LEGAL/LEGISLATIVE UPDATE – OCTOBER 19, 2018
NOT HEALTHY
Despite some recent, small gains, the inventory of available homes for sale remains sparse. The 4.3-month supply reported in October “is far from a healthy level,” the NAR’s chief economist, Lawrence Yun, observed.Inventory levels aren’t the only indicator signaling problems ahead for the housing market:
- Mortgage rates have reached an average of 4.97 percent, their highest level in seven years, approaching the 5 percent mark that some analysts view as a psychological, if not a financial, barrier for many prospective buyers.
Although national indexes continue to reflect increases (albeit smaller ones) in home prices, more sellers are reducing their asking prices for homes. A Redfin analysis found that 26.2 percent reduced their prices during a four-week period in September, up from 21.7 percent in the same period a year-ago. The percentage of homes with price declines has increased year-over-year every month since March, according to Redfin, while the number of homes selling above the listing price has declined – from 25.5 percent a year ago to 22.9 percent in September of this year. This may represent “early signs of a softening market,” Taylor Marr, Redfin’s senior economist, suggests in this report.- The “leading home price index” published by the Economic Cycle Research Institute, has dipped into negative territory for the first time in more than nine years. “The last time it was this weak … was in 2009 coming out of the last recession,” Lakshman Achuthan, a co-founder of the Institute, told CNBC. “And [this index] really did call the housing bust [in 2006]," he added. Achuthan doesn’t see evidence of a housing bust ….yet. But he is concerned, about both the economy and the housing market. In the economy, he thinks indicators are “flashing yellow…. but on the housing and home price growth, absolutely it's a red flashing light."
That bodes ill for the economy, he says, because housing can either drive economic growth or derail it through “the wealth effect”-- Homeowners feel house rich and more inclined to spend money when prices are rising and vice versa.Rising prices create “a wind at the back of the consumer and consumer confidence,” Achuthan told CNBC. Falling prices now are creating “more of a headwind going forward. It remains to be seen just ... how sharply this can fall,” he said, “but the direction we have is clear” and it is negative.
BUYING PROPERTY OR LAUNDERING MONEY?
Are bad actors using real estate transactions to disguise their money laundering activities? Senators Chris Van Hollen (D-MD) and Sheldon Whitehouse (D-RI) have asked the Government Accountability Office (GAO) to investigate that possibility. In a letter to the governmental watchdog agency, the lawmakers say they are concerned that “transnational criminal organizations and other illicit actors” may be exploiting “gaps” in the regulatory structure focusing on real estate dealings. Bank Secrecy Act requirements for reporting large cash withdrawals from bank accounts would not necessarily flag all-cash purchases of real estate as questionable, according to the legislators, who note: “The widespread money laundering risks posed by real estate transactions conducted without any financing through the use of shell companies creates challenges for law enforcement and federal regulators seeking to safeguard the financial system from illicit use.”They ask the GAO specifically to assess the effectiveness of information-gathering efforts by FinCen, the agency that oversees compliance with the Bank Secrecy Act, and to identify any additional vulnerabilities and gaps in the current BSA framework, specifically as they pertain to the real estate sector, and how they might be addressed through regulatory or legislative action.”
ANOTHER GLOBAL WARNING
A recent U.N. report has warned that avoiding the imminent, disastrous effects from global warming will require “unprecedented” changes that world leaders seem unlikely to enact.The report by the UN’s Intergovernmental Panel on Climate Change (IPCC), “shows that we only have the slimmest of opportunities remaining to avoid unthinkable damage to the climate system that supports life as we know it,” the IPCC said in a statement.
Absent major efforts to combat climate change, the report warns, within the next 20 years the world faces extreme droughts, heat waves, more increasingly violent storms and rising sea levels, resulting in forced migrations, the destruction of some species and economic losses totaling more than $54 trillion.Keeping the increase in temperatures at 2.7 degrees (F), below the 3.6-degree target set at the Paris climate change talks in 2015, could significantly reduce those impacts , giving people in the most threatened areas time to adapt.The report clearly identifies the benefits of lowering the climate change target, Thelma Krug, vice-chair of the IPCC, told Reuters. “Now more than ever we know that every bit of warming matters, she told Reuters.In a related report, Business Insider asked climatologists to identify cities in the U.S. least vulnerable to the effects of climate change. Their top choices: Tulsa, Oklahoma; Boulder, Colorado; San Diego, California; Minneapolis-St Paul, Minnesota; and Sacramento, California, Charlotte, North Carolina; Portland, Oregon; Pittsburgh, Pennsylvania; and “anywhere except Hawaii,” where the frequency of tropical storms is projected to double over the next 40 years.But even informed assessments of the “safest” places to live aren’t really reliable, Astrid Caldas, a senior climate scientist at the Union of Concerned Scientists, told Business Insider. “There is no one-size-fits-all [prediction] when it pertains to climate change," she explained. "One may move away from the coast, only to find that inland floods are a problem. One may move from the south seeking cooler climates only to be hit by extreme precipitation, or drought, or wildfires.” The bottom line, she suggests: “Each person or community needs to weigh all the factors carefully and choose their level of risk-taking."
AFFORDABLE HOUSING FOCUS
Affordable housing hasn’t gotten much attention – or funding – from the Trump Administration, but Sen. Elizabeth Warren (D-MA) wants to change that. Warren is sponsoring legislation that would provide $470 billion for housing trust funds and increase the types of financial institutions subjected to the local investment requirements of the Community reinvestment Act (CRA). A summary of her bill (the American Housing and Economic Mobility Act) says it would, among other benefits:
- Provide funding to build or rehabilitate 3.2 million new housing units for lower-income and middle-class families. The increase in affordable housing will reduce rents by 10 percent in urban, suburban and rural areas, Warren predicts.
- Invest $10 billion in a new competitive grant program that would fund infrastructure improvements in local communities that revise regulations that increase the cost of producing affordable housing.
- Provide down payment grants to first-time homebuyers living in “lower-income, formerly redlined or officially segregated” areas.
- Provide $2 billion in assistance to homeowners still struggling with the negative equity effects of the 2008 financial crisis; and
- Make it easier to use rental housing vouchers in stable, middle-income neighborhoods, where, studies have shown, landlords are not receptive to them.
A favorable analysis of the bill by Moody Analytics estimates that it would create 200,000 units of affordable housing next year, 250,00 units in 2020, and 300,000 units per year after that – not enough to eliminate the shortfall, Moody’s says, but enough to ensure that “the crisis does not get worse.”
IN THE DUMPS
The city of Lowell will have to pay more than $1.4 million in damages to current and former owners of units in the Grand Manor Condominium Association, a 36-unit community that was built on the contaminated site of a former dump. Interest accrued on the award during the five-year court battle will add more than $850,000 to that total.
The city acquired the site in the early 1900s, using it first as a quarry and subsequently as a landfill. After the landfill was covered, the city sold the site to the developer who built the condominium in 1985. The contamination was discovered in 2009, when testing identified an assortment of hazardous chemicals, including arsenic and lead. The association sued the city in 2012, when further analysis concluded that the environmental damage could not be fully remediated. The suit claimed that the contamination reduced the value of owners’ units by $79,000 each.The city contended that the suit was barred by the statute of limitations, which, the city argued, began to run in early 2009, when the contamination was discovered. The association argued that the clock did not begin to tick until 2012, when owners learned that the damage was permanent. The trial jury sided with the city on that issue, but the Supreme Judicial Court overturned that decision.The case was remanded to the Superior Court, where the jury assessed the damages and interests owed to owners. The jury had also found the city responsible for clean-up costs, totaling more than $350,000, which the city did not contest.Local officials have said they are assessing their options in light of the adverse SJC decision affirming damages for the owners. After that review is complete, Lowell City Solicitor Christine O'Connor told The Lowell Sun, “we'll be in a better position to describe the city's next steps.”
IN CASE YOU MISSED THIS
State insurance regulators are considering new consumer-friendly standards for the ‘force-placed’ property insurance mortgage lenders are allowed to purchase for homeowners who fail to maintain that coverage. The National Association of Insurance Commissioners deferred action on the proposed regulations to permit an extended review and comment period that will end October 31.Applications to business schools declined for the fourth consecutive year in 2017, with even the MBA elites (Harvard, Stanford and Wharton) feeling the effects.Homeowners 62 and older had a combined total of $249.37 billion in equity at the end of the second quarter of this year, up from $244.73 in the first quarter.Speaking of equity, although household income is rising, more homeowners are taping home equityhttps://www.bloomberg.com/news/articles/2018-09-19/cash-strapped-americans-are-leveraging-their-homes-to-pay-the-bills to pay living expenses – a danger sign, according to some analysts, who see hints of the behaviors that contributed to the last downturn.Voters want their elected officials to focus more on creating jobs than on increasing wages, a recent survey found. Sixty percent of the respondents cited jobs as their major concern compared to 40 percent targeting wages.
LEGAL BRIEF
WORDS MATTER
Say what you mean and mean what you say. Nowhere is that age-old advice more important than in insurance policies, where words that are misused, misinterpreted, missing or mangled can determine the resolution of a disputed claim. Victims of cyber-crime are parsing their policy language with particular care as they seek coverage for losses that many policies either don’t explicitly cover or purport to exclude. A recent decision by a New York federal appeals court confirms that while traditional wording may not cover cybercrime, lack of precision in that wording may provide coverage the insurers didn’t intend.
This case (Medidata Solutions Inc. v. Federal Insurance Company) involves a “spoofing” attack in which employees of Medidata, a clinical trial software firm, wired $5 million to an outside account, following e-mail instructions they were led to believe came from the company’s president and its attorney.The company filed a claim under the computer fraud provision of its crime insurance policy, which defined computer fraud as “the unlawful taking or fraudulently induced transfer of money, securities or property resulting from a computer violation.” A ‘computer violation’ in turn was defined as “any entry of data into [or] change to the data elements or program logic of a computer system.”The insurer, Federal Insurance Co., a subsidiary of Chubb, rejected the claim for two reasons:
- The spoofing did not involve the entry of or changes to data in a computer system; it involved the fraudulent changes in e-mail addresses, which the policy did not cover.
- The direct cause of the loss wasn’t the spoofing, but the wiring of funds by Medidata employees, whose actions weren’t covered by the computer fraud provision.
The District Court rejected both arguments, awarding Medidata $5.8 million in damages plus interest. The Appeals Court upheld the decision, finding that “the plain and unambiguous language of the policy covers the losses” the company incurred.Hacking vs. SpoofingAlthough there was no actual “hacking” of computer data, the court acknowledged, the spoofing attack represented “a fraudulent entry of data into the computer system” via e-mail.” The attack also “changed a data element,” the court said, because the spoofing code the fraudsters used altered the appearance of the e-mail system to falsely identify the sender of the message. Based on that analysis, the court said, the District Court concluded correctly that Medidata’s losses were covered by the terms of the computer fraud provision.Supporting its position, the insurer had cited an earlier appellate decision rejecting a medical fraud claim under a similar computer fraud provision. In that case, the court held that the loss was not covered because the fraud was not conducted “on the computer qua computer system,” and because it did not “[violate] the integrity of the computer system through deceitful and dishonest access.”
That logic didn’t apply here, the Appeals Court said, because “Medidata’s e-mail system itself was compromised, [which] “clearly implicates the computer system.” Moreover, the court added, “it seems to us that the spoofing attack quite clearly amounted to a "violation of the integrity of the computer system through deceitful and dishonest access,"Direct CauseThe court also rejected the insurer’s contention that the direct cause of Medidata’s loss was not the spoofing but the wiring of funds by the company’s employees. The court read the cause-and-effect sequence differently.“It is clear to us that the spoofing attack was the proximate cause of Medidata' s losses. The chain of events was initiated by the spoofed emails and unfolded rapidly following their receipt,” the court noted. “While it is true that the Medidata employees themselves had to take action to effectuate the transfer, we do not see their actions as sufficient to sever the causal relationship between the spoofing attack and the losses incurred.”It is hard to predict the extent to which courts in other jurisdictions will follow similar reasoning in similar disputes over cyber-crime coverage. But there is no question that the insurance industry is watching litigation in this area carefully. In an interview with Insurance Journal, Erica Davis, senior vice president of JLT Re, a reinsurance broker, notes: “Wording that may not have been originally crafted to address elements of cyber risk is now being explored when these events do occur. As an industry, we’ll see this trend continue,” she said, adding, “The best language is specific enough that intent is clear and purposeful – but nimble enough that it stays relevant as new exposures emerge.”
WORTH QUOTING
“It takes a lot of premium, a lot of margin, to account for this increased uncertainty, and I’m not sure we’re doing a good job of reflecting this and charging appropriately for it….We need to incorporate a greater range of possible outcomes into our pricing.” ─ Marc Grandisson, chief executive of insurer Arch Capital Group Ltd., quoted in a Wall Street Journal article discussing the underwriting risks related to climate change.