Legal/Legislative Update – June 1, 2014

Published on: May 30, 2014

GSE REFORM. Despite the loss of what could prove to be crucial support from several Senate Democrats, the Johnson-Crapo bill to restructure the home finance system made it out of the Senate Banking Committee with a bipartisan 13-9 margin. The legislation, which would replace Fannie Mae and Freddie Mac with a federal reinsurance fund to back up private-sector mortgage originators, has emerged as the primary vehicle for restructuring the mortgage market. But critics on both sides of the political aisle have faulted the legislation. Democrats say it doesn’t do enough to promote homeownership for low- and moderate-income consumers while Republicans say it leaves the federal government still too much involved in the housing market.

A BIG BITE. Being bitten by a dog hurts, but paying for the bite is also painful. Insurance pay-outs for injuries related to dog bites totaled more than $480 million last year, according to the Insurance Information Institute. That represents more than one-third of all homeowners’ insurance liability claims for the year. The average cost per claim declined a little – from $29,752 in 2012 to $37,862 last year, but rising medical costs and generous jury awards have pushed that average up by more than 45 percent over the last decade, according to the industry report.

UNDERSTANDABLE CONFUSION. Confidence surveys suggest that consumers are more than a little confused about the direction of the economy – -and little wonder. Consider these headlines, both appearing in different newspapers the same day: “Mortgage Availability Hits 3-Year High,” and “Charts Show Exactly How the Mortgage Pipeline is Drying Up.” And then there were these headlines, appearing in the same publication (The Motley Fool) on consecutive days: “Why the Housing Market is Teetering” followed by, “A Sure Sign that Housing is Getting Back on Track.”

Attorney-General-Martha-CoakleyLITIGATION THREAT. Massachusetts Attorney General Martha Coakley is threatening to sue Fannie Mae and Freddie Mac 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), which oversees the GSEs. While expressing the hope that Watt will direct Fannie and Freddie to change their policies, Coakley also said that her office “is considering all available legal avenues – including litigation – to ensure compliance with Massachusetts law.”

PAPER STRENGTH. Strong earnings reported by Fannie Mae and Freddie Mac and their repayment of most of the bailout money they received suggest that the two GSEs have recovered from their near death experience and are doing just fine. But the results of their recent stress test indicate otherwise. The test, mandated by Dodd-Frank, assesses an institution’s ability to withstand a severe recession. The conclusion: The GSEs would need $190 billion in federal assistance to survive – a little more than the $187.5 billion they received the last time.

REVERSE VIEW. A few recent studies, bolstered by commentary from some industry executives, have begun to cast reverse mortgages in a more favorable light, countering, to some extent a cascade of reports highlighting the risks these loans entail for seniors. The creators of the “Simpson’s” – a long-running animated television comedy ―aren’t persuaded, however. One recent episode pictured the grandfather watching television in his retirement home, when an invisible voice, sounding much like those in ads promoting the loans asks, “Have you heard of a reverse mortgage?” the grandfather replies angrily, “That’s what put me in this dump!”

LEGAL BRIEFS

VIRTUALLY IMPOSSIBLE.  Some condominium association boards are using e-mail, skype, and other technologies to discuss pending board business, exchange information and ideas, and even to hold virtual meetings. But boards in Illinois will have to be cautious about how they use these options and may not be able to use them at all. An Illinois Appeals Court ruled recently that any discussions of board business that occur outside of a formal meeting violate the state Condominium Property Act, which requires prior notice to owners of any meeting and the opportunity to attend it. The court defined “conducting board business” broadly to include any meeting involving a quorum of board members, even if they do not actually vote or otherwise make a decision. “All board discussion, investigating by reason or argument, talking about, presenting in detail for examination and consideration of association matters as well as voting thereon must be conducted in a meeting open to all unit owners,” the court ruled in Palm vs. 2800 Lake Shore Drive Condominium Association. The court also found it unacceptable for board members to vote on association business via e-mail, telephone polls or “other communicative devices” that are not open to the public.

THE MEANING OF WORDS.  A rose by any other name “may smell as sweet,” according to Shakespeare, but in real estate law, perhaps not so much. Illustrating that point, an Illinois Appeals court ruled (in Schmidt v. Bank of America) that including the phrase “for public road purposes” in the description of an easement does not transform the easement into a public roadway.

The groundwork for this dispute was laid in 1941, when Rose Parks converted a portion of her property to a neighbor (Edith Ford), reserving for herself, her heirs, successors and assigns an easement permitting “the right of ingress and egress for public road purposes over along and across” a 40-foot strip of the property.

Sixty plus years (and several owners) later, a developer acquired the remaining portion of the Parks property and began constructing a three-building condominium on it. As part of that project, the developer graded and paved the easement area to create an entryway into the development, and laid new pipes and improved existing ones under the easement area.

The owners of the Ford property sued, saying the development violated their easement rights. A trial court sided with the developer and the condominium association, concluding that the phrase “for public road purposes” created a public right-of-way that allowed the developer to build the road and other infrastructure improvements in the easement area. But the Appeals Court ruled otherwise.

The language describing the easement determines its scope, the court said, and in this case, the language permitted only ingress and egress “over, along and across” the easement. It did not include the area underneath where the developer had installed the pipes. Moreover, the court said, this was a private easement, allowing the recipient to use it to reach a public road. The phrase “for public road purposes” in context referred to the ability to reach a public road; it did not convert that private easement into a public one that all members of the public were entitled to use. “A private party reserved the easement under consideration here, and it continues to benefit private, rather than public, interests,” the court ruled.

WORTH QUOTING

“[This] represents an unwarranted intrusion into the private lives of ordinary Americans, and can be easily perceived as an abuse of the trust placed in your agencies by the American people.” ― Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee and Sen. Mike Crapo (R-ID., ranking Republican on the Senate Banking Committee, in a letter to the heads of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, criticizing their plan to establish a vast national data base of mortgage information.