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Keeping You Up-To-DateLegislation, 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."
LEGAL BRIEFS
Conflicting rights.
Eminent domain and freedom of religion are colliding in Florida, where a
church is fighting a county government’s effort to take Church-owned
property.
Broward County wants to use the one-and-a-half-acre
site, owned by the Christian Romany Church Ministries, to build a treatment
facility for drug addicts and victims of sexual assault.
The church contends that it has no alternatives
if evicted from the site and rejected the county’s offer to purchase the
land for $1.6 million -- $500,000 more than the church paid for it.
Attorneys representing
the church haven’t mounted the traditional challenge to an eminent domain
taking —that the government has failed to demonstrate the public use the law
requires. Rather, they are arguing that the seizure of the property
“substantially burdens” the free exercise of religion.
The county, for its part,
contends that it is simply “acquiring bricks and sticks,” Assistant County
Attorney Tony Rodriguez told the
Daily Business
Review.
“Unless there is a unique quality to this location
that has some religious significance,” he added, “there’s no reason [the
church] can’t move.” A District Court agreed,
finding that the relocation would be “inconvenient” for the church, but
would not improperly burden its freedom of religious expression.
In its appeal, the church insists that the
taking is burdensome, given the money it has invested in the site and also
considering the difficulty involved in finding a new location.
An amicus brief filed by the Pacific Legal
Foundation, which has led a nationwide effort to curb eminent domain
authority, argues also that the county failed to demonstrate that the taking
was essential for its project.
The Fourth District Court of Appeals heard
arguments in February and is expected to issue its decision sometime this
month.
A bridge too far?
The
National Multi Housing Council and National Apartment Association (NHMC/NAA)
have filed an “amicus” brief in a unit challenging the statute of
limitations on accessibility claims brought under the Fair Housing Act
(FHA). In the underlying suit (Garcia v. Brockway), a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit affirmed a lower court ruling holding that the
two-year statute of limitations applied to allegations that a property
failed to comply with statutory accessibility standards.
The plaintiffs appealed, arguing that the time limit should not apply
to a “continuing violation” if the unit remained out of compliance with the
law. The court ordered a full
15-judge panel to rehear arguments on that question.
The NMHC/NAA brief supports the argument of the
defendant developers that the statute of limitations should apply.
If the court accepts the contrary theory, the
brief argues, “there will be no repose for construction and design claims.
Liability would be triggered anew each time a
tester encountered an alleged violation, no matter when the unit was
designed and constructed.” That theory extends the Fair Housing statute
“beyond its enacted and intended meaning,” and subjects architects,
developers and owners to “never ending” liability, which, the housing groups
argue, thwarts eh very purpose of a statute of limitations.”
Urging the court not to be swayed by the “alarmist” statements of plaintiffs about widespread lack of conformity with the accessibility standards, the NMHC?NAA brief argues that Congress intentionally avoided putting rigid guidelines in the statute, to ensure that design professionals and builders would “retain flexibility in designing apartments and could continue to achieve diversity in home design and construction while meeting the basic accessibility and adaptability requirements” of the statute.”
WORTH QUOTING: "Q: Who's to blame? A: Who's not to blame? The mortgage brokers were out of control. Regulators were asleep. Home buyers thought they were entitled to Corian counters and a two-story great room. Everybody from Norwegian town elders to financial geniuses decided that house prices would always go up. This was an episode of mass idiocy." New York Times columnist David Brooks asking and answering the question: Who was responsible for the housing/subprime crisis?
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