Published on: October 31, 2015
PUSHBACK ON FHA CONDO RULES
Condo associations objected strenuously three years ago when the FHA tightened the requirements they had to meet to make units in their communities eligible for FHA financing. Now the National Association of Realtors and other housing trade groups are pushing back as well, arguing that the restrictions are making it more difficult for condo buyers to qualify for FHA loans. And they’re finding support in Congress, where more than 50 members of the House of Representatives have signed a letter asking the FHA to review its policies.
“FHA places significant restrictions on the purchase and sale of condominium, even though they are often the most affordable homeownership option for first-time buyers, small families, urban and older Americans,” the Oct. 13 letter states.
Signers included Rep. Blaine Luetkemeyer, (R-MO), chairman of the House Financial Services Subcommittee on Housing and Insurance, who has introduced legislation that would streamline the FHA’s certification process for condo developments, reduce the owner-occupancy requirement from 50 percent to 35 percent, and require the FHA to replace its current ban on transfer fees with the less restrictive policy endorsed by the Federal Housing Finance Agency.
Testifying in favor Luetkemeyer’s bill (the “Housing Opportunity Through Modernization Act of 2015”) at a recent hearing, Chris Polychron, chairman of the National Association of Realtors (NAR), noted that the FHA insured only 22,800 condo loans last year, down from 57,830 in 2013 and 93,470 in 2010. Industry executives acknowledge that the FHA”s share of the market, which soared during the housing downturn, has declined as the secondary market has recovered. But they also agree that FHA policies have discouraged many condo communities, especially smaller ones, from attempting the certification process.
“Current FHA regulations prevent buyers from purchasing condominiums, harm homeowners who need to sell their condominiums, and limit the ability of condominium projects to attract resident buyers,” Polychron said. The changes mandated by the proposed legislation “will give current owners and potential buyers of condos access to more flexible and affordable financing and a wider choice of approved condo developments,” he added.
HUD officials are working on revisions to the FHA condo rules, but they haven’t indicated when they expect to issue a proposal. Responding to that question at a recent housing conference, HUD Secretary Julian Castro said, “We anticipate a rulemaking process [that] hopefully will make a positive contribution to homeownership…..I believe that is going to offer greater opportunities, especially for first-time homebuyers for whom a condo is a logical choice for a starter home,” he added.
FEMA AID BILL ENCORE
The Community Associations Institute (CAI) is lobbying once again to secure legislation clarifying that condominium and cooperative associations are eligible to receive FEMA disaster aid to repair disaster-related damage to the common areas of their communities.
The regulations implementing the Stafford Act, which authorizes FEMA to work with state and local governments to provide disaster aid, permits funding for individual homeowners, including owners of condominium and co-operative units, but does not specifically authorize assistance for community associations. FEMA officials have interpreted the rules inconsistently, sometimes authorizing aid to associations, but more often than not, concluding that the statute doesn’t permit it.
Congress approved legislation last year directing FEMA to assess whether the statute permits direct aid to associations and estimate the cost of providing it. The study concluded that associations aren’t eligible for aid. Rep. Steve Israel (D-NY), the bill’s chief sponsor, is submitting legislation again this year clarifying that the Stafford Act does, in fact, permit assistance for all common interest communities, and CAI is urging its members to ask their legislators to support the measure.
“FEMA has failed community associations by inconsistently interpreting regulations that prohibit community associations from qualifying for funding from federal disaster response and recovery programs,” Dawn Bauman, CAI’s senior vice president in charge of government affairs, says in a letter to members outlining the issue. Under FEMA’s current interpretation of the statute, she notes, “while community association homeowners pay the same federal taxes as those not living in a community association, they are often denied FEMA funding while their neighbors who do not live in a community association are eligible. The legislation is critical for creating fairness in the wake of a federally declared disaster,” she emphasizes.
DRONE REGISTRATION MAY BE REQUIRED
With hobbyists expected to purchase between 700,000 and 1 million recreational drones by the end of this year, and concerns mounting about the risks they pose to aircraft in the skies and people and buildings on the ground, the Federal Aviation Administration is planning to create a mandatory system for registering and tracking them.
A task force consisting of representatives from government, the aviation and unmanned aircraft industries is working on the plan, which the FAA plans to unveil before the end of November. Among the details still to be resolved: Whether registration will be required for existing drone owners as well as for future purchasers, which owners, if any, will be exempt from the registration requirement, and what penalties will be imposed on owners who fail to obey the registration requirement.
“Registering unmanned aircraft will help build a culture of accountability and responsibility, especially with new users who have no experience operating in the U.S. aviation system,” FAA Secretary Anthony Foxx said at a press conference announcing the plan. “It will help protect public safety in the air and on the ground. There can be no accountability if the person breaking the rules can’t be identified,” he added.
Foxx said there is no current plan to require licensing for drone hobbyists.
Separately, Congress has directed the FAA to develop broad-based regulations governing commercial uses of drones. The agency was supposed to complete that process this month, but failed to meet that deadline. Agency officials now say they expect to introduce final regulations by “next spring.”
MIXED MARKET SIGNALS
Home sales data continue to generate mixed signals about the health and direction of the housing market. Existing home sales rebounded strongly in September from an August decline, increasing by 4.7 percent. The 5.55 million annual sales rate was nearly 9 percent above the year-ago volume and represented the second highest level in nearly 9 years.
New home sales moved in the opposite direction, falling by nearly 12 percent from an August level that was revised downward to 529,000 units (annualized) from an initially robust annual rate of 552,000 units.
Some analysts discounted the new home report, noting the notoriously volatile nature of these statistics.
“We view the new-home sales data as unreliable and many other more reliable housing indicators have been sending upbeat signals lately,” David Silver, an economist at J.P. Morgan, told the New York Times.
Builders apparently share that optimistic view; their confidence level, as measured by a National Association of Home Builders/Wells Fargo index, increased to 64 in October – the highest level since October of 2005. Readings above 50 indicate that more respondents view market conditions as favorable and/or improving.
On the existing home side, Lawrence Yun, chief economist for the National Association of Realtors (NAR) also emphasized evidence that the housing market continues to improve, buoyed, he said, by “an increasing share of pent–up sellers realizing the increased equity they’ve gained from rising home prices,” and using that leverage to move up the housing ladder. But first-time buyers – a critical component of the market, continue to struggle, Yun noted. They represented only 29 percent of buyers in September, down from 32 percent in August and well below their historical 40 percent average. Clearly, these buyers “are still failing to generate any meaningful traction this year,” Yun said.
CREDIT RISKS GROWING
As the economy continues to improve – or seems to be moving in that direction – banking industry regulators are beginning to focus once again on credit risk, reflecting growing concern that underwriting standards may be slipping.
Speaking to industry executives recently, Comptroller of the Currency Thomas Curry noted that increasing competition may be producing unhealthy concentrations of loans in some banks and more willingness to lend to less credit-worthy borrowers – trends that contributed to the financial crisis from which most have recovered.
“It’s the point in the cycle where we customarily see an easing of loan underwriting standards, as banks drop or weaken protective covenants, extend maturities, and take other steps to build market share,” Curry said.
“It’s also a time in which we see banks develop larger loan concentrations, without concurrent increases in reserves,” Curry added. “It’s a natural byproduct of competition during the later stages of the economic cycle, and so it’s a time when supervisors and bank risk officers need to be most vigilant.”
Curry acknowledged that banks generally have been reporting improvements in asset quality and profitability – all positive signs, he agreed. “But they can also be a misleading indicator of the fundamental health of the banking system. Credit quality, after all, reflects the outcome of decisions made when loans are originated, perhaps months or years earlier, possibly under tougher standards than those in effect today.
“The indicators that many are looking at most closely actually say little or nothing about the risk now embedding itself in bank portfolios,” he cautioned, adding, “We won’t see the results of those decisions for many months to come.”
IN CASE YOU MISSED THIS
It isn’t just the people smoking marijuana getting high on it. Some analysts are blaming the booming marijuana business in Colorado for pushing home prices there higher, too.
Rising home prices nationally are reducing delinquency rates on first mortgages and home equity lines and pulling more underwater homeowners into positive equity territory.
Credit unions are playing a bigger role in the residential mortgage market. Their share of mortgage originations increased by nearly 50 percent last year.
Following the laws of unintended consequences, the reduction in FHA premiums, intended to make home ownership more affordable for first-time buyers, appears to be pushing prices higher.
A recent study found that more than one-third of residential property appraisals contain “inconsistencies,” raising questions about the accuracy of the estimates.
RESIDENTIAL USES AND SHORT-TERM RENTALS
Condo associations contemplating restrictions on short-term rentals in their communities might want to consider recent decisions by appeals courts in two states, which found that the applicable governing documents did not preclude these activities.
In Colorado, when the board of the Wilson Mesa Ranch Homeowners Association learned that an owner (David Houston) was offering his single-family home for short-term vacation rentals, trustees approved a new rule requiring board approval for rentals of less than 30 days. Arguing that the restriction was invalid, Houston continued renting his home, the board fined him for violations, and litigation ensued.
The trial court found the association’s covenants to be ambiguous on short-term rentals, containing neither an expressed nor an implied ban on them. Resolving the ambiguity in Houston’s favor, the court dismissed the association’s counterclaim against him, and the association appealed.
The Appeals Court reached the same conclusion in (Houston v. Wilson Mesa Ranch Homeowners Association, Inc.), but followed a different path to get there. The court agreed that the covenants did not clearly bar short-term rentals. But it also focused on whether short-term rentals are “commercial uses” prohibited by covenant language specifying that the community is to “be developed and maintained as a …residential area,” in which no property “shall ever be occupied or used for any commercial or business purpose.”
To answer that question, the court considered first how other courts have defined “residential use.” While some courts have recognized a distinction between long-term and short-term rentals (finding the latter to be commercial in nature), the Appeals Court adopted the view held by many others, that it is the way in which a property is used and not for how long that defines it. “As long as the property is used for living purposes, it does not cease being ‘residential” simply because such use is transitory rather than permanent,’ the court noted.
Finding no evidence that the renters in this case used the residence “for anything other than ordinary living purposes,” the court said, “we agree with the courts that have held that mere temporary or short-term use of a residence does not preclude that use from being ‘residential.’ Moreover, even if we were to find the covenants ambiguous in this regard,” the court added, “we would be required to adopt the construction of ‘residential’ that favors the free and unrestricted use of Houston’s property.”
The court then turned to the standards that define the “commercial use” of a property. Rejecting the broad definition some courts have embraced (“using the property in any way that generates revenue”), the court relied on what it characterized as a view held by a majority of courts, that it is how a property is used by the occupants, not how it is used by the owners, that defines it use.
“We agree [with those courts] and conclude that short-term vacation rentals such as Houston’s are not barred by the commercial use prohibition in the covenants. Our conclusion is consistent with the Colorado Supreme Court’s holding, in a different context, that receipt of income does not transform residential use of property into commercial use.”
The court also had no trouble dismissing the association’s argument that the rule the board adopted requiring approval of short-term rentals simply clarified that the covenant language barring commercial and business uses precluded short-term rentals.
The covenants contain no such ban on short-term rentals, the court noted. And while the board has the authority to enforce the covenants, “it cannot rely on that authority to enforce a nonexistent covenant provision. For short-term vacation rentals to be prohibited,” the court said, “the covenants themselves must be amended….The board’s attempt to accomplish such amendment through its administrative procedures was unenforceable.”
Addressing similar questions in Zgabay v. NBRC property Owners Association, a Texas Appeals Court reached similar conclusions about the nature of residential uses and the authority of associations to prohibit short-term rentals. When they sold their home, the Zgabays held on to it, offering it for long-term as well as short-term rentals. Citing a covenant provision specifying that lots were to be used only for “single-family residential purposes,” the board ordered them to cease the short-term rentals. The Zbabays refused and the board sued them.
A trial court sided with the association, but the Appeals Court went the other way. Like the Colorado court, the Texas court found the covenants ambiguous, and once again, the ambiguity worked against the association.
The covenants in this case did not define single family residential purposes. But they did permit the posting of signs advertising properties “for sale or rent,” indicating that the leasing of homes “was contemplated by the drafters and is permissible under the covenants,” the court said. While the covenants don’t specify a minimum acceptable rental term, they do state that temporary structures (mobile homes, barns or garages) can’t be used as a residence for longer than six months, while a permanent residence is being constructed. It is clear from that language, the court said, “that the drafters know how to impose a duration on particular uses or types of structures.” Had they intended to bar short-term rentals, the court concluded, they would have done so.
Because the covenants don’t specifically prohibit “temporary or transitory uses of permanent homes as dwellings,” the court concluded, the language is ambiguous “and should be interpreted in favor of the Zgabays.”
The lesson to be drawn from these two cases is not that associations are unable to bar short-term rentals if they choose; it is that:
- The covenants must contain language establishing that restriction; if they don’t
- Owners must approve an amendment doing so; and
- The covenant or the amendment to it must clearly and unambiguously define both “residential purposes” and the short-term rentals that are prohibited.
“A politician needs warm passion to impel action but a cool sense of responsibility and proportion to make careful decisions in a complex landscape.” – New York Times columnist David Brooks., commenting on Congressional ‘paralysis.’