Joint Committee on Housing Considering Tenant Abuse Reform
Yesterday I was honored to testify before the Massachusetts Legislature’s Joint Housing Committee in favor of House Bill 1131, the Rent Escrow Bill. The bill will level the playing field between landlords and tenants and make Massachusetts more hospitable to rental property owners.
The bill prevents tenants from being allowed to withhold rent for minor or cosmetic property condition issues through the entire pendency of an eviction case. Instead, tenants would have to pay the withheld rent into an escrow account administered by the court or the attorneys until such time as the judge rules on the property conditions. Both landlord and tenant would have “skin in the game,” and it would cut way down on the expense and length of evictions.
As a landlord tenant attorney who has handled over 5,000 evictions, I told legislators some horror stories about how “professional tenants” have victimized my landlord clients by creating minor code issues, withholding rent, then attempting to extort my clients out of thousands of dollars. It certainly appeared to resonate with the lawmakers and I even got a nice round of applause from the gallery after my testimony!
If you are a landlord, please contact your state rep and senator to support House Bill 1131. After many years trying to get this bill through, we may finally have the best environment to pass this much-needed reform to the eviction system.
A little break from law stuff to talk about some important safety information. With up to a foot of snow on most Massachusetts roofs and a spring thaw on the way, there will be widespread ice dam and roof damage afflicting homeowners in the next weeks. I have a feeling it’s going to be very bad.
There are ice dams all over my roof. My son’s bedroom just sprung a leak. And I can’t get a crew out here to get on my roof until Friday at the earliest. (Sorry, but I’m not risking life or limb climbing up my ice covered roof!). I did use a roof shovel to clear a few feet of snow off the roof, but I need some professional help.
Here are some tips from my friend, George Lonergan of Lonergan Construction in Framingham (Tel: 508-875-0052) – whose roof clearing crews have been out 7 days a week. For folks closer to Boston, GF Sprague Roofing out of Needham is also good.
Try to remove snow from the roof but only if it can be done safely. A roof rake or push broom can be used but may cause damage to the shingles. If it’s not possible to remove the snow safely, call a professional.
Chisel grooves into the dam to allow the water behind it to drain off. This is a good emergency measure, especially if rain or a sudden thaw is coming. Be careful not to damage those shingles!
Fill an old pair of your wife’s pantyhose with calcium chloride snow melt and lay it across the dam. It will help to melt the dam and also keep that area of the roof clear. DO NOT USE ROCK SALT! It may stain the roof and siding. It is best for small dams or prevention. It’s also a good idea to scrape the snow off the roof first.
To prevent ice dams in the longer term, keeping warm air from escaping into the attic is the first course of action. In addition to helping resolve ice dam issues, it will result in a more comfortable and less expensive to heat home.
Ice Dam Insurance Coverage
Very few insurance policies cover ice dam or snow removal from your roof or anywhere else on your property for that matter. However, certain cases of interior damage caused by an ice dam or roof collapse may be covered. As with any insurance claim, call the claims department immediately and take photos of the damage.
Bill Would Curb Tenant Abuses of Eviction Process | State House Hearing Set For Feb. 25
For the last decade, Massachusetts landlords have been lobbying for a tenant rent escrow bill which would prevent tenants from using the infamous “free rent trick” in evictions. This may finally be the year that the Legislature passes this much needed reform to curb tenant abuses of the eviction process. Two bills, H.B. 1131 and H.B. 1110, have made their way to public hearing at the State House for a February 25th hearing before the Joint Committee on Housing. Landlords are urged to come and testify before the committee and otherwise support the bill by contacting their local representatives and senators.
The bills are designed to reform tenant abuses of the rent withholding law, including the infamous “free rent trick.” The free rent trick works like this: Tenant stops paying rent for various reasons, such as economic hardship or by design. After receiving a 14 day notice to quit for non-payment of rent, the tenant will immediately call the board of health to get the owner cited for minor or cosmetic code violations such as a hole in a window screen. Under current Massachusetts law, any code violation cited, however minor, allows the tenant to withhold rent until the eviction case is resolved. What usually happens is that the tenant skips out of town or agrees to a move out but never pays the months of accrued unpaid rent, leaving the landlord stuck with thousands of lost income to pay their mortgage and expenses.
Unlike most other states, there is no requirement in Massachusetts that the tenant post the withheld rent into some form of escrow account. There have been many instances where tenants have intentionally inflicted property damage to claim code violations or just made them up altogether.
A mandatory rent escrow law would require any tenant who exercises their right of rent withholding to pay the withheld rent into an escrow account until the unsafe conditions or code violations are repaired. After repairs are done, either the landlord and tenant agree on how the escrowed rent should be divided, or a judge orders a fair settlement. In most cases, the owner will get back most of the withheld escrowed rent. But the most important impact of a mandatory rent escrow law is that those nonpaying tenants who do not escrow can be promptly evicted for nonpayment of rent. Although nonpayment evictions will still take on average three months to resolve, much-longer-delayed evictions and the free rent trick will be stopped.
The bills will most benefit small landlords and owners-occupants of multi-family residences who rent out apartments. These property owners are typically on strict budgets, and any lost rent and attorneys’ fees will prevent them from paying their mortgages, real estate taxes and property expenses, potentially leading to default and foreclosure.
Should Result In Much-Needed Inventory Boost To Housing Market
Good news to report for property owners saddled with toxic titles resulting from the seminal U.S. Bank v. Ibanez foreclosure ruling. Massachusetts lawmakers are poised to pass into law a new bill aimed at legislatively clearing up all of these defective titles.
By way of background, properties afflicted with Ibanez title defects, in worst cases, cannot be sold or refinanced. And homeowners without title insurance have been compelled to spend thousands in legal fees to clear their titles, while some have not been able to clear their titles at all.
The new legislation, Senate Bill 1987, would render clear and marketable any title affected by a defective foreclosure after 3 years have passed from the foreclosure. Most of these toxic titles were created prior to 2009, so the vast majority of them will be cleared up.
The bill does preserve any existing litigation over the validity of foreclosures. The legislation does not apply if there is an existing legal challenge to the validity of the foreclosure sale in which case record notice must be provided at the registry of deeds. The bill also does not shield liability of foreclosure lenders and attorneys for bad faith and consumer protection violations over faulty foreclosures.
The bill has recently been passed by the Senate and now moves on to the House. Word is that it should pass through the House and on to the Governor’s Desk.
This is great news for the real estate market. I don’t have firm numbers, but there are probably hundreds, if not thousands, of these unsellable properties just sitting on the sidelines, and now they can get back onto the market. This is exactly what the inventory starved market needs.
(Hat tip to Colleen Sullivan over at Banker and Tradesman for passing along this important information).
Innocent Small Talk Apparently Illegal, According to Boston Fair Housing Commission
The seemingly innocent question posed by a Boston rental agent to Gladys Linder when they were searching for an apartment was “Where are you from?”
“Venezuela,” she answered.
Gladys and her husband went on to find an apartment a month later without further incident. But she found the question about her national origin insulting and upsetting.
This is Massachusetts, and you know what came next.
Stokel filed a complaint with the Boston Fair Housing Commission, claiming that rental agent’s question was discriminatory and caused her to suffer fear, anxiety and sleeplessness over a three-year period.
Massachusetts General Laws Chapter 151B and the Boston Fair Housing Commission Regulations make it illegal for any licensed real estate broker “to cause to be made any written or oral inquiry or record concerning . . . national origin.”
Although this was the agent’s first discrimination complaint and there was no discriminatory impact on the tenants at all, the Commission found that the question itself was unlawful and issued one of the largest penalties I have seen in recent years — $10,000 in emotional distress damages, plus $44,000 in attorney’s fees and costs and a $7,500 civil penalty against the broker — a whopping $61,500 in total liability for this single question, not to mention the tens of thousands the agent had to pay for defense legal fees.
The case went up on appeal, and fortunately the Massachusetts Appeals Court exercised some common sense and slashed the award, likely by more than half pending further proceedings. But the court let stand the commission’s ruling that the one innocuous question did indeed violate the discrimination laws. So the broker will remain on the hook for a sizable liability.
Honestly, I’m having a lot of trouble with this ruling. It appears that the broker was simply engaging in some harmless small talk by asking the applicant where she was from. There was no evidence that the broker refused to rent to her or took any other discriminatory action against them. What if the applicant had a Southern accent and said she was from Alabama? That’s not illegal discrimination, but since she is from another county, it makes the question unlawful discrimination? Unbelievable! This is one of those cases where the anti-discrimination laws result in a totally absurd result.
So thank you to the Boston Fair Housing Commission for making small talk illegal. Unfortunately, the lesson to be learned from this case for rental agents and Realtors: Don’t ask a client where they are from. I kid you not. Only in Massachusetts…
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney who often consults with Realtors and rental agents on their legal and ethical duties. He can be reached at email@example.com.
Say the word “QM” (short for Qualified Mortgage) to any mortgage banker these days, and watch their reaction. If they were smiling, they will stop. Better yet, lock the doors to prevent them from jumping off the nearest bridge.
“QM” refers to the new Qualified Mortgage rules passed by the Consumer Financial Protection Bureau under the Dodd-Frank Act which went into effect on January 10, 2014. The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed as a response to the late-2000s recession, and has brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.
Seeking to prevent the sub-prime meltdown earlier in the decade, the new QM rules — through stricter underwriting guidelines and debt-income ratios — require lenders to ensure that the borrower has the ability to repay the loan today and into the future. In exchange, lenders will be protected from borrower lawsuits.
According to a recent ComplianceEase study, 20% of today’s mortgages would not meet the new qualified mortgage standards and would be rejected. According to most loan officers who I’ve spoken to, the general consensus is that the QM Rules will make for even stricter underwriting, more loan application rejections, especially for the self-employed, and even higher interest rates for certain loans.
Debt to Income Caps
For a loan to be considered a qualifying mortgage, the borrower’s debt-to-income ratio can be no more than 43%. This means that if a borrower has $4,500 in gross monthly income, his total debt payments including his new mortgage cannot exceed $1,935 per month. Previously, some lenders had been willing to go up to 45%.
Fee And Term Caps
Lenders will be less able to make creative loans, as well. Loans that meet the QM rule can be no longer than 30 years in length. They also cannot have closing costs and fees that exceed a cap of 3% of the loan’s balance.
Self-employed borrowers will also take a hit under the QM rules. In addition to two years of personal and business tax returns — the typical requirement and now the official standard — self-employed borrowers should also be prepared to produce a profit-and-loss statement and a balance sheet. A declining income trend will require explanation, because lenders need to establish the stability and continuity of the income source. Although capital losses and net-operating-loss carry-overs cited on a tax return could previously be added back to the income, their re-inclusion under the new rules will make the loan a nonqualified mortgage. The problem for self-employed people, as always, is that they want to minimize their tax liability, but some of the ways they do so impact their ability to borrow.
Less Availability Of Higher Risk Loan Products
The QM rules will also have a negative effect on the availability of non-QM loans with higher debt to income ratios, stated income loans for self-employed, and over 30 year term loans. Non-QM loans will be subject to significant legal risk under the Ability to Repay (ATR) rule and the liability for violations is draconian, according to Jack Hartings, President and CEO of The Peoples Bankat a House hearing panel. Mr. Hartings also noted that non-compliance with QM rules could also serve as a defense to foreclosure if the loan is deemed not to be a QM loan and small community banks do not have the legal resources to manage this degree of risk. Thus these banks, he said, will not continue to make some of the loans they have made in the past such as low dollar amount loans, balloon payment mortgages, and higher priced mortgage loans.
Loan officers, I would love to hear your thoughts about the new QM rules. Realtors, were you even aware of these rules coming down the pipeline which may affect your buyers?
Congress Fails To Extend Mortgage Forgiveness Debt Relief Act for 2014
The ringing of the New Year may not be a welcome sound to distressed homeowners who were not able to complete short sales by the close of 2013. Unfortunately, Congress failed to extend the December 31, 2013 expiration of the Mortgage Forgiveness Debt Relief Act, the federal law which makes short sale debt forgiveness non-taxable.
If there’s no extension, the short sale market will be decimated. I just closed a $600,000 short sale yesterday, just under the deadline. But if that same deal closed tomorrow, it would have resulted in an over $30,000 tax bill for a distressed homeowner who could in no way afford to pay that.
Last year, Congress rushed to extend the law during negotiations about the fiscal cliff but only through the end of 2013. Lawmakers and housing advocates argue that the rule hurts those who are already financially strapped. Since 2009, more than 220,000 homeowners have sold their houses for less than they were worth through a short sale with help from a government program. There are more than 6 million homes still underwater across the country, according to a third-quarter report from research company CoreLogic.
At the federal level, there are three bills — two in the House and one in the Senate — that call for the law’s extension. One of the House bills enjoys strong bipartisan support, with 29 Democrats and 23 Republicans on board. The Senate bill — which would extend relief through 2015 — is sponsored by Senators Debbie Stabenow, Democrat of Michigan, and Dean Heller, Republican of Nevada. Stabenow sponsored the extension last year.
Housing Courts Will Likely Face Increased Caseload
Giving an early Christmas present to distressed homeowners, the Supreme Judicial Court today ruled that a foreclosed upon homeowner may challenge a bank’s title and foreclosure sale irregularities through counterclaims in a post-foreclosure eviction in the Housing Court — rather than being forced to file a separate equity lawsuit in the Superior Court. The case is Bank of America v. Rosa, SJC-11330 (Dec. 18, 2013).
The high court also held that the Housing Court has jurisdiction to hear other counterclaims against foreclosing lenders, including fair housing, consumer protection (Chapter 93A), and HAMP related claims.
The likely impact of this ruling will be that the already busy Housing Court will now be “Ground Zero” for foreclosure related litigation. Foreclosed property owners will have more weapons to delay and prevent being evicted after foreclosures.
Overall, while the ruling seeks to protect the rights of foreclosed property owners, it has the potential to delay the housing recovery in Massachusetts. The longer folks who don’t pay their mortgages are allowed to live rent free in their foreclosed houses, the more the housing market suffers. There are plenty of creditworthy buyers and investors willing and able to buy up and rehab these foreclosed properties. Letting them sit and blight neighborhoods doesn’t help anyone in the long run. Just my opinion…
Court Points Out Potential Problem with Standard Notary Acknowledgment Form
Could the the standard form notary acknowledgment clause used in virtually every recent Massachusetts deed, mortgage and other recorded instrument be defective in certain situations involving power of attorneys? That may be the result of a recent court decision by the First Circuit Bankruptcy Appellate Panel in Weiss v. Wells Fargo Bank (click for link to case).
The ruling is causing quite a bit of angst in the real estate conveyancing community. Since Revised Executive Order 455 – Standards of Conduct for Notaries Public was passed by Gov. Romney in 2004, notaries public and attorneys have been using the approved notary acknowledgment form providing that the document is signed “voluntarily for its stated purpose. ” In the Weiss case, however, the court held that the notary acknowledgment of an attorney-in-fact under a power of attorney was defective as it failed to indicate that the principal has signed under “his free act and deed.”
The facts in the Weiss case are rather unique so it may have limited effect. But it should serve as a wake-up call for notaries public, attorneys and lenders that the better practice may be to use a notary public acknowledgment with the “free act and deed” language as was common before the 2004 notary rules.
Practice Pointer: Going forward, I recommend that real estate attorneys, notaries public and lenders should consider using “free act and deed” language in notary public acknowledgments. See below for form language.
Fact of the Case: Botched Notarization With Power of Attorney
In the Weiss case, a bankruptcy trustee for Chicopee homeowners attempted to use his “strong-arm” powers to void a refinance mortgage. The borrowers took out a refinance loan on their Chicopee home with Wachovia Mortgage. They signed a limited power of attorney to enable a one Shannon Obringer (who I assume was a bank employee) to sign the mortgage. The actual signing of the mortgage occurred in Pennsylvania by a Pennsylvania notary (I assume at Wachovia’s offices). You know this wasn’t going to end well….
The pre-printed notary acknowledgment form on the mortgage was the approved MA Executive Order form, which the notary partially completed as follows:
On this 11 day of June 2007, before me, the undersigned notary public, personally appeared Shawn G. Kelley and Annemarie Kelley by Shannon Obringer as Attorney in Fact, proved to me through satisfactory evidence of identification which was/were ________________ to be the person(s) whose name(s) is/are signed on the preceding document, and acknowledged to me that he/she/they signed it voluntarily for its stated purpose.
Although there was some ambiguity from the wording as to who actually appeared before the notary and the notary failed to fill out the identification form blank space, the Court held that these were not necessarily fatal. However, the Court ruled that the language in the notarization that it was signed “voluntarily for its stated purpose” was fatally defective because it did not sufficiently demonstrate that it was the borrowers’ “free act and deed” by the attorney-in-fact’s signature, as required by Massachusetts statutory and case law. The Court went on to void the mortgage in favor of the bankrupt debtor.
New Notary Public Acknowledgment
Going forward, I would consider using a notarization acknowledgment with the older “free act and deed” language in power of attorney signing situations. The 2004 acknowledgment should be ok for typical individual notarizations. Of course, you should consult with your title company, lender and/or attorney before notarizing in any tricky situations.
Governor’s Council Crucifying Berman Over His Affiliation With Jewish Social Justice Organization
I rarely get involved in politics or judicial nominations, but recents events surrounding the judicial nomination process at the Governor’s Council of well-respected Boston attorney Joseph Berman has led me to take action.
As you may have read recently in the Globe and Herald, Mr. Berman’s Superior Court nomination is being held up by a group of councilors who have objected to his affiliation with the Anti-Defamation League, a storied Jewish social justice organization formed in the aftermath of the Holocaust. The councilors have severely criticized Mr. Berman for the ADL’s prior (and now reversed) stance on the Armenian genocide.
As Mr. Berman repeatedly explained at his hearing, he was a vocal critic of the ADL’s prior policy, advocated for its change, and considered resigning over the issue. I also believe the events in Armenia were genocide and that the ADL did a lot of damage over its policy. Led by Mr. Berman, the New England Chapter of the ADL, however, ultimately reversed its position.
Mind you, this is the same Governor’s Council with a member who voted no on the appointment of Barbara Lenk to the SJC because she’s openly gay.
As Massachusetts Lawyers Weekly has editorialized, the councilors have reached a new low, taking the position that membership in a social justice organization holding a controversial political stance disqualifies an otherwise qualified candidate from judgeship. Both the Globe and Herald have issued editorials extremely critical of the Council’s actions, calling it a “Ship of Fools” and “manufacturing madness.”
Before this controversy, I actually didn’t even know Joe personally, but I was so upset about what I read, that I started to do research and then write emails to the council members, as well as having a dialogue with Joe as well. I also took the time to listen to the audio of the nomination hearing. I can tell you it is shocking, reminding me of a McCarthy era witch-hunt. Listen for yourself here.
Joseph Berman has a great reputation and superlative skills and experience. Joe’s bio is here: http://www.lgllp.com/joseph-s-berman/. We need more judges like Joe who have a strong business and technology background as the bench has been increasingly populated with former district attorneys and public defenders who lack the skills and experience in today’s complex technology and business world.
Sometimes you see an injustice and you think, “well, there’s nothing I can do.” I thought that as well, initially, then I was inspired to take action. But the Council won’t change their minds until they hear from you. That’s where you come in.
Please consider sending an email to the council members who are still opposing Joe’s nomination. You can simply cut and paste the email below or write your own.
I thank you in advance for doing something small to correct an injustice. Next post, we’ll be back to real estate!
To: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org
Dear Councilors, I write to support the nomination of Joseph Berman to the Superior Court. I have reviewed Mr. Berman’s credentials and there is no question in my mind that Mr. Berman is eminently qualified to serve in the Superior Court, as the Governor and your fellow council members have concluded.
However, I understand there has been some controversy surrounding Mr. Berman’s affiliation with the Anti-Defamation League and its previous national political position on the Armenia Genocide. As the Boston Globe recently reported, Mr. Berman was a vocal critic of the policy and ultimately the ADL reversed its position. Regardless, you cannot hold one position of a national organization against one individual who is affiliated with it who does not share that same viewpoint.
We need more judges like Joe who have a strong business and technology legal background as the bench has been increasingly populated with former district attorneys and public defenders who lack the skills and experience in today’s increasingly complex technology and business world.
I would hope that you will reconsider your position on Mr. Berman and give a favorable vote in the upcoming hearing.
CFPB Issues Long Awaited “Know Before You Owe” Mortgage Disclosures, Replacing Truth in Lending, Good Faith Estimate, and HUD-1 Settlement Statement
As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau today issued a final rule to bolster fairness and clarity in residential lending, including requiring a new good faith estimate of costs for homebuyers, Truth in Lending disclosure and a new HUD-1 Settlement Statement.
The new Loan Estimate will replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new Closing Disclosure will replace the current HUD-1 Settlement Statement. The new forms are embedded below.
Initial Impressions, Did The CFPB Finally Get It Right?
Overall, I would say that the forms are a major improvement over the existing disclosures, especially the Truth in Lending disclosure. I always joke that the Truth in Lending disclosure should be called “Confusion in Lending” (which usually gives the borrower a chuckle) as it’s nearly impossible to explain even for a trained attorney and sophisticated borrower. That may be rectified now with the new forms — although I still may employ the joke!
The new HUD-1 Closing Disclosure is a longer and more involved form, but it basically just reorganizes all of the information now contained in the current 3 page HUD-1 Settlement Statement, and it appears to be easier to read and explain at the closing table.
The CFPB says that the new forms will replace the existing forms, resulting in a decrease in pages to review — which is a minor miracle in and of itself. A common complaint from borrowers is the sheer number of forms and disclosures signed at the closing, so this is welcome news.
3 Business Day Rule May Be Problematic
As Bernie Winne of the Massachusetts Firefighters Credit Union testified at the announcement hearing today in Boston, the new requirement that the Closing Disclosure (new HUD-1) be provided to the borrower within 3 business days of the closing may pose a problem in some transactions and will certainly result in a major adjustment in current practices. There are often last minute changes in closing figures, seller credits, holdbacks, payoffs, etc., which result in last minute changes. Hopefully, the CFPB will realize this in the upcoming implementation period and relax the rules in certain circumstances. There has already been significant chatter on Twitter and the blogosphere about this new requirement.
Another encouraging note was CFPB Director Cordray’s comments today about the agency pushing for more electronic closings. Fannie Mae has done squat to push e-closings, so hopefully CFPB will take the lead in this important area!
Loan Estimate Disclosure
The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
Lenders must provide the Loan Estimate 3 business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays). However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
The Loan Estimate will conveniently provide for the monthly principal and interest payment, projected payments over the term of the loan, estimated taxes and insurance (escrows), estimated closing costs, and cash to close.
It will provide for a Rate Lock deadline.
The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page. In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”
The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement. It is now a 5 page document compared to the current 3 page document.
Critically, the Closing Disclosure must be provided at least 3 business days before the closing. Lenders and closing attorneys will have to adapt to this new requirement as currently we usually get the final HUD approved by the lender 24-48 hours before the closing.
Page 1 of the Closing Disclosure carries over much of the Truth in Lending information previously found in the TIL form.
Page 2 and 3 replicate the existing HUD-1 Settlement Statement (pages 1 and 2) outlining the fees and closing costs, adjustments, and commissions charged to the buyer and seller. It also contained a more extensive section on Cash to Close which will be helpful to explain.
Page 4 contains a nice easy-to-read section on the escrow account which is often challenging to explain to borrowers.
The last page is similar to the current page 3 of the HUD-1, providing a quick summary of the loan terms, interest rate, total payments and APR.
A long awaited regulatory and compliance announcement may be coming to Boston next week.
The Consumer Financial Protection Bureau has announced that on November 20, 2013, it will hold a field hearing in Boston on the “Know Before You Owe: Mortgages” rules. Industry experts predict that CFPB will announce its long-awaited new Truth In Lending (TILA)-RESPA integrated disclosures final rule and forms.
The new rules and disclosures will result in another dramatic change in the Truth in Lending, Good Faith Estimate and HUD-1 Settlement Statement used by lenders and attorneys in residential purchase and refinance transactions. A new “Loan Estimate” would replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). A new Closing Disclosure would replace the current HUD-1 Settlement Statement. Our prior post on the new closing disclosures can be found here.
The event will feature remarks by CFPB Director Cordray and testimony from consumer groups, industry representatives, and members of the public. The event will be held at the Back Bay Grand, Back Bay Events Center, 180 Berkeley Street, Boston, MA 02116. If I’m lucky enough to get an invite, I will be there and will report back on what happens.
We had a great turnout today for our Massachusetts Real Estate Market Report, again presented and moderated by veteran real estate reporter Scott Van Voorhis of Banker & Tradesman and Boston.com. Scott writes for the well-known Boston.com Real Estate Now Blog which is an invaluable resource.
Some take-aways from the presentation and discussion were as follows:
As reported just about everywhere, the Massachusetts real estate market remains very strong
Year over year, 16% increase in both sales volume and sales prices
The government shutdown has had no demonstrative effect on the market, nor on the lending environment
Lack of buildable land, desirability of the Greater Boston market (as always) has resulted in high demand, low inventory environment.
Inventory is down 30% over 2012 (which was down over 2011), putting upward pressure on prices and demand. Bidding wars common for well-priced, good quality homes in desirable communities. This is creating a frenzied dis-equilibirum in certain markets which isn’t necessarily healthy.
The low inventory is the “new normal.” Get used to it.
Interest rates are forecast to dip down a bit heading into spring market 2014, with eventual rise through the remainder of 2014 and 2015. Overall, the interest rate environment remains very favorable to buyers and the market as a whole.
First time home buyers must be open to fixer-uppers and not updated homes. Otherwise, they will be in very tough competition for move-in condition homes in the good towns.
Lenders are doing loans for low credit (FICO 620 range) borrowers. ARMs making comeback.
Chuck pointed out the “Patriot Effect” for open houses on Sundays. People are staying home to watch the game. Advises trying open houses on Saturdays.
Ali Corton says that Metrowest sellers are routinely getting asking price or very close to that right now, and will continue to do so while inventory remains low
We are interested in hearing your thoughts on today’s market. Feel free to post your comments below!
Reviewing this blog, it occurred to me that I’ve never written about real estate agency and designations, which is one of the more confusing aspects of real estate law. I think all the new disclosures and regulations imposed by the Board of Real Estate, while well-intended, have made this area unnecessarily complicated. I’ll try to explain agency in plain English.
The Massachusetts real estate brokerage industry is highly regulated by both state law and regulations, as well as local and national codes of ethics. Under state regulation, once you sit down with a Massachusetts real estate agent to discuss a specific property, the agent should give you a form called the Massachusetts Mandatory Licensee Consumer Relationship Disclosure. The disclosure form describes the five types of agency relationships between and among buyer, seller, and agent:
Seller’s Agent – This is typically known as a listing agent. The real estate agent represents only the seller, not the buyer. The listing agent owes the seller undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability. However, a listing agent must disclose all known material defects in the real estate to buyers.
Open Houses: Open houses are often the cause of disputes as to agency and commissions. Under Mass. regulations, at any open house the listing agent must conspicuously post and/or provide written materials explaining to attendees the relationship they may have with the agent conducting the open house. If a buyer is working with an agent (but the agent is not present at the open house) it’s a good idea to write the name of the agent’s name and leave the agent’s card at the sign-in, otherwise the listing agent could be considered the procuring cause of the buyer which could cause a dispute down the road.
Buyer’s Agent – A buyer’s agent works for the buyer only. The agent owes the buyer undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability. Like a listing agent, a buyer’s agent must disclose any known material defects in the real estate. Some agents are exclusive buyer agent’s and do not take on listings. An advantage of using a buyer’s agent is that you can be assured the agent will work only for you, the buyer, and will have no relationship with the listing agent’s office, as is common with designated and dual agencies described below.
Designated Seller’s and Buyer’s Agent – This type of agency occurs when a listing agent refers an agent working in the same office to represent the buyer. So, two agents in the same office are representing both sides of the transaction. The happens a lot when an unrepresented buyer is introduced to the property at an open house, and the listing agent will refer the buyers to a fellow agent in her office. This is usually the smart and prudent choice to avoid the conflicts inherent in being a dual agent representing both buyer and seller, discussed below. Both buyer or seller must agree to a designated agent agency in writing. The designated agent owes her client the same duties and obligations discussed above.
Dual Agent – A dual agent represents both sides of the transaction — buyer and seller –but can be a risky proposition. The upside for the agent is that he or she keeps the entire commission, but the agency can be fraught with potential conflicts of interest. Dual agency is allowed only with the express and informed consent of both the seller and the buyer. Written consent to dual agency must be obtained by the real estate agent prior to the execution of an offer to purchase a specific property. A dual agent shall be neutral with regard to any conflicting interest of the seller and buyer.
Non-Agent Facilitator – This is the rarest of all agencies. When a real estate agent works as a facilitator that agent assists the seller and buyer in reaching an agreement but does not represent either the seller or buyer in the transaction.
What is a “broker” vs. a “salesperson”? Under the Massachusetts regulations governing real estate agents, a real estate broker runs the real estate office and is the broker of record, overseeing the transactions of all salespersons (agents). A broker must complete 40 additional hours of education and must work for a broker for at least three (3) years before they can move on to licensure as brokers. A broker is responsible for accepting and escrowing all funds, such as a deposit placed on the purchase of a home, and for finalizing transactions. A real estate broker must supervise any transactions conducted by a salesperson. Every local real estate office, even the large ones like RE/MAX, Century 21 and Coldwell-Banker, will have a broker/office manager in charge of the office. The small, independent real estate offices are typically operated by a single broker, with perhaps a handful of salespeople.
A real estate salesperson is what most folks consider real estate agents. When a person first passes their real estate exam, they become a “salesperson.” A salesperson must be affiliated with, and work under, a broker, either as an employee or as an independent contractor, under the supervision of the broker. A salesperson can not operate his own real estate business. A salesperson also has no authority or control over escrow funds.
What Is A Realtor®? A Realtor is a real estate broker or salesperson who is a member of the National Association of Realtors and has agreed to conduct herself under the comprehensive NAR Code of Ethics. Not all real estate agents are Realtors. Membership in the NAR gives a Realtor full access to the entire Multiple Listing Service providing a national database of all sold and listed properties. Realtors can also file complaints against each other and the organization accepts complaints from consumers. Complaints can affect membership status and fines can be levied against agents who are found guilty of wrongdoing by a multi-member panel of their peers. The NAR does not have the ability to suspend a real estate licenses–that action can only be accomplished by the Mass. Board of Real Estate.
Richard D. Vetstein, Esq. is a Massachusetts real estate attorney with over 15 years of experience. If you have any questions regarding real estate agency, please contact him at email@example.com or 508-620-5352.
Shutdown and Debt Ceiling Negotiations Have You Worried?
Complimentary Breakfast Seminar! Join us with veteran real estate journalist Scott Van Voorhis who will discuss the impact that the crisis in Washington D.C. is having on the Massachusetts and national real estate market, plus he will give his predictions for the early spring market.
When: November 5, 2013
Where: Avita of Needham, 880 Greendale Ave., Needham, MA
I’ve been glued to CNN in recent days, watching incredulously as those buffoons in Washington grind our government to a halt. I though for sure that a midnight deal would have been struck, but I woke up this morning with the dreaded news that the government has indeed shutdown. I’ve been trying to get a handle all morning on how this is going to affect the Massachusetts and national real estate market, and here’s what I have so far. (Updated 10/1/13 at 4:30pm below).
Tax Transcripts/SSN Verification Delays
Virtually all federally back mortgage lenders request copies of borrower’s tax transcripts through the IRS and social security numbers through the SSA. According to my friend Rick Moore, loan officer at Lendmark Loans in Framingham, and media reports, the shutdown will apparently either stop or hinder the federal agencies’ ability to issue those verifications, resulting in mortgage approval delays across the board. I know that lenders were furiously ordering tax transcripts and SSN verifications last week, in preparation for the shutdown. If your loan is in the middle of underwriting, speak to your loan officer now. You may be facing a delay in getting a clear loan commitment and a resulting delay in your closing date.
Federal Housing Administration (FHA)
The shutdown’s impact on FHA loans appears to be not as bad as originally thought. HUD’s Contingency Plan states that FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) Contractors managing the REO portfolio can continue to operate. You can expect some delays with FHA processing.
VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program in the event of a government shutdown. However, borrowers should expect some delays during the shutdown.
The Federal Emergency Management Agency (FEMA) confirmed that the National Flood Insurance Program (NFIP) will not be impacted by a government shutdown, since NFIP is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.
For USDA loan programs, essential personnel working during a shutdown do not include field office staff who typically issue conditional commitments, loan note guarantees, and modification approvals. Thus, lenders will not receive approvals during the shutdown. If the lender has already received a conditional commitment from the Rural Development office, then the lender may proceed to close those loans during the shutdown. A conditional commitment, which is good for 90 days, is given to a lender once a USDA Underwriter approves the loan. If a commitment was already issued, the funds were already set aside and the lender may close the loan at its leisure. If Rural Development has not issued a conditional commitment, the lender must wait until funding legislation is enacted before closing a loan.
It is important to note that the traditional definition of “rural” for qualifying communities for assistance will be continued in effect during the shutdown. We expect that language to continue the current definition will be included in whatever funding measure is eventually enacted.
Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will their regulator, the Federal Housing Finance Agency, since they are not reliant on appropriated funds.
The Making Home Affordable program, including HAMP and HAFA, will not be affected as the program is funded through the Emergency Economic Stabilization Act which is mandatory spending not discretionary.
Updated (Oct. 1 at 4:30pm). Memo from national mortgage lender:
“There has been no progress today toward a resolution to the government shutdown. Fortunately, the initial impact of the shutdown on mortgage originations has been small. The biggest concerns are obtaining transcripts from the IRS and social security verifications from the SSA. Certain Government produced economic reports will not be available. The Construction spending report due out this morning was not issued. The Non-Farm Payrolls report due on Friday may be affected. The impact on the mortgage market of this lack of data is difficult to anticipate.
At this time, Fannie, Freddie, and Ginnie say they will continue to operate as normal. VA says that they, too, will have no disruptions in services. FHA, however, expects delays due to reduced staffing. Origination companies, correspondent banks, and warehouse lenders may react differently as they access the risks associated with an extended shutdown.”
New Flood Insurance Rates and Map Changes To Drown Homeowners With Premium Surge, Subsidies To End
I was recently working on a sale transaction in Wareham which went under agreement with no issues. As is common in that coastal area, the property is in Flood Zone with a subsidized flood insurance annual premium of around $3,000 which the buyer was willing to live with. However, during the underwriting process, the lender advised that under new federal flood insurance map and rate changes, the property was not only in a higher flood risk elevation zone, but would also lose its subsidy upon a sale, with a new premium running a whopping $55,000 — a 1700% increase! Needless to say, the sale sank to the bottom of Buzzards Bay, and the current owner is left with a significantly devalued property.
The culprit for this storm surge is the Biggert-Waters Flood Insurance Act, which was passed after Hurricane Katrina. Under the new law, many homeowners will grapple with a double-whammy of costs — first, because their homes are no longer above base flood elevation, and second, the Act will eliminate the grandfathering of properties that were allowed to use old flood-risk data, and will end subsidies for certain types of properties. According to most projections, flood insurance premiums have the potential to increase by 25% per year for many, and for some, exponentially — like my Wareham client. Furthermore, many additional homes have been placed in the high-risk flood zone for the first time, and if the owners have mortgages, they will be required to buy flood insurance.
According to the Boston Globe, the changes will have widespread impact along coastal communities. For example, in Marshfield, roughly 1,500 homes are located in the expanded flood zone, and in Scituate, about 500, according to local officials. Coastal towns have been scrambling over the last several months to assist affected homeowners and petition Congress and FEMA to help, mostly to no avail.
Property owners have the right to appeal their inclusion in the flood zone, but they have barely more than six weeks left to do so. The deadline is Oct. 17 throughout the county. For an appeal to be successful, the owner would have to prove, with professional documentation, that the elevation is different from what the maps indicate. That’s a high burden and very costly to boot.
This situation has real potential to drown listings and sales along the affected coastal areas. I’ll be monitoring this looming storm in the weeks ahead. Stay dry!
Fate of Long-Standing Massachusetts Brokerage Model Hangs In Balance
As first reported by David Frank in Massachusetts Lawyers Weekly, the critical question of whether real estate agents are governed by the state’s strict independent contractor law, which would entitle agents to minimum wage, overtime and benefits, is headed to the Appeals Court. According to Hillary Schwab, the attorney to a group of real estate agents who filed suit against Jacob Realty in Boston, “this is the first case in Massachusetts where the concept of employment misclassification and the real estate industry have ever been dealt with in the same opinion.” An unfavorable result at the Appeals Court would essentially turn the Massachusetts real estate brokerage model upside-down, as it has historically operated with agents considered independent contractors and paid on a commission-only basis. If brokerages were required to pay their agents minimum and overtime wages and provide all the statutory benefits afforded to employees, the real estate office as we know it would likely cease to exist.
Jacob Realty Agents Required To Adhere to Dress Code, Mandatory Office Hours
The Appeals Court will consider the case of Monell, et al. v. Boston Pads, LLC, (embedded below) brought by a group of disgruntled real estate agents at Jacob Realty. According to Curbed Boston, Jacob Realty is part of a larger network of Boston rental companies (Jacob Realty, NextGen Realty and Boardwalk Properties) with 150 rental agents, making them one of the largest rental offices in Boston.
As is customary in the industry, Jacob Realty classified the agents as independent contractors, paying them on a commission-only basis and making them responsible for payment of their own taxes and monthly desk fees. At the start of their employment, the agents signed non-disclosure, non-solicitation and non-compete agreements. They had to own day planners, obtain a cellphone with a “617” area code, adhere to a dress code, submit to mandatory office hours and to various disciplinary actions if they did not meet their productivity goals.
Lower Court Rules In Favor of Broker
Superior Court Judge Robert Cosgrove issued a ruling on July 15, 2013 that the agents should be considered independent contractors and not employees under the Massachusetts Real Estate Brokerage Act. But Cosgrove said it was difficult to read the brokerage law and independent contractor law consistently. The real estate statute explicitly provides that an agent may either be an employee or an independent contractor, he noted. In the same sentence, the law reiterates that agents must remain under the auspices of a broker. In contrast, the judge wrote, the independent contractor statute requires salespeople to be free from the control and direction of employers in order to be correctly classified as an independent contractor.
The problem arises when brokerages, such as Jacob Realty, ask its agents to do many of the things traditional employees must adhere to, such as required office hours, dress code, and performance benchmarks. This is especially so where courts have, in the last few years, strictly interpreted the independent contractor and wage laws in other industries. The more requirements imposed on agent, the more likely they should be treated as employees and not independent contractors, the argument goes.
The case now heads up to the Massachusetts Appeals Court, and perhaps even the SJC — where the stakes will be much higher. This case is very hard to handicap because, as I said before, the courts as well as state and federal labor agencies have really been cracking down with the independent contractor law in favor of employees. Rest assured, I’ll be monitoring this case. I expect the MAR and GBREB will file friend of the court briefs and take a further appeal if there’s an unfavorable result. There will surely be lobbying efforts at the Legislature to preserve the historical independent contractor brokerage model.
A recent case handed down by the Appeals Court illustrates the fundamental importance of careful condominium document draftsmanship concerning what amenities are included within the definition of a “unit” — and the unintended results when deficient documents get in the hands of judges.
The case is Sano v. Tedesco (Mass. App. Ct. Aug. 28, 2013) and concerned a Lynn condominium dealing with a large repair bill for its crumbling balconies. Half of the 8 unit building enjoyed their own private balconies. Faced with a substantial repair bill, the unit owners without balconies balked at paying the bill, arguing that the balconies were part of the units they served.
The problem was that due to poor draftsmanship, the master deed inconceivably made no mention of the balconies or the support beams. Left with little guidance, the court turned to the Mass. Condominium Act, which defines a unit as “a part of the condominium including one or more rooms, with appurtenant areas such as balconies, terraces and storage lockers if any.” The judges ultimately came down the middle, ruling that each unit owner was responsible for repairs to their own balcony, but that the condominium trust was responsible for the support beams for each balcony. And even the three justice court panel couldn’t agree on that bizarre result! A dissenting judge thought that each unit owner should have been responsible for both the balconies and support beams.
I doubt any of the unit owners expected this peculiar result, with a split of responsibility over balconies and support beams. If the master deed was drafted properly in the first place with the balconies being designated as either a limited common area (with sole repair responsibility lying with the unit owner) or common area with an exclusive easement for each unit owner (with the responsibility on the condo trust), this confusing result would have been avoided. The moral of the story is make sure you hire a competent Massachusetts condominium conversion attorney who is experienced in drafting condo docs!
Special Considerations For Drafting Two and Three Family Massachusetts Condominium Conversions Documents
Avid readers of this Blog know that I’m a huge Seinfeld fan. One of my favorite episodes was the “Serenity Now” episode where Kramer went a little nutty after being tormented by neighborhood kids, muttering “serenity now, serenity now” outside his toilet papered apartment. (Seinfeld buffs also know this as the episode where George beats Lloyd Braun in a computer sales competition). For your viewing pleasure, I’ve embedded the video below.
Serenity is a good topic when it comes to condominiums because condominium living can often bring out the worst in people. There have been some good ones in Massachusetts. I’ve written about the infamous case where a disgruntled unit owner dropped bags of dog poop labeled with the name of the condo board president in hallways and gave the “bird” to condo trustees. There are others, too many to mention here, where dysfunctional trustees have brought condominiums to financial ruin and chaos.
Despite this discordance, condominium conversions of two and three multifamily homes in and around Boston, Cambridge and Somerville continue to be a popular way to cash in on the hot real estate market. A lot of these homes are owned and occupied by extended families, some of whom stay in the new condominium, and some who leave for greener pastures. Smaller condominiums, however, can be a recipe for disaster without careful planning and drafting of the legal documents which govern them. I’m going to outline some important considerations in drafting Massachusetts condominium conversion documents which will put into practice the saying that “an ounce of prevention is worth a pound of cure.”
The Master Deed
The Master Deed is where it all starts. Condominiums are a “creature of statute.” That is, they are a special legal form of property ownership enabled only through a special law called the Massachusetts Condominium Act, General Laws Chapter 183A. The owner of the property must “submit” the property into the condominium regime through the recording with the registry of deeds of a master deed.
The Master Deed sets forth what is part of the units and what is part of the shared “common areas.” Units are typically defined as all of the interior space from the lower surface of finished ceilings, surface plaster of walls and the sub-floor in, while common area consists of the innards behind the walls and buildings, the roof, most common HVAC/plumbing/heating systems, yards, and exterior of the home, among other things.
The use of “limited common areas” are especially useful in two and three family condominiums. Limited common areas are technically common area space but reserved for the exclusive use of the unit owner which it serves. Examples include private decks, porches, roof decks, parking spaces, and storage areas. The drafter can be flexible and provide that limited common areas must be repaired by either the condo association or the unit owner.
The master deed will often impose restrictions upon the use of units or rights of first refusal for the trustees or other unit owners. Care must be taken here to ensure that the units remain marketable while also protecting the serenity of unit owners. Rights of first refusal are discouraged these days.
Declaration of Trust and By-Laws
The second component of creating a condominium is the Declaration of Trust, also referred to as the By-Laws. The declaration of trust creates the condominium trust association and a board of trustees which govern the condominium.
For smaller condominiums between 2 and 5 units, the key is crafting the provisions so as to prevent dead-locking on major decisions. I almost always provide for super-majority voting on all major issues. For 2 unit conversions, I recommend unanimous voting on all major issues. And for all condos I use a mandatory arbitration clause to mediate any deadlocks.
In the case of non-payment of condo fees, which can be financial disaster for two and three unit condos, I provide for the right of the paying unit owners to be granted authority and power to start condo lien proceedings against the non-payor and recover attorneys’ fees and costs.
The declaration of trust should also contain all of the unique rules and regulations of the condominium. Important note: If these are not attached and recorded with the declaration of trust, they are not binding on unit owners. Rules should be drafted in consultation with the owners and can cover anything from satellite dishes, pets, smoking, signs, preserving architectural integrity, noise, quiet hours, parties, trash, etc.
The declaration of trust should also have standard Fannie Mae/Freddie Mac provisions which will ensure that future buyers can obtain conventional financing on their units.
Annual Budget, Condo Fees and Real Estate Taxes
The condominium should have a written annual budget and monthly condo fees established. A separate condominium bank account should also be set up with checks, deposit slips, etc. For small projects, the budget can be rather simple, encompassing the master insurance premium, water/sewer, landscaping, maintenance, and a small capital reserve fund. The monthly condo fee is calculated as the annual budget divided by the number of units divided by 12.
With respect to real estate taxes on a condo conversion, the building will continue to be assesses as a single dwelling until the tax assessor catches up to the conversion. A tax letter agreement should be prepared so that real estate taxes are prorated and properly assessed and paid by each unit owner after the conversion until each unit becomes separately assessed.
Also don’t forget that in the City of Boston, a “Trager” excise tax of $500 per unit starting with the second unit will be assessed on all new conversions. The master deed must have a “Trager” stamp before being accepted for recording.
Unit Floor Plans and Site Plan
All new condominium conversions must have prepared unit floor plans, and in Boston, a surveyed site plan. Unit floor plans will detail each unit’s gross living area, and delineate common areas, limited common areas, exclusive use spaces, and units.
How Much Does All This Cost?
Even for two unit conversions, the cost is a fair amount. Legal fees range from $2,500 – $5,000 and upwards, depending on the complexity of the project and the attorney. Recording fees and Boston excise taxes run over $1,000 and upwards. Architect and survey fees range from $2,500 and upwards. And you always get what you pay for, so keep that in mind!
Richard D. Vetstein, Esq. is a seasoned Massachusetts condominium conversion attorney. Please contact him at firstname.lastname@example.org or by phone at 508-620-5352.
Richard D. Vetstein, Esq. is a Massachusetts real estate attorney who helps people buy, sell, finance and litigate disputes involving Massachusetts real estate. For more information about him, click here. You can contact Attorney Vetstein at email@example.com or 508-620-5352.