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Keeping You Up-To-DateLegislation, Regulation, Industry Trends
It’s hard to find a silver lining in the dark clouds hanging over the housing industry, but the apartment market may qualify. MPF Research reports that rental occupancy rates jumped in the largest 64 markets in the first half of this year, as landlords filled 215,000 previously vacant units – the largest six-month jump since MPF began tracking these numbers in 1992. Vacancy rates, meanwhile, declined to 6.6 percent in June from 8.2 percent in December, the company reported. Reflecting increasing investor optimism that a recovering employment market will continue to fuel demand for rental housing, the Bloomberg REIT Apartment Index has increased by 24 percent so far this year, according to a Business Week report. The Standard & Poor’s “Supercomposite Homebuilding Index, by contrast, has declined by 5.4 percent. The rental market is also benefiting, perversely from the continuing flood of foreclosures which has pushed the nation’s homeownership rate down from its peak of 69.2 percent in the fourth quarter of 2004 to 67.1 percent in the first quarter of this year. “As homeownership continues to decline, people need to live somewhere,” Henry Cisneros, executive chairman of a Los Angeles-based real estate investment firm, and former Secretary of HUD in the Clinton Administration, told Business Week. With the home purchase market likely to remain anemic for the foreseeable future, Cisneros predicts, “the rental market will be robust for the next few years.” BUY FIRST - THEN WALK Lender concern about strategic defaults has been increasing as more borrowers who can afford to make their payments are making a “business decision” to walk away rather than continuing to make payments on homes that are worth less than their outstanding mortgage. Now, this trend has taken a new twist as borrowers who are planning to default seek to secure a mortgage on a new home first - a strategy known as “buy and bail.” “It’s an attempt to escape payments on a home whose value may never recover while securing new property, often at a lower price with a more affordable loan,” a Bloomberg News” article describing the practice explained. Industry analysts estimate that between 12 percent and 20 percent of defaults in the first half of this year were strategic. There are no statistics on the number of defaults involving borrowers who “bought and bailed” or tried to do so, but mortgage brokers and real estate brokers quoted in the Bloomberg article cited several examples of the trend. Fannie Mae and Freddie Mac have both adopted measures designed to curb the practice, by excluding rental income from an existing home in the calculation of a borrowers’ eligibility for a loan on another residence, and requiring reserves equal to the mortgage payments on both homes. Industry reports indicate that these measures have curbed buy-and-bail ploys, but not entirely. “Savvy people can always find a way to circumvent these policies,” Meg Burns, an official with the Federal Housing Finance Agency, told Bloomberg. While housing and law enforcement agencies are trying to combat voluntary strategic defaults, foreclosures resulting from involuntary defaults continue to rise. Foreclosure filings increased in more than three-quarters of U.S. metropolitan areas, according to RealtyTrac, with the hardest-hit market (Las Vegas) tabulating 1 filing for every 15 households. Foreclosures have increased most steeply among “prime” borrowers, including those holding jumbo loans, who are also the most likely to have sufficient assets to try the “buy and bail” ploy. Foreclosures on prime mortgages increased by more than 400 percent in the past two years, according to Lender Processing Services, while foreclosures on jumbo loans have increased by nearly 600 percent. A somewhat more encouraging report from Experian and Oliver Wyman indicates that strategic defaults may have peaked in the fourth quarter of 2008, with statistics for the second quarter of last year possibly representing “the first signs of a break in the clouds,” according to the report. A more detailed analysis of recent delinquency and default data is needed “to validate this [conclusion],” Peter Carroll, a partner at Oliver Wyman, indicated. The Wyman-Experian report also noted an important distinction between strategic defaulters and “cash flow managers,” who have fallen behind but still make periodic mortgage payments. “Cash-flow managers would be better candidates for loan modification programs than strategic defaulters,” Charles Chung, general manager of decision sciences for Experian, told National Mortgge Professional, because they apparently have the resources to cover their non-mortgage obligations and have indicated a desire to resolve their delinquency. “A loan modification that makes their mortgage payments more affordable is likely to be very effective,” Chung said. GSE DEBATE BEGINNING The much-anticipated, long-deferred debate over the nation’s housing finance system is about to begin. Central to that debate is the question of what role, if any, Fannie Mae and Freddie Mac, the battered mortgage financing giants, should play, how they should be structured, and how large they should be. So far, several hundred individuals and trade groups have weighed in with comments illustrating what anyone who has been following the rise and fall of the government services enterprises (GSEs) already knows: The issues are complex, the politics are radioactive and consensus is hard to find. The comment letters, submitted over the past several weeks, responded to a set of questions the Treasury Department published in advance of a conference the department is hosting August 17, to solicit input from “stakeholders” – consumer advocates, community development organizations, and housing industry trade groups. “The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country,” Treasury Secretary Timothy Geithner said in a press statement announcing the conference. “Now is the time to build on the foundation we had with the historic Wall Street reform legislation,” he added. That legislation set a January, 2011 deadline for the Administration to present blueprint for housing finance reform it had initially promised to introduce earlier this year. But Administration officials have made Fannie and Freddie a cornerstone of their efforts to bolster the sagging housing market and have been reluctant to do anything that might upset a recovery that remains slow, fragile and uncertain. Critics of Fannie and Freddie have long argued that the two quasi-governmental entities should be eliminated or privatized and their implicit federal guarantee severed. But a consensus of sorts seems to be forming around the idea that the federal government must continue to play a role in the housing finance system. Comment letters from several different interest groups proposed variations on a process through which the government would explicitly guarantee some mortgages or securities backed by them. “The urge to ‘slay the dragon’ should not cause collateral damage that would eliminate or make impossible the beneficial impacts” federal support of the housing markets has provided since the Depression, the Securities Industry and Financial Markets Association argued in its comment letter. Although Administration officials haven’t offered any details about the options they are considering, Geithner has made it clear that a federal guarantee in some form is likely to be part of any plan they propose. The Administration “won’t preserve Fannie and Freddie in anything like their current form,” Geithner said in a recent appearance on NBC’s “Meet the Press.” But he also noted that “there is going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee, so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.” A PERSISTENT PROBLEM The virtual disappearance of subprime lending has made a significant dent in mortgage fraud, but the problem persists, despite intensive efforts by state and federal law enforcement agencies to combat it. A fraud index created by First American CoreLogic has declined to 84 from a 2007 post subprime peak of 112 as lenders have tightened their underwriting standards and eliminated stated income (“liar”) loans and other products susceptible to fraud. Nonetheless, CoreLogic estimates that .55 percent of home mortgages originated last year (1.22 percent of FHA-insured loans) involved fraud. Separately, the Mortgage Asset Research Institute estimates that mortgage fraud increased by 7 percent last year - an improvement over the 26 percent increase reported the previous year, but evidence that fraud remains a serious problem, “growing and escalating in complexity,” according to the Institute’s most recent annual report. The report notes several factors driving fraudulent activity, including:
Legal Briefs A NATURAL CONCLUSION As expected, the Massachusetts Supreme Judicial Court (SJC) has jettisoned the “natural accumulation” defense that has long insulated landlords and community associations from slip-and-fall liability. (See related article by MEEB Associate Andrew Brooslin.) Until now, Massachusetts courts have based assessments of liability on whether the accumulation of snow and ice resulted “naturally” from the falling and freezing of snow, or “unnaturally,” from something a property owner did in response. The SJC decided that Massachusetts should follow other jurisdictions, which have long since rejected that distinction. “The reliance on a distinction between natural and unnatural accumulation has sown confusion and conflict in our case law,” the court ruled in Papadopoulos vs. Target Corporation. “We now discard the distinction between natural and unnatural accumulations of snow and ice, which had constituted an exception 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,” the SJC decision states. The plaintiff in this case (Papadopoulos) was injured when he slipped on a mound of snow in the Target parking lot. A lower court granted summary judgment to the store, finding that the snow accumulation was “natural.” Target argued that the lower court relied correctly on the “natural accumulation” theory, which has proven to be both “sensible and equitable.” But the SJC agreed with Papadopoulos that the natural vs. unnatural distinction defies both logic and common sense. “The only rationale the decisions of this court have offered in support of this rule is that a property owner owes a duty to repair or warn of defects on the property, and a natural accumulation of snow or ice is not a defect,” the court said. “Implicit in this rationale is that a dangerous condition on one's property can be a defect only if it is created or caused by the property owner. We do not accept this rationale where a property owner knows or has reason to know that [a risk exists]…; we have long held that the property owner has a duty to keep the property reasonably safe for lawful visitors regardless of the source of the danger…. “We now will apply to hazards arising from snow and ice the same obligation that a property owner owes to lawful visitors as to all other hazards,” the court concluded: “A duty to ‘act as a reasonable person under all of the circumstances including the likelihood of injury to others, the probable seriousness of such injuries, and the burden of reducing or avoiding the risk.’" Instead of wrestling with whether snow and ice accumulations are “natural,” the court said, fact finders in the future will focus on whether an owner’s snow removal efforts were “reasonable,” an assessment that will vary, the court said, depending on “the magnitude of the risk reasonably feared, and the burden and expense of snow and ice removal.” Rejecting Target’s argument that this reasonable care standard will impose an unreasonable burden on property owners, the SJC concluded that owners in the past could not have relied all that much on the natural accumulation defense in implementing their snow removal plans, because the line between “natural” and “unnatural” was so difficult to draw and because “a natural accumulation could so easily become an unnatural accumulation.” Additionally, the court noted, “most property owners have long been required by State regulations to keep all means of access and egress free of snow and ice at all times. The reasonable care standard we impose is less demanding than these regulatory requirements.” WORTH QUOTING: “Did we really spend $50 billion of our money just to revive the kinds of practices that led to the credit crisis?" – New York Times columnist Andrew Ross Sorkin, expressing dismay at General Motors’ plan to purchase AmeriCredit, a subprime automobile lender.
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