Legal/Legislative Update – March, 2013

Published on: March 15, 2013

EXCLUDE THAT

As damaging storms become more frequent, insurers are looking for ways to limit the claims related to them. The latest idea: A new endorsement in both commercial and residential insurance policies that would exclude coverage for cosmetic damage to roofs caused by wind and hail.

The insurance industry organizations that standardize forms for property/casualty insurers have drafted endorsements and are in the process of seeking state approval for them. The endorsements would preclude insurance coverage for wind or hail damage to the exterior surfaces of walls, or, doors or windows that is purely cosmetic and doesn’t impair their ability to prevent leaks.

The only alternative for insurers facing rising claims for this kind of damage would have been to increase premium rates, Joseph Harrington, director of corporate communications for the American Association of Insurance Services (AAIS) told Insurance News. Many companies think property owners would prefer to have the option of accepting the endorsement and reducing their premium rates instead, Harrington explained. The endorsement will be optional in most policies, at least initially, but industry executives say some insurers may make it a standard provision in their policies, and they predict that the exclusion will become an industry-wide standard before long.

ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics, is offering two cosmetic endorsement options for commercial carriers, which they can use separately or combine.

  • Providing full replacement cost coverage overall, but applying “actual cash value to the surface of the roof.
  • Excluding coverage for “any kind of marring or pitting or other superficial damage specifically from wind and hail that alters the appearance of the roof but does not prohibit it from functioning as intended as a barrier.”

Company officials say they are crafting versions of this endorsement for residential carriers, as well.

GETTING BETTER AND BETTER

The outlook for the multifamily market seems to improve with every forecast. Industry analysts are predicting that new apartment construction rates for this year will be at or near their “historic” average for the first time in more than four years. CoStar, a real estate research firm is expecting builders to deliver 140,000 new apartment units this year and add a combined total of 400,000 units over the next three years. Record low interest rates, increasing demand fueled by an improving economy, household formations delayed by the downturn, and the foreclosure crisis (forcing many former homeowners into the rental market) are driving the construction surge, Luis Mejia, director of multifamily research at CoStar, told Reit.com.

But his sunny outlook is not entirely cloud-free. “The bubble is the wild card in the equation, especially if the combination of relatively easy financing and developer’s optimism, which is always there, continues to persist too long,” he cautioned.

Rents, which have been following a steep upward trend, are still rising, but the rate of increase has slowed. Averages reported average increases of 3 percent on leases signed last year, compared with 4.8 percent in 2011, according to data compiled by RealPage.

With economic growth still slow and unemployment rates still high, landlords are focusing more on keeping their occupancy rates high, explained Greg Willett, vice president of research at MPF, which conducted the study for RealPage. As a result, he told DS News, they “aren’t pushing rents quite as hard as they were a year or so ago.”

 

ELIMINATING RISKS – AND BORROWERS

In what might be viewed as the financial equivalent of burning the village in order to save it, a recent study by CoreLogic has concluded that the new “Qualified Mortgage” rules will eliminate around 90 percent of the default risks for lenders and investors but also disqualify about 50 percent of prospective borrowers.

The rules, issued by the Consumer Financial Protection Bureau (CFPB), establish the standards loans must meet to qualify for the presumption that lenders have verified the borrower’s “ability to pay,” as the Dodd-Frank Financial Reform requires. Among other benchmarks, the debt-to-income ratio can’t exceed 43 percent (24 percent of all 2010 originations fell short of that standard, CoreLogic found) and the loans can’t have high-risk characteristics such as balloon or interest-only payments), and the points and fees charged can’t exceed 3 percent of the loan amount.

In the near-term, loans purchased by Fannie Mae and Freddie Mac or insured by the Federal Housing Administration (FHA) do not have to meet the QM standards, and since that secondary market pool currently represents about 90 percent of originations, CoreLogic noted, the near-term impact of the QM rule will be minimal. That carve-out ends in seven years.

“The irony of the exemption is that it reinforces the role the GSEs play in the market, making it harder to enact GSE reform,” the CoreLogic analysis notes.

While the QM rules alone would have disqualified about half of the 2010 loans CoreLogic reviewed, overlaying the Qualified Residential Mortgage (QRM) standards, which may include a minimum down payment of 10 percent, would have eliminated another 27 percent of purchase mortgages, the study found. “The combined impact of QM and QRM is that only 25 percent of purchase originations would meet the eligibility requirements of the QM rule’s safe harbor,” according to the analysis.

The QRM rule, which has not yet been finalized, will define loans that will not be subject to the requirement that lenders retain 5 percent of the credit risk related to them. The preliminary proposal drew an industry outcry when it set the minimum down payment requirement at 10 percent and the maximum debt-to-income ratio at 36 percent.

Industry trade groups are urging the CFPB to meld the QM and QRM rules and eliminate the down payment requirement from the “qualified” definition and adopt the QM’s 46 percent debt ceiling.

“A revised QRM definition should track the QM to ensure that all qualified borrowers have access to affordable and safe mortgage credit without a stringent down payment requirement,” Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors, told Bloomberg News.

Those arguments have gotten strong support from lawmakers, who say they did not intend for regulators to establish a strict down payment requirement when they directed them to establish the standards for “qualified” mortgages. A letter to regulators signed by both Republican and Democratic legislators, notes, “Our intent as drafters of this provision was, and remains, clear: To incent the origination of well-underwritten mortgages with traditional terms. “We intentionally omitted a specific down payment requirement and never contemplated the rigid 20 percent or 10 percent,” specified in the preliminary rule. The letter was signed by Senators Jonny Isakson (R-GA), Mary Landrieu (D-LA) and Kay Hagan (D-NC).

Regulators have indicated that they have heard the concerns about the regulations and are considering changes in response. Testifying recently before the Senate Banking Committee, Federal Reserve Governor Daniel Tarullo acknowledged the need to avoid “constrict[ing] credit to middle [and] lower middle class people, who might be priced out of the housing market.” Making the QM and QRM rules “more or less congruent…is on the table,” he added.

LEGAL BRIEFS

REAFFIRMING DISPARATE IMPACT

Asserting its continued commitment to enforcing fair housing laws, the Department of Housing and Urban Development has finalized rules establishing “disparate impact” as the standard for identifying discriminatory practices. Under that legal theory, a practice t that has a disproportionately negative impact on protected classes may be deemed discriminatory even if there is no intent to discriminate.

“Through the issuance of this Rule, HUD is reaffirming its commitment to enforcing the Fair Housing Act in a consistent and uniform manner,” HUD Secretary Shaun Donovan said in a press statement. “This will ensure the continued strength of one of the most important tools for exposing and ending housing discrimination.”

HUD used disparate impact recently in discrimination claims against Well Faro and Bank of America, which agreed to pay $175 million and $335 million, respectively, in settlements agreements avoiding litigation.

The American Bankers Association, among other industry trade groups, has urged HUD to jettison the disparate impact theory, arguing that it relies on statistical patterns that do not prove discrimination. I

ABA members are strong advocates for fair lending and fully support enforcement against practices that intentionally discriminate,” Frank Keating, president and CEO of the ABA, said in a recent letter to HUD. “However, disparate impact asserts fair lending violations occurred based only on statistical differences, where neither intent nor discrimination can be proven.”

 

ON A ROLL

The Mortgage Electronic Registration System (MERS) appears to be on a roll. After finding itself uncomfortably embroiled in the robo-signing scandal and on the losing end of several law suits alleging foreclosure-related improprieties, MERS has been quietly racking up a series of courtroom victories upholding the electronic origination and loan documentation service it provides.

The Nevada Supreme Court ruled recently that a financial institution can foreclose if it holds the note and obtains a proper mortgage assignment from MERS. MERS officials said the decision in Edelstein v. Bank of New York will establish “a statewide precedent” clarifying the foreclosure authority of a deed of trust beneficiary.

That is one of many rulings providing judicial counterweight to decisions holding that a foreclosing entity must physically hold both the note and the mortgage –rulings that invalidated foreclosure actions in which the documentation assigning the mortgages was either nonexistent or unclear. In many of these cases, the originating lenders sold the loans and named MERS as the nominee for the purchasing entity and its successors.

In another recent action favoring MERs (Crutcher v. CitiMortgage), a District Court in Atlanta echoed the Nevada decision, ruling that the registry has the authority to foreclose as long as it is listed in the security deed as nominee for the original lender and any of its successors. The plaintiff borrower argued that only the lender holding the note at the time had the authority to foreclose, but the court disagreed, ruling that “as grantee, MERS has the power of sale and the right to exercise any or all of [Lender’s and Lender’s successors and assigns’] interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender including, but not limited to, releasing and canceling this security instrument.”

A district court judge in Arkansas dismissed a class action suit accusing MERS of illegally failing to pay recording fees, ruling that state law does not require the recording of mortgage assignments. An Iowa District Court cited the same rationale in siding with MERS in a similar suit.

“As clearly described in this ruling, recording statutes are intended to give subsequent purchasers and lenders notice of recorded liens and to allow creditors to give notice of their secured interest in the property,” Janis Smith, vice president for corporate communications for MERSCORP, the parent of MERS, said in a press release commenting on the Iowa ruling. “Use of the MERS System to register mortgage loans fulfills the purpose of the recording statutes,” she added. “MERS mortgages are recorded in the public land records and MERS members pay recording fees when the mortgage is recorded.”

 

WORTH QUOTING:

“One of the greatest threats facing not just banks but many businesses … is hacking and the possible theft of proprietary data and personal information about customers.” — Federal Reserve Governor Sarah Bloom Raskin.