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FHA Issues New Mortgage Guidelines
The Federal Housing Administration (FHA) has recently adopted new guidelines for insuring mortgage loans that involve condominium units. The guideline changes are set forth in Mortgagee Letter 2011-22, and took effect on August 29, 2011.
Eligibility standards under the new guidelines include the following:
- While generally, not more that 25 percent of the property’s total floor area can be utilized for commercial purposes, the guidelines permit this limit to be extended to 35 percent under certain circumstances.
- Generally, not more than 15 percent of the condominium units can be 30 days or more in arrears, but the new guidelines permit FHA to certify projects in which up to 20 percent of the units are delinquent in assessment payments.
- A single investor cannot own more than 10 percent of the units in the project, but unoccupied and unsold units owned by the developer are not considered investor-owned for purposes of this requirement.
- At least 51 percent of the total units must have been conveyed to or be under contract for purchase to owner-occupant principal residence purchasers.
- The new guidelines set forth permissible restrictions regarding leasing, including requiring leases to be in writing and subject to the governing documents of the condominium, requiring lease terms of at least 30 days, and establishing a maximum number of rental units for the condominium project.
- The association is required to maintain a master or blanket hazard insurance policy in an amount equal to 100 percent if the current replacement cost of the condominium. A unit owner seeking an FHA insured mortgage must have an HO-6 policy, if the unit interior is not included in the association’s master policy.
- The application must include a signed and dated explanation of any current special assessment or pending litigation.
Court Decision Imposes New Requirement on “Piggybacking” of ILSA Exemption
In Gentry v. Harborage Cottages-Stuart, LLLP, the court found that “piggybacking” of exemptions under the Interstate Land Sales Full Disclosure Act (ILSA) is not permitted without a “legitimate business purpose.”
Several purchasers of condominium units sued the developer alleging the developer had violated ILSA by failing to provide the purchasers with a property report prior to their signing the purchase agreements. The developer admitted to failing to provide the required property report, but claimed two exemptions under ILSA. In reviewing the developer’s exemptions the court found there must be factual evidence demonstrating that the method of disposition has a real-world objective that manifests a legitimate business purpose, and was not an intentional attempt to evade the registrations requirements of ILSA. The court found the developer had not met its burden in establishing that its method of selling the condominium units was not adopted for the sole purpose of evading the ILSA’s protections.
Consumer Financial Protection Bureau Seeking to Streamline Federal Interstate Land Sales Full Disclosure Act
The Consumer Financial Protection Bureau (CFPB) recently inherited regulations from other federal agencies and will soon republish these as 12 C.F.R. Chapter X. The CFPB is currently seeking comments and specific suggestions for streamlining these regulations, which include the Interstate Land Sales Full Disclosure Act (ILSA). Specifically, the CFPB is asking the public to identify provisions of the regulations that it should make the highest priority for updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary.
We invite you to submit your comments to the CFPB regarding ILSA, especially as to the issue of whether condominiums should be exempt under the act. Comments should be submitted by March 5, 2012, and should reference “Docket No. DFPB-2011-0039.” Comments may be submitted electronically at http://www.regulations.gov; via mail to Research, Markets & Regulations Division, Bureau of Consumer Financial Protection, 1500 Pennsylvania Avenue NW, (Attn: 1801 L Street NW), Washington, DC 20220; or by hand delivery or courier to Research, Markets & Regulations Division, Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20006.
Buyer of Foreclosed Condominium Liable for Past Due Assessments
Maryland’s Court of Special Appeals recently held that the purchaser of a condominium unit at a foreclosure sale is liable for condominium assessments from the date of the foreclosure sale.
In the court’s December 1, 2011, decision in Campbell v. Council of Unit Owners of Bayside Condominium, the owner purchased a condominium unit at a foreclosure sale on August 3, 2009, with the foreclosure ad stating that condominium assessments that become due after the time of the sale would be the responsibility of the purchaser. The foreclosure sale was ratified on November 25, 2009, and settlement took place on December 28, 2009. The Council of Unit Owners threatened to file a lien against the owner’s unit when she failed to pay condominium assessments from the foreclosure sale date to the settlement date. The owner insisted that her obligation to pay assessments commenced at settlement when she took legal title to the unit. The owner filed suit seeking to prevent the Council of Unit Owners from filing the lien. In support of her position, the owner argued that the condominium’s governing documents and the Maryland Condominium Act impose assessment obligations on persons holding legal title to a unit, and since she did not hold legal title until the date of settlement, she was not liable for assessments accruing prior to that date. The court found that there was probable cause for the Council of Unit Owners to file the lien because equitable title to the unit passed to the owner on the date of the foreclosure sale and, as of settlement, legal title vested in the owner retroactive to the date of the foreclosure sale. This ruling was affirmed by the Court of Special Appeals.
Association Found to have Duty to Disclose Defects in Resale Disclosure Package
In a recent opinion from the Maryland Court of Appeals, MRA Property Management, Inc., et al. v. Armstrong, et al., the court examined the obligations of a condominium association and property manager when completing resale disclosure certificates. The Court of Appeals held that a council of unit owners and its property management company engage in unfair and deceptive trade practices, in violation of the Maryland Consumer Protection Act, when they violate the disclosure obligations of the Maryland Condominium Act, Section 11-135.
Twenty-three unit owners (Owners) filed suit against MRA Property Management (MRA) and the Association of Unit Owners of Tomes Landing Condominiums, Inc. (the Association), alleging that MRA and the Association violated the Maryland Consumer Protection Act by using deceptive information to complete resale certificates. The Owners purchased their units between January 2000 and October 2004, and all received resale certificates stating there were no known violations of the building code at the Tomes Landing Condominium (the Condominium). In December 2004, MRA notified unit owners of a special assessment “to correct building issues which, if not corrected, would create additional structural problems caused by water and moisture penetration,” and would cost approximately $3.9 million. In 1999 a reserve study was completed and it showed problems with the retaining wall and structural issues. The trial court entered summary judgment in favor of the Owners, finding that the Association and MRA were in violation of the Consumer Protection Act (CPA) for providing resale certificates that misled the Owners by failing to disclose certain condominium defects.
On appeal, the court held that the information on the resale certificates was relied upon by the Owners and was integral to their purchase decisions, and that the Association and MRA therefore could be held liable under the CPA. Furthermore, the court held that the Association’s statutory duty to disclose in the resale certificate “knowledge of any violation of the health and building code,” is not limited to “charged” violations. So even though Cecil County had not notified the Condominium of any building code violations, the Association could still be liable for failure satisfy the disclosure requirement.
Condominium associations and others completing resale certificates should consider the court’s ruling in this case to ensure that disclosure requirements are satisfied. Please let us know if you have any questions regarding information that should be disclosed in a resale certificate.
Association’s Failure to Pursue Defects Found to be Grounds for a Negligence Claim
In its September 29, 2011, opinion, the Maryland Court of Special Appeals in Greenstein, et al. v. Council of Unit Owners of Avalon Court Six Condominium, Inc., held that a council of unit owners has a duty to the unit owners to properly pursue claims arising out of design or construction defects in the common elements of the condominium, and breach of that duty by the council may be grounds for a negligence claim by unit owners.
Questar Homes Avalon Court Six, LLC, (Questar) was the developer of the 36-unit residential condominium known as Avalon Court Six Condominium (the Condominium) located in Pikesville, Maryland. As developer, Questar controlled the Condominium Board of Directors from 1998 until late 1999, at which time directors were elected by unit owners. From 1998 until 2002, 17 unit owners reported water infiltration through common element windows. In 2002, the Condominium manager surveyed unit owners and many reported window leaks. In 2005, the Board of Directors retained a third-party consultant to investigate the window leaks. In 2006, the Council of Unit Owners (Council) filed suit against Questar for design and construction defects that resulted in water leakage. The Council’s suit was time barred by the three-year statute of limitations. The Council then levied a special assessment against all unit owners to pay for the window repair, which costs were in excess of $1 million.
The 36 unit owners sued the Council for negligence for failing to timely investigate the water leaks and failing to timely file suit against Questar.
The unit owners asserted that because the Declaration and Bylaws give the Council and the Board of Directors the exclusive duty to maintain and repair common elements of the Condominium and the exclusive right to initiate legal proceedings regarding the same, the Council had a duty to bring legal action with respect to the common element defects. The court considered holdings in South Carolina and New Jersey cases to support its conclusion that the duty to maintain, repair, and replace common elements, together with the exclusive right to initiate litigation regarding the common elements, creates an obligation on the part of the Council to pursue recovery against the developer on behalf of the unit owners.
The court’s holding confirms a duty on the part of a council of unit owners to “properly pursue” claims against a developer. While filing suit may be one way for a council of unit owners to satisfy its duty, a suit may not always be required. In light of this holding, it is important for condominium associations and developers to timely assess defect complaints.
Montgomery County Allows Deferred Payment of Development Impact Tax
Effective December 1, 2011, an applicant for a building permit will no longer have to pay any development impact tax at the time the building permit is obtained. If the building is a single-family detached or attached residential building, the tax payment is due the earlier of the final inspection of the building by the Department of Permitting Services (DPS) or six (6) months after the building permit is issued. If the building is a multi-family residential or non-residential development, the tax payment is due the earlier of the final inspection by DPS or twelve (12) months after the building permit is issued. The rate of the tax or payment due is the rate in effect when the tax or payment is paid.
Higher Density Critical to Future Growth
In November, Dr. Stephen Fuller, Director of the Center for Regional Analysis, George Mason University, provided an economic forecast for Montgomery County as it relates to transportation, housing, and workforce development issues. Of special interest was the finding that Montgomery County had a zero-net increase in jobs from 2000 to 2010. The region’s workforce is anticipated to add more than one million new net workers between 2010 and 2030, generating a demand for over 731,000 new housing units. To meet the demand, more than 36,500 net new housing units must be built each year region wide, an annual pace of construction never before seen in the region.
While many of these jobs will be in the relatively high-wage professional and technical services sector, 40 percent of the region’s new workers will be entry-level workers. There also will be substantial growth in the education, health, leisure and accommodation, and retail trade sectors. Workers in these sectors often have more moderate wages; the more moderate wages and projected increases in fuel costs will combine to push demand for relatively smaller and more moderately priced housing, closer to jobs, in existing and growing regional employment centers, in the decades to come.
The policy implications of the shifting demographics underscore the need for new higher-density development (and redevelopment) near transit centers; recent approvals of several Master Plans (Great Seneca Science Center, White Flint, Wheaton CBD) by the County Council, as well as the creation a new Commercial-Residential Zone, have focused on creating just such development. Master plans currently under revision include the Kensington Sector Plan and the White Oak Science Gateway. The County is also developing a Countywide Transit Corridors Functional Plan that seeks to develop a bus rapid transit (BRT) network to improve mobility and support the additional density throughout Montgomery County.
Possible Relief from Impact Taxes
Montgomery County Councilmember Nancy Floreen, Chair of the Council’s Housing Committee, recently introduced legislation that would exempt new residential rental developments from the transportation and school impact taxes if 25 percent or more of the units were set aside as “affordable” units. Currently, the County requires that 12.5 percent of new units be set aside as Moderately Priced Dwelling Units (MPDUs); these units are exempt from paying the development impact tax. Bill 39-11 proposes that the rental market rate units would also be exempt. After its introduction, Councilmembers Craig Rice and Nancy Navarro were added as sponsors. The public hearing for the bill is scheduled for January 23, 2012.
The Maryland Department of Assessments and Taxation will be sending out Notices of Assessment to property owners in much of the Route 355 and Route 29 corridors, as well as other areas of eastern Montgomery County; approximately one-third of property owners in the State will be reassessed this year. Notices are generally received the last week of December and give the property owner 45 days to file an appeal. The other two-thirds of the properties not being reassessed can still appeal the current assessment if the appeal is presented to the State before December 31. If you receive a notice or otherwise desire to challenge the assessment, in Montgomery County or elsewhere, Ballard Spahr's Bethesda and Baltimore offices have significant know-how and are responsible for major reductions in value throughout the State.
Ballard Spahr Creates Mortgage Banking Group and Welcomes Three Noted Attorneys to its Washington, D.C., Office
Partners Richard J. Andreano, Jr. and John D. Socknat will serve as Practice Leaders for Ballard Spahr’s newly created Mortgage Banking Group. Along with associate Reid F. Herlihy, they come to Ballard Spahr from the Washington, D.C., office of Patton Boggs. The four lawyers, who served as editors and co-authors for Mortgage Finance Regulation Answer Book 2011-2012, published by the Practising Law Institute, will be resident in Ballard Spahr’s Washington, D.C., office. Click here for more information.
Amy M. McClain, a partner in the Baltimore office, has been honored by the Maryland Daily Record for her outstanding accomplishments. Ms. McClain is one of 46 women under the age of 40 who were recognized for their exceptional “professional experience, community involvement, and commitment to inspiring change.” Ms. McClain primarily represents public housing authorities and affordable housing developers in the context of mixed-finance transactions.
Jon M. Laria, Managing Partner of the Baltimore office, has been selected for the 2011 Leadership in Law award by The Daily Record. The Leadership in Law award recognizes members of the legal community who have devoted time and energy to bettering the profession and their communities, and have played an important role in mentoring future professional and community leaders. Mr. Laria represents real estate owners, developers, and lenders in development, financing, acquisition, and leasing transactions.