LEGAL/LEGISLATIVE UPDATE – March 14, 2016

Published on: March 14, 2016

RATE GUESSING

If you’re tired of predicting who will win the presidential primaries – or who will say what about whom in that process ─ there’s another increasingly popular guessing game you might want to play instead: How many times will the Federal Reserve hike interest rates this year?

fanniemae2Fed officials seemed to answer that question in December when they increased the Fed Funds rate for the first time since 2006, signaling at the time that as many as three additional increases would likely follow this year. But turmoil in the financial markets, triggered largely by the collapse of oil prices and weakness in the European and Chinese economies, has made policy makers less confident than they were last year about the U.S. economy’s ability to absorb higher rates.

Most economists are now predicting that the growth rate won’t get much above 2 percent this year, and some are suggesting that the odds of another recession are increasing. Fannie Mae economists cited “slowing economic growth, worsening global financial conditions and weakening inflation expectations” as their reasons for predicting only two rate hikes this year rather than three.

Although some analysts are betting the Fed won’t boost rates at all this year, the consensus forecast anticipates at least one increase, but no more than two. But a few analysts are predicting that the Fed will be forced to backtrack in the next year or two, pushing rates again back to zero and possibly into negative territory. Fed Chairman Janet Yellen didn’t dismiss that prospect entirely in recent Congressional testimony, though she did describe it as “unlikely.”

APPRECIATION RATE SLOWING
Although appreciation rates have slowed in recent months, home prices are still rising faster than average incomes. The Case-Shiller home price index posted a 5.7 percent year-over year gain in January. “That is good news for homeowners,” Lawrence Yun, chief economist for the National Association of Realtors (NAR), acknowledged, noting that higher prices give owners an incentive to sell their homes. “But I’m not so sure it’s good for the economy,” he added. New construction isn’t keeping up with demand, Yun said, and skimpy inventories are limiting choices for buyers and putting upward pressure on prices.

interest-rate-149879_1280“The spring buying season is right around the corner and current supply levels aren’t even close to what’s needed to accommodate the subsequent growth in housing demand,” he observed in a recent press release. “Home prices ascending near or above double-digit appreciation aren’t healthy,” he added, “especially considering the fact that household income and wages are barely rising.”

Despite supply constraints and price pressures, existing home sales eked out a small increase in January, rising 0.4 percent above December and almost 11 percent above the year-ago level. New home sales moved in the opposite direction, however, falling 9.2 percent below December and 5.2 percent below the same month last year.

New home starts also disappointed, posting a 3.8 percent decline instead of the 2 percent increase analysts were expecting and falling to a three-month low. Permits – an indicator of future activity – remained essentially unchanged from December’s 1.02 million annualized rate.

COMPANION ANIMALS OR PETS?

petFair Housing laws often require condo associations to waive pet restrictions for owners who say they need “emotional support” or “companion” animals to help them cope with anxiety, depression and other psychological disabilities. But boards asked to approve these accommodations sometimes suspect that owners are claiming disabilities they don’t have – and too readily finding medical experts willing to document them – in order to acquire or keep pets they would not otherwise be allowed to own.

Taking aim at that problem, Colorado lawmakers recently considered a measure that would have required “licensed professionals” (doctors, psychologists, therapists, social workers and counselors included) to actually meet with patients before certifying their medical need for a support animal. The bill’s supporters said it would prevent owners from obtaining the boilerplate documentation widely available on-line from professionals who base their conclusions on simple “tests” and telephone interviews.

The bill didn’t make it out of committee – a party line vote defeated it. But condo industry executives say it underscores increasing concerns nationally that some condo owners are abusing the Fair Housing accommodation process.

RENTAL VACANCY RATES

Apartment vacancy rates have fallen to their lowest level in more than three decades. The U.S. Census Bureau’s quarterly survey put the overall vacancy rate at 7 percent in the fourth quarter of last year, nearly 1 percent below the year-ago level. The housing market collapse, in which thousands of homeowners lost their homes to foreclosures, is partly responsible for the surge in rental housing demand. The economic downturn, leaving many households without the income they needed to buy a home, exacerbated the trend.

Builders have responded, steadily boosting the construction of multi-family dwellings, but not enough to match the growing demand, and apartment rents have increased as a result. Rents increased by another 5 percent last year, rising to their highest level since 2000, according to data compiled by MPF Research.

Although income constraints and memories of the housing collapse have favored renting over buying for many households, analysts say rising rents may be pushing toward the opposite conclusion.

A Redfin survey of 750 potential homebuyers found that rising rents have almost surpassed “a life event” as the primary motivation for buying a home. One in four respondents cited high rents as their reason for buying, compared with one in five in November and one in eight last August.

Another survey by Zillow suggests that the upward rental spiral may slow this year, “provid[ing] some relief for renters who’ve been seeing their rents rise dramatically every single year for the past few years. [But] the situation remains tough on the ground,” Zillow Chief Economist Svenja Gudell cautioned. “Rents are still rising,” she noted, “and renters are struggling to keep up.”

FLOOD INSURANCE REFORM

The U.S. House Financial Services Committee has approved legislation designed to encourage more private insurance companies to offer flood insurance. Co-sponsored by Reps Dennis Ross, a Republican and Patrick Murphy, a Democrat, the bipartisan Flood Insurance Market Parity and Modernization Act would clarify that private insurance meets a secondary mortgage market requirement for flood insurance on properties that are located in a designated flood hazard zone and financed with federally-backed mortgages.

floodingAlthough existing regulations don’t specifically require policies provided by the National Flood Insurance Program (NFIP), mortgage lenders won’t accept private insurance policies because they say it is not clear that they meet federal requirements. The legislation would clarify that policies issued by private carriers that are “licensed, admitted, or otherwise approved” in the state in which the insured property is located, would pass muster. The legislation would remove an obstacle that is preventing private insurers from entering the market, expanding choices for consumers and reducing their costs, according to the National Association of Insurance Commissioners, which supports it.

Some studies have concluded that it isn’t a lack of regulatory clarity but difficulty competing with the NFIP’s subsidized premium rates that keeps private insurers out of the market. While this legislation doesn’t address that problem, industry analyst note, the NFIP’s $23 billion deficit may build support for private alternatives to it.

IN CASE YOU MISSED THIS

Although the February employment report was stronger than expected, it didn’t do much to clarify the economic outlook. Employers added 242,000 workers to their payrolls, but average hourly wages declined for the first time in a year. The unemployment rate remained unchanged at 4.9 percent.

An NAR survey finds that millennials make up a third of home buyers, putting them just a few percentage points ahead of baby boomers. But millenials represent two thirds of first-time home buyers, explaining why we’re seeing so many articles providing advice to real estate professionals on how best to serve them.

Home flipping is back and it’s extremely profitable. Realty Trac reports that flips yielded an average return on investment of 45.8 percent last year.

Three-quarters of mortgage bankers say they are experiencing closing delays resulting from the new mortgage disclosure rules.

You can judge some books by their cover. The title of a report released recently by Sen. Elizabeth Warren (D-MA) — Rigged Justice: How Weak Enforcement Lets Corporate Offenders Off Easy, pretty much summarizes its contents.

LEGAL BRIEFS

NO ‘STRIPPING’ ALLOWED

The Federal Housing Finance Agency’s (FHFA’s) ongoing efforts to challenge the condominium “superlien,” have gotten a lot of attention and triggered no small amount of concern in the condominium industry. The FHFA’s central argument has been that federal law prevents Fannie Mae and Freddie Mac from purchasing mortgages on which their priority position might be preempted, as it could be by a condo association’s superlien.

Colorado condo owners challenging an association superlien raised a different question: Is the lien secured by a property interest or is it unsecured? If the latter (unsecured), the plaintiffs in Whispering Woods Condo. Assn. v. Rones argued, they should be allowed to “cram down” or “strip off” most of the association’s lien against their property pursuant to their Chapter 13 bankruptcy filing. The Bankruptcy Court agreed, but in what is viewed as a significant victory for New Jersey condominiums, a federal District Court ruled otherwise.

The facts weren’t disputed. The association filed a lien against the Rones in March of 2013 citing more than $6,000 in unpaid fees and assessments. An amended lien filed a year later, reflected an outstanding balance of $18,761.76. When the Rones filed for bankruptcy protection, they proposed a Chapter 13 reorganization plan requiring them to pay the association only $1,494 of the total, representing six months of unpaid fees.

Under the Bankruptcy Code, any portion of a claim that exceeds the value of the underlying collateral is deemed to be “unsecured” and can be “crammed down” to the current value of the collateral. The cramdown option does not apply, however, to an interest secured in whole or in part by a debtor’s primary residence.

An Unsecured Lien

The Bankruptcy Court concluded that the association’s lien was unsecured, because it derived not from a security interest in the property but from the statute authorizing the six-month priority lien. The Bankruptcy Court also concluded (“somewhat confusingly,” the District Court observed) that super-priority status created by the condominium statute “does not elevate the lien over any other senior claims, but only provides a statutory priority” for the payment of the designated portion (six months) of unpaid assessments. Under that reading of the statute, only the six months of assessments protected by the super lien were secured; the balance of the amount owed the association was unsecured and so could be “crammed down” – to zero, in this case, because the mortgage exceeded the value of the property.

amicusThe Association (supported in an amicus brief filed by the Community Associations Institute) argued that the Bankruptcy Court’s view that the superlien “addresses payment, not security” completely misread the statute. Although the superlien creates priority only for the six months of unpaid assessments, CAI emphasized, the entire lien is secured, and no portion it can be stripped off. “If Bankruptcy Courts are permitted to strip away the non-priority portion of a condominium association’s lien,” CAI argued, “the effect will be to unjustly enrich delinquent owners and burden every other owner to subsidize the difference.”

What the Statute Says

Focusing on the “plain meaning” of the Colorado condominium statute, the District Court agreed that the Bankruptcy Court had erred in its interpretation of the superlien and the protection it provides. The limited priority the statute creates “does not apply only to the “payment” of unpaid assessments, the court noted. “It is the lien itself, not merely the payment of that lien, which is granted a limited priority by the Condominium Act….The Condominium Act does not merely provide for the payment of six months of a condominium association’s unpaid assessments prior to the payment of other liens,” the court continued. “Instead, it ensures that result by elevating the collateral position of a portion of a duly-recorded lien on those unpaid assessments over certain other senior claims [the mortgage in this case]. This creates “a single lien with dual priority,” the court said. The six months of unpaid fees amassed before the filing of the lien are “elevated” above the first mortgage; the balance of the lien “remains junior to prior-recorded claims.”

The District Court also rejected the Bankruptcy Court’s view that because the association’s security interest was created by the statute, it was not a security interest in the property and so could be stripped out in the bankruptcy filing. The lien was created by the Master Deed, the District Court noted, and not by the Condominium Act. “The Condominium Act merely altered the priority of a portion of the Lien,” the court said. “Therefore, [it] does not serve as a source of collateral which would remove the Lien from the protection of the Anti-Modification Clause.”

The court went on to note that the U.S. Supreme Court has held that if any portion of a claim is secured by a security interest in a debtor’s principal residence, “the entire claim – both secured and unsecured portions” is protected by the anti-modification clause, which means that no portion of the claim can be stripped in a bankruptcy filing. Applying this “one dollar rule” to the association’s lien, the court said, “because a portion of the lien was secured by a security interest in the debtor’s principal residence, no portion of the association’s lien could be stripped off,” and the Bankruptcy Court should not have confirmed the debtor’s repayment plan.

WORTH QUOTING

“Many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.” — Warren Buffett in his annual letter to Berkshire Hathaway shareholders.

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