Legal/Legislative Update – June 19, 2015

Published on: June 19, 2015


The Senate Banking Committee has approved a sweeping regulatory relief bill, exempting smaller banks from many of the Dodd-Frank supervisory requirements, establishing markers for the restructuring of Fannie Mae and Freddie Mac, and modifying the integrated mortgage disclosure rules (taking effect August 1) by waiving the three-day notice required for changes in loan terms if the only change is a reduction in the borrower’s loan rate.

The proposed legislation would also expand the definition of “qualified mortgages” (assumed to comply with the ‘ability-to-repay’ requirement) to include virtually all loans lenders hold in their portfolios, and exclude from the points and fees cap on qualified loans escrow payments lender charge for future insurance payments. However, the proposed bill would not exclude from that calculation title insurance fees paid to an affiliate of the lender. Instead, the legislation directs the Comptroller General to study “the ability of affiliated lenders to provide mortgage credit.”

The Banking Committee rejected an alternative reform bill proposed by Democrats, approving Shelby’s measure on a party-line 12-10 vote. That split and the committee debate preceding the vote suggest two conclusions:

  • Shelby will have trouble mustering the 60 votes required to bring his bill to the Senate floor; but
  • There is significant bipartisan support to provide regulatory relief for community banks and credit unions.

That relief won’t come “at the expense of rolling back Wall Street reform,” Sen. Sherrod Brown (D-OH), ranking Democrat on the committee, told reporters. “But there is no legitimate reason why Democrats and Republicans can’t pass targeted legislation today that would give community banks and credit unions relief and be signed into law.”


Although the May employment report was much stronger than expected, it did not answer the key question perplexing economists and worrying investors: When will the Fed see sufficient strength in the economy to begin raising interest rates?

janet_yellenUntil recently, Fed Chairman Janet Yellen has made it clear that, for her, the risks of derailing the recovery by boosting rates prematurely outweighed the risks of triggering inflation by delaying action for too long. But in recent comments, she has signaled that her risk assessment has shifted. In a speech just before the May employment figures were releases, Yellen said current economic conditions suggest that it will be “appropriate” for the Fed to begin adjusting interest rates “at some point this year….Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy.”
But Yellen also added a significant qualifier, noting that while the employment market is “approaching” full strength, “it’s not there yet.” The timing of the Fed’s rate moves will be dictated by economic conditions, she emphasized, and the pace, she said, will be gradual.

With key economic indicators still mixed, but generally stronger, some analysts are predicting that the Fed will make its first move in September; others are predicting that continued concerns about economic growth (that 0.7 percent first-quarter declined rattled everyone a little) will stay the Fed’s hand until the end of this year or early next.

But there seems to be a growing consensus that the impact of higher rates, whenever they come, will be muted. The housing market recovery, while less than robust, is well-established and better able to withstand higher rates than it was two years ago. And household finances, at least relatively speaking are in decent shape, with debt levels lower and savings rates higher now than they were. Perhaps most important, homeowners have shifted decisively from adjustable rate to fixed-rate mortgages, leaving homeowners much less vulnerable to rate hikes. Only 18 percent of homeowners with mortgages had ARMs last year, compared with nearly 30 percent a decade ago.


Existing home sales declined in April by 3.3 percent compared with March, as skimpy inventories thwarted demand in many markets. But sales remained almost 6 percent above the same month a year ago, according to the National Association of Realtors (NAR). And the NAR’s pending sales index ― a predictor of future activity— jumped by 3.4 percent, blowing past more modest predictions and reaching its highest level in 9 years.

New home sales more than made up for the dip in the existing home sector, rising 6.8 percent over March (when sales declined sharply) and 26 percent above the year-ago volume. Starts and permits also sparkled, with annualized gains of 20.2 percent and 10.1 percent, respectively, representing the best report in more than 7 years.

Particularly encouraging to industry analysts: The strength was concentrated in the single-family sector rather than in the multi-family area, which has been the primary driver for residential construction throughout the recovery. “Homebuilding is finally finding its rhythm,” Ryan Sweet, senior economist at Moody’s Analytics Inc., told Bloomberg News. “With the job market tightening, wages showing subtle signs of improvement, and borrowing costs at historical lows,” he suggested, “we should see a solid pickup in the second half.”


Rising home prices are generally viewed as a sign of housing market strength, but some analysts are beginning to see hints of a potentially damaging price bubble in the sustained gains reported over the past three years. The S&P-Case-Shiller 20-city index jumped another 1 percent in March, pushing prices 5 percent higher year-over-year – the 35th consecutive monthly gain. Bubble concerns are understandable, given those numbers, David Blitzer, managing director and chairman of the S&P Index Committee, says. But he doesn’t think the concerns are justified. The pace of year-over year gains has slowed over the past six months, he notes, and price gains are outpacing income growth, narrowing the pool of eligible buyers.

“All of this suggests that some future moderation in home price gains is likely. I would describe this as a rebound in home prices, not a bullet,” he told Bloomberg, “and not a reason to be fearful.”

Freddie Mac economists are less sanguine. While they agree that higher prices haven’t seriously undermined affordability — yet ─ they see some cause for concern going forward. Freddie’s May Economic and Housing Outlook notes: “While many markets look highly affordable today, the story can change quickly if interest rates and home prices rise without any offsetting income growth.”


Insurers are receiving fewer dog bite claims, but they are paying more to settle them. The Insurance Information Institute reported 16,550 dog bite claims nationally last year, 4.7 percent fewer than in 2013. But the average cost of these claims increased 15 percent, to $32,072 in 2014 vs. $27,862 the year before. Claims have increased more than 65 percent in the past decade, primarily because of increases in medical costs and in the damages awarded by juries, according to the III report.
California reported the largest number of dog bite and other dog-related injuries last year (1,867), and the highest aggregate value of claims ($62.8 million), but New York, third in number of claims filed, had the highest average cost per claim ($56,628), followed by Michigan ($38,302) and Illinois ($34,894).


When it comes to declaring the housing downturn over, the fat lady hasn’t sung yet, in the view of most Americans. More than 40 percent of the respondents to a survey by the MacArthur Foundation said they think the housing crisis continues and 20 percent said it is likely to get worse. While far from upbeat, those results are more positive than they were last year, when 70 percent said the crisis was still ongoing or likely to get worse.

In the most recent survey, 60 percent cited housing affordability as a serious problem, and 75 percent agreed that young people (18 to 34) have a harder time buying homes today than they did several decades ago.

The survey highlighted the extent to which the “great recession” has affected and continues to affect the way people think about the housing market and their own finances. Sixty percent of the respondents were worried or concerned about the nation’s future, compared with 32 percent who described themselves as hopeful and confident and a large majority question the possibility of moving up the socio-economic ladder. Nearly 80 percent of the respondents agreed that is more likely that middle-class Americans will sink than that lower-income Americans will rise – and that view held across age, economic, and partisan lines, the report noted.

“The building blocks of success – having a good job, decent housing, and the ability to save for a secure future – are viewed as harder to achieve than they were a generation ago, and this in turn helps drive pessimism about social mobility,” Geoffrey Garin, president of Hart Research Associates, which conducted the survey, observed. “The idea that downward mobility is more likely today than upward mobility turns the American Dream on its head,” he added, “and it is an indicator of how badly confidence has been eroded.”


Condo boards dealing with short-term rentals and the problems related to them may find this decision by a California Appeals court (Watts v. Oak Shores Community Association) interesting and (to the extent that other courts may be guided by it) somewhat reassuring as well.

The community association involved (Oak Shores) consists of 660 single-family homes, 80 percent of them owned by part-time residents or absentee owners, 66 of whom rent their homes to short-term vacationers.

The plaintiffs (Lynda Burlison and Ken and Joyce Watts) challenged several rules the board adopted restricting short-term rentals and imposing fees on them. They argued that the fees ($325 per year plus $125/week to bring watercraft into the community), were unjustified and if imposed at all, should be borne equally by all owners, not just by those renting their units for short periods. The association counter-sued, demanding unpaid fees and fines totaling $2,355.06 for Burlison and $4,888.47 for the Watts. Burlison paid her bill under protest; by the time of the appeal, the Burlisons owned more than $10,000.

The trial court sided firmly with the association, awarding it $10,264 plus interest for the Watts’ unpaid assessments, plus nearly $1.2 million in court costs for the complaint and another $27,730 for legal costs related to the cross—complaint.

The Watts (without Burlison) appealed – unsuccessfully – to the California Appeals Court, which found that the association’s CC&Rs gave the board broad authority to adopt rules for the community, that nothing precluded rules imposing fees on short-term rentals, and that the board could impose those costs only on the owners of those rental units.

The language the plaintiffs cited to support their argument that the fees should be shared by all actually proved the opposite, the court said, confirming the association’s authority to impose fees and assessments and thereby also “confirm[ing] the power of the association to impose the type of fees at issue here. The Board may reasonably decide that all owners should not be required to subsidize Watts’ vacation rental business,” the court added.

The plaintiffs fared no better with their argument that the fees were not justified, and violated a state law requiring that the fees not exceed the cost of the services provided. On the first point, the court noted, there was no question that short-term renters impose additional costs on the association. The evidence supports that conclusion, the court said, and “experience and common sense place the matter beyond debate. Short-term renters use the common facilities more intensely; they take more staff time in giving directions and information and enforcing the rules; and they are less careful in using the common facilities because they are not concerned with the long-term consequences of abuse.”

The court also rejected the argument that the trial court should not have accepted a “roughly proportional” relationship between the fees the association charged and the costs it incurred, but should have required a more precise analysis to justify the fees. “Nothing in the language of [the statute] requires the exact correlation between the fee assessed and the costs for which it is levied that Watts appears to demand,” the court ruled, adding, “The most reasonable interpretation [of the statute] is that it requires nothing more than a reasonable good faith estimate of the amount of the fee necessary to defray the cost for which it is levied. Whether the court uses the term “roughly proportional” or “reasonably close” the test has been met here.” In fact, both courts noted, the fee ($325) was well below the estimated annual cost of more than $825 per short-term rental unit.

Demonstrating little patience with most of the plaintiffs’ arguments, the appeals court became almost snarky in disposing of the last one – that the damages awarded by the trial court were excessive, unfairly rewarding the association for “vigorously” litigating the case “in order to make a statement and [establish a precedent] for future litigation.”

Seeing in that argument the equivalent of killing one’s parents and then pleading for mercy because of being an orphan, the court pointed out that the plaintiff initiated the action in the first place, requiring the association to mount the “vigorous litigation” about which he was complaining. “[Watts] could have avoided all attorney fees and costs,” the court noted, “simply by declining to bring the instant unmeritorious action and by paying the Association the few thousand dollars it was properly demanding.”


“[Lenders] have acknowledged and taken accountability for the role our industry played in actions that led to the meltdown….But now too, policymakers – the vast network at the federal and state level – must account for their role in the recovery. They must account for their role in credit access and consumer confidence. It’s time to acknowledge the flaws in policy, corrections needed to the rules, and the impacts of going too far.” ― David Stevens, president and chief executive officer of the Mortgage Bankers Association, explaining why he thinks today’s housing policies are “failing the American homeowner.”