LEGAL/LEGISLATIVE UPDATE – MARCH 16, 2017

Published on: March 16, 2017

FED ACTS – AS EXPECTED

As expected, the Federal Reserve, which has been telegraphing its intention to boost interest rates for several months, did just that following its March meeting, ratcheting the Fed’s benchmark rate up a quarter of a point to a target range of 0.75 percent to 1 percent. Also as expected, Fed officials indicated that additional increases are likely – two more quarter-point hikes this year and three in 2018.

The Fed’s action came after February’s robust employment report: Employers added 235,000 workers to their payrolls, pushing the unemployment rate down slightly, to 4.7 percent. Although the job total beat expectations (and piggy-backed on an equally strong January report, that was revised upward to 238,000) wage growth, at a still tepid 2.8 percent, fell short of analysts’ projections. But with the inflation rate nearing the Fed’s 2 percent target and other economic indicators signaling strength, analysts had predicted accurately that the Fed would find the argument for boosting rates “compelling.”

The official statement by the Federal Open Market Committee, the Fed’s policy-making arm, noted that the economy’s moderate” growth, an uptick in business investment, continued strengthening in the labor market and a “moderate” increase in household spending supported the decision to raise rates.

“It is important for the public to understand that we’re getting closer to reaching our objectives,” Fed Chair Janet Yellen said during her post-meeting news conference. “The simple message is ─ the economy is doing well,” she added.

HOUSING CONFIDENCE RISING

Consumer confidence in the housing market, measured by Fannie Mae’s monthly Home Purchase Sentiment Index, reached an all-time high in February, beating the record-setting plateau it had reached in January. Millennials responding to the survey reported “especially strong increases in job confidence and income gains, a necessary precursor for increased housing demand from first-time homebuyers,” Doug Duncan, Fannie’s chief economist, said in a press statement. Reflecting those rising confidence levels, Fannie analysts have found preliminary indications that millennials “are accelerating the rate at which they move out of their parents’ homes and form new households,” Duncan noted.

Millennials may finally be ready to purchase homes, but they are “encountering an unfortunate reality,” according to the Washington Post. “Just as they are finally ready to buy,” the Post noted, “the housing market has the fewest homes available for sale on record. And those that are for sale are increasingly priced at values inaccessible to first-time buyers.”

That supply-demand imbalance, by all accounts, is getting worse. Inventory levels – below 4 percent at the end of February ─ were 7.1 per cent lower than they were a year ago, continuing a year-over-year decline that has been reported consistently for the past 20 months. “One thing you can count on,” a Real Estate Watch analysis concluded: “If we have fewer homes to sell, chances are we’ll sell fewer homes.”

BAD REPORT

A report by HUD’s watchdog has reignited the debate over the risks on FHA-insured mortgages. Office of Inspector General (OIG) for HUD found that the agency had “failed to adequately oversee” more than $16 billion in loans originated under a down payment assistance program that allows borrowers to reduce their down payment by accepting above-market interest rates on their mortgages. The higher rates pay for the down payment assistance the borrowers receive.

“Despite the prohibition against similar seller-funded programs, HUD’s requirements and guidelines appeared to have contributed to and enabled the growth of these questionable borrower-financed down payment assistance programs,” the OIG report claims. The report also faults HUD for failing to “adequately track” the loans, and failing even to review the way in which they were structured by the lenders offering them.

The OIG report was based on audits of loans originated by two lenders (Nova Financial & Investment and loanDepot),which, the watchdog found “did not always” comply with HUD rules, and often included fees for the down payment assistance that were not “customary or reasonable.”

According to the report, the assistance programs “violated HUD’s mission, established law, and guidance” and exposed the FHA’s insurance fund to “unnecessary risk” from potential losses on more than 700 loans totaling $48.5 million.

HUD disputed the findings in a 13-page letter, asserting that the OIG report incorrectly characterized the loans as “borrower financed,” failing to recognize that they “benefit borrowers financially through the average life of [the loan], with interest rates that are only marginally higher” than on other FHA loans. HUD considers the programs to be “an important tool for assisting underserved but credit-worthy families across the United States to move to homeownership,” the letter states.

HOUSING FIGHT

The National Association of Realtors NAR) thinks investors purchasing homes for rental purposes are making it harder for buyers, especially first-time buyers, to get into the market. And the association is particularly upset that Fannie Mae is encouraging this trend by providing financing for it. The secondary market giant was among the investors in an initial public offering by Invitation Homes, a Blackstone Group subsidiary that purchases single-family rental homes.

In a letter to the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie Mac, NAR President William Brown complained, “Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgages options, Fannie Mae is actively financing large institutions to compete with them. These investors do not expand the affordable housing stock,” Brown wrote. “Rather, in this limited market they drive up the price of rents and remove affordable inventory from the hands of American homeowners.”

According to a recent report by ATTOM Data Solutions and ClearCapital, 37 percent of the homes sold last year were purchased by buyers who didn’t occupy them. But some of the investors about whom the NAR is complaining say the association’s ‘us vs. them’ argument targets the wrong ‘them.’ Homebuyers aren’t competing with investors, Greg Rand, CEO of OwnAmerica, which brokers the sale of single-family rentals, contends. They’re competing with renters who want to occupy those homes. “If a first-time homebuyer loses a house to an investor, that means a renter family is going to live in that house, and they’re people too,” he told HousingWire.

“I would say …that’s life,” he added. “You don’t have a right to own a home if somebody else wants to own it more.”

SIZING UP – SCALING DOWN

The average size of new homes has been increasing, but downsizing is becoming more appealing to many of the people who are living in those larger structures. More than one-third of the homeowners responding to a Trulia survey said they’d prefer a smaller home, compared with 23 percent who said they’d like a larger one. Not surprisingly, baby boomers were more likely than Millennials to express a desire to downsize. The larger the home, the stronger the preference for a smaller one: 60 percent of people living in homes 2000 sq. ft. or larger said they’d buy a smaller one. The reverse was also true: nearly 70 percent of people living in homes 800 sq. ft. or smaller said they’d go with a larger one next time ─ and the larger the better. “Those living in the biggest of homes know what the downsides are of living in those homes,” Ralph McLaughlin, chief economist at Trulia, observed, noting the higher costs of utilities, taxes, maintenance and furnishing.

But rising costs are fueling increasing demand for smaller homes, as well, even among younger buyers who might prefer larger dwellings but can’t afford them. Nearly 30 percent of the nation’s housing markets, measured by county, were less affordable last year compared with their historical affordability averages, up from 13 percent a year ago, according to a recent report by ATTOM Data Solutions.

Separately, the National Association of Home Builders reports that builders constructed 13 percent more town home-style dwellings last year than the year before.

IN CASE YOU MISSED THIS

Boston has made a ‘top 10’ list, but not a particularly desirable one. The Hartford Home Fire Index ranked it fifth on a list of 100 U.S. cities with the highest home fire risks.

Drone purchases are increasing and so are the reports of safety violations related to them.

Fannie Mae and Freddie Mac both reported strong earnings for the final quarter of last year.

HUD has updated its Lead Safe Housing Rule, lowering the threshold for blood lead levels in children requiring landlords to take remedial actions.

Nearly 20 percent of recent home buyers say they weren’t aware that they would have to pay closing costs as part of the purchase transaction. ClosingCorp. extracted that nugget from an on-line survey designed to determine whether new disclosure rules have increased borrowers’ understanding of home financing costs. Apparently not.

LEGAL BRIEFS

NOT SELECTIVE ENFORCEMENT

Condo owners who want to do something their homeowner association’s rules prohibit will often accuse the board of selectively enforcing the rules. Depending on how conscientiously and consistently the board enforces its rules, that argument sometimes prevails. But a Florida Appeals Court didn’t buy it in this case (Laguna Tropical v. Barnave).

The plaintiff owner replaced the carpeting in his second-floor unit with laminate flooring, but failed to install sound-proofing material, as the association’s rules required. When the downstairs neighbors complained about the noise, the board found that in addition to ignoring the soundproofing requirement, the owner had failed to obtain approval for the flooring, which the rules also required. Citing that violation, the board ordered the owner to remove the flooring.

The owner sued, claiming that owners of other units had installed laminate flooring without objection from the board. A trial court agreed that the enforcement was selective, but the Third District Court of Appeals saw the matter differently.

To support his selective enforcement claim, the owner had noted that the association enforced the flooring rule against only 11 of the community’s 94 units. But the court found that enforcement pattern to be sensible, not selective. All 11 units targeted for enforcement, the court noted, were second-floor units, like the plaintiff’s. Of the remaining 83 units, 11 were ground floor units and 72 were two-floor configurations, with both floors occupied by a single owner. There were no enforcement actions against those units, the court pointed out, because there were no downstairs neighbors to be disturbed by the noise, and there was no evidence that the owners who had installed the flooring had failed to obtain permission to do so.

The court had no trouble distinguishing this case from another case the plaintiff cited, in which a court found that an association had selectively enforced a pet restriction that permitted only fish and birds, by allowing cat owners to keep their pets while requiring dog owners to relinquish theirs.

In this case, the court noted, the requirement for padded carpet “is plainly intended to avoid noise complaints.” Because the only flooring-related noise complaints have involved second-floor units, “like the owner’s,” the court found, “it cannot be said that the enforcement action in the present case ‘constituted unequal and arbitrary enforcement of the restriction.’

The court also rejected the plaintiff’s secondary argument, that the president of the association’s board had deemed the flooring installation “acceptable” in an e-mail message to the owner. The condominium rules and declaration “plainly require consideration and written approval by the Association’s board of directors, not merely one of its officers,” the court noted. The owner admitted that she did not request board approval and there was no evidence that the board had delegated its approval authority to the president. As a result, the court concluded, “this argument likewise fails.”

WORTH QUOTING

“These suggested [draconian] cuts are unconscionable and unacceptable. [They] would devastate critical programs that keep roofs over the heads of some of the most vulnerable people in our communities. They are in direct contrast to Mr. Trump’s promises to revitalize distressed communities and ensure that ‘nobody’s going to be dying on the streets’ from homelessness.” —Diane Yentel, president and CEO of the National Low Income Housing Coalition, responding to a Trump Administration budget proposal that would cut $6 billion from HUD’s budget.


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