Legal/Legislative Update – September 3, 2015

Published on: September 3, 2015

HUD TARGETING PRIORITY LIENS

Condo industry executives concerned about the Federal Housing Finance Agency’s (FHFA’s) efforts to challenge the priority of the condominium superlien can’t be happy about the recent announcement that the Department of Housing and Urban Development (HUD) is requiring liens created by PACE (a popular energy retrofit financing program) to remain subordinate to FHA-insured loans.

hud_logoThe HUD policy statement, issued in late August, doesn’t mention the condo superlien; it simply emphasizes HUD’s concern about the need to preserve the priority status of loans insured by the FHA. But HUD’s arguments about the threat the agency perceives to be posed by priority liens created for energy loans echo those the FHFA is using in what appears to be an intensifying effort to challenge the superliens condo associations use to protect their ability to collect delinquent fees. The HUD statement notes that the agency’s policy is “being informed” by ongoing discussions with FHFA.

Like HUD, the FHFA initially targeted PACE and similar energy financing programs when announcing its objection to the priority lien, but the FHFA also mentioned condo superliens as a source of concern. Since that initial salvo, FHFA has focused almost entirely on condominiums in an attack on the superlien that has been waged primarily in Nevada, but seems likely to spread beyond that state. (See related report.)

The Mortgage Bankers Association (MBA), the National Association of Realtors, and other banking and real estate industry trade groups that have supported that agency’s attack on the condo superlien are supporting HUD’s move to bar priority status for PACE liens as well.

Speaking for the Mortgage Bankers Association, Executive Director David Stevens said HUD’s policy “supports efforts to promote renewable energy solutions for FHA insured homes, but protects the lien priority and lien rights of the first mortgage. This modification should allow some homeowners to install energy improvements in their home but not impede the rights of the first lien, something the original PACE program failed to consider.”

TIME TO GO!

The former regulator for Fannie Mae and Freddie Mac thinks it’s time – long past time – to eliminate the quasi-governmental secondary market giants that have anchored the residential mortgage market for decades.

fmflogoFannieMaeLogoIn a Wall Street Journal opinion piece, Edward Demarco notes that lawmakers have been discussing fundamental reform of the nation’s housing finance system for years and have proposed several plans for accomplishing that goal. “But nothing has happened,” Demarco says. As a result, Fannie and Freddie continue to operate in the conservatorship in which they were placed more than six years ago, and taxpayers “[continue] to guarantee repayment to investors on roughly three out of every four new mortgages today…. taxpayers shouldn’t be left holding the bag for mortgage defaults,” Marco contends. As acting director of the Federal Housing Finance Agency, he oversaw Fannie and Freddie from 2009 to 2014, infuriating some lawmakers and housing advocacy groups because of his refusal to allow the GSEs to reduce the principal balance on underwater loans to help borrowers avoid foreclosure.

Now a senior fellow at the Milken Institute’s Center for Financial Markets, Demarco suggests two changes that would make it possible to reduce and ultimately eliminate the central role Fannie and Freddie play in the mortgge market:

  • Require sufficient risk transfer in the securitization of their mortgages to ensure that taxpayers are on the hook for defaults “only in catastrophic circumstances.”
  • Expand the securitization platform the FHFA introduced for Fannie and Freddie in 2012 to allow other entities to issue comparable mortgage-backed securities. That will create a “viable secondary market” that doesn’t require the GSEs, making it possible for Congress to end the conservatorships “and replace the Fannie-Freddie model,” DeMarco suggests.

These proposals aren’t controversial, he insists, noting that both have had bipartisan support in the past. “What is needed,” Demarco says, “is leadership – if not from the White House, then from Congress.”

CONDOS LEFT OUT

The recovery in single-family housing prices, regarded by many as evidence of a strengthening market, though bemoaned by some as a precursor of another bubble, has not spread to condos. The median condominium sales price ($216,400) is still more than $15,000 below its pre-crash peak, according to the National Association of Realtors, and buyer demand for condos remains soft.

Many first-time buyers, who would ordinarily view a condo as their starter home, are having trouble amassing a down payment or qualifying for loans, while others, spooked by the housing crash, are shying away from homeownership. Tighter underwriting requirements for FHA-insured condo loans haven’t helped, industry executives say. Investors and homebuilders, responding to rising demand for apartments, are focusing on that sector, and aren’t financing or constructing many condominiums.

j0199857The Wall Street Journal reported recently that investors purchased apartment properties worth $113 billion last year – the largest volume in 15 years; and volume in the first half of this year has exceeded last year’s same period volume by almost 40 percent.

An article in a recent issue of Mortgage Servicing News underscores those trends, reporting that BlackRock is the latest in a long line of companies to begin offering loans to investors purchasing homes they intend to rent.

“The market could certainly bear to have more entrants,” Ryan McBride, chief operating officer at Colony American Finance, which is also active in this investor market, told the publication. “This is a largely untapped opportunity in a huge potential market,” he added.

But another Mortgage Servicing article suggests the emergence of a counterbalancing trend: Rising rents are pushing some renters into the housing market. The article quotes one recent Florida homebuyer whose rent had increased from $900 to $1,400 over the past five years.

“There are good reasons to rent temporarily — when you move to a new city, for example. But from an affordability perspective, rents are crazy right now,” Svenja Gudell, chief economist for Zillow, told MSN.

Anticipating that the rent vs. buy analysis will increasingly favor buying, some builders are beginning to construct new condos – but they are concentrating on units attractive to older, somewhat more affluent buyer s—as first-time buyers remain largely missing-in-action in the current market.

If condo construction activity is going to ramp up, one Chicago-area builder told the Wall Street Journal, “the millenials need to start buying [condos].

NEW LOWS POINTING UP

If you’re looking for encouraging financial news, don’t look at the stock market. In fact, it may be best not to look at the stock market under any circumstances for a while. Look instead at the foreclosure rate. Foreclosure starts nationally fell to a nearly 10-year low in July. The total of 45,381 properties on which lenders initiated foreclosure actions was 25 percent below the April, 2009 peak of 203,948 homes.

Thirty-one states rode that downward foreclosure wave, but a few states moved in the opposite direction. That list includes Massachusetts, where new foreclosures increased by 130 percent in July compared with the same month last year.

Foreclosure activity, including court actions, foreclosure sales and bank repossessions, actually increased in July – up 7 percent over the June level and up 14 percent year-over-year. But analysts see these numbers as a positive sign, indicating that lenders are moving to complete foreclosure actions, clear out their REO portfolios, and get abandoned properties in the hands of new owners.

“Properties foreclosed in the second quarter had been in the foreclosure process an average of 629 days, the longest in any quarter since we began tracking in the first quarter of 2007,” Daren Blomquist, vice president of RealtyTrac, told Real Estate Economy Watch. More than 60 percent of the loans still in the foreclosure process were originated during the housing bubble years, down from 68 percent last year and 75 percent two years ago, further evidence, Blomquist says, that the increase in bank REO activity stems from “banks flushing out old distress rather than new distress being pushed into the pipeline.”

OVER THE LIMIT

Reports that some tenants living in rent-subsidized apartments earn too much to qualify for the subsidies they are receiving have made the Department of Housing and Urban Development (HUD) more than a little uncomfortable.

A review by HUD’s inspector general found that more than 25,000 public housing tenants nationally exceed the income limits for those projects. Most are only slightly over the line, but a few examples qualified as egregious, among them, the family with an annual income of nearly $500,000 paying $1,500 a month for a New York apartment.

A HUD spokesman insisted initially that mixed-income developments have a variety of “social benefits.” But as critics fumed about the large waiting lists filled with people who need subsidized apartments now occupied by people who arguably don’t need them, agency officials backtracked from that position.

“HUD is taking additional steps to encourage housing authorities to establish policies that will reduce the number of over income families in public housing,” an agency spokesman said in a written statement.

“Encouraging” is about all HUD can do, a Washington Post article pointed out. Although the federal government funds the housing subsidies, state and local housing authorities run the public housing programs, and the statute governing the federal subsidies doesn’t require evictions if existing tenants exceed the income limits; in fact, it specifically allows them to remain as long as they don’t violate any public housing rules.

“It puts us in a pickle,” Gloria Wright, a spokesman for the Newark Housing Authority, told the Post. “So we have to work with [over-income tenants] to encourage them to buy a house, or move out to a market-rate apartment.”

HUD officials are reportedly going to ask lawmakers to consider legislation that would give the agency and public housing authorities the authority they don’t currently have to evict tenants who no longer meet income guidelines for their subsidies.

IN CASE YOU MISSED THIS

Fannie Mae has scaled back its growth forecast for the balance of this year, citing uncertainty about the international economic climate, weakness in the energy sector and continued interest rate volatility as the major concerns. But anticipating that the Fed’ will move slowly to boost interest rates, Fannie predicts that mortgage rates will also rise gradually through next year, “which should continue to help support mortgage demand.”

Stock market turmoil triggered largely by China’s meltdown, has altered the odds for a September rate hike, with most analysts are now betting that the hike won’t come until year-end or early next year. But a few are still predicting a September move.

A Pennsylvania law firm has filed four lawsuits in a federal district court in Philadelphia, alleging that web sites violate the Americans with Disabilities Act because they are not accessible to the visually-impaired. Some analysts see this as a harbinger of a national wave of similar ADA suits to come. (See related legal update.)

All may be fair in love and war, but not, necessarily, in the pursuit of discrimination claims. A New Jersey Supreme Court recently upheld the criminal indictment of a public sector employee who stole documents from her employer to provide evidence in her employment discrimination suit.

People renting single-family homes are more likely to buy homes than people renting apartments, a Freddie Mac study has found. Slightly more than half of the renters responding to this survey said they plan to buy a home in the next three years. But 53 percent of single-family renters have near-term home purchase plans compared with only 36 percent of apartment tenants.

Builder confidence in August reached its highest level since November of 2015 as July new home sales rebounded from a steep June swoon.

LEGAL BRIEFS

NO ASSISTANCE REQUIRED FOR AN ADVERSARY

Few would argue that you should provide bullets to someone you think is planning to shoot you. Applying the same logic, a Washington Court of Appeals ruled that a condo board member likely to sue the association was not entitled to obtain legal advice from the association’s attorney, nor was he entitled to attend an executive session at which the board was going to discuss the potential litigation.

condo_meetingsThe dispute in this case (Hartstene Pointe Maintenance Association v. Diehl) stemmed from the board’s approval of a policy designed to deal expeditiously with the removal of hazardous trees. Among other provisions, the policy allowed owners to comment on a planned removal and obtain a second opinion about the health of the tree if they objected to the removal.

One board member, Diehl, voted against the policy and demanded the right to appeal it. After consulting with the association’s attorney, the board concluded initially that Diehl had no right to appeal, and subsequently barred him from a meeting at which board members were to discuss the issue. Before its next meeting, the board sought a declaratory judgment, asking a court to rule on the two key issues Diehl had raised: Whether he could appeal a board decision, and whether the board acted properly in excluding him from an executive session. When the trial court sided with the board on both points, Diehl appealed – unsuccessfully, as it turned out.

On the first question – Diehl’s right to appeal — the Washington Appeals Court noted that under the association’s governing documents, only owners affected adversely by board decisions have a right to appeal them.

Diehl fared no better with his argument that as a board member, he was entitled to see communications from the association’s attorney related to his appeal demand, and entitled to attend the executive session at which the issue was to be considered. Affirming the trial court’s ruling, the Appeals Court agreed that a condo board can exclude a member from an executive session “when its majority believes that the member may be an adversary in litigation” against the association. For the same reason, the court agreed that Diehl was not entitled to receive legal advice from the association’s attorney, nor could he demand access to information about the advice the attorney had given the board.

Because Diehl was acting as “an adversarial and in his capacity as owner-member during the time at issue,” the court ruled, “he was not a Board member entitled to such information.”

WORTH QUOTING

“We have a lot of people with issues and many are coming back into the market.” ─ John Councilman, president of the Association of Mortgage Professionals, predicting surge in housing demand spurred by an influx of “boomerang buyers” who lost their homes during the downturn, but are now in a position to buy again.