LEGAL/LEGISLATIVE UPDATE – JANUARY 25, 2017

Published on: January 25, 2017

UNCERTAINTY AHEAD

As Donald Trump settles into the Oval Office, the consensus economic forecast is “uncertainty” ─ uncertainty about the policies he will pursue, about the initiatives he will be able to implement, and about the impact they will have on the economy.

Stocks and consumer confidence levels have both been riding a post-election bump upward for the past several weeks. Mortgage rates, which had begun to rise before the election, have continued to increase, at least partly because the Federal Reserve, expressing increased confidence in the economy, has suggested that two or more increases in its target rate might follow the 25 basis point increase announced in December ― only the second Fed hike since the 2008 recession.

In explaining the decision to begin reversing the accommodative policy the Fed has followed for nearly a decade, Fed Chair Janet Yellen emphasized “the progress the economy has made and is expected to make.” But she also noted “the cloud of uncertainty” around the Trump Administration’s financial policies, especially Trump’s plan to both cut taxes and increase government spending on infrastructure improvements, which analysts say could trigger inflationary pressures as well as economic growth. “We have to wait and see what changes occur,” Yellen said.

HOUSING CONFIDENCE SLIPPING

Although the housing market ended the year on a positive note, with both new and existing home sales increasing, consumer confidence in the housing market has been sliding. Fannie Mae’s December Home Purchase Sentiment Index fell for the fifth consecutive month, as prospective buyers expressed growing concern about their ability to find a home they can afford. Increases in mortgage rates and home prices are stoking those concerns.

The S&P CoreLogic Case-Shiller home price index posted another year-over-year increase in October, the 53rd consecutive month of annual price gains. Although he characterized both home prices and the economic data as “robust,” David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, also cautioned that home prices are outpacing income gains, and that imbalance, he said, “can’t continue indefinitely.”

An affordability index produced by ATTOM Data Solutions put affordability in the fourth quarter at its lowest level in eight years, with nearly one third of the 447 counties tracked below their historical affordability averages, compared with only 13 percent in that affordability hole in the fourth quarter of 2015.

Builders, eyeing Trump’s promise to slash regulations, have been feeling more optimistic, despite the disturbing affordability trend; Realtors, eyeing rising prices and mortgage rates, less so.

Real estate industry executives are considerably less optimistic. Only a third of the respondents to a Thought Leader Real Estate Confidence Survey conducted by Imprey said they expect housing demand to increase this year compared to nearly 50 percent who expressed that view two years ago. “Confidence for 2017 is lower across nearly all questions related to housing and the economy,” Renwick Cogdon, CEO of Imprey, reported.

FHA UNDONE

The reduction in the premium for FHA-insured mortgages the Obama Administration announced a couple of weeks ago, was at the top of the Trump Administrations ‘undo’ list. Almost immediately after President Trump had taken the oath of office, HUD officials issued a Mortgagee Letter announcing that the quarter-point reduction was being rescinded “indefinitely.”

“FHA is committed to ensuring its mortgage insurance programs remains viable and effective in the long term for all parties involved, especially our taxpayers,” the letter said. But “more analysis is needed” before determining whether a rate reduction is in order. For now, that means the premium rate will remain at 0.85 percent. The reduction, which was to have taken effect January 27th, would have brought it down to 0.60 percent.

In announcing the quarter-point reduction HUD Secretary Julian Castro said it was justified by four consecutive years of improvement in the health of the FHA’s Mutual Mortgage Insurance Fund, which now has a ratio of 2.32 percent of insurance in force, exceeding the mandatory 2 percent threshold required by statute for the second consecutive year.

“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” Castro said. “We made this decision based on the strength of the fund and the impact on borrowers,” he added in subsequent comments to reporters. “We’re confident that this decision is the right one.”

An analysis by Castro’s staff estimated that the reduction would save FHA-insured homeowners an average of $500 this year. Separately, the Mortgage Bankers Association reported that the FHA share of mortgage applications posted an unusually large increase the week of January 13th, which the MBA attributed in large part to borrower anticipation of the FHA premium reduction.

REVERSAL OF FORTUNE

Owners of luxury apartments are facing a steep reversal of fortune this year, as an oversupply threatens to push vacancy rates up and rents down. Signs of that trend surfaced last year, as average apartment rents increased by only 3.8 percent compared with a 5.6 percent annual growth rate in the third quarter of 2015.

Until last year, the rental market had been booming, buoyed by increasing demand from young professionals, drawn to urban areas. Builders responded enthusiastically to that growing market. Nearly 85 percent of the 190,000 multifamily rental units completed between the last quarter of 2015 and the third quarter of 2016 were in the luxury category, according to the CoStar Group. But now the continued influx of new properties has begun to outpace the demand.

Although approximately 50,000 luxury units were rented in the fourth quarter of last year, builders pumped another 88,000 units into the market, and rents, which had been rising steadily, have begun to soften. Luxury apartment rents increased by less than 4 percent year-over-year in 2016, down from 5.6 percent in the third quarter of 2015, MFR Research reports, and that downward trend is expected to continue this year.

“This will be a very challenged leasing environment almost everywhere,” Jay Parsons, vice president of MPF, told the Wall Street Journal.

It isn’t just luxury rentals that are beginning to feel the impact of an over-supply. The National Multi Housing Council’s quarterly survey, released in January, found “weaker conditions evident across all sectors. Rising supply – particularly during a seasonally weak quarter, is causing rent growth to moderate in many markets,” Mark Obrinsky, NMHC’s chief economist, said in a press statement.

Boston is on the list of cities reporting the slowest growth in rents, with a 1.1 percent year-over-year increase last year.

A less overheated rental market will be good news for tenants, but it could bode ill for the housing market, according to analysts, who note that rising rents made home ownership a more appealing option for many buyers; as home prices rise more rapidly than rent, the balance could shift back in favor of the apartment market.

HAM RADIO ENCORE

The Community Associations Institute (CAI) will be wrestling with the “Amateur Radio Parity Act” again this year. The House has already approved the measure, endorsing with “unanimous consent” under a suspension of its rules, the same measure it approved last year. That bill, which included changes sought by CAI, died in the Senate when the legislative session ended without Senate action. The revisions CAI negotiated precluded associations from prohibiting HAM installations, but protected their right to impose reasonable limits on the location and design of equipment installed in common areas.

Rep. Adam Kinzinger (R-IL), the bill’s chief sponsor, re-introduced it quickly when Congress began its new session, U.S. Rep. Greg Walden (R-OR), a co-sponsor of the bill, chairman of the Commerce Committee, which has jurisdiction over the legislation, advanced it. Senate supporters of the bill are expected to introduce a companion measure in that body. CAI will “engage” with lawmakers in both the House and Senate “and work to protect the gains achieved in the compromise legislation” the House approved last year, a CAI update says.

IN CASE YOU MISSED THIS

  • Home ownership is still an “American dream.” It just isn’t a top priority for those who haven’t achieved it yet, a recent poll suggests.
  • The number of purchase agreements that failed to close nearly doubled last year, and experts say they have no idea why.
  • Government statistics have understated in a big way the number of students who have defaulted on their college loans.
  • The title of a panel discussion at the World Economic Forum in Davos reflected a major concern of international financial policy makers: “Squeezed and angry: How to fix the middle-class crisis.”
  • The House of Representatives has approved legislation that would require Congressional approval of any agency-issued regulations with an economic impact exceeding $100 million.

LEGAL BRIEF

WHAT’S A DOCK?

A rose may be a rose (according to Shakespeare) but a dock isn’t a building, according to a Washington State magistrate (district court) judge, who relied on Webster’s Dictionary to reach that conclusion in Property Casualty Insurance Company of Hartford vs. Herzog.

The plaintiff in this case, Douglas Herzog, purchased a homeowners policy from Hartford to cover property that included a house, a swimming pool and a dock. In discussions with the Hartford agent, Herzog emphasized that he wanted to be sure the policy would cover the full replacement cost of the dock. He said the agent assured him that was so. A month after the policy was issued, Herzog spoke again with an agent, expressing concern that the policy limit of $77,600 for “other structures” would not fully cover the cost of replacing the dock. At the agent’s suggestion, Herzog testified, he purchased an endorsement providing an additional $99,900 of coverage – the maximum the company would approve.

The policy language distinguished between “replacement cost coverage” for buildings and “actual cash value coverage” for structures other than buildings, subject to a deduction for wear and tear.

When a windstorm seriously damaged the dock six years later, Hartford calculated that reimbursement should be based on the actual cash value of the dock, which it estimated at $57,015, less a deduction for age and condition, reducing the reimbursement amount to $26,878.50.

Herzog sued, claiming that his dock was a building and should have been covered as such, for its replacement cost. The insurer said the dock was not a building and thus was subject to the actual cash value calculation.

Because the word ‘building’ was not defined in the policy, the court said it must assign the term its “plain, ordinary and popular meaning.” Turning to the dictionary, the court found this language:

“a thing built: a constructed edifice designed to stand more or less permanently, covering a space of land, usually covered by a roof and more or less completely enclosed by walls, and serving as a dwelling, storehouse, factory, shelter for animals, or other useful structure – distinguished from structures not designed for occupancy (as fences or monuments) and from structures not intended for use in one place (such as boats or trailers) even though subject to occupancy b: a portion of a house occupied as a separate dwelling.”

Hartford argued that this definition contemplates “a structure with a roof and walls” and implies “some form of occupancy” by people or animals, which would exclude open structures not attached to the building, including a dock.

Herzog contended that the court should focus only on the first part of the definition “a thing built.” Adopting the boarder description, he argued, would apply the same definition to two different terms used in the policy – “buildings” and “fully enclosed buildings.” And the policy’s definition of “a fully enclosed building,” he argued, was close to the dictionary definition.

But the court pointed out that the dictionary definition referenced buildings that are “completely enclosed” as well as those that are not – language broad enough, the court said, to cover both terms in the policy without resulting in the inconsistency Herzog asserted. Using his narrower definition, the court said, would render meaningless the distinction the policy made between “buildings” and “structures that are not buildings.”

“There would be no need for this distinction,” the court said, “if a building simply meant ‘a thing built.’

The policy also makes a “clear distinction,” the court said, between the dwelling, covered at replacement cost, and other structures “set apart from the dwelling,” which are insured only for their actual cash value. “Again, there would be no need for this distinction,” the court said, “if a building simply meant ‘a thing built.’”

Even if the dictionary did not support his argument, Herzog said, “extrinsic evidence” – the description of the coverage in an insurance company brochure and the agent’s assurance that the policy would cover replacement of the dock – did demonstrate that his understanding of the policy was reasonable.

But the court noted that extrinsic evidence comes into play only if the policy language is ambiguous, and in the court’s view, the policy’s language was “not ambiguous as to whether the dock is a building for purposes of the coverage.”

The court also found that the extrinsic evidence Herzog cited did not, in fact, support his assumption that the dock was covered for its full replacement cost. His reliance on the language in the brochure “was misplaced,” the court said, noting that the brochure “specifically refers to coverage for a dwelling. There is no promise that other structures, such as a dock, would be covered at that level.”

As for the assurances Herzog claimed to have received form the insurer’s agent, even if his assertions “are taken as true,” the court said, “none of the written documentation – including that which Mr. Herzog eventually signed —made any such assurance.” As a result, the court added, “his reliance on those statements cannot be seen as reasonable.” Also undermining Herzog’s argument, the court said: ‘At no time has Hartford offered an insurance product that would have provided full replacement cost to structures that are not buildings,” including Herzog’s dock.

“In other words,” the court concluded, “while Mr. Herzog may have believed he was entitled to [replacement cost coverage], that belief was neither reasonable nor one shared by Hartford.”

IN QUOTES

“We may be at a point where globalization is ending, and provincialization and nationalization is taking hold.” ─ Ray Dalio, a hedge fund billionaire, speaking on a panel at the World Economic Forum’s annual conference in Davos.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.