School’s coming to members of Congress over the next two days as thousands of REALTORS® meet with lawmakers to provide a refresher course on how critical the federal government’s historic support for home ownership is to the country’s future.
“We have an unprecedented situation today, because so many members of Congress are new and really don’t always know how important home ownership incentives are to the economy and to the country, NAR Chief Lobbyist Jerry Giovaniello told thousands of REALTORS® packed into a 7 a.m. session today as a kick-off to their visits to Capitol Hill.
Each year thousands of REALTORS® come to Washington for the NAR Midyear Legislative Meetings & Trade Expo, which includes two days of Hill visits to champion real estate issues to their members of Congress.
This year is different, Giovaniello said, because as Congress discusses ways to reduce the federal deficit and whether to change the Tax Code, some of the government’s longstanding incentives for home ownership, including the mortgage interest deduction and other tax provisions, will come under debate. The roles of FHA and the secondary mortgage market are also shaping up to be part of the discussion.
“Our main job is really just to educate members on why these incentives have been such priorities for the federal government for so long,” said Giovaniello.
Some 43 percent of the Senate had turned over in the last six years, and in the House, more than 80 members have been in Congress for fewer than three years, many of whom have never served in public office before. “There are many members of Congress who think FHA is a lending program rather than an insurance program, so a lot of what we have to do is just educate these members about these basic things, said Giovaniello.
REALTORS® have three simple talking points they’ll be taking with them to Capitol Hill this week:
1. Preserve MID and other housing tax incentives, including the capital gains exclusion on the sale of a principal residence and the property tax deduction.
2. Protect FHA’s ability to meet its mission of helping responsible households who needs its mortgage insurance to buy a home.
3. And pave the way for the return of private capital to the secondary mortgage market while preserving an explicit, not-for-profit, government-chartered federal presence in the market.
NAR’s tax counsel, Evan Liddiard, said the conditions are the best in almost two decades for Congress to tackle sweeping tax reform, so MID and other tax incentives will be part of the discussion. Liddiard said that even if the two houses of Congress can’t craft legislation that can pass both houses, if any paring back of home ownership incentives are included in bills that at least make it through one house or another, that sets a precedent that will make it easier in later years for harmful changes to pass. “We have to head this off now,” he said.
One argument members of Congress might make in favor of paring back MID is that they need that tax cut in exchange for lowering tax rates, which would help households across the board. But because there’s no guarantee that Congress won’t turn around in a few years and raise the tax rates again, that’s not an argument that makes sense, said Giovaniello. “Once we give up something on MID, we won’t get it back,” he said.
On FHA, which has seen its reserves take a hit in recent years, REALTORS® will be carrying the message that the agency has been the unsung hero of the country’s economic recovery. It stepped up to the plate during the housing downturn and made lending possible at a time when there were few other options. Had it not done that, the country would be in a tougher place right now. And in any case, the agency’s finances are quickly improving and could soon be in positive territory once again.
“FHA is a counter-cyclical program,” said NAR Policy Analyst Megan Booth. “It’s role is to step up when other sources of funding won’t, so it did its job.”
Legislation could be coming down the pike that might seek to require borrowers to come with a higher downpayment or to pay higher insurance premiums or to meet certain income qualifications, said Booth. each of these provisions would be devastating to the agency’s mission and needs to be resisted, she said.
The main message on reform of the secondary mortgage market is that a continued federal presence, explicit and on a nonprofit basis, is essential for the preservation of the widespread availability of 30-year, fixed-rate mortgages. Private lenders without that federal backstop simply won’t make safe, long-term financing available on a widespread basis.
“We’re going to hold members accountable for how they vote on these issues,” Giovaniello said. “That’s one of the messages we need to take to Capitol Hill. We’re watching what they do.”
To reinforce the message, REALTORS® will be wearing badges on lanyards that carry a simple message: “Home ownership is not a loophole.”
Over the next two days, that message will be out in force on Capitol Hill.
The Senate this week is taking up legislation to even the tax-collection playing field between Internet retailers and bricks-and-mortar retailers. It’s an important issue for commercial real estate professionals, because their clients face a disadvantage against out-of-state Internet retailers on tax collection.
It’s not that no tax is due when something is purchased in a different state over the Internet. A tax is in fact due, but states have no way of systematically collecting it. And a Supreme Court case from 1992 prohibits them from requiring out-of-state retailers to collect the tax on their behalf.
As a result, it’s largely been up to buyers to pay the tax, in the form of a “use tax,” but they rarely do. Correcting this disparity is the rationale behind the Marketplace Fairness Act, S. 366, which the Senate is set to pass any day now. Lawmakers and analysts generally agree that the bill will in fact pass, and then it needs to be taken up in the House, where the outcome is less clear.
NAR supports the bill, mainly for two reasons. First, it will help the commercial real estate sector, which finds the playing field tilted against it as buyers go online to buy things from vendors in another state that, if bought in a store, would require them to pay state tax. Second, it’s a good bill for states, because it will bring in tax revenue that’s owed to them, helping those with a budget gap improve their bottom line. By some estimates, states are losing out on more than $20 billion a year.
Critics say the bill equates to a new tax, but in fact the tax is already in place. The bill is intended to make it practical and simple for states to collect what they’re owed.
There are plenty of arguments on both sides of the issue, but for the real estate industry, it’s simply about creating an even playing field between them and Internet retailers. In the 4-minute video above, NAR Government Affairs analysts talk about the bill and why NAR supports it.
Access NAR’s letter in support of the bill.
Major news outlets have been talking about the Obama Administration possibly requesting $943 million from the U.S. Treasury this year to shore up the finances of the Federal Housing Administration. But whether the 80-year-old agency will actually need the cash infusion is far from clear.
The $943 million figure is part of the Administration’s fiscal 2014 budget proposal, but it’s simply a projection based on current conditions. Whether the funds will actually be needed won’t be known until September, six months from now, when the current fiscal year ends.
Today’s headlines about the bailout stem not from the agency’s single-family mortgage portfolio but from its portfolio of reverse mortgage loans, which it calls home equity conversion mortgages (HECM). These are loans that enable seniors to draw a steady stream of monthly income by tapping the equity in their house. FHA backed almost 55,000 reverse mortgage loans in 2012, making it the biggest participant in the market by far.
FHA Commissioner Carole Galante has since taken steps to pare back the agency’s reverse mortgage risk. Among other things, the agency has reduced its insurance exposure by eliminating its standard, fixed-rate reverse mortgage product, reducing the maximum amount of funds available to borrowers.
Agency Has Played Big Economic Role
The agency has really been the unsung hero of the housing market since the downturn hit several years ago, and the pressure on its reserves is the price the federal government has been paying to help keep mortgage funding flowing to first-time buyers and moderate-income households while private lenders have pared back their lending in the conventional market through tightened underwriting standards.
Unlike in the conventional market, during the housing boom FHA never loosened its underwriting standards and its financial position remained strong during the downturn, which made it one of the most stable participants in the mortgage market after the crash.
Its market share grew considerably during that time while it took up much of the slack left by the private market. Part of its growth was also driven by federal policy changes that enabled hard-hit home owners to replace their troubled mortgages with safe FHA financing. As home values plummeted in 2005 and 2006, the FHA mutual mortgage insurance fund, the agency’s main vehicle for backing single-family mortgages, came under pressure. But FHA was still able to retain its reserves for its congressionally required 30 years. (FHA also maintains a congressionally required 2-year surplus reserve account.)
FHA has since taken a number of steps to keep its finances healthy. These include increases in its upfront and monthly premium structures and tightening its enforcement over bad lenders.
The result has been a remarkable run. At a time when the two secondary mortgage market companies Fannie Mae and Freddie Mac were using Treasury funds to keep them operating after the federal government put them in conservatorship, and many of the country’s largest banks were taking assistance under the Troubled Asset Relief Program (TARP), FHA continued to operate under its own reserves.
Of course, even FHA came under pressure when home prices were seeing steep declines, and for a while last year it looked like the agency would need to tap Treasury funds to keep its reserve accounts fully funded, but in the end the improving housing market made that unnecessary as rising home values relieved much of the pressure on its reserves. The agency also received a one-time payment as its share of the National Mortgage Settlement. The National Mortgage Settlement is the 2012 agreement between five of the country’s largest banks and the federal government to address widespread problems found in the way the banks were processing their foreclosures.
The agency still has years of reserves left to meet all of its exposure should its entire portfolio of loans go bad. What it doesn’t have is the full 30-year requirement (plus the 2-percent surplus requirement), which is far beyond what banks and other financial institutions have to keep on reserve.
Lawmakers in the House are even looking at whether it’s time to reconsider the 30-year reserve requirement for the agency. Rep. Michael Capuano (D-Mass.), ranking member of the House Financial Services Subcommittee on Housing and Insurance, has introduced legislation to modify the 30-year reserve requirement. Rep. Maxine Waters (D-Calif.), ranking member on the full House Financial Services Committee, suggested in a recent hearing that it’s time for Congress to look hard at the requirement.
Were the requirement in fact eliminated, much of the pressure on FHA’s reserves would be relieved and the agency would be treated more closely to the way other financial institutions are treated.
Bottom line: The FHA has absorbed a lot of the problems in the housing market over the years and as of today it remains one of the lone housing finance agencies to come through the financial crisis without a bailout.
In the 90-second video above, House Financial Services Committee Ranking Member Rep. Maxine Waters (D-Calif.) asks NAR President Gary Thomas whether it’s time to revisit the 30-year reserve requirement for FHA. The question was posed during an April 10 hearing on the state of FHA. President Thomas was one of the panelists at the hearing, held by the committee’s housing and insurance subcommittee. Thomas said the requirement should be looked at.
The foreclosure crisis is easing but chances remain good that you’ll continue to list and sell foreclosures for a while. If you’ve had tenants in some of the foreclosures you’ve already sold than you’re probably familiar with that 2009 federal law that protects tenants against eviction when the owner loses the property to the lender.
The law is “The Protecting Tenants at Foreclosure Act” and it gives tenants two types of protection, depending on their situation. If they’ve signed a long-term lease agreement with the owner, than they’re entitled to continue renting their home for the duration of that lease agreement. So, if they have nine months to go on their lease when the owner loses the property to foreclosure, than you as the listing agent of that property have to honor that existing lease. That means no eviction or no rent increases (unless a rent increase is part of the existing lease) until the agreement expires.
If they haven’t signed a long-term lease, than they’re entitled to a minimum of three months notice before they have to leave.
There are exceptions to the law and other provisions you have to be aware of, but those are the two basic components.
Learn a little more about the law, and what protections you must accord tenants in these transactions, in this 5-minute video with NAR Regulatory Affairs and the National Law Center on Homelessness and Poverty.
It’s a phone call no association wants to receive. Fair Housing testers say sales associates in the market violated the law by treating households differently based on race and ethnicity.
That’s what happened to the Lehigh Valley Association of REALTORS® in Pennsylvania, but the story doesn’t end there.
Taking the view that even a single allegation of discrimination is one too many, the association worked with community groups to institute a hard-hitting campaign to educate its members about Fair Housing. “We made a decision to be part of the solution,” says Andrea Decker, the association’s president in 2012, when the Fair Housing testing was conducted.
The campaign combines the latest best practices on federal Fair Housing rules from NAR, the U.S. Department of Housing and Urban Development, and other groups, with an outreach program that vests brokers in the education process.
“We decided brokers were the best means to mitigate this issue,” says Justin Porembo, the Lehigh Valley association’s government affairs director. “We asked them to have an educational forum at each of their monthly staff meetings to keep the conversation about Fair Housing going.”
A new task force was created to develop monthly Fair Housing topics that brokers could use in their meetings. The task force also looked at ways to increase minority representation on the association’s board, and it worked with HUD to create a publication directed at consumers to help them understand Fair Housing and how to report activity that they think might violate the law.
The campaign has been in place for about a year now and it’s impact has been significant. “Ultimately, we feel the outcome was positive,” says Ryan Conrad, the association’s CEO. “We’re moving forward.”
In a 6-minute video. Conrad and others walk you through the details of the report by the Fair Housing testers, how the association responded, and what the outcome has been.
Share the video in time for Fair Housing Month, April 1-30.
Tax provisions are once again under discussion as lawmakers look at dueling budget plans
The federal budget process for next year began last week with release by the Senate and House budget committees of their fiscal 2014 plans. The House plan, prepared under the leadership of Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, is intended to bring the federal budget into balance in 10 years by limiting spending to about 19 percent of the gross domestic product.
The Senate plan, prepared under the direction of Sen. Patty Murray (D-Wash.), chair of her chamber’s budget committee, is intended to put the budget on a sustainable path to balance by reducing it by about $1.85 trillion, half coming from cuts and half from new revenue. The new revenue would come in part by making changes in the tax code, including by closing “loopholes” and “eliminating wasteful spending in the tax code.”
The budget is just a financial blueprint and doesn’t have the force of law, so even if some version of these two proposals is eventually passed by Congress, any actual spending cuts or tax law changes can’t be known at this point just by looking at these documents.
Even so, they’re important to real estate because they point to what battles REALTORS® could be facing in the months ahead. For example, in talking about closing tax loopholes or eliminating wasteful tax expenditures, lawmakers can use that language as a starting point for looking at deductions and credits that are available to households and individuals today. Could that include the mortgage interest deduction? That’s a possibility, says Evan Liddiard, NAR’s policy analyst on tax issues.
Liddiard sat down with Colin Allen, an NAR Legislative representative, last week to talk about how real estate fares under the two budget proposals in Congress and what comes next in the process. Get their take on how the budget battle is shaping up in the 4-minute video above.
Next step in the process is release of the Obama administration’s budget proposal, which is expected in early April. Last year the administration called for curtailment in the value of itemized deductions for wealthier households.
Despite the improving economy, home loans even for well-qualified borrowers are still unnecessarily hard to get and take too long, real estate practitioners say. But lenders take a different view. In a roundtable with three of the country’s largest lenders, home mortgage executives say they’ve ramped up capacity and are making loans quickly for qualified conventional borrowers and they expect to keep doing so even as they gear up for a host of new mortgage lending rules coming out of Washington in the next year.
“We all made a lot of loans last year,” says Joseph Rogers, Jr., executive vice president of Wells Fargo Home Mortgages. “Wells Fargo made over a half a trillion dollars in loans to customers last year. Our retailers served over a million customers. That means somebody was getting financing.”
NAR brought the three lenders together in mid-March for a wide-ranging discussion to get their take on the state of the conventional mortgage market, how long before private lenders get back into the market with non-agency products for conventional borrowers, and what it will take for lenders to get all the new rules coming out of Washington incorporated into their business processes.
The lenders say 2012 was an especially busy year, particularly in the refinance segment, because of ultra-low interest rates and regulatory changes that created a window for borrowers to move into FHA loans. Volume on the refi side could very well dip this year, but on the purchase side, the lenders say they’re making a lot of loans and plan to keep doing so. “All of our companies have been investing very heavily [on meeting purchase demand] and have been rewarded for increased capacity in this business,” says Saber Salam, senior vice president of Chase Home Mortgage.
Looking ahead, once the federal government provides clarity on what it plans to do with the two big secondary mortgage market companies Fannie Mae and Freddie Mac, which have been in conservatorship for the past several years, lenders will look anew at what it takes to get a robust private mortgage market into place.
A lot has to happen, they say, including getting the credit rating agencies back into the business of rating private-label mortgage-backed securities, and that takes time and money, so expect it to be years before we see the return of a substantial market outside agency-backed mortgages. “If we settle the issue of what’s going to happen to Fannie Mae and Freddie Mac, and on the role of FHA, and take out that ambiguity, that will help a lot [in spurring a return of private money inti mortgages],” says Rogers.
Loan standards are about right
Without a doubt, borrowers used to low- or no-doc loans are seeing tighter loan standards today and that is unlikely to change, says Rogers. “But for those other customers who are well qualified with a decent FICO score, I think credit is readily available.”
Shawn Krause, executive vice president of Quicken Loans, says to the extent lending appears tight, it’s because lenders are having to navigate a very confusing repurchase environment. Repurchase refers to when Fannie Mae, Freddie Mac, FHA, and even investors say loans weren’t originated to their parameters and require the lenders to buy the loans back, a costly penalty that lenders say is the result of a changing playing field.
“How you interpret these things makes a big difference, because lenders have been stung through repurchases, after we were trying to do what we were told,” says Rogers. “Now we have a different environment we’re dealing with.”
The lack of clarity on the repurchase rules is contributing to the difficulty borrowers face in obtaining loans, said Salam. “What we’re dealing with is some of the history of where lending standards used to be versus where they are today,” he said.
Next year is a big year for the health insurance reform law enacted three years ago, but it’s this year that you might want to start thinking about what, if anything, you’ll need to do to get ready.
The Patient Protection and Affordable Care act of 2010–what often gets referred to as Obamacare—includes an employer responsibility provison that might have an impact on you if you oversee a state or local association or brokerage.
This employer mandate, as it’s called, requires any employer with more than 50 full-time equivalent employees to provide health insurance for its employees. Right off the bat this would appear to rule out many if not most state and local associations of REALTORS®, because few associations have more than 50 employees. Same thing with brokerages, because many of them, while they might have 50 or more sales associates, don’t have quite that many employees. (Independent contractors aren’t counted as employees under the law.)
If you meet the eligibility threshold, you have to make insurance available to your employees and contribute to the cost of that coverage. Failure to do so means your employees have to get their own insurance (in one of the new “individual exchanges” that are being set up under the law), and you would be on the hook for penalties for the failure to provide affordable coverage.
The law does make a tax break available to small employers if you pick up employees’ insurance costs, and for employees who have to get their own insurance, some tax help is available there, too.
Even if you don’t meet the mandate’s employee threshold, it might make sense from a business standpoint to provide insurance, and depending on a number of factors, you might be able to provide relatively affordable coverage to your employees, especially when you factor in the tax break available to very small businesses.
There are other major aspects to the law that kick in next year, so you might consider meeting with an insurance broker or business adviser this year not only to understand what requirements you face but also what makes the most sense for you from a business standpoint.
In the 6-minute video above, Marcia Salkin, NARs managing director for legislative policy, and Robert Hay, associate director of policy for the American Society of Association Executives, talk about the employer mandate that kicks in next year and put other aspects of the law into a helpful context for you as you decide how the law affects your operations.
Congress is looking at what to do about FHA in light of the pressure on its reserves and it’s clear from a hearing that senators held yesterday the agency presents them with a conundrum. Lawmakers acknowledge the indispensable role FHA played in the aftermath of the mortgage crisis and continues to play today, yet it’s equally clear the agency is in a tough spot, although given the pressure it’s been under it’s been managing its reserves remarkably well.
Testimony by market experts that appeared before the Senate Banking Committee yesterday indicated that the housing market, and the broader economy by extension, would have been in much worse shape had FHA not stepped in with affordable mortgage credit when it did. By some estimates, it prevented home values from dropping an additional 25 percent in the darkest days after the downturn.
Testimony also made clear that the cause of FHA’s challenge to its reserves is the very opposite of what caused the mortgage meltdown. The mortgage meltdown was caused by lax underwriting and confusion about the strength of the mortgages that collateralized the private-label mortgage-backed securities that were so popular among investors during the housing boom. FHA’s challenge is very different. It never relaxed it’s underwriting standards and it maintained the safety and soundness of its mutual mortgage insurance fund throughout the boom.
After the crisis, the federal government and private sector looked to it to help shore up the market, and it did, but as a side-effect of that, it took on a lot more borrowers at a time when the broader economy was struggling. As a result of many factors outside its control, including widespread job losses and declining home prices, a portion of the borrowers it took on struggled. The result is a shortage in one of its reserve funds. But even here, the problem is not as acute as it sometimes sounds in the media, because FHA maintains reserves for 30 years, a requirement that far exceeds the private sector.
Against this backdrop, NAR President Gary Thomas made a strong case for careful action by Congress as it decides what, if anything, it should do. He shared with lawmakers the compelling story of how FHA stepped in at a critical juncture and through little fault of its own, took a hit to its reserves. In a sense it saved the economy from a much bigger blow but it did so at the expense of its own reserve fund.
Snippets of Thomas’ remarks to the Senate Banking Committee are in the 3-minute video above.