LEGAL/LEGISLATIVE UPDATE – SEPTEMBER 3, 2019
FHA CONDO RULES
The Federal Housing Administration (FHA) has approved a final rule easing access to FHA-insured mortgages for condominiums, incorporating many of the changes for which the Community Associations Institute (CAI) has been lobbying for years. The policy changes could result in the financing of an additional 60,000 condominium loans every year, according to HUD estimates. Among the key changes, the revised rule:
- Reinstates the “spot approval” process. FHA will now insure loans on up to 10 percent of the units in condominium developments that have not been certified by the agency. CAI terms this “a game-changer,” because many smaller condominium projects have found the certification process too costly and too cumbersome. HUD estimates that of the approximately 150,000 condominium developments in the country, only 6.5 percent are approved for FHA financing.
- Requires recertification every three years instead of every two.
- Eases restrictions on commercial space.
Lowers owner-occupancy requirements from 50 percent to 30 percent of units.- Increases the cap on FHA-insured units to 75 percent of the units in a condominium community.
“A balanced, data-driven condominium approval process at FHA has been a long-term public policy priority for CAI,” Dawn Bauman, senior vice president for government affairs, said in a statement. The new rule, she added, “marks a return for FHA as a key long-term partner for condominium associations.”
HOUSING IMPROVEMENT – MAYBE
In the stand-off between concern about a possible recession and the appeal of lower mortgage rates, mortgage rates appear to have won. Existing home sales increased 2.5 percent in July, rising to a seasonally adjusted annual rate of 5.43 million units. More significantly, July sales beat the year-ago total by 0.6 percent, reversing 16 consecutive months of year-over-year declines.
The increase was “inevitable,” Lawrence Yun, chief economist for the National Association of Realtors, said, given the strong labor market and “incredibly low” mortgage rates. The rate on a 30-year fixed rate mortgage stood at 3.77 percent in July compared with 4.46 percent a year ago, according to Freddie Mac.Although the July sales increase beat predictions, it was not strong enough to alter the shape of what has been a tepid spring housing market, constrained by concerns about the economic outlook and a chronic shortage of homes for sale, with no near-term relief in sight for either. The trade war with China continues to fuel recession fears, while new home construction continues to lag. Housing starts posted their third consecutive monthly decline in July, falling by 4 percent overall. Single-family construction inched up slightly, by 0.6 percent year-over-year, while permits increased by 1.5 percent – positive numers but modest gains, analysts said, given low mortgage rates and rising incomes.“In theory, low mortgage rates combined with solid economic fundamentals…should be buoying the housing market,” John Pataky, executive vice president of TIAA Bank, told Housing Wire. “But the effects of this stimulus have been muted” in the new home market. “Much of the Fed’s rate cutting has already been priced into mortgage rates,” he added. If long-term rates “bottom out” at current levels, Pataky noted, “the housing market will need to learn to stand on its own.”Some housing economists are betting against that possibility. Fannie Mae recently lowered its housing forecast, predicting now that sales for this year will fall below the 2018 level, primarily because of the inventory shortage. “Strong housing sentiment does little in the face of limited supply,” the new Fannie forecast notes.
DISPARATE IMPACT REVISION
The Department of Housing and Urban Development (HUD) is proposing new Fair Housing Act rules that would make it more difficult to prove that mortgage lending policies, while not overtly discriminatory, have an illegal “disparate impact” on minorities. Under the proposed rule, plaintiffs would have to demonstrate that a disputed practice is “arbitrary, artificial and unnecessary,” and that its discriminatory impact is significant and widespread, affecting more than one member of a protected class. The rule would also make it easier for lenders and housing providers to defend themselves against disparate impact claims by demonstrating that the formulas they are using to make policy decisions achieve “legitimate objectives.” The goal is to limit disparate impact liability “so regulated entities are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system,” HUD officials said in a statement announcing the proposal. Critics contend that the effect will be to undermine Fair Housing protections by making it almost impossible to win disparate impact claims. “The proposal threatens to halt 50 years of progress toward fair and equal access to housing and credit, with sweeping implications for people of color, women, families with children, and people with disabilities,” the Urban Institute warned.
RECESSION WARNINGS
U.S. economists are becoming increasingly concerned about the economic outlook. More than one-third (38 percent) of the economists surveyed by the National Association for Business Economics (NABE) expect a recession to begin next year, while 34 percent are predicting that a downturn will begin this year, 10 percent more than held that view a year ago. Tariffs levied in the trade war with China and rising government budget deficits are the major fears.
The NABE survey looks relatively optimistic compared with other forecasts. Ray Dalio, founder of the giant hedge fund, Bridgewater Associates, rates the odds of a recession beginning before the 2020 election at 40 percent. Chris Krueger, managing director of Cowen Washington Research Group, recently advised investors not to underestimate the negative implications of the continuing trade war. “On a scale of 1-10,” he said, “it’s an 11.” Also striking an alarmist tone, Lawrence Summers, who headed the White House National Economic Council during the 2009-2010 financial crisis, said the trade war may have created “the most dangerous financial moment” the nation has faced since the economic turbulence that triggered the “Great Recession.”
SHAREHOLDERS DEVALUED
The chief executives of some of the nation’s largest corporations are rethinking the emphasis on shareholder value. A joint statement issued by the Business Roundtable and signed by nearly 200 CEOs, suggests that corporations should prioritize the interests of their employees, their customers, their suppliers and their communities. Although the statement does not mention growing income inequality, it does reflect growing concern about that issue.“Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” the statement notes. “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders….Each of our shareholders is essential,” the statement continues, “[and] we commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
IN CASE YOU MISSED THIS
Consumer sentiment tumbled in August, declining from 98.4 to 92.1 – a seven-month low. Economists, who had expected a higher reading, blamed stock market volatility for souring consumers’ views.While many analysts view an inverted yield curve as a key indicator of an economic downturn, some think sales of recreational vehicles (down about 20 percent so far this year) may be a more accurate signal.The Department of Housing and Urban Development is awarding $27.8 million to 38 public housing agencies to finance efforts to reduce lead paint risks in older public housing units. Recipients include the Springfield (MA) Housing Authority, which received $146,125.Single family homes are getting smaller. The U.S. Census Bureau reports that the average floor area of homes constructed in the second quarter of this year was 2,465 sq. ft. That’s down from 2,551 sq. ft. in the second quarter of last year and 2,618 sq. ft. in the same period of 2017.Federal bank regulators are proposing to increase the floor above which appraisals are required for single-family homes. Under the proposed rule, appraisals would be required for homes valued at $400,000 and more. The current ceiling is $250,000.
LEGAL BRIEF
STORM DAMAGE
Disputes over the interpretation of deed restrictions and covenants typically require both a close reading of relevant documents and a balancing of competing interests. In this case (Gross v. Iannuzzi), the New Jersey Superior Court concluded that the right of an owner to rebuild a hurricane-damaged home outweighed the interests of other owners in preserving their ocean views.
When superstorm Sandy ravaged the Eastern seaboard in 2012, it severely damaged 10 attached, two-story townhomes in Margate, N.J. Nine of the homes could be repaired in place but the 10th was deemed uninhabitable.Kevin Iannuzzi purchased the home, planning to raze and replace it. The city Building Department advised him that a new structure would have to comply with a post-Sandy building code, requiring structures to be elevated to 13 feet above flood level – about four feet higher than the existing home.Two groups of owners sued to block the construction, arguing that the community’s covenants required a majority of townhome owners in the development to approve any additions to existing structures. Iannuzzi proposed to build either a free-standing home or a town home, elevated to meet existing flood standards. The plaintiffs rejected both options. A trial court agreed with the plaintiffs that both the detached home and the elevated townhome met the definition of an “addition,” requiring the approval of other owners. An Appeals Court agreed that the detached home required owner approval, but held that the plaintiffs could not bar the elevation of the townhome, because a state law ensured the owner’s right to rebuild it.In their appeal to the Superior Court, the plaintiffs advanced three arguments: The deed restriction should be enforced; Iannuzzi had to obtain a zoning variance from the city to rebuild the town home; and even if he were allowed to elevate the structure, he had to maintain the existing roof height by reducing the interior ceiling or reducing the number of stories. The court rejected all three arguments.A state law amended after Sandy allows Iannuzzi to reconstruct his town home and elevate it to meet current floods safety standards “despite declaration provisions…and any local development regulations that would otherwise preclude him from doing so,” the court said.The statutory language the court cited specifically exempted owners from “any development regulation, including any requirement to apply for a variance therefrom that otherwise would be violated as a result of using a new and appropriate elevation when lawfully repairing or reconstructing a Sandy-damaged structure….”Subsequent amendments, approved after the trial court decision in this case (and apparently “in response to it,” the Superior Court suggested), underlined the intent of lawmakers “to sweep away obstructions to flood-safe construction.” This revised statutory language stated: “Notwithstanding the provisions of any other law to the contrary, any deed restriction or agreement, no matter when entered into or made, that prohibits or has the effect of prohibiting any otherwise lawful raising or constructing of a structure to a new and appropriate elevation is contrary to public policy and therefore shall be unenforceable.”
Plaintiffs’ argument that the declaration requiring owner approval of the new structure should be enforced ignores the effect of the legislation, which is to render the declaration “no longer relevant,” the court said. The court also rejected the argument that Iannuzzi should be required to maintain the existing roof height in order to keep the new structure within the dimensions of the old one. While the Sandy-related exemption “applies only to the minimum extent or degree necessary” to allow a new structure to meet the new elevation standards, the court agreed, “that does not mean Iannuzzi must abandon the first floor of his unit in order to comply….Reading the statute as a whole,” the court said, “we conclude that…the owner can raise the entire structure several feet off the ground, while maintaining the original dimensions of the structure, including the original amount of living space. Nothing in in the [statutory] wording or history of the statute remotely suggests that the Legislature intended to require owners of two-story residences to abandon the first floors of their homes in order to obtain a flood-protected structure.”The plaintiffs also argued that local officials must approve a new site plan, because a site plan does not meet the definition of a “development” that is exempt from the approval process. But the court found that argument, too, “without merit.” A development regulation includes a site plan ordinance, the court noted, “without which there would be no site plans. “[So] the exemption necessarily includes an amendment to the site plan. Holding otherwise,” the court concluded, “would defeat the Legislature’s purpose to allow owners of Sandy-damaged structures to comply with flood-safe construction measures, without the delays inherent in variance applications and site plan approvals.”
WORTH QUOTING:
“[There are] no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade.” Federal Reserve Chairman Jerome Powell, discussing the challenges created by the ongoing trade war between the U.S. and China.