JANUARY 2022
SPEEDING UP. The Federal Reserve is accelerating the schedule for tapering the bond-buying program that has bolstered the economy throughout the pandemic. Instead of ending in November, as initially planned, the bond purchases will end in March, setting the stage for the Fed to begin raising interest rates next year. Although he didn not specify the timing of those increases, Fed projections anticipate three rate increases next year, with two additional hikes in each of the following two years, potentially bringing rates, which have been near zero since the pandemic began in 2020, to 2.1 percent by year-end 2024.
The Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, announced the shift at its final meeting of the year, but Fed officials had been telegraphing the move for several weeks before that, citing increasing concerns about inflationary pressures that were proving to be less transitory than they had expected.
Consumer prices increased at an annual rate of 6.8 percent in November, the fastest pace in almost 40 years. Although the unemployment rate has declined steadily this year, the gap between the number of jobs available and the unemployed workers willing to fill them has forced employers to boost wages aggressively, fueling concerns about a classic wage-price spiral that could turn inflationary embers into a wildfire, requiring steeper rate increases in the future.
“Economic developments and changes in the outlook warrant [the policy shift],” Powell told reporters, but he emphasized that Fed policies “will continue to provide appropriate support for the economy.”
STILL RISING. Home prices, which have been rising steadily, are still increasing, albeit more slowly, but you have to look closely to notice the difference. The Case-Shiller National Home Index recorded an annual increase of 19.5 percent in September compared with a 19.8 percent gain in August. CoreLogic’s Home Price Index jumped by 18 percent year-over-year in October, the largest year-over-year gain since the index was created 45 years ago.
Rising prices, inventory shortages and inflation fears have dampened consumers’ spirits, but, apparently, not their determination to buy homes. Pending home sales – an indicator of future transactions – increased by 7.5 percent in October, recovering from a 2.3 percent dip in September. Analysts had expected a recovery, but a smaller one. Lawrence Yun, the NAR’s chief economist says rising rents and fears that mortgage rates will rise, and consumers’ ‘sound financial footing’ are fueling demand.
"Home sales remain resilient, despite low inventory and increasing affordability challenges," he noted, while "inflationary pressures may have some prospective buyers seeking the protection of a fixed, consistent mortgage payment." Despite the challenges the pandemic, inflation fears, rising home prices and anemic inventories have created this year, Yun predicts that sales will exceed six million, “which will shape up to be the best performance in 15 years.”
MAYBE NOT. For a while, as cyber-theft and ransomware attracted headlines, insurance companies were aggressively promoting cyber-insurance policies. No longer. Demand for the insurance has increased, as corporate executives have recognized the threat posed by ransomware attacks. But insurance payouts have also soared, leading any insurers to increase their premiums, reduce their coverage and in some cases, stop offering it at all.
“Insurers are changing their appetites, limits, coverage and pricing,” Caspar Stops, who heads the cyber division at Optio, London-based insurance company, told Reuters. Companies that were offering $13 million in coverage are now offering half of that, he added.
Insurers paid almost $600 million to ransomware victims in the first six months of this year according to industry estimates, compared with approximately $400 million last year. the “combined ratio” for this line jumped by 20 percent, pushing this key profitability measure close to negative territory. Premium rates in the U.S. have doubled over the past year, according to one industry report.
Desperate to avoid damage that would cripple their computer systems companies are relying on insurance to rescue them from ransomware attacked. Savvy cyber criminals, aware of that, are targeting companies with large coverage limits. For that reason, insurance experts are advising companies not to disclose the coverage they have. Law enforcement officials are urging companies not to meet ransomware demands, but some insurers are offering different advice. While most would prefer to avoid large payouts, they also recognize that companies have to protect their business.
“Of course no-one wants to pay criminals,” Adrian Cox, CEO of Beazley, told the Reuters. “At the same time, if you ban [ransom payments], you could cripple a lot of businesses whose systems have been disabled.”
IF AT ONCE YOU DON’T SUCCEED…The Community Associations Institute (CAI) is trying once again to persuade Congress to close a legal loophole in the FEMA (Federal Emergency Management Agency) rules, preventing the agency from offering disaster assistance to community associations. Under FEMA’s interpretation of its authorizing statute, individual homeowners can receive aid to repair their roofs, heating and cooling units and other essential equipment, but community associations aren’t eligible for comparable assistance because their roofs and other structural components are commonly owned. Community associations also aren’t eligible for aid to cover the cost of debris removal following a natural disaster. Pending legislation, which has been proposed often in the past, would correct these “inequities,” CAI says.
“Residents and taxpayers just like you, living in community associations, pay the same federal taxes as residents living in non-deed restricted neighborhoods,” Dawn Bauman, CAI’s senior vice president for government affairs, notes in a letter to members. “The current system is flawed and unfair, but this legislation recognizes and improves these inequities for the 74 million people living in community associations.”
CASH TRANSACTIONS. The Treasury Department is taking a close and critical look at all-cash real estate transactions, scrutiny that may produce stricter reporting regulations. The department is seeking public comment on proposed regulations aimed at criminals who use real estate purchases to launder income from illegal activities. Boston is currently one of only 12 metropolitan areas with ordinances requiring title insurance companies to report real estate transactions in which individuals make all-cash purchase exceeding $300,000 through shell corporations. The proposed regulation would make reporting these transactions a federal requirement applicable to all title companies in all states.
“Increasing transparency in the real estate sector will curb the ability of corrupt officials and criminals to launder the proceeds of their ill-gotten gains through the U.S. real estate market,” Himamauli Das, acting director of Treasury’s Financial Crimes Enforcement Network, said in a press statement. The regulations, he added, could “strengthen U.S. national security and help protect the integrity of the U.S. financial system.”
IN CASE YOU MISSED THIS
Homeowner equity increased by $3.2 trillion homeowners are feeling house-rich these days, there’s a good reason for it. Their equity increased by $3.2 trillion last year. That 31.1 percent year-over year gain was the largest in 45 years, according to a CoreLogic report.
The town of Wolcott, Connecticut is paying i$350,000 to settle a Fair Housing suit resulting from its refusal to allow a group home for mentally disabled adults to operate in a residential neighborhood. Town officials said the home violated local zoning laws; the Department of Housing and Urban Development (HUD) said the decision violated the Fair Housing Act.
Citing the difficulty projecting home prices, the Zillow Group is existing its home-flipping business.
The increase in homebuying activity has brought a predictable increase in mortgage fraud. CoreLogic analysts found evidence of fraud in one of every 120 mortgage applications submitted in the second quarter of this year, an increase of more than 37 percent over the same period in 2020.
A class action suit accuses Kellogg of misleading advertising because, the suit contends, the company’s strawberry pop tarts contain “strawberry flavor” but hardly any real strawberries. The suit seeks monetary damages for the plaintiffs and a change in Kellogg’s marketing practices.
LEGAL BRIEF
FOLLOWING PROCEDURE. Insurance policies specify in detail the procedures that must be followed when filing a claim. Failure to follow those procedures can cloud a claim, at best, and may defeat it, as this decision by a Florida Appeals court illustrates. (American Coastal Insurance Co. vs. Hanson’s Landing Association).
The coverage dispute between a condominium community (Hanson’s Landing) and its insurer (American Coastal) stemmed from the community’s claim for hail damage suffered in a 2015 storm. The association filed its claim two years after the storm, when, association officials said, they first discovered the damage. American Coastal (AC) responded by issuing a reservation of rights, based on the delay in filing the claim. The insurer’s response also highlighted the prompt notice, documentation and other requirements for securing coverage under the policy.
The association estimated the cost of repairing the roof damage at $6.8 million; AC’s adjuster – an engineer – set the cost much lower, at about $1.2 million, concluding that some of the roofs could be repaired and did not require replacement. Seven months later, in 2019 , the association submitted a revised claim for $18.3 million, this one accompanied by an engineer’s report, which was not included with the original claim.
At this point, AC denied the claim, arguing that the community had not filed timely notice of the damage, had not provided necessary documentation, and had not allowed the insurer to inspect maintenance records, contracts, repair invoices and other repair-related records, as the policy required. The insurer also accused the association of inflating the repair costs and misrepresenting the damage.
The association sued AC for breach of contract. A trial court granted the association’s request for an order compelling an independent appraisal of the property damage. AC appealed, arguing that the appraisal was premature because the underlying question of whether coverage was required had not been resolved. That was the key question on appeal.
The association argued that:
· An appraisal was mandatory under the terms of its all-risk policy;
· The association had “substantially” complied with the policy’s claim-reporting requirements; and
· The insurer’s allegations of misrepresentation were unrelated to the coverage question and were instead part of the dispute over the amount of the loss.
Focusing on the terms of the policy and relying on several Florida precedents, the Appeals Court sided with the insurer. The association’s delayed reporting of the damage and its failure to provide damage documentation and other information the policy required, created a “factual dispute” over whether the conditions for coverage had been met, the court noted. “Because a finding of liability necessarily precedes a determination of damages,” the court ruled, the appraisal the trail court argued was “premature.”
Quoting from one of several decisions on this question, the court noted: “Because appraisal exists only to determine the amount of loss, and not whether coverage exists, a party cannot seek appraisal until the insurer admits coverage (or until coverage is determined by the court).”
In this case, because American Coastal has denied coverage, the court explained, “…the trial court must resolve the extent of coverage under the policy prior to ordering an appraisal.” Accordingly, the court reversed the lower court’s decision and remanded the case for a determination of the coverage question.
WORTH QUOTING: “All lights on risk management are flashing red….The financial system is not getting safer. It is getting more dangerous again.” ─ Oliver Baete, chief executive officer of Allianz, a Munich-based money management firm.
Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island, and New Hampshire.