LEGAL/LEGISLATIVE UPDATE – June 1, 2017

Published on: May 31, 2017

FLOOD INSURANCE REFORM

Congressional lawmakers have launched a bipartisan effort to reform the troubled federal flood insurance program. Rep. Sean Duffy (R-WI), chairman of the subcommittee that oversees the National Flood Insurance Program (NFIP) unveiled draft legislation that incorporates a broad range of ideas supported by Republicans and Democrats Draft legislation aimed at stabilizing the financially fragile program. Key provisions would: Restrict or bar coverage for properties in high risk areas that file multiple insurance claims; allow the federal government to purchase and demolish high risk properties so owners could move elsewhere; expand the participation of private insurers in the flood insurance arena, authorize subsidies and other assistance for low-income owners unable to afford flood insurance, and require the NFIP to expand its use of reinsurance and other measures to reduce taxpayer exposure to losses.

Congress faces a September 30 deadline for reauthorizing the NFIP, through which homeowners purchase the flood insurance that is mandatory on properties financed with federally insured mortgages – a broad umbrella that includes the majority of loans, which are purchased by secondary market giants Fannie Mae and Freddie Mac.

Legislators and industry executives are optimistic about the prospects for the legislation, given the consensus support for many of its core provisions. However, most also share the assessment of Larry Larsen, senior policy advisor for the Association of State Floodplain Managers, who told National Mortgage News that despite the strong support for the legislation, “it has a long way to go yet.”

RATE HIKE AHEAD ─ PERHAPS

Despite the uncertainty reflected in the minutes of the Federal Reserve’s May meeting, analysts are expecting the Fed to raise interest rates another 25 basis points in June. The uncertainty, voiced by several members of the Federal Open Market Committee (FOMC), stemmed from hints of softness in some economic indicators, especially the inflation gauge that Fed policy makers follow closely. That gauge has consistently fallen short of the 2 percent annual rate Fed policy-makers have embraced as a target.

The most recent report on consumer spending may allay their concerns. The Commerce Department reported that consumer spending increased by 0.4 percent in April, following an upwardly revised 0.3 percent increase in March. The stronger than expected jump in expenditures, the largest gain since December, adds another positive mark to a list that also includes a 1.2 percent increase in the first quarter economic growth rate – slower than the fourth quarter but stronger than predicted.

Pointing in the opposite direction, corporate profits declined by 0.3 percent in the first quarter compared with the fourth quarter of last year, and recent sales figures indicate that the previously hot automobile market has begun to cool.

While those hints of weakness disturbed some FOMC members, the minutes from the May meeting reflected a consensus that any slowing in overall economic growth would prove transitory, and that another rate increase “would soon be appropriate.”

DEMAND VS. DESIRE?

Surveys suggest consistently that millennials want to buy homes; their bank balances convey a different message. A recent study found that nearly 70 percent of millennial renters have saved less than $1,000 for a down payment and 40 percent acknowledged that they aren’t consistently saving any money at all.

“It is encouraging that millennials do want to buy homes,” noted Andrew Woo, director of data science at Apartment List, which conducted the survey. “The study suggests that they are delaying forming households, but they’re not giving up.” But the statistics indicate that they have a large financial mountain to climb.

Analysts cite student debt, rising rents, and the recession-driven delay in launching their careers as the major forces driving the gap between millennials’ desire for home ownership and their ability to achieve it. The Apartment List study estimates that at their current savings rate, fewer than 30 percent of young adults between the ages of 25 and 34 could save enough for a 10 percent down payment in the next three years.

Economic challenges are part of the problem, priorities may also be a factor. The study suggests that many millennials could theoretically save more than they do. While those making less than $24,000 manage to sock away about 10 percent of their income annually, those earning $72,000 are saving less than 3.5 percent. “Living in vibrant urban centers with ready access to restaurants, bars and entertainment might also make saving seem less urgent,” the study’s authors speculate.

DRONE DEFEAT

A federal appeals court has rejected Federal Aviation Administration (FAA) rules requiring owners of recreational drones to register their equipment. The agency adopted the rules as part of an effort to address safety concerns as sales of unmanned aircraft continue to grow. The FAA estimates that 2.3 million drones will be sold this year for recreational use, plus another 2.5 million for commercial operations.

John Taylor, a drone owner, successfully challenged the registration requirement, arguing that the FAA lacked the authority to promulgate it. Taylor opposed the requirement on principle, because he viewed it as an “authoritarian” example of “government overreach,” and because it contradicted legislation enacted in 2012, specifically prohibiting the FAA from issuing rules covering “model aircraft,” the definition of which included drones.

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit agreed. While acknowledging the safety concerns driving the FAA rules (drones flown recklessly in the path of commercial aircraft, for example) the court said the wording of the 2012 legislation was clear. It says the FAA “may not promulgate any rule or regulation” affecting model aircraft. “Statutory interpretation doesn’t get much simpler,” the court said.

FAA officials say they are reviewing the ruling and considering their options. The regulations were adopted “to ensure that drones are operated in a way that is safe and does not pose security and privacy threats,” an agency press statement said.

The drone industry generally supported the rules; some industry trade groups expressed dismay at the court ruling. “We have to have rules,” Brian Wynn, president of the Association for Unmanned Vehicle Systems, told the Washington Post. “Why? Because we don’t want a drone ingested into an aircraft engine.”

CONSTRUCTION HOPE

For housing industry executives concerned about the shortage of available homes for sale, the most recent reports on new home construction aren’t encouraging. Builders completed fewer new homes in April than in the previous month, and they started fewer residential projects as well.

“This continued, slow pace of construction of new homes is a major bottleneck to a faster economic and housing recovery,” Lawrence Yun, chief economist for the National Association of Realtors, said in a statement

A closer reading of the data yields a somewhat less discouraging assessment of the construction picture. Although completions declined by 8.6 percent in the month to month comparison, they increased by 15.1 percent year over year. And while residential starts declined overall, most of the dip was in the multifamily sector, which analysts had been expecting.

Providing more cause for concern, single-family permits declined by 2.5 percent between March and April – a prime home buying season, when construction activity should be increasing. Some analysts think continued strong demand for homes will ensure that any construction dip is short-lived. Eyeing the permit decline, Ralph McLaughlin, chief economist for Trulia, told Housing Wire that he isn’t so sure. “We’ll be closely watching this [statistic] in the coming months to see whether the dip is an anomaly or the start of a trend,” he said.

IN CASE YOU MISSED THIS

HUD Secretary Ben Carson says he is backing a proposal that would allow the Federal Housing Administration (FHA) to gain approve “spot loans” in condominium communities that have not obtained FHA certification. Dawn Bauman, senior vice president for legislative affairs at the Community Associations Institute, says resuming this discontinued program “[would] be very helpful” for condo buyers and sellers and for condo associations.

Refinanced loans defaulted more often and caused considerably more damage during the real estate downturn than the home purchase programs that were largely blamed for the meltdown, an analysis by the Urban Institute has concluded.

The biggest threat to economic growth is not the lack of jobs but the lack of qualified workers to fill them.

Bidding wars aren’t the only byproduct of rising home prices and shrinking inventories. A strong sellers’ market is also spurring a surge in fraud and misrepresentation on mortgage loans.

The average size of new homes is shrinking as builders shift their focus from luxury homes to entry level buyers at the lower end of the market.

LEGAL BRIEFS

FAULT LINES

Community association boards worry, understandably, about their liability if they fail to provide adequate security for residents. But they also face potential liability if they do. A Georgia Appeals Court reached that conclusion in this case (Camelot Club Condominium Association, Inc. v. Afari-Opoku), filed by the widow of an association resident killed by assailants who gained entrance to the gated community despite presence of a full-time security guard.

The victim, Emmanuel Afari-Opoku, had met one of the assailants in a parking lot several miles from the condominium, to purchase electronic equipment from him. That assailant, joined by two others, followed Afari-Opoku back to his condominium, planning to rob him. The security guard waved them through the gate, without questioning them. The trio accosted the victim in his unit and, in the course of what turned out to be a botched robbery attempt, one of the assailants shot and killed him.

Afari-Opoku’s widow (Georgina) sued both the security company (Alliance) and the condominium association. A jury awarded her a total of $3.25 million in damages, assigning 25 percent of the fault to the association, 25 percent to the security company, and the remaining 50 percent to the three assailants. The trial court issued a judgment that that called for $1.625 million against the association, representing its 25 percent share of the fault plus Alliance’s 25 percent share, for which the association was held to be vicariously liable; plus an additional $812,500 against the security company, representing its 25 percent share of the fault.

Both the association and the widow, Georgina, appealed. Georgina contested the allocation of fault, while the association contested the finding that it was negligent and that it was vicariously liable for the security company’s negligence as well. Georgina won on two of the three.

To establish the association’s negligence, Georgina had to prove that the risk to her husband was “foreseeable,” and that the association’s knowledge of the risk was “superior” to that of the victim. The court found that the evidence supported both arguments. Among other points – a long history of crimes at the association had led the board to hire the security guard; Camelot officials acknowledged that they received quarterly crime reports from the police, and the association manager testified that he had actually witnessed at least one attempted assault on the property.

“We find that this and other evidence at trial was enough to support a finding by the jury that the prior criminal activity was sufficient to attract Camelot’s attention to the dangerous condition that ultimately resulted in Emmanuel’s murder and thus that the incident was reasonably foreseeable by Camelot,” the court said.

The association didn’t contend that the victim had the same, or even any, prior knowledge of the criminal activity. It argued instead that because the crime originated in another location (when the assailants decided to follow Emmanuel and rob him), conditions at Camelot were not relevant. The court disagreed, noting: “The crime does not have to originate on the landowner’s property in order to hold the owner liable… [w]hat matters is the foreseeability of the potential for a criminal act on the premises, even if it began elsewhere….All that is required is evidence that the particular danger which resulted in the assault on plaintiff was foreseeable under all the circumstances and that the defendants were negligent in failing to exercise ordinary care to guard against it.”

While the court found some support for Georgina’s vicarious liability claim, vague instructions to the jury undermined it. The jury could have found the association vicariously liable for the security firm’s negligence, had it concluded that the association had breached its statutory duty “to keep the premises and approaches safe,” the court noted. But the jury might also have found either nuisance or common law negligence, and neither of those standards allows for vicarious liability. Unable to determine from the verdict “on which of Georgina’s claims the jury, in its prerogative, based its award,” the court rejected the decision to make Camelot liable for Alliance’s share of the fault.

WORTH QUOTING

“It used to be that if you were an adult and didn’t own your own home, you were kind of a bum. {That stigma] has been blown into a million pieces.” — George Casey, chief executive of Stockbridge Associates, a housing industry consulting firm, noting the increasing appeal of renting over buying for many young adults.


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