Keeping You Up-To-Date

Legislation, Regulation, Industry Trends

RESPA:  IT’S BACK!

Twice in the past six years, the Department of Housing and Urban Development (HUD) has floated a plan to overhaul the Real Estate Settlement Practices Act (RESPA),  a statute that nearly everyone views as dysfunctional at best and counter-productive at worst, only to see the proposed reforms shot down by industry opposition.  Given that history, the consensus expectation was that HUD this time would offer a narrowly drawn proposal designed to avoid controversy and win broad support.  But the plan the agency has outlined turns out to be more expansive in some respects than its predecessors, and initial industry reaction suggests that the road to approval will be anything but smooth.

“Complicated, confusing and controversial” is how attorney Philip Schulman, a RESPA specialist, described the revamped reform plan.  “It’s déjà vu all over again,” he told National Mortgage News.

Some aspects of that “déjà vu” are decidedly different, however.  The subprime meltdown has heightened concern about predatory lending, creating a political environment that is far less resistant to financial a regulation and more receptive to HUD’s argument that mortgage-related disclosures need to be clearer and more helpful to consumers.

Unlike the reform plans rejected in the past, the current proposal does not include the “guaranteed payment” option that would have allowed lenders to bundle closing services from varied providers (without violating RESPA’s anti-kickback provision) in exchange for guaranteeing the loan rate quoted on the “Good Faith Estimate” (GFE).  But the new plan revamps the final settlement statement as well as the GFE, mandates the use of a standardized GFE form, and introduces a controversial “closing script” designed to ensure that borrowers understand the terms of their loan and are aware of any discrepancies between the estimated and final loan costs.  The new proposal also requires the disclosure of “yield spread premiums” paid to brokers for originating higher-rate loans – a requirement that mortgage brokers opposed before and are no more likely to embrace now. 

With these changes, the GFE “will finally mean what it says.  What you see [will be] what you get,” HUD Assistant Secretary Brian Montgomery told reporters at a press conference announcing the proposal. 

HUD also anticipates that by encouraging borrowers to shop for mortgages and making it easier for them to compare loan costs and terms, the proposed reforms will reduce loan origination costs by an average of $668 per borrower, generating aggregate savings of $8.35 billion annually.  Most of those savings ($5.88 billion) will come from the revenues of loan originators -- $3.53 billion from mortgage brokers and $2.35 billion from depository institutions – a fair result, HUD’s impact statement argues, because they have been overcharging uninformed consumers through the combination of high origination fees and yield spread premiums.” 

The analysis also estimates that the RESPA revisions will produce $550 million in up-front compliance costs for originators and settlement services providers, and ongoing compliance costs of $1.2 billion annually, amounting to an additional $100 per loan.

As in the past, industry executives have responded to the proposal initially by emphasizing their support for RESPA reform and their belief that clear consumer disclosures are important, while expressing “concerns” about the specific changes HUD is proposing.  Whether these “concerns” will solidify into the wall of opposition that defeated past RESPA proposals remains to be seen, but in what probably is not a promising indicator, seven industry trade groups have asked HUD to extend the comment period from 60 to 120 days.  Noting that the 300 page proposal covers “myriad subjects beyond disclosures,” the groups note in a joint letter that “it will take commenters more than 60 days to study the [plan] carefully and to prepare thoughtful comments on the implications of its many provisions.”   

That hardly sounds like smooth sailing ahead.  The more likely interpretation, according to industry observers who have followed past RESPA reform battles:   “Here we go again.”    

COMPETING PRESSURES

Trying simultaneously to address past problems while avoiding future ones, Fannie Mae has announced that it is tightening underwriting standards, while giving delinquent borrowers struggling with existing loans more time to find alternatives to foreclosure.  The seemingly contrary policies reflect the competing pressures on Fannie and Freddie Mac, from legislators, who want them to play a larger role in resolving the subprime crisis, and from their shareholders, who are not pleased by the large foreclosure-related losses both have reported this year. 

In two separate announcements, Fannie Mae informed loan servicers recently that they will be able to give delinquent borrowers six months instead of four to resolve their problems, before initiating foreclosure actions against them.   In the second announcement, Fannie Mae officials said they were establishing a minimum credit score of 580 for loans the company will purchase going forward, while considering lower scores in some “special” circumstances.  The new guidelines will also increase from four to five years the “recovery period” required for borrowers seeking loans following a bankruptcy, although, again, the guidelines will allow a shorter period for borrowers who can show “documented extenuating circumstances” contributing to their bankruptcies. 

“Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission," Fannie Mae Spokesman Brian Faith said in a press statement. "We have taken these steps to ensure that borrowers receive loans that give them the best chance to sustain homeownership,” he added.

Both Fannie Mae and Freddie Mac have also announced recent increases in their underwriting fees, as they seek to offset the losses that have battered the stock prices of both companies.  According to the Wall Street Journal, the new fees will  add .0125 points to the interest rate for borrowers with solid credit scores putting  20 percent down; for weaker borrowers with lower down payments, the increase could be as much as half-a-point.

Separately, the Office of Federal Housing Enterprise Oversight (OFHEO), the primary regulator for Fannie Mae and Freddie Mac, has decided to ease their capital requirements so the two companies can increase liquidity in the credit-strained secondary mortgage market.  Analysts estimate that the policy change will allow the two companies to purchase an additional $200 billion in mortgages this year.

SEEING THE GREEN

City governments and financial services companies alike are jumping on the environmental bandwagon, joining what appears to be a goring and increasingly diverse movement to comb at global warming and control rising energy costs.  

Los Angeles, for instance, wants to become “the greenest city in America” with a proposed initiative calling for stricter green building mandates, including a   regulation requiring buildings that exceed 50,000 sq. ft. or have 50 or more units  to follow the guidelines for certification as a Leadership in Energy and Environmental Design (LEED) project.  The Los Angeles proposal is expected to win approval when it goes before the City Council this spring, according to a report in National Real Estate Investor.

Buildings won’t actually have to go through the process of obtaining LEED certification, but those that do will be rewarded with fast-track status through the permitting and review process.

Los Angeles is among the 87 cities, 15 counties and 27 states that have either passed or are in the process of introducing legislation or ordinances aimed at encouraging sustainable design in public and/or private development, according to the U.S. Green Council.

Atlanta, which leads in the number of LEED certified buildings with 53 projects either completed or underway, is “likely to incorporate green building requirements into building codes for both public and private developments,” according to NREI. A 2003 ordinance already requires the largest new and major renovated city-financed construction projects to meet LEED criteria.

PNC Financial Services Group Inc. has 42 LEED-certified buildings – operational facilities and bank branches – and plans to promote education among loan officers and the lending industry as a whole on sustainable building underwriting practices, according to a second NREI article.

Wells Fargo & Co. has provided more than $1.5 billion in financing for LEED-certified buildings. “Our green building program is not really a separate activity from our overall approach to the business,” Paul Brunbaum, a Senior Wells Fargo VP in the commercial real estate group told NREI. “It is part and parcel of our mainstream lending practice.”

Understanding and underwriting the value of green buildings can be difficult because there simply is not yet enough information to support appraising green buildings differently from conventional buildings, he said. Partly for that reason, few commercial lenders are currently offering green mortgage loans, which are still concentrated with community banks and boutique lenders.  Investor return is a major obstacle, according to one industry executive, who told NREI:  “Should we earn less of a return to finance a property that is built with a new way of construction?” 

FARING WELL IN A DOWN MARKET

Neighborhood and community shopping centers with concentrations of drug stores and food retailers will do better in an economic downturn than the general merchandise regional malls, according to Torto Wheaton Research economist Abigail Marks.

“Neighborhood and community centers, with their concentration in the food and health sectors, seem poised to weather the storm, as the stores in these sectors have outshined other retailers over the past two years,” she maintains in a report, “Where Are They Now?”

Marks recognizes that falling home prices and rising gas prices have taken a chunk out of the disposable income that might be spent at these shopping centers. “We expect this negative effect from high gas prices to linger into 2008; however, the retailers that populate neighborhood and community centers appear to be well-positioned to se stronger absorption this year,” she said.

Absorption rates for neighborhood and community centers improved last year, rebounding from a record low in 2006.  Regional malls, on the other hand, are bracing for another down year, according to the Torto Wheaton report.  “With their concentrations in the general merchandise sector and clothing, regional malls may be headed into a year more like 2007 than 2006, as the momentum for same-store sales growth in these sectors seems to have cooled,” Marks noted.

Sales declined last year for home improvement and durable goods retailers Home Depot and Sears as well as for department stores like Macy’s and JCPenny – anchor stores in many regional malls.  

WHERE ARE THEY NOW?

Press reports have trumpeted the soaring foreclosure rates in communities nationwide, but where do all of those former homeowners go when they lose their homes?  Into the rental housing market, apparently, and the trend is creating a secondary crisis in that arena. In Denver, CO, one of the nation’s foreclosure hot spots, apartment vacancy rates have fallen by half from 10 percent three years ago to around 5 percent today.  Nationally, the apartment vacancy rate declined from 6.9 percent in 2003 to 5.6 percent last year, according to the real estate research firm, Marcus & Millichap. 

Homeowners displaced by foreclosures aren’t entirely responsible for those statistics, but they are contributing both to the shrinking supply and the rising cost of rental housing, analysts say.  And the trickle-down effect is falling heavily on lower-income renters, who are hard-pressed to compete in a tightening rental market.  Nearly one quarter of the 211 elected officials responding to a National League of Cities survey last month said foreclosures were contributing to an increase in the homeless populations in their cities.

It isn’t just the foreclosures on owner-occupied single-family homes that are roiling rental housing markets; foreclosures on multi-family dwellings are forcing many tenants out of the apartments they currently occupy – a trend that is particularly evident in Massachusetts, with its large supply of two- and three-family homes.  According to statistics compiled by The Warren Group, nearly 25 percent of the foreclosures petitions filed in February involved the owners of two- and three-family properties. 

Of course, what is undeniably bad news for many tenants translates into good news for many landlords, who are seeing something of a boom after what had been a difficult period for many.  A few years ago, low interest rates and easy underwriting standards sucked tenants out of apartments and into homeownership situations, forcing landlords in many markets to lower rents and offer concessions to keep their units occupied.   Now, rising foreclosure rates are reversing that trend, increasing demand for apartments and allowing landlords to raise rates and eliminate concessions once again. 

As a result, although real estate stocks generally have been hammered, real estate investment trusts (REITs) focusing on apartments and self-storage facilities have performed relatively well.  The benefits for apartments are obvious, but storage facilities?  “The simple logic there,” Mike Kirby, director of research for investment-research firm Green Street Advisors., told the Wall Street Journal “is that as people downsize their housing, they need some place to store their stuff."