Published on: April 12, 2016
Fannie Mae and Freddie Mac have developed standardized forms covering the condominium project information lenders are required to obtain for the condo loans they sell to the two secondary market giants.
The agencies are responding to industry complaints about the amount of information association boards and managers are supposed to compile and the risks they incur by responding to many of the questions.
Although CAI officials initially applauded the new forms, industry executives have been considerably less enthusiastic about them, to say the least. Stephen Marcus in our firm has said flatly: “I hate the form and will not have our clients fill it out except with the words that I add.”
Other condo attorneys have been equally critical of the forms and equally loathe to embrace them. “Obtaining some of the information is time consuming [and expensive] and may require [input from a] professional,” Henry Goodman, a partner in Goodman, Shapiro & Lombardi, LLC, noted in his comments. “While associations want to help owners marketing their property,” he added, “they have no obligation to fill these items out.”
Dawn Bauman, CAI’s senior vice president for government and public affairs, was more positive, noting in a press release that with the new forms “association boards and community management companies will no longer need to spend valuable time and resources completing multiple and conflicting questionnaires.”
Bauman also said that Freddie Mac and Fannie Mae representatives will be on hand to answer questions about the uniform condominium questionnaire at CAI’s National Conference and Exposition in Orlando, Florida next month. Based on the initial comments, from Marcus, Goodman and others, they are going to get an earful.
A BLAME GAME
Realtors and home builders continue to spar over who or what is responsible for the inventory shortage that analysts say is crimping home sales and increasing prices. Lawrence Yun, chief economist for the National Association of Realtors (NAR), has complained for months that builders simply are not producing enough new homes to meet the demand. David Crowe, the NAHB’s chief economist, fired back recently, insisting that it is existing homeowners who are creating the problem, because they aren’t selling their homes and moving up.
“I don’t believe there is a shortage of new housing inventory,” he told Housing Wire. “There is a shortage of existing housing on the market, and that [creates] a trickle effect. If the existing homeowners are unwilling to sell, they are not released to buy the new homes. The new home market is waiting on existing homeowners selling their current home to build more new homes,” he insisted. Buyers looking for new homes, he noted, are able to find them.
Anecdotal evidence suggests that some buyers, unable to find existing homes, end up buying new ones instead. That may explain, partly, why existing and new home sales moved in opposite directions in February. Existing home sales, which sizzled in January, fizzled the following month, plunging by more than 7 percent; new home sales increased by 2 percent, beating expectations, though still remaining more than 6 percent below the year-ago level.
Reversing a 3 percent decline in January, pending sales of existing homes (an indicator of future sales) increased by 3.5 percent in February. Although that represents the largest gain in a year, it hardly warrants a standing ovation, according to Rick Sharga, chief marketing officer at Ten-X, who pointed out that the index is less than 1 percent higher than it was a year ago. “The year-over year number is the one to pay attention to,” he told DS News, and that statistic, he said, suggests that next month’s existing home sales “may not give us much to get excited about.”
The NAR’s chief economist, Lawrence Yun, found the pending sales increase more encouraging, but remained cautious about the outlook. “The key for sustained momentum…is a continuous stream of new listings quickly replacing what’s being scooped up by a growing pool of buyers,” he noted in a press statement. “Without adequate supply,” he warned, “sales will likely plateau.”
Builders do seem to be ramping up new home construction – albeit moderately and inconsistently. Housing starts overall increased to an annualized rate of 1.18 million units in February, with the single-family sector posting its largest gain (7.2 percent) in more than eight years. While building permits declined by more than 3.1 percent, single-family permits eked out a 0.4 percent increase that was better than expected, but not enough to bolster builders’ sagging spirits.
The NAHB’s confidence index remained unchanged in March after dipping by 3 percent in February to reach a nine-month low. Although encouraged by the buyer traffic they are seeing, builders were less optimistic about the six-month outlook for new home sales.
A Zillow survey found consumers have also lost confidence in the housing outlook. The company’s overall U.S. Housing Confidence Index fell to 69.9 in January compared with 67.4 a year ago, with confidence in the near-term outlook falling more steeply – from 74.1 to 71.8.
Rising home prices may have something to do with that trend. The closely watched Case-Shiller index of prices in 20 metropolitan areas increased by 5.7 percent year-over-year in January – more than twice the inflation rate. A separate Realty Trac survey found home prices exceeding wage gains in two-thirds of the nation’s housing markets.
Developers of affordable rental housing are finding the most favorable financing climate they’ve encountered in years.
It is an “absolutely awesome” time to be looking for mortgage financing in this sector, Frank Lutz, senior vice president at Berkadia Commercial Mortgage, told National Real Estate Investor. Lutz and other industry executives quoted in the article reported that Fannie Mae, Freddie Mac and commercial banks are all pursuing loans more aggressively than they have in the past several years.
The GSEs’ interest in this sector isn’t hard to understand; both have $30 billion caps on market rate lending but no limit on their affordable housing financing. With the rental housing market sizzling, Fannie and Freddie have reached their market rate caps quickly, industry analysts note, explaining in part their “increased desire” to lend in the affordable housing arena.
Commercial banks have been equally enthusiastic, partly because affordable housing loans help them meet their Community Reinvestment Act (CRA) requirements, but also because these loans tend to perform well, producing minimal risk for lenders and some insulation during economic downturns.
“It’s not a cyclical business,” Maria Barry, national executive for Community Development Lending at Bank of America Merrill Lynch, told NREI. “It is very stable during downturns [and] it has high impact in the community.”
A DIFFERENT VIEW
The Federal Reserve has cited slow wage growth as a major reason for its reluctance to boost interest rates as aggressively as some critics say is necessary to forestall inflationary pressures. What if the Fed’s policy makers are wrong – and wage growth is more robust than the assume?
Some economists, including some Federal Reserve economists, are raising that question. A recent paper co-authored by Mary Daly, associate director of research at the San Francisco Fed, suggests that the wage figures are being distorted by two factors – the retirement of high-wage baby boomers, who are being replaced by younger, lower-earning workers.
“The signal is muddied so we shouldn’t use it as an indicator that the labor market is weaker than we observe when we look at the unemployment rate,” Daly told Bloomberg News “Absent the changes in labor-force composition,” she argues, “we would have seen wage growth come up more consistently with the decline of unemployment.”
Her paper, co-authored with another researcher at the San Francisco Fed (Benjamin Pyle) and Bart Hobijin an economics professor at Arizona State University, notes that the disproportionate firing of younger employees artificially skewed wages higher during the downturn; their return to the work force is now dragging the average wage figures down, disguising strength in the underlying trend.
IN CASE YOU MISSED THIS
New York Attorney General Eric Schneiderman has added his voice to the chorus asking FHFA Director Mel Watt to “broadly and quickly” approve a principal reduction plan for underwater homeowners facing foreclosure.
Home builders are facing their worst labor shortage in the past seven years.
Financing for affordable housing may be plentiful today (see above), but a recent study has found the affordable housing supply is lagging demand in the country’s 11 largest metropolitan areas.
American consumers are piling on credit card debt at double last year’s pace.
BOARDS HAVE POWER — COVENANTS SAY HOW MUCH
Condominium governance is complicated, to say the least, but some of the fundamentals are clear, among them:
- Boards derive their authority from the association’s governing documents and can’t exercise authority they don’t have; and
- In most cases, restrictions on the use of individual units or requirements for them require the approval of owners; they can’t be imposed through rules enacted by the board.
In this case (Stobe v. 842-848 West Bradley Place Condominium Association), an Illinois board argued unsuccessfully that because the condo declaration did not specifically allow owners to lease their units, the board could adopt a rule preventing them from doing so.
The Plaintiffs (Stobe and co-owner, Gottelt) purchased a unit in this condo community shortly after it was created, in 2005 and began renting it to tenants. Two years later, when some owners expressed concern that a high percentage of rental units might make it difficult for owners to sell or refinance their units, the board proposed and subsequently adopted a rule specifying that no more than 30 percent of the units could be rented at any time. Explaining its rationale, the board noted that while a 50 percent owner-occupancy rate might satisfy FHA standards, “the board believes it must look out for the interests of those hoping to obtain conventional financing, which often stipulate greater requirements.”
In 2012, the board notified Stobe and Gottelet that it was going to enforce the leasing restriction, evict their tenants, and fine the owners retroactively for the ongoing violation. Stobe and Gottelet sued, arguing that the board did not have the authority to impose the leasing rule and arguing further, that the rule conflicted with the Declaration, which permitted leasing. The association argued that because the declaration did not specifically authorize leasing, the board was free to restrict it.
After initially issuing summary judgment for the association, the Circuit Court reconsidered and ruled for the plaintiffs, finding that the Declaration assumed owners would be able to rent their units, even if it didn’t state that explicitly. The Appeals Court agreed.
Had the drafters of the declaration not anticipated leasing activity, the court noted, they would not have specified conditions controlling it – specifically, a six-month minimum leasing term, and a provision stating that as long as renters accepted the association’s governing rules and regulations, the association had no “right of first refusal” on their tenancy. “If owners had no right to lease their units,” the court noted, “the enumerated limitations would be meaningless.”
The court also rejected the association’s argument that had the drafters intended to prohibit the board from drafting rules governing leasing, they would have indicated that in the covenants. That argument posed the wrong question, which, the court said, is not whether the declaration did or did not revoke the board’s authority to restrict leasing, but whether the board ever had that authority to begin with.
“Under the board’s approach, the board could do anything it pleased, so long as the declaration did not expressly forbid it,” the court noted.
Statutory requirements also undercut the association’s position, the court said. While the declaration generally authorizes the board to enact rules governing the community, the court pointed out, the state condominium statute specifically prohibits boards from enacting rules that conflict with the declaration or other condominium governing instruments. “We presume the bylaws’ drafters were aware [of that statutory provision],” the unanimous decision noted.
“The declaration, when considered with the bylaws and the Act, clearly intended that owners have the right to lease their units, subject only to specific limitations,” the court explained, continuing: “Although the declaration did not expressly state this intention, it did not need to, as this is the only reasonable inference to be drawn under these circumstances. Because the declaration has spoken on the matter of leasing, any augmentation or diminution of plaintiffs’ right to lease their unit must be accomplished through an amendment to the declaration, not a rule promulgated by the Board. Accordingly,” the court concluded, “the circuit court properly entered summary judgment in favor of plaintiffs.”
“We have spoken many times about the extraordinarily positive and resilient American economy…Today, it is growing stronger, and it is far better than you hear in the current political discourse. But we have serious issues that we need to address — even the United States does not have a divine right to success.” ─ Jamie Dimon, CEO of JPMorgan, in his annual letter to shareholders.