LEGAL/LEGISLATIVE UPDATE – September 5, 2017

Published on: September 5, 2017

FAMILIAR BUT NOT THE SAME

Home equity loans and “cash-out’ mortgage refinances – two enduring symbols of the excesses that triggered the financial meltdown a decade ago – are becoming popular again. But industry experts insist that they are a sign of economic health, not a harbinger of another economic disaster. Lenders approved nearly $46 billion in new home equity lines of credit in the second quarter – the highest level since 2008, according to data compiled by Equifax. Separately, Freddie Mac reports that cash-out refinances increased by 6 percent to $15 billion during that period. Rising home prices are increasing the equity against which homeowners can borrow, and an improving labor market are making them more confident about their ability to repay the loans, analysts say. Lenders, meanwhile insist that they are doing a much better job of managing the risks, by scrutinizing borrowers more closely, underwriting more conservatively, and encouraging borrowers to use equity loans to finance home improvements or to consolidate debt, not to finance expensive vacations or luxury expenditures. “We continue to watch what’s going on and the way it’s being done, but it’s much different from before the crisis,” Tom Wind, who heads U.S. Bancorp’s home mortgage division, told the Wall Street Journal. Among other positive indicators: Home equity lines outstanding have been declining, despite the increase in originations, and new originations remain far below the combined total of more than $720 billion recorded in 2006 and 2007 at the peak of the housing bubble.

AT ODDS

Fed Chair Janet Yellen, who has been talking up the benefits of financial regulation, may be talking herself out of a job. Yellen, whose term expires in February of next year, said recently that the reforms adopted in response to the crisis that nearly felled the global financial system a decade ago have made financial institutions stronger overall. Speaking at the Fed’s annual conference in Jackson Hole, Wyoming, she said, “The events of the crisis demanded action, needed reforms were implemented, and these have made the system safer.” While she acknowledged that some modifications were in order, she rejected suggestions that higher capital requirements and other mandates have impeded lending activity – to the detriment of borrowers and the economy. Her remarks are at odds with the Trump Administration’s criticism of Dodd-Frank (the primary legislative reaction to the financial meltdown) and its plans to dismantle the regulatory framework the legislation created. In fact, Yellen specifically cautioned against any significant reduction in regulatory oversight. “Any adjustments to the regulatory framework should be modest,” she said, “and [should] preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.”

REFORM INCENTIVE

The mammoth 500-year storm that flooded Houston and devastated several other communities on the Texas coast may stimulate long-stalled efforts to overhaul the National Flood Insurance Program overseen by the Federal Emergency Management Association (FEMA). Rep. Jeb Hensarling (R-TX), who chairs the House Financial Services Committee, is urging lawmakers to approve a package of sweeping reforms designed to stabilize the insurance fund, which is already more than $25 billion underwater, without counting the billions in claims stemming from the Hurricane Harvey. The Financial Services Committee has approved the reforms, which would encourage broader participation by private insurers, but would also significantly increase premium costs for property owners. The Senate Banking Committee, which oversees the flood insurance program, hasn’t yet considered a reform bill and isn’t likely to do so in the near term, making a short-term reauthorization of the existing program, before it expires at the end of September, the most likely outcome, industry analysts agrees, despite the preference of Hensarling and others for comprehensive reform. “Harvey should make it clearer that the way we’ve been doing things has not been sustainable and changes need to be made,” R.J. Lehmann, a senior fellow at the R Street Institute, told Insurance Journal. “But lawmakers are not going to want to whack people who are already suffering from the hurricane with more costs.”

READY FOR A FIGHT

As lawmakers prepare to tackle tax reform, real estate industry executives are digging in their heels to protect the mortgage interest deduction, which ranks high on the list of tax breaks some reformers want to eliminate. One idea, floated as part of the Trump Administration’s tax reform blueprint, would reduce the cap on the mortgage interest deduction from its current level ($1 million) to $500,000. The Tax Foundation estimates that the change could save more than $308 billion over a 10-year period.

Affordable housing advocates, led by the National Low Income Housing Coalition, have endorsed this approach, suggesting that the savings could be used to increase the supply of affordable rental housing. Some critics warn, however, that the Republican Congress is more likely to use the savings to fund tax cuts for higher income individuals.

Regardless of how the savings might be used, the real estate industry wants Congress to treat the mortgage interest deduction as it has in the past – as a ‘third rail’ that lawmakers shouldn’t touch. “[L]imiting the mortgage interest deduction amounts to a de facto tax increase on current or future homeowners while putting homeownership further out of reach for prospective buyers,” William Brown, president of the National Association of Realtors (NAR), said in a press statement. The trade group is no more enamored of doubling the standard deduction — a key component of many of the tax reform plans under discussion. According to some estimates, close to 90 percent of the middle income Americans who currently used the mortgage interest deduction would no longer do so if this change is adopted.

Doubling the standard deduction and repealing the deduction for state and local taxes (also on the tax reform table) “would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers,” the NAR contends.

STATE OF MIND

Housing affordability may be as much a “state of mind” as it is a reflection of financial limitations. That’s the argument advanced by Sean Becketti, vice president and chief economist for Freddie Mac, who thinks press reports decrying the nation’s affordable housing shortage are creating a misleading view of the housing market. “Housing is at near record affordability, and I can prove it, he asserts in a recent blog.

Those headlines notwithstanding, Becketti says, the “Housing Affordability Index” – a widely used measure developed by the National Association of Realtors, stands at a record high. “That means the median-income family has more than enough income to qualify for a mortgage to buy the median-price house,” Becketti points out.

Housing “feels” unaffordable, he says, because home prices have been increasing steadily and incomes have not kept pace with that trend. Tight inventories, reports of bidding wars for scarce properties, and uncertainty about whether borrowers can qualify for mortgages deepen the affordability concerns. But based on the standard ratios reflected in the NAR index, Becketti says, there is no question that “mortgage payments today are more affordable than at almost any time in history.”

IN CASE YOU MISSED THIS

The Missouri state legislature has revoked a minimum wage increase St. Louis officials had approved for that city. A new state law requires all Missouri municipalities to adhere to the state minimum of $7.70 an hour. That means workers who had been earning $10/hour since May will soon be earning $2.30/hour less.

Massachusetts Governor Charlie Baker has begun selecting appointees to serve on the Cannabis Control Commission, responsible for regulating both recreational and medical marijuana sales in the state. State Sen. Jennifer Flanagan is the first of five commissioners to be named thus far.

After increasing steadily for the past decade, single family homes are getting smaller again as builders shift their focus from the high to the lower-end of the market.

The labor shortage about which builders have been complaining for the past two years is getting worse.

Tight inventory levels would improve if more owners would sell their homes. But that isn’t happening.

LEGAL BRIEFS

BEDEVILED BY DETAILS

The volunteers who serve on condo association boards, though usually dedicated and well-meaning, are not always as detail oriented as they should be. Two recent decisions highlight the problems that can result when board members don’t dot all their procedural I’s and cross all of their operational T’s.

In the first (Tyra Summit Condominiums II Association, Inc. v. Clancy), a Colorado appeals court found that an amendment condominium association residents had approved was invalid, because the board had failed to give proper advance notice of the meeting at which the vote was held.

The state’s Common Interest Ownership Act requires two separate notices for amendments to a community’s declaration lays out detailed requirements for amending an association’s declaration, primary among them: The change must have been discussed in advance in at least one meeting of association members; and, at least 10 days before the meeting, the board must provide written notice to every owner specifying the date, time and location and describing the general nature of the amendment on which they will be voting.

The first notice, sent in June, properly announced the date, time and location of the annual meeting (to be held August 1) and referenced the proposal to amend the declaration, but noted that the attorney had not yet completed the draft on which he was working. The board said it would mail the proposed amendment as soon as it was in final form. The second notice, sent July 28th, included the wording of the amendment, which owners approved.

Two owners challenged the amendment, arguing that the board had not complied with the statutory notice requirements. A trial court found the notice to be adequate but the appeals court disagreed. The first notice did not describe “the general nature” of the amendment, the court said, noting:

“Stating that the Board is in the process of finalizing a new declaration and indicating that information would be provided in the future does not provide owners with notice of the “general nature” of the proposed changes. It merely notifies them that changes will be proposed. Although the second notice included the amendment, the court said, it was sent only three days before the meeting, not “no less than” 10 days in advance, as the statute requires.

The board of a Florida HOA also stumbled over procedural details, when it took steps first to fine an owner for violating association rules, and then to impose a lien when the owner failed to pay the fines. (Dwork v. Executive Estates of Boynton Beach Homeowners Association, Inc.)

The owner in question (Dwork) was cited frequently over several years for failing to maintain his property in accordance with association rules. The board finally got fed up and notified him that he would be fined if he failed to comply within 15 days of receiving the notice. When he didn’t respond, the board sent another notice, telling him that the fine committee would consider the issue on at a hearing to be held 13 days after the date on the notice. Dwork didn’t attend the hearing, at which the committee voted to begin levying fines. When he refused to pay, the board recorded a lien against his unit and began foreclosure proceedings to collect $8,135 — the lien amount plus accumulated fees and costs.

The trial court dismissed the foreclosure action, ruling that the board’s notice of the hearing, sent 13 days in advance, did not comply with the Florida Homeowners’ Association act, which requires 14 days’ notice. As a result, the court fond, the lien against Dwork’s unit was unenforceable. Despite that error, the court awarded the association damages equaling the fines levied against Dwork, plus court costs and collection fees. In the court’s view, although the association hadn’t followed the procedural requirements, Dwork clearly owed the money and equity required a judgment reflecting that.

Dwork appealed, arguing that the association was obliged to follow the statutory notice requirements. The association countered that all the notices preceding the hearing notice constituted substantial compliance with the statute; since Dwork had never responded to the earlier notices, he was unlikely to respond to the hearing notice either, and an additional day wouldn’t have prejudiced him.

The appeals court sided with Dwork, finding that substantial compliance wasn’t sufficient; the statute is unambiguous, the court said, and must be construed strictly. “Generally, notice provisions of a statute should be applied in a way to further the main purpose of those requirements;  that is, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections and defenses at a hearing,” the court said.

There was no question, that Dwork had received actual notice of the hearing and ignored it, the court acknowledged. It also agreed with the trial court’s assessment that “the equities….certainly favored the HOA.” But the determining issue, the court said, was what the statute required and “case law compels us to hold that the HOA was required to strictly comply with [the statute] to perfect its ability to impose and collect the fines.”

WORTH QUOTING

“It’s a new normal in the housing market. Ever-rising prices being met by insatiable demand.” Cheryl Young, senior economist at Trulia.


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