Agenda SummaryReal Estate Finance Marquis Ballroom Northeast Marriott Hotel Anaheim, CA Thursday, January 26, 2006 9:00 AM – 11:30 AMPresiding: J. Michael Roberts, Chair Mike Donohoe, Vice-Chair Maggie Hickman, Vice-Chair Jeannette Way, Executive Committee Liaison Judy Zeigler, NAR Committee Representative Dave Stefanides, GAD LiaisonC.A.R. Staff: Matthew Roberts, Federal Governmental Affairs Manager Ron Kingston, Legislative AdvocateI. Opening CommentsII. Approval of Previous Meeting’s NotesIII. State IssuesA. ActionItems:1. Mission Statement In light of the sunset of the Government Mortgage Program Subcommittee, the following change is recommended to the current Real Estate Finance Committee’s mission statement.“The missionof the committee is to review and recommend positions on proposed legislation and regulatory actions affecting the broad area of real estate financing, including federal housing credit programs, state and local housing finance agencies and secondary mortgage markets. It develops programs and policy recommendations on regulations and legislation designed to preserve and enhance the real estate financing needs of California homebuyers and sellers. It reports to the Executive Committee and the Board of Directors. The Government Mortgage Program Subcommittee works closely with state and federal officials to ensure that programs and legislation developed to meet real estate financing needs also effectively meet the needs of REALTORS® and their clients.”B. Discussion/Reporting Items: 1. Specialized California license plates to benefit housing. As REALTORS® know, the Legislature has authorized a limited number of specialized automobile license plates, Veterans, Lake Tahoe, Children, UCLA Alumni, CA Coastal Commission, and the CA Arts Council have substantially benefited from the sale of license plates. The question before the membership will be to determine if there is sufficient interest to pursue a specialized vehicle license plate that will benefit affordable housing issues.2. Predatory Lending. While significant discussions occur in the nation’s capitol over this matter, there are still ongoing conversations before the Legislature about predatory lending practices by institutional lenders.3. CalHFA (California Housing Finance Agency) anticipated 2006 loan and mortgage insurance activity. The agency is expected to make over $1billion of loans to first time home buyers this year. New mortgage instruments will be offered as well. To a more limited degree CalHFA’s mortgage insurance arm will continue to offer MI to eligible purchasers of single family dwellings.4. Other
IV. Federal IssuesA. Discussion/Reporting Items:1. Predatory & Subprime Lending. A number of bills have been introduced in the 109th Congress that address the issue of predatory and subprime lending. One of the bills that has been mentioned as a vehicle for this issue should Congress decide to address it is H.R. 1295, the Responsible Lending Act. Introduced by Representatives Bob Ney (R-OH) andPaul Kanjorski (D-PA), this bill, also known as the Ney-Kanjorski bill, has gained the support and backing of lenders throughout the country because of its preemption of state laws addressing subprime and predatory loans.At the C.A.R. September 2005 business meetings, C.A.R. took the following position: “that C.A.R. ‘OPPOSE,’ and seek the support of NAR to ‘OPPOSE,’ H.R. 1295 because it includes:
-- A federal preemption of California’s subprime lending law; -- Federal requirements for a uniform mortgage broker license; -- A hard numerical threshold on debt to income ratio for borrowers; -- An extension of the Home Ownership and Equity Protection Act (H.O.E.P.A)to purchase money mortgages.”At NAR’s October business meetings, C.A.R. asked the Conventional Finance Committee to consider C.A.R.’s policy. The Committee referred the motion to the NAR Subprime Lending Working Group for consideration.H.R. 1295 has 38 cosponsors and has been referred to the Subcommittee on Housing and Community Opportunity.
C.A.R.’s Equal Opportunity - Cultural Diversity Committee will lookat non-legislative means which C.A.R. may utilize in educating and protecting buyers from predatory loans.
2. Community Choice in Real Estate. Representative Ken Calvert (CA) and Senator Wayne Allard have reintroduced the Community Choice in Real Estate Act with the same bill numbers as the 108th Session of Congress, H.R. 111 and S. 98. H.R. 111 is in the House Subcommittee on Financial Institutions and Consumer Credit and has 251 cosponsors, including Representatives Baca, Berman, Bono, Capps, Cardoza, Costa, Cunningham, Davis, Doolittle, Eshoo, Farr, Filner, Gallegly, Harman, Herger, Honda, Hunter, Lantos, Lee, Lewis, Lofgren, Matsui, McKeon, Millender-McDonald, Miller, Miller, Napolitano, Nunes, Pombo, Radanovich, Roybal-Allard, Sanchez, Sanchez, Schiff, Sherman, Solis, Tauscher, Thompson, Waters, Watson, Waxman, and Woolsey. S. 98 has 26 cosponsors, including Senator Boxer, and has been referred to the SenateCommittee on Banking, Housing, and Urban Affairs.In December, President Bush signed the Transportation, Treasury, and Housing and Urban Development spending bill, which contained a one-year prohibition against the Federal Reserve Board and U.S. Treasury Department proposal that would allow big banking conglomerates to operate real estate brokerage, leasing, and property management businesses. This is the fourth consecutive year that Congress has enacted the prohibition, which CAR strongly supports.3. Natural Disaster Insurance. On November 17, 2005, Representative Ginny Brown-Waite (R-FL) introduced the Homeowners’ Insurance Protection Act, H.R. 4366. The bill would create a reinsurance program for natural disasters and encourage prevention and mitigation programs. States that create an insurance and/or reinsurance program to cover against residential property loss and the contents of apartment buildings will be able to purchase reinsurance contracts from the U.S. Treasury. These contracts will cover earthquakes and disasters that result from them such as fires and tsunamis, hurricanes and typhoons, tornados, volcanic eruptions, severe winter storms, and other naturaldisasters.The state program will have to include prevention and mitigation provisions that require a minimum of $10,000,000 and a maximum of 35 percent of the net investment income of the state program be used to mitigatelosses from natural catastrophes. The bill has two cosponsors and has been referred to the House Committee on Financial Services.H.R. 4366 would appear to replace The Homeowners Insurance Availability Act, H.R. 846. H.R. 846 was also introduced by Representative Ginny Brown-Waite (R-FL) on February 16, 2005, and has 18 cosponsors, including Farr and Sherman. The bill will implement a reinsurance coverage program for residential propertylosses to homes and the contents of apartment buildings, caused by “covered perils,” available only through contracts for reinsurance coverage purchased at regional auctions. The Secretary of the Treasury would divide the country into regions (no less than six) by areas of “greatest risks of losses from covered perils” and that “have lesser risks of losses from covered perils.” This includes separate regions for all or part of California. The bill will create a “Disaster Reinsurance Fund” to be established within the U.S. Department of the Treasury. The fund would be financed primarily from the sale of contracts for reinsurance coverage to insurance companies. Contracts would not exceed one year; however, they would cover all eligible losses that occur in that time frame. “Covered Perils” are defined as: 1) earthquakes, 2) perils resulting from earthquakes, such as fire and tsunamis, and 3) tropical cyclones having maximum sustained winds of at least 74 miles per hour, including hurricanes and typhoons.C.A.R. supported a similar reinsurance program with the passage of the California Earthquake Authority and would support a federal reinsurance program for all natural disasters.4. Terrorism Risk Insurance Program. On November 26, 2002, theTerrorism Risk Insurance Act (TRIA) became law and the Terrorism Risk Insurance Program was established under the U.S. Treasury Department in response to the September 11, 2001, terrorist attacks. Due to the terrorist attacks, it became extremely difficult (if not impossible) for owners of at-risk commercial properties to obtain insurance. In fact, many insurance companies began to insert terrorism exclusions into their insurance policies. The creation of this program meant that terrorism exclusions on existing insurance policies were removed and all policyholders had the ability to secure coverage for terrorism risk.In December, prior to Congress’ holiday recess, the U.S. House and Senate reached an agreement on extending TRIA. The legislation increases the point at which federal backstop assistance kicks in from $5 million this year to $50 million in 2006 and $100 million in 2007, and creates the President's Working Group on Financial Markets (which includes the Treasury secretary and the Chairs of the Fed and SEC).5. FDIC Proposed Preemption Rule for State-Chartered Banks. On October 14, 2005, the Federal Deposit Insurance Corporation issued a proposed rule on “Interstate Banking; Federal Interest Rate Authority.” The proposed rule would exempt a state-chartered bank’s interstate-branch from a host state’s laws. Instead, the state-chartered bank’s home-state laws would apply to the activities of the interstate branch, regardless of where it was located. For example, if a state-chartered bank from Arizona opened a branch in California, its California branch would only have to adhere to Arizona’s laws. This ruling stems from a Financial Services Roundtable petition requesting the preemption in light of the Office of the Comptroller of the Currency’s preemption rule from a few years ago.Thepreemption would apply to the state-chartered interstate branches to the same extent that federal preemption applies to federally chartered interstate branches. This includes laws pertaining to community reinvestment, consumer protection, fair lending, and establishment of intrastate branches. Additionally, the FDIC has defined “activity conducted at a branch” as “an activity of, by, through, in, from, or substantially involving, a branch.” This broad definition will allow nearly all activity of an interstate bank to be preempted from the host state’s laws so long as they have a branch established in that state.C.A.R., NAR, state Attorney Generals, consumer-protection advocates and others have submitted comment letters in opposition to the FDIC ruling. Please see attached C.A.R. comment letter. (Comment Letter )6. Alternative Mortgage Products & Proposed Federal Guidelines. In an effort to ensure that “lenders should not encourage or accept applications from borrowers who clearly cannot afford the dramatically increased payments that are likely to result at the end” of an initial low-payment period for alternative mortgage products, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and National Credit Union Administration (NCUA) have proposed guidelines on development, underwriting, compliance, and risk management for lenders who offer these products. Areas that theagencies are requesting comment on are (again these are only to apply to nontraditional loans, not conventional loans):
When should stated income be allowed for underwriting?
Should future income be taken into consideration? And if so, how can this be done? If this is the case should other future events be taken into consideration, such as higher interest rates?
The agencies’ guidelines pertaining to loan underwritingwill address:
Appropriate borrower repayment analysis;
Potential for collateral-dependent loans;
Below market introductory rate;
Lending to subprime borrowers; and
Loans secured by non-owner-occupied properties.
The agencies’ guidelines pertaining to risk management will address:
Maintaining performance measures and management reporting systems that provide warning of potential or increasing risks;
Maintaining an allowance for loan and lease losses at a level appropriate for portfolio credit quality and conditions affecting collectibility;
Maintaining capital levels that reflect nontraditional mortgage portfolio-characteristics and the effect of stressed economic conditions on collectibility; and
Applying sound practices in valuing the mortgage-servicing rights of nontraditional mortgages
Finally, the guidelines will address consumer protection. Specifically, they will ensure that the borrower understands the terms of the loan, and that the institution has ensured that the consumer has been provided withclear and balanced information about the benefits and risks of the loan.C.A.R. leadership will work with staff to voice the Association’s perspective on the details of the proposal.V. FHA IssuesA. GAO Releases FHA Report. In November, 2005, the Government Accountability Office released a report on FHA-insured loans with down-payment assistance. FHA insured loans with down-payment assistance grew from 35 to almost 50 percent from 2000 to 2004. In 2000, 6 percent of FHA-insured loans received down-payment assistance from seller-funded nonprofits. This number rose to almost 30 percent in 2004. It was numbers such as these that prompted the House Subcommittee on Housing and Community Opportunity to request the GAO study to evaluate the performance of FHA-insured loans with down-payment assistance.In FHA-insured loans where down-payment assistance was from a seller-funded nonprofit the study found that:
House-price appreciation rates were lower in states with a higher percentage of these types of down-payment assistance;
Sellers who participated in the down-payment assistance would raise the price of their homes to recover the required payments that went to the organization;
These homes would sell and appraise for 2 to 3 percent more than comparable homes;
Appraisers were unaware that down-payment source was from seller; and
Loans with down-payment assistance do not perform as well as loans without. This includes a higher delinquency and claim rate.
While FHA has internal controls and standards, the GAO report made recommendations on how the FHA may better manage its risk with these loans. These recommendations include:
FHA should change underwriting practice to show seller-funded downpayment as a seller inducement to the sale;
Stricter underwriting standards because FHA’s portfolio is heavy with loans with downpayment assistance; and
Internal reviews that target lenders that do a high volume of loans with down payment assistance.
Congress has yet to act on the report. A copy of the report may be obtained at: http://www.gao.gov/docsearch/abstract.php?rptno=GAO-06-24B. FHA 2006 Loan Limits. Because the FHA loan limit ceiling is set at 87% of the conforming loan limit, the 2006 FHA loan limit was increased when the conforming loan limit for 2006 was increased. The new conforming loan limit for 2006 is $417,000. Therefore, the new FHA loan limit ceiling is $362,790. FHA loans limits are set at 95% of an area’s median home price. When that price is above the ceiling it is considered a high-cost area, and their FHA loan limit is $362,720. For 2006, California has 25 counties that qualify as high-cost areas. For a complete list of FHAloan limits please click on the following Web-site: https://entp.hud.gov/idapp/html/hicostlook.cfmC. Five-Year FHA Hybrid ARMs. HUD has issued a final rule allowing FHA to insure five-year ARMs. The FHA-insured five-year ARM will have an annual interest rate adjustment cap of two percentage points, and a lifetime cap of six percentage points. This rule finalizes an interimrule HUD issued in March of 2005.D. FHA Single Family Loan Limit Adjustment. The FHA Single Family Loan Limit Adjustment Act, H.R. 176, was introduced on January 4, 2005, by Representative Gary Miller (CA) and has17 cosponsors, including Calvert, Capps, Cox, Harman, Lee, Lofgren, Matsui, and Woolsey. The bill would raise the FHA loan limit to 100% of the conforming loan limit, which is currently $417,000. The FHA loan limit is currently at 87% of the conforming loan limit or $362,790. By raising the loan limit, it is hoped that the FHA program would be better utilized in high-cost states and would increase homeownership opportunities. H.R. 176 is currently in the House Subcommittee on Housing and Community Opportunity.E. FHA Zero Downpayment. On June 30, 2005, Representative Patrick Tiberi (R-OH) reintroduced the Zero Downpayment Pilot Program Act, H.R. 3043. This bill would authorize the FHA to create a zero-downpayment product for residential purchases. Borrowers would have to meet underwriting criteria, but their downpayment and closing costs could be financed into the loan. However, borrowers would likely pay a higher upfront premium and be required to attend pre-purchase counseling. It is thought that the creation of such a product would put FHA back on equal footing with traditional lenders who currently offer zero-downpayment loan products.F. FHA Temporary Mortgage Assistance. The Homeowners’ Emergency Mortgage Assistance Act, H.R. 378, was introduced on January 26, 2005, sponsored by Representative Chaka Fattah (D-PA) and has 8 cosponsors. The bill would restore home-mortgage assistance through the FHA single-family mortgage insurance program. The main purpose of the bill is to permit the provision of mortgage paymentson behalf of homeowners who, due to no fault of their own, are experiencing temporary financial difficulties. Qualifying circumstances include: loss of job of a household member; salary, wage or earnings reduction of a household member;injury, disability or illness of a household member; divorce or separation in the household; and death of a household member. However, for a borrower to qualify there must be a “reasonable prospect” that he/she will be ableto resume full mortgage payments no later than 36 months after the beginning of the period for which assistance payments are provided. In addition, borrowers cannot be more than 60 days in arrears on a residential mortgage within the 2-year period preceding the delinquency for which assistance is requested (unless they can demonstrate that the prior delinquency was the result of financial hardship beyond their control). For those who qualify, the HUD Secretary wouldmake payment funds available through the Mutual Mortgage Insurance Fund. Payment includes amount of principal, interest, taxes, assessments, hazard insurance, any mortgage insurance or credit insurance premiums, and reasonable attorney's fees. These payments would be repaid to the MMI Fund with interest, according to a schedule agreed upon by the Secretary and the mortgagor.VI. VA & HUD IssuesA. 2006 VA Loan Limits.Effective January 1, 2006 veterans will be able to get no-down payment loans up to the full conforming loan limit of $417,000. The VA home loan program guarantees up to 25% of the national conforming loan limit and is often used by lenders in place of a downpayment on the mortgage.B. RESPA. HUD held a series of RESPA Reform Roundtable discussions across the country during the months of July and August to receive input and information from the real estate communityon possible changes to the Real Estate Settlement Procedures Act (RESPA). REALTORS® were represented at almost all of these meetings, ensuring that C.A.R. and NAR policy was presented and taken into consideration in any decision made by HUD. HUD had submitted a final rule to the Office of Management and Budget (OMB) in December 2003. It was strongly suspected that the final rule was similar to a proposed rule published in July 2002. Under the original proposal, a one-package approach to the Guaranteed Mortgage Package was suggested. This would allow lenders to blind bundle all closing-cost services and the loan together as long as they provided guaranteedinterest rate and one total cost figure. C.A.R. worked with California’s congressional delegation to pressure HUD to withdraw their proposal, which they did on March 22, 2004.HUD had intended to propose its new rule by the end of 2005, however due to hurricane Katrina they have delayed issuing the proposed rule. Issues discussed at the roundtables were the possibility of single or double packaging of costs. Thiswould include a safe harbor for Section 8 violations (i.e., kickbacks). HUD’s rationale for the safe harbor is that any savings from kickbacks made by one vendor to another would be passed on to the consumer. Attendants of these meetings correctly stated that not only would a Section 8 safe harbor NOT help to pass kickback savings onto the consumer, but quite the opposite. Additionally, it was pointed out that packaging is currently taking place within the market now, and that kickbacks may possibly take place now ONLY if ALL of the savings are passed onto the consumer. C.A.R. President Jim Hamilton, who attended multiple HUD RESPA Reform Roundtable discussions, stated thatthe current market is creating a competitive environment and that a Section 8 safe harbor package would only hurt consumers and decrease competition within the real estate business. Other attendees included representatives from the banking, mortgage broker, escrow, title, credit, and consumer advocacy community.C. American Veterans Homeownership Act. On June 16, 2005, Representative Paul Ryan (R-WI) introduced H.R. 2952, the American Veterans Homeownership Act. This legislation would:
Revise the definition of qualified veteran for purposes of the veterans’ mortgage bond program to include all veterans who served on active duty regardless of date of service.
Allow veterans to apply for financing under the bond program up to 25 years after the end of their active duty.
Revise volume limitations applicable to the issuance of such bonds in certain states.
Thislegislation would amend the rules which govern how the Qualified Veterans Mortgage Bonds’ proceeds are distributed. Under current law mortgage loans made with these proceeds may only be used for veterans who served on active dutybefore 1977, and who applied for the financing within 30 years of release from active service. These bonds are available in California, Alaska, Oregon, Texas and Wisconsin. H.R. 2952 currently has 38 cosponsors and has been referred to the House Committee on Ways and Means.VII. Fannie Mae and Freddie MacA. Fannie Mae & Freddie Mac 2006 Conforming Loan Limits. Fannie Mae’s and Freddie Mac’s conforming loan limit was raised to $417,000 for 2006. This represents a 16% increase over the 2005 conforming loan limit of $359,650. It is estimated that 466,326 additional households will now be eligible for conforming loans.B. GSE Oversight & High-Cost Conforming Loan Limits. Congress has reinvigorated its attempt to write regulatory reform legislation amid continuing scrutiny of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—the housing government-sponsored enterprises (GSEs). The effort to balance the generally accepted need for stronger regulation of the GSE’s financial structure and financial reporting without undermining the current federal housing finance system proved elusive in the 108th Congress. However, legislation introduced in both the House and Senate in the 109th is under active consideration, and is beginning to move through Congress.On October 26, 2005, the House passed H.R.1461, the Federal Housing Finance Reform Act, on a 331-90 vote. Included in the bill were major victories for California REALTORS® and future homeowners. One victory was the inclusion of an amendment by Representative Gary Miller that would allow a newly created independent GSE regulator to set high-cost conforming loan limits by an area’s median home price, up to 150% of the national conforming loan limit. Currently, the conforming loanlimit is $417,000; however, high-cost states such as Hawaii, Alaska, Guam and the Virgin Islands, are allowed a high-cost conforming loan limit of $625,500 (150% of the regular conforming loan limit). In addition, the legislation doesnot place a statutory restriction on the size of the GSE’s portfolios.On July 28, 2005, the Senate Committee on Banking, Housing, and Urban Affairs reported S. 190, the Federal Housing Enterprise Regulatory Reform Act. The Senate bill, unlike the House bill, would limit what the GSEs could hold within their portfolio, effectively limiting the portfolio size, and there were tough approval measures for new GSE programs. Most glaringly absent though was the lack of a high-cost conforming loan limit issue. Senator Jon Corzine (D-NJ) introduced a high-cost amendment, but it was forced to be included in a Democratic substitute bill that died in Committee along party lines. Subsequently,S. 190 was reported out of Committee along a party line-vote. It is very likely that Senator Richard Shelby (R-AL) will seek a Manager’s Amendment to bring Democrats on board prior to S. 190 going to the Senate floor. C.A.R.is working with NAR to rally support among other high-cost states for a unified lobbying effort on this issue, including a co-authored open editorial in local newspapers in multiple states, joint letters to Congress, and a multi-state fly-in to Washington D.C. by State Association Presidents to directly lobby Congress on this issue.VIII. New BusinessIX. Adjournment