Published on: December 30, 2014
SUPER BATTLE. The condominium super lien appears to be under attack. First came the ‘Drummer Boy’ decision (Drummer Boy Homes Association, Inc. vs. Carolyn P. Britton et.al.), in which a Massachusetts appeals court ruled that associations can’t have multiple liens in place. Rejecting the successive rolling liens that associations have used traditionally to ensure the collection of unpaid common area assessments and attorneys’ fees when delinquencies span multiple six-month periods, the court ruled recently that associations must wait until one lien expires before seeking to impose another. Now the Federal Housing Finance Agency has piled on, announcing that secondary market giants Fannie Mae and Freddie Mac will not purchase mortgages with provisions that give another entity priority over the first mortgage.
The agency’s primary concern is energy retrofit programs like PACE in California, requiring homeowners to repay those loans as part of their property tax bill and thereby giving the energy loans a priority position. But the FHFA’s statement also singled out the superlien that protects condominium associations as being equally unacceptable.
Although condominium priority liens have been in place in Massachusetts since 1993 and even longer in some states, the FHFA’s concern was apparently triggered by a recent Nevada Supreme Court decision affirming the priority statue of homeowner association loans in that state. In the Nevada case, the agency has asked the court to rule that the HOA’s foreclosure sale is “invalid and contrary to federal law to the extent that it purports to extinguish Fannie Mae’s property rights.” The agency will file similar actions in other states “to void foreclosures that purport to extinguish Enterprise property interest in a manner that contravenes federal law,” the FHFA’s press statement asserts.
Explaining its position, the agency notes that the priority status of mortgages Fannie and Freddie purchase must be secure. This is one of the “bedrock principles” on which their support of the housing market is predicated, the statement notes. “As a result, any lien from a loan added after origination should not be able to jump in line ahead of a Fannie Mae or Freddie Mac mortgage to collect the proceeds of the sale of a foreclosed property.”
The Community Associations Institute (CAI) has blasted the FHFA for a policy that, the association charged, is designed “to bail out mortgage servicers that lacked the competency to meet basic contractual requirements and follow established rules of civil procedure.”
Condominium associations typically exercise their right to foreclose under their priority lien only because mortgge lenders have themselves failed to foreclose in a timely fashion on delinquent homeowners. By targeting the HOAs rather than the lenders, Thomas Skiba, CAI’s chief executive officer, asserted, the FHFA is ignoring other remedies available to Fannie and Freddie to deal with “the mismanagement” of mortgage servicers and is “trying to protect Fannie and Freddie at the expense of association homeowners. That’s unfair, unconscionable and unacceptable,” Skiba said. “CAI will continue to monitor FHFA’s hostile actions against the right of community associations to secure priority liens on properties within their boundaries,” he added.
DRONE DREAD. Complaints from commercial pilots about close encounters with drones are increasing the pressure on the Federal Aviation Administration (FAA) to develop regulations governing the devices. “The government is getting near-daily reports — and sometimes two or three a day — of drones flying near airplanes and helicopters or close to airports without permission,” the Associated Press reported recently. The FAA regulations ae expected to require all drone operators to obtain a license, allow drones to fly only during daylight hours, and require them to remain below 400 feet and within sight of their operators. Complaints filed with the FAA have identified drones flying at altitudes of more than 2,000 feet and coming within 500 feet of commercial aircraft. “So far we’ve been lucky because if these things are operating in the sky unregulated, unmonitored and uncontrolled, the possibility of a close proximity event or even a collision has to be of huge concern.” Rory Kay, former chairman of the Air Line Pilots Association’s safety committee, told the Associated Press. “[But] it should not be a matter of luck that keeps an airplane and a drone apart,” he added.
COSTLY BREACH. Data breaches create significant liability risks for financial institutions – and any other entities that collect consumer information. Failure to manage a breach properly increases the potential liability by several orders of magnitude. That hard-learned lesson is going to cost TD Bank $825,000 ― the price of a settlement agreement with the Massachusetts Attorney General, who sued the bank for failing to properly safeguard consumer data and then failing to report a breach when it occurred.
Bank officials discovered in March of 2012 that a third party delivery service had lost two unencrypted computer tapes it was transporting from one bank office to another. Although they determined quickly that the tapes may have contained personally identifiable information of bank customers, they did not notify the Attorney General’s Office or the more than 90,000 affected customers until October. State law requires notification of a breach as soon as it is discovered.
Under the agreement, TD Bank will pay $325,000 in civil penalties $75,000 in attorney’s fees and costs and an additional $225,000 to a fund managed by the AG’s Office to promote financial education and consumer assistance programs. The bank also agreed to upgrade and expand its data security procedures.
It is worth noting that the state laws requiring protection of consumer information apply to any entity collecting the information ─ including community associations.
RECORD LOW. Mortgage lenders may set a new record ─ for the lowest volume of loan originations in 13 years. Originations averaged $357 billion per quarter for the first three quarters of 2014; absent a fourth quarter surge, which would be unusual, the year will end with the fewest originations since 2000, according to statistics compiled by the Federal Reserve Bank of New Yew York. The key factor, bank economists suggest, is the steep decline in refinancing activity since interest rates began to rise in the middle of the year. Home purchase activity hasn’t filled that gap – -barely equaling last year’s relatively sluggish pace. Most industry analysts expect next year to look a lot better, as lenders loosen underwriting standards and an improving economy encourages more prospective buyers to enter the market.
AFFORDABILITY SQUEEZE. Affordability pressures are increasing for prospective home buyers, possibly explaining at least in part the still less than robust housing recovery. A RealtyTrac survey of 1000 counties found that homes in one-third of them were less affordable than they have been in the past 14 years. “Eighty-one percent of the U.S. population lives in markets where the percentage of income needed to purchase a median-priced home is at or below its long-term average,” Daren Blomquist, vice president at RealtyTrac, said in a press statement. “One-third of the counties analyzed – representing 19 percent of the total population in that counties — are now less affordable than their long-term averages,” he added.
CHEERS OR FEARS. Housing industry executives have generally praised the recent decision to allow Fannie Mae and Freddie mac to purchase loans with down payments as low as 3 percent. Easier underwriting standards, they say, will expand home ownership opportunities to lower income borrowers and give the housing market a needed boost. But Robert Shiller, cofounder of the Case-Shiller Home Price Index, is less enthusiastic. In fact, he’s more than a little concerned. “It sounds a little risky for the lender and for the mortgage insurer who is going to insure these,” he told CNBC. The timing is particularly problematic, he believes, because home price appreciation rates have begun to slow. “They’re still going up, but at a slower pace,” he noted. “And in history, that has sometimes been the precursor of a decline.”
STATE OF MIND. Courts in different jurisdictions continue to grapple with the complicated question of free speech in condominium communities – specifically, the extent to which common interest ownership communities can limit that Constitutional right. A Mississippi Federal District Court concluded recently that an association rule banning political signs and door-to-door solicitations was permissible because it did not constitute a “state action.”
The decision is interesting, among other reasons, because Massachusetts courts have also focused on the state action question in limiting the authority of associations to restrict First Amendment rights of owners. In the Massachusetts case (Board of Managers of Old Colony Village Condominium vs. Steven Preu), the Appeals Court ruled that initiating a suit to enforce association rules constituted a state action sufficient to apply Constitutional standards to a judicial review of the rules. Because the Constitution forbids governmental entities from abridging Constitutional rights, community associations are subject to those limitations only if they are viewed as state actors, or their equivalent.
In the Mississippi case (Fletcher v. Diamondhead Country Club and Property Association, Inc.), the owner-plaintiffs argued that Constitutional protections applied for one of two reasons: Because the association was a “company town”; or because the town government and the association were “intertwined,” making it impossible to distinguish between them. The court rejected both theories.
On the first question (company town), the court cited a 1946 Supreme Court decision (Marsh v. Alabama) defining a company town as one that had “”all the characteristics of any other American town[, including] residential buildings, streets, a system of sewers, a sewage disposal plant and a `business block’ on which business places [we]re situated.” Diamond Head did not meet that definition, the court said, because it “does not perform major municipal functions such as police protection, fire protection, utility services, or operation of one or more public schools.”
The plaintiffs had relied partly on Diamond Head’s history – noting that the community association was created before the town (which shares its name) and ultimately incorporated into it. They had also cited a Law Review article to support their contention that “large, mixes-use residential community associations qualify as state actors” under the Supreme Court’s Marsh definition.
But the court noted that one of the mixed-use communities described in the article “had 21 churches, four shopping centers, eight public schools and a sewage treatment plan,” and the other had “ten shopping centers and operated parks, libraries and a fire department. Those facts are not analogous to those here,” the court said, adding, “Plaintiffs do not cite and the Court has not found [any] binding authority holding that because almost all residential homes in a city are part of a property owners association, that association is automatically a company town.” The community association’s rules would constitute state action under the Marsh ruling, the court said, only if the association “assumed all of the attributes of a state-created municipality, [exercises] semiofficial municipal functions…. [and is, in effect] performing the full spectrum of municipal powers and standing in the shoes of the state.”
The court also rejected the “pervasive intertwinement” argument. The defining features here, the court said, would be “whether the association is mostly comprised of…public officials]; whether public officials dominate decision making; whether the organization’s funds are largely generated by public institutions; and whether the association is acting in lieu of a traditional state actor.” The plaintiffs, the court said, had not presented evidence to support that claim.
”Not only is there no issue of fact that the city is not responsible for enforcement of the [association’s covenants] and rules, but the city’s ordinances also actually allow [the political signs and solicitations] that the association’s covenants prohibit. This fact certainly weighs heavily against finding that the [association’s] action should be ‘fairly treated] as that of the city.”
Geography did not alter than conclusion. Although most residents of the city live in the community association, “similar boundaries and other facts alleged by the plaintiffs do not automatically convert private action into state action.”
“While preserving the solid footing of the reserve fund is essential, reducing fees does not necessarily conflict with this goal. As any business knows, just as a price that is set too high will lead to less profit, not more, lowering the premium on qualified borrowers may actually produce greater revenue and fully restore the capital ratio more quickly.” ─ From a letter to HUD Secretary Julian Castro, signed by Sen. Barbara Boxer and 17 other lawmakers, urging a reduction in FHA mortgage insurance premiums.