Legal/Legislative Update – May 17, 2015

Published on: May 17, 2015

CAI-NE_logoSTILL GROWING.  The number of community associations, and the number of people living in them, continues to grow. The Community Associations Institute (CAI) tallied 333,600 common interest ownership associations in the U.S. at the end of last year (including homeowner associations, condos and cooperatives), and projects that another 8,000 to 10,000 communities will be added to the total by the end of this year. That’s up from 260,000 in 2004 and 10,000 in 1970, when the condominium ownership concept began to take hold. Close to 66 million people now reside in community associations, compared with about 52 million in 2004 and only 2.1 million in 1970, according to CAI’s most recent statistical report.

Florida, California, Texas, Illinois and North Carolina boast the largest number of associations (47,100, 43.300, 19,400, 18,150 and 13,600, respectively); Massachusetts ranks seventh, with 12,000 communities and 2 million community association residents. New Hampshire has between 2,000 and 3,000 associations, according to the CAI estimate, while Rhode Island and Vermont each have between 1,000 and 2,000.

Among other statistical tidbits in the CAI report:

  • Homes in community associations have an estimated collective value of $4.95 trillion.
  • Community associations collected approximately $70 billion in assessments from owners last year, funneling about $22 billion of that total into reserves.
  • There are between 7,000 and 8,000 association management companies operating in the U.S. employing between 95,000 and 100,000 individuals.
  • Between 50,000 and 55,000 association managers provide services to community associations. Notwithstanding those numbers, CAI estimates that between 30 percent and 40 percent of associations are self-managed.

SUPER STRUGGLE.   The North Carolina state legislature is considering a measure that would prohibit community associations from foreclosing on delinquent owners in order to enforce a priority lien. Instead, the proposed law would allow associations to garnish state income tax refunds to satisfy owners’ debts. The bill’s sponsor says he agrees that condo owners should pay their fees, but he doesn’t think they should lose their homes if they fail to do so.

“We’ve seen a lot of HOAs abusing their [foreclosure] power,” State Rep. Rodney Moore told WSOCTV in Charlotte. But Moore also recognizes that his proposed alternative – garnishing tax refunds – may not be a viable solution for community associations. “If people don’t have money for their dues, they probably won’t have tax refunds either,” he agreed.

Moore’s bill, not yet approved by the state House or Senate, calls for a constitutional amendment, which would have to be approved by North Carolina voters. The underlying issue – the condominium superlien and the foreclosure authority related to it – has surfaced in many other states and on a national level as well.

federal-housing-finance-agency1-300x300Nationally, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, recently restated its position that federal law precludes enforcement of a priority lien on loans purchased by the two secondary market giants. The agency is appealing a Nevada Supreme Court decision affirming the authority of a condominium association to foreclose and extinguish an existing mortgage. The Community Associations Institute (CAI) is submitting an amicus brief in that case, asserting the legitimacy of and need for the superlien.

CAI officials say they are also concerned about reports that FHFA officials have been actively lobbying Nevada lawmakers to repeal that state’s superlien. According to those reports, the agency’s general counsel told legislators at a recent hearing that lenders would be reluctant to approve loans subject to the superlien.

In New England:

  • The Maine Legislature recently defeated another effort to establish a priority lien for condominiums.
  • New Hampshire lawmakers rejected a measure authorizing community associations to foreclose in order to enforce their priority lien.
  • The Massachusetts Supreme Judicial Court is reviewing an Appeals Court decision holding that community associations can have only one priority lien in place on a property at a time, precluding the “rolling liens” commonly used to prevent collection gaps.
  • The Rhode Island Supreme Court is reviewing a lower court decision holding that a condominium’s priority lien does not extinguish a first mortgage after a foreclosure.

CUTTING TWO WAYS.   Although appreciation rates have moderated over the past year, home prices are still rising. The S&P Case-Shiller 10-city index increased by 4.8 percent in February (vs.4.3 percent in January) and the 20-city index was up by 5 percent, compared with a 4.5 percent annual increase the previous month.

Rising prices are something of a double-edged sword for housing, encouraging owners to put their homes on the market, but creating affordability pressures that deter some buyers. Slowing appreciation rates also cut two ways – easing affordability pressures on buyers, but impeding the recovery of underwater homeowners whose outstanding mortgages exceed the value of their homes. Zillow estimates that 17 percent of homeowners with mortgages were in that position last year.

“Negative equity is likely to remain a persistent feature of the housing market for years,” Stan Humphries, Zillow’s chief economist predicts, and the effects will be felt most strongly at the lower end of the market, reducing the supply of homes affordable for first-time buyers. “As we enter this new normal,” Humphries notes in a recent report, “negative equity may return as a heated topic of concern to policy makers, given its stubborn refusal to go gently into that good night.”

EMPLOYMENT REPORT.   Employers added 223,000 positions to their payrolls in April, falling a little short of the consensus, but beating many more pessimistic forecasts and rebounding strongly from the March Department of Labor report, which was revised downward from a dismal 126,00 to an even more dismal 85,000.

The Federal Reserve, which has been inching closer to a decision to raise the Fed Funds rate, appears to have backtracked a little, responding both to the March employment report and slower than expected first quarter growth.

Meeting before the April’s more encouraging numbers were released, the Federal Open Market Committee, the Fed’s policy-making arm, said the Fed will make a rate move “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Analysts, who had been predicting a rate increase as early as June, are now saying it’s not likely before September at the earliest, and may not come until next year.
The closely watched and much-parsed FOMC statement did not specify a timeframe, but seemed to suggest that Fed policy makers are inclined to move more slowly than inflation hawks would like, to avoid a premature rate hike that could derail the economic recovery.

“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels,” the statement said, “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run.”

The April employment gains probably did not alter that position.

WHERE’S THE GAP?   Analysts have been fretting about the dearth of first-time buyers in the housing market – blaming their absence, in part, for both the somewhat lackluster housing recovery and the continuing decline in homeownership rates. But the statistics show that ownership rates are declining more steeply for middle-aged homeowners than for the millenials poised to follow them on the housing ladder.

According to a Census Bureau report, ownership rates for adults between the ages of 35 and 44 fell 7.2 percentage points ― from 65.7 percent in 2009 to 58.5 percent ─ in the first quarter of this year; for millenials (adults younger than 35) the decline was 5.2 points. The overall ownership rate for all ages fell by 3.4 percent during that period to 63.7 percent —the lowest level since 1993.

The housing market’s net loss has been a net gain for rental housing: While owner –occupied units declined by 386,000 over the past year, according to the Census report, the number of renter-occupied units increased by almost 1.9 million.

Some housing industry analysts are predicting that this trend may soon be reversed. “With credit conditions now loosening and employment set to continue growing strongly, we suspect this long downward trend may not last for much longer,” Ed Stansfield an analyst at Capital Economics, observed in a recent report. “A long- overdue upturn in household formation, as more young adults leave the parental home, could provide a significant boost to homebuilding over the coming years,” he predicted.

But that boost will come only if incomes grow, other economists caution. “The No. 1 issue in the housing market right now is wages,” Jay Morelock, an economist with FTN Financial, told Bloomberg News. For the housing recovery to be sustainable in the long run, we have to see wages increase at a faster pace.”

BIDDING WARS.   There’s a term we haven’t heard in a while. But industry executives are reporting that skimpy housing inventories are sparking intense competition and, yes, bidding wars in some parts of the country.

Trulia has identified several markets where homes are selling quickly, sometimes within days of being listed for sale. They include San Francisco and New York City, where 70 percent of homes are selling within two months and many more quickly than that.

Boston should also be on this list of hot, if not overheating, markets, according to the Boston Globe, which reported recently that some real estate brokers are listing homes for less than they think they can get in order to create competition among potential buyers and push selling prices up.

“You can get a ‘Hunger Games’- style fight,” one agent told the paper.

The Massachusetts Association of Realtors reports that the inventory of homes for sale in the state is currently lower than it has been since 2004, when the trade group began compiling these statistics.


Anyone who owns cats, or who has spent any time around them, knows that their urine is … pungent, to say the least. But is it also a “pollutant” and can it cause physical damage to a dwelling requiring compensation under a homeowners’ insurance policy? The New Hampshire Supreme Court considered those questions recently, finding for the homeowner plaintiffs demanding coverage and against the insurance company denying it on both questions.

The plaintiffs in Mellin v. Northern Security Ins. Co. noticed a strong stench shortly after moving into the condo unit they had purchased in an Epping, NH community. A tenant to whom they had previously leased the unit had also complained about the “strong odor of cat urine”, and moved out for that reason.

Investigating at the Mellins’ request, the town building inspector found the smell, coming from a neighboring unit, so overpowering, he ordered the Mellins to vacate their condo temporarily so the odor could be eliminated. When those remediation efforts failed, the Mellins decided they could neither rent the unit nor occupy it, so they sold it, but for far less, they contended, than the price for which comparable units in the area had sold.

They sought insurance compensation for their loss. When the insurance company (Northern) rejected the claim, the Mellins sued, and when a trial court ruled in favor of the insurer, they appealed.

The Mellins argued that they had suffered a “physical loss” for which their policy provided coverage. But the trial court agreed with Northern that the loss was not “physical,” because the odor did not alter the appearance or structure of the unit. The trial court also accepted the insurer’s additional argument that cat urine is a pollutant, for which coverage was appropriately denied under the policy’s pollution exclusion clause.

A divided (3-2) New Hampshire Supreme Court ruled differently. On the question of whether the odor caused a physical loss: Because the policy itself did not define what constituted a physical loss, the insurer and the trial court had relied on what they said was the “commonly understood” meaning of the term, requiring “a tangible alteration to the appearance, color or shape” of the unit. But the court’s majority found that definition to be too narrow.

“We conclude that ‘physical loss’ need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.” The court acknowledged that, to merit coverage under the policy, the changes “must be distinct and demonstrable.” But evidence that a change had made the property “temporarily or permanently unusable or uninhabitable,” might support a finding that the owners had suffered a physical loss, the court said, and it directed the trial court to determine whether the Mellins could prove this point.

On the second question ― whether urine is a pollutant to which the policy’s pollution exclusion applied ─ the court reversed the trial court’s conclusion that it was. The insurer had argued that cat urine was encompassed in the policy’s “unambiguous” definition of pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” The plaintiffs countered that pollutants implied “widespread environmental contamination” and “cat urine odor in a condominium unit does not constitute environmental contamination.” The Supreme Court majority found the policy language sufficiently ambiguous to make both interpretations credible, requiring a finding for the plaintiffs.

“For exclusionary language to be considered clear and unambiguous,” the court explained, “two parties cannot reasonably disagree about its meaning….Thus, when an insurance policy’s language is ambiguous and one reasonable interpretation favors coverage, we construe the policy in the insured’s favor and against the insurer.”


“It is imperative that we find ways to create both meaningful wage growth for all workers, and increase the supply of affordable housing, and soon. If not, we run a real risk of the working class in America running out of affordable housing options, either to rent or to buy.” ─ Stan Humphries, chief economist of Zillow.