Legal/Legislative Update – October 29, 2014

Published on: October 29, 2014

fha_logoFHA RISING. The Federal Housing Administration (FHA) has almost succeeded in rebuilding its insurance fund, which has been stuck for several years below its federally-mandated capital levels. A recent report by Moody’s analytics concludes that the fund will have “close to” the 2 percent reserve cushion it is required to maintain. Huge losses, attributable primarily to the FHA-insured reverse mortgage (HECM) program, forced the agency to accept federal funds last year (a $1.7 million infusion) for the first time in its history. “[But] the FHA’s financial situation is improving rapidly, and it should be able to significantly reduce its insurance premiums in the next year or two,” Mark Zandi, chief economist at Moody’s and the author of the report, said.

While the FHA’s financial condition has been improving steadily, its share of the mortgage market has been shrinking, falling to about 18 percent in September, based on a moving average calculated by Campbell/Inside Mortgage Finance. At the height of the mortgage crisis, the agency provided a lifeline for the struggling housing market, insuring nearly 30 percent of mortgage originations. But efforts to rebuild the agency’s depleted insurance fund, including steep increases in premium rates, have made FHA loans more expensive and less competitive with loans insured by private mortgage insurance companies. Industry trade groups have been urging the agency to reduce its fees but FHA officials have thus far resisted that pressure.

AT THE HIGH END. Soaring vacation sales confirm what home sales statistics suggest: Upper income buyers are providing most of the momentum for the housing recovery. The National Association of Realtors (NAR) reports that vacation home sales increased almost 30 percent last year, representing 13 percent of total sales ― the highest percentage for this segment since 2006. Sales to investors, which had been rising steadily, moved in the opposite direction, falling from 24 percent in 2012 to 20 percent last year. Those statistics come from the NAR’s annual Investment and Vacation Home Buyer Survey. NAR economists say an improving economy and a strengthening job market have encouraged more consumers to purchase vacation homes, while rising prices have driven investors out of the single-family market. Investors who planned to “flip” the properties they purchased have clearly abandoned that strategy, or have been forced to do so: Only 4.6 percent of all single family homes sold in the second quarter were flipped (sold within 12 months of purchase), according to RealtyTrac ─ down from 5.9 percent in the first quarter and down from 6.2 percent in the second quarter of last year.

TARGETING DISCRIMINATION. The Department of Housing and Urban Development (HUD) is intensifying its efforts to combat housing discrimination. The agency has awarded nearly $40 million to more than 100 fair housing and non-profit organizations in 43 states to fund their investigations, testing and education programs. “Ending housing discrimination is at the core of HUD’s mission and it takes dedicated people on the ground to address it,” HUD Secretary Julián Castro said in a press statement. “These funds support community-based organizations that do great work every day on the front lines in the fight for fairness and equality in our nation’s housing market.” Underscoring HUD’s focus on discrimination, the agency has initiated several enforcement actions, including a $5 million settlement agreement with Wells Fargo Home Mortgage resolving allegations that the lender discriminated against women who were pregnant.

WIDENING GAP. The number of Americans working now exceeds pre-recession levels, but income growth has remained stagnant overall – restraining consumer spending, weakening the housing recovery, and widening the income gap between the most and least affluent Americans according to a recent Financial Times report. Trulia compared the 10th and 90th most expensive housing markets and found the income disparity between them at its widest point since 1969. Another report by economists at JPMorgan Chase suggests that conditions might be improving. According to this report, middle income jobs – in such areas as manufacturing, transportation and construction – are beginning to increase and that trend should boost wage levels. But that won’t happen quickly, Mike Evangalista, a policy analyst for the National Employment Law Project, cautions. The loss of middle class jobs has been severe, he told CNN, and it will take time to recover that lost employment ground. “We’ve got a long way to go,” he noted.

BAD MOON RISING. Housing analyst Joshua Pollard sees bad times – very bad times – ahead for the housing market. He’s predicting that home values will decline by 15 percent over the next three years, as investors, who have pushed prices up during the recovery, abandon the market, leaving homes significantly overvalued and beyond reach for many prospective buyers. “The shift from a good market to a bad market occurs quickly, exaggerated by the circular currents of confidence from consumers, investors and lenders in unison,” Pollard, a former Goldman Sachs executive, writes in a report he sent to the White House. “When unnatural levels of demand or supply impact the market, prices are pushed in lockstep.” The “devaluation” of home prices he is predicting “will expose a major financial imbalance that could lower an entire generation’s esteem for the American dream,” Pollard warns.

WRONG ASSUMPTIONS. Here’s another explanation for the still weaker than expected housing market: An inordinate number of the prospective buyers who should be fueling demand assume they need a higher down payment than many lenders actually require. That conclusion comes from a survey by Zelman & Associates, in which nearly 40 percent of the respondents said the minimum down payment required is 15 percent; in fact, nearly 20 percent of borrowers obtaining conventional loans this year made down payments of less than 10 percent, according to Freddie Mac. The survey results “are a wake-up call to the housing industry that we have more to do to let the next generation know they can get a conforming, conventional mortgage with a down payment of as little as 5 percent (sometimes with as little as 3 percent coming out of their own pockets),” Chris Boyle, the head of the Single-Family Sales & Relationship Management with Freddie Mac., noted in a commentary on the survey.


FAIR HOUSING REDO. A few months ago, we reported that a Tennessee homeowners association had prevailed in a dispute with owners seeking to add a sun room for their disabled children. (Hollis v. Chestnut Bend Homeowners Association). That victory has turned out to be short-lived.

A federal appeals court overturned the District Court decision granting summary judgment to the association, finding that the lower court did not properly assess the merits of the homeowners’ fair housing accommodation request.

To recap: The Hollises wanted to add a sun room to their home to provide play space for their two disabled children. After rejecting several design proposals, for lack of sufficient details and failure to meet the community’s aesthetic standards, the board of the Chestnut Bend Homeowners Association finally approved the Hollises’ design plans for the sun room, contingent on their willingness to substitute a shingled roof for the metal roof they planned. The Hollises objected to the change and sued the board. While the suit was pending, having become frustrated with the prolonged wrangling, the Hollises sold their home and moved to another community. The damages they sought included $300,000 as compensation for (in their view) being forced to move.

Granting summary judgment to the community association, the District Court ruled that the Hollises had presented no evidence that the board intended to discriminate against them by rejecting their request for a fair housing accommodation. Applying the “McDonnell Douglas” standard used in employment discrimination cases (referring to a Supreme Court decision establishing it), the court found that “there was no evidence [the board] acted with ill will or malevolent intent” in refusing to approve the Hollises’ sun roof application. The Hollises “failed to produce anything ─ not even a scintilla of evidence — to suggest that the [board’s] aesthetic reasons for rejecting [the sunroom proposal] were pretextual or unworthy of belief,” the court concluded.

But the Appeals Court found the lower court’s reasoning fundamentally flawed. Discriminatory intent, the Appeals Court said, is not a factor in a fair housing claim as it is in the employment discrimination arena. “Both precedent and logic make clear that the McDonnell Douglas test is applicable only where the defendant’s discriminatory intent constitutes an element of liability,” the court noted, “and an FHA plaintiff need not prove discriminatory intent to establish a viable reasonable-modification claim….The crux of a reasonable accommodation reasonable modification claim,” the court added, “will typically be the question of reasonableness….Intent is irrelevant in reasonable modification cases,” the court concluded, and the District Court erred by applying that standard here. The Appeals Court remanded the case, ordering the District Court to review its conclusion that there was no issue of material fact requiring a trial on the merits of the Hollises’ fair housing claim.


‘‘The mortgage industry is basically ticked off.’’ — Guy Cecala, publisher of the trade journal Inside Mortgage Finance, explaining why lenders have been reluctant to approve mortgages to low- and moderate-income first-time buyers.