LEGAL/LEGISLATIVE UPDATE – NOVEMBER 28, 2018
BETTER BUT NOT GOOD
It looked like good news, but it wasn’t, particularly. Existing home sales in October eked out a 1.4 percent increase over the prior month, breaking what had been six consecutive monthly declines. But October sales fell 5.1 percent below the year-ago pace, posting the largest annual decline in four years, and fueling growing concern that the housing market’s woes may be deepening.Lawrence Yun, chief economist for the National Association of Realtors (NAR), who tries to emphasize the positives in gloomy statistics, acknowledged as much, telling the Wall Street Journal, “There is some feeling that the market could actually go even lower than it is now in terms of sales,”Analysts have blamed the critical inventory shortage for pushing prices beyond the reach of many buyers, but rising interest rates appear to be even more problematic, chipping away at both affordability and consumer confidence. The stock market’s swoon isn’t helping, according to Mike Fratantoni, Yun’s counterpart at the Mortgage Bankers Association, who noted in the same WSJ article, “There is a little anxiety about how much things are going to slow.” There is some reason to expect the market to strengthen next year, as inventory levels improve and weaker demand eases upward pressure on prices. But for now, Fratantoni told the Journal, “we’re in this awkward place.”New home construction is contributing to that ‘awkwardness.” Single-family home starts and permits both declined in October, signaling weakness for the month and for the immediate future. A 6.5 percent year-over year decline in the completion rate added to the bad news, indicating that builders are not going to be making a significant dent in the inventory shortage any time soon.Builder confidence levels, which have remained relatively high all year, are finally reflecting the cumulative impact of progressively weaker housing reports. The National Association of Home Builders’ confidence index fell by six points in November, continuing a gradual year-long decline from the 18-year high reached in December of 2017.Separately, Redfin reports that nearly one-third of the homes sold in October recorded price reductions, the largest number in more than eight years. Adding to the evidence of market weakness, a Bloomberg article chronicled the surge in buyer incentives that builders are offering to sell new homes. “Everyone is hungry for buyers,” a real estate broker quoted in the article observes.
GAUGING CYBER-THREATS
Awareness of cyber-security threats is growing among community association boards and managers, but gaps remain in efforts to mitigate those risks. A survey by the Foundation for Community Association Research found that more than half (56 percent) of community associations now have policies and procedures in place to collect, store, and protect homeowners’ personal data, training board members and security precautions, but 44 percent provide no training in technology use and cybersecurity.The survey was based on responses from more than 60 community association managers, board members and industry professionals. Only 36 percent of the board members said they were aware of the availability of cyber-insurance, but of those, nearly 70 percent said their communities had obtained the coverage.Among the other findings:
- Only 9 percent of the respondents said their communities or communities they represent had suffered a data breach in the past year; all reporting breaches said the financial impact had been “minimal.”
- Fraud and theft were the top concerns, cited by 52 percent of respondents, followed by storing and destroying records properly (51 percent), breaches in management software (49 percent) and defamatory postings about association management (48 percent).
- A large majority (70 percent) said they continue to store hard copies of documents, such as contracts, financial records, and resident contact information.
In an age of increasing cyber-threats, “not one sector of our economy is safe…[and] community associations and the residents who live and work in these communities are no exception,” David Jennings, executive director of the foundation, notes in an introduction to the report. CAI will use the research “to develop tools to educate community association leaders about cybersecurity issues arising from social media, community websites, and third-party payment portals. It also will be used to develop professional educational materials and best practices in cybersecurity for the professionals who work with associations.”
APPRAISAL EXEMPTION
Federal financial regulators want to exempt more homes from the appraisals required when single-family homes are sold. The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve Board have proposed increasing the price threshold at which the appraisal requirement applies from $250,000 to $400,000. Mortgages sold to Fannie Mae or Freddie Mac, insured or guaranteed by the Federal Housing Administration or the Veterans Administration would still be subject to the existing threshold. Even so, the OCC estimates that an additional 217,000 of the mortgages originated in 2017 would have been exempted under the new appraisal rule.Regulators say they are responding to “concerns raised about the time and cost associated with completing residential real estate transactions.” Raising the appraisal threshold, they add, “could provide meaningful burden relief… without posing a threat to the safety and soundness of financial institutions.”Instead of the full, in-person appraisal required for loans above the threshold, lenders could use an automated loan “evaluation,” which is less extensive and does not have to be prepared by a state-licensed or state-certified appraiser.Appraisers, not surprisingly, don’t like the idea, not simply because it would reduce the need for appraisers, but because it would “undermine the crucial risk mitigation services that appraisers provide clients and users of appraisal services.”That’s according to James Murrett, president of the Appraisal Institute, who warned in a statement that exempting more homes from the appraisal requirement “will return to the loan production-driven environment seen during the lead-up to the financial crisis, where appraisal and risk management were thrust aside to make more – not better – loans.” It would appear, he added, that the regulators “have learned nothing from that experience.”
NO CHANGE
Anticipating that the multifamily construction market will slow next year, the Federal Housing Finance Agency has left the multifamily lending caps for Fannie Mae and Freddie Mac unchanged at $35 billion each. But within those caps, the agency says it will “continue strategic exclusions for affordable housing and green lending, to encourage market support for these categories.”Affordable housing exclusions will be based on what the agency describes as a “data-driven process” designed to ensure that the exclusions target markets with the largest number of “cost-burdened” renters. This approach, “will result in less variation in market designations over time and offer greater stability to the multifamily market,” an agency press release notes.Recalculating the ‘green lending” exclusions, targeting loans that encourage energy conservation, “may increase the implementation cost of these loans for some borrowers,” agency officials acknowledge. “However, with careful consideration of the type and quantity of energy-saving and water-saving measures implemented,” they say, those costs “can be minimized.”
FAIR HOUSING PROTECTIONS
Senators Tim Kaine (D-VA) and Orrin Hatch (R-UT) are co-sponsoring legislation that would add source of income and veteran status to the list of discriminatory factors barred by the federal Fair Housing Act. The measure is needed, the lawmakers say, because the current law does not specifically prohibit property owners from denying access to housing to veterans or to individuals using housing vouchers.“As a fair housing lawyer, I witnessed the pain experienced by families who were discriminated against as they searched for a home,” Kaine said in a statement. “Housing decisions should be made on a potential tenant’s merits, not harmful prejudices that hurt the nation’s veterans and families in-need,” he added.“Helping veterans lead lives of dignity and independence has long been among my top priorities. This bill is part and parcel to that legacy,” Hatch noted in a separate statement announcing the bipartisan measure. “It will put an end to the immoral housing discrimination against veterans and others who rely on veterans’ benefits, social security disability, or other non-wage legal income,” he said, adding, “This bill will address the fact that Source of Income is not a protected class under the Federal Fair Housing Act, thereby helping to remove an unnecessary barrier facing Utah families and veterans on the path to self-reliance.”The American Bar Association has joined a number of housing advocacy groups, including the National Low Income Housing Coalition and the National Fair Housing Alliance, in supporting the measure.
IN CASE YOU MISSED THIS
Eyeing a growing population of renters, builders are constructing more homes for the rental market. This sector represented 4.3 percent of home starts in the first quarter of 2018, compared to the historical average of 2.7 percent.Single-family homes, which had been shrinking in recent surveys, are getting larger again.Regulators are cracking down on all-cash home sales. The Financial Crimes Enforcement Network, which polices money-laundering activities, is requiring Title Insurance Companies in major housing markets to report details of cash transactions of $300,000 or more.If you’re looking for evidence of the income gap, Susan Crandall, director of the Center for Social Stability at U-Mass-Boston, has found it. She calculates that CEO compensation has increased by 1,000 percent since the 1970s, compared with a gain of about 11 percent for the employees who work for them.
LEGAL BRIEF
ONCE A GOLF COURSE ─ BUT NOT ALWAYS
A mortgage lender and a community association clashed over whether the association could claim ownership of a golf course, even though it was no longer used for that purpose. The association won.
Homes sold faster in Boston than in any other major market in October, moving from listing to ‘sold’ in an average of 15 days, according to a Redfin survey. Nearly 40 percent of the homes sold above the asking price.The dispute in Codale Commercial Funding, LLC v. Villages of Marlborough Community Association, Inc. centered on the original covenants for this Maryland condominium association, which specified that should the developer or its successors cease owning or operating the golf course for 365 consecutive days, it would revert automatically to the association. That provision reflected the agreement between the developer and the county, which had approved higher-density construction for the site on condition that the developer maintain the existing golf course as open space for the benefit of the association.More than two decades later, the owner of the golf course fell on hard times and Codale Commercial foreclosed on the owner’s mortgage. Finding the golf course in serious disrepair and determining that it would be too costly to reopen it, Codale maintained the property as open space for about four years, at which point the lender began discussing alternatives for redeveloping the property with the association’s board. The association’s board decided instead to enforce the reversion clause. The board asked a circuit court to issue a declaratory judgment and to grant a “quiet title” affirming the association’s ownership rights. Codale countersued, accusing the association of fraud, negligent misrepresentation and unjust enrichment. When the association prevailed, Codale appealed, advancing four major arguments for reversing the lower court’s decision. The Maryland Court of Special Appeals rejected all of them.Argument 1: The association did not legally exercise the reversion clause and so never actually owned the property. Codale argued that the covenant required reversion of the golf course if the developer (or its successors) ceased to own and operate the parcel as a golf course. Because Codale never ceased owning the parcel, the company contended, the conditions triggering reversion weren’t met. The Appeals Court ruled that this argument misstated the covenant’s language, which says reversion would be triggered if the developer ceased to own or operate the golf course property. “Codale's interpretation…would require us to ignore the plain meaning of the Covenants because it can only succeed if we read the word ‘or’ as meaning ‘and,’” the court noted. Because Codale ceased operating the parcel as a golf course, the reversion language was properly triggered, the court said, “and the property reverted to the Association.”Argument 2: The restrictive covenant should be voided because material changes in circumstances made enforcement no longer feasible and rendered the covenant’s purpose no longer achievable. Voiding a covenant is justified, the Appeals Court noted, only if there has been a “radical change” in circumstances. The trial court found no evidence to support that finding and the Appeals Court agreed that Codale had “failed to establish any radical change in circumstances that would require us to invalidate the Covenants.”Codale had also contended that because the golf course could not be operated economically, the covenant’s purpose could not be fulfilled. But the court pointed out that the stated purpose of the covenant was to satisfy the conditions the developer accepted in exchange for the density bonus, by providing open space to the association “either as an operating golf course or as open space owned by the association.” Enforcement of the reversion clause achieved the covenant’s purpose, the court ruled. “The developer received its density bonus, and now the Association, in the absence of an operating golf course, has obtained ownership over the open space property.”Argument 3: The association waived its reversion claim because the board did not enforce it immediately. Codale contended that during extensive discussions about the future of the property, board members repeatedly expressed concern about the cost to the association of acquiring it. Those statements, Codale argued, reflected the board’s intention not to exercise the reversion clause. The circuit court found that while individual board members “expressed their personal p[references and opinions,” the board as a whole never executed an agreement with Codale. The court also found that the board had no obligation to enforce the covenant until Codale’s “repeated assertion of ownership” required it to act. The Appeals Court agreed. The association did not waive its right to act, the court noted, by waiting until Codale’s actions “stirred the Association to enforcement…. Thus, we see no clear error by the circuit court and affirm its determination that the Association did not waive its right to enforce the reversion.”
Argument 4: The association was unjustly enriched by collecting maintenance fees and real estate taxes from Codale when the company assumed incorrectly that it owned the property. Codale argued that the board misled the company by indicating that it did not intend to enforce the reversion clause. Because the payments were induced improperly, Codale maintained, the association should refund them. Neither the circuit court nor the Appeals Court bought that argument. “Codale was well aware of its right not to pay…knew or should have known that the [board] never decided that the property should not revert to the association,’ the Circuit Court noted. Moreover, the court pointed out, Codale chose voluntarily to pay the expenses “with the hope that the [board] would support [the company’s] development plan.”Affirming the lower court’s conclusion, the Appeals Court noted: “These findings, which have ample support in the record, establish that Codale gratuitously contributed to the maintenance and real estate expenses for the Property, despite knowing about the reversion clause in the Covenants, in an attempt to further its business interests. Thus, it was not inequitable for the Association to retain the benefits under these circumstances.”
WORTH QUOTING
“The uncertainty is palpable.” ─ Ralph Wiechers chief economist at the German Mechanical Engineering Industry Association, in a Wall Street Journal article, commenting on growing concern about the global economic outlook.