The Federal Housing Administration has extended its temporary rules governing the certification of condominiums – a requirement to make buyers and owners eligible for FHA-insured mortgages. The extension – until August 31, 2017, will give agency officials time to incorporate changes mandated by Congress in the Housing Opportunity through Modernization Act, which was signed into law at the end of July. Among other changes, the law:
Requires the FHA to streamline its recertification process for condominiums, making it less extensive and less burdensome than the initial certification process;
Reduces the FHA’s owner-occupancy requirement from the current 50 percent to 35 percent of the units in a community;
Allows lenders to approve FHA condominium loans in communities in which more than 25 percent of the space is commercial, without obtaining a waiver from the FHA; and
Directs HUD to adopt the Federal Housing Finance Agency (FHFA) policy on transfer fees, allowing the FHA, like Fannie Mae and Freddie Mac, to approve loans on units in condominiums that impose those fees.
The notice announcing the extension indicates that it ”supports the continuation of FHA’s ability to insure mortgages in condominium projects and avoid market disruption, while work continues on the rulemaking necessary to propose policy revisions and address items in the [Housing Opportunity Act].” The new legislation echoes many of the provisions in FHA’s temporary rules, but goes well beyond them. Among other differences: The FHA rules do not change the agency’s policy on transfer fees, as the statute now requires – a major victory for the Community Associations Institute (CAI), which has lobbied unsuccessfully for this change for several years.
In a press release applauding passage of the Housing Opportunity measure, CAI noted that it “will not only help condominium projects maintain their FHA approval, it will also ease the burden on condominium projects and put ownership [within] reach for more families.”
WILL THEY OR WON’T THEY?
Federal Reserve Chair Janet Yellen has delivered the much anticipated speech that was expected to signal clearly whether the Fed will be raising interest rates this year. It didn’t. While asserting that “the case for an increase in the federal funds rate has strengthened in recent months,” Yellen also emphasized that “the economic outlook is uncertain and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited,” she added, “because monetary policy will need to respond to whatever disturbances may buffet the economy.” While some analysts concluded that the odds of a rate hike – possibly in September – have increased, others reached the opposite conclusion – that an increase won’t come until after the election (when the Fed will have more information about the strength of the labor market, consumer spending, business investment and other key indicators) and may not come before next year. At least one analyst termed Yellen’s’ message and the Fed’s current interest rate views “wishy-washy.”
MORE MIXED MESSAGES
Like Fed Chair Janet Yellen (see above), the housing market is sending mixed signals. Existing home sales in July fell more than 3 percent below the June level as stubbornly low inventory levels and rising prices (a byproduct of those low inventories) offset the benefits of near record-low mortgage rates. Pending home sales, an indicator of future sales, managed to inch up a bit, rising 1.3 percent above the June level , but remaining about even with the year-ago figure.
The unexpectedly steep decline in purchases pushed existing home sales below the year-ago level for only the second time in the past 21 months, stirring concerns that the housing market’s recovery may be stalling. While median home prices have increased by only 11 percent during that period, median home prices have soared by 62 percent, according to the National Association of Realtors (NAR).
“Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” Lawrence Yun, the NAR’s chief economist, said in a press statement. “Realtors are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows,” he added. “The party is over” in the housing market, Aaron Terrazas, an economist with Zillow, agreed.
New home buyers apparently haven’t received that memo. New home sales increased by almost 13 percent in July, reaching their highest level in nearly nine years. The anemic inventories that have crimped existing home sales are having the opposite effect here, providing buyers with options they can’t find in the previously-owned pool. An increase in the construction of lower-priced homes – a market segment builders have largely ignored until now ― is also fueling new home sales, industry analysts say.
Providing more good news, housing starts also increased in July, reaching their highest level in five months, but building permits – an indicator of future construction activity – declined slightly (by 0.1 percent) compared with June, following three successive monthly increases, indicating to some analysts that the current momentum may slow.
Look, up in the sky, it’s a bird, it’s a plane. It’s a… pizza? Not exactly a pizza, but a drone delivering one in New Zealand, marking what appears to be the first air-borne pizza delivery the first air-borne pizza delivery in the world. Domino’s, the first to test drone delivery of pizzas, is pursuing plans to introduce the service in Australia, Belgium, France, the Netherlands, Japan and Germany this year. The United States isn’t on that list, because current regulations limit commercial uses of drones. The Federal Aviation Administration has issued rules covering drones weighing less than 55 pounds that are used for “routine, non-hobbyist” purposes. But these rules won’t apply to drones delivering pizza or other products, because those vehicles will be flown by pilots.
Condo associations, meanwhile, continue to ponder how they will respond to the expanding use of this technology, anticipating that many community members will acquire recreational drones, while others will doubtless complain about the businesses or owners flying them over the community. We recommend that boards begin thinking about the policies they will need to address the safety and privacy concerns drones have triggered. For example, boards may want to consider adopting regulations limiting the size of drones residents can own, or specifying where and when they can land in common areas.
A DISTURBING TREND?
The decline in the homeownership rate ― now at a 50-year low ─ has spurred considerable hand-wringing in the housing industry, as analysts fear that the current trend, which has many young adults favoring renting over home buying – could become a permanent, market-impairing condition.
The ownership rate, now just below 63 percent, could fall to 58 percent or lower by 2050, according to some predictions. But the statistics aren’t triggering alarm bells for everyone. Ralph McLaughlin, chief economist for Trulia, points out that while ownership rates have reached an historical low, this year’s decline “isn’t statistically significant from a year ago.” To the extent that ownership levels are still falling, he suggests, the explanation lies more in an improving rental market than in any “real” decline in the number of homeowner households.
The increase in renter households actually bodes well for the housing market, he believes, because it indicates that millenials, who have been living with their parents since the economic downturn, are finding their financial footing and establishing households of their own. Renting an apartment, he notes, is the first step toward ultimately buying a home.
Svenja Gudell, chief economist for Zillow, isn’t convinced. It isn’t just the millenials who are opting to rent, she notes. “Broadly speaking, the falling homeownership rate is a sign that renting isn’t only for those just starting out or making a transition, but is becoming an increasingly viable longer-term option for many households,” and that, Gudell believes, is cause for long-term concern.
IN CASE YOU MISSED THIS
Delinquencies on home equity lines of credit are increasing as the loans reset at higher rates.
Year-over-year increases apartment rents continue to slow, indicating that this torrid market may be cooling off.
Freddie Mac is predicting that mortgage originations will top the $2 trillion mark this year, underpinning what analysts there expect will be “the best year in home sales in a decade.”
The Supreme Court has agreed to decide whether municipalities can sue lenders for discrimination under the Fair Housing Act, based on their failure to maintain foreclosed properties in disadvantaged neighborhoods.
An insurance company is arguing that it has no obligation to defend a condo association against the claim of an owner who says she was sickened by the association’s failure to prevent the accumulation of pigeon poop in the community.
CHIPPING AWAY AT THE IMPLIED WARRANTY
Two recent decisions by Illinois courts have made it harder for condominium associations in that state to win construction defect claims against builders. Separate decisions by the First District Court of Appeals and the state Supreme Court affirm and strengthen contractual provisions waiving the implied warranty of habitability for home buyers and substituting an express but limited one-year warranty.
In Board of Managers of Park Point v. Park Point at Wheeling, the District Court considered whether the disclosure of the warranty waiver in the purchase contract satisfied the three standards the Illinois Supreme Court had established in a previous decision (Petersen v. Hirschman Construction Co.):
The disclosure must be “a conspicuous part of the parties’ agreement;
It must refer to the warranty of habitability by name; and
It must disclose the consequences of the waiver.
The court found that the waiver disclosure language in this contract met those standards. The use of capital letters to describe the waiver “was sufficient as a matter of law to bring [it] to the buyer’s attention,” the court said. The disclosure language also “refers to the warranty of habitability by name, fully discloses the consequences of its inclusion in the contract and was, in fact, a part of the agreement executed by the parties,” as the Supreme Court’s standard requires.
The court also pointed to a separate warranty certificate attached to the contract, that stated, also in capital letters, that the warranty “is in lieu of all other warranties of seller, express or implied (including without limitation any implied warranty of merchantability, habitability or fitness for a particular purpose)….” While this language alone would not have met the disclosure standard, the court agreed, “it did strengthen some of the disclaimer terms in the main contract.”
The condo association had argued that the waiver was unenforceable because the developer had not “called it out” orally to all buyers and required them to initial the disclosure provision to acknowledge that they understood it. Some Illinois appellate courts had ruled that ‘calling out’ the waiver in this way was necessary, but the District Court rejected that interpretation of the Supreme Court’s standard.
As long as the waiver is disclosed “conspicuously” in the contract, refers to the warranty “by name” and discloses ‘in plain language” the waiver’s consequences, the court said, the waiver is enforceable and “a seller is not required to use a particular method of bringing a disclaimer to the attention of the buyer, such as having the buyer initial the provision.”
Waivers Are Forever
In a separate case, Fatah v. Bim, the Illinois Supreme Court ruled that the waiver of the implied habitability warranty by the first buyer of a property applies to subsequent buyers. The First District Court of Appeals, which issued the warranty disclosure decision discussed above, had ruled that a subsequent buyer was not bound by the first buyer’s waiver. But the Supreme Court rejected that view, holding that it would be unreasonable for a builder released from an implied warranty by one buyer to have to honor it for a subsequent owner.
The court had reached the opposite conclusion in a previous decision, holding that a second buyer was not bound by the first buyer’s waiver. But in that case, the court noted, little time had elapsed between the original purchase of the newly constructed home and its sale to the second buyer.
“This short time period was significant because it meant that the plaintiff occupied the house during a time when the original owners would still have been covered by the implied warranty of habitability if they had remained in the house. That being the case, allowing the plaintiff to pursue a cause of action for breach of the implied warranty would not alter the burdens or risks that were already placed on the builder-vendor and, importantly, would not alter the builder-vendor’s reasonable expectations,” the court explained.
Builders who negotiate for a waiver of the implied warranty do so to obtain the certainty of a finite period during which they are responsible for curing construction defects, the court noted, affair exchange, in the court’s view, for the concession – a lower purchase price or an express warranty, they offer in return.
“If the implied warranty is extended to a second purchaser even in the face of a valid waiver, the financial certainty, which the builder-vendor bargained for and assumed it had obtained, is lost,” the court said. “The builder-vendor has no means of knowing when the house might be sold by the first purchaser or to whom and, thus, no way of knowing when, or if, liability for latent defects in the construction of the house will reappear. Thus, in this case, extending the implied warranty of habitability to plaintiff would mean that defendants paid the price to obtain the waiver of the implied warranty from [purchaser] by providing and performing under an express warranty, but face liability anyway. This is unreasonable.”
The court also cited a public policy reason for its decision. Holding that an implied warranty, once waived “may be revived at any time the house is sold,” would render the waiver “effectively meaningless,” ensuring, the court said, “that no builder-vendor would ever enter into waiver agreements in the future.” As a result, “a practice we expressly authorized…that has been utilized in the housing industry for almost 40 years would be eliminated.”
“I continue to believe that conservatorship is not a desirable end state and that Congress needs to tackle the important work of housing finance reform.” ― Mel Watt, director of the Federal Housing Finance Agency, taking sides in the debate over whether his agency or Congress should take the lead in reforming the nation’s housing finance system.
Marcus Errico Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.
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