On November 7, 2011, the US Supreme court granted certiorari in Gallagher v. Magner, 619 F.3d 823, 829 (8th Cir. 2010) cert. granted, 10-1032, 2011 WL 531692 (U.S. Nov. 7, 2011).
The case arose out of the Eighth Circuit when several owners and former owners of rental properties in St. Paul, Minnesota brought consolidated actions, challenging the City of St. Paul's enforcement of its housing code.
In 1993, the City enacted the Property Maintenance Code which “[e]stablishes minimum maintenance standards for all structures and premises for basic equipment and facilities for light, ventilation, heating and sanitation; for safety from fire; for crime prevention; for space, use and location; and for safe and sanitary maintenance of all structures and premises.”
To enforce the code, the City established the Department of Neighborhood Housing and Property Improvement (“DNHPI”) as an executive department responsible for administering and enforcing the Housing Code. DNHPI was empowered to inspect all one- and two-family dwellings and administer and enforce laws regulating maintenance of residential property. This sounds all and well; protect the safety of residents and promotes the general appearance of the city … Until Andy Dawkins, the Director of DNHPI instructed his property inspectors to conduct proactive “sweeps” to detect housing code violations.
Dawkins also instructed his inspectors to “code to the max”, by writing up every violation that the inspectors would see, in addition to complaints about violations brought to the DNHPI’s attention by neighbors and other residents of the City. A “user-friendly” reporting system was also set up to allow neighbors and residents of the city to file complaints.
One can only imagine the ensuing tsunami of strategically-placed "complaints" neighbors could volley at each other, but the DNHPI employed a specific variety of strategies for renter-occupied dwellings. These included orders to correct or abate conditions, condemnations, vacant-building registration, fees for excessive consumption of municipal services, tenant evictions, real-estate seizures, revocations of rental registrations, tenant-remedies actions, and even, court actions.
While the DNHPI may sound like the HOA from Hell, its effects were broad, and far reaching. The DNHPI’s tactics fell heavily on low-income, African-American tenants living in privately-owned housing. The Appellant-Plaintiffs included individuals who own or formerly owned rental properties in the City. These property owners allege that they have suffered increased maintenance costs, fees, condemnations, and were forced to sell properties in some instances, due to as many as ten to twenty-five code violations, which ran the gamut of unsavory living conditions, such as rodent infestations and “inadequate sanitary facilities.”
Specifically, the Appellant-Plaintiffs allege that the City enforced the Housing Code more aggressively with regard to their properties because they rented to a disproportionately high amount of racial minorities, particularly African-Americans.
The 8th Circuit affirmed the lower court’s decision, except for the dismissal of the Appellant-Plaintiff’s disparate impact claim under the Fair Housing Act. The court held that the Appellant-Plaintiffs had satisfied the first query of the McDonnell-Douglas “Burden Shifting Analysis”, by successfully proving a prima facie case which requires showing “that the objected-to action[s] result[ed] in ... a disparate impact upon protected classes compared to a relevant population.”
The Judge correctly held that this was shown by four things which he ruled were sufficient to advance a theory of disparate impact:
(a) The City experienced a shortage of affordable housing
(b) Racial minorities, especially African-Americans, made up a disproportionate percentage of lower-income households in the City that rely on low-income housing.
(c) The City's aggressive Housing Code enforcement practices increased costs for property owners that rent to low-income tenants.
(d) The increased burden on rental-property owners from aggressive code enforcement resulted in less affordable housing in the City.
Gallagher v. Magner, 619 F.3d 823, 835 (8th Cir. 2010).
Thus, the court held that “given the existing shortage of affordable housing in the City, it is reasonable to infer that the overall amount of affordable housing decreased as a result. And taking into account the demographic evidence in the record, it is reasonable to infer racial minorities, particularly African-Americans, were disproportionately affected by these events.” Id.
In contrast, the City argued that “[the] Appellants must do more than show that the Housing Code increases the cost of low-income housing and that African-Americans tend to have lower incomes.” Id. at 836. The court, however, held that in viewing the evidence in the light most favorable to the moving party, “the evidence demonstrates that there is a shortage of affordable housing and that the City's aggressive code enforcement exacerbated that shortage.” Id.
Turning to the second query of the McDonnell-Douglas test, the court held that “the City has shown that enforcement of the Housing Code promotes the objectives of providing minimum property maintenance standards, keeping the City clean and housing habitable, and making the City's neighborhoods safe and livable.” Id. at 37.
The game goes into overtime, with the burden once again shifting to the plaintiffs to “offer a viable alternative that satisfies the [City's] legitimate policy objectives while reducing the ... discriminatory impact” of the City's code enforcement practices.” Id.
To do so, the Plaintiffs used the City's former program for Housing Code enforcement called “Problem Properties 2000” (“PP2000”). The program’s lists of goals and tactics of included: “identification of properties with a history of unresolved or repeat Housing Code violations, meeting with the owners individually, encouraging the owners to take a more business-like approach to managing their properties, keeping closer tabs on changes of ownership, and using consistent inspectors at each property.” Id. at 838.
Appellant-Plaintiffs contend that PP2000 embodied a flexible and cooperative approach to code enforcement, which achieved the goals of code enforcement while maintaining a consistent supply of affordable housing, something that, the Appellant-Plaintiffs argue, the DNHPI failed to do.
The City argued that this approach would not “reduce the alleged impact on protected class tenants,” and the District Court agreed with them, reasoning that “because participating landlords were not excused from compliance with the Housing Code, they would still incur the same costs of compliance with the housing code, leaving any alleged discriminatory effect on African-Americans unchanged.” Id.
However, the Court disagreed, stating that the Plaintiff-Appellants “offer[ed] evidence that the challenged enforcement practices burdened rental-property owners and thereby reduced affordable housing options. There is also evidence that PP2000 generated a cooperative relationship with property owners, achieved greater code compliance, and resulted in less financial burdens on rental property owners. It is reasonable to infer from these facts, viewed most favorably to Appellants, that PP2000 would significantly reduce the impact on protected class members.” Id.
Thus, the Court of Appeals overruled the District Court’s finding on the issue of disparate impact. The US Supreme Court granted certiorari, and is set to hear the case later this Spring, in 2012. The potential to change the landscape of Fair Housing litigation in this case is huge. The Disparate Impact test has been an invaluable tool in the fight against facially-neutral laws that, as applied, present an onerous burden on a protected class of people. What the Supreme Court will do in this case remains unclear, and the court may or may not strike down the McDonnell-Douglas "Burden Shifting" analysis, as they struck down the Trafficante case earlier this year.
Time to tackle shark practices of debt companies and their Scottish solicitors says GLC
Govan Law Centre (GLC) is concerned that the OFT's Debt Collection Guidance is being routinely ignored in Scotland not only by UK debt purchasing companies but more worryingly by certain firms of Scottish solicitors who undertake debt collection as one of the primary activities of business. Besides causing unnecessary human misery, unfair, oppressive, and disproportionate business practices are resulting in vulnerable Scottish homeowners being threatened with homelessness as creditors use inhibitions for tiny debts. The practice results in creditors being able to scupper Scottish Government mortgage to rent transactions, where families facing homelessness can have their house purchased by a social landlord.
GLC's Mike Dailly said:
"To give an illustration of the problem, we have a case in Glasgow where it has taken us many months to defend a repossession action and broker a complex mortgage to rent transaction, which is now being thwarted by a Scottish firm of solicitors acting on behalf of an English debt purchasing company for a debt of £810. Last month the company was prepared to accept repayment at £5 per week, but since obtaining an inhibition it wants all of the money as a lump sum".
"Our client is on incapacity benefit and has offered £100 plus £5 per week but the company's solicitors advise their client says no. We believe this Scottish law firm and company have engaged in aggressive, oppressive, and unfair practices contrary to the OFT's expected standards for consumer debt recovery, and contrary to section 25 of the 1974 Consumer Credit Act".
"Govan Law Centre is considering all legal remedies available to our clients against such companies and their Scottish solicitors - including where appropriate 'naming and shaming' - however, it is quite clear there is a major regulatory role here for the Law Society of Scotland which needs to be addressed, a need for the OFT to intervene, and ultimately a pressing need for the Scottish Government to review the ability of their own Mortgage to Rent scheme to be de-railed by unsecured creditors with relatively tiny debts through the inappropriate use of inhibitions".
Lunch with Ben Bernanke and the Future of Housing Finance
Last week I wrote about eating lunch with Federal Reserve Chairman Ben Bernanke, who was in El Paso on Thursday, November 10, to greet returning troops and Fort Bliss and to participate in a town hall on the military base. As an added part of his trip, he had a private lunch with a dozen or so business people from El Paso. The purpose of the luncheon was to allow Bernanke to hear from the business community about our concerns and the factors which are affecting our ability to grow and to hire others.
As I explained last week, we each had two minutes to speak about whatever topic we wished. After we had each made our statement, Bernanke made a general statement addressing some of the concerns raised (for specific points from that discussion, see Part I of this blog). Cindy Ramos-Davidson, CEO of the El Paso Hispanic Chamber of Commerce, who had actually coordinated the event, then allowed some of the business owners to ask follow up questions. One of the businessmen asked a question about what Bernanke believes will be the future of Fannie Mae and Freddie Mac. These huge bloated corporations which have been in conservatorship since September of 2008 have cost taxpayers hundreds of billions of dollars so far. And with huge bonuses for the executives of the corporations making news this week, today seemed to be a perfect time to examine Bernanke's answer.
In brief, Bernanke responded that there is a lot of talk of privatizing Fannie Mae and Freddie Mac. If they were privatized, the government might offer some sort of insurance to back the mortgages. This would restore their status very much to the pre-2008, pre-conservatorship arrangement that existed for many years. Under that system, Fannie Mae and Freddie Mac were both largely private corporations with the U.S. government owning a minority interest in both. The issue with this was that most investors bought the mortgages Fannie and Freddie securitized with the implicit understanding that the mortgages were backed fully by the US government. And when gross mismanagement drove both corporations into bankruptcy, the U.S. taxpayer had to pick up the tab.
Most conservatives favor privatization today. I am included in that number. In my opinion, the insurance backing the mortgages should be private as well. In my experience, people watch their own money more carefully then they watch their neighbor's, and they certainly watch their own money much more carefully than they watch the taxpayers'. As long as the shadow of the Treasury Department and a possible bailout loom over Fannie and Freddie, the entities will never have incentive to behave responsibly.
Having said that, every housing professional knows that Fannie Mae and Freddie Mac are an indispensable part of the U.S. housing finance process. That leads me to Bernanke's second comment. He indicated that Fannie and Freddie might be done away with completely in favor of a system of mortgage lending that more closely resembles Canada and Europe, where nothing similar to Fannie and Freddie exist and the banks finance mortgages through the sale of bonds. He added that Canada and Europe have home ownership rates similar to the U.S. and implied that since their system works well for them, it could work well for us too.
As a thirteen and a half year mortgage veteran, I was very intrigued. I decided to check out the facts about housing finance in Canada and Western Europe--for the purposes of this discussion I looked at the United Kingdom, France, and Germany and Switzerland to see how their systems of mortgage finance compare with ours.
To set the baseline for comparisons, according to the U.S. census bureau current U.S. homeownership rates are at about 66% which is down from close to 70% during the height of the boom. Not surprisingly, the median average home price varies by region. According to the National Association of Realtors, in August of 2011, the median home price in the North East was $244,100, in the Midwest it was $141,700, in the South $151,000, and in the West $189,400. Our most popular mortgage product is the thirty-year fixed rate mortgage with the interest rate fixed for the entire term of the loan--I saw statistics indicating that 9 out of 10 homeowners have a thirty-year fixed rate mortgage. These conventional conforming mortgage products have no prepayment penalty. While this product is criticized by some who say it is outdated because Americans no longer stay in their homes thirty years, it has remained a safe, secure form of financing. Currently about 5.82% of U.S. homeowners are 60 days or more past due on their mortgage loans--which means that over 94% of U.S. homeowners are making their mortgage payments on time.
CANADA
I started with our neighbor to the north as I expected that it would probably be most similar to the U.S. in terms of lifestyle of the residents including home ownership rates. About 60% of Canadians own their own homes. In the 35-44 age group, 58.2% are homeowners. Conventional mortgages typically require 25% down, but mortgages of over 80% of the sales price or appraised value are available with insurance provided by the Canada Mortgage & Housing Corporation. I saw one website that claims that GE Capital provides private mortgage insurance financing as well, but the Canadian Department of Finance website states that the Canadian government backs all mortgages over 80%. A typical mortgage in Canada is fixed for 5 years with an amortization of 25 years. After the fixed period ends, the rate becomes variable. Interestingly, all Canadian mortgages appear to have prepayment penalties. Royal Bank's website is advertising mortgages fixed for 4, 5 and 7 year terms at special pricing of 5% interest fixed for seven years.
Property in Canada is more expensive than the United States. Wallet Pop says that prices have increased approximately 7.7% since 2010; the average cost of a home in Vancouver is now $517,000, and in August of this year the average home price in Canada was $349,916. According to Realty Times, residents of British Columbia need to earn $157,000 to be able to qualify for an average home. This locks out young couples and first time homebuyers, who are now being encouraged to "rent to own" and to go to builders who specialize in assisting first time buyer. Wallet Pop recommends that young buyers try Daniels First Home--a builder of condominiums and town homes. Their website http://www.danielsfirsthome.ca/ advertises that potential buyers can move into their new condos, which start at $199,000, by making deposit payments until they can qualify for financing.
Next, we hop across the pond to the UK. The mortgage system in the UK also provides amortizations of up to 25 years. The website of one UK mortgage broker advises that mortgages are typically fixed for 2, 3, and 5 years; right now the rates are fairly comparable among those three terms as the Bank of England has kept rates low to shore up the economy. It is possible to fix a rate for the entire term of the loan, but the interest rate becomes higher as the term is fixed for longer periods, making this virtually impossible for many borrowers. After the fixed rate term ends, homeowners pay the Standard Variable Rate, which is 1-2% higher than the Bank of England base rate. Some borrowers also take advantage of capped rate mortgages which are linked to the Standard Variable Rate but which "cap" the interest rate for a period of time. Fixed rate mortgages cost the borrower an additional fee which has risen sharply in the last few years, making these mortgages initially much more expensive than Variable Rate mortgages.
Although interest rates are low, qualifying for a mortgage is very difficult, particularly for first-time homebuyers. The National Housing Federation has a report from Oxford Economics showing that, on the averag,e first-time homebuyers need to put down almost 30% of the sales price in order to purchase and they can borrow only about 2.8% of their income. (Financial Times August 30, 2011).
Homeownership rates have been as high as 72% in the UK (2001), but right now homeownership is on the decline. Current homeownership rates are at 67% and that number is expected to drop to 64% by 2021. In London, 6 out of 10 Londoners are expected to be renters by 2021. The average house price in Greater London is 440,230 pounds (approximately $880,460 USD). A detached home in London (what we would think of as a regular single family residence) costs 810,234 pounds ($1,620,000 USD approx.) For Londoners, this means that the average Londoner would need to triple his current salary in order to be able to buy the average home. Only 4 London burroughs have an average house price of 250,000 pounds ($500,000 USD). This has created a huge housing problem. According to Kate Dodsworth, Assistant Director of the National Housing Federation, "London has become unaffordable for ordinary, hardworking (people) who have no real chance of buying their own house." David Orr, chief executive of the National Housing Federation adds, "Homeownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy." Currently 800,000 Londoners are on the social housing waiting list and 200,000 are living in over-crowded conditions. Private rents have increased 30% since 2008.
FRANCE
Any plan to utilize the strategies of Western Europe should include a discussion of France. The Wall Street Journal On-Line reports that homeownership in France is about 57%. Required downpayments range from 50% to 10%--French taxpayers can borrow up to 100% of the sales price. However, Banque de France sets very strict underwriting requirements for mortgages. The mortgage company qualifies the prospective borrower using 1/3 of his gross income. Therefore a borrower making $100,000 a year would be qualified on $33,333 of that income. From that amount, the lender subtracts all taxes, debts and the proposed mortgage payment. French banks also require that borrowers over 55 submit to a health exam and purchase life insurance to pay off the mortgage upon their deaths. Because of the difficulty in obtaining a French mortgage, most of the mortgage sites I consulted recommend that would-be buyers from the U.S. and UK might want to get mortgages in their own countries against their own homes and pay cash in France.
Housing is very expensive in France, particularly in Paris. According to France Today's website, the average price of an apartment in Paris at the end of last year was euros 7000 (approximately $9561.00 USD) per square meter (which is approximately 11 square feet) That works out to about $868.27 per square foot. According to the Paris Chamber of Notaires, none of the 20 districts of Paris reported prices under euros 5000 ($6829 USD) per square meter. This would make the low-end pricing $620.81 per square foot for an apartment in Paris. Since several sites that I consulted last night indicate that the average wage in France is $42,390.00 and French mortgages require the lender to qualify the borrower on 1/3 of his income, I strongly suspect that the majority of the 57% of French who own their properties probably are living in homes that their families have owned for a long time and that these rates are not the result of new purchases.
As an interesting aside, I learned in researching this piece that France's VAT tax is included in the real estate commission and virtually all services. One ex-pat wrote about her experiences buying radiators in France and said that she paid a professional to install the radiators rather than doing the installation herself because the 19% VAT tax is reduced to a little over 5% if the installation is purchased at the time as the service. The net effect is that it is cheaper to hire laborers than it is to do the work yourself. Also, virtually everything in France requires a license, including television sets. When a individual purchases a television set, the seller is required to report the sale to the French government who then requires that the new owner purchase a license in order to be able to watch television.
Germany actually has the second largest mortgage market in Europe, just behind the UK. Sixty percent of new loans originated from 2003-2008 had fixed rates of 5 years or more. In September of 2010, the average price of an existing home in Germany was euro 265,500 ($398,250.00 USD); the average price of a new home was euro 232,500 ($348,750 USD) and the average price of an apartment was euro 140,000 ($210,000 USD). According to WSJ On-line, approximately 46% of Germans own their own home.
WSJ On-line cites Swiss homeownership at 37%. I was unable to find out much about their mechanisms of financing mortgages, but I did determine that in Switzerland the government discourages homeownership by taxing homes both as income and as assets. The majority of Swiss prefer to rent.
In Summary
While it is fine to say that Europe and Canada enjoy the same rate of homeownership as the U.S. the statistics don't bear that out. Where mortgage financing is difficult to obtain, buyers cannot buy their homes and sellers cannot sell. The ultimate effect is that rents become very expensive and properties are soon priced out of the reach of average people. Home ownership becomes a privilege of the wealthy rather than a goal to which all citizens can aspire.
So the question is, do we want to import Europe's system of housing and housing finance to the U.S? What do you think?
Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books. For more information, visit her website at http://www.frontier2000.net/.
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