LEGAL/LEGISLATIVE UPDATE – OCTOBER 30, 2017

Published on: October 28, 2017

BIG NEWS

It is difficult to remember a time when condominiums weren’t part of the housing landscape. It is also unlikely that many early advocates of this ownership option envisioned just how large a space it would occupy. More than 20 percent of the U.S. population now resides in a common interest ownership community. That translates into 67.8 billion people living in approximately 345,000 condominium communities – compared with about 2.1 million residents in 10,000 community associations in 1970.

Those statistics and others compiled by the Foundation for Community Association Research, document the steady increase in both the popularity and value of condominiums. Homes on community associations had an aggregate value of $5.5 trillion last year, according to the National and State Statistical Review published annually by the Foundation; associations collected a total of $88 billion in assessments to finance their operations.

The report identifies several major factors driving the growth of community association, primary among them:

  • Recognition by homeowners of the value and benefits of “collective management.
  • The need for affordable housing alternatives.
  • The ability of community associations to provide some services traditionally provided by municipal governments – a reason many cities and towns actively encourage condominium development.

In rankings based on number of common interest ownership communities, Florida is first with 47,900 communities. California, a close second, has 45,400 communities, followed by Texas (19,900), North Carolina (13,900) and New York (13,800). Massachusetts, with 12,300 associations, ranks seventh; New Hampshire, Maine, Vermont and Rhode Island are at the low end, ranking 31st, 37th, 40th and 43rd, respectively.

SCALING BACK

HUD Secretary Ben Carson has promised to scale back enforcement what he termed the “ridiculous” rise of lending enforcement actions. Speaking at the Mortgage Bankers Association’s annual conference in Denver, Carson repeated, with more detail, comments he’d made a few weeks ago at a Congressional hearing, at which he complained that punishing mortgage lenders for “innocent mistakes” under the False Claims Act is making them reluctant to originate loans.

“I’m not exactly sure why there had been such an escalation previously, but the long-term [effect] of that escalation is obviously providing fewer appropriate choices for consumers,” Carson told MBA attendees. “And that’s exactly the opposite of what we should be doing.”

Carson cited the concerns of lenders who have noted their reluctance “to participate fully” in FHA programs “because of the undue risks they perceive from a lack of clarity in what we expect and exposure to outsized liability from immaterial errors,” “Lenders have rightly pointed out that absolute perfection in the lending process cannot be achieved, and that borrowers bear the costs of compliance through higher mortgage rates,” he added.

The HUD secretary said his agency is working with the Department of Justice (DOJ) to address the problem, starting with a comprehensive review of FHA’s lender certification process. But he also emphasized that HUD’s belief that some enforcement actions have become excessive does not imply a willingness to tolerate ‘bad actors’ in the mortgage industry.

“We are not open for business to fraudsters, those without proper controls, or those who do not take their obligations in our market seriously,” Carson stated. “They will be found out and held accountable,” he continued, adding, “We must do this to protect taxpayers and the fiscal integrity of FHA and Ginnie Mae.”

DRONE FEARS

Drone safety – or the lack of it ─ is in the headlines again, with reports that the National Transportation Safety Board is investigating a collision in September between a private drone and an army helicopter. No one was injured in the incident, which occurred near Staten Island, NY, but the helicopter reportedly sustained extensive damage. The NFSB investigation is said to be “ongoing.” Separately, a small passenger plane approaching Quebec City airport collided with a drone, with no injuries to the six passengers and two crew members and only minor damage to the plane. But the result could have been “catastrophic,” Marc Garneau, Canada’s minister of transport, told reporters. “This should not have happened,” he said. “That drone should not have been there.”

Canadian officials say they have received 1,596 “drone incident” reports so far this year, 131 of them classified as creating serious “aviation safety concerns.” In the U.S., safety incidents involving drones now average 250 per month, prompting the Federal Aviation Agency to announce “emergency action” to accelerate its review of requests to fly drones in restricted areas. Because the agency has not been able to keep up with those requests, FAA officials told Bloomberg News, many drone operators are flying without permission and without oversight.

In a related development, President Donald Trump recently signed a directive authorizing the FAA to grant exemptions from restrictions on commercial drones to enable corporations to test drone operations and allow municipal and state governments to assess regulations needed to ensure their safety.

The goal is to collect information that will help regulators develop a separate air traffic control system for low-flying aircraft, Michael Kratsios, a spokesman for the White House Office of Science and Technology Policy, told reporters, Michael Kratsios of the White House Office of Science and Technology Policy told reporters in a conference call.

“In order to maintain American leadership in this emerging industry here at home, our country needs a regulatory framework that encourages innovation while ensuring airspace safety,” Kratsios said.

TAX DEBATE CONTINUES

The tax reform debate is spawning more divisions in the housing industry. The Mortgage Bankers Association (MBA) has announced its support for a proposal that would retain the mortgage interest deduction but significantly reduce its value by doubling the standard deduction. The MBA position tracks that of the National Association of Home Builders but clashes with the National Association of Realtors (NAR), which has strongly opposed any move to dilute the interest deduction. significantly reduce the value of the mortgage in Lining up with the National Association of Home Builders.

Both the NAHB and the MBA have hailed the opportunity to overhaul the tax code and create “innovative” policies that would more effectively expand home ownership opportunities for middle-income borrowers. The NAR has warned that weakening the interest deduction would remove an essential pillar supporting home ownership and threaten home values.

Although willing to accept a change in the interest deduction, the MBA is not happy with other proposals that would eliminate the deductibility of business interest charges and do away with the popular “like-kind exchange” tax treatment for real estate investments. Those proposals “have raised significant concerns with our membership,” the association stated in a letter summarizing its position.

HOUSING SURPRISE

The housing market performed better than expected in September, sustaining less of a blow than feared from the devastating storms that battered Houston and much of Florida. Existing home sales were almost 1 percent higher in September than in August, a small gain but a welcome relief after three consecutive monthly declines. Still, analysts suggested that the big picture for home sales remains less than stellar. The positive September numbers notwithstanding, “sales fell year-over year for the first time since last year,” Svenja Gudell, Zillow’s chief economist, pointed out. And the reason, she said, “is abundantly clear. It is simply impossible to sell more homes when the number of homes for sale keeps falling.”

If the modest increase in existing sales surprised industry analysts, the ‘blow-out’ jump in new home sales stunned them. Volume topped an annualized rate of 667,000 units, 17 percent above the year-ago level, nearly 19 percent better than August, and the fastest pace for new home sales in nearly a decade.

“This is the kind of new home sales activity we need and expect to be seeing,” Zillow’s Gudell said.
August’s storms did take a toll on construction activity, however, as housing starts fell 4.7 percent below the August level, and permits fell by around 4.5 percent both for the month and for the year. Most of the permit decline was in the multifamily sector however; single-family permits increased by 2.4 percent compared with August.

“Given the relatively small number of homes for sale, it’s surprising that single-family starts haven’t trended more sharply higher this year,” David Berson, chief economist for Nationwide, told HousingWire. But he predicts that strong demand will push construction activity higher in the final months of this year.

Home builders apparently share his optimism. The NAHB’s monthly confidence gauge increased by four points in September, to reach its highest level since May.

IN CASE YOU MISSED THIS

The Congressional Budget Office estimates that the National Flood Insurance Program is under water this year by about $1.4 billion.

Companies have argued for years that executive compensation should be tied to stock market results, and a recent study confirms that the two are related – but inversely. The higher the compensation, the worse the stock performance.

National median rents topped $1,080 in September – the highest level for the year. Separately, Zillow reports that homelessness in the highest-rent cities increased by 4 percent between 2011 and 2016.

New York has enacted a law banning electronic cigarettes anywhere traditional tobacco cigarettes are barred.

Nearly a third of the employers responding to a recent survey said employee job performance had been impaired by the use of prescription painkillers; 15 percent reported injuries or close calls attributable to the drugs and 70 percent said the drugs have affected their workforce in some way.

LEGAL BRIEFS

CLEARLY AMBIGUOUS

In insurance coverage disputes, the courts typically construe ambiguities against the insurer and in favor of the insured. Knowing this, you would think insurance companies would draft their policies carefully, with scrupulous attention to the definitions of key terms. Apparently not – at least, not in the policy at issue in this dispute between a Pennsylvania condominium associations (Village Heights) and the Cincinnati Insurance Company.

The facts were straightforward: Herbert Graves and his wife owned one of 15 detached homes in this 50-unit community, which also included a duplex, a triplex and apartment units in 19 separate buildings. The Graves moved into an apartment and offered their home for sale. While they were on vacation, a pipe burst in the vacant home, doing significant damage to the structure. The condominium association filed a claim for damage to walls, drywall, ceilings, and internal mechanical, electrical and HVAC components, all of which were defined as common areas, for which the association was responsible. The insurer (Cincinnati) rejected the claim, citing a provision of the policy denying coverage for water damage if more than 31 percent of the property had been vacant for more than 60 consecutive days preceding the loss. The key question before the court: Did the coverage and vacancy requirement apply to a single building, as the insurer contended, or to all 19 buildings collectively, as the association maintained?

The association focused on policy language that described coverage for a “blanket building” and cited a single coverage limit for that blanket building. Because the policy “treats the common elements [of the condominium] as one building,” the association argued, even though a unit owner may move out of his unit, no vacancy occurs,” because 49 of the 50 units were still occupied – well above the policy’s 30 percent occupancy requirement.

The insurer construed the language differently, arguing that the coverage applied to the 19 buildings individually, not collectively. Additionally, the insurer argued, references to the “building where the loss occurred” and “the entire building” were intended to specify that the vacancy requirement applied to the individual structure that was damaged.
In its analysis of the dispute, the court found the policy wording unhelpful, at best, noting, among other problems, that it used “multiple different phrases” to describe the covered property. “Simply put, the Policy’s Declarations do not define any terms, they merely identify the coverages available under the Policy,” the court said. The declarations also fail to define a “blanket building,” the court noted. They simply “indicate that the Policy provides Blanket Building Coverage. . ..”

Although the court initially found the association’s interpretation of the blanket building coverage “somewhat contrived,” it concluded that, in fact, its argument “had logic.” The association is responsible for the common areas, the court noted, and the policy language provides coverage for a “blanket building,” setting a single policy limit for all the common areas. “This language bolsters a construction that [the insurer] meant for all of the locations to be construed as one building,” the court said, noting further: “Certainly, each separate structure did not receive its own insurance valuation, nor were the structures listed separately before the Policy indicated that they would have blanket coverage.”

The wording of the vacancy provision also lacked clarity, according to the court, which found the insurer’s interpretation – that “entire building” referred to the stand-alone structures individually – to be a “reasonable reading” of the occupancy requirement and possibly “even more reasonable” than that of the association. “However, our place is not to choose which reading is the more reasonable,” the court said, “but simply to decide whether two reasonable readings exist.” And the association’s interpretation─ that “blanket building” referred to all the buildings collectively as a single insured unit – was also reasonable, the court said. Had the insurer intended to assign coverage to the buildings individually, the court noted, “it could have easily provided a separate schedule and description of each structure. Given this shortcoming and others,” the court concluded, “ambiguity exists. And we are bound to construe any such ambiguity in favor of the insured.”

WORTH QUOTING:

“My concern is that if we do a tax cut financed by increasing the debt, the deficit, we’ll get the short-term up and then come right back down to trend growth, and when it’s over, we’ll be more highly leveraged than we were before.” ─ Robert Kaplan, president of the Dallas Federal Reserve Bank.


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