Housing Crisis: Do Nothing?

Today’s New York Times has an interesting, and rather distressing article regarding the continuing distress in the housing market; economists, realtors and politicians cannot decide on whether or not to continue trying to support (and maybe even salvage) the housing market; neither option appears very promising.

In sum, if nothing is done, prices will correct to natural levels; that would be unpleasant for present homeowners but a boon for new purchasers; the downside, however, is that more existing owners may decide to default, if they see more negative equity.  On the other hand, continued efforts to prop up the market may not work, will cost lots of money, and are politically unpopular.

The lack of consensus may end up bringing about the old political answer: do nothing.

The Next Foreclosure Fight – CNBC.com

A short clip on the ever-expanding number of community associations that are choosing to foreclose on unit owners in debt:

The Next Foreclosure Fight – CNBC.com.

Like most of these clips, it fails to cover the subject very thoroughly.  The foreclosing association’s attorney implies there are no options other than foreclosures for associations facing debt; CAI‘s CEO Tom Skiba is a participant and defends the need for non-judicials as a “tool in the toolbox;” the attorney guest asserts that HOAs are not community associations, but rather corporations, that create assessments for the benefit of their vendors.  (Principally attorneys and vendors.)

News on Reverse Foreclosures

My Twitterpal Melissa Garcia, (@ColoradoHOAGal) pointed me to this article in the Miami Herald, which  explains the mechanics of a typical reverse foreclosure.  Reverse foreclosures are being pursued by community associations throughout the country, as associations find themselves stuck with units on which the owners will not pay and on which the lenders will not foreclose.  The problem arises everywhere, but particularly in those states with higher foreclosure rates.

A condominium or homeowners association (HOA) that forecloses a unit upon which there is a senior lien will not be able to take title, but will be able to get access to the unit, and presumably put some pressure on the lender to step up to its obligations.  The law is still developing in this area, so watch for new developments as some cases are decided.

The article also quotes another frequent blogger and twitterer, Donna Berger, (@CondoandHOALaw); Donna wisely recommends that associations rent the units after taking them from the banks.

Stacking Up

There’s been lots of community association news in Utah over the past several weeks, and not a lot of time to write about it.  The Utah appellate courts have handed down several cases dealing directly with community associations and homeowners, and several other cases with tangential, but significant impacts on the industry.  I’ll blog about those in the next several days.

The other news deals, rather surprisingly, with progress in various community association projects.  First, a new project in the Sugarhouse area is opening soon; the controversial Urbana on Eleventh “condominium tower” will have 29 “pet-friendly” units.  Neighbors fear parking and crime issues, but many local businesses are hoping for increased commerce.  Units will range from slightly under 200k and up to slightly over 500k.

Meanwhile, progress on the City Creek project is continuing, with a good portion of the food court having its grand opening today.  That event gave rise to some new publicity and a status update on all of the buildings, nicely shown on this diagram.  Units in the Richards Court condominiums will commence in just a few months, with units in the taller Regent and City Creek Tower 1 project being available in mid-2011.  (Interestingly, the developer has little available information on the “Tower 1;” the provided link is to a skyscraper page.  That page is worth a look, since it has some photographic history of the construction, and nerdy photos, rendering and videos.

And lastly, the City Creek Project has gotten some more publicity from the New York Times, which has an interesting outsiders take on the church/state and economic issues associated with the development.  One interesting tidbit in the NY Times article notes that although the church will likely allow alcohol in some of the development, they will sell the underlying property to accommodate that while “keep[ing] the church from being in the liquor business or from benefiting from liquor sales.”   (Regular readers of this blog will recall that the New York Times has written on the City Creek project in the past.

Utah Condo Sales Are Up — Way Up!

The Salt Lake Board of Realtors issued its fourth quarter 2009 Housing Market Report, and it appears that the Utah housing market, and particularly the condominium market may be on the mend.

Single family sales were up 36 percent compared to the same quarter of the previous year; condominium sales were up even more.  544 condominiums sold during the quarter in Salt Lake County, which was a 42 percent increase over the corresponding 2009 quarter.

The year-end figures for 2009 were also up over the numbers for 2008.  2008 was the third year of a three year downturn in sales, thus suggesting that 2008 may have been the bottom.

Here’s a link to the Salt Lake Board of Realtors’ press release and here’s a link to a spreadsheet of the statistics.

CCAL Law Conference — Financing Availability

Over the past several years, many changes have taken place in real estate financing; one of the less publicized areas of change deals with the availability of financing for community associations.  Lenders and underwriters are changing the way they review and approve those associations that can get federal mortgages.
The panelists for today’s town hall meeting on mortgage financing eligibility include DeLynn Conley, Senior Risk Manager, Project Standards, Fannie Mae; Loura K. Sanchez, Esq., CCAL, Stephen M. Marcus, Esq., CCAL; and George E. Nowack, Esq., CCAL.
FHA Loans
FHA loans are now 30% of the market.  On February 1, spot loans will no longer exist.  Previously, questionnaires would be distributed, and largely ignored.   However, starting on February 1, associations will need to be approved, and those approvals will be expensive to obtain.
There are 3 mortgagee letters that have been issued.  Mortgagee letter 46b provides two methods for approval; currently, all applications are being sought through the FHA.
There are many documentary requirements on applying for certification.  An attorney’s opinion is not required by FHA, but is left to the lender or developer.  The developer or lender may, in turn require a letter.  That opinion will require, in theory, that an association complies with “all applicable laws and regulations…”
Rights of first refusal will be allowed, if not discriminatory.
FHA may have an advantage with respect to pre-sale requirements; in connection with FHA, it will be at 30% through the end of 2010.
FHA used to limit its involvement in a project to 10%; that will be increased to 50% through 2010.  Thereafter, it will decrease to 30%.
FHA appears to have removed legal document requirements, other than a transition limitation.
FHA will be reviewing budgets, and an inclusion of deductible funding for insurance deductibles.
FMAC will follow FNMA and FMAC requirements; FNMA will require 10% reserve funding and deductible coverages for insurance.
Insurance Requirements
FNMA requirements now require insurance to cover 100% replacement cost, including replacement of the Units.  This can be a guaranteed replacement cost policy, or a policy with a replacement cost policy with an agreed value endorsement to cover any coinsurance gap.
Under the new rules, a borrower becomes involved in connection with betterments and improvements.  If the association policy doesn’t cover betterments and improvements, there will be a gap.
Bare Walls – the association’s policy will cover only replacement of the drywall or plaster, and none of the fixtures or improvements.
Single Entity – the most typical coverage, according to Nowack.
All-In  — the association’s policy will cover and replace all contents of the unit, including the improvements and betterments.
If the association does not cover with all-in coverage, the owner must obtain a “walls in” policy.  (Which would be a standard HO-6 policy.)  The policy must cover, at a minimum, 20% of the appraised value of the Unit.  A major problem with this, of course, is that the value of a Unit may well include intangibles such as a view.
Another new insurance requirement is fidelity coverage; the association needs to have a minimum of three months of aggregate assessments, and an amount equal to all of the association’s reserves.
What Next?
Steven Marcus is suggesting that associations be proactive prior to February 1 to obtain certifications; Project Approvals out of Philadelphia is one possible source.
Associations involved in litigation, and associations with special assessments in place, will be reviewed on a case-by-case basis.

Is Your Association Distressed?

My colleague, Julie Ladle and I are preparing the materials for an upcoming NBI Seminar, Common Interest Community Issues in a Distressed Market, which will be held in Salt Lake City on December 9, 2009.

Since stories and facts are much more interesting and enlightening than case law discussions, we’re seeking your help. How’s the economy impacting your association? What are you doing to respond to the economic conditions.

Our specific agenda items include: Disclosure Requirements When Selling Condominiums, Development Agreement Defaults, and Successor Developers: The Legal Implications of Takeover. If you have any experience with any of these issues, give us a call or drop us an email. You’ll find contact information for both of us at haolaw.com.