LEGAL/LEGISLATIVE UPDATE – JULY 1, 2016

Published on: June 30, 2016

CAI FORECAST

community_grayThe aging of buildings and their residents and the need for qualified managers are among the major challenges confronting the condominium industry, according to a series of white papers produced by the Community Associations Institute (CAI). Those conclusions came from CAI members and industry experts who met throughout last year to identify the major trends that will affect condominiums in the future.

Four white papers, produced by four different panels, examine how communities will evolve; how association governance and management are likely to change over time; how these changes will influence the community management profession; how associations will be affected by legislation, regulation and court decisions; and how external trends and opinion leaders will influence associations moving forward.

“It’s human nature to focus on current and near-term needs, but our collective success depends in large measure on how well we plan for the future,” 2015 CAI President Julie Howard, a partner in the Atlanta-based law firm of Weissman, Nowack, Curry & Wilco, said in a press release. “That’s doubly important in a growing and evolving enterprise like community association housing. It’s essential that we try to understand the challenges and opportunities that await all of us,” she added. “The fewer surprises the better.”

interest-rate-149879_1280A RECOGNIZABLE PATTERN

The current housing market recovery and the economic recovery generally have been characterized by their failure to conform to historical patterns. But the Boston housing market is finally behaving the way the textbooks say it should: Rising home prices have increased homeowner equity enough to encourage more sellers to put their homes on the market; the increased supply has slowed appreciation rates enough to pull more buyers into the market, while low interest rates and somewhat stronger wage gains have increased their purchasing power. The net result: Home sales in the Boston area increased by 12.5 percent in March compared with the same month last year, according to the Greater Boston Association of Realtors; condominium sales jumped by more than 30 percent, the biggest year-over-year increase in nine years. The median sales price increased by less than 1 percent for single-family homes and 5.5 percent for condos, while days on market fell by 9 percent for condos and 13 percent for single-family properties. Inventory levels for condos were more than 5 percent higher than a year ago while the supply of single-family homes increased by nearly 15 percent. A MarketWatch article explained: “The concept of a rising tide lifting all boats is what is occurring in the Boston housing market.”

BLAST FROM THE PAST

Remember low-documentation (low-doc) loans? Also known, less than affectionately, as “liar loans,” they became a short-hand description of the shoddy underwriting practices that were largely if not entirely, responsible for the housing market melt-down that triggered the worst economic downturn since the Depression. The loans pretty much disappeared as lenders tightened their credit standards, but they have resurfaced recently, as lenders seek to improve market share and profit margins in an improving economy.

Not to worry, the lenders offering the loans and some industry experts contend. In their current form, the loans are different –and safer – than their predecessors. Among other key changes: Borrower credit scores are higher (700 is the minimum) and owner down payment requirements are higher, averaging 40 percent. Equally important, industry experts contend, lenders are doing a much better job of analyzing and verifying borrowers’ income and assets.

“Stated income loans are not inherently bad products,” Ann Fulmer, a senior advisor for FormFree Holdings and a fraud expert, told MortgageOrb. What made them risky in the past, she says, is the “layered risks” they combined – adjustable rates, negative amortization, “teaser” rates that jumped after a short period, and 100 percent financing among them. Loading that level of risk on borrowers who are “overstating” their income “is a recipe for disaster,” Fulmer cautions.

The loans were never intended for marginal borrowers with limited financial assets, she points out. They were intended for “wealthy, high-liquid-asset borrowers who qualified more on their assets than they did on their income. When targeted appropriately and underwritten properly, she says, these loans “are fine.”

BIG CYBER-THREATS FOR SMALL COMPANIES

security-265130_1920Small companies generally assume that cyber-criminals will overlook them in favor of larger, richer targets. But In fact, smaller companies often face the largest risks because they usually have the weakest defenses.

Almost half of cyber-attacks worldwide last year were against small businesses, according to a Symantec survey. Many of the attacks involved fraudulent emails, convincing employees to divulge access codes or bank account information thieves used to hack corporate bank accounts. Malaware seizing control of computers or wrecking other forms of havoc has also become a widespread and growing threat for businesses.

A survey by CFO Magazine found that one in five small and midsized companies reported cyber-attacks last year, compared with one-in-four larger financial firms. The National Small Business Association estimates that cyber-attacks cost their members an average of $32,000 per incident.

Although small companies are increasingly vulnerable to cyber-crimes, many lack the most basic defenses — data encryption, off-site backups of their websites, and security fire-walls, experts testifying at a recent Congressional hearing on the issue said. Nearly 80 percent of the small business owners responding to a recent survey said they didn’t have even a rudimentary a cyber-attack response plan in place, even though a majority of them reported that they had been hit by cyber-crimes.

THE DEBT FACTOR

Economists have been debating the impact of student debt on the home-buying capacity of first-time buyers. Some analysts say the impact has been minimal; others contend that debt has been a major impediment for borrowers and a major factor contributing to a housing recovery that has been significantly more erratic and weaker than normal. A recent study finds support for the latter view.

student-loan-debt-1160848_1280More than three-quarters of the respondents to a survey of non-homeowners said the need to repay student debt was delaying their home purchase plans; more than 50 percent of that group said they expected the delay to be more than five years. Respondents reported average student loan debts of $25,000 to $30,000, but nearly 40 percent had more than $50,000 in outstanding student loans.

Loan payments on top of rent and other household expenses are making it difficult for prospective buyers to save for a down payment – a problem cited by three-quarters of those responding to the survey, sponsored jointly by the National Association of Realtors and American Student Assistance. Nearly 70 percent said the debt burden makes them feel financially insecure and 63 percent said they don’t think they can qualify for a mortgage because of it.

Low inventories, rising rents and sluggish wage growth are exacerbating the problems, Lawrence Yun, the NAR’s chief economist, says, going a long way to explain “why the share of first-time buyers remains at its lowest point in nearly three decades.”

IN CASE YOU MISSED THIS

There is no locality in the U.S. where a full-time worker earning the prevailing minimum wage is able to afford the rent on a modestly priced two-bedroom apartment, the National Low Income Housing Coalition reports.

Most Americans think the country has a housing crisis and they want government to do something about it.

Chinese nationals are the leading foreign buyers of American homes; they invested $6 billion in residential properties last year alone, more than a third of them in California.

Foreclosure levels have fallen to their lowest level in nine years, declining to pre-crash levels in more than one-third of the metropolitan areas surveyed by RealtyTrac.

Employers are finding “exaggerations” and “misrepresentations” in nearly 90 percent of the resumes submitted by job applicants.

LEGAL BRIEFS

THINKING DOESN’T MAKE IT SO

A policy may be long-established and well-understood by board members, but if it isn’t in writing and demonstrably understood by owners, enforcement isn’t assured. That’s the legal lesson to be drawn from a recent decision by an Indiana Appeals Court, rejecting a condo association’s effort to enforce architectural restrictions. (Castlewood Property Owners Association, Inc. v. Guerra-Danko.)

The architectural standards at issue, described in the association’s covenants, required prior written approval from the Architectural Review Committee (ARC) for any changes in a unit’s exterior. The purpose of the requirement, the covenant explained, was to ensure architectural harmony and protect property values in the community.
The covenant stated specifically that the ARC would have the “sole discretion… to approve any such construction plans or specifications . . . for aesthetic or other reasons …” and could base its decisions on, among other considerations, “the suitability of the proposed building . . . with the surroundings, and the [effect] of the building . . . on the outlook from adjacent or neighboring properties.”

wood-1216456_460Shortly after purchasing a home in the community, Guerra-Danko (the plaintiff in the litigation) discovered extensive termite damage, and undertook to replace the cedar siding, without obtaining prior permission from the ARC, as the covenant required. When the president of the board informed Guerra-Danko of that requirement, she submitted the written request, which the committee rejected, ruling that it did not conform to the community’s architectural standards. Although the material Guerra-Danko selected – rough cedar finish siding – was actually molded from cedar clapboards, it was classified as vinyl, which the ARC said it had never approved.

A trial court ruled for Guerra-Danko, finding serious problems with the decision-making process (among them – -the committee did not hold a meeting nor give Guerra-Danko an opportunity to argue her case before issuing its decision), and finding no evidence to support the association’s contention that the covenants were unambiguous and did not violate public policy.

An Appeals Court upheld the decision. Determining first that Indiana Law did not specifically address the question of how much deference the decisions of condo association governing bodies should receive, the court concluded that a “reasonableness” standard should apply – -and the association’s decision, in the court’s view, fell short.

The court ruled specifically that the association had presented “absolutely no evidence, expert or otherwise [that] remotely tended to show” the siding Guerra-Danko selected clashed with the neighborhood aesthetics or would undermine property values in the community. No members of the ARC were themselves real estate experts, the court noted, and the committee did not seek input from real estate professionals to determine the impact on property values.

meeting-152506_1280“This dearth of evidence leads unerringly to a conclusion that the ARC did not exercise its powers under the Protective Covenants in a reasonable manner,” the court ruled.

Equally significant, and equally detrimental to the association’s case, the court found that because the ARC’s policy prohibiting vinyl siding was not in writing, owners could not reasonably be expected to know about it.

“There was evidently a neighborhood agreement reached in 1998 to that effect, but homeowners purchasing residences in Castlewood since 1998 would have no way of knowing about this informal prohibition,” the court noted, adding: “We do not go so far as to require that community guidelines such as this vinyl siding prohibition be written and provided to all community members, but we certainly believe that it would be the better practice to do so.”

One justice on the three-member panel dissented, finding sufficient evidence that Guerra-Danko knew or could have known that vinyl siding wasn’t allowed. A survey taken 11 years before this dispute and submitted as evidence at the trial, indicated that a majority of the owners had agreed that vinyl siding should be barred. While owners who purchased after that survey might not be aware of it, this justice agreed, had Guerra-Danko sought approval before replacing her siding, as the covenants required, she would have received that information.

There was also evidence that she was aware of the need to obtain prior permission before replacing her siding, this justice noted. Before beginning the project, he pointed out, Guerra-Danko received a letter from the board stating that the ARC must approve all exterior changes. “Under such circumstances,” the dissenting justice concluded, “I cannot say that the ARC’s decision to prohibit Guerra-Danko from using vinyl siding on her home was unreasonable.”

WORTH QUOTING

“We’re building about half as many homes as we should be in a normal market. There still aren’t enough homes on the market to keep up with the high demand from every type of homebuyer.” — Zillow Chief Economist Svenja Gudell.