Legal/Legislative Update – May, 2013
GETTING THE SCOOP ON POOP
It is an annoying, disgusting and seemingly inevitable by-product of pet-friendly policies in condominium and apartment communities: Some residents don’t clean up after their dogs. Fining offending residents is the obvious response, but finding them after-the-fact can be a problem. Enter PoopPrints, a Knoxville, Tenn. pet waste management company, with a thoroughly modern solution. As the company’s name suggests, its strategy involves identifying the dogs responsible for leaving the deposits behind.
Like investigators of human crimes (think a canine version of television’s CSI), the company matches DNA from trace evidence collected at the scene to a DNA data base created by swabbing the mouths of pets in the community. Most owners (and presumably their pets) typically cooperate in this initiative, company officials say.
Legends at Oak Grove, a 264-unit apartment complex spotlighted recently in an article in Multifamily Executive, introduced the poop-tracking program a year ago and pronounced it an immediate success. The community easily offset the cost ($35 – $55 for each initial DNA test kit plus $60 per sample for retrieving and testing fecal matter) by assessing a one-time pet fee of about $350 and establishing a graduated schedule of fines for clean-up offenses, ranging from $75 for the first offense to $150 per incident for repeat offenders.
Simply the knowledge that their pets’ poop would no longer be anonymous was enough to ensure virtually 100 percent compliance by residents, Adam Chavira, property manager at Legends, told the trade publication. “When we sent out that first letter [explaining] what DNA testing would entail,” he reported, “the community almost cleaned itself overnight.”
FIXING A ‘BROKEN’ SYSTEM
Continuing its regulatory focus on the mortgage market, the Consumer Financial Protection Bureau (CFPB) has published comprehensive rules governing mortgage servicing practices ranging from the way loan officers are compensated, to how they communicate with borrowers and the procedures they must follow when they foreclose.
The goal is “to fix a broken system” and to ensure that borrowers are treated fairly and “with dignity,” CFPB Director Richard Cordray said during a hearing introducing the new rules.
One of the major symptoms of that ‘broken’ system, Cordray and others contend, was a compensation structure that encouraged loan originators to “steer” borrowers toward higher-cost, higher-risk loans. The rules prohibit linking compensation to the interest rate or other loan term. They also bar “dual compensation” arrangements, in which originators are paid both by the borrower and a third party.
The rules also establish uniform foreclosure procedures, targeting the abuses that led to a multi-billion-dollar settlement agreement involving the nation’s largest loan servicers. Among other key provisions, the new regulations:
- Prohibit “dual tracking” – a common practice in which servicers proceeded with foreclosures while simultaneously negotiating loan modifications with delinquent borrowers.
- Require servicers to wait until loans are at least 120 days delinquent before beginning a foreclosure action.
- Require services to follow a “fair review process” that includes notifying borrowers of loss mitigation options, such as a loan modification, before initiating a foreclosure.
- Notify borrowers in writing if their modification requests are denied, explaining the reason for the denial and informing them of their possible right to appeal.
“Many servicers failed to provide the basic level of customer service that borrowers deserve, costing them money and dumping them into foreclosure,” Cordray said at the field hearing. “Dealing with sloppy mortgage servicing became a frustrating nightmare….Our new rules… are designed to give strong protections to struggling borrowers. In this market, as in every other, consumers have the right to expect information that is clear, timely, and accurate,” he added. “[And] when it comes to mortgage servicing, they also deserve a fair process. This is all the more true given the high stakes for consumers and the central importance of homeownership in our society.”
Although more restrictive in some respects, the rules were generally in line with what industry executives had expected, raising concerns they have expressed in the past, about compliance costs and administrative burdens that some say will force smaller companies out of the servicing business.
Although the uniform standards will generally benefit the industry, a report by Fitch Ratings concluded, the compliance requirements “will further increase compliance costs….extend timelines, and potentially drive further consolidation within mid- to smaller servicers.”
“So many of these changes go right to the pocketbook,” Diane Pendley, managing director at Fitch, told Housing Wire. “I would not be surprised if we don’t see an additional group of servicers, or their parent firms, making the decision that the liabilities, the oversight and the costs make it prohibitive for them to stay in the business.” □
WHO WILL BUY?
Baby boomers have reached, or are nearing, the age at which many will be down-sizing, moving from into smaller dwellings or retirement communities. The question is: Who will buy the homes they currently own? The answer is not nearly as clear, or as optimistic, as it would have been a decade ago, a report by the Bipartisan Policy Center, concludes.
The expected buyers – members of a generation demographers have dubbed “Echo Boomers” – have the numbers to absorb the homes their parents (and grandparents) will be selling, the report, “Demographic Challenges and Opportunities for U.S. Housing Markets,” points out. But their finances are fragile and may prevent them from moving up the housing ladder, or from entering the housing market at all, according to the report.
Income, or the lack of it, is the major problem. Real median income increased more or less steadily between 1975 and 2000, enjoying a couple of major growth spurts during that period. But since 2000, the report notes, median income hasn’t increased much at all, ending the decade about where it was in 1998.
The recession, from which the economy appears finally to be recovering, forced many would-be home buyers to remain in the rental market and led many young adults to delay forming their own households, or to dismantle households they had formed – and move in with their parents.
About half of the 25-34-year olds who took that route (back to their parents) had incomes that would have put them below the poverty line otherwise, hardly I a position to rent dwellings, let alone to purchase them. Absent these and related trends, the report says, there would have been nearly 2.7 million fewer vacant homes cluttering the housing market today.
Even as the economy recovers and job prospects improve, the home buying capacity of the Echo Boomers will be limited, the report says, by the high levels of credit card and student loan debt many of them carry – a prospect that bodes ill not just for the Boomers but for the housing market as a whole, according to the report, which emphasizes the importance of developing thoughtful, well-targeted housing policies going forward.
“Housing policies will likely affect individuals’ decisions about whether, when and with whom to form households,” the report notes. “Even more, the housing policies that emerge by the end of the 2010’s will influence whether many households buy or rent, where they decide to live and whether houses currently owned by Baby Boomers are sold, rented or leave the housing stock entirely. Whether for newly forming households or long-established ones, therefore, housing policies that emerge by the end of this decade have the potential to affect significantly the wealth portfolios of tens of millions of American families.”
Residents of New York condominiums and co-operatives damaged by Hurricane Sandy aren’t blaming climate change alone for creating the out-sized storm; they are blaming their governing boards, property managers, or both, for failing to prepare adequately for it.
The class action suits (there are several of them pending) claim generally that those responsible knew (based on weather forecasts) that a powerful storm was coming; should have known, based on recent history (Super storm Irene the year before) that extensive damage was possible; and should have done more to protect the buildings they governed or managed from the massive damage they could have anticipated
But legal analysts predict that plaintiffs in these cases will have a hard time overcoming the “business judgment rule” that generally shields board members from liability as long as they acted in good faith, demonstrated some degree of prudence and weren’t guilty of blatant negligence or self-dealing. While managers aren’t protected by the business judgment rule, analysts think they will have a strong defense, as well: How can they be deemed negligent for failing to prepare for a storm the likes of which no one had ever seen?
In one suit described in a New York Law Journal article, residents of a co-op building allege that the superintendent dutifully and appropriately stacked sandbags in front of a building set back from the water but failed to put them around a building fronting on the water, because he didn’t have enough to complete the task. “Obviously, that sounds stupid,” noted one commentator. But while this may provide grounds for firing the superintendent, he agreed, it is not necessarily enough to prove negligence on the part of the board that hired him.
BLAMING THE BROKER
An insurance broker who incorrectly described the coverage a condominium’s insurance policy provided has some liability for the uncovered losses the community incurred, the Florida Supreme Court has ruled.
Two lower courts dismissed the suit the Tiara Condominium Association filed against Marsh & McLennan Companies after discovering that the association’s policy provided only $50 million in coverage – not the $50 million per occurrence the broker had said was in effect. The coverage proved insufficient when the community suffered more than $100 million in damages from two separate hurricanes in 2004. As part of a settlement, the insurer covered $89 million of the claims and the association sued the broker for the balance.
Two lower courts dismissed the suit, agreeing that the economic loss rule required a showing that the association had suffered actual property damage or personal injuries as a result of the broker’s actions; the association could not recover for a purely financial loss, the courts said. But the state’s highest court disagreed, ruling not only that the case against the broker could proceed, but also that the state’s courts should revert to the origins of the economic loss rule and apply it only to product liability cases in the future.
“Our experience with the economic loss rule over time, which led to the creation of the exceptions to the rule, now demonstrates that expansion of the rule beyond its origins was unwise and unworkable in practice,” the majority opinion states. “Thus, today we return the economic loss rule to its origin in products liability.”
Interestingly, a Massachusetts Appeals Court also recently revised a prevailing interpretation of the economic loss rule, holding in Wyman V. Ayer Properties that the limitations on recovery did not apply to a community association seeking damages for flawed construction.
“We will still, even though I’m a free-market capitalist, have a federal imprint on housing when all is said and done.” ― Rep. Scott Garrett (R-NJ), talking about proposals to revamp Fannie Mae, Freddie Mac, and with them, the nation’s mortgage financing structure.
Legal/Legislative Update – April, 2013
HOUSING RECOVERY CATCHING ON
The Housing recovery appears to be contagious, spreading gradually but steadily to more areas of the country. The National Association of Home Builders (NAHB) reported 259 metropolitan areas on its February “improving markets” index, up from 242 in January and the sixth consecutive month in which the index has gained ground. When the trade group began compiling the index in September of 2011, only 12 metropolitan areas made the list.
All 50 states now have at least one metropolitan area on the list, David Crowe, chief economist for the NAHB, noted in a press release. “Today, the story is about how widespread the recovery has become as conditions steadily improve in markets nationwide,” an indication, he said that the housing recovery “has substantial momentum.”
Continuing increases in home prices seem to confirm that positive view. CoreLogic reported an 8.3 percent year-over-year increase in December, the tenth consecutive annual gain and the largest jump in its index since May 2006.
We are heading into 2013 with home prices on the rebound,” Anand Nallathambi, president and chief executive of CoreLogic, said in a press statement. Price gains for last year were “broad-based,” he noted, reflected in all but four states. “All signals point to a continued improvement in the fundamentals underpinning the U.S. housing market recovery,” he added.
Home buyers, apparently, have gotten that message. A Bloomberg News report on the prospects for the typically busy spring market notes that the supply-demand balance “is tipped so far in favor of sellers that almost a third of listings in areas from Washington, to Denver and Seattle under contract in two weeks or less.”
Industry analysts quoted in the article note the dearth of listings (currently at a 12-year low), the inclination of many sellers to hold off, anticipating that prices will continue to rise, and the inability of homebuilders to keep up with growing demand as the major factors creating a seller’s market.
“There is just no inventory for buyers,” one real estate agent quoted in the article, observed. “There are lots of losers in the marketplace now. When you have multiple offers, there are several losers and only one winner for each home.”
Industry analysts are predicting that current conditions will prevail, at least through the current selling season, until prices rise enough (at least 5 percent to 10 percent, they suggest) to push sellers off the fence and into the market.
MORE COLLATERAL DAMAGE
The damage foreclosures cause for borrowers and for communities has been well documented. Less noted has been the collateral damage on tenants when banks foreclose on the homes they are renting.
“Renters are innocent bystanders caught in the crossfire of the foreclosure crisis, becoming vulnerable to homelessness through no fault of their own,” the National Law Center on Homelessness and Poverty (NLCHP) notes in a recently published report on the issue, “Eviction (Without) Notice: Renters and the Foreclosure Crisis.” The report estimates that 20 percent of the foreclosed properties in 2010 were rentals and 40 percent of the families facing eviction resulting from foreclosures were tenants, not owners.
A federal law, Protecting Tenants at Foreclosure (PTFA) provides some protections to tenants living in foreclosed properties – requiring new owners to honor existing leases and to give tenants with short-term leases or without leases 90 days’ notice before evicting them – but that law is set to expire in 2014 and it has many shortcomings, the study found, among them: “Violations …are widespread,” tenants are often unaware of their rights, and new owners often fail to communicate with tenants or “provide illegal, misleading, or inaccurate written notices” to them.
The NLCHP recommends several Congressional actions to address the problems the report identifies, among them:
- Make the PTFA permanent;
- Amend the law to include an express right of private action for tenants whose rights are violated; and
- Designate a federal agency to be responsible for enforcing the law.
Additionally, the report suggests that federal regulators monitor banks for compliance with PTFA and urges states to enact expanded protections for tenants living in foreclosed properties.
IN THE BUDGET
The budget President Obama submitted to Congress recently contained reams of information about his Administration’s priorities, not to mention plenty of fuel for the partisan fires burning in Washington. One thing it did not contain is good news for the Federal Housing Administration (FHA), which the budget projects will need $943 million in federal funds this year to balance its books. On the plus side, the budget also anticipates that taxpayers will realize a net profit of $51 billion on the $187.5 billion government bailout of Fannie Mae and Freddie Mac.
The secondary market giants, which were seized by regulators in 2008 when massive losses threatened to sink them, have slowly returned to profitability as the housing market has recovered. Fannie Mae reported net income of $17.2 billion last year while Freddie Mac earned $11 billion for the year after losing $5.3 billion in 2011.
The FHA, on the other hand, continues to bleed from loan losses, despite a series of steps aimed at stabilizing its wobbly insurance fund. The agency’s problems stem in large part from the outsized role it has played in filling the home mortgage financing gap as the housing market has struggled to recover from its prolonged downturn.
FHA Commissioner Carol Galante told lawmakers recently that she is confident the remedial actions the agency has taken and the rebound in home prices will avoid the need for a taxpayer bailout, but some analysts remain skeptical.
Edward Pinto, a resident fellow at the American Enterprise institute and an outspoken FHA critic, estimates that the agency is insolvent “to the tune of $32 billion. If the United States has just a modest to moderate recession at any time in the next three or four years,” he told the Los Angeles Times, recently, “the FHA and taxpayers will suffer catastrophic losses.”
DEBT COLLECTION RULES
Since the beginning of this year, the nation’s debt collection companies have been operating under a regulatory spotlight wielded by the Consumer Financial Protection Bureau (CFPB). Exercising authority granted in the Dodd-Frank Financial Reform Law, the CFPB recently unveiled new rules establishing operating requirements and mandating consumer protections for agencies with more than $10 million in receipts. Those companies will also be subject to periodic compliance examinations.
The rules will cover approximately 175 of the nation’s 4,500 debt collection agencies, responsible for more than 60 percent of annual collections totaling more than $12 billion. Industry executives have complained that the threshold for review is too low; consumer advocates say it is too high. The Federal Trade Commission fielded more than 180,000 consumer complaints about debt collection agencies last year compared with only 14,000 a decade ago.
“Millions of consumers are affected by debt collection, and we want to make sure they are treated fairly,” CFPB Director Richard Cordray said in a press statement. “We want all companies to realize that the better business choice is to follow the law — not break it,” he added.
Examiners will review collection practices to make sure agents are correctly identifying themselves, are properly disclosing the amount of debt owed and are not “harassing or deceiving” consumers in pursuing debts, the CFPB statement said.
Underscoring its regulatory focus, the CFPB recently won a law suit against Payday Loan Debt Solution, Inc., a Florida-based debt settlement agency. A Federal district court ordered the company to refund up to $100,000 in fees it had charged consumers illegally.
“This action is part of the CFPB’s comprehensive effort to prevent consumer harm in the debt-relief industry,” an agency press release said, adding, “The bureau is working to ensure federal consumer laws are being followed at every stage of the process and is focusing not only on debt-relief service providers, but also on their partners, including those who facilitate their unlawful conduct and who may also violate federal consumer financial laws.”
A COSTLY FAIR HOUSING LESSON
A Worcester condominium board has discovered the hard way that “just say no” is not the best strategy for dealing with disability-related accommodation requests. The board of Federal Square Condominium Trust and its management company, Alpine Property Management, recently negotiated a $20,000 settlement agreement with state Attorney General Martha Coakley to resolve allegations that they discriminated against a resident of the mixed-use 76-unit community by refusing to repair broken elevators and failing to take other steps to make the building wheelchair accessible.
The wording of the press release announcing the agreement suggests that the condominium board and manager did not spend much, if any time discussing the requested modifications before refusing to approve them, eschewing the give-and-take process that the state and federal fair housing laws require. (See this month’s alert.)
“Massachusetts law requires landlords to communicate with and provide reasonable accommodations for their tenants with disabilities,” Coakley said, adding, “Landlords must meet their obligations under the law in a timely manner, especially when it comes to tenants who have every right to safe access to their own home.”
Of the $20,000 Federal Square and Alpine must pay, $16,500 will go to the tenant; the balance ($3,500) is a penalty paid to the state. The agreement also requires Alpine employees to attend fair housing training sessions and requires the management company to implement new policies to ensure that it responds promptly (in 15 days or less) to future accommodation requests.
ANOTHER FAIR HOUSING AGREEMENT
Worcester appears to have become something of a magnet for Fair Housing litigation of late. Coldwell Banker Residential Brokerage and an attorney representing the seller of a home in that community have agreed to pay $90,000 to settle a suit filed against them for blocking the sale of the house to a buyer who planned to rent it to a non-profit group that provides supportive housing to individuals with disabilities. When the executor for the estate selling the home learned of that plan, he insisted on a restrictive covenant specifying that the property could not be rented to unrelated individuals or students. The real estate agent added that language and the prospective buyer withdrew. He subsequently filed a complaint with the Department of Housing and Urban Development (HUD), which agreed that the covenant violated the Fair Housing Act.
Under the agreement, Coldwell Banker and the law firm involved will each pay $39,000 the prospective buyer of the home and $6,000 each to the buyer’s real estate agent. Additionally, the law firm (Bowditch & Dewey) must offer fair housing training to its employees, donate 100 hours of free legal services related directly to fair housing and another 100 hours of services related directly to promoting disability rights.
It is probably worth noting that this settlement agreement was announced in April, which has been designated Fair Housing Month, possibly because April is Fair Housing Month, marking the 45th anniversary of the passage of the Fair Housing Act .
NO EASY OUT
Bank of America won’t be able to duck on procedural grounds law suits accusing it of accepting kickbacks for private mortgage insurance. A U.S. District court rejected the bank’s argument that the claims should be dismissed because the statute of limitations has expired. The court didn’t rule on the merits of the case, only on the procedural question of whether it should proceed. But the decision means the bank will have to answer allegations that it employed an illegal “pay-to-play’ reinsurance scheme, collecting payments from insurers for referring borrowers to them. Referral fees of that kind are prohibited by the Real Estate Settlement Procedures Act (RESPA). The homeowners initiating the suit are seeking to have it certified as a class action.
Their complaint names three insurance companies — Radian Guaranty Inc., Genworth Mortgage Insurance Corp. and United Guaranty residential Insurance – which, like Bank of America, sought unsuccessfully to have the action dismissed on procedural grounds.
In rejecting the request, U.S. District Judge Berle Schiller said the plaintiffs should be allowed to pursue their claim despite the statute of limitations, because the bank intentionally disguised its illegal actions. “Plaintiffs’ allegations that defendants dressed up an illegal scheme to appear as a legitimate transaction is sufficient to deny defendants’ motion to dismiss,” the judge ruled. Separately, Radian, Genworth and United have agreed to pay more than $15 million to resolve allegations that they paid illegal kickbacks to lenders, under the terms of a settlement negotiated with the Consumer Financial Protection Bureau. □
“I’m glad Fannie Mae is showing an increase in income, but we have to remember that this is largely because we have crowded out private capital and made Fannie or Freddie the only viable execution option for new loans.” ─ Sen. Bob Corker (R-TN), commenting on Fannie Mae’s positive earnings report.
Legal/Legislative Update – March, 2013
As damaging storms become more frequent, insurers are looking for ways to limit the claims related to them. The latest idea: A new endorsement in both commercial and residential insurance policies that would exclude coverage for cosmetic damage to roofs caused by wind and hail.
The insurance industry organizations that standardize forms for property/casualty insurers have drafted endorsements and are in the process of seeking state approval for them. The endorsements would preclude insurance coverage for wind or hail damage to the exterior surfaces of walls, or, doors or windows that is purely cosmetic and doesn’t impair their ability to prevent leaks.
The only alternative for insurers facing rising claims for this kind of damage would have been to increase premium rates, Joseph Harrington, director of corporate communications for the American Association of Insurance Services (AAIS) told Insurance News. Many companies think property owners would prefer to have the option of accepting the endorsement and reducing their premium rates instead, Harrington explained. The endorsement will be optional in most policies, at least initially, but industry executives say some insurers may make it a standard provision in their policies, and they predict that the exclusion will become an industry-wide standard before long.
ISO, a member of the Verisk Insurance Solutions group at Verisk Analytics, is offering two cosmetic endorsement options for commercial carriers, which they can use separately or combine.
- Providing full replacement cost coverage overall, but applying “actual cash value to the surface of the roof.
- Excluding coverage for “any kind of marring or pitting or other superficial damage specifically from wind and hail that alters the appearance of the roof but does not prohibit it from functioning as intended as a barrier.”
Company officials say they are crafting versions of this endorsement for residential carriers, as well.
GETTING BETTER AND BETTER
The outlook for the multifamily market seems to improve with every forecast. Industry analysts are predicting that new apartment construction rates for this year will be at or near their “historic” average for the first time in more than four years. CoStar, a real estate research firm is expecting builders to deliver 140,000 new apartment units this year and add a combined total of 400,000 units over the next three years. Record low interest rates, increasing demand fueled by an improving economy, household formations delayed by the downturn, and the foreclosure crisis (forcing many former homeowners into the rental market) are driving the construction surge, Luis Mejia, director of multifamily research at CoStar, told Reit.com.
But his sunny outlook is not entirely cloud-free. “The bubble is the wild card in the equation, especially if the combination of relatively easy financing and developer’s optimism, which is always there, continues to persist too long,” he cautioned.
Rents, which have been following a steep upward trend, are still rising, but the rate of increase has slowed. Averages reported average increases of 3 percent on leases signed last year, compared with 4.8 percent in 2011, according to data compiled by RealPage.
With economic growth still slow and unemployment rates still high, landlords are focusing more on keeping their occupancy rates high, explained Greg Willett, vice president of research at MPF, which conducted the study for RealPage. As a result, he told DS News, they “aren’t pushing rents quite as hard as they were a year or so ago.”
ELIMINATING RISKS – AND BORROWERS
In what might be viewed as the financial equivalent of burning the village in order to save it, a recent study by CoreLogic has concluded that the new “Qualified Mortgage” rules will eliminate around 90 percent of the default risks for lenders and investors but also disqualify about 50 percent of prospective borrowers.
The rules, issued by the Consumer Financial Protection Bureau (CFPB), establish the standards loans must meet to qualify for the presumption that lenders have verified the borrower’s “ability to pay,” as the Dodd-Frank Financial Reform requires. Among other benchmarks, the debt-to-income ratio can’t exceed 43 percent (24 percent of all 2010 originations fell short of that standard, CoreLogic found) and the loans can’t have high-risk characteristics such as balloon or interest-only payments), and the points and fees charged can’t exceed 3 percent of the loan amount.
In the near-term, loans purchased by Fannie Mae and Freddie Mac or insured by the Federal Housing Administration (FHA) do not have to meet the QM standards, and since that secondary market pool currently represents about 90 percent of originations, CoreLogic noted, the near-term impact of the QM rule will be minimal. That carve-out ends in seven years.
“The irony of the exemption is that it reinforces the role the GSEs play in the market, making it harder to enact GSE reform,” the CoreLogic analysis notes.
While the QM rules alone would have disqualified about half of the 2010 loans CoreLogic reviewed, overlaying the Qualified Residential Mortgage (QRM) standards, which may include a minimum down payment of 10 percent, would have eliminated another 27 percent of purchase mortgages, the study found. “The combined impact of QM and QRM is that only 25 percent of purchase originations would meet the eligibility requirements of the QM rule’s safe harbor,” according to the analysis.
The QRM rule, which has not yet been finalized, will define loans that will not be subject to the requirement that lenders retain 5 percent of the credit risk related to them. The preliminary proposal drew an industry outcry when it set the minimum down payment requirement at 10 percent and the maximum debt-to-income ratio at 36 percent.
Industry trade groups are urging the CFPB to meld the QM and QRM rules and eliminate the down payment requirement from the “qualified” definition and adopt the QM’s 46 percent debt ceiling.
“A revised QRM definition should track the QM to ensure that all qualified borrowers have access to affordable and safe mortgage credit without a stringent down payment requirement,” Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors, told Bloomberg News.
Those arguments have gotten strong support from lawmakers, who say they did not intend for regulators to establish a strict down payment requirement when they directed them to establish the standards for “qualified” mortgages. A letter to regulators signed by both Republican and Democratic legislators, notes, “Our intent as drafters of this provision was, and remains, clear: To incent the origination of well-underwritten mortgages with traditional terms. “We intentionally omitted a specific down payment requirement and never contemplated the rigid 20 percent or 10 percent,” specified in the preliminary rule. The letter was signed by Senators Jonny Isakson (R-GA), Mary Landrieu (D-LA) and Kay Hagan (D-NC).
Regulators have indicated that they have heard the concerns about the regulations and are considering changes in response. Testifying recently before the Senate Banking Committee, Federal Reserve Governor Daniel Tarullo acknowledged the need to avoid “constrict[ing] credit to middle [and] lower middle class people, who might be priced out of the housing market.” Making the QM and QRM rules “more or less congruent…is on the table,” he added.
REAFFIRMING DISPARATE IMPACT
Asserting its continued commitment to enforcing fair housing laws, the Department of Housing and Urban Development has finalized rules establishing “disparate impact” as the standard for identifying discriminatory practices. Under that legal theory, a practice t that has a disproportionately negative impact on protected classes may be deemed discriminatory even if there is no intent to discriminate.
“Through the issuance of this Rule, HUD is reaffirming its commitment to enforcing the Fair Housing Act in a consistent and uniform manner,” HUD Secretary Shaun Donovan said in a press statement. “This will ensure the continued strength of one of the most important tools for exposing and ending housing discrimination.”
HUD used disparate impact recently in discrimination claims against Well Faro and Bank of America, which agreed to pay $175 million and $335 million, respectively, in settlements agreements avoiding litigation.
The American Bankers Association, among other industry trade groups, has urged HUD to jettison the disparate impact theory, arguing that it relies on statistical patterns that do not prove discrimination. I
ABA members are strong advocates for fair lending and fully support enforcement against practices that intentionally discriminate,” Frank Keating, president and CEO of the ABA, said in a recent letter to HUD. “However, disparate impact asserts fair lending violations occurred based only on statistical differences, where neither intent nor discrimination can be proven.”
ON A ROLL
The Mortgage Electronic Registration System (MERS) appears to be on a roll. After finding itself uncomfortably embroiled in the robo-signing scandal and on the losing end of several law suits alleging foreclosure-related improprieties, MERS has been quietly racking up a series of courtroom victories upholding the electronic origination and loan documentation service it provides.
The Nevada Supreme Court ruled recently that a financial institution can foreclose if it holds the note and obtains a proper mortgage assignment from MERS. MERS officials said the decision in Edelstein v. Bank of New York will establish “a statewide precedent” clarifying the foreclosure authority of a deed of trust beneficiary.
That is one of many rulings providing judicial counterweight to decisions holding that a foreclosing entity must physically hold both the note and the mortgage –rulings that invalidated foreclosure actions in which the documentation assigning the mortgages was either nonexistent or unclear. In many of these cases, the originating lenders sold the loans and named MERS as the nominee for the purchasing entity and its successors.
In another recent action favoring MERs (Crutcher v. CitiMortgage), a District Court in Atlanta echoed the Nevada decision, ruling that the registry has the authority to foreclose as long as it is listed in the security deed as nominee for the original lender and any of its successors. The plaintiff borrower argued that only the lender holding the note at the time had the authority to foreclose, but the court disagreed, ruling that “as grantee, MERS has the power of sale and the right to exercise any or all of [Lender’s and Lender’s successors and assigns’] interests, including, but not limited to, the right to foreclose and sell the property; and to take any action required of lender including, but not limited to, releasing and canceling this security instrument.”
A district court judge in Arkansas dismissed a class action suit accusing MERS of illegally failing to pay recording fees, ruling that state law does not require the recording of mortgage assignments. An Iowa District Court cited the same rationale in siding with MERS in a similar suit.
“As clearly described in this ruling, recording statutes are intended to give subsequent purchasers and lenders notice of recorded liens and to allow creditors to give notice of their secured interest in the property,” Janis Smith, vice president for corporate communications for MERSCORP, the parent of MERS, said in a press release commenting on the Iowa ruling. “Use of the MERS System to register mortgage loans fulfills the purpose of the recording statutes,” she added. “MERS mortgages are recorded in the public land records and MERS members pay recording fees when the mortgage is recorded.”
“One of the greatest threats facing not just banks but many businesses … is hacking and the possible theft of proprietary data and personal information about customers.” — Federal Reserve Governor Sarah Bloom Raskin.
Legal/Legislative Update – February, 2013
San Bernardino Country, which attracted national attention last year when lawmakers said they were considering using eminent domain as a tool to deal with underwater mortgages have attracted attention anew with their decision not to pursue that plan.
Members of the Joint Powers Authority ― a commission appointed to consider the idea on behalf of the county and two of its cities ― unanimously rejected the proposal, which called for seizing delinquent loans and reducing the principal balance so borrowers could avoid foreclosure.
Commission members cited lack of public support and concerns about threatened litigation and the potential harm to the housing and mortgage markets as the primary reasons for their decision.
“It introduced risk into the market that we couldn’t quantify,” Greg Devereaux, who chaired the five-member commission, told the Los Angeles Times. “It wasn’t a decision that a board like this should make unless there was overwhelming support in the community for going forward with that solution, and assuming that risk; that support never materialized.”
Chicago Mayor Rahm EmAanuel has also publicly rejected the idea, which is being floated nationally by Mortgage Resolution Partners (MRP), a California investment firm that has proposed eminent domain as a tool that can help local communities deal with the economic damage foreclosures inflict on neighborhoods and municipalities. The company would serve as an intermediary, collecting fees for syndicating the loans local governments seize.
MRP officials said they were disappointed by the San Bernardino decision but continue to explore the idea with more than 30 other jurisdictions nationwide.
Mortgage industry executives, on the other hand, were relieved by the outcome of the San Bernardino deliberations, which they had been monitoring closely, fearful that the idea, once implemented, may spread.
“We are encouraged” by the no vote, Timothy Cameron, managing director and head of the Asset Management Group of the Securities Industry and Financial Markets Association. “The unprecedented, potential use of eminent domain would cause severe damage to struggling housing markets and is likely unconstitutional on its face,” Cameron told the LA Times.
ABILITY TO REPAY
The Consumer Financial Protection Bureau (CFPB) has finalized the “ability to repay” regulations requiring lenders to verify that home buyers can afford the mortgages they receive. There was a time when this would have sounded like common underwriting sense to lenders and borrowers. But in the wake of the financial implosion – caused in no small part by reckless and abusive mortgage lending ― it sounds almost revolutionary.
“I firmly believe that if the ability-to-repay rule we are announcing today had existed a decade ago, many people…could have been spared the anguish of losing their homes and having their credit destroyed,” Richard Cordray, director of the CFPB, said in announcing the new rules.
The Dodd-Frank Financial Reform legislation mandated the ability to repay requirement, directing regulators to define a category of “qualified mortgages” that would be deemed to comply. The CFPB has defined as plain vanilla”lower-priced loans that are typically made to borrowers who pose fewer risks.” This definition excludes loans with points and fees exceeding 3 percent, no- and low-documentation loans (known less than affectionately as “liar loans”) as well as mortgages with risky characteristics balloon payments, interest-only payments, negative amortization and terms longer than 30 years.
The rules specifically require lenders to base underwriting decisions on the actual principal and interest payments over the life of the loan (not on “teaser” rates in effect during a limited introductory period) and to consider eight specific underwriting criteria:
- Debt-to-income ratio (which can’t exceed 43 percent)
- Current income or assets;
- Employment status
- Current and expected earnings;
- Credit history;
- Monthly payments on the mortgage
- Other mortgage-related obligations and loans associated with the property
- Other debt obligations and
- Borrower’s ability to assume more debt
Responding to concerns about the potential impact on credit availability, the CFPB decided to phase-in the debt-to-income limit over 7 years or until Congress restructures Fannie Mae and Freddie Mac. Until then, loans with higher ratios will be deemed “qualified mortgages” as long as they meet the secondary market underwriting requirements established by Fannie Mae or Freddie Mac.
The Community Associations Institute (CAI) is still assessing the impact of the QM regulations on condominium loans. In a preliminary statement, CAI Executive Officer Thomas Skiba noted with approval that common area fees are included in the calculation of the borrower’s ability to pay. That standard “will ensure home buyers are able to fulfill all financial obligations related to owning their home—including their association assessments,” Skiba said, adding, “this will create a greater degree of financial stability for community associations, while helping to ensure fairness and equity for all owners in a community.”
Housing industry executives and analysts have been cheering the housing market recovery, proclaiming it strong and sustainable. But not everyone is convinced. The main problem, Quinn Eddins, director of research a Radar Logic, believes, is that it is investors, not homebuyers, who are driving the positive numbers, and those investors aren’t buying from home builders or home owners; they are buying from financial institutions selling foreclosed properties and from other investors who are selling distressed properties they’ve acquired.
“Some commentators suggest that investor-driven home price appreciation could spur demand among housing consumers, which will in turn bring about a broad-based and sustainable recovery in the nation’s housing markets,” Eddins wrote in a recent market report. And that may be the case, he said, “but we are skeptical of this theory.”
Because “traditional” homebuyers are still pretty much sidelined by conservative underwriting guidelines, Eddins argues, “it is hard to see a direct connection between the current increase in institutional demand and future gains in household demand.” Equally problematic, he suggests, the strategy investors are using – buying foreclosed properties and renting them – will eventually kill that business model, because it will push prices up to the point at which “the economics of buy-to-rent strategies no longer work.”
Rather than the sustainable recovery other analysts see, Eddins anticipates another negative cycle, with falling demand from investors increasing the REO inventories of banks and pushing prices down again, until investor demand recovers, starting the current trend over again – invests will dominate the market, pushing sales and prices upward. This cycle will continue, Eddins predicts, “until consumer demand recovers and drives a real recovery in housing values.”
Purchasers of new homes, who had embraced a ‘smaller is better’ philosophy during the housing downturn, have apparently decided that bigger is better again. After declining for five years, the average size of newly built homes increased by 3.7 percent in 2011 compared with the previous year, according to data compiled by the Census Bureau.
A recent survey by PulteGroup confirmed that trend, finding homebuyers in all age groups expressing a preference for larger homes. That includes baby boomers, now at an age and stage where conventional wisdom suggests they should be thinking about down-sizing. Only 28 percent of respondents 55 and older said they expect their next home to be smaller.
“Across all demographics…respondents] said they want their next house to be the same size or larger,” Valerie Dolenga, a spokesman for PulteGroup, told DS News. “An overwhelming majority – 84 percent – said they don’t intend to downsize. I don’t think the McMansion is dead,” she added. “People want that square footage.”
Younger households need space to accommodate growing families; for baby boomers, Dolenga said, the issue is “stuff.”
“They have a lot of stuff …they don’t want to let go of…and stuff has to have a place to go.”
HOLD OR FOLD
The Massachusetts Supreme Judicial Court has ruled that financial institutions must either hold the mortgage and note or be acting on behalf of the note holder in order to initiate a proceeding to determine if a borrower is entitled to foreclosure protections under the Service Members Civil Relief Act. “Because non-mortgagees are not, by law, in a position to foreclose on a mortgage,” the court ruled, “they could not suffer the loss that the service member proceeding redresses.”
That ruling, in HSBC Bank USA, N.A., Trustee v. Jodi B. Matt, is consistent with SJC’s landmark decision last year in Eaton v. Federal National Mortgage Association, concluding that possession of the note and mortgage is required to establish standing to foreclose.
The court eased the impact of that ruling considerably by deciding it would not be retroactive. The Eaton decision also made it clear that while “unity” (possession of both the mortgage and the note) is required in a foreclosure action, the foreclosing entity need not physically possess the note; it need only document that it represents the note’s holder. A footnote in the decision said lenders could meet that requirement by filing a statutory affidavit with the registry of deeds affirming that they either hold the note or represent the entity that does. A footnote in HSBC indicates that a similar process may be acceptable to establish standing in SCRA actions.
In another foreclosure-related decision outside of Massachusetts, the U.S. Court of Appeals for the Sixth Circuit has held that attorneys who handle foreclosure actions may meet the definition of “debt collectors” under the federal Fair Debt Collection practices Act. The court made it clear, however, that the definition applies only to attorneys whose primary business is mortgage foreclosure.
A lower court had ruled that attorneys are not covered by the FDCPA, which requires debt collectors to comply with a laundry list of consumer protections and establishes huge civil penalties for failure to do so. The lower court in this case concluded that foreclosure actions involve the protection of a security interest and so are not “debts as defined by the FDCPA. But the Sixth Circuit rejected that view.
Any activity whose purpose is to obtain payment of a debt “is properly considered debt collection,” the court held, and “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt.”
The Second, Third, Fourth and Eleventh Circuits have reached the same conclusion.
“If the FHA were a private financial institution, likely somebody would be fired, somebody would be fined and the institution would find itself in receivership….It is merely and merrily on its way to becoming the recipient of the next great taxpayer bailout.” –Jeb Hensarling (R-TX), chair of the House Financial Services Committee, during a recent hearing on the financial condition of the Federal Housing Administration.
Legal/Legislative Update – January, 2013
Although surveys show that young adults, sidelined by the economic downturn and rattled by the housing market collapse, appear to be regaining their appetite for home ownership, builders are not curbing their appetite for constructing multi-family housing.
Increasing demand for apartments has pushed rents and property values higher, while low interest rates have created a favorable construction climate. As a result, multifamily construction activity has been increasing steadily for the past two years. Starts increased by 54 percent in 2011 and have been averaging more than 35 percent ahead of the 2011 pace this year. Real Estate Analytics is predicting that multifamily sales for last year will reach $75 billion — 40 percent above the 2011 total.
But even as industry executives have welcomed the multifamily recovery, they have begun to worry that a new bubble could be forming, threatening to produce a glut of vacant, and over-valued rental buildings as home ownership rates begin to rise.
Historically low interest rates have reduced the ratios between annual revenue and market value, pushing property values higher. But industry executives worry about what will happen when interest rates begin to rise.
“Don’t get complacent,” Patrick Simons, an analyst at Strategic Property Economics, warned in a recent client newsletter, noting, “these levels are not the historical norm.”
Some analysts think the norm may be changing, as policy makers and consumers rethink traditional assumptions about home ownership in the wake of the subprime debacle that contributed to the housing market’s collapse. “It is entirely possible that some people aren’t supposed to rent a home – that some people are supposed to rent,” Stephen Gordon, chairman and chief executive officer of Opus Bank, told American Banker.
JUST IN TIME
The skin-of-their-teeth Congressional action that avoided a national plunge over the fiscal cliff also rescued a measure that allows homeowners who participate in a short sale (selling their homes for less than they owe on the outstanding mortgage) or restructure their mortgages, to avoid tax liability on the debt forgiven under those transactions.
In addition to resolving (albeit temporarily) the rancorous debate over spending and tax policies, the fiscal cliff agreement, embodied in the American Taxpayer Relief Act of 2012, also extends for a year the Mortgage Forgiveness Debt Relief Act of 2007, which was scheduled to expire on December 31. That law exempted from taxation up to $2 million in mortgage debt forgiven on homeowners’ primary residence. Realty Trac estimates that the average debt forgiven on a short sale is $95,000, which, the company estimates, could trigger a tax bill of as much as $33,250, depending on the individual’s tax rate.
Housing industry executives and consumer advocates had argued frantically that eliminating this tax break would jeopardize the expanding, though still fragile, housing recovery.
“Our tax policy should not result in bad housing policy that will prolong a foreclosure crisis that has already gone on for too long,” the Center for Responsible Lending and the Financial Services Roundtable argued in a joint letter to lawmakers in early December
The cliff legislation also renews a law that expired a year ago, allowing homeowners to deduct the premiums on private mortgage insurance as well as on government-backed FHA, VA and Rural Housing Service loans. More than 3.5 million homeowners claimed that deduction in 2009, according to Compass Point Research & Trading.
A DEEPENING HOLE
FHA officials have acknowledged that the agency is facing serious financial pressures, but the problems may be even more serious than reports to date have indicated. An analysis of loans approved in 2009 and 2010 found that the foreclosure risks are well above average, threatening losses that could exceed $20 billion. That projected loss would be in addition to the $13.5 billion deficit identified in an agency audit citing exposure related to the collapse of the housing market.
The recent study, by Edward Pinto, a recent fellow at the American Enterprise Institute, focuses on loans originated after the housing implosion, which makes the conclusions “particularly disturbing,” industry observers say. Pinto analyzed 2.4 million FHA-insured loans, looking at their location and borrower characteristics. He found that the agency does not accurately assess the repayment prospects of borrowers, approving high-risk loans and failing to set premium prices that accurately reflect those risks.
Although FHA underwriting standards generally set a maximum housing debt-to-income ratio of around 30 percent, exceptions allowed by the rules pushed that ratio much higher. More than 40 percent of the loans approved in 2010 went to borrowers with debt ratios exceeding 50 percent or with credit scores lower than 660 – borrowers who, Pinto said, were “just a car repair away from failure.”
“The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores to make a risky financing decision,” he said, “one combining a low score with a 30-year loan term and a low down payment. This sets up for failure the very families and communities it is the F.H.A.’s mission to help.”
Equally problematic, he noted, the agency doesn’t adjust the guarantee fees charged to reflect the risks, charging the same amount regardless of their credit scores or size of the down payments they make. He also found a high concentration of loans in low-income zip codes, where foreclosure rates will likely reach 15 percent – above the average of 9.6 percent the FHA’s recent audit is projecting for the two years Pinto analyzes.
The problem is not the agency’s commitment to providing mortgages to low- and moderate-income borrowers, Pinto emphasizes; it is the failure to underwrite those loans prudently and control the risks. He suggested specifically that loan terms should be shorter (20 years rather than 30) and maximum debt loads lower.
“The [agency] should set loan terms that help homeowners establish meaningful equity in their homes with the goal of ending their dependence on F.H.A. lending,” he said.
FHA officials disputed Pinto’s conclusions, particularly the suggestion that long-term loans increase the risks to borrowers and the agency. “The assertion that FHA is setting up potential homeowners for failure by insuring a 30-year, fixed, rate , fully documented loans for underserved borrower is not supported by the information presented, George Gonzalez, an FHA spokesman, told the New York Times. He added that “selective use of FHA data ignores that the [agency] has successfully provided access to mortgage financing for millions of creditworthy borrowers for almost 80 years.”
You probably won’t find many Massachusetts residents who would prefer to live in Michigan, and (not to dis Michigan residents), the reverse may also be true. But when it comes to defending slip-and-fall claims, Massachusetts landlords and community associations have some cause to envy their Michigan counterparts. While Massachusetts courts have made it more difficult for property owners to prevail in those suits, Michigan courts have moved in the opposite direction.
The Michigan Supreme Court ruled last year that Michigan residents should be aware that snow and ice makes walkways slippery, have an obligation to exercise due care and can’t automatically blame property owners if they are injured in a fall.
The case at issue involved a woman who suffered serious injuries in a fall outside a (don’t overlook the irony) health club. The court ruled that she knew the ground was slippery and had no compelling reason to enter the club at that time.
Citing that decision, a Michigan Appeals Court ruled that a supermarket was not liable for the injuries a man received when he slipped in the icy parking lot, because, the court pointed out, he could have shopped elsewhere.
“Michigan being above the 42nd parallel of north latitude is prone to winter. And with winter comes snow and ice accumulations on sidewalks, parking lots, roads, and other outdoor surface,” the majority held in the Supreme Court’s decision, adding, “Landowners are not charged with a duty of ensuring absolutely the safety of each person who comes onto their land, even when that person is an invitee.”
The Massachusetts courts held a similarly unsympathetic view of slip-and-fall complaints until three years ago, when the state Supreme Judicial Court (SJC) eliminated the distinction courts had recognized between “natural” and “unnatural” accumulations of snow – the former resulting from the inevitable falling and freezing of the white stuff, the latter from efforts owners undertook to deal with it.
Under the old legal framework, the courts had regularly rejected slip-and fall claims when the accumulation was deemed natural, providing a sturdy defense for landlords and community associations. But in “Papadopoulos vs. Target Corporation, the SJC eliminated that long-standing distinction, and the exception it had provided to “the general rule of premises liability, that a property owner owes a duty to all lawful visitors to use reasonable care to maintain its property in a reasonably safe condition in view of all the circumstances.”
That ruling leaves property owners more exposed to slip-and-fall liability in Massachusetts than they might be in Michigan, which probably isn’t enough in itself to spur a mass migration from Boston to Detroit. On the other hand, the Tigers did make it to the World Series last year, while the Red Sox….well, never mind about that.
WORTH QUOTING: “It might not be quite as fluid for a period of time, change will come slow, but the private sector will, over time, be able to make up the slack…. When the markets froze up, the GSEs were the only answer just because we hadn’t developed any other model. But the next time it happens, the private sector could be there.” — Walt Smith, CEO of Riverstone Residential, predicting, that private sector lenders will be able to fill the financing gap for multifamily construction created by the restructuring and down-sizing of Fannie Mae and Freddie Mac.
Legal/Legislative Update – November, 2012
Struggling to bolster reserves depleted by loan losses that are threatening the solvency of its insurance fund, the Federal Housing Administration (FHA) is increasing premiums on the low-down-payment home mortgages the agency insures. The increase, equaling one tenth of one percent of the loan amount, is the second the agency has implemented this year in an effort to avoid what would be the first taxpayer bailout in its 78-year history.
In February, FHA officials increased premiums by 75 basis points (from 1 percent to 1.75 percent) and tightened underwriting requirements for a broad range of loans, in an effort to stabilize the mortgage insurance program’s wobbly finances. But the agency’s annual audit indicates those measures have fallen short. According to that report, issued just before Thanksgiving, the insurance fund is facing an anticipated deficit of $16.3 billion this year, based on current projections for loan losses and premium income.
Most of the losses are linked to loans originated during the housing crisis, as the FHA has stepped up in a big way to fill the gap created by the dearth of private sector mortgage financing. That activity nearly tripled the agency’s loan portfolio, increasing its liabilities and straining its insurance fund. The agency now insures nearly one third of all residential mortgages compared with only about 5 percent in 2006.
“With its dual mission of providing access to homeownership for underserved populations and supporting the housing market during tough times, there’s little doubt that FHA helped prevent a much deeper crisis,” Shaun Donovan, Secretary of the Department of Housing and Urban Development, observed recently. “That progress, however, has not been without stress,” he acknowledged.
The FHA’s cash reserves plummeted to a record low of $2.6 billion last year (insuring a portfolio of about $1.1 trillion in loans), triggering warnings that taxpayer assistance was inevitable. The audit report has renewed those warnings.
“A substantial portion of their loans continues to be high risk,” Edward Pinto, a former Fannie Mae executive, now a resident fellow at the American Institute, a conservative think tank, told Reuters. “While they’ve been trying to dig themselves out of this hole, to some extent, the hole has gotten deeper.”
FHA officials say the audit’s findings are based on overly conservative projections for loan losses and home prices that do not reflect improving conditions in the housing market. A separate report by the Mortgage Bankers Association, found that delinquencies on government-backed loans declined in the third quarter. Ironically, the agency has also been victimized somewhat by the housing recovery, because borrowers have taken advantage of record low interest rates to refinance their loans, eliminating FHA insurance and reducing the agency’s premium income.
The latest round of premium hikes may also be something of a double-edged sword, strengthening the insurance fund, but also making it more difficult for the agency to fulfill its primary mission provide affordable mortgages for lower income borrowers.
“It’s a tightrope,” Carol Galante, the acting FHA commissioner, told the Washington Post, adding, “We continue to look at that balance every day.”
CHANGING THEIR POLICIES
The regulatory pushback on force-placed insurance is forcing insurers and lenders to alter their approach to this traditionally profitable business in significant ways.
Mortgage contracts typically give lenders the right to ‘force place’ property insurance if borrowers fail to obtain or maintain it. But insurers and lenders have been under fire from regulators and consumer advocates critical of the high cost of the insurance the commissions banks earn on those policies and the lack of incentive to find competitive prices on the policies. An investigative report by American Banker found that force-p-laced premiums industry-wide were as much as 10 times the cost of policies purchased voluntarily.
One major provider of this insurance, Assurant, has announced plans to create more “flexible” policies – read that, lower-cost premiums linked more clearly to industry losses. One of the largest issuers of force-placed insurance, Assurance also agreed recently to reduce premiums by more than 30 percent in California, one of several states where regulators are scrutinizing the pricing structure.
The New York Department of Financial Services, which regulates insurers in that state, has been studying force-placed insurance and is expected to release a report on the issue before the end of this year. The Comptroller of the Currency has also expressed interest in the issue and Fannie Mae announced recently that it intended to establish a relationship with an insurance company to control the issuance and pricing of force-placed policies on loans Fannie has purchased.
SIGNS OF UNBUNDLING
As the economy improves, many of the young adults (and older ones) who moved in with their parents – or never left home – are finding jobs and housing of their own, ‘unbundling” many of the households that were bundled during the downturn. But household formation rates remain well below historical norms, suggesting that large segment of what should be the new household cohort hasn’t gotten there yet.
Mark Zandi, chief economist at Moody’s Analytics, has calculated that there are nearly 2 million fewer households today than would be the case in a “normal” economy. The difference, he says, is largely in the 18-34 age group – ‘echo-boomers’ who are still living with their parents or doubling up with friends. Zandi estimates that more than 17 million adult children were living with their parents this year, up from 15.3 million five years ago, before the economy cratered.
Nearly 20 percent of these ‘home again’ or ‘still at home’ adult children were unemployed in March of last year, according to a recent U.S. Census Bureau report. That report also indicates that the number shared households increased by 11.4 percent between 2007 and 2011, while new household formations increased by only 1.3 percent. In the depth of the recession (between January, 20008 and January 2011, the household formation rate fell to its lowest level since 1970, when the Census Bureau began tracking that data.
But analysts see an improving trend. New household formations rebounded strongly in 2010 and 2011, growing by 1.3 million and 1.7 million, respectively, in those years, “tilt[ing] the trailing average back in the right direction,” economists at American Century Investments note in a recent blog. “This represents an important trend, especially when viewed in the context of recent gains in home prices and sales,” they suggest.
That upward trend is likely to continue, adding 1.3 million households annually for the rest of this decade, they predict, suggesting that housing demand “may explode as the economy emerges from the worst housing crisis since 1937. And, with housing inventory currently at a 30-year low,” the American Century economists expect, any significant surge in demand could exceed existing supply, creating the potential for housing to once again contribute more meaningfully to economic growth.”
The state attorneys general who negotiated a multi-million-dollar settlement with mortgage lenders and servicers accused of foreclosure-related abuses are urging Congress to extend the Mortgage Debt Relief Act of 2007.
If that legislation expires, as scheduled, at the end of this year, troubled borrowers who receive loan modifications will owe taxes on the forgiven debt, “making the National Mortgage Settlement much less effective,” the attorneys general warn in a letter to House and Senate leaders. The five largest banks covered by the settlement – Bank of America, JP Morgan, Chase, Wells Fargo, Ally Financial and Citigroup, have provided a combined total of more than $26 billion in relief to borrowers thus far, according to a recent report.
“Failure to extend this tax exclusion will result in $1.3 billion in tax increases on the very families who can least afford it,” the letter, signed by 41 attorneys general, notes. “Each of our offices receives calls every day from homeowners trying to save their homes or struggling to recover from losing their homes,” the letter continues, adding, “a home lost to foreclosure depresses future home sale prices, damages the value of surrounding homes, and harms families, neighborhoods and our general economy.”
If you push on one end of a balloon filled with water, it will bulge at another point. The housing market works the same way. When the housing market was booming, homeownership rates soared and rental demand sagged. Now, the reverse is true. The collapse of the housing market depressed ownership rates at one end but boosted rental demand at the other. The rental population grew by nearly 5 million while the population of homeowner households shrank by more than 1.5 million, according to data compiled by the Mortgage Bankers Association. Now it appears that trend may be changing once again.
A weak economy, sluggish job creation rates, the financial battering the recession delivered to household balance sheets and uncertainty about both the economic outlook and home price trends have combined to keep many potential homebuyers out of the market since the downturn began, because they lacked the confidence, the financial capacity, or both to purchase homes. But the continuing economic recovery – -slow, but consistent – rising home prices and record low interest rates are beginning to offset those negatives.
The homeownership rate stood at 65.5 percent in the third quarter, down from 66.3 percent a year ago and well below the record 70 percent before the market crashed, but unchanged from the second quarter, indicating to some analysts that the downward spiral is ending.
Homebuilders, sensing that shift, have accelerated construction plans, starting work on new homes at an annualized rate of more than 870,000 in September – the best performance in four years. Market dynamics have pushed rental prices up (as rental demand has increased), while pushing home prices down, making ownership less costly than renting in many markets.
“This has been a year of steady growth in the percentage of consumers with positive home price expectations,” Doug Duncan, senior vice president and chief economist of Fannie Mae, said in a recent report. “Increasing household formation, encouraged by an improving labor market, is adding additional momentum to the housing recovery and putting upward pressure on rental price expectations. Expected increases in both owning and renting costs may encourage more consumers to buy and add further strength to the housing recovery already under way.”
SINS OF THE FATHERS
“The Hustle” sounds like a 1970s disco dance, but it refers to what the Department of Justice (DOJ) describes as a “particularly brazen” fraud designed by Countrywide Mortgage, for which, Bank of America, which purchased the erstwhile mortgage giant, is being sued.
The civil fraud suit alleges that Countrywide intentionally short-circuited loan reviews that were intended to detect fraud and shoddy underwriting in order to speed the approval and sale of loans to Fannie Mae and Freddie Mac. That process (which the suit contends continued after B of A acquired Countrywide), and an incentive structure linked exclusively to the number of loans originated but not their quality, resulted in loan “defect” rates nine times the industry norm, causing more than $1 billion in losses, according to the complaint.
“Countrywide and Bank of America systematically removed every check in favor of its own balance,” sheet, Preet Bharara, U.S. attorney for the Southern District of New York, said in a press statement. “This lawsuit should send another clear message that reckless lending practices will not be tolerated,” he added.
Separately, Bhara’s office has accused Wells Fargo of intentionally misleading the Federal Housing Administration about the quality of loans insured by that agency, through “longstanding and reckless” lending practices spanning more than a decade. The suit is seeking hundreds of millions of dollars in damages to compensate the FHA for its losses on failed loans.
(Wells Fargo and Bank of America have both paid multi-million dollar settlements to resolve DOJ allegations that they illegally charged higher interest rates to minority mage borrowers. The payments – $335 million for B of A and $125 million in penalties plus $50 million in assistance funds for Wells – are the largest and second largest- fair lending settlements negotiated to date.)
The suits against Bank of America and Wells Fargo are the latest in a string of legal actions targeting financial institutions involved directly or indirectly in lending excesses that triggered the mortgage market meltdown and the recession resulting from it.
- Citigroup, Flagstar Bancorp and Deutsche Bank have settled civil fraud cases for $158.3 million, $132.8 million and $202.3 million, respectively.
- The federal mortgage task force created to coordinate actions related to the financial meltdown has sued Bear Stearns & Company (now owned by JPMorgan Chase), for “widespread misconduct” in the packaging and sale of mortgage-backed securities.
- The Massachusetts attorney general sued Morgan Stanley for its financial backing of New Century, a now defunct mortgage lender. The company agreed to pay $102 million to settle that claim. The American Civil Liberties Union has recently filed a separate suit against Morgan Stanley, accusing the investment bank of pressuring Century financial to make questionable loans targeting low-income minority borrowers.
Financial institutions have generally been settling these actions out of court — paying sizable financial penalties but neither admitting nor denying guilt – but some are beginning to fight back. Wells Fargo for example, has thus far refused to settle the DOJ suit, arguing that the multi-billion-dollar settlement the nation’s largest financial institutions negotiated with federal and state officials earlier this year, should have largely cleared the liability slate. Jamie Dimon, chief executive of JPMorgan, has also complained publicly about being sued for actions by Bear Stearns, which his bank purchased at the request of the Federal Reserve during the height of the financial meltdown.
Those complaints have drawn a sympathetic response from an unlikely source — Rep. Barney Frank (D-MA) — the ranking Democrat on the House Financial Services Committee. Hardly known as a cheerleader for the financial industry, Frank has urged federal and state officials not to prosecute financial institutions for the actions of smaller institutions they purchased at the behest of government agencies struggling to contain the financial crisis.
In a statement issued earlier this month, Frank noted JPMorgan as a case in point. “The decision now to prosecute J.P. Morgan Chase because of activities undertaken by Bear Stearns before the takeover unfortunately fits the description of allowing no good deed to go unpunished,” a characterization that, he said, applies equally to Bank of America’s acquisition of Merrill Lynch, but not to that bank’s purchase of Countrywide. “I am aware of no federal urging that led CEO Ken Lewis of Bank of America to take over Countrywide, and it is entirely appropriate for the bank to be pursued on that ac,” Frank stated.
Frank emphasized that he was not suggesting “there should be impunity for those in various financial institutions who misbehave,” but the remedy, he said, should be “to pursue those individuals rather than the institutions for which they worked.”
Although the Justice Department did not comment directly on Frank’s argument, a spokesman for the New York Attorney General’s Office dismissed it, telling reporters, “It would be the ultimate legal loophole if accountability for billions of dollars’ worth of fraud upon taxpayers and investors could simply disappear into the ether because ownership of a company changed hands.”
“Every single thing about housing is flashing green. There’s not one thing that’s flashing red. Household formation is up, housing inventory is down, and housing affordability is at an all-time high.” James Dimon, CEO J.P. MorganChase, in a recent interview with CNBC-TV.
Legal/Legislative Update – October, 2012
FHA GETS IT (MOSTLY) RIGHT
The Federal Housing Administration’s latest effort to revise the certification requirements for condominium associations appears to have hit the marks – or at least some of them. The revisions, detailed in a mortgagee letter, address most of the concerns industry executives have raised during a three-year battle that produced three different versions of the requirements community associations must meet to make individual condominiums in those communities eligible for FHA-insured mortgages.
“We hoped this would happen a lot sooner,” Thomas Skiba, the Community Association Institute’s chief executive officer, said in a press statement, but the revised guidance represents “an important step in the right direction,” and “excellent for sellers, buyers, condominium communities and the housing market across the country.”
The most significant changes:
- Scale back the assurances association representatives must make in the certification applications they sign;
- Eliminate the requirement that community associations specifically name the manager or management company covered by their fidelity insurance policy;
- Ease the delinquency limits to specify that no more than 15 percent of a community’s units can be more than 60 days delinquent – up from 30 days in the earlier guidance; and
- Allow a single entity to own a maximum of 50 percent of the units in an existing condominium development or a non-gut rehab conversion – up from 10 percent and “probably the most significant change” the FHA made, Stephen Marcus, Stephen Marcus, a partner in Marcus, Errico, Emmer & Brooks, believes.
Marcus does not share the consensus industry view that the changes in the certification language addressed all the concerns about that issue (“I don’t think the changes in the language were all that dramatic,” he said), but he agrees that overall, the revised guidance represents a marked improvement over previous versions.
“There might be some complaints that they didn’t go far enough in some areas and didn’t address every concern,” Marcus said, “but what they changed, they changed for the better. You don’t hear anyone screaming, ‘I can’t believe they did this.’”
While the Federal Housing Administration (FHA) has gotten kudos (mainly) for its revised condominium guidance (see above item), the agency’s plan to increase mortgage insurance premiums on multifamily new construction has not been at all well received.
Housing industry executives are, in fact, furious about the increase (from 45 basis points to 65 basis points), which is needed, agency officials say will provide a larger financial cushion for the FHA’s insurance fund, generate additional revenue for the government and “ encourage private lending to return to the market by ensuring FHA is not underpricing its risk.”
A letter signed jointly by nine housing and mortgage finance trade groups, led by the Mortgage Bankers Association, the National Association of Home Builders and the National Multi Housing Council questioned both the announced purpose of the premium increase and its likely impact.
The impact, the groups warned, will be overwhelmingly negative, short-circuiting the recovery in the multi-family market, increasing construction costs and pushing apartment rents higher. As for the purpose, the letter asserts pointedly, “Our organizations do not believe that HUD has provided compelling justification for the increases.” That statement, highlighted in bold, constitutes a none-too-thinly veiled threat that the groups may challenge the rule for failing to meet what is a threshold requirement for new regulations.
Some industry executives have suggested that the increase is designed not to offset risks in the multifamily sector, as the FHA has argued, but to bolster the single-family insurance fund, which has been devastated by delinquencies and foreclosures.
“What do you think?” a recent article in the industry trade publication, Housing Finance News,” asked. “Is this another instance of the multifamily industry being shaken down to pay for the sins of the single-family industry?”
Whatever the accuracy of that charge, a recent analysis by Fitch Ratings suggests that the single-family fund faces continuing problems. The FHA increased premium rates for single-family mortgages in February, but that increase may not be sufficient to handle a new surge in mortgage delinquencies, Fitch warned. The agency’s current capital cushion is 0.24 percent of liabilities – perilously close the Congressionally-mandated minimum of 2 percent.
“While delinquency rates for nonguaranteed loans have been improving steadily [at major banks],” the Fitch report noted, “the trend for FHA-guaranteed loans is starkly different….This may eventually force the FHA to look for opportunities to put back some defaulted loans to the banks, particularly if the agency’s funding status worsens and U.S. home prices fail to rebound quickly,” Fitch analysts said in a press statement.
ENCOURAGING SHORT SALES
Homeowners struggling to avoid foreclosure, but still current on their loans, may be eligible for relief under a revised short sale program announced recently by the Federal Housing Finance Agency (FHFA). The new guidelines allow servicers to approve short sales for borrowers whose loans are held by Fannie Mae and Freddie Mac if the borrowers meet specified “hardship” criteria, including the death or disability of the borrower or co-borrower, divorce, legal separation, illness or disability, or a job transfer more than 50 miles away.
“These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities,” FHFA Acting Director Edward DeMarco said in a press statement.
In addition to extending eligibility for short sales, which had been offered only to borrowers who were seriously delinquent, the FHFA has made several other changes designed to make the short sale process easier and more attractive for borrowers and lenders. Among the key changes:
- The most troubled borrowers — those who are 90 days or more delinquent or who have credit scores lower than 620 — will no longer have to document their hardship, and the short sale process may be expedited for them.
- Fannie and Freddie will waive their right to pursue deficiency judgments following short sales. Borrowers with sufficient income or assets can make cash contributions or sign promissory notes instead.
- The new rules cap at $6,000 the amount the GSEs will pay second lien holders. The goal is to discourage investors from delaying short sales in an effort to secure a larger settlement, but critics say $6,000 probably won’t provide much of an incentive for them to get out of the way.
- Members of the armed services who are required to relocate will become automatically eligible for short sales even if they are current on their loans, and they won’t be required to contribute funds to offset the remaining deficiency.
The recently announced changes are part of a broader “Servicing Alignment Initiative” announced earlier this year, designed to streamline and coordinate the GSEs’ short sale and other foreclosure assistance programs. New guidelines announced in June require servicers of GSE-held loans to review and respond to short sale request within 30 days and make a final decision within 60 days after receiving the complete loan package.
Lenders, who had been resisting short sales, have been relying increasingly on them as a less costly alternative to the foreclosure process. Short sales represented nearly 9 percent of home sales in May of this year, according to a CoreLogic report, up from 7.6 percent the year before and up from 6.5 percent in 2010. Of the nearly $10.5 billion in relief offered homeowners thus far under a national agreement settling allegations of foreclosure abuse, more than $8.5 billion has come in the form of debt participating lenders have written off in short sales.
You won’t find many business executives today who aren’t acutely aware of the danger of high-tech hacking or the potential liability they face from a major breach of their data defenses. But you also won’t find many who are protecting themselves from those possible losses.
Only about 25 percent of corporate risk managers are buying insurance to cover data breaches, a recent insurance industry survey has found; and those that are buying cyber-insurance policies are acquiring protection too limited to provide much coverage for a major loss.
Although premium prices have been declining as more insurers have entered this market, companies continue to view the policies as too costly, unnecessary, or both, the survey, by Towers Watson (an insurance brokerage firm found. Of the 153 risk managers responding, 72 said they have declined to purchase any coverage at all for loses resulting from data breaches.
“That was probably one of the more shocking findings we saw … that was virtually unchanged from what our survey found last year,” said Corey Gooch, a senior consultant at Towers Watson, told Insurance Journal.
Nearly two-thirds of the managers who have shunned the coverage said they thought their existing controls were adequate or their risks minimal. But more than half admitted that they do not review their risks annually, as cyber security experts advise. □
QUID PRO QUO
Wondering why officials in St. Paul, MN suddenly dropped a law suit challenging a key fair lending enforcement strategy? Republican lawmakers say the decision resulted from an “inappropriate” deal the Department of Justice cut, agreeing to stay out of unrelated litigation involving the city, if the city would drop its Supreme Court appeal, which analysts predicted, would “blow a big hole” in the disparate impact theory the DOJ has been using increasingly in fair lending actions against banks.
First the underlying case – Magner v. Gallagher. It was a fair housing action, brought by a group of landlords, contending that the city’s aggressive enforcement of housing code standards was having a “disparate impact” on minority tenants, who were disproportionately affected by rent increases. The Eighth Circuit Court sided with the landlords; the city appealed to the Supreme Court. Financial institutions, consumer advocates (and, apparently, the DOJ) recognized that a decision rejecting the disparate impact argument in this case would also undermine fair lending enforcement actions alleging the discriminatory impact of bank policies even where there was no evidence of discriminatory intent.
To avoid that outcome, Republican lawmakers claim, Asst. Attorney General Thomas Perez, who heads the DOJ’s Civil Rights Division, offered to drop a plan to join an unrelated law suit accusing Saint Paul officials of violating the Fair Claims Act, if the city would drop its Supreme Court appeal.
Unlike common settlement agreements, this one “obstructed rather than furthered the ends of justice,” Rep. Patrick McHenry (R-NC) and three of his Republican colleagues said in a letter to Attorney General Eric Holder. The agreement was possible, they said, because, “Mr. Perez knew the disparate impact theory he was using was poised to be overturned by the Supreme Court….”So he bargained away a valid case of fraud against American taxpayers in order to shield a questionable legal theory from Supreme Court scrutiny in order to keep on using it,” the letter continued.
A DOJ spokesman rejected the complaint, telling American Banker, “The resolution reached in these cases was in the best interests of the United States and consistent with the Department’s practice in reaching global settlements….”The decision was appropriate and made following an examination of the relevant facts, law and policy considerations at issue,” the spokesman added, noting, “The Department has broad discretion under the False Claims Act to achieve global resolutions that consider policy and other pending litigation factors.”
“This is not the time to be questioning the fundamental pieces [of U.S. housing policy]… while we’re still very much focused on recovering from the crisis….Anything that would change the system substantially now [would] have a real risk of stopping the momentum that we have in the housing market.” – HUD Secretary Shaun Donovan, in a recent C-SPAN interview, cautioning against any near-term attempt to tamper with the home mortgage interest deduction.
Legal/Legislative Update – September, 2012
NOTHING TO FEAR BUT….CONGRESS
Conventional wisdom – as reflected in many discussions of what’s ailing the economy holds that concern about new regulations is preventing businesses from investing in new equipment and expanding their payrolls. But recent reports indicate that business executives are most concerned not about regulatory actions but about Congressional inaction that will push the country over the “fiscal cliff” – shorthand for the automatic tax increases and sweeping budget cuts that will take effect in January if lawmakers are unable to agree on a deficit reduction plan.
More than 40 percent of the executives is responding to a recent poll by Morgan Stanley cited the fiscal cliff as their primary reason for delaying investment and hiring decisions.
“The fiscal cliff is the primary driver of uncertainty, and a person in my position is going to make a decision to postpone hiring and investments,” timothy Powers, chief executive of Hubbell Inc., a manufacturer of electrical products, told the New York Times.
Economists estimate that concern about political gridlock in Washington combined with worries about the debt crisis in Europe will reduce economic growth by at least half-a-percentage point in the second half of this year.
Some industry executives are beginning to complain publicly about political paralysis in Washington. “Totally irresponsible and absolutely insane,” is how the head of one manufacturing trade group quoted in the Times article described the current impasse. “Companies see the writing on the wall,” he added, “and business decisions are now being made [based] on this.”
LOST OR DELAYED?
Housing economist Robert Shiller thinks the recession has created a “lost decade” for housing, with many first-time buyers unable to realize their homeownership dreams. Other analysts think homeownership dreams have simply been misplaced but will be renewed as the economy improves.
Robert Shiller, co-founder of the Case-Shiller home price index, sees a combination of prolonged slow growth and a heavy student loan debt burden combining to keep would-be buyers out of the housing market for many years to come.
Analysts reporting signs of a housing recovery “are the devastating downturn are “underestimating tectonic shifts in the U.S. economy that make the housing market a different place from a decade ago,” Shiller told If his assumptions are correct, Shiller said, it is likely that home prices won’t rebound for another generation.
Some recent studies have confirmed that grim forecast. A study by the John Burns Real Estate Consulting firm found that the number of first-time buyers has plummeted by 20 percent since 2008 ad predicts that this figure will continue to decline for another three years before beginning to stabilize.
The fear of those who see the decline in homeownership as a long-term trend is that young consumers who lack the capacity to purchase homes now will lose the desire for homeownership in the future. But other analysts contend that the desire for homeownership is as strong as ever.
“This is purely an economic phenomenon, not a behavioral one,” Ben Sopranzetti, a professor at Rutgers Business School, told Business Week “What we need is job growth,” he said. The problem, Sopranzetti agrees, is that job creation has been and is likely to r painfully slow.
Older workers are delaying retirement, limiting opportunities for younger workers; student loan debts are making it difficult for many to accumulate a down payment and tight underwriting standards are making it hard for them to qualify for mortgages. As a result, Sopranzetti said, “It could be years before the conditions are right for many of these young consumers to buy homes, even if they’re inclined to do so.”
Most analysts agree that the housing market will rebound eventually, because Millenials – between the ages of 18 and 35 now – will become more interested in settling down as they get older. But homeownership trends will be driven not by their demand for housing but by their “effective demand,” – their ability to purchase it.
There is no question that Millenials will want to “settle down” as they get older, Joel Kotkin, who writes on real estate trends and social issues, told Business Week. “The key thing is, will the economy be so crappy that the Millennials will never be able to afford a house?”
The Consumer Financial Protection Bureau (CFPB) has proposed a boat load of new rules designed to improve disclosure and promote fairness in the home mortgage market. The new rules build on continuing efforts by regulators to curb abusive mortgage lending practices, help borrowers shop more effectively for loans, and ensure that they understand the terms of the loans they receive. Among the key provisions:
- Within three days of receiving a loan application, lenders would have to give borrowers a detailed, three-page loan estimate, including the interest rate, how, if at all, the rate might change over the life of the loan, and the largest monthly payment possible.
- Lenders would have to disclose any potential risks related to the loan the borrower is obtaining and highlight components of the loan, such as prepayment penalties, borrowers would want to avoid.
- Lenders must provide a closing form, at least three days before the closing, with more detailed information about likely closing costs.
“When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal,” Richard Cordray, the director of the bureau, said in a press statement.
The proposed rules drew rare praise from both consumer advocates and financial industry executives. Consumer groups said the revamped disclosure forms do a much better job of highlighting and explaining loan details to borrowers. Kathleen Day, a spokesman for the Center for Responsible Lending, noted the “more prominent disclosure on prepayment penalties” as a significant improvement.
David Stevens, president of the Mortgage Bankers Association, said the association also supports clearer disclosures for consumers and credited the CFPB for taking a major step in that direction. But he expressed concern that the short (90-day) comment period may not be long enough to permit a thorough review of the 1,000-page document.
The rules have their share of critics, however. The Independent Bankers Association has asked the CFPB to exempt smaller banks that do relatively few mortgages from the new disclosure requirements. Republican lawmakers, who opposed the creation of the new agency and have tried to restrict its reach, have criticized the length and complexity of the proposed rules.
A memo prepared by staff of the House Small Business Committee complained that the proposed rules are “as long as War and Peace but probably not as interesting to read, and about as indecipherable as if you were an English speaker trying to read the novel in Russian.”
Responding to that criticism at a recent hearing, Cordray noted that the actual rules represent “only a small portion” of the 1000-page document. “Much of it is the kind of explanation, procedure, detail, analysis that Congress has told us they want to require before we write a rule.”
Conventional wisdom assumes, and several studies have confirmed, a positive relationship between quality schools and property values: Property values appreciate more rapidly in good markets and decline less steeply in poor ones in areas known for having quality public schools. It appears that schools have an equally positive (or negative) effect on foreclosure rates.
An analysis by RealtyTrac Inc. found that the percentage of foreclosures sales declined as school rankings rose in five metropolitan areas — Jacksonville, FL., Atlanta, GA; Toledo, OH; Stockton, CA; and Seattle, WA.
Stan Humphries, chief economist for Zillow, a real estate data company, thinks those findings may have more to do with income levels – which tend to be higher in highly regarded school districts – than with the schools themselves. “It is likely that both educational outcomes and foreclosures are ultimately linked to income, not to each other,” he told the Wall Street Journal.
Andre Schiller, one of the researchers responsible for the RealtyTrac analysis, thinks the relationship between schools, prices and foreclosures is more direct. Higher income residents push for quality schools, he suggested, and quality schools, in turn, attract higher income buyers. “Once in place, the higher-quality school systems reinforce this, causing higher demand for properties there and higher values,” Schiller told the WSJ.
WINS AND LOSSES FOR MERS
The Mortgage Electronic Registration Systems (MERS), the mortgage tracking system that was ensnared in the robo-signing fiasco, continues to rack up mixed results in law suits challenging its ability to foreclose on behalf of lenders.
In the most recent decision, the Washington Supreme Court held that the company could not foreclose on a borrower because it did not have physical possession of the note the borrower had signed with the lender who had registered the mortgage with MERS. The court didn’t hold that the foreclosures themselves were invalid; only that MERS did not have standing to pursue them.
“There is nothing in this opinion that prevents the parties from proceeding with judicial foreclosures” and “it does not find that deeds of trust that name MERS as beneficiary are invalid,” MERS noted in a press statement. The company also pointed out that no longer forecloses in its own name – a practice it abandoned more than a year ago when the robo-signing controversy exploded. So the decision has no impact on its current operations, MERS emphasized, but analysts pointed out that it could affect an untold number of past foreclosures in Washington State that have been or could be contested.
Courts in other jurisdictions have sided with MERS on the standing issue. A federal district court in Minnesota sanctioned an attorney for filing multiple foreclosure challenges based on MERS’ failure to hold the note, finding that the actions were “frivolous” and designed only to impede legitimate foreclosures.
Separately, the 10th Circuit Court of Appeals found recently that Utah’s laws would allow MERS, as a beneficiary of a deed of trust, to foreclose on behalf of lenders it represents.
WORTH QUOTING: “The American Dream of homeownership may be comatose, but it is not dead.” — UCLA economist David Shulman, in a recent report detailing the continuing strength of the rental housing market. That trend will run its course, Shulman predicted, and interest in home ownership will rebound as rising rents narrow the gap between renting a home and owning one.
Legal/Legislative Update – August, 2012
A PRINCIPAL DECISION
Intensifying pressure from the Obama Administration, legislators and housing advocacy groups forced Edward DeMarco, acting director of the Federal Housing Finance Agency, to reconsider his refusal to allow Fannie Mae and Freddie Mac to reduce the principal balances on the loans of struggling homeowners. But it didn’t make him change that unpopular position.
“We concluded that the potential benefit was too small and uncertain relative to the known and unknown costs and risks,” DeMarco said.
The agency, which oversees Fannie and Freddie, based its determination on an extensive analysis of the likely effects of principal reductions on borrowers, the GSEs, investors and taxpayers. That analysis showed that principal reduction was no more effective than other assistance alternatives in helping homeowners avoid foreclosure, and involved greater risks to and higher costs for taxpayers and the GSEs, DeMarco said.
Making no effort to disguise the Administration’s frustration, Treasury Secretary Tim Geithner disputed that conclusion, noting that several studies – including the FHFA’s own analysis — have demonstrated substantial potential savings for taxpayers and the GSEs from the principal reduction program the Administration has implemented.
A recent study by Amherst Securities comparing the effectiveness of different assistance programs found that the redefault rate for principal modifications was 12 percent after 12 months, compared with 23 percent for interest rate reductions and 30 percent for “capitalization” modifications, extending the loan term.
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner wrote in a letter to the independent regulator, adding, “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
DeMarco acknowledged that the agency’s study identified some scenarios under which taxpayers would benefit from the principal reduction program, but those projections assume more widespread buyer participation than is likely and fail to consider that the program targets buyers who are seriously underwater, for whom redefault risks are particularly high. He also cited “moral hazard” – the possibility that borrowers able to repay their loans will default “strategically” to reduce their loan — as a major concern and an argument against principal reductions.
The exchange between DeMarco and Geithner mirrors what has been an ongoing debate between advocates of principal reduction, who say it is essential to help the housing market and the economy recover, and critics who say the long-term negative implications – increasing taxpayer costs and discouraging mortgage investment – can’t be ignored.
Republicans, who share the latter view, applauded DeMarco’s decision, while Democrats, who support principal reductions, decried it. Sen. Bob Corker (R-TN) praised DeMarco for “[refusing] to bend to political pressures,” while Rep. Gary Peters (D-MI) blasted the FHFA for “turning its back on hundreds of thousands of underwater homeowners.”
Economist Paul Krugman, who has been among DeMarco’s most outspoken critics, was even more direct, arguing in his New York Times column, “This guy needs to go.”
AT LONG LAST — FLOOD INSURANCE
Congress finally did what it has been unable to do for the past three years: Revamp the National Flood Insurance Program and reauthorize it for several years. That action, a month before the program’s authorization was set to expire, avoided both another of the short-term extensions Congress has approved, and another costly and disruptive lapse. The National Association of Realtors estimates that two-month lapse that occurred in 2010, before Congress finally agreed on a short-term extension, forced the cancellation of 1,400 home sales per day.
Lawmakers have long agreed that the insurance program, run by the Federal Emergency Management Association (FEMA) had to be restructured, but they have been unable to agree on the changes required. The compromise approved by the House and Senate extends the program for five years and stabilizes its finances (battered badly by payouts after Hurricane Katrina and other hurricanes in an exceptionally stormy 2005) by giving FEMA more discretion to boost insurance rates and by limiting coverage to primary residences, excluding vacation homes, which had been covered in the past. The legislation also strengthens FEMA’s floodplain mapping program and makes it easier for the agency to move, raze or deny coverage for homes that produce repetitive insurance claims.
The White House released a statement applauding the measure, saying it will “reduce flood risk and increase the resiliency of communities to flooding…. Transitioning to actuarially sound rates [will] enable policyholders and communities adjust to risk-based premiums,” the statement added.
A RISING EQUITY TIDE
Rising home prices are boosting equity positions, pulling some underwater borrowers out of the financial depths and into beak-even or better positions for the first time in years. Price gains erased the negative equity of more than 700,000 homeowners in the first quarter, according to a CoreLogic report, which tallied 11.4 million mortgage borrowers still under water – down from 12.1 million in the final quarter of last year. Of the borrowers who still owe more on their homes than their outstanding loan balance, nearly 2 million were facing a gap of only 5 percent, the report found.
“This is a meaningful improvement that is driven by quickly improving outlooks in some of the hardest hit markets,” Mark Fleming, CoreLogic’s chief economist, told CNN-Money. While the still sluggish economic recovery will prevent dramatic improvement in the housing market, Fleming acknowledged, “reducing the number of underwater households is an important step toward reducing future mortgage default risk,”
Also boding well in the risk management area, a new credit scoring model identifies many more consumers as good credit risks. The model, developed jointly by Fair Isaac Corp. (FICO) and CoreLogic, combines traditional credit information gleaned from credit card companies and other financial sources, with data collected from public records, including short-term installment loans, rental payment history, and real estate information. This additional information creates “a more precise score and picture of the borrower,” Tim Grace, vice president of CoreLogic, said in a press statement.
Using the new model, the number of consumers with the highest credit score (800 to 850) nearly doubles, to 44 percent – about matching the decline in the second tier (700 to 799). Nearly 70 percent of consumers end up with higher credit scores under this model, but less than 1 percent are pushed above 700 – the cutting off point many mortgage lenders use in qualifying borrowers.
You won’t find many business executives today who aren’t acutely aware of the danger of high-tech hacking or the potential liability they face from a major breach of their data defenses. But you also won’t find many who are protecting themselves from those possible losses.
Only about 25 percent of corporate risk managers are buying insurance to cover data breaches, a recent insurance industry survey has found; and those that are buying cyber-insurance policies are acquiring protection too limited to provide much coverage for a major loss.
Although premium prices have been declining as more insurers have entered this market, companies continue to view the policies as too costly, unnecessary, or both, the survey, by Towers Watson (an insurance brokerage firm found. Of the 153 risk managers responding, 72 said they have declined to purchase any coverage at all for loses resulting from data breaches.
“That was probably one of the more shocking findings we saw … that was virtually unchanged from what our survey found last year,” said Corey Gooch, a senior consultant at Towers Watson, told Insurance Journal.
Nearly two-thirds of the managers who have shunned the coverage said they thought their existing controls were adequate or their risks minimal. But more than half admitted that they do not review their risks annually, as cyber security experts advise.
TRAYVON MARTIN LIABILITY CLAIM
The mother of Trayvon Martin – the unarmed black teenager who was killed by a neighborhood watch captain — has sued the Florida homeowners association to which the watch group was connected. Industry experts had widely predicted the legal action, noting evidence that the association oversaw the watch group and thus would likely have, or be alleged to have, legal responsibility for the actions of its members.
Martin was shot by watch captain George Zimmerman after Zimmerman had called police to report that the teen was behaving suspiciously. Martin was returning from a convenience store to a home he was visiting in the gated community. Ignoring instructions from the police dispatcher, Zimmerman followed Martin, confronted him, and claims he subsequently shot the youth in self-defense. He has been charged with second degree murder and is awaiting trial.
Martin’s mother is seeking $75,000 in damages from the homeowners association. Travelers Insurance Company, which insures the community, has moved to deny the claim, citing a provision in the insurance policy excluding coverage for losses resulting from “bodily injury, sickness, mental anguish, emotional distress, disease or death of any person.”
Local governments have long used eminent domain as a mechanism for taking public property for public purposes. Now some country governments are considering using the same legal strategy to “take” underwater mortgages from lenders in order to help struggling borrowers avoid foreclosure.
Mortgage Resolution Partners, a California-based venture capital firm, floated the idea recently, as a low-cost way to address the collateral damage to communities (loss of tax revenue, abandoned property and blighted neighborhoods) of the ongoing foreclosure crisis.
Eminent domain allows local, state, or federal government entities to take private property, provided they use it for “public purposes” and pay the owners fair market value for it. Supporters of the plan say its public purpose (helping communities) is clear and the fair market value of mortgages could be determined easily through auctions and comparable sales. San Bernardino County and its two largest cities (Fontana and Ontario) have approved resolutions authorizing them to acquire underwater mortgages but have not as yet taken steps to implement the plan.
The basic idea is straightforward: Governmental entities would ‘seize’ underwater mortgages on which the borrowers are still current, pay the mortgage owners ‘fair market value’ based on current, lower values, and then restructure the loans to produce lower payments and lower principal balances for borrowers.
Supporters say this strategy benefits everyone: Borrowers end up with loans they can afford, cities and towns boost their tax rolls and avoid the negatives of foreclosed properties and investors shed high-risk assets. But financial institutions that own second liens behind the first mortgages targeted for taking would not be among the winners, because they would have to recognize losses they have thus far been able to hide by refusing to restructure them to reflect depressed home values.
The opposition of second lien holders has been a major impediment to government assistance plans that call for lenders to restructure loans by reducing the principal balance. If the second mortgage isn’t also restructured, the net effect is often to increase the collateral backing the second mortgage, leaving the borrower still underwater on the debt.
Financial industry trade groups are arguing that using eminent domain to take mortgages would be unconstitutional and warning that lenders would increase mortgage interest rates and tighten underwriting standards in response.
“Eminent domain is not the right mechanism to address these problems,” Timothy Cameron, managing director of the Securities Industry and Financial Markets Association’s asset managers group, told California officials at a recent meeting. “There are better ways to attack these problems,” he argued, adding, “We need mortgage investors and lenders to come back to these fragile markets – but this plan will force both groups to avoid them….The use of eminent domain will do more harm than good.”
Steven Gluckstern, chairman of the company that proposed the eminent domain plan, says it will do what private investors have been unable or unwilling to do thus far – resolve the foreclosure crisis. We’re now six years into the crisis and public and private entities have not been able to solve it,” he said in a recent press interview. “This is a balance sheet problem for homeowners,” he added, “and if you want to fix the economy, you have to fix this problem.”
WORTH QUOTING: “Fannie and Freddie should be abolished. You shouldn’t have this shareholder-public thing. That clearly, in retrospect, was a problem. But I think some form of ultimate federal government guarantee is an important thing if you’re going to have 30-year, fixed-rate mortgage.” ─ Rep. Barney Frank (D-MA), in an interview with Housing Wire.
Legal/Legislative Update – June, 2012
The Consumer Financial Protection Bureau (CFPB) is going to take a little more time before finalizing the “Qualified Mortgage” rule – establishing the guidelines for determining a borrower’s “ability to repay” a residential mortgage. The original comment period ended in July of last year and the agency was expected to issue a final rule by the end of this month. But agency officials said they want to review more lending data and obtain more information on litigation costs and liability risks created by the new rule. The extended comment period will now end July 9 and a final rule issued “before the end of 2012,” an agency announcement said.
“Through our ability-to-repay rule, we want to ensure that consumers are not set up to fail with mortgages they cannot afford and we want to protect access to affordable credit,” CFPB Director Richard Corday said in a press release. “We are committed to gathering solid data to inform this important rule,” he added.
Some industry executives are hoping the focus on litigation concerns indicates the agency may adopt a ‘safe harbor’ for lenders that originate ‘qualified mortgages’ rather than the ‘rebuttable presumption’ advocated by consumer groups, which would create more leeway for borrowers to sue lenders for violating the rule. But many observers drew the opposite conclusion from the information the agency is requesting, suggesting that the CFPB is more likely to allow borrowers to question whether lenders should have approved a loan in the first place.
“I think with asking all these questions about litigation costs, to me it really says that they are gearing up for a release that will involve the rebuttable presumption alternative, ” Isaac Boltansky, an analyst with Compass Point Research and Trading, told American Banker.
Jaret Seiberg, a senior policy analyst at Guggenheim Securities agreed. “We think the risk is rising for an adverse ruling in 2013,” he wrote in recent commentary.
The delay in finalizing the Qualified Mortgage rule will almost certainly delay the release of the companion “Qualified Residential Mortgage” or “skin-in-the-game” rules, requiring loan originators to retain 5 percent of the credit risks on any loans that do not meet specified underwriting standards.
The proposed rules established a minimum 20 percent down payment requirement, but industry analysts are predicting that regulators will bend on that restriction, which lenders and consumer advocates alike have waned would prevent many low-income and minority buyers from purchasing homes. An analysis by CoreLogic found that nearly 40 percent of buyers in 2010 made down payments of less than 20 percent.
“They’re not talking about 20 percent anymore,” Rep. Barney Frank (D-MA) a supporter of the rule, conceded in an interview with Housing Wire. But Frank also defended the need to set the regulatory bar high enough to avoid the lax underwriting that contributed to the mortgage market meltdown.
“We used to make loans without securitizations,” he told Housing Wire. “They [lenders] must not think they’re making good loans if they can’t hold 5 percent,” he added. “Do they have so little confidence in their judgments that [they think the 5 percent risk retention requirement] would be fatal to them?” □
Investors no longer have a corner on the foreclosure market. The National Association of Realtors (NAR) reports that homebuyers – that is, people who actually plan to occupy the homes they purchase – are more willing to consider foreclosures than they have been in the past.
Buyer interest in foreclosure sales has nearly tripled in the past two years, according to the NAR, which identified that trend in a recent telephone survey. Nearly two-thirds of the respondents said they would be likely to purchase a foreclosed property, up from just 25.3 percent two years ago. Most of those prospective buyers (92.3 percent) said they intended to occupy the homes; only about 7 percent were looking for investments.
NAR analysts attributed the growing interest in foreclosures to a combination of changing buyer attitudes and very attractive foreclosure discounts. On that point, respondents were surprisingly realistic about the discounts they could expect, with most predicting foreclosure prices averaging between 10 percent and 30 percent below market. Recent reports put the average at around 29 percent nationally. Respondents were also realistic about likely appreciation rates, predicting gains of not much more than 2 percent annually over the next five years, with younger buyers, on the whole, more conservative (and less optimistic) than older ones.
While interest in foreclosure sales is growing, banks are becoming more willing to accept short sales – in which owners sell their homes for less than they owe on their mortgages – as a means of avoiding foreclosures. Realty Trac estimates that homes in some stage of foreclosure represented more than 25 percent of homes sold in the first quarter, with short sales accounting for about 12 percent of that total – up from 10 percent in the fourth quarter of last year and 9 percent a year ago. Although short sales reached a three-year high in the first quarter, sales of bank-owned properties declined by nearly 15 percent, according to the RealtyTrac report.
The average short sale price in the first quarter was $175,461 – representing a discount of about 21 percent — 10 percent lower than a year ago and the lowest average in the three years RealtyTrac has been compiling these statistics. REO sale prices were discounted by about 33 percent, but the first quarter average, at $147,995, was only 2 percent lower than the first quarter a year ago.
Massachusetts reported the largest discounts both for short sales (38 percent) and foreclosure sales (45 percent), according to RealtyTrac. The Bay State also logged its largest number of foreclosure petitions in nearly two years – 47 percent more in April than in the same month last year, according to the Warren Group. But the increase does not indicate that conditions are deteriorating, Corey Hopkins, editorial director for the company, emphasized; – only that lenders are acting more aggressively and more quickly to clear the backlog of distressed properties that accumulated the nation’s largest servicers and regulators negotiated their way out of the robo-signing mess.
“Foreclosure activity was so low last year that we’re inevitably seeing a rise in foreclosures across the state,” Hopkins said in a press release, adding, “It’s necessary for a wave of foreclosures to work through the system this year, but it shouldn’t cause panic. In order to return to a healthier market, the backlog of distressed properties needs to be cleared from banks’ books.”
FLOOD INSURANCE REDUX
In what has become a perennial exercise in legislative kick the can, Congress has approved another two-month extension of the federal flood insurance program, avoiding once again the home sale glitches a lapse in the program would create. The latest 60-day extension gives lawmakers until July 30 to approve a more permanent measure overhauling the program, or (as is more likely) kick this legislative can down the road once again.
As part of the deal required to approve the extension, the measure includes a provision eliminating subsidized premiums for second homes and vacation homes, on which the Senate insisted. The Senate leadership, in exchange, agreed to take up a broader reform measure this month.
The House and Senate have agreed on the need to reform the National Flood Insurance Program, overseen by the Federal Emergency Management Association (FEMA), but have not agreed on exactly how to accomplish that goal. The House last year approved a measure reauthorizing the program for five years, but the Senate has neither considered that bill nor introduced an alternative to it.
Congress has approved multiple short-term extensions for the NFIP during the past three years and actually allowed the program to lapse for a few weeks in 2010. Another lapse could be devastating in the current fragile housing market, industry executives have warned. The National Association of Realtors has warned that the inability to obtain insurance, required for homes in flood hazard areas, could threaten as many as 1,300 closings daily.
“If it were to expire, new housing construction would stall, in fact, in many places, just come to a halt, real estate transactions would come to a screaming halt, taxpayers would be on the hook for future disasters,” Senate Majority Leader Harry Reid (D-NV) warned in the debate preceding the Senate vote to extend the program.
“We are pleased that the House voted to concur with the Senate’s 60-day NFIP extension,” Ben McKay, senior vice president of federal government relations for the Property Casualty Insurers Association, said in a press statement. “However, this only delays the fundamental debate over the future of the flood insurance program.” McKay said he is “hopeful” the Senate will follow through on its promise and act on a long-term reauthorization and reform measure this month.
KNOWING THE SCORE
Consumers have become much savvier about credit scores, but they don’t know as much as they should, and those knowledge gaps could affect the cost and availability of credit for many borrowers.
An annual survey designed to test consumer knowledge of credit scores found encouraging improvement in the general understanding of how the scores are used and the key factors affecting them.”
In the numerous consumer knowledge surveys we have undertaken over the past several decades, I have never seen such improvement from one year to the next,” said Stephen Brobeck, executive director of the Consumer Federation of America, which conducted the survey jointly with VantageScore Solutions. But there is still considerable room, and need, for improvement, according to Brobeck, who cited several areas in which lack of information and misconceptions remain problematic.
On the positive side, more consumers knew:
- Who collects the information on which credit scores are base;
- What constitutes a “good” score;
- How to increase a low score; and
- That it is important to check the accuracy of credit reports periodically.
More than two-fifths of the respondents had obtained or received their credit scores in the past year, and the survey found that members of that group were more likely than others to answer the questions correctly.
More than 90 percent were aware that mortgage lenders and credit card issuers use credit scores, but two-thirds or more were also aware that landlords, insurance companies and cell phone companies also rely on the scores in making their decisions.
Three quarters of the respondents were able to identify the major credit bureaus, and a large majority (89 percent or more) could identify the factors (missed payments, personal bankruptcy, and high credit card balances) that weigh most heavily in credit scoring formulas.
Younger consumers, between 18 and 35, who are most likely to rely on credit, also seemed to know more about credit scores, the survey found.
Particularly impressive and “somewhat surprising,’ Brobeck said, was the widespread understanding of “new and fairly complicated” consumer protections related to credit scores. For example, between 70 percent and 80 percent of the respondents knew the three circumstances under which lenders using credit scores are required to disclose them to borrowers.
Brobeck attributed the improvement partly to publicity surrounding the new protections and to more aggressive efforts by CFA and other advocacy groups to educate consumers about credit issues generally and credit scores in particular.
But the survey also identified gaps in some key areas:
- Only 29 percent are aware that consumers with lower scores will pay more, and possibly a lot more, for credit.
- Fewer than half (44 percent) understand that a credit score typically measures repayment risk; 22 percent thought it measured a borrower’s debt load and 21 percent the borrower’s other financial resources.
- More than half still think age and marital status influence the credit score and 21 percent think ethnic origin is a factor.
- Only 9 percent are aware that know that multiple inquiries during a short period will lower a credit score, but more than one third believe (incorrectly) that isolated individual inquiries will have that eff
- More than half agreed with the statement that credit repair companies are “always” or “usually” helpful in correcting credit report errors and improving scores, despite considerable evidence to the contrary.
Financial institutions thought the Attorneys’ General agreement resolving the “robo-signing” mess would corral the potential liability they faced for flawed foreclosure practices. But a pending court decision threatens to open the foreclosure liability box anew.
The Florida Supreme Court will decide whether a lender charged with fraud for submitting flawed foreclosure documents can eliminate the fraud charge by dismissing the case, correcting the documents and re-filing them in a new foreclosure action.
The decision will directly affect thousands, and potentially hundreds of thousands of homeowners in Florida, which has been the epicenter of the nation’s foreclosure crisis. But it could influence the decisions in many other jurisdictions where courts are considering similar issues.
The issues in this case (Roman Pino v. Bank of New York Mellon) echo those in a Massachusetts Supreme Judicial Court decision last year invalidating a foreclosure because the lender could not prove that it had received a valid assignment of the mortgage, absent which, the court ruled, the lender lacked standing to foreclose.
In this case, although the bank has negotiated a settlement with the plaintiff, Pino, under terms indicating that the terms of his mortgage have been “satisfied,” the Florida court has decided to issue a ruling anyway. The decision is expected before the end of this year.
Financial industry executives say a decision against the bank – in effect, barring voluntary dismissal as a means of correcting flawed documents – would be draconian and threaten the fragile housing recovery in Florida and anywhere else the theory is applied.
“An affirmative answer to the certified question would impact general credit and lending practices, just as the fragile real estate finance industry begins to rebound from a severe economic downturn.” The Mortgage Bankers Association wrote in an amicus brief supporting the bank.
Consumer advocates say as long as lenders know they can avoid liability for abusive foreclosures by re-doing them when challenged, they will have no incentive to change their procedures.
WORTH QUOTING: “We still live in a dangerous and uncertain world, with Europe confronting a severe and protracted crisis… [but] I prefer our challenges to those of any economy anywhere in the world.” — Treasury Secretary Timothy Geithner, speaking to a group of regional businesses and non-profit organizations in Baltimore.
Legal/Legislative Update – May, 2012
It seems that Federal Housing Administration (FHA) officials may have been listening after all to the complaints – angry, widespread and ongoing – about the agency’s stricter underwriting guidelines for condominium loans. The Community Associations Institute (CAI) has spearheaded efforts to persuade the agency to rethink, revise and in some cases withdraw requirements that, industry executives say, are making it more difficult for prospective buyers to purchase condominiums and for existing owners to sell or refinance the units they own.
Agency officials acknowledged recently that they are “evaluating potential changes,” but declined to specify what they might be. Syndicated columnist Kenneth Harney first reported that the FHA was going to ease some of the restrictions, in a column noting the problems the rules have created for individual buyers and sellers, for condominium communities and for the housing market as a whole.
“According to condominium experts, realty agents, lenders and builders, FHA’s rules have become overly strict and have cut off unit buyers from their best source of low-cost mortgage money, thereby frustrating the real estate recovery that the Obama administration says it advocates,” Harney reported.
CAI officials are predicting that the delinquency limits and certification requirements community associations must meet to make units eligible for FHA financing may be among the areas FHA will revise. The delinquency restrictions, barring FHA loans in any community in which more than 15 percent of the owners are more than 30 days delinquent on common area charges, disqualify many communities in areas hard-hit by foreclosures, industry executives say, while the certification requirements – and concerns about the potential liability they create for board members – have prevented many more communities from even seeking FHA approval.
The trade group is expecting only “modest” revisions in the certification requirements, however. A recent analysis for members notes: “CAI does not anticipate FHA will modify the certification to protect signors from making legal determinations or attestations that the condominium is in compliance with all applicable local, state, and federal laws and regulations.”
There has been no shortage of explanations for the causes of the economic disaster that has decimated the housing market specifically and real estate values overall. But in the commercial sector, it appears that flawed appraisals played an outsized role.
That’s according to a recent study published by CRE Finance World, which found a gaping discrepancies between the appraised values on which loans were based, and the price at which these properties were eventually sold.
“This study confirms what many of us have thought but heretofore have only known anecdotally: That appraisals are not very accurate,” according to KC Conway, executive managing director at the brokerage firm Colliers International, and , co-author of the study with Brian Olasov, a managing director at the law firm McKenna Long & Aldridge,
The study is based on market data covering the period March 2007 through September 2011. The authors found that appraised values exceeded sales prices for 64 percent of the 2,076 properties reviewed, creating an aggregate shortfall of $1.4 billion. The Selling prices exceeded the appraisals in 35.5 percent of the transactions, by a total of $661 million.
In 121 of the transactions, appraised values exceeded selling prices by 100 percent; at the other extreme, the appraisals were less than 70 percent of the sales prices for 132 properties. Far from being the reliable estimates the market needs, the authors said these appraisals more closely resemble “a game of horseshoes… close is good enough.”
The study echoes what critics of the appraisal industry, including many appraisers themselves, have been saying for a long time – the system rewards appraisers who “go along to get along,” providing the numbers necessary to support loan decisions, and accepting the cut-rate fees on which lenders insist, knowing they risk losing business otherwise. That criticism has been loudest among residential appraisers, but industry executives say this study indicates the concerns are equally valid in the commercial sector.
“It is a broken profession in a lot of ways,” John Cicero, a managing principal of the appraisal firm Miller Cicero, told The New York Times. “The appraisal industry has become commoditized, where lenders see appraisals as simply a commodity to be purchased by a vendor and where more emphasis is placed on the price of an appraisal than the expertise of the appraiser…. They actually refer to us as vendors submitting a bid, not educated professionals who are providing an important service,” he added.
Some industry executives questioned the study and its conclusions, noting that a selling price lower than the appraised value does not necessarily prove the appraisal was inaccurate. The study doesn’t consider, for example, why the loans were sold, nor does it indicate whether the sales were market transactions or distressed sales.
Appraisals have to be judged on their own merits, Bill Garber, the director of government and external relations for the Appraisal Institute, told the Times, not as part of an aggregate analysis that fails to make essential distinctions between about properties and the loans involved.
Still, the role of flawed appraisals shouldn’t be downplayed, study co-author Olasov argued. “When you take a look at the 400-plus bank failures that have taken place going back to 2009,” he said in the Times article, the “precipitating” factor was the impact of “declining appraisal values” on real estate portfolios.
Consumer advocates and many economists have been arguing for some time that short sales represent a viable alternative to foreclosures, benefiting lenders and borrowers alike. It appears that more lenders are beginning to agree. Short sales increased by more than 33 percent in January compared with the prior year, exceeding foreclosure sales in a dozen markets and narrowing the gap between short sales and foreclosures overall.
Statistics compiled by RealtyTrac indicate that short sale prices declined in January by about 10 percent year-over year – as did the time required for lenders to approve the transaction, averaging 306 days – down slightly from 308 days in the fourth quarter of 2011 but a significant improvement over the peak of 318 days in the third quarter of last year.
The time frame is likely to get even shorter as a result of new guidelines adopted by Fannie Mae and Freddie Mac, requiring lenders to approve a short sale within 30 days of receiving the proposal. They can take an additional 30 days if needed, but must provide borrowers with weekly updates on the progress of the review. The new rules take effect June 15th.
“The Federal Housing Finance Agency (FHFA) and the [GSEs] are committed to enhancing the short sales and deeds-in-lieu process as additional tools to prevent foreclosure, keep homes occupied and help maintain stable communities,” Edward DeMarco, the FHFA’s acting director, said in announcing the guidance. “These timeline and borrower communication announcements set minimum standards and provide clear expectations regarding these important foreclosure alternatives.”
As home prices continue to fall, median rents are rising, and those trends are shifting the dynamics in many housing markets. Buying has become more affordable than renting in 98 out of the nation’s 100 largest metropolitan areas — even in New York, Los Angeles and Boston, according to a rent vs. buy index compiled by Trulia.
This should boost home sales, in theory, as renters recognize that it would be more cost-effective for them to own their own home. But rising rents are making it more difficult for many prospective buyers to amass the down payment they need, forcing them to continue renting and increasing the demand for rental housing, which is putting more upward pressure on rents.
A recent report by Zillow documents the rising rent trend, finding that rents increased by 3 percent between January 2011 and January 2012, while home values declined by 4.6 percent during the same period. But Zillow’s chief economist, Stan Humphries, sees this as a net positive for the housing market.
“While it seems that rents are rising at the expense of home values, the opposite is true,” Humphries said in a press statement. “A thriving rental market will stimulate home sales as investors snap up low-priced inventory to convert to rentals,” he added, noting, “the flourishing rental market is the silver lining to the nation’s housing downturn.”
With that prospect in mind, Fannie Mae has begun to sell some of its REO properties in blocks to investors, for conversion to rental units, putting the first of those packages on the market in February.
The National Association of Realtors, meanwhile, reports that investor purchases of single-family homes increased by nearly 65 percent last year to 1.23 million units compared with 749,000 the year before. Investment sales represented 27percent of 2011 transactions, compared to 17 percent in 2010, according to the NAR. “During the past year, investors have been swooping into the market to take advantage of bargain home prices,” Lawrence Yun, the NAR’s chief economist said. Investors were also attracted by rising rental income, which, Yun noted, “easily beat cash sitting in banks.”
The financial headlines haven’t provide many surprises of late – at least, not many pleasant ones. But here’s one that is worth reporting: “With $2.7B Profit, Fannie Mae Ends Q1 Without Drawing Taxpayer Funds.” That’s not just surprising; it’s astounding, given recent history, which has required massive infusions of federal aid for both Fannie Mae and Freddie Mac since they were placed under federal conservatorship four years ago.
Fannie Mae officials attributed the “significant improvement” in the company’s financial performance to a steady decline in credit-related expenses and to its ability to shed some of the foreclosed properties its REO portfolio.
Freddie Mac also reported a first quarter profit of $577but it wasn’t enough to offset the dividend due on the government assistance it has received. As a result, the company is seeking an additional $19 million in funding from the Treasury Department. ,
“In the first quarter, Freddie Mac sharpened its focus on building value for the industry, homeowners and taxpayers by aligning its resources and internal business plans to meet the goals and objectives laid out in our new Conservatorship Scorecard and Strategic Plan,” Chief Executive Officer Charles Haldeman Jr. said in a press statement. “Today, we are executing against that plan, working with our regulator to build a new infrastructure for the housing finance system and establish a path for shifting risk to private investors.”
Far less surprising than Fannie Mae’s return to profitability were reports that the Obama Administration does not plan to unveil its plans for restructuring the housing GSEs “any time soon.” That word came from HUD Secretary Shaun Donovan, who told a Congressional committee the Administration has not set a date for submitting the proposal, on which it has been working for the past two years.
Lawmakers also appear to be in no hurry to tackle reforms, even though Congressional critics have been demanding action on Fannie and Freddie since the government seized them in 2010. The central role the GSEs have played and continue to play in bolstering the housing market since its collapse have made even their harshest critics reluctant to pursue them too aggressively.
The Treasury Department outlined several options for restructuring the GSEs in a white paper drafted more than a year ago and industry analysts say reforms will likely incorporate some of these ideas. But they also agree that significant action isn’t likely from the Administration or Congress until after the November elections.
Young people, who represent the nation’s future, aren’t very confident about it. A recent survey of teenagers between the ages of 14 and 18 found that only 56 percent of them expect to do as well or better financially than their parents. That’s down from nearly 90 percent responding to the survey, conducted by Junior Achievement and The Allstate Foundation, last year.
The 2012 Junior Achievement Teens and Personal Finance survey also uncovered a dramatic shift in the age at which teens think they will be financially independent from their parents or guardians. Only 18 percent of the teens who responded indicated they’d be independent by age 20, compared with 44 percent a year ago; the number of teens who said they won’t be independent until they are much older (25 to 27) doubled to 23 per cent compared with 12 percent in 2011.
Among other survey results:
- Teens agree that managing their money is important, but few are doing it. Nearly one-third of the respondents said they weren’t budgeting their money, compared with only 10 percent who admitted that in the 2011 survey.
- Teens are not getting as much financial information in school as they have in the past. Nearly 60 percent said they were learning about money management in school last year; this year, only 24 percent said they were getting that training. Most agreed that it would be best to get that information before they graduated from high school. .
- Parents are an important role model in financial management as in other behaviors. Nearly 60 percent of the teen respondents said their parents have reduced their savings during the recession (up from 21 percent last year), and the kids are following suit – only 56 percent said they plan to save some of the money they earn this year, down from 89 percent last year.
WORTH QUOTING: “Although not all will go smoothly, the U.S. economy’s fundamentals are firming, putting it in better position to handle whatever comes.” — Mark Zandi, chief economist for Moody’s Analytics.
Force-placed insurance, which has resided for years in a dark corner of the mortgage industry, is now in the spotlight, and the attention hasn’t been flattering. New York state insurance regulators announced recently that they are broadening the investigation they launched earlier this year, asking several insurance companies to justify premiums on force-placed home insurance policies, which mortgage lenders buy on behalf of borrowers whose coverage has lapsed. The New York investigation reportedly has found evidence that these policies cost as much as 10 times the price of the lapsed policies but have claims rates that are a fraction of industry averages.
New York regulators aren’t the only ones asking questions about industry practices. The California insurance commissioner recently ordered the 10 largest companies providing force-placed insurance in that state to lower their rates. And Fannie Mae recently announced that it intended to establish a relationship with an insurance company to control the issuance and pricing of force-placed policies on loans Fannie has purchased. Fannie is also issuing new guidelines detailing the circumstances under which lenders can force-place insurance and specifying the charges they can require borrowers to reimburse.
Law suits challenging force-placed insurance are proliferating. In a case that industry executives are following closely, and with concern, a federal judge has cleared the way for a class action suit against Wells Fargo. The borrower initiating the action claims that the bank charge him $10,000 for seven months of coverage that he was able to purchase for only $2,500 per year.
American Banker, whose reporting spurred the New York investigation, has kept up the pressure. A recent article focusing on the work of a Florida attorney, details “evidence of abuses and self-dealing [suggesting] that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.”
The article notes in particular potential “conflicts of interest” involving questionable and possibly illegal commissions insurers pay to the lenders purchasing force-placed policies from them.
“There’s no arm’s-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit,” Diane Thompson, of counsel for the National Consumer Law Center, told the publication. “Servicers and insurers have turned this into a gravy train.”
“With little regulatory oversight or even private investor awareness, force-placed insurance has helped make drawn-out foreclosures lucrative for servicers — far more so,” in some cases, the article adds, than avoiding the foreclosure. “As the intermediary between borrower and investor,” the article suggests, “servicers appear to be benefiting themselves at the expense of both.”
Legal/Legislative Update – April, 2012
WILL THEY OR WON’T THEY?
The betting is heavy but the odds are mixed on whether Edward DeMarco, the head of the Federal Housing Finance Agency (FHFA) will bow to pressure and allow Fannie Mae and Freddie Mac to reduce the principal balance on some mortgages in order to help borrowers avoid foreclosure.
DeMarco has consistently opposed principal reductions, citing the cost to taxpayers and “moral hazard” – the possibility that borrowers who can handle their loan payments will “default strategically” in order to reduce their loan obligations.
Analysts who heard DeMarco speak recently at the Brookings Institution drew different conclusions about whether the increased incentives the Treasury Department is offering for principal reductions under the Home Affordable Mortgage Program (HAMP) have led the FHFA director to alter his view.
Bank of America analysts wrote in a note to investors that they saw a “zero to minimal chance” that principal reductions are in the offing for Fannie and Freddie. But analysts at Keefe Bruyette concluded otherwise: “We think a change in policy to allow more principal reductions is coming but expect it will be announced later in the month.”
A New York Times article reporting on the speech suggested that DeMarco’s remarks had “opened the door” to principal forgiveness, but then went on to note that his comments “left doubt about whether he would change his long-held stance” opposing that policy.
Those who found evidence that DeMarco is bending on the issue focused on his acknowledgment that the Treasury incentives (increased from between 6 and 21 cents for every dollar of principal reduced to between 18 and 63 cents) would save Fannie and Freddie approximately $1.7 million. “No wonder the FHFA might now be keener on the idea,” an analysis by Capital Economics suggested.
But those who saw little reason to expect DeMarco to embrace principal reductions concentrated on the bulk of his speech, in which he detailed all the reasons he still doesn’t like idea. For one thing, he noted, the projected savings may be more ephemeral than real, since they assume that all of the nearly 700,000 eligible borrowers would participate, and discount the “moral hazard” that DeMarco sees as a major problem. If 90,000 borrowers default strategically, he said, the savings from the Treasury incentives would be erased.
Although borrowers for whom principal is forgiven re-default less frequently than those who receive principal forbearance (where the payment reduction is temporary), DeMarco acknowledged, the impact on investors also has to be considered, and their losses are higher when principal is reduced.
DeMarco also questioned assertions that because Fannie and Freddie are by far the major players in the mortgage market today, their failure to reduce principal for borrowers is impeding the housing market’s recovery. The borrowers who would be eligible for relief represent only “a fraction” of the approximately 11 million homeowners estimated to be “underwater” today, DeMarco said, so the impact on the market will be negligible.
“This is not about some huge difference-making program that will rescue the housing market,” DeMarco said. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”
That sounds like someone who is sticking to his guns, not surrendering them. But with pressure on Fannie and Freddie continuing to mount, DeMarco’s opposition to principal reductions may not matter, Issac Boltansky, an analyst at Compass Point, told DS News. “If he refuses to adopt principal reduction as a means of foreclosure prevention,” Boltansky said, “we believe the likelihood of him being relieved of his position is extremely high.”
Just two weeks after announcing a new, more restrictive lending policy, the Federal Housing Administration (FHA) has decided to delay it. The policy would have denied FHA loans to borrowers who had more than $1,000 in disputed debts unless they either repaid the sum or could demonstrate at least three months of consistent payments to reduce it.
The policy, announced in late March, was designed to reduce default risks and bolster the agency’s reserves, pressured by delinquency rates that have increased as the FHA’s loan volume has soared. Agency officials described the policy as “prudent and reasonable,” but they modified it almost immediately, as lenders and builders reported an immediate and devastating impact on loan originations and new home sales.
In the face of that backlash, agency officials announced an exemption for borrowers who could demonstrate that their collection dispute was related to “life events,” such as medical bills, a job loss or divorce. But they backpedaled further and faster the next day, saying they would delay implementation of the policy until July 1, to give lenders time to adjust to the new rule. In the meantime, agency officials said, “the FHA “intends to seek additional input on this section and work to clarify guidance, as appropriate.”
Industry executives think that’s a nifty idea. They will note among other concerns that collection problems are common among first-time buyers, who rely disproportionately on FHA loans.
“I know first-time home buyers and I know the starter home market, and that is just the way it is,” Jeremy Radack, a Texas real estate attorney, told Builder on Line. The FHA’s desire to reduce its risks and its losses is understandable, Radack said, but this policy, he believes, is a misguided effort to do so.
“Unless there’s some secret study that I have never seen, there is absolutely no relation as to how much collections you have and how you pay back your mortgage,” he said. Credit scores, he added, are a much more accurate indicator of default risk.
BLAST FROM THE PAST
Bidding wars. There’s a phrase that hasn’t been heard (other than during card games) for several years. But real estate agents in several markets are reporting increasing competition among prospective buyers for a limited supply of homes for sale. The phenomenon isn’t widespread; it is limited, at least for now, to markets in which the economic recovery has been faster, and the job market, consequently stronger, than the national average. But that this trend is surfacing anywhere marks a dramatic change in a housing market that has been crawling on the bottom, even as the economy has begun to recover.
Existing home inventories have fallen to the lowest level since 2005, with available listings declining by nearly 50 percent in Miami, Phoenix, and Oakland – among the markets in which bidding wars are being reported. The dearth of new construction has also pushed new home inventories below six months – the level generally viewed as balanced between buyers and sellers.
Agents responding to a survey by Redfin, an on-line real estate brokerage, reported multiple bids on half the offers I Seattle, Boston, and Washington, D.C. and on nearly three-quarters of the offers in the San Francisco area.
Foreclosure sales, accelerating now that the ‘rob-signing’ logjam has been broken, will boost inventories and continue to depress home prices, analysts agree. But markets in which the economies are strengthening should be able to absorb that increase, according to Mark Zandi, chief economist for Moody’s Analytics Inc. “The housing crash is finally giving way to recovery in an increasing number of markets across the country,” Zandi told Bloomberg News.
Rising rents are making home buying more cost-effective than renting in many markets and reports of increasing sales are leading many prospective buyers who had been reluctant to enter a declining market to conclude that the tide may be shifting.
“The decline in unsold listings and vacant homes and the increase in rents presage better times ahead for single-family housing,” Zandi said.
MONEY = HAPPINESS AFTER ALL
We all know money can’t buy happiness – but maybe it can. After reviewing 40 years of happiness research spanning hundreds of thousands of people in 155 countries and cross-matched with economic development data, researchers at the Wharton School have concluded that people in more affluent countries are, on the whole, happier than people in less affluent nations.
That conclusion (which seems obvious) actually challenges the widely-accepted view of other behavioral scientists, who have determined that happiness is relative, depending not on how much money individuals have but on how wealthy they feel in relation to others in the same country – a “keeping up-with-the-Joneses” effect.
Based on that theory, someone earning a few dollars more than the average in a poverty-stricken country would be just as happy, in relative terms, as someone earning $200,000 in the United States. The idea that people adjusted to poverty and found happiness even at the lowest economic levels was comforting to people living in more prosperous countries, Justin Wolfers, an associate professor at Wharton and a co-author of the study, told Reuters, because “you didn’t have to feel bad as you drove down the road in your BMW.”
The conventional wisdom assumed that happiness depended on the ability to “keep up with the Joneses,” whatever their income level. But the Wharton study suggests that relative income is only marginally significant in the happiness equation, Wolfers said. “If the Joneses live in a rich country and you also live in a rich country, you’re both happier than you would be if you lived in a poor country,” because in a rich county, “you don’t have to worry as much about your kids dying. You’re rarely in pain. You [probably] don’t have to earn a living through manual labor….In a poor country like Burundi, where you’re worried about your child dying, the little buzz you might get from being richer than the Joneses doesn’t really matter.”
Having been hit over the head repeatedly with the legal equivalent of two-by-fours, community associations are finally getting the message: Fair Housing laws prohibit discrimination and require reasonable accommodations for those suffering from disabilities. After seeing community associations repeatedly end up on the wrong end of heft legal judgments, boards may not have learned quite enough to avoid these legal landmines entirely, but at least some of them have apparently learned not to pursue legal battles that will prove both futile and costly for their communities. Two recent cases illustrate that point.
A Texas homeowner association ordered a family to get rid of a baby kangaroo that, the board said, did not qualify as a “family pet” permitted by the association’s rules. But the board backed down quickly, and apologetically, after learning that the kangaroo (weighing only about 10 pounds) had been adopted only temporarily as a comfort animal for a child with Down’s syndrome, and would be sent to a wildlife sanctuary within a few months. Saying it regretted the initial “miscommunication,” the board said in a follow-up letter: “Now that we have more information about the situation, it was never our intention to separate this beautiful girl from the kangaroo….We know that the baby kangaroo will only live in our community for a brief time until a more suitable home can be found. We plan to work with the family to do what’s best for all homeowners.’
Similar evidence of the educational effects of the two-by-four can be found in a short-lived battle in a Connecticut condominium association over the right of a Jewish homeowner to place a Mezuzah on her doorpost. The rules in this community permitted owners to display items on their doors, but not their doorposts, which is where Jewish tradition dictates that Mezuzahs must be placed. The board ordered the owner to remove or relocate the Mezuzah, or face fines of $50 per day. But when the owner retained attorneys who have won several similar anti-discrimination suits, the board’s surrender was quick and its apology effusive. In a letter announcing that the issue had been resolved, the association’s attorney wrote that the owner “acted with full propriety and within her legal rights in affixing the mezuzah to her door post.” He also extended a “personal apology” to the owner and to the Jewish community, noting that neither he nor the board “was aware of the significance of her placing the mezuzah upon her door post.”
Fair Lending and Fair Housing are intersecting in an investigation with potentially unsettling consequences for some major financial institutions. The Department of Housing and Urban Development (HUD) is investigating allegations that Wells Fargo violated anti-discrimination laws by failing to maintain foreclosed homes in minority neighborhoods as effectively as homes in more affluent communities.
The complaint is the first of several a coalition of housing advocacy groups says it plans to file based on a study of more than 1000 properties in 8 cities. Wells Fargo is one of six lenders targeted in the study, which was funded by a grant from HUD.
The review found that properties in white neighborhoods were consistently maintained more carefully and marketed more aggressively than properties in areas with large black and Hispanic populations according to Morgan Williams, director of enforcement and investigations at the National Fair Housing Alliance (NHFA), the lead group in the coalition. Williams said the advocacy groups were “dismayed” by the findings.
Neglect of foreclosed properties contributes to blight in affected neighborhoods, Shanna Smith, president of the NHFA, said in a conference call with reporters. And that blight “is all the responsibility of the banks [that] own and have an obligation to market and maintain these properties,” she said.
Wells Fargo officials denied allegations that the bank’s handling of foreclosed properties is discriminatory. “Wells Fargo conducts all lending-related activities in a fair and consistent manner without regard to race,” Vickee Adams, a bank spokeswoman, told reporters. “That includes the marketing and maintenance standards for all foreclosed properties for which we are responsible.”
HUD officials have declined to comment publicly on the discrimination charges against Wells Fargo, other than to confirm that an investigation is under way.
The complaint against the bank does not suggest that it discriminated intentionally against minority neighborhoods, only that its practices had a discriminatory impact on them.
“The intent to discriminate is often … demonstrated in the law through substantial significant disparities, and we certainly have those here,” Peter Romer-Friedman, an attorney representing the NHFA said. “We have no doubt that either HUD or a federal court could easily conclude that the type of conduct that was observed by our investigation here is well within the framework of what Congress intended to prohibit.”
Legal/Legislative Update – March, 2012
ANOTHER EMINENT BATTLE
The House of Representatives has approved legislation that would prohibit local and state governments from using their eminent domain authority to take private property for private commercial development.
The legislation seeks to reverse a controversial 2005 Supreme Court Decision (Kelo v. City of New London) holding that a commercial development satisfied the “public purpose” required to justify an eminent domain taking, because it would generate tax revenue for the municipality involved. The courts had typically defined public purpose more narrowly, requiring a direct public benefit – for example, taking land needed to construct or expand a public highway.
Critics said at the time that the Supreme Court’s definition would make the eminent domain power virtually unlimited, and render homeowners defenseless against it, as virtually any commercial development would generate more revenue than a single-family home ― an argument the bill’s supporters emphasized during the floor debate.
“The government now has license to transfer property from those with fewer resources to those with more. The founders cannot have intended this perverse result,” said Rep. Maxine Waters (D-CA), who co-sponsored the bipartisan bill with Rep. James Sensenbrenner (R-WS).
Sensenbrenner noted the rare display of bipartisanship in the House and the even rarer collaboration of two members who stand at opposite ends of the liberal-conservative divide.
“This is a Sensenbrenner-Waters bill,” Sensenbrenner said – probably the only one lawmakers will ever see, he suggested, and “that is probably one of the best reasons to vote in favor of it.”
The Private Property Rights Protection Act, H.R. 1443, would prevent states from using eminent domain over property to be used for economic development, establish a private right of action for property owners and withhold for two years federal development funds from a state or local government that violates the rule. The legislation would also prohibit the federal government from using eminent domain to advance private commercial development.
The House has passed similar legislation in the past – including a 2009 measure that won a 376-38 vote. But the Senate failed to consider that measure and the Democratic leadership has not indicated whether it plans to advance this one.
Several states have acted to limit eminent domain powers in the wake of the Supreme Court ruling, making federal legislation unnecessary, according to Rep. John Conyers (D-MI), one of the few lawmakers to oppose the House bill. “Congress should not now come charging in after seven years of work and presume to sit as a national zoning board, advocating to our national government the right to decide which states have gotten the balance right, and deciding which project are or are not appropriate,” he said.
FORCING THE ISSUE
A federal judge has cleared the way for a class action suit challenging the “force placed” insurance a mortgage lender forced a homeowner to purchase. Although the suit targets only one lender (Wells Fargo), it threatens an industry practice that is both common and extremely lucrative for lenders and insurers.
Mortgage contracts typically give lenders the right to purchase insurance policies for owners whose policies have lapsed and force owners to pay the cost. Consumer advocates have long argued that the premiums on force-place policies are much higher than those the buyers were paying previously, and unjustifiably so.
The Florida class action suit – Williams v. Wells Fargo, et. al. — goes further, alleging that the premiums the insurance company (QBE) charged were inflated artificially by illegal kickbacks the company paid to Wells. Evidence submitted by the plaintiffs indicated that QBE paid about 40 percent of the premiums as commissions to subsidiaries and to Wells, while paying only about 7 percent in claims – a ratio that most state insurance regulators would find unacceptable.
An American Banker article published earlier this year found that force-placed premiums industry-wide were as much as 10 times the cost of policies purchased voluntarily. That article and consumer complaints have focused regulatory attention on the force-placed issue. The New York State Department of Financial Services has launched an investigation of the policies and the Office of the Comptroller of the Currency has expressed interest in the issue as well. Fannie Mae recently announced that it intended to establish a relationship with an insurance company to control the issuance and pricing of force-placed policies on loans Fannie has purchased.
“The (proposal) is structured to ensure that insurance costs are significantly reduced,” a Fannie Mae statement announcing the proposed rule stated. The company also plans to issue guidelines detailing the circumstances under which lenders can force-place insurance and specifying the charges they can require borrowers to reimburse.
“Our goal is to reduce costs for Fannie Mae and thereby taxpayers, and to reduce a barrier for homeowners becoming current on their loans,” Andrew Wilson, a spokesman for Fannie Mae, told Reuters.
Bank regulators in New York have said their investigation will continue, notwithstanding Fannie Mae’s announced policy change, and attorneys representing plaintiffs in the Florida class action have said the litigation will not stop there.
“There will likely be national class actions,” one of the plaintiffs’ attorneys told American Banker.
A SERIOUS DISQUALIFIER
Opposition to regulations that would increase down payment requirements for home buyers continues to build, and it is coming increasingly from consumer advocacy groups, not just from lenders.
In the latest broadside against the “Qualified Residential Mortgage” (QRM) standards regulators have proposed, the Center for Responsible Lending has warned that the 20 percent minimum down payment required to qualify for “qualified” loans that would be exempt from reserve requirements would push at least 60 percent of borrowers who currently qualify for the lowest-cost mortgages into higher rate loans, and would force many of them out of the market entirely.
The study, “Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages,” acknowledges that higher down payment requirements reduce delinquencies and defaults. But those gains are more than offset, the study contends, by the large number of otherwise credit-worthy borrowers who would not be eligible for the “qualified” loans that most lenders will want to originate.
Minorities would be particularly hard-hit, according to the study which estimates that the new rules would exclude 70 percent of Latino borrowers and 75 percent of African-American borrowers who would currently qualify for “fairly priced” mortgage loans.
The more stringent requirements are unnecessary as well as counterproductive, the CRL study contends, because other underwriting changes mandated by the Dodd-Frank Financial reform legislation – specifically bans on no-documentation loans and prepayment addressed the major underwriting deficiencies that contributed to the subprime mortgage crisis.
Those changes alone “would curtail the risky lending that occurred during the subprime boom and lead to substantially lower foreclosure rates without overly restricting access to credit,” the study concludes. The QRM standards, on the other hand, would do much to undermine the housing recovery and very little to reduce defaults, the study concludes.
Pressure on Fannie Mae and Freddie Mac to reduce the principal balance on some underwater loans in order to help borrowers avoid foreclosure continues to mount. The latest push comes from the settlement state attorneys general negotiated with major lenders and loan servicers to resolve allegations of widespread foreclosure abuses. The agreement includes a provision requiring lenders to reduce the principal for some eligible homeowners, reflecting the growing acceptance of principal reductions as an effective – and according to many analysts, the most effective – loan modification tool.
Edward DeMarco, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, disagrees, and has thus far refused to allow the GSEs, which are not covered by the Attorney Generals’ agreement, to reduce the principal on loans they have purchased. His position has put him in an increasingly public battle with California Attorney General Kamala Harris, who recently demanded that Fannie and Freddie suspend foreclosure actions in California until the FHFA undertakes the review it has promised of its debt reduction policy.
“I know [the AGs’ agreement] will confirm what many economists have already concluded: principal reduction plans are the most helpful form of loss mitigation for homeowners and the most cost-effective for investors when compared to foreclosures,” Harris wrote in her letter to DeMarco.
She has previously insisted that DeMarco resign, because his opposition to principal reductions is contrary to the interests of homeowners; DeMarco argues that his primary obligation is not to help homeowners but to ensure the viability of Fannie and Freddie and limit taxpayer losses from the GSES, which have been operating under government conservatorship for the past four year and received billions of dollars already in government assistance. Her letter demands “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”
DeMarco has said he is willing to review his opposition, and may find he has no choice but to bend. The Treasury Department recently increased the incentives offered to servicers and investors who reduce principal on loan modifications under two government assistance programs and has offered those incentives to Fannie Mae and Freddie Mac for the first time.
Congress is also considering legislation designed to make principal reductions more appealing to lenders. A measure sponsored by Sen. Menendez (D-NJ) would establish an equity sharing arrangement for lenders who reduce a borrower’s mortgage balance. The bill establishes a two-year pilot program under the FHFA and the Federal Housing Administration to test the program, which would give lenders a fixed share of the appreciated value when a home is sold (capped at 50 percent), based on the amount of debt forgiven.
“When you owe more than your house is worth through no fault of your own, relief can be hard to come by,” Menendez said in a press release announcing his proposal. “My bill aims to break this cycle by giving homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone.”
Idaho property owners have won a significant victory in their battle with the Environmental Protection Agency that is being closely watched by environmentalists and real estate industry executives, who are on opposite sides of the issue.
The U.S. Supreme Court ruled that the couple, Mike and Chantell Sackett, have the right to challenge an EPA order requiring them to cease work on the home they were building on land the EPA determined contained wetlands. Under EPA rules, the Sacketts could not challenge the stop-work order; they had to cease construction and restore the wetlands the EPA said they had disturbed before they could challenge the underlying ruling, that the property contained wetlands.
The Supreme Court rejected that position. “There is no reason to think that the Clean Water Act was uniquely designed to enable the strong-arming of regulated parties into ‘voluntary compliance’ without the opportunity for review — even judicial review of the question [of] whether the regulated party is within the EPA’s jurisdiction,” Justice Antonin Scalia wrote in the unanimous opinion.
Property rights advocates said the SJC’s ruling supported their contention that the EPA’s procedural rules amounted to an abuse of power.
“The justices have made it clear that EPA bureaucrats are answerable to the law and the courts, just like the rest of us,” Damien Schiff, a spokesman for the Pacific Legal Foundation, which represented the Sacketts, said. “The EPA can’t try to micromanage people and their property — it can’t order property owners to dance like marionettes — while denying them any meaningful right to appeal to the courts,” Schiff told the New York Times.
But environmentalists also claimed victory, noting the narrow procedural grounds on which the Supreme Court ruled. The court did not reject the EPA’s authority to issue compliance orders, they said; only the point at which the orders can be challenged.
“The court did not adopt any of the radical ideas advanced by industry and its allies that could have severely hampered public health and environmental protections,” Jon Devine, a senior attorney for the Natural Resources Defense Council, told the Times.
The Obama Administration had argued that allowing property owners to challenge compliance orders would weaken the EPA’s ability to prevent environmental damage during what could be prolonged court proceedings. But the court held that compliance orders “will remain an effective means of securing prompt voluntary compliance in those many cases where there is no substantial basis to question their validity.”
“He’s acting as if he was head of two private companies called Fannie and Freddie and not taking into account the impact this has on the economy, and I think he should be more cooperative with efforts to reduce foreclosures.” —Rep. Barney Frank (D-MA), arguing that the director of the Federal Housing Finance Agency (FHFA) should be replaced because of his refusal to allow Fannie Mae and Freddie Mac to reduce the principal balance on the mortgages of some struggling homeowners.
Legal/Legislative Update – February, 2012
A MATTER OF PRINCIPAL
The Senate is considering legislation that would encourage lenders to reduce the principal balance on underwater loans, by giving them a share of any appreciation borrowers realize when the home is sold.
The legislation, sponsored by Sen. Bob Menendez (D-NJ) would establish two pilot programs to test the efficacy of this strategy, one under the Federal Housing Administration, involving FHA-insured loans and the other under the Federal Home and the other under the Federal Housing Finance Administration, targeting loans securitized by Fannie Mae and Freddie Mac.
Lenders would reduce the principal balance of the loan to 95 percent of the home’s current appraised value in stages, by one-third every year for three years, as long as the borrower remains current on the loan. The lender’s equity share at sale would depend on the amount of the principal reduction, capped at 50 percent of the appreciation.
“When you owe more than your house is worth through no fault of your own, relief can be hard to come by,” Menendez said in a news release announcing his legislation. “My bill aims to break this cycle by giving homeowners the relief they are looking for by working with banks to find acceptable solutions for everyone.”
His legislation falls squarely in the middle of an intensifying debate over whether principal reduction offers the best hope of clearing the logjam that is impeding the housing market’s recovery, or will exacerbate existing problems by encouraging borrowers who are able to repay their loans to default intentionally in order to obtain principal reduction relief.
Warning about the “moral hazard” involved in a principal reduction plan, Dale Westhoff, head of structured products research for Credit Suisse contends that this approach could push defaults “much, much higher.”
“We’ve never done this before; we don’t know what the risk is,” Westhoff, told reporters recently. In addition to encouraging more strategic defaults, he said, the strategy could also increase borrowing costs across-the-board, as lenders build “price protection” into their mortgage rates.
A Credit Suisse study of loan modifications found essentially no difference in the re-default rates of borrowers who received principal reductions and those who did not.
“You’ve got to base policy on something that’s factual,” Chandrajit Bhattacharya, an analyst at the bank, told reporters at a briefing. “You can’t base policy on something that you expect that hasn’t happened yet,” he added.
A slew of other economists and legislators have taken the opposite view, urging the Fannie Mae and Freddie Mac to embrace principal reductions on a broad scale – a move that Edward DeMarco, acting head of the FHFA and the GSEs’ primary regulator, has thus far resisted, arguing that writing down principal would increase the losses for the GSEs which are operating under federal conservatorship and have already received a combined total of more than $150 billion in federal aid.
“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), told the Wall Street Journal in a recent interview. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point,” he added.
Federal Reserve President William Dudley agreed, citing a study by Fed economists concluding that “a large proportion of those loans that are deeply underwater will ultimately default — absent an earned principal reduction program.”
A study by Amherst Securities Group LP estimated that principal reductions would prevent up to 10 million distressed property sales over the next year. “We have shown that, even controlling for all other factors, principal reductions are more effective,” Laurie Goodman, an analyst for Amherst, said in an e-mail to Bloomberg News. “Realize also that banks are doing it on their own portfolios and have been for years. Why would they continue if it was not more effective?”
CURB YOUR ENTHUSIASM
Here’s a switch. Housing industry officials say forecasts calling for a significant jump in new residential construction are “overly optimistic.” It’s usually analysts who are accusing industry executives of basing their forecasts more on wishful thinking than economic reality.
The forecasts at issue came from economists at Moody’s Analytics and Bank of America who are predicting that multi-family builders will begin work on 310,000 units and 260,000 units, respectively, this year – increases of between 70 percent and 75 percent over last year.
“We would love it if [Moody’s forecast] was right, but developers still need capital to start projects,” Sharon Dworkin Bell, senior vice president in charge of multifamily for the National Association of Home Builders (NAHB) told Multifamily Executive News. But the trade group is predicting that multifamily totals ― a forecast based, Bell said, on both current market conditions and historical trends.
That is much closer to the consensus view, that capital constraints and sluggish economic growth will restrain new construction activity for at least the next year.
“The combination of cautious equity and still-stringent construction loan underwriting by commercial banks should keep 2012 starts of rental apartments near 200,000 units,” Ronald Witten, president of Witten Advisors, LLC, told Bloomberg. That’s better than the 2011 performance, but well below Moody’s more upbeat forecast.
But Chen is betting heavily that stronger employment growth, reflected in recent labor market statistics, will boost household formation rates, increasing rental housing demand. As the job market rebounds, young adults who moved in with their parents when they couldn’t find jobs will be able to afford apartments of their own, Chen predicts. At the same time, tight lending standards and credit histories impaired by the downturn will continue to limit the number of consumers able to qualify for mortgages, pushing them into the rental market or keeping them there.
The rental market is already reflecting that pressure. Rental vacancy rates have been falling for the past year and are now “close to their historical averages,” Chen says, and she thinks trends will continue to favor the multifamily sector as the economy improves.
“Economic growth will strengthen even more in 2013 and 2014,” she predicts, “[creating] even greater demand for rental housing.”
ONE MORE TIME
Another day, another Obama Administration effort to help homeowners avoid foreclosure. The latest initiative, which President Obama unveiled in his State-of-the-Union address, targets approximately 3.5 million homeowners excluded from existing assistance programs because their loans weren’t sold to Fannie Mae or Freddie Mac.
Eligible homeowners, who would have to be current on their existing loans and meet fairly flexible underwriting requirements, would be able to refinance at today’s lower interest rates, even if they have little or no equity in their homes. The Federal Reserve estimates that more than two-thirds of the 12 million underwater borrowers are current on their loans.
The plan has gotten mixed and largely predictable reviews – support from consumer advocates and liberal Democrats; opposition from conservative lawmakers and economists.
“This is a positive plan that is mostly simple common sense,” Dean Baker, co-director of the Center for Economic and Policy Research, told the Washington Post. “Why shouldn’t we want underwater homeowners to benefit from the low-cost financing available to everyone else?”
“We’ve done this at least four times where there’s some new government program to help home owners who have trouble with their mortgages [and] none of these programs have worked,” Speaker of the House John Boehner countered. “I don’t know why anyone would think that this next idea is going to work.”
Boehner’s comments underscore what is likely to be a major obstacle for this new initiative – it will require Congressional approval. And that won’t come easily, partly because of the political dynamics in a presidential election year, but also because the Federal Housing Administration (FHA) would guarantee the refinanced loans, and that agency is already struggling with outsized claims against its insurance fund. Financial institutions also are unlikely to embrace the plan, which would be financed in part by a new tax on banks.
“The mass refinance proposal will have appeal to those that are sitting in homes, underwater, and feel like they have been left on the sidelines during this interest rate rally that has brought mortgage rates to near historic lows,” David Stevens, president and CEO of the Mortgage Bankers Association, told the Washington Post. “[But] the funding mechanism, the moral hazard, the re-default risk, and the role of government intervention in housing will likely create divides on both sides of the debate that will make the likelihood of this moving forward an uphill climb.”
STUCK IN PLACE
The poor housing market and sluggish economic growth have produced historically low mobility rates, altering, at least temporarily, migration patterns that have been in place for several decades.
An analysis of Census data by the Carsey Institute at the University of New Hampshire found that migration into former boom states, such as Arizona, ground to a halt when the recession began and has not recovered, while states that had been losing residents for years — such as New York, Massachusetts, and California — have seen the outflow virtually halt.
Mobility rates always slow during economic downturns, the report notes, but migration levels declined last year to the lowest level since the government began tracking these numbers in the 1940s, according to a New York Times report.
The depressed housing market is preventing many unemployed workers from moving to other areas where they might be able to find jobs, because they can’t sell their homes. Responding to the tough market, many companies have become more cautious about recruiting employees from other areas and less generous in the relocation benefits they offer.
“Today, companies are spending more time with employees up front, learning about their real estate commitments before job offers are extended. Rather than a one-size-fits-all relocation program, benefits are decided case by case,” USA Today reported recently.
One major change: Some companies are encouraging employees they are recruiting from other areas to rent instead of buy. Others are providing bonuses to employees who sell existing homes quickly (a quiet means of offsetting losses on those sales) the article noted.
“We have companies that have been very quietly relocating employees, and even some of our larger clients are starting to pick up now,” one real estate executive specializing in relocations noted, adding, and “it’s a very encouraging sign.”
Litigation challenging the application of ‘disparate impact’ claims to fair housing laws has ended in an out-of-court settlement, avoiding the Supreme Court decision that, housing industry executives hoped would resolve the question in the industry’s favor.
Disparate impact claims usually involve allegations by consumer advocacy groups that lending policies, even if non-discriminatory in intent, have a disproportionately negative impact on minorities. In this case (Magner v. Gallagher), it was rental property owners in Minnesota who claimed that the aggressive enforcement of building code requirements my municipal authorities was forcing the owners to raise rents, creating a disproportionate impact on low-income and primarily minority tenants.
Housing industry trade groups were hoping the Supreme Court would rule that disparate impact claims cannot be brought under the Fair Housing Act. Financial industry trade groups, who were also watching the case closely, were hoping the court would apply the same reasoning to the Equal Credit Opportunity Act (ECOA), barring disparate impact claims under that statute as well.
Both sides are arguing that if the underlying process – loan originations or rental housing policies – is not discriminatory, there should be no claim of discrimination, even if the outcome has a disproportionately negative impact on a protected class. To rule otherwise, industry groups contend, would open the door to a torrent of essentially merit-less discrimination claims. Disparate impacts, they argue, can result because of logistics – the sheer number of individuals in a protected class.
That is a particular concern for lenders as regulators begin to enforce the new “qualified mortgage” standards. A “friend of the court” brief filed on behalf of the Independent Community Bankers of America, The Consumer Mortgage Coalition and the American Financial Services Association notes that in order to verify a borrower’s ability to repay, as those standards require, lenders will have to apply more conservative underwriting standards, which will necessarily have a disproportionate impact on lower income and minority borrowers.
“Such differentials may prompt disparate-impact lawsuits,” the associations wrote. “Even though lenders can defend such suits on the basis that their practices are undertaken in accordance with federal regulation, lenders will still face the reputational and monetary costs incurred in doing so.”
Industry trade groups generally view the dismissal of the case as a missed opportunity to win a more favorable interpretation (for then) of the fair housing and fair lending laws. Consumer advocacy groups, who also thought the High Court would move in that direction, view the dismissal as a dodged bullet.
“Whenever [the court] has a chance to whittle down, if not obliterate, disparate impact, they will,” an attorney who represents plaintiffs in fair lending cases, told American Banker. “And that’s no secret,” he added.
WORTH QUOTING: “There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file.” — New York Times columnist Gretchen Morgensen commenting snidely on the agreement state attorneys general negotiated with major banks to resolve allegations of widespread abuses of the foreclosure process.
Legal/Legislative Update – January, 2012
The Federal Housing Finance Agency (FHFA) has filed suit against the city of Chicago, challenging a new ordinance that makes mortgage lenders responsible for the upkeep of vacant homes on which they hold mortgages, including homes on which they have not yet foreclosed.
The FHFA argues that the ordinance unfairly impose ownership obligations on lenders without conferring any benefits, including the right to lease or sell the properties.
Under the ordinance, lenders face fines of up to $1,000 daily for failing to provide basic maintenance on vacant properties for which they are responsible. The ordinance also requires lenders to inspect properties they have financed monthly and to pay $500 to register any properties found to be vacant.
Chicago is the latest of several cities struggling to prevent foreclosed and abandoned properties from triggering a downward spiral that can infect and destroy entire neighborhoods. The Las Vegas City Council recently approved an ordinance similar to Chicago’s, imposing fines and jail sentences of up to six months on absentee owners who fail to maintain their properties.
The Las Vegas ordinance requires lenders to inspect all properties in default and to register any found to be vacant with the Department of Building and Safety. In addition to paying a $200 registration fee, lenders must appoint a property manager responsible for inspecting the property at least once a month until it is either sold or occupied.
Philadelphia has approved regulations requiring property owners – including lenders that have foreclosed on homes – to bring vacant properties up to code. The regulations authorize local officials to fine violators and seize their property.
A separate ordinance requires owners of vacant properties to ensure that they have “a functional door or window.”
“Philadelphia residents can no longer afford to have vacant properties harming their neighborhoods,” Mayor Michael Nutter said in announcing the initiatives. “Abandoned buildings tarnish blocks, bring crime and encourage illegal dumping. The city is committed to holding these landowners responsible. Eliminating vacant and blighted properties will benefit our neighborhoods and encourage development.”
Lenders view these requirements as unfair and unreasonable, noting, among other concerns, that they have no legal right to control a property until they have acquired it through foreclosure.
One Wall Street Journal reader suggested that taxpayers also should object to rules that will impose additional costs on Fannie Mae and Freddie Mac, both of which are operating under government conservatorship. “As a taxpayer,” this reader noted in an on-line comment, “I will not only [be responsible for] the upkeep of my own property, I will now be responsible for the upkeep of property in states that I don’t live in.”
Borrowers who default “strategically” on their mortgages – because they think it is in their financial interests – are influenced strongly by media coverage of the depressed housing market and by housing experts who suggest that walking away from an underwater loan is a rational response to a bad investment, a recent study contends.
“The overwhelming media coverage of the current financial crisis has made homeowners aware, or at least alerted them to become aware, of their equity position in their home,” according to Michael Seiler, who co-authored the study analyzing the role social networks play in their decision to default on mortgages homeowners can afford to pay. Commissioned by the Mortgage Bankers Association, the study suggests that social networks, intensified by the rapid-fire exchange of information on the Internet, “create the potential for much faster spread of strategic defaults,” as one strategic default triggers others in a destructive domino reaction.
According to recent industry reports, nearly 29 percent of homeowners with mortgages are currently underwater on those loans – up from about 27 percent in the second quarter. Zillow, which compiled those statistics, attributes the increase largely to the prolonged foreclosure sale process. Although foreclosure rates have been declining, the time required to complete the foreclosure process has been steadily lengthening since the rob-signing scandal brought foreclosure filings virtually to a halt.
“We’re in uncharted waters,” Stan Humphries, Zillow’s chief economist, told MSN.com. “More than one in four homes underwater and about 9 percent unemployment is a recipe for more foreclosures.”
Against that statistical backdrop, analysts warn, strategic default risks are growing ― a concern underscored by the MBA’s recent report. Housing pundits, “with a far-reaching sounding board” can reach and influence many borrowers, and in “fragile markets,” the MBA study cautions, “advice by those considered to be experts can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse.”
“From a policy standpoint,” Michael Fratantoni, vice president of research and economics for the MBA, notes in a press statement, “the research supports the contention that opinion and information (or disinformation) can move markets. More specifically,” he adds, the research demonstrates that “policymakers and mavens have the ability to stabilize or de-stabilize markets.
Since the subprime crisis sank the housing market and ignited an economic downturn, homebuyers have largely shunned adjustable rate mortgages (ARMs) in favor of fixed rate loans, perceived to be safer because they aren’t subject to the rising rates and resulting payment shock that crippled many ARM borrowers. But Paul Willen, a senior economist at the Federal Reserve Bank of Boston, thinks ARMs have gotten a bad rap. “The data refute the theory” that ARMs are inherently unsafe and that they were a major factor in the housing crisis, Willen contended in recent testimony at a Senate banking Committee hearing.
Willen analyzed 2.6 million foreclosures and found little evidence of payment shock. For 88 percent of the ARMs, his analysis shows, the payments had remained the same or declined since the loans were originated. Moreover, Willen testified, more than half – 60 percent – of the borrowers who lost their homes had fixed-rate mortgages.
Economic factors – declining home prices, job losses and other life events – not ARMs, were responsible for most of the foreclosures, he told legislators.
“The narrative of the fixed rate mortgage as an inherently safe product invented during the Depression that would have mitigated the subprime crisis because it eliminated payment shocks does not fit the facts,” Willen asserted.
Fixed rate mortgages have some benefits, he acknowledged and it is true, he agreed, that default rates on ARMs are higher. “But since defaults occur even when the payments stay the same or fall,” he argued, “the higher rate is most likely connected to the type of borrower who choses an ARM, not to the design of the mortgage itself.”
A FAMILIAR PATTERN
The continuing debate over the future of Fannie Mae and Freddie Mac will look familiar to anyone who has tried unsuccessfully to lose weight: The more legislators agree on the need to slim down the two government services enterprises (GSEs) and reduce their domination of the secondary mortgge market, the larger and more influential they become.
Although operating under government conservatorship since 1998, the GSEs have shouldered much of the burden of government efforts to bolster the struggling housing market. As a result, despite pressure to wean the market from government support, the GSEs currently own or guarantee half of all U.S. mortgages and back about 90 percent of them.
“We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008,” Sen. Bob Corker (R-TN), said recently.
Corker introduced the latest in a series of measures (the House has considered 15 of them this year) aimed at reducing that trend. As its name suggests, Corker’s “Residential Mortgage Market Privatization and Standardization Act” aims to privatize the mortgage finance system by reducing the volume of mortgage-backed securities Fannie and Freddie issue gradually, over the next 10 years. Key provisions would also:
- Direct the Federal Housing Finance Agency to develop uniform underwriting standards and uniform guidelines for servicing and pooling arrangements; and
- Create a new electronic mortgage registration system, also overseen by the FHFA.
A House measure, introduced earlier this year by Rep. Scott Garrett, has the same goal (eliminating Fannie and Freddie as lynchpins of the mortgage market) and calls for the same standardization of underwriting, pooling and servicing rules. Garrett’s bill would also repeal the controversial risk-retention provision in the Dodd-Frank financial reform bill, requiring lenders to retain 5 percent of the risk on loans they package and sell to investors.
The Obama Administration has been working on a secondary market reform plan, but has not yet completed it. “As you know, we’ve been a little busy. We had a little crisis in Europe, and we had a little debt limit debate,” Treasury Secretary Tim Geithner responded when asked about the delay at a recent Congressional hearing.
Garrett said the need for reform is urgent and requires speedier action. “Most, if not all, of my colleagues, Republican and Democrats alike, recognize the status quo is unsustainable. The government-sanctioned duopoly of Fannie and Freddie is not only systemically dangerous to our economic security, it’s un-American,” he said.
Although there is broad agreement that the current GSE model must be changed, there is no consensus on how it should be restructured or on the key question of the role government should play in the housing market. Most Democrats and many Republicans doubt that a completely privatized system will work.
Garrett’s bill addresses that concern to some extent, carving out a continuing role for government, but a very limited one, restricted to providing low income housing.
American voters also appear to be divided on how much support if any, government should provide for home finance. A recent survey by Move, Inc. found that government should expand its role while 42 percent said it should be reduced.
But a large number of the respondents agreed that housing should be a top priority for the next president, tackled in the first 100 days after he or she takes office; nearly 31 percent said the president should focus on helping homeowners avoid foreclosure while more than 26 percent said the priority should be keeping mortgage interest rates low.
Significantly, more than 80 percent agreed that housing is an essential component of the economic recovery, and 70 percent said a candidate’s position on housing policy could sway their votes in the next presidential election. “After four years of living in a housing downturn, American voters clearly want answers and are looking to our elected leaders for solutions,” said Errol Samuelson, chief revenue officer of Move, Inc., said in a press release. “The survey illustrates that candidates who share the concerns of the American people and make housing a top priority will win their confidence,” he added.
PROPERTY RIGHTS ENCORE
The U.S. Supreme Court is tackling another closely watched property rights case this year. A few years ago, the court reviewed the limits on a government’s right to take private property for public purposes. In this case (Sackett v. EPA), the court is assessing the appropriate balance between the rights of property owners and the regulatory authority of government. The Sacketts purchased a vacant lot in a subdivision zoned for residential development, in which other homes had been and were being constructed. They obtained the required permits and got a verbal go-ahead from the Army Corps of Engineers, which concluded that although the site had water on it periodically, it did not meet the regulatory definition of a wetland.
The Environmental Protection Agency (EPA) disagreed. The agency ordered the Sacketts to halt construction on their home, replant the trees they had removed and otherwise restore the site to its original condition and maintain it as a wetland. Moreover, citing its authority under the Clean Water Act, the EPA said the Sacketts could not appeal the wetlands order until after they had completed all the remediation work the agency had ordered. That’s the issue the Supreme Court will decide – whether the agency can require property owners to comply with an order before giving them an opportunity to appeal it.
The lower courts sided with the EPA, saying the agency acted within its statutory authority; the Sacketts and a host of real estate industry groups supporting them argue that allowing the EPA to, in effect, seize private property without judicial review denies the owners the due process to which they should be entitled.
Media reports have characterized the case as a “David v. Goliath” fight defending private property rights against an “overreaching” federal agency. A CNN report noted “wide support” for the Sacketts when the Supreme Court heard oral arguments in early January, citing this comment by Justice Samuel Alito: “If you related the facts of this case ― as they come to us — to an ordinary homeowner, don’t you think most ordinary homeowners would say this kind of thing can’t happen in the United States?”
The medical authorities responsible for defining psychological disorders may add hoarding to that list. Hoarding is one of seven new conditions experts are reviewing as they compile the fifth and newest revision of the Diagnostic and Statistical Manual of Mental Disorders. To qualify, a condition must have “a unique set of symptoms and a verifiable medical cause.” If hoarding makes the cut, it would arguably be recognized as a disability requiring reasonable accommodations under the Fair Housing laws. The new handbook is slated for publication in May of 2013, so landlords and community associations have some time to consider just what kinds of accommodations might be required if they must treat hoarding as a disability rather than a problem.
“I teach financial markets, and it’s a little like teaching R.O.T.C. during the Vietnam War. “You have this sense that something’s amiss.” — Yale Professor Robert Shiller, co-founder of the Case-Shiller home price index, quoted in a New York Times article on the impact of the “Occupy Wall Street” movement.