Published on: May 29, 2015
A CAPITAL ISSUE. You know an industry issue should be written in capital letters when you start seeing ads promoting services to deal with it. So condo industry executive should note with some degree of concern recent reports that vendors have begun marketing HOA Super-Lien Services to manage the perceived risks the condominium superlien poses for lenders and investors.
“There are super lien laws on the books in 21 states, plus Washington, D.C. Historically, they’ve rarely been invoked, but when they are, the results can be devastating for mortgage debt holders,” an article in National Mortgage News reported – a fairly accurate reflection of how the issue is being covered generally in the media – both mainstream and trade publications.
According to this article, Black Knight Financial Services, CoreLogic and LRES are among the vendors that have “flooded the market” with products purporting to identify properties that are subject to condo super-liens and monitor the records to spot active liens in those properties. Some of the vendors also offer to negotiate with condo associations to resolve lien disputes; others are offering to create escrow services for HOA dues.
Although priority liens have been in place in many states (including Massachusetts) for more than two decades, they became controversial only recently, when courts in Nevada and Washington, D.C. ruled that a condo lien could wipe out a first mortgage in a foreclosure. (See Legal Briefs below.)
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, responded by asserting that federal law prohibits the secondary market giants from taking a secondary position on loans they purchase, and vowing to challenge foreclosures that would threaten their priority position. The agency has also filed an amicus brief in an appeal of the Nevada decision upholding the priority lien and is lobbying actively in support of legislation repealing Nevada’s priority lien statute.
Officials at the Community Associations Institute (CAI) have expressed concern that the FHFA’s widely publicized criticism of the superlien is encouraging more widespread opposition to it, even in states where it has been operating for successfully for many years without creating any problems for lenders.
DRONE CONTROLS. Drones are coming Legal/Legislative Update | May 17, 2015 | MEEB– and state Legislatures are acting quickly to restrict where they can fly and what they can do. Florida lawmakers recently approved a measure prohibiting the use of drones to photograph or record images of people or their property from the air – restrictions that would apply to local and state governments as well as individuals and commercial entities. FLA: That’s because on Thursday, SB 766 was sent to Gov. Rick Scott’s desk. The bill states that drones cannot be used to photograph or record images of people or their property from the air. The restrictions would also apply to state and local governments. Florida previously approved a law requiring law enforcement agencies to obtain a warrant in order to use drones to collect “evidence or information,” – the first state to restrict the use of drones for law enforcement purposes.
The most recent tally shows 13 states with laws addressing drones and 10 more considering legislation this year. Most of those measures target law enforcement, but some, like Florida’s most recent initiative, restrict commercial uses as well. For example, a North Carolina law prohibits the use of drones by any entity for the surveillance of individuals or their property. A Louisiana statute, similarly, makes it a crime to use drones for the surveillance of “a targeted facility’ without the owner’s prior written consent.
At the federal level, the Federal Aviation Commission (FAA) recently issued proposed regulations governing the use of drones for some commercial purposes. Those rules, which aren’t expected to be finalized for at least two years, don’ yet open the door for the drone delivery services that Google and Amazon, among others, would like to launch, although they are seen as a step in that direction. The FAA has not yet proposed rules restricting the recreational use of drones, although that step, too, is widely expected. The hobbyist who accidentally landed a small drone on the White House lawn probably accelerated this part of the FAA’s rulemaking schedule.
FAA rules currently prohibit the commercial use of drones, but the agency has granted several waivers, including at least one to an Arizona real estate agent, allowing him to use his drone “to enhance academic community awareness and augment real estate listing videos,” the FAA said in a press statement.
The National Association of Realtors has been pushing the FAA to move further and faster to approve commercial uses of drones for real estate professionals. “Realtors are showing tremendous interest and enthusiasm for new drone technologies that could help them market listings in an efficient and environmentally sensible manner,” the association said in a press statement after the Arizona agent won his waiver.
CFPB TRANSPARENCY. The House of Representatives has given resounding (401-2) approval to a measure demanding more transparency from the Consumer Financial Protection Bureau (CFPB). Sponsored by Randy Neugebauer (R-TX) and Andy Barr (R-KY), the measure would require all CFPB advisory and subcommittees to hold open meetings.
“This bill ensures that we, as an American family, can see what takes place at the CFPB – it makes complete sense,” Duffy said during the floor debate on the measure. “This is about making government work; making it accountable and transparent. That should start at these meetings,” he added.
A Senate version of the bill is awaiting a hearing before the Committee on Banking, Housing and Urban Affairs.
Another measure targeting the CFPB has encountered considerably more resistance. The legislation itself – the Bureau of Consumer Financial Protection Advisory Boards Act – isn’t particularly controversial. It would establish a number of advisory boards representing small businesses, credit unions and community banks, to “advise and consult” with the CFPB on issues affecting those constituencies. But an amendment that would slash funding for the agency has attracted stiff opposition from Democrats and from President Obama, who has threatened to veto the bill if it includes this provision.
The amendment, introduced by Rep. Jeb Hensarling (R-TX), chair of the House Financial Services Committee, would reduce the maximum funding the CFPB can request in 2020 and 2025 by a combined total of $145 million.
Rep. Denny Heck (D-WA), who co-sponsored the advisory committee bill, has urged lawmakers to reject the funding amendment, which he said “puts the torch” to the measure he supported. In a Statement of Administration Policy threatening a presidential veto, the White House said the funding provision “is solely intended to impede the CFPB’s ability to carry out is mission of protecting consumers in the financial markets.”
ABOUT THOSE PERMITS…. Municipal officials have moved to block construction of a new condo development in D.C. because of concern that it could damage fragile water tunnels under the site. That sounds like a reasonable and necessary enforcement action, but for this detail: The move to halt construction came after the building was almost complete – and local officials are saying the building must be demolished.
The developers, Edge Investments, needless to say, aren’t pleased. Having obtained all the necessary building permits, they had concluded, reasonably, that any problems would have been identified during the approval process.
If the building’s location on top of a crucial water tunnel posed a “catastrophic risk” to the city’s water supply that city officials claim, they should have voiced their concerns long before now, the developer contend in a suit they have filed to halt the demolition.
City officials, who have begun gutting the building, contend that the developers “misrepresented the finished product” in their permit applications. The courts will eventually sort this out, but with demolition now under way, the key questions will likely be – who will pay for the demolition, what compensation, if any, is owed to the developers and their investors, and who’s going to foot that bill?
THE RENTAL FACTOR. If there is a silver lining in the sluggish housing recovery, it is the apartment market, which has been booming. And analysts are predicting that the good times may continue for the remainder of this year and well into 2016. While single-family starts have lagged (the 20 percent April surge was an exception), multifamily starts have exceeded 242,000 annually since 1990, hitting a torrid 340,000 last year. Strong demand has kept pace with the supply, pushing rent levels higher and keeping vacancy levels low enough to spur more construction.
Therein lies what some see as one of the impediments keeping first-time buyers on the sidelines: Rental costs are making it impossible for many to save the money they need for a down payment. Rents increased an average of 4 percent nationally for the year ending in April, outpacing the 3 percent increase in home values during the same period, according to statistics compiled by the Zillow Group.
Still, rising home prices have made owning a home less costly than renting in more than three-quarters of U.S. counties (according to RealtyTrac), a mismatch that usually pushes renters into the housing market. But that doesn’t appear to be happening today.
Rising rents explain why some renters are unable to become homeowners, but that’s only part of the problem. Many renters who could make the mover are choosing not to do so, reflecting a lack of interest in buying rather than the inability to do so.
“From a purely affordability standpoint, renters who have saved enough to make a 10 percent down payment are better off buying in the majority of markets across the country,” Daren Blomquist, vice president at RealtyTrac., told Housing Wire. “But factors other than affordability are keeping many renters from becoming buyers” he suggested. Primary among those factors: A desire for the mobility, freedom from maintenance obligations, and insulation from declines in home values that renting provides.
Nearly two-thirds of the renters responding to a recent survey said they were very or moderately satisfied with their rental experience. Nearly 70 percent of those who have experienced rent increases said they would like to buy a home but can’t afford to do so, but nearly half (46 percent) said they like where they liv and have no plans to move despite the higher rental costs.
FED RATE WATCH. The Federal Reserve continues to eye an increase in the Federal Funds Rate this year, but from a distance and with no apparent inclination to hasten that move. Speaking recently at the Providence (RI) Chamber of Commerce, Fed Chairman Janet Yellen restated her position that the agency will adjust rates when economic conditions make an increase “appropriate.” But she made it clear that current conditions don’t yet meet that definition.
While job gains have moved the labor market closer to full strength, she said, “in my judgment we are not there yet.” The unemployment rate is close to what many economists believe to be its natural low point, but Yellen said she doesn’t think the statistics “fully capture the extent of slack” in the labor market, created by the large number of people who are no longer looking for work (and so are no longer counted as part of the work force) because they have given up on the possibility of finding a job.
Yellen said she expects the economy and the labor market will continue to improve this year, making a rate hike before year-end still likely if not assured. But she also emphasized that the Fed has “no intention of embarking on a preset course of increases in the federal funds rate after the initial increase. Rather, we will adjust monetary policy in response to developments in economic activity and inflation as they occur If conditions improve more rapidly than expected” she said, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable.”
SUPERLIEN PREVAILS IN NEVADA – SO FAR. A Nevada Federal District Court has rebuffed an attack on the condominium priority lien, ruling that the interests of a first mortgage lender can be extinguished by a foreclosure. That decision in Freedom Mortgage Corporation v. Las Vegas Development Group, upheld a Nevada Supreme Court decision that had triggered a backlash from the Federal Housing Finance Agency (FHFA), primary regulator for Fannie Mae and Freddie Mac, which had filed an amicus brief arguing that the superlien violates federal l law. (See related articles here and here.) Freedom filed its suit about three months after the Supreme Court decision, seeking to overturn a priority lien foreclosure three years before, extinguishing the lender’s interest in a loan insured by the Federal Housing Administration (FHA). Freedom advanced two primary arguments:
- The priority lien law subverts the purpose of HUD’s FHA program and so should be preempted under the Constitution’s “Supremacy Clause.”
- The priority lien violates the “Property Clause” which prohibits state governments and private individuals from extinguishing the property rights of a federal government entity without permission of Congress.
District Court Judge Jennifer Dorsey rejected both arguments. On the first, she ruled that HUD’s insurance of the loan did not create the “property interest” contemplated by the Property Clause.
“The key to a successful Property Clause challenge is that the federal government either held a deed of trust against, or owned, the property. Freedom Mortgage has not demonstrated that HUD had, has, or will ever acquire a constitutionally protected interest in the Castro property,” Judge Dorsey said, adding: “Freedom Mortgage has supplied–and I find–no legal justification to conclude that the Property Clause also bars HOA foreclosure sales of properties with private-lender-owned mortgages that HUD has merely insured.”
Her rejection of the Supremacy Clause argument was even more pointed. Freedom argued that permitting the assertion of a superlien against HUD-insured properties would subject the agency to “the vagaries of different state laws” and undermine the purpose of the FHA insurance program —”to enable low-income borrowers to obtain loans with the least risk of loss upon foreclosure.
Judge Dorsey court was unimpressed by that argument, finding Freedom’s “apocalyptic predictions” to be “unsupportable” and its assertion of an unresolvable conflict between state and federal law to be without merit. A conflict justifying federal preemption of a state law exists, she said, only if it is physically impossible to comply with both the state and federal laws, or if a state law precludes implementation of a federal program. “Neither circumstance exists here,” Judge Dorsey said,” because the lender controls its ability to comply with both state law and the federal program, and because Nevada’s super-priority law for HOA-assessment foreclosures is no obstacle to the purpose and objective of HUD’s program.”
On the conflict between state and federal law, Judge Dorsey said: It is true that extinguishing the lender’s interest in a loan makes it impossible to convey marketable title to HUD after foreclosure, as federal law requires. “[But] the lender gets itself into this predicament only by ignoring HUD’s directives,” which require lenders to take the steps necessary to protect their security interests. “This obligation specifically includes HOA fees and assessments…. In“ super-priority lien states, the HUD-insured lenders’ obligation to prevent foreclosure by satisfying HOA liens is not an aspirational goal: it’s a requirement,” outlined in a 2002 HUD directive in which HUD told lenders specifically that in states with priority lien laws, they had an obligation to satisfy outstanding HOA liens.
That guidance, which Judge Dorsey quotes extensively in her decision, states:
For those states where unpaid condo/HOA assessments constitute a priority lien against the property, lenders must first attempt to negotiate with the condo/HOA to waive or accept reduced payments for delinquent fees. Should the negotiations prove unsuccessful, lenders should pay all condominium/HOA fees prior to conveyance, whether or not the association has filed a lien…. HUD will not object if lenders voluntarily pay delinquent condo/HOA fees that were the responsibility of the former borrower to pay…..
Condominium/HOA fees paid by the lender are 100 percent reimbursable to the lender…. Lenders may also claim reimbursement for penalties, interest, and/or late fees incurred by the former mortgagor and paid by the lender. . . .
Lenders not only have the ability to avoid foreclosure (and the resulting extinguishment of their interest), Judge Dorsey noted, they are required to do so under the rules governing FHA loans.
Freedom’s second and primary preemption argument – that the priority lien impedes the purpose of the FHA program – also went nowhere with Judge Dorsey, who said the lender had not explained “how requiring a lender to protect its collateral from an HOA foreclosure by satisfying unpaid HOA assessments would, in fact, impede the program’s goals, and I find no support for this conclusion.”
“Incentivizing” banks to satisfy HOA liens actually strengthens HUD’s goals, Judge Dorsey said, by preserving the financial health of condo communities, avoiding HOA foreclosures and helping owners remain in their homes.
“If private lenders could earn an exemption from those laws merely by buying mortgage insurance from the federal government, lenders would be disincentivized to ensure their mortgagors’ HOA dues and assessments are paid so that common areas and property values can be maintained. “ That result, Judge Dorsey said, is “inharmonious with Congress’s intent to help stabilize the housing market…. Nevadans who purchase homes in these common-interest neighborhoods should have the certainty of knowing that they will not have to subsidize the private lenders who fund mortgages in their communities but make the strategic choice not to satisfy the related HOA obligations.”
The decision represents a decisive victory for the superlien and for the Community Associations Institute (CAI), which has been using essentially the same arguments to defend the priority lien in Nevada and elsewhere – mainly that the FHFA’s position is both legally incorrect and poor public policy. HOA dues are the lifeblood of community associations, CAI has emphasized, protecting the interests of lenders as well as associations and condo owners.
But this decision won’t end the superlien battle. Gloria Navarro, chief judge of the U.S. District Court in Nevada, ruled last year (in Washington & Sandhill Homeowners Association v. Bank of America) that Nevada’s superlien statute does, in fact, violate the Supremacy Clause; and just a few weeks ago, another Nevada District Court Judge (Kathleen Delaney of the 8th District Court) found the superlien statute “facially unconstitutional” because its ‘opt-in’ notice provisions “do not mandate that reasonable and affirmative steps be taken to give actual notice to lenders and other holders of recorded security interests prior to a deprivation of their property rights.”
The Ninth District Court in Nevada will be next in line to consider the constitutionality of the superlien and, perhaps, determine its fate, in Nevada. But the FHFA shows no signs of ending its attack, so the Nevada challenge, whatever its outcome, is likely to be, not an end note, but a preview of battles to come in legislatures and courts in other states. CAI is seeking court permission to file an amicus brief in one or more of the Nevada cases, and is monitoring challenges as they surface elsewhere.
“In the end, this is no substitute for bipartisan legislation that reforms the GSEs and efforts should be made to achieve — or at least not impede — such reforms.” ― Douglas Holtz-Eakin, president of American Action Forum and former head of the Office of Management and Budget.