LEGAL/LEGISLATIVE UPDATE – JUNE 16, 2016

Published on: June 16, 2016

READY, SET, WAIT!

Pity the poor Federal Reserve officials, fingers twitching over the interest rate trigger, forced once again to reassess whether the economic indicators are telling them it is still too soon to act.

janet_yellenJust two weeks ago Fed Chairman Janet Yellen had hinted strongly that a rate hike was likely, when she told a Harvard audience, “It is appropriate, as I’ve said in the past, for the Fed to gradually and cautiously increase our overnight interest rate over time. Probably in the coming months such a move would be appropriate.”

But at its June meeting, the Federal Open Market Committee decided the weak April employment report (see related item, below) required additional analysis to determine whether it reflects underlying weakness in the economy, or, as some analysts believe, indicates a shrinking pool of workers qualified for available jobs. A weakening economy would argue against increasing the Federal Funds rate to avoid triggering a deeper downturn, but a worker shortage suggests the opposite – that delaying a rate hike could overheat the economy and increase inflation risks.

The official statement issued after the FOMC meeting noted the mixed messages in economic news: “Although the unemployment rate has declined, job gains have diminished…[While] the pace of improvement in the labor market has slowed, growth in economic activity appears to have picked up.”

Fed officials are still anticipating a “gradual” increase in rates this year, the FOMC statement noted, but it did not specify the number of increases or their timing.

GRIM AND GRIMMER

With just about every other indicator flashing green, the jobs report turned bright red in May, as employers added only 38,000 workers, the smallest number in almost six years. Less than robust reports for March and April were revised downward, and the unemployment rate fell to 4.7 percent – another sign of weakness, reflecting a surge in workers leaving the job market rather than the absorption of those seeking jobs. The statistics renewed concerns about the economic outlook and reduced the likelihood that the Federal Reserve will boost interest rates in the near term. (See related item, above.)

termination-110301_1920The slowdown in job growth looks pretty pervasive across industries,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., told Bloomberg News. “The easy thing to say is, this takes June off the table for a Fed hike,” he added. “To get to July, we’re going to need a pretty nice rebound in the data.”

The labor report wasn’t entirely dismal. Average hourly earnings increased by 0.2 percent, following a 0.4 percent April gain that was higher than initially estimated, boosting pay by 2.5 percent for the year. But it’s not at all clear that this improvement will offset concerns about the reluctance of business executives to increase their payrolls or boost investment.

Until the jobs report sprayed cold water on it, the economic forecast had seemed to be brightening. Among other positive signals:

  • First quarter GDP growth, at 0.8 percent, was stronger than initially reported;
  • Consumer spending also increased a lot more than expected, buoyed by small but steady income gains;
  • The May manufacturing report was a little stronger than expected – not robust, but encouraging, and industrial production also increased; and
  • Jobless claims declined, suggesting to some analysts that the labor market is much stronger than the May statistics indicated.

While acknowledging concern about the April employment report, Yellen remained upbeat about the economic outlook, telling a business group before the FOMC meeting: “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.” she told the

j143q33k69loivqmp2dg_400x400FLOOD INSURANCE RATES RISING

Flood insurance premiums are rising. Implementing policies mandated by Congress, the Federal Emergency Management Agency announced premium increases in policies issued by the National Flood Insurance Program (NFIP) averaging 9 percent for most homeowners, but reaching a maximum of 15 percent for some. FEMA has also directed insurance companies writing flood policies to review them on renewal to make sure the most current flood maps are being used to assess flood risks. Agency officials have acknowledged that the NFIP’s flood mapping policies classify some properties inaccurately. According to press reports, mapping errors in Ocean City, MD put more than 15 condominium communities on the wrong side of the high-risk line, increasing annual insurance premiums for one property from $22,000 to more than $550,000. Municipal officials have indicated that they are working with FEMA to correct the error, but aren’t certain how long that process will take.

CHANGING TASTES

Millenials, who are driving up demand for apartments, are also changing the standard amenities developers are including in new buildings. Fireplaces, which used to be in the ‘must have’ category, have all but disappeared, according to a recent survey by REIS, Inc., which found this feature in only 4 percent of the buildings constructed in 2014, compared to 41 percent in the early 2000s. New buildings are also more likely to have laundry facilities inside units rather than in a common laundry rooms (71 percent in new buildings vs. 57 percent in older ones), more likely to have elevators (38 percent vs. 17 percent) and more likely to have a doorman – 11 percent vs. 4 percent, but less likely to have a security patrol (31 percent vs. 19 percent). Playgrounds are also far less prevalent in newer buildings, indicating that multifamily developers are not primarily targeting families, the REIS survey suggested.

PRICE PRESSURES

abode-987096_1920With inventories of existing homes tight and construction activity lagging, home prices are rising steadily – too steadily for many analysts, who fear the negative impact on housing affordability. Home prices, as measured by the S&P/Case-Shiller index, have increased by 30 percent since the market bottomed in 2012, putting them near the record highs they reached before the housing market crashed in 2007.

“It’s a great market if you have pristine credit and lots of money,” Sean Becketti, chief economist at Freddie Mac, told the Wall Street Journal. “The people starting out who are looking for that first home—they’re having a tougher time.”

An analysis of Census Bureau data shows that only 6 percent of the homes constructed last year were priced at $150,000 or less, while 78 percent fell in the $150,000 – $500,000 range. A separate survey by the National Association of Home Builders found that 31 percent of prospective buyers expect to pay less than $150,000 and 15 percent less than $100,000 for the homes they buy – indicating that most are likely to be disappointed and many will continue to be renters.

IN CASE YOU MISSED THIS

Sperlonga, a credit data aggregator, and Equifax are teaming up to test a process for including HOA fees in the information used to calculate consumer credit scores.

Default rates on home equity lines of credit are rising, and some analysts think that trend will continue.

The Government Accountability Office has found IRS oversight of the distribution of Housing Tax Credits to be “lax.” In an earlier report, the GAO recommended that Congress make HUD jointly responsible for overseeing the program.

Although home sales have been strengthening generally, demand for luxury homes, priced at $1 million or more, seems to be declining.

Reversing a decades-long trend in household formation patterns,, Americans 18-34 are more likely to be living with their parents than with a partner or in their own household.

LEGAL BRIEFS

THE LAST WORD ON A DISABILITY

HUD’s Administrative Law Judges (ALJs) are charged with rendering objective rulings on the fair housing discrimination complaints the agency initiates. But with the power to overturn these rulings, HUD can have the last word. In a recent case, HUD’s ‘last word,’ upheld by the First Circuit Court of Appeals, produced a decision HUD officials described as “a victory for HUD, [and an] even greater victory for people with disabilities.” (United States Department of Housing and Urban Development v. Castillo Condominium Association.)

The underlying legal battle, between the condominium association (Castillo) and an owner (Carlo Giménez), began when the association’s board informed Giménez that his possession of a dog violated the community’s no-pet rule and ordered him to remove the animal. Giménez responded that the dog provided emotional support for his anxiety and depression, and that he was entitled to keep the pet as an accommodation for his disability, required by the Fair Housing Act. An accompanying letter from his psychiatrist supported his claim.

When the board rejected his accommodation request, Giménez complained to HUD, which subsequently sued the association for discrimination on his behalf. Finding the doctors who testified for Giménez less credible than the association’s expert witnesses, who disputed their conclusion that Giménez needed a support animal, the ALJ who heard the case ruled that Giménez had failed to prove “by a preponderance of the evidence” that he suffered from a disability requiring a reasonable accommodation.

pet-1162072_1920Giménez appealed to the Secretary of HUD, who overruled the ALJ, finding that Giménez suffered from a legitimate disability, and that the association was aware of the disability and should have granted him an accommodation for it. Concluding that the association was guilty of discrimination and that Giménez had suffered both emotional and financial harm because of it (among other things, he was forced to sell his unit and move elsewhere in order to keep his dog), the Secretary remanded the case to the ALJ to determine the appropriate damages and civil penalties.

The ALJ recommended a $3,000 award to Giménez for emotional distress and a $2,000 civil penalty against the association. The minimal ward was appropriate, the ALJ said, because the association’s actions resulted from “ignorance of the law” rather than “willful, malicious conduct” that would have justified the maximum penalty,
Dissatisfied with the award, to say the least, Giménez appealed again to the HUD Secretary, who once again sided with him, increasing the emotional damages to $20,000 and the civil penalty to $16,000 – the maximum allowed.

Unhappy with that decision, the association sought judicial review. Ordinarily, courts give considerable deference to an agency’s order, as long it is supported by “substantial evidence in the record as a whole.” This case presented something of a twist, however, the court noted, because the administrative law judge who heard the evidence and the HUD Secretary reached different conclusions about it. Although the Secretary has the authority to set aside the decision entirely or remand it for further consideration, the court acknowledged, “common sense suggests that … some weight should be given to the ALJ’s factual findings.”

The key questions for the court were: Whether the Secretary had clearly stated the reasons for rejecting the ALJ’s findings, and whether those reasons were supported by the administrative record.

The court concluded that “substantial evidence” supported the secretary’s conclusion that the association had discriminated against Giménez by failing to acknowledge his disability and grant an accommodation for it. The ALJ erred, the court said, by discounting the testimony of both the psychiatrist and the primary care physician who treated Giménez.

The psychiatrist wasn’t credible, the ALJ had concluded, because he and Giménez were friends and because the doctor had not charged for his services. Following that logic, the court said, “would lead to the nonsensical conclusion that a physician who does not charge for his services could never testify…and might even mean that a person who receives all of his medical treatment for free could never establish a disability. In the end, it is the overall quality of the proffered testimony that determines its probative value,” the court asserted.

Rejecting the testimony of the primary care physician was similarly unjustified the court said, because, like the psychiatrist, the physician had treated Giménez for years and was capable of assessing his mental state.

“The Secretary was well within his purview to credit [the testimony of both physicians] and to make the ultimate determination that Giménez was disabled…Even under the heightened scrutiny demanded by the applicable standard of review,” the court said, “the Secretary’s decision passes muster because the record, viewed critically, clearly supports his position.”

The court also rejected the association’s contention that the psychiatrist’s expert testimony should have been ruled inadmissible at the hearing. “An agency has wide discretion in determining what individuals are competent to testify as experts in an administrative proceeding and what expert opinion testimony is admissible in such a proceeding,” the court said. “The record in this case, fairly read, offers no reason to think that this wide discretion was somehow exceeded.”

WORTH QUOTING

“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,. “That’s doubly important in a growing and evolving enterprise like community association housing. It’s essential we try to understand the challenges and opportunities that await all of us. The fewer surprises the better.”― Julie Howard, 2015 president of the Community Associations Institute, commenting on the release of CAI white papers analyzing the future of community associations.

 

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