Legal/Legislative Update – October 1, 2015

Published on: September 30, 2015

CFPB MORTGAGE RULES: THE DEBATE CONTINUES

cfpb-consumer-financial-protection-bureauThe statistics indicate that the Consumer Financial Protection Bureau’s (CFPB’s) new mortgage rules haven’t had the devastating impact that industry executives had predicted. But critics say the statistics don’t paint an entirely accurate or complete picture of what is happening in the market. And cynics point out that it is still too early to gauge the impact on residential real estate closings, which almost everyone agrees will take longer, and possibly a lot longer, after the new rules kick in this month.

The statistics come from the Home Mortgage Disclosure Act (HMDA) report prepared annually by the Federal Reserve, based on data mortgage lenders are required to compile. The statistics for 2014 do not show the decline in lending to minorities that critics warned would be one result of the stricter debt-to-income ratios required to qualify for the “safe harbor” assumption that lenders have verified the ability of borrowers to repay the loans they receive. In fact, the HMDA data indicate that the share of loans approved for minority borrowers actually increased in 2014, after declining for several years. Although the number of financial institutions offering mortgage loans declined, the report notes, the decline matched a consolidation trend that has been ongoing for several years.

Consumer advocates say the report confirms their view that dire warnings about the mortgage rules were unfounded. The CFPB shares that view. Speaking recently at a real estate industry conference, CFPB Director Richard Cordray noted, “[Critics] offered dire predictions that our rules would lead to the demise of community banks and credit unions, which would have to withdraw from the mortgage market altogether. We never believed any of this unsupported hyperbole. And it turns out we were right.”

But industry executives say the HMDA statistics are a poor yardstick for gauging how the rules are affecting the mortgage market – a shortcoming the HMDA report itself acknowledges.

“There are significant challenges in determining the extent to which the new rules have influenced the mortgage market, and the results here do not necessarily rule out significant effects or the possibility that effects may arise in the future,” the report said.

The impact on lending may not have been dramatic, but it has been significant, Bob Davis, executive vice president of the American Bankers Association, told National Mortgage News. Lenders report anecdotally that they have reduced the variety of loans they offer because of the rules, Davis said, and while volume may not have declined, he acknowledged, it has not kept pace with borrower demand.

“The fact that loan demand should have resulted in more rapid growth — of purchased money mortgages in particular — than occurred” indicates that the rules have had a measurable impact on the availability of credit, he added.

REGAINING GROUND

arrow-156792_1280Rising home prices are lifting more properties into positive equity territory. More than 90 percent of homeowners with outstanding mortgages had equity in their homes in the second quarter, as 759,000 properties moved from negative to positive equity positions, according to CoreLogic. Separately, the Urban Institute reports that equity gains have increased the total value of the residential housing market to $22.7 trillion,

“For much of the country, the negative equity epidemic is lifting,” Anand Nallathambi, CoreLogic’s CEO, said in a press statement. The 4.7 percent increase in home prices the company is predicting for next year would put another 800,000 homes in the positive equity column.

Despite these gains, 4.4 million homeowners are still struggling with homes valued at less than the outstanding mortgage on them. Most of the equity gains have been concentrated at the upper end of the price range; 95 percent of homes valued at more than $200,000 have equity compared with 87 percent of those valued at less than $200,000. And many of the homes with equity don’t have much of it. Approximately 9 million properties (17.87 percent of those with mortgages) have equity of less than 20 percent and 1.1 million (2.3 percent) are below 5 percent.

“Under-equitied borrowers may have a more difficult time refinancing their existing homes or obtaining financing to buy new homes,” the CoreLogic report notes. “[They] also are more at risk of moving to negative equity if home prices fall.”

CONDITIONS FAVOR RENTING OVER BUYING

The ‘buy-vs.-rent’ equation, which has see-sawed back and forth between both ends of the spectrum, has titled back toward renting as rising home prices create affordability pressures for many buyers.

for-rent-148891_1280The Beracha, Hardin & Johnson quarterly index produced by Florida Atlantic University (FAU) and Florida International University, compares the long term impact on wealth accumulation resulting from purchasing or renting a home. That analysis found market conditions at the end of the first quarter either trending toward or “strictly favoring” renting nationally and in 23 major cities.

Soaring home prices put some cities (Dallas, Denver and Houston among them) “clearly in rent territory,” according to this report. Chicago, Cincinnati, Cleveland and Detroit also remain “in strong buy territory,” but seven other cities are near the “indifference point,” with conditions favoring neither renting nor buying.

Ken Johnson, a professor at FAU’s College of Business and one of the index authors, says buyers should pay close attention to these trends. “The deals are out of the marketplace” in most areas, he cautions, making it “essentially a tossup between rent and ownership as to which will, on average, provide greater wealth accumulation.”

The current tilt in favor of renting over buying evident in many markets isn’t a temporary response to current conditions, according to the Urban Institute; it reflects the conclusion of many Americans that renting is “a better fit” for their families than owning. That thinking will continue to boost demand for rental housing, according to a recent Institute report, which predicts, “Over the next 15 years, new renters will outnumber new homeowners.”

CONFIDENCE GAUGES DIFFER

Consumers are feeling increasingly optimistic according to one survey, and increasingly discouraged, according to another. The University of Michigan’s September survey was downbeat, sending that index down to 87.2 compared with 91.9 in August. Respondents expressed concern that the weakening Chinese and European economies will affect their own employment and income prospects.

Consumers responding to the Conference Board survey were feeling better about the outlook – almost two points better in September (103.0) than in August (101.5), and considerably better than economists surveyed by the Wall Street Journal, who had predicted a reading closer to 97.0.

September’s overall reading is the second highest since the recession ended, while the he present-situation component of the index reached an eight-year high, despite continuing volatility in the financial markets and steady declines in equity values.

Sprinkling a bit of cold water on the results, Lynn Franco, the Conference Board’s director of economic indicators, noted that “while consumers view current economic conditions more favorably, they do not foresee growth accelerating in the months ahead.”

They also appear to be somewhat ambivalent about the job market. Although 25.1 percent of the respondents agreed that jobs are now “plentiful,” compared with 22.1 percent who held that view I August, 24.3 percent said jobs are “hard to get,” compared with 21.7 percent a month ago. But workers between the ages of 35 and 54, who constitute the largest segment of the labor pool, are among the most optimistic.

The biggest threats to consumer confidence in the near-term, many analysts believe, are more political than economic, the threat of a budget impasse and another government shut-down primary among them. “Even if there is no shutdown, political bickering and finger-pointing are downers for consumer confidence,” Chris Christopher, economist for HIS Global Insight, told the Wall Street Journal.

INCLUSIONARY HOUSING: HELPING WITHOUT HURTING

Inclusionary housing policies, if well-designed and targeted appropriately, can reduce the rapid “gentrification” of neighborhoods, without discouraging development and depressing home values, a study by the Lincoln Institute of Land Policy contends. ”

The study, Inclusionary Housing: Creating and Maintaining Equitable Communities, describes the strategies communities have used successfully to avoid the negative impacts inclusionary housing opponents cite and to combat the legal and political challenges they often mount.

group-418449_1280“More than 500 communities have used inclusionary housing policies to help maintain the vibrancy and diversity of neighborhoods in transition, and we’ve learned much along the way,” Rick Jacobus, the study’s author, notes. “Research shows that if programs are thoughtfully designed and implemented, they can be a valuable tool at a time when affordable housing is desperately needed.”

Inclusionary zoning policies make the creation of affordable housing, or the payment of a specified amount to be used for that purpose, a condition for approving market-rate developments. Many of the concerns cited by critics are unfounded, according to the report, which notes that “rapid construction of market rate housing actually fuels the need for more affordable housing by changing the character of neighborhoods.”

Among other key findings:

  • The most successful policies build public support and forge close working relationships with private developers.
  • Offering flexibility and economic or other incentives to developers can avoid negative impacts, “but these tools need to be used judiciously.”
  • Follow-up to enforce affordable housing restrictions is essential “Some communities have created thousands of affordable homes, only to see them disappear after subsequent sales,” the report notes.

“Hot-market cities, skyrocketing housing prices push middle class and low income residents far away from well-paying jobs, reliable transportation, good schools and safe neighborhoods,” George McCarthy, president of the Lincoln Institute, notes in a press statement. “Inclusionary housing alone will not solve our housing crisis,” he acknowledges, “but it is one of the few bulwarks we have against the effects of gentrification— [provided that] we preserve the units we work so hard to create.”

IN CASE YOU MISSED THIS

Black Knight Financial Services has developed a new service “to help protect mortgage services and investors from potential losses resulting from home owner association super liens.”

An improving economy and a strengthening labor market should be encouraging more millenials who have been living with their parents to form their own households. But soaring rents and skimpy housing inventories are preventing what should be a predictable (and presumably a desirable) move.

Despite stomach-churning volatility in the financial markets, existing home sales in at least half the major markets are on track to record their best year since 2007.

When it comes to lending discrimination, the Consumer Financial Protection Board (CFPB) believes, it is better to over-estimate than under-estimate it.

Corporate executives will increasingly face personal liability for corporate crimes committed on their watch under a new policy announced recently by the Department of Justice (DOJ). The policy, unveiled in a DOJ memo, responds to criticism from lawmakers, consumer advocates and others about the failure to hold individuals accountable for violations of regulations and laws that contributed to the financial meltdown.

LEGAL BRIEFS

DATA SECURITY EXCUSES DON’T FLY

The Federal Trade Commission (FTC) doesn’t regulate condo associations, but a recent federal appeals court decision contains a warning and potentially useful guidance on the obligation associations share with corporations of all kinds to safeguard the personal information they collect.

In this case (Federal Trade Commission v. Wyndham Worldwide Corporation), the U.S. Court of Appeals for the Third Circuit ruled unanimously that the FTC could sue the hotel corporation for failing to do enough to prevent multiple computer breaches resulting in the theft of customers’ credit card numbers and other sensitive data. Hackers breached the hotel chain’s computer system on three separate occasions between 2008 and 2010, stealing the credit and debit card information of more than 600,000 hotel guests and running up fraudulent charges totaling more than $10.6 million dollars.

keyboard-895556_1280The FTC claimed that Wyndham’s failure to implement adequate data security measures constituted an “unfair and deceptive act or practice” under the FTC Act, and that the company’s published privacy policies were misleading, because they promised a level of security the hotel chain did not provide.

Wyndham argued that the FTC was “overreaching” and that its suit was not justified, because the agency has not published clear cyber-security standards against which Wyndham’s policies could be measured. A District Court rejected Wyndham’s motion to dismiss the suit on those grounds and the Third Circuit upheld that decision, concluding: “Taken together, [Wyndham’s unfair security practices] unreasonably and unnecessarily exposed consumers’ personal data to unauthorized access and theft.”

The litany of measures the court said Wyndham failed to implement may suggest the benchmarks against which other courts may measure the security precautions condo associations and others adopt or fail to adopt. Specifically, the court found that the company failed to encrypt information, used “easily guessed” passwords, failed to use “readily available security measures,” including firewalls, to block unauthorized access, and failed to follow “proper incident response procedures” when breaches occurred.

The courts faulted Wyndham’s security measures not just because they were inadequate, but because they fell short of what the company’s posted privacy policy claimed. That policy stated in part: “We safeguard our Customers’ personally identifiable information by using industry standard practices, [including] the use of 128-bit encryption… We take commercially reasonable efforts to create and maintain “fire walls” and other appropriate safeguards. . . .

The reality was very different, according to the appeals court, which noted: “The [FTC’s] complaint does not allege that Wyndham used weak firewalls, IP address restrictions, encryption software, and passwords. Rather, it alleges that Wyndham failed to use any firewall at critical network points, did not restrict specific IP addresses at all, did not use any encryption for certain customer files, and did not require some users to change their default or factory-setting passwords at all.”

The hotel chain mounted several arguments in its defense, primary among them: That its privacy policies did not meet the definition of “unfair” (the basis of the FTC’s suit) because they were not ‘unequitable’ nor marked by injustice, partiality or deception.”

The appeals court disagreed, noting that “a company does not act equitably when it publishes a privacy policy to attract customers who are concerned about data privacy, fails to make good on that promise by investing inadequate resources in cybersecurity, exposes its unsuspecting customers to substantial financial injury, and retains the profits of their business.”

The court also gave short shrift to the company’s contention that it had been victimized by the hackers and should not be punished for their crime. And it rejected as “reduction ad absurdum’ the argument that the FTC’s interpretation of the statute gave the agency virtually unfettered authority to regulate virtually every aspect of a company’s business, allowing it to sue supermarkets “that are sloppy about sweeping up banana peels.” That suggestion drew an acerbic reply from the court, which noted: “Were Wyndham a supermarket, leaving so many banana peels all over the place that 619,000 customers fall hardly suggests it should be immune from liability….”

Wyndham got no further with its contention that it had no way of knowing what security standards the FTC would deem “fair,” because the agency hasn’t published regulations or guidance delineating them. According to the court, the key question was not whether Wyndham had notice of how the FTC was interpreting the statute, but whether the company could reasonably be expected to understand what the statute itself required.

The company might have been able to claim some level of uncertainty about the security measures that were required before the first hacking incident, the court suggested, but not after the second and third. “At least after the second attack, it should have been painfully clear to Wyndham that a court could find its conduct failed the cost-benefit analysis.”

As noted previously, the FTC doesn’t regulate condo associations and isn’t going to sue them, as it did Wyndham, for data security lapses. But condo owners whose personal information is stolen in a security breach certainly will sue their community association. And association boards that fail to adopt reasonable data security measures are likely to find courts as unsympathetic to them as this appeals court was to Wyndham.

WORTH QUOTING

“Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective.” ─ Federal Reserve Chair Janet Yellen, insisting that a rate hike remains on the table this year, despite the decision to stand pat in October.