LEGAL/LEGISLATIVE UPDATE – OCTOBER 23, 2017

Published on: October 23, 2017

CHINK IN MORTGAGE INTEREST ARMOR

Reversing a long-standing policy and diverging notably from other housing industry trade groups, the National Association of Home Builders announced recently that it would not oppose eliminating the tax deduction for mortgage interest payments as part of a broad reform of the tax code, as long as the plan includes a tax credit for homeownership.

“Now our policy is much more flexible,” NAHB President Jerry Howard, told Reuters. President of NAHB saying. Flexibility on mortgage interest, he said, “gives us a unique opportunity to help craft a unique tax policy as it is related to housing.” While acknowledging that the tax plan being floated by the White House doesn’t contain a homeowner tax credit, Howard, said Congressional leaders have expressed interest in the idea.

Other industry trade groups. Including the influential National Association of Realtors, have shown no sign of easing their long-standing support for the interest deduction or ending their steadfast opposition to any move to revoke it.

Testifying recently at a Congressional hearing, Ioana Harrison, chair of NAR’s Federal Taxation Committee said the trade group supports the broad goals of “simplification and structural improvements for the tax system,” and agrees that individual tax rates “should be as low as possible while still providing for a balanced fiscal policy…. We simply believe that to achieve these goals, Congress should commit first to doing no harm to the common interest that homeownership provides.”

The proposal that has triggered this intra-industry debate would increase the standard deduction, which wouldn’t directly eliminate the interest deduction, but would significantly reduce its value, and by extension, the NAR and other industry trade groups contend, reduce the value of homeownership. The NAR has predicted that this approach could reduce home prices by as much as 10 percent and increase taxes for most middle-income Americans.

A study by Zillow estimates that doubling the standard deduction and eliminating the deduction for state and local taxes, as one of the major tax reform plans proposes, would mean that only buyers of homes worth more than $80000 would benefit from the interest deduction, compared to a benchmark of $305,000 under the current tax law.

Gary Cohn, the president’s chief economic advisor, has questioned the assumption that the mortgage interest deduction provides essential support for homeownership, insisting that “people don’t buy homes” because of it.

Many economists agree with him, pointing out that the deduction primarily benefits higher income earners who are most likely to itemize rather than take the standard deduction. A recent study by Redfin calculates that households making more than $100,000 receive 77 percent of the benefit.

“If we are at a point where we have to choose what to fund and what not to fund, and what to subsidize and what not, I think our dollar could be better placed helping middle-class families,” Redfin’s chief economist, Nela Richardson, told Housing Wire. “From a social perspective, I think the money could be used to really help bridge the equity gap in this country,” she added.

FLOOD INSURANCE REFORM

Back-to-back hurricanes – Harvey, Irma and Maria – and the devastating damage they caused has increased the pressure to reform the National Flood Insurance Program, but not enough to win Congressional approval of legislation that would achieve that goal. The House approved a bipartisan measure that would have encouraged private insurance carriers to offer flood protection, now provided almost entirely by the NFIP. But the Senate rejected the measure, arguing that it did not bring the sweeping reform lawmakers say the program needs. A primary concern, expressed by Sen. Sherrod Brown (D-OH), is that the measure would allow insurers to “cherry pick,” offering low-risk coverage while leaving the NFIP, already more than $1.4 billion in debt, still carrying the insurance load. Reform, Brown and others who opposed the House bill said it must bring stability and solvency to the NFIP, and ensure the availability of affordable flood coverage for homeowners.

Jeb Hensarling (R-TX), chair of the House Financial Services Committee, said the Senate had lost an opportunity to do just that. The legislation the Senate rejected, he said, won unanimous approval in the House. “You can’t get any more bipartisan [than that],” Hensarling told Bloomberg News. “To claim [the bill] is somehow ‘controversial’ doesn’t make any sense.”

The House had attached the flood reform measure to a bill authoring a six-month extension of funding for the Federal Aviation Administration, which was set to expire. They stripped out the insurance provision, saying it threatened approval of the must-pass FAA measure. Earlier this month, President Trump signed a three-month extension of the NFIP, which is set to expire at the end of this year.

DELINQUENCY RATES RISING

Incomes are rising, the job market is strengthening, consumer confidence is high – so why are credit card delinquency rates rising? The answer is fairly straightforward: Debt levels are rising faster than incomes. The more complicated question – is this cause for concern? And on that, analysts are divided. Consumers are carrying an aggregate total of $784 billion in credit card debt; Major credit card issuers – Capital One, Synchrony Financial and Alliance Data Systems ─ have all been reporting steady increases in delinquency rates this year, rising to 4 percent of loans outstanding at Capital One, 4.5 percent at Synchrony.

While not “overly worrisome” in themselves, Credit Suisse analyst Paul Condra told the Wall Street Journal, the rates are “among the highest” the industry has seen in the past six years, and should be watched closely because of that. While some analysts note that the economy is stronger now than it was before the crash and lenders and consumers are behaving more responsibly now, others fear that the painful lessons of the past have faded.

“The new level of debt is cause for alarm,” according to Lucia Dunn, an economist at Ohio State University, whose research has shown that only half of credit card debt is paid off every monte, leaving many consumers paying high interest rates, which, rising delinquencies suggest, a growing number are struggling to afford.
Sung Won Sohn, an economist at Cal State, also has watched Americans’ relationship with debt for many decades. He says all this borrowing has him worried.

“We are beginning to forget the lessons learned from the painful recession in 2007 to 2009,” Sung Won Sohn, an economist at Cal State, told NPR. “Consumer spending is the largest portion of the economy,” he noted, “and when the time comes for an economic recession, this is going to make the situation worse.”

CHILL IN THE AIR

The hot apartment market is cooling. The chill noted already in the overheated New York and San Francisco markets has spread to less pricey markets, where rents that had been rising steadily, have moderated significantly. Although the 2.6 percent annual increase posted in the third quarter was “roughly in line with national norms,” the Wall Street Journal warned, with a surge of new units in the pipeline, “tougher times could be in the offing.”

“You have to wonder how much momentum are we going to lose over the next six months,” Greg Willett, chief economist at RealPage, told the Journal.

Separately, the Census Bureau reports that the absorption and completion for privately financed apartments were flat in the first quarter, as were asking rents. Completion and absorption rates for condominiums, on the other hand, both increased during that period, “signaling a strengthening market,” according to an Eye on Housing report.

NEW FOCUS ON HOUSING HARASSMENT

In an unexpected departure from what had appeared to be a scaling back of efforts to enforce laws protecting individual rights, the Department of Justice has announced a new initiative to combat sexual harassment in housing. DOJ officials said the initiative will specifically “work to identify barriers to reporting sexual harassment to the Department and other enforcement agencies.” The Department’s Civil Rights Division, which is responsible for enforcing the Fair Housing Act, will lead this effort, beginning with pilot programs in Washington, D.C. and western Virginia. “No woman should be made to feel unsafe in her own home,” Acting Assistant Attorney General John Gore said in announcing the program. “The Justice Department is committed to vigorously enforcing the Fair Housing Act’s ban on sexual harassment and is looking forward to working closely with state and local partners to combat this problem,” he added.

It is not clear how the DOJ program relates to rules the Department of Housing and Urban Development(HUD) adopted two years ago, targeting what the agency termed “quid pro quo” sexual harassment in housing. Those rules, which significantly increased liability of housing providers if they fail to prevent harassment by third parties, stirred anxiety in the condominium industry, because condo associations are among the housing providers that must comply with the rules. In a comment letter submitted before the rules were adopted, the Community Association Institute (CAI) noted that the rules would make condo associations potentially liable if one resident harassed another and the board failed to intervene.

“Most community association homeowners would react with horror to the notion that association board members, employees, or agents would inject themselves into the interpersonal relationships of homeowners and residents to investigate these interactions and relationships for discriminatory elements,” CAI complained.
HUD responded to some of those concerns adding language in the final rule clarifying that:

  • All disputes among residents don’t constitute discriminatory harassment under the Fair Housing law;
  • Community associations don’t have a general duty to halt discrimination, unless a specific law or their governing documents require them to do so.
  • Association boards aren’t required to take actions beyond those authorized by applicable laws or the association’s governing documents.

The final rule also adds a “reasonable person” standard to determine whether an association should have been aware of discriminatory actions by third parties

IN CASE YOU MISSED THIS

The Department of Housing and Urban Development is increasing premiums and imposing other restrictions on FHA-backed reverse mortgages, in an effort to stem losses the popular program is creating for the FHA’s insurance fund. “Given the losses we’re seeing in the [reverse mortgage] program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD Secretary Ben Carson said.

Everyone’s hacked – literally. More than half the business executives responding to a recent survey reported that their companies had suffered a cyber-attack in the past year.

Amid continuing complaints about depleted inventories of available homes for sale comes this discordant note in a First American analysis: Supply is exceeding demand in many markets.

Homeowner equity increased by more than 760 billion in the second quarter an average annual gain of about $13,000 per owner. That has made homeowners very happy, but it has also increased home prices so much that they are now over valued in 34 percent of major U.S. markets, according to CoreLogic.

Increasing reliance on solar energy in Australia, while no doubt beneficial for the climate, has spurred a surge in complaints from homeowners about high rise buildings blocking access to the sun required by their rooftop solar panels.

LEGAL BRIEFS

AS THE WORDS TURN

Poorly drafted declarations with murky definitions and ill-defined descriptions are responsible for many legal battles between condominium associations and owners. But just because documents are well-drafted doesn’t mean owners won’t challenge them. Clarity didn’t deter Grand Arcade, Ltd. from challenging an assessment for repairs to the common areas of the Grand Arcade Condominiums, a 99-unit mixed-use development in which GAL owned 5 commercial units.

The Grand Arcade Condominium Owners’ Association determined that windows and exterior masonry in the community’s four buildings required repair. The board told owners that they would be responsible for replacing windows in their units, if necessary, but all owners would share the cost of repairs to building exteriors (window frames, sashes, caulking, etc.) which were deemed common areas.

GAL balked, arguing that none of its windows required repair and the components on which repairs were needed were either part of the residential units or limited common areas related to residential units for which the commercial owner was not responsible. A trial court found that the declaration was unambiguous in its description of the window frames as part of the common elements and the Ohio Court of Appeals agreed. (Grand Arcade Ltd. V. Grand Arcade Condominium Owners’ Association, Inc.).

The company found support for its position in the definitions of common elements and limited common elements: The first (common elements) did not refer specifically to “windows” or “glass”, the company noted, while the second (limited common elements) included “all glass and screens within window and door frames within or attached to the perimeter walls of such Unit.” GAL read that phrase to mean that the windows and door frames were “attached” to the interior perimeter walls, making them part of the limited common area.

The Appeals Court read the document differently. GAL’s interpretation, the court said, was based on a “selective” reading of the declaration that ignored a section further defining common elements in part as “[a]ll other areas, facilities, places, and structures that are not part of a Unit.” The contention that window frames and doors were part of the interior perimeter walls of the unit also ignored language defining a unit as “bounded by the interior (un-drywalled) surfaces of the perimeter walls,” the court said. “This language suggests that the exterior perimeter walls are outside of the unit and fall within the scope of common elements,” the court concluded.

Further undercutting GAL’s argument was the definition of limited common elements as components “which are located within the bounds of [an owner’s] unit and serve only [that] unit.” The declaration specified that limited common elements included “all glass and screens within window frames….” making components outside the glass, which were not listed as limited common elements, common elements by implication, the court said, explaining: “Neither the definition of a ‘Unit’ nor the definition of a ‘Limited Common Element’ includes the window frames that connect windows to the structure of any of the Association’s buildings. And since the description of ‘Common Elements’ includes ‘[t]he entire balance of the land and improvements thereon’ that are not located ‘within a Unit,’ the window frames, which are not part of individual units or ‘Limited Common Elements,’ are ‘Common Elements.’”

The court also found no support for GAL’s contention that language specifying that commercial owners would not pay expenses related to residential limited common areas (and vice versa) somehow also “exempts it from its obligation to pay its proportionate share of common element expenses.”

WORTH QUOTING

“The Fed should be under no pressure to raise rates. We have time to let inflation climb back to target.” ─ Neel Kashkari, President of the Minneapolis Federal Reserve Bank.


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