NEW CONDO FINANCING RULES
The Federal Housing Administration (FHA) has proposed new regulations easing some of the requirements condominium associations must meet to make units in the communities eligible for FHA-insured mortgages.
Key changes would: Reinstate the “spot approval” process, under which the FHA will insure loans on individual units in associations that have not themselves been certified by the FHA; ease the recertification requirements for condos that have obtained initial certification; potentially reduce the percentage of units that must be owner-occupied; and increase the maximum percentage of commercial space allowed.
The proposed changes “would be more flexible, less prescriptive, and more reflective of the current market than the [existing] requirements,” the Department of Housing and Urban Development (HUD) says in the Federal Register notice announcing the proposal. The intent, HUD says, “is to regulate where necessary to ensure financial soundness and project viability, but to be flexible where possible, and retain the ability to be responsive to the market.”
Under the proposed rules, condos would have to be recertified every three years instead of every two years. As long as they meet the application deadline (within six months before and six months after the existing certification expires), they would only be required to update information submitted previously; they would not have to submit a new application.
HUD is also considering replacing the current 50 percent minimum owner-occupancy requirement with a range that could vary from 25 percent up to 75 percent, subject to HUD approval, depending on market conditions. The proposal also suggests a range (25 percent to 60 percent) to replace the current 50 percent cap on non-residential space. HUD is seeking public comment on both those changes, and on the proposed recertification time period,
The Community Associations Institute (CAI) and real estate industry trade groups, including the National Association of Realtors (NAR), have been urging the FHA to revise its existing rules, which, industry executives say have made it too hard for condo associations to meet eligibility requirements, eliminating a significant source of affordable housing for buyers who need or want FHA loans, and making it impossible for many existing condo owners to refinance using the FHA program.
The proposed regulations respond to those concerns and to a recently enacted law (The Housing Opportunity through Modernization Act) in which Congress directed HUD to rethink the FHA’s condominium financing requirements.
CAI’s initial response was positive. A press statement said the trade association “as a whole is pleased with the proposed regulations, and believes they support condominium association boards in providing greater flexibility and less burden than the current process.” The CAI will be submitting formal comments on the proposal, which are due November 28th.
The NAR also intends to comment, with somewhat less enthusiasm than CAI has expressed. Among other concerns the NAR cited in its press release: Under the owner occupancy range HUD is considering, between 25 and 75 percent, the ceiling could be considerably higher than the 35 percent cap Congress suggested in the Housing Opportunity legislation, a cap NAR considers to be “a more appropriate and productive threshold.”
STILL WAITING TO JUMP
A child playing jump-rope (which children don’t actually seem to do any more), will wait for just the right moment, when the rope is in precisely the right position, to begin j
umping. The Federal Reserve, similarly, appears to be waiting for the right moment, when the economic moon and stars and planets are all perfectly aligned, to boost interest rates. It hasn’t found that moment yet.
The Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, decided in September once again to delay a rate move, concluding that the risks of bruising the economy still outweigh the risks of igniting inflation.
“Our decision does not reflect a lack of confidence in the economy,” Fed Chair Janet Yellen insisted after the meeting. But with inflation still subdued, the August employment report a bit weaker than hoped, and business investment still below par, she said, FOMC members decided “it’s better to err on the side of caution.” That view was not unanimous, however; three Fed governors reportedly opposed the decision, arguing that the Fed should act before the economy begins to overheat rather than waiting until the fire is raging.
DISCRIMINATION LIABILITY
The Department of Housing and Urban Development (HUD) has finalized regulations that could make community association boards liable under the Fair Housing Act, for the actions of employees or residents who “harass” other residents. The rules, proposed in February, would make housing providers, including condominium boards as well as landlords, potentially liable for the discriminatory acts of third parties if they were aware of the behavior, or should have been aware of it, and failed to halt it. Analyzing the implications in a MEEB Alert, Doug Troyer, a partner in the firm and a specialist in employment law, explained: “In a condominium setting, this means boards may be liable for the actions of a resident if board members are aware that one resident is harassing another one, and fail to take “prompt action” to stop it.
Douglas Troyer
The application of the rule to condos is clear, Troyer noted, pointing to language specifying that third party liability “can derive from an obligation to the aggrieved person created by a contract or lease (including bylaws or other rules of a homeowner association, condominium or cooperative).
CAI identified several concerns in its comments on the proposed rules, including: The requirement that boards prevent discriminatory actions by individuals over whom condo associations have no control; the obligation to take actions that boards aren’t authorized to take; and the obligation to intervene in disputes among individual residents.
“If the offending party is neither an officer nor an agent of the association, it is unclear what duty, if any, an association board or agent would have to intervene,” CAI noted in its comments, adding: “It is “highly unlikely that any community association’s board or agent has any legal authority to investigate, make findings of fact, reach a determination that violations of federal law have occurred or are likely to occur, and impose penalties against a resident [based on those findings].”
The final rule addresses at least some of those concerns, with revised language clarifying that:
All disputes among residents don’t constitute discriminator harassment under the Fair Housing law;
Community associations don’t have a general duty to halt discrimination, unless a specific law or their governing documents require them to do so.
Association boards aren’t required to take actions beyond those authorized by applicable laws or the association’s governing documents.
The final rule also adds a “reasonable person” standard to determine whether an association should have been aware of discriminatory actions by third parties.
WORKING OVERTIME
A coalition of business groups led by the Chamber of Commerce and officials in 21 states have filed suits seeking to block new rules that would make millions of American workers newly eligible for overtime pay. The Department of Labor rules, which take effect December 1, would double the salary threshold that defines “non-exempt” workers, who must receive overtime pay if they work more than 40 hours in a week. That dividing line would increase from $23,600 to $47,476.
The new standard would require many employers to reclassify workers who are currently exempt from the overtime requirement, and begin paying them time-and-half (150 percent of their hourly rate) if they exceed the 40-hour limit in any week.
Employers say the change will dramatically increase their costs, forcing them to slash payrolls, curb hiring, and increase prices they charge consumers. Critics are also concerned about the burden and disruption created by a provision that will adjust the overtime threshold automatically every three years.
Obama Administration officials say the new overtime standard will ensure that workers are compensated fairly for the work they do, but critics say employers are more likely to reduce the hours employees work than to pay them more for the work they do.
The backlash against the rule has been loud and intense. The House of Representatives voted recently to approve a bill that could delay implementation by at least six months. However, there is currently no comparable measure in the Senate, which would also have to approve the delay, nor any indication that President Obama would sign the legislation, if it does win Congressional approval.
EQUITY RISING
Rising home prices boosted home equity by nearly 10 percent in the second quarter of this year compared with the same period last year, pushing nearly 93 percent of homeowners with outstanding mortgages into a positive equity position. Only about 8.6 million homes – 17 percent of those with mortgages – have less than 20 percent equity, and only about 2 percent have equity of less than 5 percent, according to data collected by CoreLogic.
“We see home prices rising another five percent in the coming year based on the latest projected national CoreLogic Home Price Index,” Annand Nallathambi, president and CEO of CoreLogic, said in a press statement. “Assuming this growth is uniform across the U.S.,” he added, “that should release an additional 700,000 homeowners from the scourge of negative equity.”
Sustained gains have pushed home prices nationally to within 0.6 percent of the peak set in July of 2006, before the housing market began to implode, creating what some analysts warn is a double-edged sword – improving the equity position of existing homeowners but reducing affordability for prospective buyers.
Lawrence Yun, chief economist for the National Association of Realtors, shares that concern. Noting the back-to-back declines in existing home sales in July and August, Yun cautioned: “We go back to the same bottom line: Lack of inventory choices and prices rising way too fast are hurting affordability.
IN CASE YOU MISSED THIS
A Washington Post article detailed critical financial problems at a number of condominium communities “mired in a recession that never ended.”
Mortgage originations are on track to top $2 trillion this year, according to Freddie Mac, which is predicting “the best year in home sales in a decade.”
The U.S. Census Bureau reports that household incomes increased by 5.2 percent last year – the first year-over-year gain since 2007. The poverty level meanwhile declined to its lowest level since 2008.
Sen. Ron Wyden (D-OR) is sponsoring legislation that would provide tax credits to developers for building or renovating rental housing affordable for middle income households.
In a sign of an improving labor market, a recent survey found that more than half of employees are willing to consider looking for another job, and 44 percent are actively doing so.
LEGAL BRIEFS
DISTINCTION WITHOUT A DIFFERENCE
Does a bankruptcy discharge extinguish a condominium owner’s liability for assessments? Two Florida bankruptcy courts appear to have answered that question differently. But a careful read of the opinions indicates that they used the same interpretation of bankruptcy law to reach their different conclusions.
In In re: Montalvo, the Bankruptcy Court for the Middle District of Florida, considered whether a condo association had inappropriately applied rents collected on a unit owned by a debtor to delinquent assessments owed on that unit.
The debtor, Federico Montalvo, owned two units in the Villa Medici condo community, and stopped paying assessments on both when he filed a Chapter 13 bankruptcy petition. A court-appointed receiver assumed control of the units and, at the association’s request, rented them and applied rents collected to assessments due before the bankruptcy filing, and to assessments accrued after.
Montalvo claimed the association had no right to collect pre-petition assessments, because they were discharged by the bankruptcy, and that he had no liability for assessments accrued after the filing, because they were related to a payment obligation established before the bankruptcy and eliminated by it.
The association countered that its collection efforts were directed at the condominium unit and not at Montalvo personally. The assessment obligation was established by a covenant, which, the association said, ran with the property, was not affected by the bankruptcy, and would remain attached to the property until another owner purchased it and assumed personal liability for the payments.
The Bankruptcy Court agreed with the association. “Under Florida law, obligations imposed by declarations encumbering real property are more akin to covenants running with the land than [to] contractual obligations detached and separate from real property ownership,” the court said.
Following that interpretation, the court reasoned, the association did not violate either the automatic stay or the discharge terms by collecting pre-filing delinquencies, because “those assessments were a lien against the unit that arose from a covenant that runs with the land,” and “the association did nothing to collect the monies personally from the debtor.”
The same reasoning supported the association’s collection of post-petition assessments, the court said. Although the discharge petition erased personal liability for claims originating before the bankruptcy filing, the court noted, noting that “assessments will continue to accrue after the bankruptcy is filed, and the discharge will not relieve the debtor of these post-petition in personam liabilities. Debtor remains personally liable for the post-petition assessments,” the court concluded, “because the obligation runs with the land from the time of his discharge until title to the real property transfers.”
The headline for a decision by the Bankruptcy Court for Florida’s Southern District –“Bankruptcy discharge extinguishes personal liability for assessments,” suggested a contrary interpretation of the law. But in fact, this decision echoed the reasoning of the first.
The owners in this case, Jose and Ivanna Ramirez, filed a Chapter 13 bankruptcy petition, naming the Magnolia Court condo association as one of the creditors. After the discharge, the association demanded payment of assessments accrued after the date of the bankruptcy filing and sued the Ramirezes when they refused to pay. The Ramirezes countersued, asking the court to sanction the association for violating the discharge order, which extinguished all debts covered by the court-approved reorganization plan.
The court addressed a conflict between the general provisions of the bankruptcy code, which say the discharge doesn’t apply to assessments accrued after the discharge as long as the debtor owns the unit; and Chapter 13 of the code, which says once the debtor makes all required payments, the remaining debts are discharged.
This court, like the Middle District, distinguished between personal obligations, which were discharged by the bankruptcy, and property-related obligations stemming from covenants running with the land. To accept the Ramirezes’ argument, that property-related obligations were also discharged, would produce an illogical and unfair result, the court said:, citing a decision in another Florida case: “A debtor could continue to live in a unit after completion of a Chapter 13 plan in perpetuity without obligation to pay the same fees that neighbors must pay.”
Rejecting the Ramirezes’ demand that the association be sanctioned for improperly attempting to recover from them personally, the court noted that the Florida law governing personal liability for post-petition condo assessments is “unclear.” There was thus no basis for finding that the association’s actions were “contemptuous” and warranted the $125,000 in compensatory and punitive damages the Ramirezes sought, the court concluded.
IN QUOTES
“You lived in a bad neighborhood. You didn’t police yourselves. You’re going to have to live with this. You frickin’ blew up Planet Earth. Shut up and move on.” ― Steve Eisman, the investor, featured in “The Big Short,” who spotted the questionable lending policies that created the subprime fiasco, expressing little sympathy for lenders complaining about over-regulation following the housing market collapse.
Marcus Errico Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.
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