Published on: July 21, 2015
FED POISED TO RAISE RATES – MAYBE
The June economic reports brought a spate of mostly good news, peppered with continuing concerns about the employment outlook. Although employers added 223,000 jobs for the month wage gains remained anemic, leaving the timing of the Fed’s interest rate move still in doubt. On that point, Federal Reserve Chair Janet Yellen told a Congressional committee last week that the Fed plans to begin raising interest rates this year. The adjustments will be “gradual,” she said, and their timing will depend on economic conditions.
“If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target,” she said in her Congressional testimony. “But I want to emphasize that the course of the economy and inflation remains highly uncertain,” she added, “and unanticipated developments could delay or accelerate this first step,” she added.
The Fed continues to focus on the employment statistics for stronger evidence of the improvement policy makers want to see. While conditions “have improved substantially,” Yellen said, “they are not yet consistent with maximum employment.”
The unemployment rate dropped to 5.3 percent in June – its lowest rate in 7 years – but the decline came not because more people are finding jobs but because they are giving up on the prospect of doing so. The participation rate declined by another 0.3 percent to 62.6 percent and the participation rate for workers between 25 and 54 hasn’t budged at all this year, reflecting continued weakness in this key segment of the employment market.
FAIR HOUSING REGULATIONS
Adding clarity, and perhaps a little more muscle, to fair housing requirements, the Department of Housing and Urban Development (HUD) has finalized rules that will require local housing agencies to demonstrate how they are using federal housing funds to reduce racial disparities in their communities by more effectively integrating segregated neighborhoods.
The rules are designed to encourage the construction of affordable housing in more “desirable” neighborhoods with access to good schools and other amenities, while improving the housing stock in lower-income areas.
Announcement of the HUD rules came just two weeks after the Supreme Court narrowly affirmed the “disparate impact” theory, which holds that policies may be deemed discriminatory if they have a discriminatory impact, even if there is no intent to discriminate. The HUD rules, similarly, assert that “fair housing compliance isn’t just a matter of saying, ‘I didn’t discriminate,’ Rob Breymaier, executive director of the Oak Park Regional Housing Center in Chicago, told the New York Times. “It’s also saying, ‘I’m doing something proactively to promote an integrated or inclusive community.’”
Although housing and civil rights advocates, like Breymaier, have applauded the rules, conservative lawmakers have denounced them as another example of counterproductive overreaching by the federal government.
Rep. Paul Gosar (R-AZ) called the rule “the most aggressive attempt yet [by President Obama] to force his utopian ideology on American communities disguised under the banner of ‘fairness.’” Gosar sponsored an amendment, which the House has approved, that would prohibit HUD from using federal funds to enforce the new requirements.
The housing market continues to show signs of strength. Existing home sales rebounded strongly in May after an April swoon, increasing by 5.1 percent for the month and by more than 9 percent year-over year. Pending home sales, measured by a National Association of Realtors reached their highest level in 9 years – posting their ninth consecutive year-over year gain.
New home sales soared, rising nearly 20 percent above the year-ago level to a seasonally adjusted 546,000 units. Permits for new construction increased by nearly 12 percent to a seasonally adjusted annual rate of 1.28 million units – exceeding the 1 million mark for the second consecutive month and persuading some analysts that the housing recovery is on a sustainable path.
Chris Rupkey, chief financial economist at MUFG Union Bank in New York, is among them. He told the New York Times: “Residential construction has been the laggard in this recovery, and the moonshot surge in new permits today means the final piece of the recovery puzzle is now falling into place.”
Lawrence Yun, NAR chief economist, says May home sales rebounded strongly following April’s decline and are now at their highest pace since November 2009 (5.44 million). “Solid sales gains were seen throughout the country in May as more homeowners listed their home for sale and therefore provided greater choices for buyers,” he said.
But Lawrence Yun, the NAR’s chief economist, sounded a cautionary note. “However, overall supply still remains tight, homes are selling fast and price growth in many markets continues to teeter at or near double-digit appreciation. Without solid gains in new home construction,” he warned, “prices will likely stay elevated — even with higher mortgage rates above 4 percent.”
For all the talk about the lingering effects of the housing downturn – and the fear that it might permanently dent the appeal of home ownership – Americans value the ‘American Dream’ as much as ever. But they overestimate the difficulty in achieving it, underestimate their ability to achieve the goal, and don’t fully understand the home buying process.
Those are the key findings of a Wells Fargo-Ipsos survey designed to assess “How America Views Homeownership.” Of the more than 2,000 adults responding to this on-line survey, 65 percent said homeownership is highly desirable and 72 percent agreed that this is a good time to buy. More than 80 percent said they understand the home buying process, but 45 percent said they would need a credit score above 780 to qualify for a mortgage and more than a third said a down payment of at least 20 percent would be required – both serious misconceptions.
A separate survey by Chase identified similar knowledge gaps. Although more than 40 percent of the potential homebuyers in this survey said they were not concerned about their lack of home buying knowledge, about one-third admitted that they were “not very” or “not at all” aware of the closing costs they would have to pay.
THEY BEG TO DIFFER
As the housing market has improved, homeowners and appraisers have been moving closer to agreement on housing values. But for most of this year, they have been moving further apart in their assessments, with appraisers valuing homes more conservatively than owners. Appraiser prices were 1.4 percent lower than owners’ estimates in June, according to Quicken Loans’ monthly Home Price Perception Index. This is the fifth consecutive month value estimates have diverged in this way, and the gap has been widening every month.
Quicken analysts say the trend reflects increasing stability in a market that is not yet on solid ground. “Over the last five months we’ve seen homeowners continually value their homes higher than appraisers,” Bob Walters, Quicken’s chief economist, said. “While each local market has a different story to tell, a large part of this perception gap is likely due to the normalization of home prices,” he added. “After about a year of home values trending upward, it takes some time for many homeowners to realize home values are stabilizing in their neighborhoods “The real test for home price solidity will be when inventory increases to a level of equilibrium between supply and demand.”
Separately, the National Association of Realtors reported that more than half (63 percent) of the homes sold in May sold below their list price. But the discounts were relatively small, ranging from 1 to 11 percent. Most of the homes selling at a discount (84 percent) were on the market for 12 months or more; but nearly 24 percent of the homes sold within a month were sold for more than the listing price, according to the NAR.
IN CASE YOU MISSED THIS
The CFPB has asserted broad RESPA enforcement authority in a recent decision significantly expanding the liability of PHH Corporation for accepting “kickbacks” from mortgage insurers. The CFPB upheld an Administrative Law Judge’s finding that PHH had violated RESPA but increased the number of separate violations involved, increasing the required disgorgement from $6 million to $109 million.
Black Knight Financial Services estimates that 6.5 million borrowers would benefit from refinancing their existing mortgages. More than half-a-million of them could save $500 a month by lowering their rates, according to this analysis.
The Federal Housing Finance Agency has approved massive pay increases for the CEOs of Fannie Mae and Freddie Mac, boosting their compensation from n $600,000 to around $4 million. The Obama Administration has objected to the move, as have Congressional leaders and just about everyone else who has commented publicly on it.
Mortgage rates are inching up. Thirty-year fixed rates averaged 4.08 percent for the week ending July 2, according to a Mortgage Bankers Association (MBA) index. That was up from 4.02 percent the previous week and the highest level so far this year, but still below the year-ago average of 4.12 percent.
Rising interest rates have curbed mortgage applications; they’ve fallen 4.7 percent in the past month, according to the MBA. But home prices are still rising. CoreLogic reported a 6.3 percent increase nationally for May – the 39th consecutive month for year-over-year price gains.
The Federal Financial Institutions Examination Council, an interagency coordinating body for federal banking industry regulators, has issued two statements in the past month cautioning banks and credit unions about cyber-security risks and emphasizing ng the importance of effective risk mitigation policies.
STRICT AND CONSISTENT
Consistency may be “the hobgoblin of little minds,” as Ralph Waldo Emerson contended. But consistency (though not the “foolish” kind Emerson was targeting) can also provide the strongest defense of a condo association’s rules. It was the consistent enforcement of its pet restrictions that won the day for a California homeowners’ association in a dispute with an owner who had two pets and wanted the board to waive its one-pet-per unit rule. (The Villas in Whispering Palms v. Tempkin.)
The single-pet restriction dated from the creation of this 98-unit planned community in 1979. But over the years, as often happens, the rule was widely violated by a number of owners who had two dogs. After pretty much ignoring those violations for nearly 20 years, the board decided to tackle the problem, informing owners in 2003 that the one-dog limit would be strictly enforced. While owners who had two dogs could request a variance and keep both, the board said, they could not replace the second dog after one of the pets died.
Two years later, the board determined that some owners were still violating the rule and polled owners to see if they wanted to revise it. The majority wanted to retain the one-dog limit.
Enter Richard Tempkin and his friend, who had one dog when they moved into the community in 2010 but acquired another to create a transition period before the older dog died. After receiving multiple violation notices, Tempkin requested a variance from the pet restriction, which the board denied. When he refused to remove the second dog, the board began imposing fines, eventually seeking a court order requiring Tempkin to remove the second dog and pay the accumulated fines.
A trial court supported the board’s actions and Tempkin appealed. His primary argument was that the board had granted previous variances – allowing some owners to retain two dogs – and should have granted him a variance with the same conditions. The failure to do so, Tempkins contended, made the rule “arbitrary and capricious.”
A California appeals court found nothing inconsistent about the board’s enforcement of the rule, however. The board levied fines on other owners to ensure compliance, as it did on Tempkin, waiving the fines for owners who agreed to obey the restriction. And while the board had the authority to grant variances, the court noted, it wasn’t required to do so and did so only once after 2005, allowing an owner with a medical disability who already owned a dog to obtain a service dog as well.
Condo rules will generally be deemed reasonable if they are reasonably related to the purposes of the association and are enforced even-handedly. The board’s actions met both standards, the court said.
“The fact the board took no action to enforce the rule for many years before 2004 is not an indication of selective or arbitrary enforcement,” the court concluded, especially given that the board began to enforce the rule strictly after determining that owners wanted to retain it. “In the face of years of past uncorrected violations, the decision to strictly enforce the pet restriction was a reasonable and informed decision of the board, entitled to judicial deference,” he court said.
“Yes, the word crisis is harsh and alarmist, but it accurately reflects the complete void of focus on housing as an opportunity by Washington policy makers, including the actions of the regulators and enforcement officials that are narrowing the credit box. Fact – there is a shortage of affordable housing (both rental and owned) and the homeownership rate today is at its lowest point in over two decades. Today’s environment is not encouraging credit expansion. It’s forcing lenders to be overly conservative – ultimately failing entry-level homeowners on every front.” — David Stevens, president of the Mortgage Bankers Association.