Agenda SummaryReal Estate Finance Committee Marriott Hotel San CarlosRoom III û Mezzanine Level Monterey, CA Thursday, January 18, 2007 9:00 AM û 11:30 AMPresiding: Mike Donohoe, Chair Patricia Bouie Hinds, Vice Chair Greg Galli, Vice Chair Susan Tilling, Executive Committee Liaison Judy Zeigler, NAR Committee Representative Diane Carlton, GAD LiaisonStaff: Matt Roberts, Federal Governmental Affairs Manager Ron Kingston, Legislative AdvocateI. Opening CommentsII. State IssuesA. Discussion/Reporting Items1. StatewideHousing Bond Allocations.The electorate approved a statewide housing bond of $2.85 billion last year.á Of that amount, $900 million has been set aside for the legislature to create new state housing programs.á Legislative hearings will start during the first quarter of 2007.2. Mortgage Revenue Bond Allocations.The new state Treasurer will hold hearings during the first two months of 2007 to set the rules for allocating mortgage revenue bonds to qualified issuers (state and local government housing entities).á Once the rules are set, the state will immediately consider allocating the bonds to those issuers.á Approximately $1.5 billion will be allocated this year.3. Predatory Lending.Unquestionably, we can expect certain legislators to introduce legislation that will propose to curtail predatory lending.4. OtherIII. Federal IssuesA. Discussion/Reporting Items1. PAYGO.One of the promises the Democratic Party made during their campaign to gain a majority in Congress was that they would reinstitute the Pay-As-You-Go (PAYGO) budget rules.á The basic idea behind PAYGO is that for any additional spending or tax cut that iscreated there must be an offset so that the budget deficit is not increased.á While this decision should help reduce the large budget deficits that have been seen in the past few years, it also raises some interesting dynamics when it comesto major reforms being discussed, such as the elimination of the Alternative Minimum Tax (AMT) and changes to the Medicare prescription drug coverage.á (Please see attached issues briefing paper)2. Mortgage Insurance.In the last hours of the 109th Congress, H.R. 6111, the Tax Relief and Health Care Act of 2006, was passed.á Inside this tax extenders and Medicare bill, a new tax deduction of mortgage insurance premiums was included.á This is a one-year-only provision that would allow some 2007 home buyers to deduct the cost of their mortgage insurance premiums (PMI).á In order to qualify, the loan must originate in 2007 and canbe applied to private mortgage insurance, FHA insurance, and VA and Rural Housing premiums as well.á The new deduction is available to those with less than $100,000 adjusted gross income on a joint or single tax return ($50,000 for married filing separately) and phases out for incomes above $110,000 ($55,000 for married filing separately).á Individuals who claim the deduction are not permitted to prepay premiums that are otherwise due after 2007.á Currently this provision expires on December 31, 2007 and would have to be renewed during the 110th Congress or it will expire.á3. Predatory Lending.The issue of Predatory Lending is expected to be addressed by Congress in the 110th Session.á Democrats are expected to hold hearings on this issue, though it is unclear if they will make a serious attempt at passing any legislation.á Three questions that pose themselves when addressing this issue are, 1) what is ôPredatory Lending,ö 2) who is best to regulate and oversee it, the states or the federal government, and 3) would consumers and lenders benefit from one national law to regulate the industry instead of 50 different state laws?á Chair of the House Financial Services Committee, Congressman Barney Frank (D-MA) has placed passing a predatory lending bill as a high priority.áWhile the subprime market has played an important role in making homeownership available for many Californians who otherwise would not qualify for prime loans, the question of when a loan is more harmful than beneficial to the borrower remains unanswered.á4. Supreme Court Hears OCC Preemption Case.In November, theSupreme Court heard oral arguments in Watters v. Wachovia, a case that may have far reaching implications on the jurisdiction of state laws and regulations on subsidiaries of national banks.á This case originated several years ago in Michiganwhen the Office of the Comptroller of the Currency (OCC) ruled operating subsidiaries of national banks were exempt from most state laws and regulations.á This would allow bank subsidiaries to circumvent state real estate lending and licensing laws.á REALTORS« opposed the OCC preemption regulation because it creates an uneven playing field.á REALTORS« involved in real estate lending related activities, such as appraisal, home inspection, mortgage and title services,are at a disadvantage with national banks and their operating subsidiaries, which do not have to abide by and bear the costs of state licensing and compliance regulations.áThis case stemmed from when Michigan attempted to bar WachoviaÆs mortgage unit from making loans in the state after it gave up its state registration.á Thus far, four circuit courts have agreed with the OCC and Wachovia.á Because the OCC cites the National Bank Act as giving it authority to make their ruling, a primary question the high court will look at is how the National Bank Act applies to operating subsidiaries since they are not specifically mentioned in the Act.áThe Court is expected to announce its decision prior to its summer recess in June.5. Insurance Regulation.There was a growing interest in insurance regulation reform during the 109th Session of Congress that cut across party lines.á Because of this, it is anticipated that Congress will introduce and possibly vote on insurance regulation reform in the recently convened 110th Session.á It is still not known exactly what sort of reform will be proposed or possibly passed by Congress. áPrevious discussions and bills from prior sessions range from the creation of a separate federal insurance license which an insurer may choose instead of a state license, to the complete elimination of state regulation of the insurance industry.áC.A.R.Æs policy is to oppose the preemption of state laws and to protect CaliforniaÆs right to regulate the insurance industry.á CaliforniaÆs ability to regulate insurance is perhaps most important in the areas ofproperty, fire and earthquake.á California needs to be able to regulate those types of insurance as California is perhaps the most unique state in the Union with its large population, multitude geographical regions and climates, and variousnatural disaster threats.Critics charge that the existing state-based regulatory system has failed to effectively regulate the increasingly complex insurance industry.á Others believe that compliance with 50 separate state regulatory agencies creates a regulatory burden for companies operating nationwide.á Some observers believe this inefficiency contributes to recent problems with the availability and affordability of insurance products.6. Natural Disaster Insurance.The intensity of large natural disasters in recent years has made the acquisition of adequate homeownersÆ insurance very difficult in some areas.á More and more insurers are declining to write policies, canceling existing policies or increasing premiums on existing policies to the point where homeowners can no longer afford to make payments.á Areas that have seen the largest increases in insurance premiums are the gulf and east coast states with premiums increasingby as much as 12 times.áIn California it is only a matter of time until a large earthquake hits a highly populated area causing incalculable financial damage along with the personal casualties that follows such a tragedy.á According to the California Insurance Commissioner, only 14 percent of California homeowners have earthquake insurance.á Some canÆt afford it while others believe the federal government will pay to rebuild their homes as it is doing after Hurricane Katrina.áC.A.R. supports the creation of a federal reinsurance program to act as a backstop for the private market and/or a state insurance fund. This backstop will save tax payers billions of dollars, and strengthen and protect the availability of natural disaster insurance.7. 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.á The agencies proposed allowing national bank conglomerates to engage in real estate brokerage and management, reclassifying these activities as financial in nature.á 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) of 1999 do not authorize banking firms to provide real estate brokerage and property management services, as these are non-financial activities.á REALTORS« have supported the enactment of the Community Choice in Real Estate Act in previous sessions of Congress, which removes the powers of these agencies to regulate these real estate activities.áC.A.R. and NAR policy supports the separation of banking and commerce.á 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.While the Community Choice in Real Estate Act has yet to pass, C.A.R. and NAR have been successful in getting Congress to block the Treasury from implementing its rule.IV. FHA IssuesA. FHA Reform.The Federal Housing Administration (FHA) was created in 1934 as a way to ensure that lenders would supply the home buying market with capital.á The FHA helped to expand homeownership to low- and moderate-income home buyers and has since insured over 33 million properties.á The FHA is a self-sustaining program in that it charges a premium to cover its risks and operating expenses.á The FHAÆs current portfolio is comprised of 79% first-time home buyers, 35% of which are minorities.In 1999, the FHA insured approximately 127,000 homes bought in California.á In 2005 that number dropped to roughly 5,000.á Proposed legislation was introduced in the 109th Session of Congress that would have significantly reformed FHA insurance to stop the hemorrhaging of market share, not just in California, but across the country.á Additionally, the bill would have attempted to expand the FHAÆs ability to compete with the subprime market.á The reforms proposed included:
Increasing the FHA insurable limits.á Currently, the FHA insures 95% of an areaÆs median home price with a ceiling of 87% of the conforming loan limit ($362,790) and a floor of 48% of the conforming loan limit.áThe legislation would increase the FHA limit to 100% of an areaÆs median home price capped at 100% of the conforming loan limit ($417,000), with a floor of 65% of the conforming loan limit ($271,050).
Making it so that condos are insured in the same manner as single-family homes.á
Allowing for the coverage of zero-down loans.á Currently, the FHA may only insure loans with a minimum of three percent down.
Allowing theFHA to insure 40-year mortgages.
Lastly, the bill would have allowed the FHA to set its insurance premiums by risk.á Under current law the FHA is limited to 2.25% upfront and .5% annual renewal premiums (the annual renewal premium is added to the monthly mortgage payment of the home buyer).á The FHA currently charges a 1.5% upfront premium and .5% annual renewal premium.á Under the bill the FHA would have balanced the mortgage terms and borrowerÆs finances when calculating the upfront and monthly premiums.á This means taking into consideration the income, assets and financial profile of the borrower as well as the loan-to-value (LTV), loan period, fees and amortization schedule of the loan product.á Presumably, this should allow the FHA to tailor products to borrowersÆ specific financial circumstances.á An example is a borrower with a small amount of cash to put down on a mortgage, but shows a strong monthly income.á For this home buyer, the FHA may charge a lower upfront premium but with a higher annual renewal.
This issue will be introduced again in the 110th Session of Congress, most likely by California Congresswoman Maxine Waters.V. VA & HUD IssuesA. RESPA.Following the resignation of HUD General Counsel Keith Gottfried, any RESPA reform proposal will likely be further delayed.á KeithGottfried, whoÆs resignation became effective November 5, was regarded as a champion of RESPA reform.á It was anticipated that any new HUD rule regarding RESPA was likely to focus on improving the good-faith estimate and would no longer consider the guaranteed-mortgage package component.á It was the guaranteed-mortgage package component that many in the real industry had problems with when HUD released its original RESPA reform proposal in 2002.No new timeline has been announced stating when HUD anticipates a new RESPA reform proposal.á Some in the industry believe with Gottfried gone, HUD will have to practically start over from scratch with any new proposal.VI. Fannie Mae & Freddie Mac IssuesA. 2007 Conforming Loan Limits.The Office of Federal Housing Enterprise Oversight (OFHEO) announced on November 28, 2006, that the 2007 conforming loan limits for Fannie Mae and Freddie Mac will remain at the 2006 level of $417,000 for one-unit properties.á OFHEO bases the annual change in the conforming loan limit on the October-to-October change in the average house price in the Monthly Interest Rate Survey (MIRS) of the Federal Housing Finance Board (FHFB).á From October 2005 to October 2006, the FHFB reported a decline in the average home price from $306,759 to $306,258; or a decline of 0.16 percent.á This is the first decline in the MIRS since 1992-1993.áOFHEO has stated it will defer this yearÆs decrease to the 2008 conforming loan limit.á This will allow for mortgages still in the pipeline to not be disrupted while giving lenders, the Government Sponsored Enterprises (GSE), homebuyers and investors plenty of time to prepare for the change.á While it is good news for California that the loan limit is not decreasing, there is a majority of areas in California still hurt by the stagnant loan limit.á CaliforniaÆs medianhome price increased 2% to $548,680 in October 2006 from October 2005.B. High-Cost Conforming Loan Limit & GSE Reform.The median home price in California for the month of November 2006 was $555,290.á The current conforming loan limitùthe maximum loan amount that Fannie Mae and Freddie Mac (Government Sponsored Enterprises) may purchase on the secondary market in 2007ùis $417,000.á While the conforming loan limit is in excess of many statesÆ median home prices, in high-cost states such as California the loan limit is far too low.á In the late 70Æs and early 80Æs Congress recognized the importance of increasing the conforming loan limit for high-cost states by raising HawaiiÆs, AlaskaÆs, GuamÆs and later the Virgin IslandsÆ conforming loan limit to 150 percent of the national limit.During the 109th Session, Congress had reinvigorated its attempt to write GSE regulatory reform legislation amid continuing scrutiny of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.á 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.á This amendment would allow a newly created independent GSE regulator to set high-cost conforming loan limits by an areaÆs median home price, up to 150% of the national conforming loan limit.á This would increase the conforming loan limit to $625,500 in CaliforniaÆs highest-cost areas.While the House passed a C.A.R. supported bipartisan bill, they were never able to work out a compromise with the Senate Republicans or the Administration.á The first point of contention at the end of the session was the portfolio size of the two GSEs which is estimated at over $4 trillion.á The second issue was the creation of an affordable housing fund from the GSEÆs profits that Republicans feared would be used by liberal entities to lobby and campaign against G.O.P. candidates.Congressman Barney Frank (D-MA), the new chair of the House Financial Services Committee, which has jurisdiction over this issue, has stated his intent to introduce and mark-up legislation early in the 110th Session.VII. Other BusinessA. Glossary of Federal Government Acronyms - HandoutVIII. Adjournment