Agenda SummaryReal Estate Finance Committee Sheraton Grand Hotel Grand Nave Ballroom, Gardenia Room Sacramento, CA Thursday, June 7, 2007 9:00 AM – 11:20 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 David Milton, Legislative AdvocateI. Opening CommentsII. State IssuesA. C.A.R. Sponsored LegislationAB 1356 (Houston) Agents of Equity Purchasers- Existing law effectively (and inappropriately) precludes legitimate real estate agents from representing investor purchasers of properties that are in foreclosure. The prohibition is the inadvertent result of requiring buyers’ agents to purchase a bond for the sale, in the amount of twice the value of the property. These bonds are currently not available. AB 1356 will allow agents an alternative for demonstrating financial responsibility through the proof of E&O insurance, which is available. This measure will make the financial responsibility requirement of the Home Equity Sales Act (Act) workable, and avoid artificial restrictions on the ability ofhomeowners to salvage their equity from foreclosure.Due to late breaking amendment negotiations, the bill received a hostile reception in the Assembly Judiciary Committee, and AB 1356 was held in Committee and became a two-year bill. Amendments clarifying the insurance requirement have removed the opposition of the primary opponents, the Western Center on Law and Poverty.Substantial input has been received from the State Bar Conference of Delegates, which would like to sponsor a more comprehensive re-write of the Act. The Conference is essentially requesting C.A.R. to allow it to co-sponsor AB 1356 as a vehicle to reform the Home Equity Sales Contract Act (Civil Code Section 1695, et seq.). The Judiciary Committee is working with C.A.R. and the State Bar to achieve significant improvements to the equity purchaser process. Note that mostof the Act, and the proposed changes, relate to equity purchasers and not their agents.The State Bar amendments, which are proposed as changes to the Act in addition to the proposedC.A.R. amendments regarding bonding, are intended to include:1. Increased warnings to home equity sellers and increase penalties for violators of the Act. The revisions would make it clear to sellers that they are, in fact, selling their homes, not merely refinancing. The additional warnings provided in the new language are intended to increase a seller’s awareness as to the nature of the transaction.2. A recording requirement for an option to repurchase is added to the Act that will put purchasers on notice of the equity sale.3. Maximum fines for violators are increased from $25,000 to $100,000, as well as maintaining the existing law’s potential for criminal penalties, and creating a possible additional fine equal to the appraised value of the residence if is intentionally sold to a bona fide purchaser in violation of the Act and lost to the victimized seller.4. Broadens the definition of “residence in foreclosure” and “residential realproperty in foreclosure” to include the option that the equity purchaser has actual knowledge that the equity seller has defaulted on the loan and is going into foreclosure, even if the Notice of Default has not yet been recorded.5. Requires that the sales agreement for the property in foreclosure be printed in 12-point type instead of the current 10-point type, and contain a notice in 14-point boldface type that the transaction is intended to transfer title of the equity seller’s home and when complete, the equity seller will no longer be a homeowner.6. Increases the responsibility of buyers from equity purchasers that have either actual or constructive knowledge that the equity seller is in possession of the property and has a repurchase option prior to the time within which the equity seller may cancel the transaction has elapsed. Essentially creates a duty of due diligence for a subsequent BFP to verify that the equity purchaser has good title to convey.7. Requires that if the value of the equity in the subject property exceeds $50,000.00, the equity seller will be required to either obtain counseling from a certified HUD counselor to ensure that the equity seller fully understands the terms and consequences of the transaction, or sign a written waiver ofthe counseling. Waiver or counseling must be completed prior to recordation of the transfer of title. The form for the waiver is also mandated to be in 14-point boldface type.8. Ifan equity seller repurchase option is included in the agreement, the repurchase price shall be capped at the price which the equity seller received from the equity purchaser, or the total amount disbursed for the benefit of the equity seller, whichever isgreater, plus the fair market value of any improvements to the property made by the equity purchaser.9. Provides that oral evidence may be used to show fraudulent representations inviolation of the Act.10. Requires that the closing of a contract pursuant to the Act shall be conducted by a neutral escrow agent in the office of the closing agent.11. Adds a new section regarding leases and violations of the Act by the equity purchaser. If the equity purchaser has entered into a lease-back with the equity seller, and the equity purchaser has violated any provision of the Act, the equity purchaser as lessor may not recover possession of the residence in any action or proceeding, cause the lessee to quit the property involuntarily, increase the rent, or decrease any services,until the equity purchaser has cured any violation of the Act.Status:Assembly Judiciary CommitteeB. Other Legislation1. General Bills of InterestAB 588 (DeLeon) Credit History – Public Utilities-This bill is intended to assist consumers in building a positive credit history by, if they so choose, authorizing the release to financial institutions or consumer credit reporting agency of the consumer/subscriber’s utility service payment history. Such consent must be in writing. The proposed statute requires the Public Utilities Commission to promulgate rules to govern the public utilities’ provision of the consumer’s payment history. No other information regarding the consumer may be provided by the utility.C.A.R. Position:Support Status: Assembly Appropriations CommitteeAB 628 (Price) Residential Mortgage Loans and Gift Prohibitions-This is a proposal to prohibit real estate brokers and residential mortgage lenders or servicers from making a gift to a borrower or potential borrower. “Gift” is defined to include, but not be limited to, money, a rebate, a trip, a gift card, or a gift certificate. C.A.R. opposesthis bill because it would prevent real estate brokers from negotiating compensation terms with clients and significantly impact the broker’s ability to conduct his/her business. AB 628 has become a two-year bill at the request of the author.C.A.R. Position:Oppose Status: Assembly Banking &Finance CommitteeAB 941 (Torrico) Real Property Loans and E- Documents-This bill is the author’s idea and it would require a real estate broker or lender to provide a borrower with the option to receive all documents connected with a loan in an electronic format. It defines “electronic format” as information held in a record created, generated, sent, communicated, received, or stored by electronic means. It further requires that the electronic format shall not jeopardize or compromise the security or integrity of the original record or of any proprietary software in which it is maintained.C.A.R Position:Favor Status: Senate Rules CommitteeAB 1677 (Calderon, C.) Internet Banking Transactions-Opposed by virtually all of the financial institutions industry representatives, this bill proposes to require that businesses providing bankingand other financial services over the internet implement policies and procedures for authenticating the legitimacy of such internet transactions, with fines and legal liability created for failure to do so.C.A.R. Position:Watch Status: Assembly Floor2. Nonconforming Loan/Sub-Prime Loan BillsSB 385 (Machado) Real Estate Mortgages -The Real Estate Law includes in the definition of a “real estate broker” a person who engages in the business of negotiating real property purchases with the public. This bill would add to the definition of a real estate broker any person who engages as a principal in the business of making 8 ormore loans to the public from their own funds within a year. It will also allow DRE to require REALTORS® to report their specialization when reviewing a license. C.A.R. will oppose SB 385 unless it is amended to limit Department of Real Estate inquiries about business activities unless they are related to mortgage brokerage.Additionally, the bill proposes to require the Commissioner of Financial Institutions, Commissioner of Real Estate, and Commissioner of Corporations to apply the guidance on nontraditional mortgage product risks published by the federal financial institution regulatory agencies and the Conference of Bank Supervisors, as well as the American Association of Residential Mortgage Regulators, to state-regulated financial institutions and real estate brokers and licensees, respectively.C.A.R. Position:Oppose Unless Amended Status: Senate Appropriations CommitteeAB 1538 (Lieu)- California Housing Trust Fund; Home Loan Refinance Assistance-The author, Chairman of the AssemblyBanking & Finance Committee, is proposing to create a home loan assistance program, to be known as the “Foreclosure Prevention Act”, funded by private donations into the California Housing Trust Fund and administered by the California Housing Finance Agency (CalHFA). It would allow first-time homeowners who are facing foreclosure due to loan terms associated with variable interest rates, prepayment penalties, balloon payments, or excessive fees, to refinance their loans into fixed rate loan products. The borrower and holder of the loan would have to agree to enunciated criteria established by CalHFA. C.A.R. currently has an “unrated” position on the bill as the author has indicated it will require a significant amount of additional research and consultation with the lending industry before finalized.C.A.R. Position:Not Rated File Status: Assembly Appropriations CommitteeC. State Administrative Activity1. Department of Real Estate (DRE) Proposed Disclosure Requirements for Non-Traditional Mortgage Products-a) Effective March 2007, the Department of Real Estate adopted new Form 885 entitled “Mortgage Loan Disclosure Statement/Good Faith Estimate of Nontraditional Mortgage Product”. This form will assist mortgage brokers engaging in the making or facilitation of nontraditional mortgages in the accurate disclosure to the borrower of all costs the borrower is “likely to incur in the settlement of your loan.”b) On June 29, 2007 the DRE Commissioner will be conducting a public hearing in Sacramento on proposed changes in regulations of the Commissioner. Section 2842 of Title 10 of the California Code of Regulations is proposed to be adopted to specify a disclosure form to be givento borrowers who are obtaining a “nontraditional mortgage product”. This form will require such details as the possible changes in interest rates, impact on payments of such interest rate changes, amount of negative amortization and the impactof negative amortization on monthly payments.Section 2848 of the Regulations is being amended to require additional disclosures in the advertising for such mortgage products, to include a description of the impact of negative amortization on monthly payments; how often and how much interest rates and payments can change; and whether there is a balloon payment involved in the financing.Both Form 885 and the Proposed Changes in Commissioner Regulations Regarding Nontraditional Mortgage Products can be found on the DRE Website (www.dre.ca.gov).
2. Business, Transportation & Housing (BT&H) AgencyConsumer Home Mortgage Information WebsiteBT&H has recently launched a new website for consumers looking to purchase a home, and those already in homes, to provide helpful information about mortgages. The new “Consumer Home Mortgage Information Website can be accessed atwww.yourhome.ca.govorwww.sucasa.ca.gov.These websites are intended to provide as much information as possible regarding nontraditional mortgage products in particular and mortgages generally in the current market.III. Federal IssuesA. Action Items1. Flood Insurance
C.A.R. Policy: C.A.R. supports reform of the National Flood Insurance Program (NFIP)On March 26, 2007, Congressman Barney Frank (D-MA) introduced H.R. 1682, the Flood Insurance Reform and Modernization Act. The purpose of this bill is to financially stabilize the National Flood Insurance Program (NFIP). Following the 2005 hurricane season, the NFIP went $25 billion in the red and has yet to recover. Congress has extended financial assistance to the NFIP; however, that is only a temporary solution and C.A.R. is cautiously optimistic that a bill will be passed prior to the end of the 110th Congress.H.R. 1682 would:
Increase flood insurance coverage for residential property,
Provide coverage for necessary increases in living expenses, basement improvements, business interruption, and replacement costs of contents,
Increase borrowing authority for the flood insurance program,
Increase annual limitation on premium increases from 10 percent to 15 percent,
Provide funding for mitigation of severe repetitive loss properties, including demolition and rebuilding,
Amends RESPA to requiregood faith estimates to state that flood insurance coverage for residential properties is generally available, whether or not the property is located in an area having special flood hazards, and
Authorizea study by the GAO on the extension of mandatory flood insurance coverage purchase requirements to properties located in any area that would be designated as having special flood hazards but for the existence of a structural flood protection system.
B. Discussion/Reporting Items1. Subprime and Predatory Lending (NAR Subprime Paper ) C.A.R. Policy: C.A.R. has addressed the issue of subprime and predatory lending multiple times in the past, including the opposition to federal preemption of state laws and the creation of a separate mortgage brokerage license requirement. Additionally, C.A.R. supports strong consumer protection laws, but those laws must not be so stifling as to hinder the flow of capital to the markets.While subprime legislation will originate from the House Financial Services Committee or the Senate Banking, Housing and Urban Affairs Committee, a number of Congressional Committees and Subcommittees have held hearing pertaining to subprime lending, predatory lending and the rise in foreclosures. A number of legislative ideas have been discussed, including federal preemption of state subprime and predatory lending laws, bail out of home owners, refinance assistance for homeowners, and other ideas.It is still too early to know what final legislation will look like and while both the Senate and the House are likely to pass bills, it is unclear whether they will be able to agree on a final bill to send to the President’s desk.On May 3, 2007, Senator Chuck Schumer (D-NY) introduced S. 1299, the Borrower’s Protection Act of 2007. If passed, S. 1299 would:
appropriate $300 million for community groups that specialize in foreclosure prevention,
regulate mortgage brokers and originators under the Truth in Lending Act,
create standards for brokers and originators to assess a borrower’s ability to repay a mortgage, and
hold lenders accountable for brokers and appraisers.
2. Supreme Court Hands Down OCC Ruling
In April, the Supreme Court ruled 5-3 that subsidiaries of federally chartered banks are subject to the oversight and regulations of the federal government and not the states. In the ruling of Waters v. Wachovia, the Court found that “A nation bank may engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the bank itself; that power cannot be significantly impaired or impeded by state law.” The ruling will allow national bank subsidiaries to no longer comply with state consumer protection laws and licensing.REALTORS® had beenhoping the Supreme Court would rule against the OCC and Wachovia, and recognize that the National Bank Act does not extend to subsidiaries of national banks. NAR had filed a brief with the Sixth Court of Appeals in support of state regulation of national bank subsidiaries.3. National Disaster Insurance C.A.R. Policy:C.A.R. believes Congress should look to implement legislation that will create a government backstop for private insurance providers, create incentives for homeowners to take steps to mitigate the effects of a natural disaster on their property, and update insurance regulations and the tax code so that insurance companies may better prepare for disasters.The intensity of large natural disasters in recent years has made the acquisition of adequate homeowners’ insurance very difficult in some areas. 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. Areas that have seen the largest increases in insurance premiums are the gulf and east coast states with premiums increasing by as much as 12 times.In 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 follow sucha tragedy. According to the California Insurance Commissioner, only 14 percent of California homeowners have earthquake insurance. Some can’t afford it while others believe the federal government will pay to rebuild their homes as it is doing after Hurricane Katrina.C.A.R. believes Congress should look to implement legislation that will create a government backstop for private insurance providers, create incentives for homeownersto take steps to mitigate the effects of a natural disaster on their property, and update insurance regulations and the tax code so that insurance companies may better prepare for disasters. Some members of Congress have already introduced legislation on this issue; however, Barney Frank (D-MA), the chair of the House Financial Services Committee has asked Congressmen Klein (D-FL) and Mahoney (D-FL) to work with all principals involved (including REALTORS®) in drafting legislation. Klein and Mahoney are expected to introduce their bill prior to the end of summer.4. Banks in Real Estate C.A.R. Policy:C.A.R. supports the separation of Banking and Commerce.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) of 1999 do not authorize banking firms to provide real estate brokerage and property management services, as these are non-financial activities. REALTORS® have supported the enactment of the Community Choice in Real Estate Act in previous sessions of Congress, whichremoves the powers of these agencies to regulate these real estate activities.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.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.The House has introduced H.R. 111 and the Senate has introduced S. 413 which would place a permanent ban on banks entering into real estate activities. Presently, H.R.111 has 259 cosponsors and S. 413 has 20 cosponsors.5. Industrial Loan Companies C.A.R. Policy: C.A.R. supports the separation of Banking and Commerce.In 2006, in response to applications from Wal-Mart and Home Depot to become owners of industrial loan companies (ILCs), REALTORS®, bank trade associations, and many others voiced concerns to the Federal Deposit Insurance Corporation (FDIC) and Congress about mixing banking and commerce through the ILC statutory loophole that permits commercial firms to own this type of federally insured state bank. Congress is considering amending the Federal Deposit Insurance Act to close the ILC loophole.Responding to pressure by Congress and the regulators, Wal-Mart withdrew its application to charter an ILC. However, numerous commercial companies, including Home Depot, DaimlerChrysler, Ford Motor Company and Toyota are still pursuing owning an ILC.REALTORS® are supporting the enactment of H.R. 698, the "Industrial Bank Holding Company Act of 2007." H.R. 698 would prevent an ILC from being controlled by a commercial firm. On May 21, 2007, the House overwhelmingly passed H.R. 698 371-16.IV. FHA IssuesA. FHA Reform C.A.R. Policy:C.A.R. supports increasing FHA’s loan limit to 100% of the conforming loan limit, allowing zero down mortgages, allowing FHAto set insurance premium using risk based pricing, and allowing FHA to insure zero down mortgages.On March 29, 2007, Maxine Waters introduced H.R. 1852, the expanding American Homeownership Act. The bill will attempt to expand the FHA’s ability to compete with the subprime market and regain market share. The reforms proposed include:
Increasing the FHA insurable limits. Currently, the FHA insures 95% of an area’s 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. The legislation would increase the FHA limit to 100% of an area’s median home price cappedat 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.
Allowing for the coverage of zero-down loans. Currently, the FHA may only insure loans with a minimum of three percent down.
Allowing the FHA to set its insurance premiums by risk.
H.R. 1852 has been marked up out of Committee and is expected to be brought to the House Floor for a vote prior to the end of this year.V. VA & HUD IssuesA. RESPA Reform C.A.R. Policy:C.A.R. supports a two-package approach to the Guaranteed Mortgage Package proposed by HUD for RESPA Reform.
In June 2005, the Department of Housing and Urban Development (HUD) released its “roadmap to RESPA reform,” a continuation of its efforts to revamp the Real Estate Settlement Procedures Act (RESPA) regulations. A new proposal has been delayed after Secretary Jackson initially indicated it would be available in the spring.
HUD’s withdrawn 2004 RESPArule 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 thelending industry. Any regulation that moves an industry toward greater concentration should be viewed with considerable caution, as it could lead to higher closing costs.
A new proposal from HUD has been delayed but efforts are being made to come out with a proposal in 2007.
At roundtables in 2005, 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 would haveincluded 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 would havebeen 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. VA Loan Limits C.A.R. Policy:C.A.R. supports increasing the VA loan limit, especially in high-cost areas to allow veterans better access to affordable home loans.On May 16, 2007, Senator Hillary Clinton (D-NY) and Congressman Patrick Murphy (D-PA) introduced companion bills in both the House and the Senate. The purpose of these bills, S. 1409 and H.R. 2385, the 21st Century GI Bill of Rights Act, is to extend and improve access to a number of benefits designed for veterans. This includes exempting “Veterans from paying loan fees and expand opportunities for veterans to purchase, build, repair or improve a home by increasing access to low interest loans through the Veterans Affairs Home Loan Guaranty Loan Program for homes valued up to $625,000. The current program requires loan fees and is capped at the conforming loan rate of $417,000.”C. Qualified Veteran Mortgage BondsC.A.R. Policy:C.A.R. supports eliminating the pre-1977 service requirement for QVMB eligibility.
On January 18, 2007, California Congresswoman Susan Davis has introduced the H.R. 551, the Home Ownership for America’s Veterans Act. The purpose ofH.R. 551 is to increase access to lower cost mortgages funded by Qualified Veteran Mortgage Bonds (QVMB) for America’s veterans. Under current law, veteran’s must have served prior to 1977 to qualify for a QVMB loan. Currently, only five states are allowed to utilize the QVMB program, California, Wisconsin, Alaska, Texas and Oregon. Congress addressed the issue of QVMB during the last session of Congress, and while some states received the qualification fix, California opted not to because of the severe reduction in funding authorization that would have accompanied it. However, since Congress only extended funding to the other states for four years, this issue will have to be addressed either during the 110th or more likely the 111th session.VI. Fannie Mae & Freddie Mac IssuesA. High-Cost Conforming Loan Limit & GSE Reform C.A.R. Policy:C.A.R. supports GSE oversight reform and creation of a new GSE regulator with powers that include the authority to set high-cost conforming loan limits by an area’s median home price.The new Democratic-controlledCongress raises the prospect that GSE reform legislation may be adopted in 2007. Proposed legislation introduced by House Financial Services Committee Chairman Barney Frank (D-MA) would overhaul the regulatory oversight of the housing government-sponsored enterprises (GSEs) -- Fannie Mae, Freddie Mac, and the Federal Home Loan Banks system (FHLBanks). The introduced bill, H.R. 1427, is a product of both bipartisan legislation considered in the 109th Congress and compromise agreements between House Democrats and the Department of the Treasury. The new legislation creates a strong, independent safety and soundness regulator with broad powers analogous to current banking regulators.
On May 22, 2007, the House passed H.R. 1427 – GSE Reform Bill. Included in the final version is a provision to increase conforming loan limits to match the median home price in high-cost Metropolitan Statistical Areas were the median home price is above the $417,000 conforming loan limit. The high-cost conforming loan limit would be capped at 150% of the national limit, $625,500.