Legal/Legislative Update – April 2, 2014

Published on: April 2, 2014

APPRAISAL RULES. Federal regulators have issued new rules governing the state registration and supervision of appraisal management companies (AMCs), which serve as intermediaries between appraisers and lenders. Although states aren’t required to establish a regulatory structure for AMCs, federally-regulated financial institutions can obtain appraisal services only from those that are subject to state oversight.

READY TO BOUNCE. Real estate brokers, emerging from a miserable winter, are expecting an exceptionally sunny spring. “Because we’ve had a late start to sales, we expect a bit of an exaggerated seasonal bounce,” one economist told Bloomberg News.

MORE TAPERING. Blaming the harsh winter “in part” for the notable weakness reflected in several recent economic reports (including housing), the Federal Open Market Committee decided to continue “Tapering” the Fed’s purchase of mortgge-backed and Treasury securities by $25 billion and $35 billion per month, respectively.

GOING DOWN. Average credit scores on FHA-insured loans are declining ― an indication that lenders are easing their underwriting standards. Inside Mortgage Finance reports that credit scores averaged 680 in January compared with 701 in 2013; the average debt-to-income ratio was 40.3 percent, up from 38 percent last year. Highlighting that trend, Wells Fargo, the nation’s largest mortgage lender, is reportedly now willing to consider credit scores as low as 600, down from the previous minimum of 640. Dumping a bit of cold water on these media reports, the Comptroller of the Currency reported recently that while some lenders have, in fact, eased their underwriting standards to varying degrees,86 percent haven’t loosened up at all.

FLOOD RESPONSE. Democrats and Republicans in Congress who haven’t agreed on much have agreed on two things in the past year: First, that the National Flood Insurance Program was financially unstable and had to be reformed; and second, that they didn’t like the blowback from homeowners and real estate industry trade groups when flood insurance premiums soared as a result of the reform legislation they had approved.

HELP AT LAST. It took a while, but the federal government’s Home Affordable Refinance Program (HARP) has finally “hit its stride,” in the words of a Reuters article. Nearly 3 million struggling homeowners have refinanced under the foreclosure avoidance program since it was launched in 2011, most of them in the past two years.

 

LEGAL BRIEFS

NICE TRY. Community associations and owners often fight over whose insurance is responsible for covering which claims. To avoid those disputes and reduce the risks of costly insurance gaps for owners, community association attorneys (our firm, included) typically advise association boards to urge and even to require condominium owners to obtain HO-6 insurance policies covering their units and the property within in them. An Illinois condominium association tried to use an insurance requirement for owners as a liability shield, arguing that because owners were required to maintain insurance, the association did not have to pay for damage to an owner’s unit, even though the association’s negligence was responsible for it. (Kedvale Street Properties, LLC v. Kedvale Court Condominium Association)

The owner in this case was a management company (Kedvale Street Properties, LLC), that leased its unit to a tenant. Kedvale’s manager notified the community association that a leak originating in a common area stairwell had flooded the unit and requested permission to have a plumber on site at the time correct the problem. The association (for reasons known only to the board) refused the request and waited more than a month before making the necessary repairs. Because the downstairs was uninhabitable, the tenant withheld two months’ rent and the flooding caused thousands of dollars in damage to the unit, for which the owner (Kedvale Street) paid.

The company sued the association to recover the repair costs and other financial losses, arguing that the board had breached its duty to maintain the common areas. The board countered that the bylaws required owners to maintain insurance covering any damage to their units and a trial court agreed that repairs were the responsibility of the owner, not the board. The appeals court ruled otherwise.

There were two competing bylaw provisions at issue, the court reasoned. The first specified:

“Nothing contained in this Declaration shall be construed to impose a contractual liability upon the Association for maintenance, repair and replacement of the Common Elements or the Units . . . but the Association’s liability shall be limited to damages resulting from negligence. The respective obligations of the Association and Unit Owners . . . shall not be limited, discharged or postponed . . . because they may become entitled to proceeds under policies of insurance.”(Emphasis added).

The second provided:

“Each unit owner shall be responsible for physical damage insurance on the personal property in such Unit Owners Unit and elsewhere on the Property … ;

. . .

Each Unit Owner hereby waives and releases any and all claims which such Unit Owner may have against … the Association … for any damage to the Common Elements, the Units, or to any personal property located in the Unit or Common Elements caused by fire or other form of casualty to the extent that such damage is covered by fire or other form of casualty insurance or would be covered by insurance for which such Unit Owner is responsible …”

The association argued that the second provision, making the owner, not the association, responsible for insuring against property damage, should apply. But the court concluded that the obligation of owners to maintain insurance on their units did not absolve the association of its obligation to maintain common areas nor eliminate its liability for negligence in carrying out that responsibility.

In order to be enforceable, an “exculpatory provision” (which many courts do not particularly like) must be specific, and this one, the court said, was not nearly specific enough about the claims covered by its terms.

The conflict between the two bylaw provisions was also problematic for the association, the court found, noting, “A party cannot promise to act in a certain manner in one portion of a contract and then exculpate itself from liability for breach of that very promise in another part of the contract….Given the fact that we must read all provisions in the declaration and by-laws as a whole and view each provision in light of the other provisions,” the court concluded, “we find that the exculpatory clause does not bar Kedvale’s action to recover damages caused by the defendants’ negligence.”

 

WORTH QUOTING

“Nobody on this planet is going to be untouched by the impacts of climate change. “— Rajendra Pachauri, chairman of the United Nations Intergovernmental Panel on Climate Change, commenting on its recent report concluding that the effects of climate change are already severe and will become more severe still barring aggressive steps to deal with greenhouse emissions.