Agenda SummaryReal Estate Finance Committee Grand Nave Ballroom, Gardenia Room Sheraton Grand Hotel Sacramento, CA Thursday, June 8, 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, 2006 GAD Committee LiaisonC.A.R. Staff: Matthew Roberts, Federal Governmental Affairs Manager Ron Kingston, Legislative AdvocateI. Opening CommentsII. Approval of Previous Meeting’s NotesIII. State IssuesA. Discussion/Reporting Items:1. AJR 32 (Arambula) Qualified veteran mortgage bonds. The resolution memorializes the President and Congress to enact legislation that would revise provisions of the IRS code to authorize increased issuance of Qualified Veterans Mortgage Bonds (QVMB) to fund home loans. The states of Wisconsin, Texas, Oregon, California and Alaska offer low-interest rates on home loan mortgages to eligible veterans. Only veterans who served prior to January 1, 1977 are eligible for QVMB loans. C.A.R. Position: Support2. AJR 47 ( Mark Ridley-Thomas) CA Housing Affordability. The bill memorializes the President and Congress to recognize the high cost of purchasing a home in the state and to raise the FHA conforming loan limits. In so doing the measure finds increasingthe conforming loan limit would increase the number of purchasers. C.A.R. Position: Support3. AB 2416 ( Torrico) Appraiser Fees. The bill specifies that only one fee for appraising the same real property may be collected unless the borrower has obtained a new or additional loan and more than six months have elapsed since the prior appraisal. C.A.R.Position: Favor4. OtherIV. Federal IssuesA. Action Items:1. FHA Risk Based Pricing (Please see IBP ).In May, 2006, C.A.R. leadership supported the recommended position from the Real Estate Finance Committee’s leadership, that C.A.R. “SUPPORT” legislation to allow the Federal Housing Administration (FHA) to set their mortgage insurance premiums using risk-based pricing, so long as the legislation includes:
Increasing the FHA loan limits to 100% of the conforming loan limit,
Insuring zero down mortgages, and
Insuring 40 year mortgages.
Because NAR’s Federal Housing Policy Committee was scheduled to take policy on this issue at the NAR May business meetings, C.A.R. leadership felt it was important for C.A.R.’s NAR Directors to have clear direction prior to those meetings.2. FHA Home Equity Conversion Mortgage (Please see IBP ). Reverse Mortgages allow older homeowners (62 and over) to convert part of the equity in their home into income without having to sell their home ortake on new monthly mortgage payments. FHA has now proposed a home equity conversion mortgage (HECM) for purchase.B. Discussion/Reporting Items:1. Natural Disaster Insurance.The intensity of large natural disasters in recent years has made the acquisition of adequate homeowners’ insurance very difficult in some areas. Insurers are declining to write policies, canceling existing policies or increasing premiums on existingpolicies. Recently, Hurricanes Katrina and Rita have refocused attention on this issue.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 andthe contents of apartment buildings will be able to purchase reinsurance contracts from the U.S. Treasury. These contracts will cover earthquakes and the natural disasters that result from them such as fires and tsunamis, hurricanes and typhoons, tornados, volcanic eruptions, severe winter storms, and others.H.R. 4366 has 15 cosponsors and has been referred to the House Committee on Financial Services. There are other bills that address the issue of natural disaster insurance; however, H.R. 4366 has been touted as the likely vehicle for this issue to move. Congress has stated their hesitation to move any natural disaster insurance bill prior to reforming the NationalFlood Insurance Program which is currently bankrupt.2. Community Choice in Real Estate.In early 2001 the Federal Reserve and the U.S. Treasury Department proposed rules to expand the powers of national bank conglomerates. The agencies proposed allowing national bank conglomerates to engage in real estate brokerage and management, reclassifying these activities as financial in nature. C.A.R. and NAR strongly oppose the proposal, arguing that the Bank Holding Company Act of 1956 and the Gramm-Leach-Bliley Act (GLB Act) of 1999 do not authorize banking firms to provide real estate brokerage and property management services, as these are nonfinancial activities. REALTORS® strongly supportenactment of the Community Choice in Real Estate Act, H.R.111/S.98, which removes the powers of these agencies to regulate these real estate activities. REALTORS® believe that potential problems would occur in the context of national mega-bank conglomerates and has not taken a position against the limited real estate activities, authorized by law, engaged in by a few state banks, credit unions, and thrifts.
C.A.R. and NAR policy supports the separation of banking and commerce. If permitted to engage in real estate brokerage and management, national bank conglomerates would have an unfair competitive advantage and inherent conflicts of interest would result.
As it has since 2002, Congress has enacted another one-year ban, effective through September 30, 2006, against the Treasury Department from issuing a final rule permitting national bank conglomerates to engage in real estate brokerage and management. This represents the fifth consecutiveyear that authorizing legislation has been introduced permanently barring national banks from engaging in real estate brokerage and management activities. C.A.R. and NAR continue to urge Congress to enact a permanent ban. H.R. 111/S. 98was reintroduced in the 109th Congress by Representatives Calvert (R-CA) and Kanjorski (D-PA) and Senators Allard (R-CO), Clinton (D-NY) and Shelby (R-AL). H.R. 111 has 254 House cosponsors while S. 98 has 26 Senate cosponsors.
3.OCC Ruling Allowing Banks to Develop Real Estate.In December 2005, the Office of the Comptroller of the Currency (OCC) announced it was authorizing national banks to invest in real estate projects involving the development of office buildings, hotels, residential condominiums, and windmill farms. OCC is the principal federal banking regulator for national banks. The OCC actions represent a marked departure from what is permitted by the National Bank Act, the OCC’s regulations, and previous OCC rulings regarding the types of real estate activities in which national banks may engage. The new rulings represent the OCC’s continued efforts to dramatically expand the real estate powers of national banks.
C.A.R. is concernedthe OCC has set in motion a process that will inevitably lead to national banks becoming actively involved in real estate development and brokerage activities. This will result in inherent conflicts of interest when real estate developers seek financingfor competing projects. Moreover, federal subsidies give banks an unfair advantage when competing with other developers. These activities also will markedly increase the risk exposure of national banks, threaten the safety and soundness of the banking system, and lead to authorization of banks becoming real estate brokers.
In addition, permitting national banks to engage in real estate activities undermines the long-standing, Congressionally-mandated separation between banking and commerce. Thelessons learned from the savings and loan scandal of the 1980s and the sluggish Japanese economy, where banks are intertwined with real estate and commercial enterprises, are two dramatic examples of negative consequences of mixing banking and commerce.
C.A.R. opposed a 1983 California law allowing banks to engage directly in real estate activity and has continued to oppose similar legislation. REALTORS® have raised their concerns about the OCC rulings with OCC Comptroller John Dugan, Chairman Ben Bernanke of the Federal Reserve Board, Treasury Secretary John Snow, and acting Chairman Martin Gruenberg of the Federal Deposit Insurance Corporation. C.A.R. and NAR are also communicating our strong objections to members of Congress, urging members to communicate their objections directly to OCC, and suggesting that Congress take action to rein in the inappropriate expansion of banks into real estate development. 4. Wal-Mart Bank. OnMarch 28, NAR submitted a written statement to the Federal Deposit Insurance Corporation (FDIC) urging the FDIC not to approve the application filed by Wal-Mart Stores for federal deposit insurance for Wal-Mart Bank. The Wal-Mart Bank would be a Utah-chartered state bank, commonly referred to as an industrial loan company or ILC.
REALTORS® oppose approval of the application because, if successful, it would establish a dangerous precedent leading inevitably to an erosion of the national policy against mixing banking and commerce. There are two key reasons for this national policy. It prevents conflicts of interest that would occur if banks not only provided financial services but competed with their commercial customers. It also prevents the unfair competitive advantage banks would have because they have access to cheap sources of capital, thanks to federal deposit insurance and other advantages.
5. National Flood Insurance Program Reform.Congress has introduced numerous bills to reform the National Flood Insurance Program (NFIP) which has become insolvent. One of the bills, H.R. 4973, the Flood Insurance Reform and Modernization Act of 2006, was passed out of the House Committee on Financial Services on March 16, with bipartisan support. Included in the bill are provisions that will increase the borrowing authority of the NFIP to $25 Billion, increase the coverage limits for residential flood insurance from $250,000 (structure) and $100,000 (contents) to $335,000/$135,000, increase coverage on non-residential properties from $500,000 to $670,000, increase amount FEMA can raise premiums annually from 10% to 15%, review the nation’s flood maps (including mapping the500-year floodplain), and extend the mitigation program for properties with severe repetitive losses.
Also included in H.R. 4973 is a provision to phase in actuarial rates for subsidized vacation homes,second homes, and non-residential properties. Currently, all properties prior to 1975 and are required to have flood insurance are subsidized with low premiums. NAR has policyopposing a blanket imposition of higher insurance premiums on vacation homes and rental properties.On May 25, 2006, Senator Shelby (R-AL) introduced and held mark-up hearings in the Senate Banking, Housing, and Urban Affairs Committee for the Senate’s NFIP reformbill. The Committee marked-up the bill by a 20-0 vote.6. Predatory & Subprime Lending.A number of bills have been introduced in the 109th Congress that addresses 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) and PaulKanjorski (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 and -- A hard numerical threshold on debt to income ratio for borrowers;”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.7. IRS Ruling on Down Payment Assistance Organizations.On May 4, 2006 the IRS came down with a ruling that organizations that provide seller-funded downpaymentassistance to buyers cannot qualify as tax-exempt organizations. Programs that provide downpayment assistance can still qualify for tax-exempt status, but the IRS ruling sets stronger rules for which programs can, and cannot qualify. In order to qualify the programs must be properly structured and operated under the rules the IRS has set for not-for-profit organizations. The main problem found was programs that factored in the amount of money the seller put into the program to determine how much the buyer would received. These programs are blamed for increasing the cost of the housing as well as the risk of default for the buyer.8. 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 atthe 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 the agencies 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 futureincome 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 underwriting will 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 ofnontraditional 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 with clear and balanced information about the benefits and risks of the loan. (C.A.R.’s comment letter )V. FHA IssuesA. FHA Reform. H.R. 5121, the Expanding Homeownership Act of 2006 was introduced by Reps. Ney (R-OH), Waters (D-CA), Miller (R-CA) and Tiberi (R-OH). This bill would reform the FHA program to make it a more viable mortgage alternative for homebuyers. The bill would increase the FHA loan limits nationally and in high-cost areas, would eliminate the 3% downpayment requirement, would allow FHA to extend loan terms to up to 40 years, and would allow FHA to price loans depending on borrower’s risk. The House Financial Services Committee marked-up H.R. 5121 on May 24. The bill now waits for a floor vote. Also introduced was S. 2597, the Federal HousingFairness Act of 2006, by Senator Clinton (D-NY). This bill would raise the FHA loan limits nationwide to the lesser of the conforming loan limit, or the median single-family home price in the area.VI. VA & HUD Issues A.RESPA.In June 2005, the Department of Housing and Urban Development (HUD) released its “roadmap to RESPA reform,” a continuation of its efforts to revamp theReal Estate Settlement Procedures Act (RESPA) regulations. A new proposal is expected in the spring of 2006.
REALTORS® advocate a market-based approach to RESPA reform that encourages fair competition, protects consumer choice and provides full disclosure of costs and services in the mortgage transaction.
HUD’s withdrawn 2004 RESPA rule would have put lenders in control of the entire real estate settlement transaction while operating under an exemption from Section 8’s anti-kickback provisions. The rule could have lead to increased concentration but less competition within the lending industry. Any regulation that moves an industry toward greater concentration should be viewed with considerable caution, as it couldlead to higher closing costs.
A new proposal from HUD is imminent in the Spring of 2006. It is expected to be based upon a series of informal meetings with industry and consumer representatives to initiate a “meaningful exchange of ideas” on possible changes to the RESPA regulations. The roundtable meetings were held in July and August of 2005: four in Washington D.C. and three co-hosted with the Small Business Administration in Los Angeles, Chicago and Fort Worth. REALTORS® were represented at each of these meetings.
At the roundtables, HUD disclosed the provisions of a 2004 “final” RESPA rule which was withdrawn from the Office of Management and Budget’s (OMB) consideration. That RESPA rule wouldhave included an enhanced Good Faith Estimate (GFE) four-page form with yield spread premium disclosure and tolerances for third party settlement services; a Mortgage Package Offer (MPO) (formerly the Guaranteed Mortgage Package Offer or GMP), that wouldhave been exempt from RESPA’s Section 8 anti-kickback provisions; and a Settlement Services Package (SSP) product that would allow non-lenders to offer packages including appraisals, title services, recording fees and other lender required settlement services. HUD’s 2004 rule would not have required a lender to accept an SSP the consumer brought to the transaction.
HUD has said it is committed to drafting a rule that would provide greater certainty of closing costs for consumers. While there is no "formal" consensus, most roundtable participants seemed to agree that HUD should pursue an enhanced or improved GFE and should forgo its regulatory efforts to develop a packaging rule.B. Qualified Veteran Mortgage Bonds.As home prices have risen in California, only a few select veterans in California and four other states have benefited from low-interest rate mortgages secured by Qualified Veterans’ Mortgage Bonds (QVMB). The bonds are tax exempt government obligation and are backed by the full faith and credit of the issuing state. Veterans who finance their homes through QVMBs can receive an interest rate of .50-.75 percentage points less than that of a conventional loan.Under current law, to qualify for a QVMB a veteran must have served on active duty prior to January 1, 1977 and applied for financing before their thirty-year anniversary of leaving the service. This prohibits veterans of more recent or ongoing military conflicts such as Operation Iraqi Freedom, Operation Enduring Freedom, Kosovo, Somalia, and the 1991 Persian Gulf War from being able to benefit from these loans.The new tax law signed by President Bush in May included a provision that allows veterans in Alaska, Oregon and Wisconsin to qualify for the loans if they apply anytime within 25 years of leaving the service, regardless of when they served. California’s Cal Vet chose not to be included in this fix due to the new lower dollar limit they would have been given. Cal Vet may currently issue up to $340 million in QVMB. If they had been included in the new law that number would have dropped to $16 million this year and increased to $66 million in 2010. Cal Vet has stated that they may still service veterans that didn’t serve prior to 1977 using “unrestricted” funds (money from prepaid mortgages secured by bonds that are not yet due).VII. Fannie Mae and Freddie MacA. GSE Oversight & High-Cost Conforming Loan Limits.Recently Congress has reinvigorated its attempt to write Government Sponsored Enterprise (GSE) regulatory reform legislation amid continuing scrutiny of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Proposed GSE reform legislation in the House was used as a vehicle by California legislators, Gary Miller and Brad Sherman, to attach a high-cost conforming loan limit amendment. This amendment 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. This would increase the conforming loan limit to $625,500 in California’s highest-cost areas.Legislation, H.R. 1461 passed the House of Representatives on October 26,2005 by a 331-90 bipartisan vote. An amendment by Representative Garrett (R-NJ) to strip the high-cost conforming loan limit provision from the House bill was easily defeated. In addition to the high-cost provision, H.R. 1461 would reform the GSE in the following way:
It would create a new independent regulator with broad authority to direct the activities of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks,
It does not set statutory limits on the retained portfolio of the GSE, nor limit what may be held,
It would create a streamlined approval process to bring new programs to the market quickly,
It would require the new regulator to define mortgage origination and the secondary market, prohibiting the GSE from participating in activity not considered a secondary market activity (The bill does exempt existing automated underwriting, consumer education, and counseling programs from this definition), and
It would create an affordable housing fund using 5% of the GSE’safter-tax profits.
S. 190, the Senate GSE reform bill, was reported by the Senate Banking Committee along a party line vote, and does not include the high-cost conforming loan limit provision. After the Senate Banking Committee reported S. 190 back in July, the Chairman of the Committee, Senator Shelby (R-AL), stated his hesitation to move S. 190 forward without amendments to garner more bipartisan support. Recently, Senator Shelby stated that GSE reform would be addressed in the Senate prior to the end of this year. B. Fannie Mae Rudman Report.In February, 2006, a report was put together for the Special Review Committee of the Board of Directors ofFannie Mae. This report was referred to as the Rudman Report, after former Senator Warren B. Rudman who headed the investigation. The Office of Federal Housing Enterprise Oversight (OFHEO) had requested the report beput together in light of past accounting irregularities by Fannie Mae.What the report concluded was:
First, management’s accounting practices in virtually all of the areas that were reviewed were not consistent with GAAP (Generally Accepted Accounting Principles), and, in many instances, management was aware of the departures from GAAP.
Second, except for one instance in connection with the 1998 financial statements, the report did not find evidence supporting the conclusion that management’s departures from GAAP were motivated by a desire to maximize bonuses in a given period.
Third, employees who occupied critical accounting, financial reporting, and audit functions at the Company were either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly.
Fourth, the information that management provided to the Board of Directors with respect to accounting, financial reporting, and internal audit issues generally was incomplete and, at times, misleading.
Fifth, the Company’s accounting systems were “grossly inadequate.”
Finally, the report concluded that Howard, the Former CFO, and Leanne Spencer, the former Controller, were primarily responsible for adopting or implementing accounting practices that departed from GAAP, and that they put undue emphasis on avoiding earnings volatility and meeting EPS targets and growth expectations.
In addition to these critiques, the report did state that current management has begun to implement changes that the report would have recommended. This is only a brief summary of the full report which is 2,652 pages.
Just recently, the OFHEO finished its own probe into the accounting scandal at Fannie Mae. The report found a “litany of accounting problems and failures by Fannie Mae’s management and directors.” Because of this report Fannie Mae has been fined $400 million and its portfolio will be limited to its December 31, 2005 level.VIII. New BusinessIX. Adjournment