners to support the privilege? And were the communications at issue “sufficiently confidential” and “reasonably necessary” to accomplish the purposes for which the association had retained the attorney. The court answered both questions in the association’s favor.

On the commonality of interest question, the court noted, that while the interests of owners and the association might diverge on some issues, in this case, “the association was seeking to share its privileged information with homeowners, to the extent that it believes they ‘all have the same goals in mind….In the role of client,” the court noted, “the Association could properly take into account not only its own goals of protecting the common areas, but also the interests of its individual member homeowner sin their units….The relationship of the two construction defect actions was close enough so that the individual homeowners had common interest in the legal status of the Association’s action.”

On the second question – whether the discussions with owners were necessary and whether participants expected them to be confidential, the court said: The nature and content of the initial meeting and subsequent ones “support conclusions that (the disclosures at each state were] intended to carry out the purpose of pursuing the Association’s lawsuit…in such a way that would be consistent with and not interfere with the rights of the individual owners….[T]hese circumstances [also] show that the Association and its counsel and the individual homeowners who participated in the litigation meetings, maintained a reasonable expectation that information to be disclosed about the status of the litigation was confidential in nature,” the court concluded.

WORTH QUOTING

“Here we have this existential threat that I really do think has the possibility of being catastrophic, and I don’t think people have any sense of that.” — Robert Rubin, Treasury Secretary in the Clinton Administration, one of three former Treasury Secretaries (George Shultz and Henry Paulson are the others) participating in a task force that is “sounding the alarm” about climate change.