LEGAL/LEGISLATIVE ALERT FOR MAY, 2020

Published on: April 29, 2020

PANDEMIC RELIEF

Nearly 3 million homeowners have taken advantage of a government pandemic-relief program that allows them to skip for up to a year payments on mortgages purchased by Fannie Mae, Freddie Mac or Ginnie Mae. That represents 5.5 percent of all outstanding mortgages, totaling $651 billion in principal payment, Black Knight, a mortgage data analytics company, estimates.

Loan servicers have been sounding alarm bells since the program was announced, noting that servicers must still make principal and interest payment to holders of mortgage-backed bonds, and make the property tax and insurance payments borrowers owe even if borrowers don’t make those payments to the servicers. The financial burden on servicers could “take down the [mortgage finance] system entirely,” David Stevens, former head of the Mortgage Bankers Association (MBA) warned, unless the federal government provides a financial backstop for servicers.

Ginnie Mae, which backs loans insured by the Federal Housing Administration and loans guaranteed by the Veterans Administration, has established a relief fund for that purpose; the Federal Housing Finance Agency, which oversees Fannie and Freddie, recently announced a four-month cap on the payments servicers must make on loans purchased by Fannie and Freddie. The cap “will provide stability and clarity for the $5 trillion Enterprise-backed housing finance market,” FHFA Director Mark Calabria said in a press statement. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment,” he added.

Industry executives have said the cap will help, but doesn’t go far enough to provide the support servicers need

“While this reduces servicers’ worst-case cash flow demands considerably, we continue to stress the need for Treasury and the Federal Reserve to create a liquidity facility for those servicers who need it” in order to continue making the requirements they are required to make on behalf of borrowers, Robert Broeksmit, CEO of the Mortgage Bankers Association, said in a statement..

 

Treasury Sec. Steven Mnuchin

Treasury Secretary Steven Mnuchin has said the government is aware of the problem and will “make sure the market functions properly. We have all the appropriate people on it,” he said at a press conference about three weeks ago. In a more recent statement, however, he said there are no current plans to create the liquidity facility industry executives are requesting. “We’re not looking at a Fed facility at this time,” he told Bloomberg News. “The moves that [regulators] have taken are more than sufficient to create liquidity.”

GROWTH INTERRUPTED

The U.S. economy has produced almost 23 million jobs since the Great Recession ended in 2009; the pandemic has erased them in the past two months. The number of Americans filing for unemployment aid has slowed a bit, but the numbers are still breathtaking. Another 4.4 million people submitted new claims during the week ending April 17th, boosting the total of jobless workers to 26 million and pushing the unemployment rate close to 15 percent, according to current estimates. The last time unemployment reached these levels was 100 years ago in the early stages of the Depression. Economists are predicting that the unemployment rate could reach 15 percent or higher. Some are predicting that a second wave of unemployment claims could follow this initial deluge, which is straining the capacity of many state assistance programs.

New York state’s unemployment website reportedly “collapsed” recently and Florida officials are reporting a backlog of hundreds of thousands of initial applications for benefits. If states can’t prop up these programs, the economic pain could be intensified and prolonged, Torsten Slok, chief economist for Deutsche Bank Securities, told NBC News. Unemployment benefits are “automatic stabilizers,” he noted. If unemployed workers can’t get the funds that allow them to buy goods, the current downturn, already expected to be steep, will likely become longer “and even deeper,” he earned.

REVERSING DIRECTION

At the beginning of March, home sales seemed to be picking up speed, heading into the crucial spring market. The coronavirus sent the market quickly into reverse. Existing home sales in March were about even with the year-ago total, but those numbers reflected activity before the middle of the month, when stay-at-home orders began to take effect. By the last week of the month, with 90 percent of the country locked down, sales were almost 12 percent below the same period last year – and still falling. New home sales declined by 15.4 percent in March, the largest one-month dip in more than six years.

Sellers were also backtracking. More than 28,000 listings were pulled from the market during the week ending March 29, according to a Redfin report. New listings were 10 percent below the year-ago level; total listings were off by more than 10 percent.

Industry executives think the decline in home sales reflects a pause in an upward trend that will resume when the pandemic recedes, when pent-up demand and low mortgage rates will reignite the fires the pandemic smothered. But some analysts predict that the pandemic-induced recession will be deeper and last longer than optimists hope, not just slowing the market, but derailing it for the rest of this year and possibly well into 2021.

A key question is how much the pandemic will undermine consumer confidence and for how long. Current reports are not encouraging. Consumer sentiment plunged 18.1 Index-points in early April, the largest monthly decline ever recorded. Consumer attitudes toward housing have also taken a hit. Fannie Mae’s Home Purchase Sentiment Index lost 12 points in March, falling to 80.8 –its lowest reading in three-and-a-half years. The reading for April will almost certainly be lower.

Home builders, not surprisingly, are also feeling less upbeat about the market. Confidence, measured by a National Association of Home Builders (NAHB) index, fell from 72 in March to 30 in April – the largest monthly loss ever recorded and the lowest reading since 2012. But the NAHBs chief economist, Robert Dietz, predicts that housing could recover more quickly from this downturn than it has from previous ones, because this market isn’t suffering from the overbuilding that hampered . The key difference, he says: “We’re in an underbuilt market with short supply, unlike a decade ago, when we were overbuilt. That means housing has the potential to come back quickly and could be one of the sectors that will…lead the economy into a rebound.”

STORM WORRIES

Tired of worrying about Covid 19? Focus on hurricanes, instead. Meteorologists are warning that the 2020 hurricane season could be above-average in the number of major storms. Warmer seas and “favorable” weather patterns may produce four hurricanes with winds of at least 111 miles per hour this year, compared to the 2.7 storms in an “average” season, according to forecasts developed by the Colorado State University Tropical Meteorological Project. These experts are also anticipating as many as eight hurricanes before the season ends November 30. Accuweather similarly is predicting between two and four major hurricanes and between 14 and 18 named tropical storms.

Homeowners bracing for the next hurricane season are getting some relief from the Federal Emergency Management Association (FEMA), which has extended the grade period for renewing federal flood insurance policies issued by the national Flood Insurance Program, giving policy holders up to 120 days instead of 30 to pay their premiums before their coverage lapses. “FEMA understands the sense of urgency related to financial hardships [related to the pandemic] and wants to be proactive,” David Maurstad, a FEMA deputy associate administrator, said in a press statement. “We hope this extension will give policyholders some peace of mind and allow them extra time to renew their policies to ensure they are covered should a flood loss occur,” he added.

RENTING BY CHOICE

Is the United States, long known as a nation of homeowners, becoming a nation of renters instead? Some statistics suggest this may be the case. As housing prices have soared and inventory levels have declined, the population of renters has increased, now standing at 108.5 million compared to 99.4 million in 2010. That analysis comes from Rentcafé, a nationwide internet listing service, with an obvious interest in an upward rental trend. But the numbers are interesting. Among other points, the Rentcafé research notes:

  • Renters now represent 34 percent of the U.S. population.
  • Over the past decade, the number of renters has increased by 9.1 percent compared with a gain of 4.3 percent for homeowners.
  • Renters now outnumber homeowners in one-third of the nation’s largest cities.
  • While many renters are in that category by necessity, because they can’t afford homeownership, an increasing number are choosing to rent, boosting the proportion of high-income renter households.
  • The renter population in the suburbs is also increasing. In 40 of the 50 largest metropolitan areas, the renter population grew more in the suburbs than in the big cities. “Where people want to live is changing,” noted Doug Ressler, manager of business intelligence at Yardi matrix, a research group affiliated with Rentcafé. Suburban renters are drawn by the larger units, better school systems, lower rents and access to transit hubs.

IN CASE YOU MISSED THIS

Economists have identified a positive relationship between housing affordability and job creation. link between housing costs and job creation

Concerned about a weakening of consumer protections at the federal level, California is creating its own version of the Consumer Financial Protection Bureau.

Media reports have focused on the number of homeowners entering forbearance programs, but renters are having a hard time, too. Nearly 25 percent of renters were unable to pay all of their April rent; 13 percent paid only part of it and 12 percent made not payments at all.

Data breach incidents have been increasing, but the number of records exposed in these incidents has declined.

Round two of the Payroll Protection Program didn’t get off to an auspicious start; the web site for processing the loans crashed immediately after opening.

LEGAL BRIEF

SMOKING ACCOMMODATION

It is generally accepted that condominium owners can elect to ban smoking in their communities by amending their governing documents, or decline to do so. The plaintiff in this Michigan appellate case (Davis v. Echo Valley Condominium Association) argued that the association should be required to impose a ban as an accommodation for her asthma-related medical disability. The court disagreed.

The plaintiff, Phyllis Davis, began complaining in March of 2016 about smoke infiltrating her unit from a neighboring unit, occupied by the Rules, who rented the unit from its owners (the Lamnins). She asked the board to require the owners to deal with the problem. The association’s management company wrote the Lamnins informing them of the complaint. While acknowledging that smoking was permitted in the community, the letter asked the owners to help control the seepage of smoke by either insulating the doors or asking their tenants to smoke on the balcony.

When Davis filed another complaint a year later, the board installed a fresh-air system on Davis’ ductwork, at the association’s expense. When that didn’t provide sufficient relief, Davis’ attorney wrote the Lamnins asking them to either block the smoke entirely or require their tenants to stop smoking. Noting that association rules permitted smoking in the units, the Lamnins refused to impose a no-smoking rule on their tenants, but offered to purchase an air purifier for the unit. Finding that solution unsatisfactory, Davis asked the association to grant a “reasonable accommodation” under the Fair Housing Act, prohibiting smoking in her building.

While awaiting Davis’ response to a request for more information, the board proposed a bylaw amendment barring smoking in the community, which owners rejected. Davis subsequently sued the Lamnins, the association and the management company. The Lamnins evicted their tenants, sold their unit and settled with Davis, but her suit against the association and the management company continued.

A District Court granted summary judgment to the defendants, ruling that a smoking ban was not a “reasonable accommodation” required by the Fair Housing Act. The court also rejected Davis’ argument that the board had breached its obligation to enforce the bylaws, ruling that smoking was not a “nuisance” the board was required to prohibit.

The Appeals Court agreed with the lower court. On the Fair Housing claim, the court noted, Davis had failed to meet the base-line requirement to demonstrate that her asthma was a “disability” that “substantially limited” major life activities.

The law also requires accommodations that are “necessary” to give a person with a disability an equal right to enjoy their dwelling, and the smoking ban Davis requested did not meet that test either, the court said, noting that non-disabled residents might also dislike the smell of smoke. “The law does not require more or better opportunities” for people with disabilities compared to those without them, the court said. The fact that Davis had lived in her unit for several years while the tenants were smoking in the unit next door also undermined her argument that a building-wide smoking ban was an “essential” accommodation, the court found.

Accommodation Is an “Adjustment”

The strongest argument against her claim, the court said, was the statute’s definition of an accommodation as an “adjustment” in an existing policy or rule. The smoking ban Davis requested wasn’t simply an adjustment, the court said; it represented a “fundamental change” in the association’s policy, which permitted smoking in owners’ units.

A blind tenant’s request for a seeing eye dog in a community that banned pets would be an accommodation, the court explained; but a tenant with pet allergies who seeks to ban pets in a pet-friendly community would be requesting a fundamental change in policy. “Davis’s smoking ban falls in [this category],” the court said, because it turns the association’s challenged policy “into something it is not…“No one would describe a change from a smoking-permitted policy to a smoking-prohibited policy as an ‘accommodation,’” the court added. “It is more rewrite than adjustment.”

Accommodations must not only be “adjustments” in existing policies, the court noted; they must also be “moderate – not extravagant or excessive.” And they must not interfere unduly with the rights of third parties. The smoking ban, the court said, interfered with the rights of owners who had bought their units because smoking was permitted in the community. Quoting from a previous 6th Circuit decision, the court noted, “a third party’s rights [do] not have to be sacrificed on the altar of reasonable accommodation.”

The court also dismissed Davis’ argument that smoking constituted a “nuisance” prohibited by the association’s covenants. Interpreted in the context of a condominium community in which residents have chosen to live close to each other, nuisances would apply to “activities that most residents would reasonably find significantly bothersome,” the court said, excluding activities that would be “generally expected” in a condominium.

“Davis chose to live in a [community] whose bylaws do not restrict smoking” the court reasoned. “While even a small amount of smoke might be a nuisance in a complex that bans smoking, the same cannot be said for a complex that allows it.”

While Davis’ asthma makes her more sensitive to second-hand smoke than others, the court acknowledged, a nuisance, by definition “is not subjective. The bylaw ties the standard of liability to an ordinary resident, not to a resident with unique needs,” the court concluded. “We think the standard …must be set at a sufficiently high level to permit activities that are ‘generally expected” in a condo complex. And in [this community] those expected activities include … smoking in one’s condo.”

WORTH QUOTING

“The housing market will not go unscathed [by the pandemic], as consumer confidence and a strong labor market are essential in the decision to purchase a home. Yet, this time, housing is a casualty of a public health crisis turned economic, not the cause of an economic crisis…. While housing led the recession in 2008-2009, this time it may be poised to bring us out of it.” ─ Mark Fleming, chief economist for First American Financial Corporation.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.