LEGAL/LEGISLATIVE UPDATE – JANUARY 2, 2019

Published on: January 2, 2019

STAYING THE COURSE

Downplaying concerns about stock market turbulence and ignoring angry tweets from the White House, the Federal Reserve raised its benchmark interest rate in December for the fourth time in 2018.

“Information received since the Federal Open Market Committee (FOMC) met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate,” the committee said in a statement after its December meeting. “Job gains have been strong, on average, in recent months,” the statement added, “and the unemployment rate has remained low.”

Fed Chairman Jerome Powell echoed those sentiments in his post-meeting press conference, signaling confidence in the economy’s underlying strength and a commitment to remain on the rate-tightening course the Fed has been following for the past year.

Rejecting suggestions that political and economic unease required at least a pause in the rate increases, Powell said,“ We think this move was appropriate for what is a very healthy economy.” The Fed Chairman also emphasized that President Trump’s criticism of the rate hikes “played no role” in the FOMC’s decision. “Nothing will deter us from doing exactly what we think is the right thing to do,” he stated.

There are some indications that the Fed’s assessment of the “right thing to do” may be moderating somewhat, however, in the face of the stock market’s dizzying ups and downs and evidence that economic growth worldwide is slowing. While past FOMC statements have noted plans for “further gradual increases,” the December statement inserted the word “some” in that phrase, suggesting to some analysts that the pace of rate hikes may slow next year. Supporting that conclusion, several Fed officials have suggested recently that they anticipate only two rate increases next year rather than the three most have been predicting.

DON’T ASK

A newly enacted Seattle ordinance forbidding landlords from checking the criminal record of prospective tenants has enraged landlords in that city and sent uncomfortable ripples throughout the multifamily industry nationwide. Fair Housing advocates lobbied for the measure, arguing that it would ease a growing housing crisis in the city. But landlords, represented by the Pacific Legal Foundation, are challenging the ordinance, saying it sets a dangerous precedent, increases their liability risks, and interferes unreasonably in the operation of their business.

The ordinance echoes in some respects HUD guidance issued last year, restricting the use of criminal background checks to screen prospective tenants. The guidance warned property owners that a blanket policy rejecting residents solely because they have a criminal record may violate the Fair Housing Act, because it could have a discriminatory impact on minorities.

The Fair Housing Act “does not prohibit housing providers from appropriately considering criminal history information when making housing decisions,” the guidance emphasized. “[But] arbitrary and overbroad criminal history-related bans are likely to lack a legally sufficient justification.”

The guidance requires housing providers using criminal history as a selection criterion for residents to determine first if the policy might have a discriminatory impact. If so, providers must demonstrate that:

  • The policy is necessary to achieve a “substantial, legitimate, non-discriminatory interest”; and that
  • There is no less discriminatory alternative that could achieve the goal.

STILL LAGGING

Although existing home sales managed anemic month-over month increases in October and November, sales for both months lagged significantly behind the year-ago pace. The annual gap was 7 percent in November and 5.1 percent in October. The November dip was the largest annual decline in seven years, according to the National Association of Realtors (NAR).

Lawrence Yun

Inventory levels improved in November, BUT most of the improvement was at the upper end of the market. “There is still a housing shortage for affordable homes that many moderate to middle-income families will be looking for,” Lawrence Yun, the NAR’s chief economists, told the Wall Street Journal.

Single-family home construction, which has been limping all year, declined for the third consecutive month, the Commerce Department reported, falling nearly 13 percent below the year-ago pace. Builder sentiment, measured by a National Association of Home Builders (NAHB) index, fell to its lowest level since May of 2015.

Rising mortgage rates and higher home prices continue to batter the housing market, reducing the pool of buyers able to afford a home purchase, John Burns, CEO of John Burns Real Estate Consulting, told CNBC, adding, “I definitely think we’re in a correction.” said in a press statement.

RENTAL STRENGTH

Providing a positive counterpoint to lagging home sales, and perhaps a consequence of it, demand for rental housing remains strong, enabling landlords to push rents steadily higher. Reis reports that effective rents (adjusted to reflect landlord concessions) increased by almost 1 percent in the fourth quarter, pushing the year-over-year increase to 4.6 percent. That upward trend has continued despite a surge in multifamily construction that had stirred concerns that developers were getting too far ahead of demand. “Apartment occupancy growth has nearly kept pace with supply growth,” according to the Reis report, which credits the strong labor market and housing affordability pressures for the continuing strength in the apartment sector. Multifamily developers apparently are expecting current trends to continue. Multifamily housing starts increased by 20 percent in November compared with the same month in 2017, and Reis is predicting that construction will “remain robust” this year. “Our outlook remains favorable given the current conditions of positive job growth and tepid housing sales,” the company’s report says, predicting that “recent momentum should keep rent growth positive,” even if vacancy rates “edge up” slightly this year.

FLOOD INSURANCE REPRIEVE

The National Flood Insurance Program (NFIP), on the verge of being derailed by the federal government shutdown, has won a last-minute reprieve. After ruling initially that the program would have to cease operations during the shutdown, the Federal Emergency Management Agency (FEMA) backtracked, rescinding that guidance and announcing that the agency could continue selling new policies and renewing existing ones without interruption.

That year-end drama unfolded in the final minutes hours of the legislative session. Having failed again to approve a comprehensive overhaul of the flood insurance program, lawmakers were going to ok yet another extension. But the extension was part of the short-term government funding bill that Congress failed to enact before year-end. To keep the flood insurance program running, lawmakers approved a separate measure funding FEMA until May of this year. But FEMA ruled that the shutdown negated that measure and that the NFIP could not operate during the shutdown.

Housing industry trade groups blasted that decision as short-sighted and damaging. The ruling “jeopardizes tens of thousands of home sales across America,” Shannon McGahn, senior vice president of government affairs for the National Association of Realtors (NAR) said in a statement. The association estimated that the 40,000 closings per month will be disrupted by the inability to obtain flood insurance for properties on which it is required.

Republican lawmakers weighed in, pressuring FEMA to reconsider and urging the White House to intervene. Those efforts resulted in FEMA’s announcement that the program would continue operating “without interruption.”

House Majority Whip Steve Scalise (R-LA), one of the lawmakers taking credit for the reversal, said in a statement: “While it’s frustrating that they did not follow Congressional intent from the beginning, I’m glad they were willing to work with me on reversing their decision.”

“It’s unfortunate so many people were inconvenienced due to FEMA’s error, but I’m glad they are correcting it so home sales in limbo can proceed,” Sen. Bill Cassidy (R-LA), added.

IN CASE YOU MISSED THIS

Recession risks are rising. Economists polled by Reuters in December rated the recession odds 40 percent higher than they did a year ago. A separate poll of chief financial officers found that nearly half expect a serious downturn before the end of this year; 80 percent think a recession is likely before the end of 2020.

Kathy Kraninger, the new director of the Consumer Financial Protection Bureau has reversed a decision by her predecessor that would have changed the agency’s name to the Bureau of Consumer Financial Protection.

Concerned about the prospect of long extension cords running from apartments and condominiums to parking lots, the Cambridge City Council has asked city staffers to find alternative ways owner of electric cars can charge their vehicles.

Taking the most aggressive steps to date in the airline industry’s efforts to cope with the problems resulting from animals on board, Delta Airlines will no longer allow emotional support animals on flights longer than eight hours and will ban service and support animals younger than four months from all its flights. Delta cited as the reason for its decision an 84 percent increase over the past year in reported “incidents” involving animals.

Los Angeles has joined a growing list of cities and towns nationwide restricting the short-term rental of single-family homes. Closer to home, the Massachusetts Legislature has enacted a law taxing short-term rentals, requiring owners to register the properties, and allowing cities and towns to impose separate registration and health inspection requirements. The law takes effect July 1.

LEGAL BRIEFS

DUE PROCESS REQUIRED

Condominium owners cede some of their rights when they choose to live in a common interest ownership community, but they don’t cede all of them. And among the rights they retain, an Illinois Appeals Court has ruled, is the right to due process in the enforcement of association covenants.

The dispute in this case (The Midwest Club, Inc. v. Ahmed) arose when a new owner (Ibrahim Ahmed) cut down two mature trees on his lot without obtaining prior written permission from the association, as the covenants required. The board held an emergency meeting, which Ahmed was not invited to attend, at which it decided that Ahmed must replace the trees within 30 days or face a fine of $100 per day until he did so.

The association’s manager sent Ahmed a letter informing him of that decision. The board president sent a follow-up letter repeating the violation notice and the warning that fines would begin in two weeks ( January 1, 2012) if the trees weren’t replaced. Ahmed responded in a letter saying he was not aware that he needed prior permission before removing the trees, and explaining that safety concerns required their removal, because one of the trees was diseased and the other allowed raccoons to get into the attic. He also indicated a willingness to replace the trees but said it would be more sensible to do that in the spring than in the winter.

When the trees had not been replaced by March, the board filed suit against Ahmed, seeking an order directing him to replace the trees and seeking recovery of the accumulated fines and attorneys’ fees. The trees were replaced before the trial, but the association’s claim for fines and legal fees remained.

Ahmed argued that the fines weren’t legally imposed because he wasn’t given notice of the meeting at which the board decided to levy them and had no opportunity to explain his position. The trial court agreed, ruling that the board was not entitled to legal fees either, because it had not prevailed on the collection of the fines. The association appealed.

There was considerable confusion at the trial level about who actually owned the property (which was owned by a trust) and whom the board should properly have targeted in its enforcement order and subsequent suit. Cutting through that confusion, the Appeals Court focused on the key questions – whether Ahmed (or other members of his family) was entitled to due process and whether he had received it.

On the first question, the court noted that the Illinois condominium law authorizes association boards to collect reasonable fines from owners for violating association rules, after giving them “notice and an opportunity to be heard.” That means, the court said, that in addition to following any due process requirements in the association’s rules, boards “are required to comply with general principles of due process. [And] the crux of due process,” the court noted, “is the right to notice and a meaningful opportunity to be heard.” Ahmed, in the court’s view, had received neither.

While the board’s letter informing Ahmed of the tree cutting violation might be deemed to constitute notice of the infraction, the court said, “the record establishes that the defendants never had a meaningful opportunity to be heard” on the fines the board imposed. The board did not invite Ahmed to attend its initial emergency meeting and rejected his requests to speak at subsequent sessions. Ahmed did explain his position in a letter to the board, the court acknowledged, but due process, the court said, requires the opportunity both to state a view and to have that view considered. “And there is no indication in the record that the Board ever considered [Ahmed’s] letter,” or reconsidered its position in light of it, the court said.

The Appeals Court also upheld the trial court’s determination that because the association did not prevail on its underlying claim to collect the fines the board imposed, it was not entitled to legal fees related to that collection effort.

WORTH QUOTING

“I’m in the peculiar position of thinking the Fed should not raise rates, but it should not listen to the President, which is a hard position….There’s a pretty good case for not raising rates now. But to not raise rates in this meeting would look like they’re allowing themselves to be bullied.” ─ Nobel Prize-winning economist and New York Times columnist Paul Krugman, writing before the Fed decided to boost rates in December.


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