LEGAL/LEGISLATIVE UPDATE – FEBRUARY 14, 2019
PATIENCE IS A VIRTUE – AND A FED POLICY
“Patience” was the byword for the Federal Reserve (Fed) in January, driving a unanimous decision by the policy-making Federal Open Market Committee (FOMC) to stand pat on interest rates for now, and producing a decidedly less hawkish tone in the statement released after the committee’s meeting.“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the statement said.Although not surprising in light of recent developments – the 34-day government shutdown and stock market turbulence among them – the Fed’s decision did mark a notable shift from concern about an overheating economy, to concern about risks to economic growth.The Federal Reserve hiked its benchmark interest rate four times in 2018 and, until recently, had been signaling the likelihood of as many as three and possibly four rate increases this year. Analysts are now predicting no more than two hikes in 2019 and some think the Fed may not boost rates at all.Confirming a more cautious approach to monetary policy, Fed Chairman Jerome Powell told reporters after the FOMC meeting: “We are now facing a somewhat contradictory picture of generally strong U.S. macroeconomic performance alongside growing evidence of cross-currents. Common sense risk management suggests patiently waiting greater clarity.”
WARNING SIGNS
Concerns about the economy have been mounting since December, when the Fed approved its fourth rate increase of 2018:
- The rate of economic growth slowed at year-end, falling below the 3 percent pace maintained through last September.
- The government shutdown is expected to shave an estimated $3 billion – between 0.3 percent and 0.4 percent – off the first quarter growth rate, already expected to slip below 2 percent.
- The ongoing trade war (which has produced the steepest decline in China’s economic growth rate in nearly three decades) has led many American businesses to curtail expansion and investment plans – further dampening the growth outlook for this year.
- Consumer spending – the primary engine driving U.S. economic growth - remained solid for most of last year, and employers continue to expand their payrolls (adding 304,000 workers in December). But growth in retail sales has slowed and consumer confidence has been declining since November. The University of Michigan’s confidence survey fell to its slowest level in nearly two years in January.
“There are good reasons to expect growth to be slower in 2019 than 2018, Jim O’Sullivan, chief U.S. economist at High Frequency Economics, told the Wall Street Journal. “The question is how much.”Most analysts still see enough underlying strength in the economy to sustain the expansion, which is close to becoming the longest on record. Diane Swonk, chief economist at Grant Thornton, is in that camp. “The economy is slowing but not enough to derail the expansion,” she told the Journal. But she is not sanguine about the outlook. “The bad news is the straws on the camel’s back are really piling up,” she noted, “and the back’s beginning to bend.”
FEELING BETTER
Although home sales have been disappointing, to say the least, since the middle of last year, Lawrence Yun, the NAR’s chief economist, thinks conditions will improve this year. That is primarily because, with the Fed’s recent shift in policy direction (see item above), the interest rate outlooks is now more favorable. Interest rates, which declined unexpectedly at year-end, are now likely to remain low and possibly fall further, Yun predicts. “Rather than four rate hikes, there will likely be only one increase or even no increase at all,” he told reporters recently. “This has already spurred a noticeable fall in the 30-year, fixed-rate for mortgages,” he noted. “As a result, the forecast for home transactions has greatly improved.”The prospect of lower rates has also made home builders more optimistic. Builder confidence levels, measured by a National Association of Home Builders index, increased by 2 points in January, after steep declines in November and December had left the index at its lowest level in more than two years.
Whether that more positive mood is sustainable is open to question, however. New home sales for November rebounded from an October decline, but still fell 7 percent below the year-ago pace. Separately, the Mortgage Bankers Association reported a 7 percent year-over year decline in applications for mortgages to finance new home purchases in December, following a 13 percent drop in November. And Zillow reports that builders reduced prices on about 25 percent of the new homes offered for sale last year in most of the nation’s largest housing markets.Although lower interest rates and slower appreciation rates may ease affordability pressures for some buyers, demand is emerging a potential question mark. Homebuying sentiment, measured by a monthly Fannie Mae survey, plummeted by 12 points in December, as the number of buyers who think it’s a “good time” to buy sank below the number who think it’s a good time to sell. That is “a foreboding signal,” according to a recent article in Business Insider,” which notes that this has occurred only twice in the 26 years Fannie has been asking this question. And both instances, the article notes “preceded our two most recent recessions.”
MILLENNIALS AGING IN PLACE
Media reports have noted, with varying degrees of concern, the increasing number of young adults (25-34) still living with their parents – 22 percent were in that category in 2017, compared with 12 percent in 2000. But many of these articles have also suggested that returning to the nest may be, not just a sign of delayed adulthood (or at least, not only that), but also a wise financial strategy, enabling cash-strapped millennials to save the money they need for a down payment on a home of their own.
A recent study by the Urban Institute suggests otherwise. The study found that young adults living with their parents did not necessarily amass the nest egg that would enable them to establish households of their own. They were, in fact, less likely to be homeowners 10 years later than young people who had left the parental nest earlier. And those who did ultimately buy homes did not buy more expensive homes or make larger down payments, nor did they realize as large a return on their home ownership investment as contemporaries who struck out on their own sooner.“Living with parents does not better position young adults for homeownership, a critical source of future wealth,” the study concludes, “and [it] may have negative long-term consequences for independent household formation.”
HOUSING FINANCE REFORM – ONE MORE TIME
It appears that Congress is gearing up to take another swing at housing finance reform. Sen. Mike Crapo (R – ID), chair of the Senate Banking Committee, who has sponsored a number of unsuccessful housing reform bills in the past , has released an outline that he thinks a new reform measure should follow. The key components:
- Private companies would guarantee principal and interest payments on eligible mortgages that would be securitized through a platform operated by Ginnie Mae. The percentage of outstanding mortgages they could guarantee within a specified time frame would be capped.
- The Federal Housing Finance Agency – the primary overseer of Fannie Mae and Freddie Mac – would be restructured to replace the single director with a bipartisan board of directors.
- A new “Market Access Fund” would replace affordable housing goals and ‘duty to serve’ requirements as a source of support for affordable housing initiatives in under-served and low-income communities. The fund would be financed by assessments paid by private loan guarantors.
“We must expeditiously fix our flawed housing finance system,” Crapo said in a press statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed rate mortgage, increase competition among mortgage guarantors, and promote access to affordable housing,” he added.
Crapo’s proposal comes several weeks after Joseph Otting, acting director of the FHFA, indicated that agency would be introducing a plan to restructure Fannie Mae and Freddie Mac and end the conservatorship under which they have been operating for the past 10 years. The White House also announced recently that it planned to unveil a housing finance reform plan “shortly,” but there has been no follow-up on either statement.
IN CASE YOU MISSED THIS
Higher-income earners are increasingly opting to rent their homes instead of buying them, reflecting changing attitudes some analysts attribute to the lingering impact of the Great Recession.It wasn’t abuses of the banking system that triggered the Great Recession but structural flaws in the banking system itself that caused the financial meltdown, a “reassessment” of the financial crisis contends. According to this analysis, “”The system] failed colossally. It was bailed out, rebuilt to original specs, and is set to die another day.”Fannie Mae is doubling the cap on “small” multifamily mortgages as part of an effort to increase the supply of affordable rental housing.Profits realized on home sales reached a 12-year high last year, even as the market slowed over the course of the year.Drones are going mainstream as more businesses discover the efficiencies and cost savings they can provide. “Drone users are now realizing a deep return on their investments from the aircraft's ability to help save hours of time and labor,” Business Insider reports.
LEGAL BRIEF
EXCEED THE LIMITS ─ ERASE THE LIEN
Superlien statutes in Massachusetts and other states provide essential protections to condominium associations; but they also require careful attention to procedural requirements. Variances from the statutory details can trigger legal challenges and threaten enforceability of the lien – as in this District of Columbia case (4700 Conn 305 Trust v. Capital One, N.A.).When an owner fell behind on common area payments, the Parker House Condominium Association (4700 Conn 305 Trust) filed a lien covering 11 months of unpaid assessment and initiated a foreclosure action to enforce the lien. The foreclosure notice specified that the unit would be sold subject to the outstanding mortgage of $308,000 held by Capital One. The association purchased the unit at foreclosure for $11,000 – reflecting the total of unpaid assessments ($6,108) plus legal fees. When Capital One subsequently sought to foreclose through a judicial foreclosure, the association countered that its foreclosure, under the state superlien statute, had extinguished the mortgage.The trial court granted summary judgment in favor of the association on the superlien priority but ruled that it was bound by the terms of the foreclosure notice, making the foreclosure sale subject to the outstanding mortgage. The association appealed that finding.The Appeals Court considered two questions: Whether the association had invalidated its superlien rights entirely by filing a lien for 11 months when the statute protects only six months of delinquent fees; and whether the association had purchased the unit subject to Capital One’s mortgage, as the foreclosure notice had specified.The superlien question focused on the statutory language, which said the lien would take priority over a first mortgage “to the extent of the common expense assessments . . . which would have become due in the absence of acceleration during the [six] months immediately preceding institution of an action to enforce the lien.” Capital One had interpreted this to mean that because the statute clearly limited superpriority lien protection to six months of assessments, the 11-month lien the association had filed did not qualify. (Note: Although this is a D.C. case, it echoes a decision by the New Hampshire Supreme Court holding that filing a lien covering more than the six months allowed under that state’s superlien statute would totally invalidate the superlien, barring the collection of any portion of the amount owed.)
Not What the Law SaysIn this case, the Appeals Court disagreed with Capital One’s interpretation of the D.C. superlien statute. “That reading, in our view, engrafts a limitation on [the statute] that its language will not bear.” Although the statue limits the superlien to six months of delinquent payments, the court agreed, “it implies nothing about retention or loss of that priority if the foreclosure seeks to enforce the lien for a greater amount of assessments owed.”The correct reading of the statute, which the court applied to an earlier decision, “effectively splits condominium-assessment liens into two liens of differing priority,” one superior to the first mortgage, and the other in line behind it. The statute dictates how the proceeds of a foreclosure sale will be distributed, the court said, “but reflects no intent to nullify the super-priority lien just because both liens are enforced in the same sale.”The superlien statute was designed to give condo associations “maximum flexibility” to collect delinquent payments, the court continued. “That flexibility would be hamstrung if an association were put to the choice of foreclosing to recoup more than six months of assessments (with attendant loss of its super-priority lien) or limiting the forced sale to the most recent six-months of arrearage.” Under Capital One’s interpretation of the statute, the court said, the accidental inclusion of more than six months of arrearages would erase its superpriority position. Efforts to recover late charges and reasonable fees, which the statute specifically allows, would have the same effect – reducing the superpriority lien to junior status behind the first mortgage. The net effect, the court said, quoting from an earlier decision, “would effectively constitute a waiver by the association of its superpriority lien,” which the statute does not permit.Reading BackwardThe court found even less persuasive Capital One’s argument that a 2017 amendment to the statute should apply to this sale ,even though it occurred in 2013. The amendment requires that foreclosure sales “expressly state” whether they target only the six-month priority lien or include additional arrearages that have junior status. That amendment, the bank contended, “clearly indicates” the legislature’s understanding that the statute “always gave super priority status only to [foreclosed liens] that did not exceed the six-month period of unpaid assessments.”The court found two flaws in that reasoning. First, it noted, “ordinarily, the views of a subsequent legislature form a hazardous basis for inferring the intent of an earlier one.” In this case, the court said, “[we] do not take the 2017 amendment…as an invitation to revise our understanding of [the superlien statute].” Although the amendment raises some questions about the legislature’s view of whether junior liens can be preserved when enforcing a superlien, the court acknowledged “it falls well short of demonstrating that under the statute as applied to this 2013 sale, an assessment lien forfeits its super-priority merely because additional arrearages (or fees and costs) are sought in the foreclosure.”
The bottom line on this issue, the court concluded: Enforcement of the association’s superlien extinguished the bank’s first mortgage.But the foreclosure itself raised equitable questions for two reasons, the court said: Because the sale price was so much lower than both the outstanding mortgage and the apparent value of the unit; and because the sale, by the terms of the foreclosure notice “was erroneously conditioned” on the assumption of the first mortgage. Those questions, the court concluded, should be addressed by the trial court, to which the case was remanded for that purpose.
WORTH QUOTING
“Respect for government, respect for the Supreme Court, respect for the president, even respect for the Federal Reserve. It’s all gone. and it’s really bad. At least the military still has all the respect. But I don’t know: How can you run a democracy when nobody believes in the leadership of the country?” ─ Former Federal Reserve Chairman Paul Volcker, in an interview with the New York Times.