Legal & Legislative Update – September 17, 2013

Published on: September 17, 2013

EQUAL TREATMENT. Congress is considering and likely to pass legislation that would require FEMA to provide the same coverage for condominiums and co-operatives it offers to owners of single-family detached homes. Under current FEMA rules, condominiums and co-ops that suffer storm damage are eligible for loans, but not for grants, because they are defined as “business associations” and not as residences.


TAKE THAT! The Federal Housing Finance Association, which oversees Fannie Mae and Freddie Mac, has instructed the two GSEs to ““limit, restrict or cease business activities” in any community that uses its eminent domain authority to seize and restructure underwater mortgages. Since the two entities currently buy about 90 percent of the mortgages lenders originate, that is no idle threat. Nor is it the only one. HUD officials have suggested that FHA financing might also be barred in jurisdictions using the eminent domain strategy. Ignoring the threat of legal challenges from financial institutions and the prospect that Fannie Mae and Freddie Mac will not purchase mortgages in the community, the city council in Richmond, CA voted to use its eminent domain authority to seize and restructure the mortgages of underwater borrowers. Several other communities – most recently, North Las Vegas, Nevada – have rejected the idea.


GET FRACKING. New York State’s highest court will decide whether communities have the right to ban ‘fracking’ – the process used to drill for natural gas. The suit pits environmentalists, who contend that fracking pollutes underground water sources, against property owners, who want to lease drilling rights on their land and oil companies, which want fracking rights for obvious reasons.


RADON RULES. The Department of Housing and Urban Development is focusing on radon. The agency has announced new policies requiring radon testing and (where needed) mitigation in most new construction, conversion and substantial rehabilitation projects financed by FHA loans as well as in most homes financed with FHA mortgages.


STEADY AS SHE GOES. The Fed’s most recent economic survey reports modest to moderate growth spread consistently across most of the country, with strong demand for homes and cars largely (but not entirely) offsetting the negative impact of federal budget cuts. But the August employment report came in slightly below projections, with a gain of 169,000, indicating that employers want to see more evidence of the surge in consumer demand that many analysts are


WORST OF THE WORST. Whom do Americans dislike most? The federal government, banks and oil and gas companies topped that list in a recent Gallup poll, with health care (despised by almost half the respondents) a close third. Computers, restaurants and farming and agriculture were the most liked.





NO COMPENSATION. Is a community association entitled to compensation for common area fees lost when a government entity takes condominium units through eminent domain? A U.S. appeals court has rejected that idea.

The underlying dispute between Mariners Cove, a 58-unit townhome development in Louisiana, and the U.S. Army Corps of Engineers, stemmed from the substantial damage the community incurred from Hurricane Katrina. The Corps decided that it had to acquire 14 of the townhomes in order to gain the access it needed to rebuild a pumping station on the levee adjacent to the community. The agency negotiated successfully with the owners to compensate them for the loss of their property, as the Constitution’s ‘takings clause’ (barring the taking of private property for public uses without compensation) requires.

But the community association argued that it, too, was entitled to compensation for the loss of its right to collect assessments from the units. According to the association, the Corps should either pay the annual assessments due for the “reasonable” life of the community or a lump sum based on the estimated future assessments the association would have collected from the 14 condemned townhomes.

The key issues for the court were whether the association’s right to collect assessments constitutes a “property right,” and if so, whether the Takings Clause requires compensation for it. In United States of America v. Mariners Cove Townhomes Association, Incorporated, the Appeals Court for the Fifth Circuit concluded that the association did in fact have a legitimate property right in the condemned units, but it also agreed with the lower court that because the loss of the assessments resulted from the condemnation, compensation was barred by the “consequential loss” rule, which specifically excludes compensation for losses that result indirectly from eminent domain. Under this legal theory, owners must be compensated for the value of property lost but not for the future revenue they might have collected from a business located there.

In this case, the court concluded, the association’s property interest was contractual in nature and not linked closely enough to the development of the land. “If we were to recognize [association’s] right as compensable, we would give special status under the Takings Clause to what essentially is a contract, merely because it appears in a title document.” Such a finding, the court added, “would unjustifiably burden the government’s eminent domain power.”


WORTH QUOTING: “Low down-payment loans coupled with exotic adjustable rate mortgages helped fuel a massive housing bubble, which ultimately burst and took down the financial sector. So the question now is do we want to do this again?” ─ Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax Virginia.