The Fiduciary Duty
Dilemma
Will financial services reform legislation solve the
problem?
With the passage of the Senate's financial services reform
bill on May 20, Congress is beginning the process of working
out differences between it and a House version passed
earlier. House Financial Services Committee Chairman Barney
Frank (D-MA) said, "I think the president will sign this
bill before the Fourth of July."
The legislation would create a new consumer protection
agency under the Federal Reserve charged with preventing
mortgage, auto and credit card lending abuse. It would also
empower the government to wind down large failed financial
corporations and create a federal council to prevent risks
to the global economy. It would expand scrutiny of the
derivatives market, restrict unfair credit rating agency
practices and give shareholders a say in corporate affairs.
There are many similar provisions in the House version of
the legislation. One of the main differences between the two
versions is that the House version imposes a “fiduciary
duty” on stockbrokers and insurance agents, while the Senate
version calls for a study to determine if the current
standards are adequate. Under the concept of fiduciary duty,
service providers held to this standard are expected to
place their client’s best interests ahead of their own.
Attorneys, real estate agents, financial planners and
investment advisers, among others, currently owe a fiduciary
duty to their clients.
We believe that this may be the most critical provision of
the legislation, and the financial services sector should
support a
fiduciary duty requirement
because it is in their own best interest to do so. Anyone
providing individualized investment advice should bear a
fiduciary duty toward their clients. That duty reinforces
the trust that is essential to a stable financial services
sector. As a result of the recent practices that brought on
the current recession, many consumers no longer trust or
respect companies in that sector. Restoring that trust is
essential to a stable economy.
A fiduciary duty requirement is not that onerous. It’s not
that complicated or hard to do, nor have fiduciary duty
obligations resulted in excessive numbers of lawsuits or
other serious problems in other sectors where it is
currently applied. We doubt than many investment advisers
would have any difficulty in adhering to that standard. In
addition to stockbrokers and insurance agents, a fiduciary
duty standard should also be applied to mortgage brokers as
well as mortgage lenders because of their important role in
the future of American homeowners. Those few that can’t meet
this reasonable standard would deserve the punishment that
they would receive. The existence of the standard combined
with an occasional enforcement when necessary would greatly
improve the image of professionals in the financial services
sector.
Recent developments in mortgage foreclosures underscore the
downsides of client distrust. Public perception of mortgage
lenders is very low. The abandonment of sound underwriting
practices by lenders and their practice of giving risky
subprime loans to unsophisticated borrowers has undermined
the public trust. Many people believe turnabout is fair
play, including mortgage borrowers who fully understand
mortgage alternatives and in many cases have opted for safe
30 year fixed rate mortgages.
While there is much public sympathy for the many subprime
borrowers who have lost their homes to foreclosure (and the
growing number of prime mortgage borrowers who are losing
their homes as a result of recession-induced job losses),
few have much sympathy for the lenders. Policymakers are
unlikely to want to help lenders staunch losses, even when
they are caused by homeowners who can afford their mortgage
but choose to walk away instead.
The latter has become a very large problem. There has been
substantial growth in what are known as “strategic
defaults”. In a strategic default, the homeowner can afford
to pay their mortgage, but decides to stop making payments.
This is most common when homeowners owe far more to the
lender than their home is worth. A recent survey of
homeowners, by search site Trulia.com and RealtyTrac,
revealed that 41% of homeowners would consider walking away
from their mortgages if their homes were worth less than the
amount they owed.
In the present environment there is little public
condemnation of strategic defaults, and some may feel good
about lenders receiving what they feel is a well-deserved
payback for their own irresponsible policies. Lenders are
unlikely to receive the public support required to address
this problem until public trust in them is restored. One way
to do that is through a fiduciary duty standard, because
consumers would then appreciate that mortgage lenders and
brokers were on their side.
Although some business groups oppose the new fiduciary duty
standard, consumer groups like Consumer Federation of
America and AHGA support it strongly, as do some business
groups, including the North American Securities
Administrators Association, the Certified Financial Planner
Board of Standards, the Financial Planning Association, the
National Association of Personal Financial Advisors as well
as the Committee for the Fiduciary Standard.
It’s time for all advisors whose financial counseling is
important to consumers’ financial future to join consumers
on this issue and help get rid of investment advisors who
don’t care about their clients’ financial future.
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Which
Way Will Baby Boomers Bounce?
Baby boomers retirement housing choices will have a huge
influence on the economy.
The huge population of baby boomers, born between 1945 and
1964, is just beginning to migrate into retirement. What the
boomers do, and where they live, will impact both the
national and local economies.
Del Webb, America’s largest builder of active adult
communities, released its tenth annual survey of baby
boomers in May. In late 2009, Del Webb conducted two surveys
among different baby boom populations: Survey one included
younger baby boomers turning 50 years of age in 2010 and
older baby boomers turning 64 in 2010; Survey two included
current Del Webb residents with a median age of 65 among
respondents. The purpose of these surveys was to understand
the similarities and differences between younger baby
boomers and older baby boomers. According to the survey,
nearly a third of older Baby Boomers plan to move in
retirement, with more than 50% planning to move to a
different state, about 25% of them planning to move to a
different city within the same state, and less than 20% of
older Boomers planning to move within the same city.
Additionally, the desire to move during retirement is on the
rise among today’s younger Boomers surveyed, with 42% of
those turning 50 in 2010 planning to do so, as compared to
36% among 50 year olds in 1996.
For today’s 80 million Boomers, the choices vary on where to
spend their retirement years. Some consumers choose to
retire in place in the city where they currently live and,
potentially, near family and grandchildren. Alternatively,
some consumers seek warmer climates. The Carolinas have
emerged as the preferred destination for retirement, while
perennial favorites, Florida and Arizona, remain top
contenders. Both younger and older Baby Boomers ranked
either South or North Carolina first as their preferred
location in retirement—with the other Carolina ranking as
their second choice. More Baby Boomers are also purchasing
their retirement home before they actually retire. As with
other homeowners, retiring Boomers have become a bit more
cautious in their spending habits. They are more likely
today to forego amenities in their home that don’t seem
quite worth the money.
Many consumers want to be close to shopping, restaurants and
cultural amenities, whether they are inside or near to their
community. Many of them also want their community to be
located near their family, church and/or friends. Among Baby
Boomers looking to move, the most important factors in
deciding where to relocate were an area’s cost of living
(81%) and access to preferred healthcare programs (66%).
Cultural and recreational amenities, as well as a more
favorable climate, ranked higher than being close to family
members, including parents, children and/or grandchildren.
For current Del Webb residents who plan to move again
consider both access to healthcare and cultural/recreational
amenities ranked as the most important factors at 71%, with
the cost of living a concern among 70% of these respondents.
Being close to their grandchildren ranked second to last in
consideration at 44%.
Among some of the other findings are that younger boomers,
who are turning 50 soon, plan to retire at age 67, four
years later than 50-year-olds who responded to the survey in
1996. The impact of the recession has impacted many of them,
but many just like to continue working even if they don’t
need the money. At least in part the result of recent
economic events, 41% of Boomers who turned 50 this year
think they'll never be financially prepared for retirement
versus 15% of 50 year olds in 1996.
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Government Googles Google’s Privacy Policy
Privacy policies of Google and social-networking sites puts
them in policymakers’ crosshairs.
The world’s pre-eminent search vehicle is coming under
increased scrutiny at a time when Congress is in the process
of considering Internet privacy legislation. The latest flap
is over Google’s Street View, a mapping tool that provides
ground level views of people’s homes. AHGA has previously
expressed concerns about this tool, which also creates home
security risks from car thieves and burglars. Google does
not inform homeowners when it puts their homes on Street
View.
In the latest episode, Google was found to also be
intercepting data from unencrypted Wi-Fi networks while it
was also photographing properties from cameras mounted on
the roof of roving cars for
Street View. Google claims the
data collection was accidental, but it is difficult to
understand how that might happen as part of a photographic
exercise. Three senior House legislators - Henry Waxman
(D-CA), Ed Markey (D-MA), and Joe Barton (R-TX) – have asked
Google a dozen detailed questions about the process,
including whether the intercepted data has been destroyed
and whether an outside review of privacy practices will take
place. Markey and Barton had earlier asked the Federal Trade
Commission to determine whether the search company's
collection of Street View Wi-Fi data violates the law.
Under the Electronic Communications Privacy Act anyone who
"intentionally intercepts" any electronic communication,
including a wireless communication, is guilty of a crime. At
least three class action lawsuits have been filed against
Google regarding the practice. Google has also received
flack over its Google Buzz original launch and it’s multiple
relaunches earlier this year.
Google is not alone in terms of Internet sites that are
raising privacy concerns. Facebook, MySpace, Meetup,
LinkedIn and other social-networking sites have also been
accused of selling user data to advertisers without their
knowledge or permission. Many consumers appear unaware that
under current law these companies own the data and that in
some cases they store account data for years. Privacy
settings on some of the social-networking sites are
challenging to use for many. As a result, Facebook chief
executive Mark Zuckerberg announced a modification that
makes it much easier for users to control how they share
data. Not only may these social-networking sell data to
advertisers, but it may also be subject to discovery through
subpoenas by law enforcement agents and opposing parties in
civil lawsuits.
All of this is occurring as House Communications, Technology
and Internet Subcommittee Chairman Rick Boucher (D-VA) is
circulating draft legislation that will regulate Internet
data collection. The bill would create privacy regulations
that Internet companies and many non-Internet companies must
follow. Any company or nonprofit organization that collects
personal information from at least 5,000 people, including
names, e-mail addresses, or U.S. mailing addresses, would
not be allowed to "use" or "disclose" the data without
consent.
The American Homeowners Grassroots Alliance supports this
provision. Neither the American Homeowners Grassroots
Alliance nor the American Homeowners Foundation discloses
such data about its members under any circumstances. Liberal
groups have criticized the draft as inadequate while
business groups such as the Interactive Advertising Bureau
claim that it goes too far. The latest Google flap is likely
to encourage a more restrictive approach.
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Lower home energy demands will reduce the
 need
for future offshore drilling.
The ongoing offshore oil spill in the Gulf of Mexico is a
saga that will cost thousands of Gulf Coast workers their
jobs and harm the coastal environment for decades, if not
permanently. The disaster underscores the need to reduce our
nation’s future petroleum dependency. A number of current
and future initiatives related to home energy efficiency are
contributing to that goal.
On May 6, the U.S. House of Representatives passed the
Home Star Energy Retrofit Act of 2010. The legislation
creates a national energy retrofit program for American
homeowners. The bill must also be passed by the Senate, and
funding for it must be approved. It would provide thousands
of dollars in “cash-for-caulkers” rebates which would apply
to a variety of home renovations that improve energy
efficiency. They include more insulation and energy-saving
replacement windows and doors. Homeowners would receive
rebates or discounts from retailers or contractors at the
time of sale and the retailer or contractor would handle the
rest of the paperwork.
The Home Star Energy Retrofit Act is separate from
the $1,500 home energy tax credit included in the 2009
economic stimulus bill, which also applies to similar
eligible expenditures through the end of 2010. Also passed
in 2009 was a $4.7 billion home weatherization program.
Funding for the latter has been slow to make its way to
states through federal grants. Critics of The Home Star
Energy Retrofit Act fear it may run into similar
bottlenecks.
President Obama was quick to praise the House passage of the
Home Star Energy Retrofit Act, calling it “a common sense
bill that will create jobs, save consumers money, and
strengthen our economy. At a time when millions of
Americans are looking for work and companies are ready to
take on new customers, this legislation will help jumpstart
job growth and demand for new products created right here in
America. This rebate program will not only put
people back to work, it will lower costs for homeowners who
choose to improve their home with products like energy
efficient windows, water heaters and air conditioners.
And it will also save consumers money on energy bills down
the road.”
Progress is also being made on strengthening energy
efficiency requirements in building codes. Although stronger
energy efficiency requirements raise the costs of homes,
they also reduce subsequent home energy costs. At some point
the additional building costs are offset by ongoing home
energy cost savings, and the latter also helps overall home
affordability.
The International Energy Conservation Code (IECC),
determines energy efficiency standards for all new
buildings. A series of code hearings are held every three
years. In 2009 the IECC increased efficiency requirements by
12%. The American Homeowners Foundation believes that this
could increase the cost of a typical new U.S. home by
$2-3,000, but it could also reduce a homeowner’s annual
utility costs by $500 or more. Under the best of conditions
it could pay for itself in four years, but in many cases it
will take longer. Another bonus is that energy efficient
homes will command higher resale prices as energy costs
continue to rise.
Unfortunately, mortgage lenders have not done a very good
job of supporting energy efficient home construction. They
certainly have to pay close attention to market values, and
in the current slow housing market a new energy efficient
home may not bring that much more than one built to a lesser
standard. Lenders are also rightfully concerned (finally)
about affordability. Affordability is a function of total
housing costs, which includes the cost of the home, real
estate taxes, and home energy costs. The American Homeowners
Foundation believes that lenders should look at all these
costs. If the buyer of an energy efficient home can
demonstrate that their monthly energy costs will be $50 to a
$100 less, then the lender should allow them to finance that
much more in monthly mortgage payments.
It will take a while for home energy efficiency improvements
to be felt in the marketplace, but they are coming. The
potential for further energy cost reductions is very high.
Policymakers have been scrutinizing automotive mileage
standards for decades, but only recently is society starting
to take a serious look at ways to improve home energy
efficiency. In that sense we are only beginning to harvest
the low hanging fruit.
The American Homeowners Foundation urges homeowners to take
advantage of home energy improvement incentives when they
become available. There are also smart and cost effective
green home improvements homeowners can make with or without
those incentives. HomeGain, a leading real estate website
recently surveyed 1,000 real estate agents and brokers
nationwide, asking them to identify do-it-yourself (DIY)
Green home improvements that cost under $300 and that
benefit sellers most when they sell their homes. Some are
better described as maintenance activities, but anything
that improves energy efficiency at a low cost should be on
your to do list for this summer.
The top nine Green home improvements that real estate
professionals recommend to home sellers based on cost and
return on investment to the sellers are:
1. Plant trees and shrubs
2. Replace air filters
3. Green home staging
4. Weather strip and caulk doors and windows
5. Install programmable thermostats
6. Install low flow shower heads
7. Use auto turn-off power strips
8. Install CFL or LED lights
9. Paint with low VOC paint
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Please take the time to contact your legislators and express your
views on pending policy issues covered in this
month’s Home Base. It's easy - you can reach your
legislators by email in a couple of mouse clicks,
and you can use the content in Home Base and
elsewhere on our website to help you develop your
message.
To look up the phone number, email, and/or postal address of your
U.S. Representative or your two U.S. Senators, (or
your state representative or state senator)
click here. You can also look up which
legislators represent your zip code if you don’t
recall their names.
A personal meeting is a particularly effective way
to get their attention and reinforce your message.
Many legislators are also happy to meet personally
with their constituents when they are back home on
weekends or when Congress is not in session. This
summer Congress will be in recess May 31 - June 6;
July 5 - 11; and August 9 - September 12.
Please consider also requesting a follow up
face-to-face meeting in their home state or home
district offices near you when you contact their
Washington DC offices on policy issues.
Is there a policy issue that is particularly
important to you which significantly impacts
homeowners or home ownership? Any member may propose
a position on a policy issue, so please check the
American Homeowners Grassroots Alliance's 2010 Issue
Guide.
If it isn't on the list, we invite you to send us an
email and tell us why you think the American
Homeowners Grassroots Alliance should take a
position and work on it.
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