Legal/Legislative Update – November 12, 2014

Published on: November 12, 2014

RETHINKING LOW DOWN PAYMENTS. Conventional wisdom holds that low-down payment mortgages approved for borrowers who really couldn’t afford home ownership costs, and who ultimately defaulted on their loans, contributed much to the implosion of the financial markets. But the Urban Institute compared default rates on loans with down payments of 3-5 percent and 5-10 percent, and found that there wasn’t much difference between them. Credit history is a far more accurate indicator of a borrower’s ability to repay, the study concluded. The study comes as Fannie Mae and Freddie Mac are considering again accepting loans with down payments of less than 5 percent. “This analysis tells us that there is likely to be minimal impact on default rates as low-down payment GSE lending gravitates towards borrowers with otherwise strong credit profiles,” the study concluded.

DON’T BLAME MILLENIALS. Housing industry analysts bemoaning declining home ownership rates have blamed millenials (20- and 30-somethings) for turning their backs on the American Dream. But a recent article in The Atlantic contends that it is actually middle-aged consumers who were hit hardest by foreclosures during the downturn, who represent “the true lost generation of homeowners.” In fact, the article notes, homeownership rates over the last two decades have declined less for millenials than for any other age group under 64. “Today’s historically low homeownership rate isn’t the result of the cheapest generation abandoning the housing market. It’s their older cousins, Generation-X, who are really running for the exits.”

NO REFI BOOM. Declining mortgage rates have encouraged more homeowners to refinance their mortgages, but we aren’t likely to see the kind of refi boom past rate declines have triggered, industry analysts agree. Over the past 15 years, borrowers have saved nearly $70 billion in interest payments by refinancing their mortgages, according to a recent report by Freddie Mac. And many borrowers could still benefit from lower rates lower. But tighter underwriting requirements have made it difficult for many of them to qualify for new loans. And despite strong gains in appreciation rates, an estimated 8 million borrowers are still struggling with negative equity. As a result, Freddie’s chief economist, Frank Nothaft, notes in this analysis, while lenders may see more refinance applications this year, “the refinance boom is over.”

A CRITICAL MISMATCH. Employers added 214,000 workers to their payrolls in October, exceeding the 200,000 benchmark for the ninth consecutive month. Revisions to the September report added 31,000 to that month’s total, boosting average monthly gains for the past six months to 230,000. The unemployment rate fell to 5.8 percent, continuing an improving trend that has brought the rate down from 7.2 percent two years ago. But the employment gains haven’t been matched on the income side; average wages grew by only 2 percent in October, barely beating the inflation rate and explaining why a falling unemployment rate hasn’t done much to lift consumers’ spirits. “We are adding jobs, but it is still a wageless recovery,” Elise Gould, an economist with the Economic Policy Institute, told the New York Times “The economy may be growing,” she added, “but not enough for workers to feel the effects in their paychecks.”

DISPARATE IMPACT? Although the Supreme Court may ultimately reject “disparate impact” as a means of combating discriminatory lending and housing practices, federal regulators have been using the theory aggressively to enforce fair lending requirements. But it seems that federal lending regulations implemented in the wake of the financial meltdown may themselves by having a disparate impact on minorities. The Federal Reserve’s annual report on mortgage lending trends says 70 percent of new home purchase mortgages went to non-Hispanic whites last year, up from 60 percent in 2004. African-American borrowers received only 4.8 percent of the loans (down 2 percentage points), while Hispanic Whites saw their share decline by 1 percentage point to 7.3 percent. The report, based on Home Mortgage Disclosure Act (HMDA) statistics reported by lenders, found that minorities were also significantly more likely than whites to receive high-priced (subprime) mortgages. Lenders cited poor credit histories as the most common reason for rejecting minority loan applications.

WRONG ASSUMPTIONS. Many prospective homebuyers assume they won’t be able to obtain a home mortgage and so aren’t even attempting to purchase homes as a result. Although nearly one-third of the consumers responding to a Loan Depot survey said they would like to buy a home in the next two years, more than half said they think it is more difficult to qualify for a mortgage today and have decided not to try for that reason. A Fannie Mae survey found similar evidence that young renters (between the ages of 18 and 34) are delaying home purchase decisions because they don’t think they can amass the down payment they need or qualify for a loan. Our results suggest that many young renters may continue to rent longer due to insufficient financial capability and/or preparation, despite the majority’s preference for owning,” Sarah Shahdad, strategic planning analyst at Fannie Mae. And the report’s author, noted.


LIMITS OF RESONSIBILITY.   Community associations have some responsibility to protect owners from harm. But just what those responsibilities entail and how far they extend are often subject to interpretation and dispute. The courts in Massachusetts and other jurisdictions have been gradually expanding those boundaries, requiring associations to do more to avoid negligence claims. But a Mississippi appeals court drew a narrower line in Dedeaux v. Lake Owners Association, Inc.

The plaintiffs – Marilyn Dedeaux and Russell Guymon – both residents of the community, were injured when a speeding boat slammed into the boat in which they were sitting, on a lake owned by the association. They sued the association, claiming it had failed in its duty to ensure the safety of the waterway. A trial court granted summary judgment to the association, finding no evidence that the board should have anticipated the accident and taken steps to prevent it. A Mississippi Appeals Court agreed.

The plaintiffs cited a boating accident that had occurred six years before as evidence that the board should have recognized the danger and taken steps to prevent it. But the court found that single incident “removed in time,” insufficient to support the claim that the accident was “reasonably foreseeable.” The plaintiffs also argued that the board’s consideration and rejection of a plan to hire a “lake marshal” (primarily to regulate fishing on the lake) demonstrated knowledge of potential dangers. The board rejected that plan, the plaintiffs pointed out, specifically to avoid creating the impression that the marshals were ensuring the safety of swimmers and boaters.

The Appeals Court found that argument lacking, too. Prior court decisions have held that merchants “are not required to carry out the duties of the police force,” the court noted, “and neither are homeowner associations.” And because property owners aren’t required to insure the safety of ‘invitees,’ the court added, “we cannot fault [the association] for wanting to avoid the possible appearance it had assumed a duty that Mississippi law has never imposed.”

Imposing liability on the association “without any notice of an unreasonably dangerous atmosphere on the lake,” the court concluded, would have the effect of making the association strictly liable for the negligence of the boater who caused the accident. “[The plaintiffs] have failed to establish as a matter of law that [the association] owed a duty to protect them…and without a duty owed, there can be no negligence.”


“These numbers are a wake-up call that the housing market is a major driver of the economy and it can’t be a vibrant market when so many new households are excluded from it.” — Jim Carr, a former Fannie Mae executive, now a scholar at the Opportunity Agenda, commenting on recent statistics indicating that minorities continue to lag whites significantly in home mortgage approvals.