Legal/Legislative Update – April 30, 2015

Published on: April 30, 2015

FHFA DOUBLES DOWN. The Federal Housing Finance Agency (FHFA) is doubling down on its position that loans backed by Fannie Mae and Freddie Mac are not subject to the “super lien” that gives condo associations priority status over a first mortgage in the collection of past due assessments owed by delinquent owners.

Responding to a Nevada Supreme Court ruling upholding the right of HOAs to foreclose and extinguish a first mortgage loan in that process, the FHFA asserted last December that federal law prohibits subjecting Fannie and Freddie loans to “levy, attachment, garnishment, foreclosure, or sale “without the agency’s consent as long as the two GSEs are operating under conservatorship, which has been the case for the past seven years.

federal-housing-finance-agency1-300x300In a new statement issued two weeks ago, the agency restated its determination to fight any effort to impose a superlien on GSE-backed loans. “FHFA has an obligation to protect Fannie Mae’s and Freddie Mac’s rights, and will aggressively do so by bringing or supporting actions to contest HOA foreclosures that purport to extinguish Enterprise property interests in a manner that contravenes federal law,” the agency asserted. “Consequently, FHFA confirms that it has not consented, and will not consent in the future, to the foreclosure or other extinguishment of any Fannie Mae or Freddie Mac lien or other property interest in connection with HOA foreclosures of super-priority liens.”

The Community Associations Institute (CAI), which blasted the FHFA’s position and its intervention in the Nevada Supreme Court case last year, has not responded directly to the agency’s latest statement. But the association is continuing its efforts to combat what appears to be growing resistance to the condominium superlien in many states, including some in which the law has been in place for a decade or more.

In Massachusetts, for example, a state appeals court rule last year (in the Drummer Boy decision) that condo associations can’t have multiple liens in place, precluding the rolling liens most use to pursue delinquent fees. The New Hampshire state Legislature recently rejected a measure that would have given condo associations in that state the authority to foreclose in order to enforce their super lien priority.

In a recent blog post, CAI notes “egregious” reports that FHFA officials are actively lobbying Nevada lawmakers to repeal the state’s association priority lien statute. CAI officials have attempted to explain why the superlien is essential to protect the interests of condominium owners and the health of condominium associations, but thus far, to no avail, the blog post notes.

To make that argument more strongly and more directly, the association is asking CAI members “to share their association’s experiences with prolonged foreclosures on abandoned properties.” The post notes: “Federal policymakers in Washington DC need to hear directly from community associations that there is no excuse for lenders allowing abandoned properties to fester in our communities, damaging association finances and posing significant safety risks to residents.”

SAME STATS – DIFFERENT STORIES.  Perhaps the most interesting feature of the March new home sales statistics was the way – or ways – in which they were reported. The statistics indicated that March sales took a giant step backward, falling 11.4 percent behind February’s upwardly revised annual pace of 543,000 units – the strongest showing in seven years. On a year-over-year basis, however, the March figure (481,000 annualized) was up by nearly 20 percent. Focusing on the negative, month-to-month plunge, USA Today said new homes sales had “collapsed,” while the Wall Street Journal, focusing on the positive, said the trend “looks solid” despite the February-March decline.
Michael Feroli, chief U.S. economist for JP Morgan Securities, noted the conflicting forces created by slow wage growth (a drag on sales) and low interest rates (a strong positive), concluding that on balance “the trend looks pretty favorable.”

Reflecting that upbeat view, the National Association of Home Builders/Wells Fargo builder sentiment increased rose four points in April, as the outlook for the next six turned strongly positive. The April reading (56) was the highest in three months.

Existing home sales were unambiguously positive, increasing by more than 6 percent to an annualized rate of 5.19 million – the best performance since September of 2013, according to the National Association of Realtors (NAR). With many economists predicting stronger wage gains and solid employment growth, the continued gains for employment and wage gains, the NAR’s chief economist, Lawrence Yun, is predicting what could be the best year for existing home sales in nearly a decade.

“The combination of low interest rates and the ongoing stability in the job market is improving buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years,” he told MarketWatch.

CYBER FEARS.  Republicans and Democrats, who have been unable to agree on much of anything in recent memory, have had no trouble agreeing that cybersecurity is a major concern. The House of Representatives overwhelmingly approved a measure that would prod private companies to share information about cyber-threats with each other and with federal government investigators. The Obama Administration, which has been trying unsuccessfully for several years to get substantially similar legislation through Congress, supports the measure. The Senate Intelligence Committee has already approved a comparable bill, which is expected to reach the Senate floor this spring.
Privacy concerns have derailed support for previous cyber-security measures, but the widely publicized hacking of Sony Pictures (blamed on North Korea) and major data breaches at Target and Anthem (a provider of medical insurance) tipped the balance in favor of strong anti-hacking action.

“We are under attack as I speak,” Rep. Dutch Ruppersberger (D-MD), said during the floor debate on the House bill. “To do nothing is not an option,” he added.

MORTGAGE CHOICE ENCORE. The House of Representatives has approved the “Mortgage Choice Act,” amending the Truth-in-Lending Act to exclude the fees paid to title insurance companies and other businesses affiliated with a lender from the definition of the points and fees subject to the three percent cap under the “Qualified Mortgage” rules. Loans on which points and fees exceed three percent of the mortgage amount do not qualify for the “safe harbor” assumption that lenders have complied with the requirement that they verify the ability of borrowers to repay the mortgages they receive.

Fees paid to unaffiliated businesses were already excluded from the cap calculation and critics had argued that the disparity between affiliated and unaffiliated businesses was unfair and unjustified. The House unanimously passed a version of this measure on a voice vote last year, but it never made it to the Senate floor.

Title insurers, lenders and Realtors generally supported the bipartisan measure; consumer advocacy groups did not, arguing that it would increase borrowers’ costs.
Jeb Hensarling (R-TX), chairman of the House Financial Services Committee and one of the bill’s sponsors, said it will expand homeownership opportunities for less affluent borrowers. “The American dream for so many low- and moderate-income Americans is that one day they can achieve financial independence,” Hensarling said in a press statement. “We are trying to ensure that low- and moderate-income Americans have convenience, that they have choice, that they have lower prices.”

But many Democrats opposed the measure, arguing that it will allow lenders to overcharge borrowers and encourage the reckless lending policies that contributed to the financial crisis. The White House has threatened to veto the bill for that reason.

“By exempting certain fees from the three percent cap, [the legislation] would allow lenders to increase the cost of loans and still be eligible for ‘Qualified Mortgage’ treatment,” the administration said in a statement on the bill, adding, “This revision risks eroding consumer protections and returning the mortgage market to the days of careless lending focused on short-term profits.”

SECOND THOUGHTS.   Real estate ads tend to feature new home buyers smiling broadly as they stand in the doorway of their newly purchased homes. More realistic images would show at least some of these buyers looking nervously and even a bit unhappily over their shoulders.

Nearly 40 percent of the first-time homebuyers responding to a recent Chase Mortgage survey said they had second thoughts afterward – not about whether to buy, but about what they bought and how they made the purchase decision. Some said they wish they had purchased a larger or smaller home in a different neighborhood and more than half (56 percent) wish they had known more about the home buying process before purchasing their homes. The areas where they wanted more information: The closing process (22 percent), negotiating the purchase price (19 percent) and obtaining a mortgage (15 percent).

“While consumers said they felt prepared to buy a home and were satisfied with their home purchase, our results found that there are challenges and areas for improvement,” Lisa Foradori, chief marketing officer for Chase Mortgage, said.

LITTLE BOOM FROM BOOMERANG.   “Boomerang” buyers may not provide the “oomph” some housing market analysts have been predicting. A recent study by the National Association of Realtors (NAR) identifies several obstacles likely to prevent formerly distressed buyers, who lost their homes during the downturn, from re-entering the market.

The NAR studied the records of nearly 9.3 million owners who went through foreclosures, lost obtained a deed-in-lieu of foreclosure or participated in a short sale between 2006 and 2014. Approximately 1 million of those former owners have purchased homes and another 1.5 million are theoretically likely to qualify for home purchases over the next five years, the study found. However, nearly 250,000 of those would-be buyers may be blocked, the NAR said, because credit policies are tighter today than when they initially purchased their homes.

“The extended time needed to repair credit scores or save for a down payment, combined with other overlapping post-distress factors on credit quality such as missed auto loan or credit card payments, will limit the ability for many to buy in the current credit environment,” the study notes.

On the bright side, NAR Chief Economist Lawrence Yun pointed out, “The deep wounds inflicted on the housing market during the downturn are finally beginning to heal as distressed sales continue to decline and home prices in some parts of the country have bounced back to their near-peak levels,” Yun says. “Borrowers with restored credit will likely have the ability and desire to own again, encouraged by the long-term benefits homeownership provides in a stronger economy and more stable job market.”

LEGAL BRIEFS

THE RIGHT TO BE HEARD.   The courts in most jurisdictions give condo association boards considerable discretion in adopting and enforcing regulations governing their communities. But they also generally require boards to follow the procedures they establish. Failure to do so tripped up the board in this Connecticut case (Congress Street Condominium Association Inc. v. Anderson) challenging the board’s authority to impose a fine for violations of the community’s architectural control regulations.

The owner in this dispute (Anderson) removed several large exterior windows in his unit and replaced them with a door, without obtaining the board’s permission, as the regulations required. The board notified Anderson of the violation, indicating that a fine of $12 per day would be imposed for every day the violation continued. When Anderson refused to pay the accumulated fines, the board obtained a lien on the unit and subsequently moved to foreclose.

 

Anderson sued, arguing that the fines were improper because the board had not conducted a hearing before imposing them. A trial court agreed with the association that the hearing was simply a formality, and that Anderson had an opportunity to argue his case in court. The court awarded the amount the association sought, calculated (as suggested in the association’s amended complaint) from the date of the court hearing rather than from the date the violation occurred.

Anderson fared better on his appeal.  On the key question – whether Anderson was entitled to a hearing – the Appeals Court found that both the state Common Interest Ownership Act and the association’s governing documents required one. The state law provides that associations may levy fines on owners after giving them “notice and an opportunity to be heard.” The association’s bylaws similarly permit the board to levy finds following notice and a hearing, and specify the procedures required for the hearing. Those procedures include a requirement that owners accused of violations “have the right, personally or by a representative, to give testimony orally, in writing, or both…”

The court agreed with the association that the hearings don’t have to be formal, but, the court said, they do have to be fair. Citing a previous case, the court noted: “A fundamental principle of due process is that each party has the right to receive notice of a hearing, and the opportunity to be heard at a meaningful time and in a meaningful manner.”

Because the board had not granted Anderson that fundamental right, the court concluded, the fines levied on him were improper and the lower court erred by awarding judgment for the association.

WORTH QUOTING

“We do expect acceleration in growth and housing demand, but even under our upbeat forecast the housing markets return to a stable range of activity remains a couple years away.” –— Freddie Mac economic outlook.