Legal/Legislative Update – March 1, 2015

Published on: February 27, 2015

janet_yellenFED POLICY: “PATIENCE”.  An interest rate hike is on the Fed’s radar screen, but it is still a relatively small blip, visible, but not imminent. Fed Chairman Janet Yellen conveyed that message in recent testimony before the House Banking Committee, telling lawmakers that while recent economic reports are encouraging, the Fed is in no hurry to alter its current low-rate course.

“There has been important progress,” she said. “However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective….If economic conditions continue to improve, as the committee anticipates,” she added, “the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” she added, and will alter its statements to reflect that intention.

But patience, though not endless, is still the operative word in the Fed’s strategy, Yellen indicated. If that term appears in the statement issued after the Federal Open Market Committee’s mid-March meeting, Yellen said, it will mean the Fed won’t make any rate move before the end of July, at the earliest.

A SAFE BET.   Federal Housing Finance Agency Director Mel Watt insists that loans with low (3 percent) down payments, which Fannie Mae and Freddie Mac will now be able to purchase, are no riskier than loans with larger down payments as long as they are properly underwritten. Congressional representatives quizzing him at a recent House Financial Services Committee hearing weren’t convinced.

With all due respect, I understand what you’re saying,” Committee Chairman Jeb Hensarling (R-TX) responded. “But I fear what you’re doing is again, repeating the exact same mistakes that brought us here in the first place and now you’re in a contest with FHA to see who can be the nation’s largest subprime lender. I fear we are going in the complete wrong direction with your policy.”

CONSUMERS DON’T SHOP.   The Consumer Financial Protection Bureau has mandated a massive overhaul of the mortgage disclosure requirements designed in large part to help home buyers shop more effectively for mortgages. An even more serious problem may be that consumers don’t shop for mortgages at all.

A CFPB analysis of borrowers who purchased homes in 2013 found that nearly half (47 percent) of the 5,000 buyers surveyed considered only a single lender. A large majority (70 percent) relied on the lender or broker they used to provide information about their loan. About one-third relied on real estate brokers or home builders.

“Almost nobody looks only at one house and decides to stop right there,” CFPB Director Richard Cordray said in a recent speech, expressing his concern about the survey results. “Consumers spend considerable time looking at different neighborhoods and at different homes for sale. The same should be true of choosing among possible mortgage loans.”

Obtaining loan information from the entities providing the loan is problematic, he noted, because they have “important personal stake in selling the mortgage…. What is best for them is not always going to be best for the consumer.”

HACK ATTACK.    An ultra-sophisticated group of hackers has stolen an estimated $1 billion from more than 100 financial institutions in 30 countries, in what security experts are describing as an “unprecedented cyber-robbery.” The gang used state-of-the-art malaware – meaning that existing defenses couldn’t combat it – to infect the computers of bank employees, enabling them to mimic employee activity and thus transfer funds or steal them outright.

“These bank heists were surprising because it made no difference to the criminals what software the banks were using,” Sergey Golovanov, principal security researcher at Kaspersky Lab, Russia’s largest producer of antivirus software, said in a report. Kaspersky’s global research and analysis team led the investigation that uncovered the global hacking operation. “It was a very slick and professional cyber-robbery,” the report noted.

fha_logoRETHINKING PENALTIES.   The Federal Housing Administration (FHA) is considering easing up on the hefty penalties imposed on mortgage lenders for “minor” defects in the loans they approve. Those outsized penalties – like the $614 million JPMorgan Chase agreed to pay under a settlement agreement with the Justice Department – have led many lenders to tighten their underwriting standards and led others to concentrate on “plain vanilla” loans (to higher income, low-risk borrowers) while avoiding some market products entirely – including loans insured by the FHA.

The DOJ has been using the False Claims Act to pursue lenders when errors – even relatively minor ones – are uncovered in loans they have originated and sold. According to the Wall Street Journal, the Department of Housing and Urban Development (HUD) is concerned about limiting credit to eligible borrowers – especially lower-income borrowers, and wants the FHA to limit major enforcement actions to errors that should have disqualified the loans. Justice Department officials are reportedly pushing back, however, arguing that regulators should not ‘give in’ to banking industry lobbyists who are complaining about the penalties and warning of their deleterious effects on the mortgage market.

The conflict “shows the tightrope policy makers and regulators are trying to walk,” the Journal noted. “While they want to hold lenders accountable for crisis-era mistakes and retain recourse should the loans go bad, they also want the banks to extend loans to some consumers who have been largely shut out of the mortgage market since the crisis.”

INVENTORY SHORTAGE.   Housing industry analysts have been warning that an inventory shortage could undermine the housing recovery. Recent statistics indicate those concerns may be justified. The National Association of Realtors, Zillow and, among others, are all reporting that inventory levels are exceptionally low, putting upward pressure on home prices and slowing home sales activity.

The NAR reported that inventory levels declined by 6.7 percent in January and were almost 9 percent below the year-ago mark; noted that limited move-up choices have kept existing homeowner sin place for an average of 10 years – an industry record.

“We are not seeing enough growth in inventory to support recovering demand,” Jonathan Smoke, chief economist for, said in his report. Nearly 80 percent of the markets he analyzed reported a decline in inventory levels. Only a few “standout” markets reported gains, he noted, “and growth in inventory is necessary to see sustainable growth in demand.”


ERRORS AND REVISIONS.    If your bank erroneously deposits $1 million in your account, you’d be hard-pressed to argue that you should be allowed to benefit from the error and spend the money as if it were yours. Using similar logic, a Texas Appeals Court ruled that a homeowners’ association could correct a typographical error misstating the square footage on which owners’ assessments were based and increase the assessments based on that correction.

The plaintiffs in this case (Waterford Harbor Master Association v. Landolt) purchased their property in 1991. The master declaration and the plat both listed the total size of the community as 594,254 sq. ft. However, Exhibit B, attached to the declaration, listed the size as 394,254 sq. ft. In 2002, the association’s board of directors voted to correct the Exhibit B figure and recalculated owners’ assessments using the larger square footage. The change increased the Landolts’ assessment by about 8 percent. They paid the increase under protest for the next 10 years.

In 2012, owners voted to amend the declaration to correct the square footage in Exhibit B to match the declaration and the plat. The Landolts filed suit, arguing that the correction of the square footage and the owners’ vote affirming it were both invalid. The trial court agreed, awarding the plaintiffs $16,218.24 (four years of excess assessments) plus attorneys’ fees and interest. The association appealed.

The Landolts based their argument partly on language in the declaration specifying that if property is added to or subtracted from the association, owners must approve any resulting change in their percentage interest in the community. The association contended, and the appeals court agreed, that the board did not add or subtract any property; it simply corrected a typographical error.

Both the declaration and the plat use the same square footage (594,254), the court noted, and “there is no evidence that the 394,254 figure [used in Exhibit B) was accurate. [Nor is there] evidence to contradict the 594,254 figure….”

The Exhibit B figure was clearly a typographical error, the court said, and typographical errors ‘must yield to the well-established doctrine that written contracts will be construed according to the intention of the parties, notwithstanding errors and omissions, by perusing the entire document and to this end, words, names, and phrases obviously intended may be supplied.’”

The court also rejected plaintiffs’ contention that the owners’ vote affirming the Exhibit B correction was invalid because it was based on an erroneous calculation of owners’ voting rights. The plaintiffs cited a provision in the Declaration specifying that voters’ rights could be altered only if property were added to the subdivision. But, again, the court pointed out, that wasn’t the case here. “The correction to the square footage of the entire Reserve had no bearing on, and changed nothing concerning the voting of individual lot owners.”

The Landolts advanced one other argument for reducing their assessment: Because a park in the community was described as a “common area” under a sub-association (and thus exempt from assessment there), they said it should be deemed “common facilities” under the Master Declaration and similarly excluded from the assessment of owners’ pro rata shares.

The court didn’t buy that argument either. Absent evidence to the contrary, jurists on the appellate panel agreed, courts must assume the individuals drafting documents say what they mean and mean what they say.

“The parties’ intent is expressed in the words used, and the words omitted, from each declaration,” the court noted. For purposes of calculating pro rata shares, the court explained, the Master Declaration uses the term “common areas” in describing the park; the declaration does not refer to “common facilities,” which would exempt it from the calculation. That wording “evidences the intent that the park be included for purposes of calculating assessments under the Master Declaration,” the court said. “Similarly, that the [sub-association’s] Declaration does not refer to “Common Facilities,” as it deals with matters of voting and assessments, evidences that the parties intended that Common Area requires different treatment. In short,” the court continued, “had the drafters of both the Master Declaration and the [sub-association] Declaration intended that ‘Common Facilities’ and ‘Common Area’ include the same property, the terms used would have been the same. Because different terms were used, neither of which is ambiguous, all must be construed in light of the entire agreement.”

Based on that conclusion, the court reversed the trial court’s award of damages to the plaintiffs and awarded the homeowners’ association approximately $33,000 for attorneys’ fees plus an additional $30,000 for its successful appeals.


“There’s no other way to say this. The official unemployment rate, which cruelly overlooks the suffering of the long-term and often permanently unemployed as well as the depressingly underemployed, amounts to a Big Lie.” ─Jim Clifton, chairman and CEO of the polling firm, Gallup, commenting on the January labor market report.