By Robert Freedman, senior editor, REALTOR® Magazine
You might be wondering what’s in the 2,300 pages of financial services reform that has just passed Congress. It now goes to President Obama for signature.
Relatively few of the pages of legislation touch on real estate finance directly. Much of the bill addresses the way hedge funds, banks, and other financial services companies are regulated. One of its centerpieces is the new Financial Stability Oversight Council, which will have the job of issuing alerts when it sees lending practices becoming too risky.
But there are pieces of the legislation that could impact you.
First, administration of the Real Estate Settlement Procedures Act (RESPA) will move out of HUD and into a new agency in the Federal Reserve called the Consumer Financial Protection Bureau. That bureau will also administer the Truth in Lending Act (TILA), which is overseen in the Fed.
I interviewed NAR Senior Legislative Analyst Tony Hutchinson about the bill in mid-July and he said the agency shift by itself won’t introduce anything new. In fact, HUD staff that administer RESPA today will probably administer RESPA tomorrow; they’ll just do it under a different agency name.
Even so, the move is something NAR will be looking at closely, because HUD and the Federal Reserve bring different cultures to settlement services, and it’ll be important to see if the Fed introduces subtle shifts in the way RESPA is administered.
Importantly, when the legislation was being written, NAR worked closely with lawmakers to ensure that an unmistakable firewall is maintained between the two very different businesses of financial services and real estate brokerage. That was both a defensive and a preemptive move on NAR’s part, because original language in parts of the bill seemed so overly broad that it risked allowing brokerage practices to be inadvertently lumped into rules meant for financial services. The so-called carve-outs that NAR secured in Congress are meant to make clear that lawmakers intended regulators not to confuse the two at some point down the road.
Second, the kinds of exotic loans that are widely recognized for their destabilizing effect on mortgage markets several years ago will face a much different regulatory environment in the future. That might seem like a non-issue today, since so few if any of these loans are being originated now. But lawmakers are looking ahead and saying that once financial markets return to something close to normal, the days of too-easy loans won’t return as well. It’s not that those loans will be a thing of the past. As NAR argued during the crafting of the bill, those loans have a place when they’re reserved for the borrowers they were originally designed for (investors and other sophisticated borrowers, and those with uneven income streams that don’t come nicely laid out on W-2 forms). Rather, those loans will be allowed as long as lenders reserve them for borrowers who can be expected to pay them back and that take steps to ensure borrowers have the financial wherewithal that they say they have.
In our interview, Hutchinson said these changes will lead to slightly longer processing times for subprime and other exotic mortgages but the increased time shouldn’t be an issue for your business. Importantly, there’s nothing in the bill that would impact plain vanilla fixed and adjustable-rate mortgages.
Third, investors and homeowners who want to provide seller financing to buyers will be able to do so as long as they limit those transactions to three times a year. For most homeowners, including those with several properties, that amount of flexibility is reasonable—certainly it’s a big improvement over what was in the bill up until just a few weeks before the House-Senate conference committee took up the legislation. Originally, property owners were limited to a seller-financing transaction only once every three years. The intention of such a tight limitation was to protect against some abuses that were seen in markets during the housing boom, but NAR was able to make the case that too many regular property owners would be hurt by a remedy that was intended to stop a minority of abusers.
Fourth, although the legislation leaves reform of secondary mortgage market companies Fannie Mae and Freddie Mac for later, it does start to lay the groundwork by requiring regulators to come up with some initial planning by certain deadlines, the first being in early 2011. In other words, the federal government is served notice that the process for reforming the two companies along with the Federal Home Loan Banks must start in earnest next year.
The bottom line on the legislation is that, for such a sweeping set of reforms to our country’s financial services sector, real estate is impacted surprisingly little. Really, all the changes are at the margins, and much of what NAR focused on during the writing of the bill was the all-important carve-outs to ensure the legislation does nothing to change the separation between banking and commerce. To that end, REALTORS® efforts in this area were an important success, measured less by what the legislation does than by what it doesn’t do.