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As a Texas real estate and development attorney who has represented lenders, commercial borrowers and developers for years, and as someone who has been critical of the “band-aid” solutions to the sub prime delinquency problem proposed by some politicians, I am heartened when I see solutions that appear to actually address the problem. Recently, an article by Karen Freifeld and Sharon L. Lynch in Bloomberg reported that Fannie Mae and Freddie Mac have reached an agreement with Andrew Cuomo, New York’s Attorney General, regarding appraisal standards. The agreement provides that Fannie Mae and Freddie Mac will buy mortgages only from lenders that adopt new standards that are meant to make sure that appraisals for home mortgages are independent and objective. Specifically, the new standards would prohibit mortgage brokers from selecting the appraiser for a loan, and would also prohibit lenders from using in-house staff or lender-owned appraisal companies to do appraisals for home loans.Fannie Mae and Freddie Mac are two federally chartered but privately operated organizations that buy real estate loans from banks. A large percentage of United States banks do not keep each home mortgage that they make for the full term of the loan. Instead, they sell their loans to Freddie Mac or Fannie Mae for a discounted amount of the full loan. Once the banks get paid by Freddie Mac or Fannie Mae, they can go out and make new loans with that money. Obviously, Fannie Mae and Freddie Mac are crucial to the liquidity of the United States mortgage industry. Banks will have to comply with standards set by Freddie Mac or Fannie Mae in order to sell loans to them.

From what I have read about the sub prime delinquency situation, inflated and even fraudulent appraisals appear to be at the heart of the current problem, just as they were for the Texas savings and loan debacle of the 1980’s. I suggest that the adoption on a national basis of the rules that are going into effect in New York will go a long way towards preventing the sub prime loan problems we see now.

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As a Texas real estate and development attorney who has represented lenders, borrowers and developers in Texas for years, I find the current debate over sub prime mortgages to be especially interesting. Sub prime loan foreclosures in Texas are not as extensive as they are in other states, however, they are still of concern in Texas and certainly nationally. Hillary Clinton has proposed a ninety day moratorium for foreclosures on sub-prime loans, according to her web site. Manny Fernandez in a recent article in the New York Times online describes how politicians in New York are pushing for a one year moratorium on sub-prime mortgage delinquencies in that state. One of these politicians, James Brennan, a Brooklyn Democrat, is quoted as saying: “There’s nothing wrong with giving people some time to see if better arrangements can be worked out.”Will someone please send these politicians to economics school? Their proposals may be designed to get votes, but they do not appear to deal in an educated way with the current sub-prime mortgage issues. For one thing, these proposals are based on the assumption that all sub-prime loans were made by evil, greedy lenders who imposed fraudulent terms on unsuspecting borrowers. I doubt that this is the situation for every sub prime loan out there. Secondly, a certain portion of these borrowers will not be able to pay any type of reasonable monthly payment, and should not have qualified for these loans in the first place. Giving them more time to “work things out” may be a fantasy. Thirdly, who is going to be responsible for deterioration in the condition of some of these homes while payments are not being made (since the threat of foreclosure often serves to dampen homeowner maintenance and repair)? Fourth, have these politicians calculated the cost to the economy of the mortgages to qualified borrowers that do not get made because of the chill this “solution” has on the mortgage lending market? And finally, do we really want government to step in and rescue people who have, in many cases, made an uninformed or inappropriate financial decision?

This kind of mass moratorium is calculated to wreck havoc with financial markets (can you say recession?). So in answer to James Brennan’s comment that there is nothing wrong with a moratorium, I would have to respond: think again! These proposals seem to illustrate what our form of government does best: create ill-considered quick-fixes to complicated problems in the hopes that voters will buy in to the illusion that something is being done.

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As the reader may be aware from one of my prior blogs concerning Texas rural water companies, not only have I served as an attorney for rural water and sewer companies in Texas for years, I have also spent the last year as President of the rural water company where I reside in east Texas. My term as a director and president will end next month, when our company holds its annual members meeting and elections. I have chosen not to run again because I believe it is important for the long term health of a water company for as many people as possible in the community to take a turn at being a director and an officer.

Alas, the problem is getting people interested. I have talked to many people in our community about running. Some say that they don’t know anything about treating water. My response is that they do not need to be an expert, they simply need integrity, common sense, and a willingness to base their decisions on what is best for the company and the community as a whole, rather than what may help a friend or neighbor.Some have told me that they are just too busy. I ask those people to consider that it is only a commitment for one board meeting a month. Is that too much of a price in terms of time for healthy drinking water for ourselves and for our children and parents, who are the people most vulnerable to pathogens in improperly treated water?

What often happens is that the people in the community who are best suited to serve on the board of directors don’t run for one reason or another. Instead, we often get candidates who are people who have been caught violating the rules, who have been forced to comply, and who are now mad. They want to be on the board so they can change those rules! This has got to be among the poorest of reasons to become a member of the board. In addition, in their ignorance and anger, these people are unaware that the local water company does not make the rules, the Texas Commission on Environmental Quality does that. However, we do have to enforce the rules. Not only can the board of directors not change the TCEQ’s rules, but in addition, the Texas Non-Profit Corporation Act prohibits a member of the board from voting on something that affects the member directly. Also important is the probability that if a rural water company director votes to violate the TCEQ rules, the water company may be fined and their officers and directors liability insurance will not pay for those fines. That means that those fines can come out of the pocket of the directors who voted to violate the rules.

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As a Texas real estate and development attorney, I am concerned that Texas real estate lending suffered some unwelcome notoriety recently when the Dallas Business Journal, quoting an announcement by the online publication, Mortgage Daily, announced that Texas had the fourth highest level of fraudulent real estate loans in the country.

Mortgage fraud in Texas has elicited a strong response from the Texas Attorney General. In July, 2007, the Attorney General announced a judgment against Ameriquest Mortgage Co. in which Ameriquest must return $21 million to Texas residents as restitution for deceptive practices by Ameriquest. The deceptive practices alleged to have been committed by Ameriquest include not adequately disclosing whether loans carried fixed or adjustable rates, charging excessive origination fees and prepayment penalties and using inflated appraisals that qualified borrowers for loans.The Texas Legislature has responded to the fraud crisis by enacting new rules governing loan officers and mortgage brokers and by requiring loan applicants to sign a notice that they are aware of the severe criminal penalties that apply if they are providing false information as to their identity, income, employment and/or intent to occupy the collateral. These rules are enforced by the The Texas Department of Savings and Mortgage Lending (formerly the Texas Savings and Loan Department).

The primarily vehicle for the fraud, from what I have read so far, is an inflated appraisal by a broker complicit in the fraud. Inflated appraisals were also one of the vehicles for the Texas savings and loan scandal of the 1980s. It seems we just don’t learn. Or maybe the problem is that we learn, but greed wins out anyway!

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In Part One of this blog regarding resources available for Texas rural water and sewer companies, I discussed the tremendous resource that Texas rural water companies and their lawyers have in the Texas Rural Water Association. In addition to the TRWA, there are two other associations that can be tremendously helpful to Texas rural water companies and attorneys who represent them.

The National Rural Water Association is also a great resource. An individual membership is only $25.00 per year, and includes a subscription to their great magazine, “Rural Water”. One of the things I appreciate most about the National Rural Water Association is that they keep an eye on, and report on, research by and proposed new regulations of the Environmental Protection Agency (the “EPA”). The EPA is the federal agency that is primarily responsible for enforcement of the federal Safe Drinking Water Act. Since the rules and regulations of the EPA are passed on directly to the state agencies that regulate water supply (in Texas, that agency is the Texas Commission on Environmental Quality or “TCEQ”), the information provided by the National Rural Water Association is often a crystal ball of changes ahead for Texas rural water companies.Another worthwhile organization that is a great resource for rural water companies is the American Water Works Association. This is a national organization with a more technical focus. AWWA publishes three excellent journals: “Opflow”, “Journal AWWA” and “Mainstream”. Their online library is excellent, and gives you access to a wealth of technical information. Membership for a water company with 5000 connections or less is $280.00 per year.

Each of these resources, the TRWA, the NRWA and the AWWA, are excellent resources for rural water companies and their attorneys. I highly recommend them.

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As an attorney for rural water and sewer companies in Texas, I have experienced first hand the increased regulatory and legal challenges faced by Texas rural water companies and their lawyers. While there is no substitute for having a knowledgeable attorney, there are several nonlegal resources available that are invaluable to Texas rural water companies.

The first of these resources is the Texas Rural Water Association. According to the TRWA website, its mission is:”To help water and wastewater systems supply Texans with safe and affordable water and wastewater services by providing:

* technical assistance,

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In a previous post, I discussed the implications for Texas contractors and insurance companies and their attorneys of the decision of the Texas Supreme Court in Lamar Homes, Inc. v. Mid-Continent Casualty Company. The Court’s decision had a second element that is notable, and will be helpful to attorneys who are trying to collect an insurance claim from a carrier.

Texas has what is commonly referred to as the “prompt payment” statute (Texas Insurance Code § 542.051 ) which provides for additional damages against an insurer who wrongfully refuses or delays payment of a claim. A “claim” is defined as a first party claim “made by an insured or policyholder under an insurance policy or contract or by a beneficiary named in the policy or contract [that] must be paid by the insurer directly to the insured or beneficiary.” The problem has been that the Texas Insurance Code does not separately define “a first-party claim,” and Texas court decisions have been divided as to what it means. Some Texas Courts have defined a first party claim as a claim paid under a first party insurance policy, such a life insurance policy or an auto policy, where the insured is buying insurance to cover their own life or property. The reasoning here is that third party insurance, where the insured is purchasing insurance to cover a loss to others (such as the other guy in a car wreck) is not a first party claim and is therefore not covered by the prompt payment statute.

The Texas Supreme Court in the Lamar Homes case decided that the insurance company’s duty to defend Lamar Homes, even though the payment of attorney’s fees for defense would go to a third party (Lamar’s attorneys) was covered by the prompt payment statute. This part of the decision is, in my opinion, a good thing, because it requires insurance carriers to whom the statute applies to promptly review the claim, do their research and make a decision on the claim, rather than dragging their feet.

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A decision by the Texas Supreme Court either delighted or horrified Texas attorneys, depending on whether they represented consumers of construction services, construction companies or insurance companies. In Lamar Homes, Inc. v. Mid-Continent Casualty Company, an opinion delivered on August 31, 2007 and which became final in December 2007, the Texas Supreme Court held that unintended construction defects constitute property damage under a commercial general liability policy (“CGL” policy), triggering a duty by the insurer to defend the home builder and to pay damages on behalf of the builder when a home owner sued the builder for construction defects.This is a surprising decision in some ways because, in general, CGL policies in Texas cover claims for bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). A damage claim because something has been built defectively is usually not covered by a CGL policy. The CGL policy is intended to cover tort claims. A claim that something was built defectively is a breach of contract claim, As the dissent in this case so ably points out, this decision turns the construction industry and the CGL insurance industry on its head.

Attorneys representing home owners may smile at this decision, and think they have been handed another source from which to collect damages when a builder’s construction (or the work of the builder’s subcontractors) turns out to be defective. However, the real loser because of this decision may be the very person that this decision appeared to benefit: the consumer! If CGL insurers are now obligated to cover every real or imagined, major or minor, defect in new construction, then the premiums for those policies will most certainly rise. Those increased premiums paid by the contractor will be passed on to the consumer in both residential and commercial construction. Rents will ultimately increase. What this decision really does is spread the cost of construction defects among all of us. In addition, this decision really shields the bad builders in the short run: they can pass these costs on to their CGL carrier, rather than being liable themselves for shoddy work.

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As an attorney, I have represented rural water companies in Texas for years. I have prepared their corporate documents, assisted with government grant and loan applications, and negotiated non-standard and subdivision service contracts, among other things. I have also served as an officer and as a director on the board of a rural water company. Based on my experiences, I believe that many of Texas rural water utilities are struggling, and in some cases, may be headed for a crisis.

Rural water companies (also called community water systems) are, along with rural electric co-operatives, the backbone of American rural life. The U.S. Congressional Budget Office estimates that nationally, as of 1999, roughly 54,000 publicly or privately owned community drinking water systems provided drinking water to some 250 million people. Here in Texas, water companies are regulated by the Texas Commission on Environmental Quality (the “TCEQ”), and through the TCEQ, the Environmental Protection Agency, under the authority of the federal Safe Drinking Water Act. The problem begins with the fact that many of the rural water companies in Texas are so small. In many cases, the board of directors consists of a small group of farmers or ranchers or local residents, who are almost always great people, but who do not always have the tools or the background to deal with the increasingly complex technological and regulatory requirements imposed on all water companies, regardless of size.Here in Texas, rural water companies get tremendous technical and legal assistance from our state association, the nonprofit Texas Rural Water Association (“TRWA”). Notwithstanding this help, the diseconomies of scale and the increasing cost and complexity of complying with all the state and federal regulations are taking their toll on rural water companies.

The answer, I believe, is going to be in smaller companies banding together to create county-wide or even regional co-operatives. Initially, these co-operatives could use their buying power to save their members money on chemicals and other supplies. Ultimately, the co-operatives would jointly invest in treatment plants and other infrastructure needed to produce water.

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As I indicated in a previous post, a recent decision by the Texas Supreme Court contains an important lesson for Texas attorneys who represent Texas real estate owners, general contractors or subcontractors. Texas attorneys who practice construction law should be aware that, because of this decision, claims by a temporary labor service are covered by the Texas mechanic’s lien statutes, and that service can file a mechanic’s lien claim, just as an individual laborer can. As a result, when using a contractor who uses workers from a temporary labor service, an owner and/or general contractor must comply with the mechanic’s lien statutes, including the portions of those statutes regarding the timing of payment and the withholding of payment to a contractor who has been using temporary workers. The Texas mechanic’s lien statutes are complex, and not for the faint of heart. If you are a property owner or contractor, you would be well served by retaining an attorney who is experienced in construction law to review your contracts and explain the time limits in the statutes to you. This is one area where an ounce of preventive legal advice can save you a lot of money later!

It might seem obvious that workers from a temporary labor service should be considered as “labor” under the Texas mechanic’s lien statutes. However, this issue does not seem to have been decided until recently by the Texas Supreme Court. In Reliance National Indemnity Co., L&T Joint Venture and Lamar Construction Inc. v. Advance’d Temporaries, Inc. the Texas Supreme Court decided that a temporary staffing agency could, indeed, file a mechanic’s lien for unpaid labor services.

The case arose from the construction of an apartment building in Corpus Christi, Texas. L&T Joint Venture, the general contractor, hired Gonzalez, an individual, to do the framing, drywall and roofing at the project. Gonzalez supplemented his crew with additional workers from Advance’d. A written agreement between Gonzalez and Advance’d specified that the workers were employees of Advance’d, not Gonzalez. Reliance was the surety on the job.At some point, L&T terminated Gonzalez, and paid him through the date of termination. Unfortunately, Gonzalez did not pay Advance’d. Advance’d gave a statutory mechanic’s lien notice that it had not been paid to the owner, the general contractor and the surety .

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