Editor’s note: This post packages together six write-ups from REALTOR® Magazine Online on legislative and regulatory matters of interest to real estate professionals from the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo, which took place in Washington, D.C., May 10-14.

REALTORS® Fight Back Against Home Ownership Attacks
Changes to Secondary Mortgage Market Must be Gradual
U.S. in Same Debt Class as Greece?
The Impact of Dodd Frank on Real Estate
Tax Reform Goes ‘Back to the Future’
Navigating Life on MARS

REALTORS® Fight Back Against Home Ownership Attacks
Originally published May 11, 2011
A wide range of issues that risk putting homeownership out of reach for all but a narrow slice of households in the U.S. are coming to a head.

That’s the big picture that members of Congress must see as REALTORS® flood Capitol Hill for meetings with their senators and representatives this week, NAR’s chief lobbyist Jerry Giovaniello told REALTORS® attending the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington.

Among the high-profile issues that lawmakers are starting to talk about: Reforming secondary mortgage market companies Fannie Mae and Freddie Mac and deciding whether the mortgage interest deduction should be curbed, perhaps starting with second homes. But these are just the tip of the iceberg, Giovaniello told hundreds of REALTORS® at the Federal Issues Update Wednesday morning.

Some 8,000 REALTORS® are in Washington, D.C., this week and meetings with their members of Congress are a central part of why they’re here.

Among the threats to home ownership for the broad middle class are rising fees and tightening standards for FHA and conventional financing, a looming decrease in high-cost loan limits for FHA and conventional mortgages, a proposal to require a high minimum down payment for “safe” conventional loans, overly rigid FHA condominium financing rules, and a looming expiration of federal flood insurance.

The Question Lawmakers Need to Hear

“This is a perfect storm,” Giovaniello said. “There are 83 new members of Congress.” For these and other members who might not see how all of the different issues knit together, “you need to get back to the original attack on home ownership. The question is whether only a certain class of households will be able to become home owners in this country.”

The proposal for a high down payment is of particular importance, because if the proposal stands, it would lead to further consolidation in the mortgage lending industry, leading to just a few financial institutions in the industry, Giovaniello said. These big lenders are already too big to fail, in the same way that Fannie Mae and Freddie Mac were considered too big to fail. That led to hundreds of billions in bailout funds after the mortgage meltdown.

The high down payment proposal is in a recommended rule by banking regulators that would define a safe conventional mortgage as that with at least 20 percent down, and other tight underwriting requirements. If loans don’t meet that definition, lenders would have to retain 5 percent of the value of the loans on their books, a requirement that would lead to far higher interest rates, knocking out much of the broad middle class of home buyers.

Down Payment Isn’t the Issue; Underwriting Is

Should the proposal be finalized into law, it would lead to concentration in lending among the largest banks because community banks and other small lenders won’t have the resources to hold the 5 percent on their books.

Giovaniello said lawmakers might try to compromise and press the regulators to lower the requirement to 10 percent down, but that misses the point. The issue isn’t minimum down payment, Giovaniello said. FHA and VA have very low down payments, yet they have better loan performance than the conventional market. The issue is simply sound underwriting.

“We have to change this argument,” he said. “Lenders want REALTORS® to compromise at 10 percent. That’s just not going to work.”
—Robert Freedman, REALTOR® Magazine

 
Changes to Secondary Mortgage Market Must be Gradual
Originally published May 11, 2011
Former high-level officials for Presidents Barack Obama and George W. Bush agree that any changes to the secondary mortgage market to drive private capital back into housing must be gradual. Otherwise, the shock to the system could destabilize the economy and housing.

“You don’t want the medicine to kill you,” said David Axelrod, former senior adviser to President Obama and one of the chief architects of his election three years ago. “You want to come out healthier on the other side.”

Dana Perino, the chief spokesperson for President Bush during his second term, predicted that lawmakers would debate reform proposals for the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, for another two years before changes are enacted. “You can’t throw this thing in reverse,” she said, referring to the need to take time in crafting a solution to the two companies. As recently as last week, Fannie Mae announced it needed another federal infusion of $8.5 billion as it works through the bad loans on its books.

The message from Perino and Axelrod jibes with the one REALTORS® will be sending to their members of Congress this week on their visits to Capitol Hill. NAR’s proposal calls for replacing the two companies over time with another entity that maintains federal support of the market without allowing executives and shareholders of the new company to privately profit while taxpayers take any losses.

Keeping the MID Intact

During those Capitol Hill visits, REALTORS® will also be talking about the need to preserve the mortgage interest deduction, and in response to a comment from a REALTOR®, imploring Axelrod to talk to his boss about the importance of the deduction to the young buyers she works with, Axelrod said he generally agreed with the need for the MID to benefit households getting into the housing market and trying to build wealth.

Maintaining the current value of the deduction for higher-wealth households is something that should be talked about, said Axelrod, alluding to a controversial proposal in the Obama administration’s latest budget request to cut the value of MID and other itemized deductions for higher-income households.

“Your young couple should be able to take advantage of that tax deduction,” he said, but that raises the question of whether there should be a “limit so [the deduction] is there for that young couple that really needs the help.” The Obama administration’s proposal would cut the value of itemized deductions to 28 percent for households in the 35 percent tax bracket.

‘Nudge Lawmakers In a Creative Direction’

Both Perino and Axelrod encouraged REALTORS® to use their meetings with lawmakers this week to drive home their messages on policies that impact housing.

“NAR is an amazingly powerful organization,” said Perino, “not because you have a great D.C. lobbying group, but because you represent all those communities. Members of Congress want their communities to thrive, so if NAR comes with creative ideas and a united front, you can nudge lawmakers in a creative direction and get things done.”

Axelrod ended his comments with a note of optimism. “It’s a testament to our country,” he said, “that we’re always perfecting our union, always moving forward — and hopefully we do that in a way that sustains and strengthens the middle class. Key to that is the work you do, home ownership.”
—Robert Freedman, REALTOR® Magazine

U.S. in Same Debt Class as Greece?
Originally published May 11, 2011
The financial position of the United States is not too different than that of Greece or other countries in the European Union that are teetering on bankruptcy and need a bail out, one of the Senate’s past leaders on financial issues told REALTORS® yesterday.

Former Sen. Judd Gregg (R-N.H.) said that the financial future of our country is grim if lawmakers don’t seriously address the federal government’s budget deficit.

Saving the United States from the fate of Greece is the size of the country and the role of the dollar as the global currency. Those characteristics give the U.S. “more running room” than other countries but without those benefits, the Greek situation is “not that different from ours,” said former Sen. Judd Gregg (R-N.H.) at the first day of the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington. Gregg spoke to a full ballroom at the Legislative & Political Forum.

Gregg, a senior member of the Budget and Banking committees when he was in the Senate, says the United States has historically run an average 35 percent deficit, but today that figure is past 60 percent and heading up. The debt is bigger in Japan, but because that country has a high savings rate, the Japanese are able to finance their own debt. The United States, where the savings rate is too low, requires investors from China, the Middle East, and elsewhere to finance much of the country’s debt.

Foreign Investors Key

If the country’s debt continues to swell, Gregg said, foreign investors will grow wary that the United States will end up inflating away much of its debt, making their investments in Treasury bonds and other instruments far less valuable. That would mean increasingly high interest rates to attract investors, destabilizing the U.S. economy and hammering real estate.

Gregg said both House Budget Committee Chairman Rep. Paul Ryan (R-Wis.) and President Obama have put forward substantive proposals for reducing the debt, in each case by about $4 trillion, but neither plan was developed with bipartisan support. That bipartisanship is critical, since any substantive plan will mean painful cuts to the big entitlement programs like Social Security, Medicare, and Medicaid.

Voters need to see lawmakers working across the aisle on a fair deficit reduction plan, one that spreads the pain around, Gregg said. Only then will voters get behind lawmakers in support of broad cuts to the popular entitlements.

Some Ideas for Fixing It

Gregg outlined a few key steps that he said would go a long way to getting the country’s fiscal woes under control, including freezing cost-of-living increases in programs; cutting discretionary spending, including to the military; and making the big entitlements solvent by, among other things, gradually increasing the age at which benefits kick in. Gregg also talked about reforming the federal tax code to provide incentives for creating economic growth, reforming energy policy, and reforming heath care.

Gregg said he was disappointed that President Obama didn’t embrace proposals released late last year of the bipartisan deficit reduction commission. That plan also would cut the deficit by a projected $4 trillion, including in part by reducing the value of the mortgage interest deduction and other itemized deductions for higher-bracket taxpayers.

“We can [reform the budget] now, in an orderly way,” Gregg said, “or in four or five years have an economic crisis driven by the world losing confidence in the dollar.”
—Robert Freedman, REALTOR® Magazine

The Impact of Dodd Frank on Real Estate
Originally published May 13, 2011
Although the 2,314-page Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law last year doesn’t affect real estate brokers and agents as much as, say, mortgage originators, it does have some significant implications for the industry, said Phillip Schulman, a partner at the Washington, D.C. law firm K&L Gates LLP.

In his remarks at the Real Estate Services Forum Thursday during the REALTORS® Midyear Legislative Meetings, Schulman told attendees that the mortgage lending sector was targeted by many of the bill’s provisions.

“[Dodd-Frank] came down hard on loan officers and mortgage brokers. Why? Because they were the ones working with the borrowers,” said Schulman, adding that in the future all originators will be qualified, licensed, and registered, as well as issued a unique identifier.

“Anytime there’s a violation committed by a loan officer, it’s going to be reported in a nationwide system,” he said.

The bill also affects the financial sector, particularly in terms of the structure of securities, which are debts or equities that are packaged for investment. To avoid the financial fraud of the previous decade, Dodd-Frank requires financial companies that create securities to hold a minimum 5 percent stake in them — the exception being securities that are composed of qualified residential mortgages (QRM).

Current QRM requirements for borrowers include no option adjustable-rate mortgages (ARMs), no bankruptcy in the past three years, no prior short sale or foreclosure, and points and fees charged by the lender totaling less than 3 percent of the loan’s value. Furthermore, lenders and regulators have recently recommended implementing a higher minimum down payment.

The increasingly stringent requirements pose a serious challenge to a viable housing market, Schulman noted.

“The eligible loan is shrinking and shrinking, and it’s going to be harder for someone who has any dents or scratches in their credit to get a loan,” he said. “It’s all well and good to get the riff-raff out of the business and get rid of these exotic, fly-by-night financial products, but let’s not throw the baby out with the bath water.

“We just came through a decade of this laissez-faire attitude. The atmosphere was one of easy money. We put millions of Americans in homes who probably should not have been there. Today, Washington is all about risk management. Congress and regulators stepped in and were asked to regulate. So they did what they always do. They overregulated. I think until we earn back the trust of the Congress and the regulators and even the American people, we’re going to continue to be scrutinized like never before.”

Here are a few other important, real estate-related changes brought about by the bill:

Bureau of Consumer Financial Protection: This new behemoth regulatory agency — which Jay N. Varon, Schulman’s fellow speaker and a litigation partner with law firm Foley & Lardner LLP, characterized as the “centerpiece” of Dodd-Frank — will officially launch on July 21. This organization will encompass a half-dozen current regulatory agencies and 18 consumer statutes, including RESPA. It will also have what Varon called “nuclear” penalties, meaning punishments for violations will be much more stringent than they are now.

Prohibitions on steering and loan-officer compensation: Dodd-Frank changed the compensation model for loan officers to prevent them from steering consumers into loans that may not be right for them, yet profitable for the lending company. According to Schulman, loan officers will collect the same sum per loan, whether it’s a 30-year fixed mortgage or an option ARM. Still, he said this new arrangement isn’t entirely fool-proof. “Businessmen figure out a way to make every system work. Sure, they’ll pay them 50 basis points for loans of all kinds. But they can also pay them bonuses based on total volume,” he explained.

Appraisals and AMCs: New regulations in Dodd-Frank are designed to protect appraiser independence, Schulman said. These rules also sunset the Home Valuation Code of Conduct (HVCC), which caused a great deal of consternation among real estate professionals who say it contributed to the collapse of deals after it was enacted in 2009.
—Brian Summerfield, REALTOR Magazine

Tax Reform Goes ‘Back to the Future’
Originally published May 12, 2011
When it comes to reforming the tax code and reducing the deficit, legislators and policy makers are heading “back to the future,” said Steve Bailey, tax aide to Sen. Kent Conrad (D-N.D.), who has served as chair of the Senate’s Budget Committee since 2006. But they won’t need a DeLorean or a flux capacitor to return to policies that extend as far back as the Reagan years.

In remarks Wednesday morning to the Federal Taxation Committee during the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo, Bailey said the two most seriously considered models for tax restructuring and deficit reduction borrow heavily from reforms implemented in 1986, mainly streamlining of the tax code through elimination of certain tax expenditures for corporations and individuals.

“Tax reform, for those of us who remember what it was like when President Reagan ordered his Treasury Secretary to come up with a plan, scared a lot of people,” Bailey said. “But Congress worked through it, industry had its input, citizens had their input. It was all worked out through our democratic process.”

For some commercial real estate practitioners, the 1986 tax reform decimated their business. Surely, that’s a time many veteran practitioners remember as they contemplate the tax-reform plans being floated today. Many practitioners are concerned about erosion of the mortgage interest deduction and capital-gains exclusion on home sales, as suggested by the recent Simpson-Bowles deficit reduction commission proposal.

Although Bailey noted that the Simpson-Bowles recommendations did not receive the supermajority commission vote required to pass the proposal on to Congress for a vote, he said many of the larger tax expenditures targeted in the report — such as the mortgage interest deduction — would continue to be discussed as a target for cutting in order to raise federal revenues. “You’re going to have winners and losers as you go through that,” he added.

However, the process will be spread over several years, Bailey explained. “Tax reform is not going to be fast-tracked.” Part of the reason is that many of the players involved still aren’t willing to compromise on what needs to be kept and what needs to be cut. “Members of Congress say, ‘Everything’s on the table except … ’ They’re all part of the problem, and they need to be part of the solution,” he said.

One area where compromise will be needed in the near-term is on the debt ceiling. As NAR tax specialist Linda Goold pointed out, the federal government will technically run out of money sometime this month. Although the Treasury Secretary can move some funds around to maintain solvency for a few more months, the government will default by August if the debt ceiling isn’t raised before then. This would likely trigger a global financial catastrophe, Bailey said.

“Congress will have to cut spending [if the debt ceiling isn’t raised], but a lot of other horrible stuff would happen too,” he explained. “An industry like yours that’s sensitive to interest rates — you wouldn’t want to see what happens after that.”
—Brian Summerfield, REALTOR Magazine

Navigating Life on MARS
Originally published May 12, 2011
The Mortgage Assistance Relief Services (MARS) rule released by the Federal Trade Commission last November to protect home owners from foreclosure prevention scams has several unintended consequences for real estate professionals who are involved in short-sale transactions. Laurie Janik, general counsel for the National Association of REALTORS®, spoke about the rule during the Risk Management and Licensing Forum Wednesday at the REALTORS® Midyear Legislative Meetings.

MARS imposes uniform requirements on businesses that market and provide mortgage relief services to consumers and, therefore, applies to practitioners who negotiate with sellers or lenders regarding short sales or who refer consumers to others who do. Unfortunately, the disclosure requirements are confusing, Janik said, because the rule writers weren’t actually looking at the role of real estate professionals.

“[The rule] is not a good fit for what you do,” said Janik, who has been talking with FTC staff about changing the disclosure language to make it more relevant for real estate professionals, or even making practitioners exempt from the disclosure requirements.

Specifically, the rule requires that MARS providers who advertise their short-sale expertise in soliciting business disclose several facts, including:

• They are not associated with the government.
• They are not approved by the government or lender.
• The lender may not agree to any changes proposed during the transaction.

The rule bans all upfront fees charged to consumers. It also requires that service providers specify what they’ll charge before the consumer hires them and disclose the fee once again before the seller completes a transaction. The rule requires that those two amounts be the same.

However, since lenders are known to reduce commissions paid to listing agents for short sales before closing, it may be impossible for practitioners to comply with the requirement that the fee disclosed to consumers be the same, Janik said. Alternatively, if a practitioner leaves that section of the disclosure form blank because no additional fee is charged for the short-sale negotiation service over and above the broker’s commission, it could be misconstrued by the client as an agent agreeing to accept no compensation for the transaction.

The MARS language allows consumers to stop doing business with a service provider any time, and Janik said this clause could inadvertently suggest that the consumer could terminate an entire listing agreement. (While agency representation is consensual, and therefore, the client can always end the agency representation, an early termination of a listing agreement exposes the seller to the payment of damages.)

Based on her conversations with FTC officials, Janik said she’s optimistic that the FTC will make changes to the disclosure requirements that will make the language more relevant for real estate professionals or provide another meaningful accommodation. She said, in the meantime, that she doesn’t expect the FTC to crack down on real estate practitioners who are involved in short sales in the course of providing traditional real estate services to sellers.
—Wendy Cole, REALTOR® Magazine

Robert Freedman

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