Marriott Hotel Grand Ballroom Salon G/H/J Anaheim, CA Thursday, October 11, 2007 3:00 PM –5:00 PMPresiding: Malcolm Bennett, Chair J. Michael Roberts, Vice-Chair Jeanne Garde, Vice-Chair Susan Tilling, Executive Committee Liaison Heath Hilgenberg, NAR Committee Representative Paul Cardus, GAD Liaison
C.A.R. Staff: Matt Roberts, Federal Governmental Affairs Manager Jeff Keller, Public Policy AnalystI. Opening Comments: Malcolm Bennett
II.Guest Speakers: Jerry Giovaniello, Chief Lobbyist for NAR Greg Galli, Chairman of the Troubled Mortgage/Foreclosure Task ForceIII. Report of Action Items from Reporting CommitteesA. Real Estate Finance B. Taxation C. Land Use and Environment D. Equal Opportunity – Cultural Diversity E. Housing Opportunity F. Commercial InvestmentIV. First Impression Issues
A. Action Items
1. Bankruptcy Laws The issue of including mortgages in bankruptcy proceedings was last strongly broached in the early 1990’s. At this time, NAR and C.A.R. were against the concept, specifically the cramdown provisions. However, in theearly 1990’s, loans were predominantly fixed rate mortgages and ALT-A loans with exploding ARMS were not predominant on the market. Needless to say, times and mortgages have changed dramatically since the last time this issue wastaken up by REALTORS®. Is it time for C.A.R. and/or NAR to revisit these issues considering the current market conditions? (Please see attached Issues Briefing Paper )B.Discussion/Reporting Items1. Data Security C.A.R. Policy:In January 2007, C.A.R. took the following policy: “That C.A.R., in conjunction with NAR, pursue a small business exclusion in any federal data privacy legislation and oppose federal preemption of state data privacy laws.”One of the issues that started in the 109th Congress and is carrying over into the 110th Congress is the issue of data security. Once again, there are multiple competing bills and issues of turf battles; as up to six separate committees may hold hearings concerning data security. At this point, it does not seem clear if cooler heads will prevail and allow for one compromise data security bill to pass through the committees and the Congress. The largest debates still center around whether data security bills should preempt state laws and how much consumer protection should be allowed. Businesses want one national policy so it is easier for them to operate in every state. Consumer rights groups fear that federal preemption will weaken some states which currently havestronger data protection laws, such as California.Other debates center on when notification of a breech must be sent out (if there is evidence of a breech or potential that there was a breech), what rights consumers have tocorrect errors on their credit reports, and how long and who pays for freezes on credit reports if a breech occurs.Currently, two data security bills have been marked out of committee in the Senate. S. 495, the Personal Data Privacy and Security Act of 2007, was introduced by Senator Leahy (D-VT) and has six cosponsors. On May 3, 2007 S. 495 was marked up and passed out of the Senate Judiciary Committee by a voice vote. S. 495 would preempt state laws and would require notification when “there is a reasonable basis to conclude a breech has occurred”. It also allows consumers access to their credit reports and information when a breech occurs.S. 1178, the Identity Theft Prevention Act, was introduced by Senator Inouye (D-HI) and has 4 cosponsors. S. 1178 was marked up and passed out of the Senate Committee on Commerce, Science, and Transportation on April25, 2007 by a voice vote. S. 1178 would preempt state law and would require notification if “the breech creates a reasonable risk of identity theft” and would allow for consumers to put a freeze on their credit report when a breech occurs.In the House the Democrats have yet to propose their version of data security. Rep. Frank (D-MA) has said he will introduce a data security bill during the 110th Congress. Currently, Rep. Price (R-GA) has introduced a Republican data security bill, H.R. 1685, the Data Security Act of 2007. H.R. 1685 currently has no cosponsors and is in the House Financial Services Committee. H.R. 1685 would preempt state law and says notification in only needed is “an entity determines that personal information involved in a breech of security is reasonably likely to be misused in a manner causing substantial harm”.
At this point it appears as if no datasecurity bills will make it any further then being voted on in committee. Too many committees have claimed jurisdiction and so far no committee leader has signaled that they are willing to work on a compromise data security bill that would be able to clear the House or Senate.
2. FTC Issues Warning on Deceptive Mortgage Ads In September 2007 the Federal Trade Commission (FTC) warned more than 200 companies about “potentially deceptive” mortgage ads that can give the borrower false impressions over the true costs of the home loan. These ads were in various forms of media: newspaper, magazine, online, and mail ads.
The FTC declined to provide a list of the companies warned. Some ads highlighted rates as low as 1%, but didn’t inform consumers that these were short “teaser” rates or negative amortization loans. The media outlets themselves are not responsible for the deceptive ads, but they were also encouraged to screen ads to protect their readers and viewers.
3. Retirement Visas At the June 2007 C.A.R. meetings, the Federal Issues Committee decided to maintain their current policy, “That C.A.R. recommends to NAR that NAR continue to explore the issue of creating a new U.S. retirement visa designation.”, as NAR continues to consider whether or not to take further action in seeking a special “SilverCard” visa designation.At the 2007 NAR midyear meetings, NAR committees took differing policies on whether the issue should be further examined and pursued. At the end of the meetings, NAR created a PAG (PresidentialAdvisory Group) to further examine the issue. C.A.R is expecting an update from the PAG and further details during the November 2007 NAR meetings. We will update you with more information as it becomes available.
4. Terrorism Risk Insurance In response to the attacks of September 11, 2001, the Terrorism Risk Insurance Act (TRIA) became law and the Terrorism Risk Insurance Program was established under the U.S. Treasury Department. Due to the terrorist attacks, it became extremely difficult (if not impossible) for owners of commercial properties at risk to obtain insurance; many insurance companies even 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.On September 19, 2007 the House passed H.R. 2761, the Terrorism Risk Insurance Revision Extension Act, by a vote of 312-110. H.R 2761 extends the provisions found in the original TRIA for 15-years and creates coverage for nuclear, biological, chemical and radiological (NBCR) attacks. Additionally, H.R. 2761 calls on the Treasury Department to give updates on the terrorism insurance market every two years, including its impact on commercial real estate, and establishes a blue-ribbon commission for making recommendations ona long-term private market solution.H.R. 2761 reduces the threshold for triggering the reinsurance backstop from $100 million to $50 million and also reduces the deductible for terrorist attacks over $1 billion.The Senate Banking, Housing, & Urban Affairs Committee is currently expected to take up TRIA extensions on October 17, 2007. Nonetheless, the White House has expressed the possibility of a veto as they would prefer to see a largerexpansion of the private market rather than a long-term expansion of a federal backstop.
V. Taxation Issues
A. Discussion/Reporting Items:1. Carried Interest Under most real estate partnerships when a private equity partnership is developed there are two categories of participants. There is the general partner (GP) and the limited partner(s) (LP). The LPs are the ones who contribute the capital to fund the projects. The GP either puts up a small (usually 1-2%) amount of capital, or none, but handles the financial dealings of the partnership and brings their expertise and experience to theproject. When that property is sold, the profits are divided, primarily among the LPs. However, there is a common practice in partnerships, including real estate partnerships, that gives the GP a portion of the profits. This is separate from his annual management fee which covers his salary and overhead. This part of the profit is known as carried interest. The carried interest (which can be up to 20% of the profit from the investment) is part of the setup of the partnership and is done to give the GP an incentive to push for the success of the partnership venture and is a return on their “sweat equity”.The Househas introduced H.R. 2834, which is currently in the House Ways & Means Committee with 23 cosponsors. H.R. 2834 would eliminate taxing carried interest at capital gain rates (currently 15%) and instead tax them at the standard income rates (currently up to 35%). The Senate has introduced S. 1624, which is currently in the Senate Committee on Finance with four (4) cosponsors. S. 1624 currently focuses on private equity groups and does not includereal estate carried interest in the language of the bill, but it is expected that this will be amended in the future to include real estate and mirror H.R. 2834. (Please see attached Issues Briefing Paper )
2. 1031 Exchange Accommodators If a real estate investor utilizes a 1031 exchange, the profits from the sale of one property are directly used to purchase a second property and capital gains taxes are deferred until that property is sold. However, the business of 1031 exchange accommodators is largely unregulated at the federal and state levels of government with hundreds of independent exchange accommodators across the country. In March, a Santa Barbara law firm filed a lawsuit charging two exchange accommodators, Qualified Exchange Services and Southwest Exchange, of stealing more than $95 million from 130 investors in 12 states. As a result of this type of incident, the California Legislature and some in Congress are considering if there needs to be legislation that would require the licensing of exchange accommodators, as well as requiring a fidelitybond and errors and omissions insurance. (Please see attached Issues Briefing Paper )3. Mortgage Cancellation C.A.R. Policy:C.A.R. has previously taken the policy: “that C.A.R., in conjunction with NAR, pursue changes in federal law or regulation to exempt from unfair taxation relief of indebtedness income from short sales of principal residences.”In today's market, some individuals are "upside down" on their mortgages (i.e., they owe more on the mortgage than the fair market value of the property). If they should sell the property and be unable to repay the full amount of any outstanding mortgage debt, the lender may forgive some or the entire shortfall (this is known as a "short sale"). Similarly, in foreclosures a borrower might be forgiven some portion of a mortgage debt if the lender is not able to satisfy themortgage liability from the sale proceeds. When some portion of a debt is forgiven, income tax is imposed on any amount that a lender forgives.Under current law, if a mortgage lender forgives or cancels a debt, the taxpayer/borrower is required to recognize income and pay tax on the amount of the canceled debt. Exceptions are provided to this rule in the case of bankrupt or insolvent taxpayers. Rules are also provided that defer taxation for relief of debt on loans for commercial and investment property, but the tax laws have never extended relief to an individual who sells a personal residence for an amount that is less than the outstanding debt on the property.
Example: Assume that an individual purchased a home for $450,000. Atthe time of a subsequent sale, the outstanding mortgage balance might be $415,000. If the home sells for $400,000, the individual has incurred a non-recognizable capital loss of $50,000 and is short $15,000 to pay off the outstanding mortgage. If the lender forgives this $15,000 debt, then the homeowner must recognize the $15,000 as ordinary income and pay tax on it.
Legislation is needed to assure that mortgage debt that is canceled or forgiven is not treated as income and taxed on primary residences. The House introduced H.R. 1876, the Mortgage Cancellation Relief Act of 2007, which would allow for residential mortgage debt relief to be excluded from gross income. The Senate introduced a companion bill,S. 1394. S. 1394 is currently in the Senate Committee on Finance and has eight (8) cosponsors. H.R. 1876 is currently in the House Ways & Means Committee and has 30 cosponsors, including Reps. Eshoo and Filner.
On September 25, 2007 Chairman of the House Ways & Means Committee, Rep. Rangel (D-NY) introduced his own mortgage cancellation relief bill, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. On September 26, 2007, H.R.3648 passed out of the House Ways & Means Committee by a unanimous voice vote.H.R. 3648 would remove taxes from mortgage cancellation relief provided on a mortgage on a primary residence. The tax relief would only apply to the original purchase price, plus personal improvements of a primary residence and would not cover any amount over the original purchase price if a loan has been refinanced with a “cash out” option. The relief would also only apply to first mortgages, not second mortgages or home equity lines of credit. The relief would apply to any forgiveness given on or after January 1, 2007.H.R. 3648 was marked up to cost $2 billion over 10-years. Under PAYGO rules, to offset this lost in revenue, H.R. 3648 made changes to corporate estimated tax rates and to rules governing second homes that are converted into primary residences. Currently, if a second home is converted to a primary residence and lives in for at least two out of the past five years, this home is allowed to use the $250,000/$500,000 capital gains exemption. H.R. 3648 would allow gain received once the house became a primary residence to be excluded from capital gains taxes (up to the same limits), but would tax gains attributed to the time when the house was not a primary residence, up to the previous 15 years. However, this rule will not count against any gain prior to January 1, 2008. H.R. 3648 passed the House on October 4th by a vote of 386-27.Additionally, the IRS has added a special section to their website concerning tax issues and consequences with foreclosures and debt cancellation. This information can be found on the IRS webpage (www.irs.gov) or directly at http://www.irs.gov/newsroom/article/0,,id=174034,00.html4. Qualified Veteran Mortgage Bonds C.A.R. Policy:C.A.R. supports eliminating the pre-1977 service requirement for QVMB eligibility.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 obligations 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 fora 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.H.R. 551, the Home Ownership for America’s Veterans Act of 2007, was introduced on January 18, 2007 byRep. Davis (D-CA). H.R. 551 is currently in the House Committee on Ways & Means and has 65 cosponsors, including 50 from California. H.R. 551 would eliminate the requirement that you serve before January 1, 1977 and replaces it with “who applied for the financing before the date 25 years after the last on which such veteran left active service.” It would also use the Conventional Mortgage Home Price Index compiled by Freddie Mac to help determine inflation rates and after 2010 the limit of the amount a state is allowed to use would be adjusted based off this inflation rate (multiply the limit by the inflation adjustment factor).
5. FIRPTA C.A.R. Policy:In the January 2005 meetings C.A.R. adopted policy which stated, “That C.A.R. in conjunction with N.A.R., ‘SUPPORT’ legislation that would permit a seller to provide the information required by the Foreign Investment in RealProperty Tax Act (FIRPTA) to escrow or another settlement provider as an alternative to providing that information to the buyer.”Over the past several years as identity theft has become more of a concern for everyone, sellers have grownincreasingly uneasy with providing their taxpayer identification numbers. The concern has become so great that some sellers are refusing to provide the required non-foreign affidavit to the buyer or are providing an affidavit with theseller’s taxpayer identification number removed. This creates a dilemma for buyers’ who may be liable for the sellers’ tax liability from the sale of the real property if they do not receive a fully completed sellers’ affidavit.On April 17, 2007 the House passed H.R. 1677, The Taxpayer Protection Act by a vote of 407-7. Included in H.R. 1677 was the FIRPTA fix that C.A.R. has been working on. C.A.R. has been working diligently with NAR and House Ways & Means staff on getting a FIRPTA fix introduced that would allow the seller to provide the non-foreign affidavit to a settlement provider instead of the buyer. As you know,this has been a long standing issue that has had trouble gaining traction in Congress. Thanks to the help and efforts of Congressman Mike Thompson (D-CA), C.A.R. was able to get language attached as an amendment to H.R. 1677.C.A.R. and NAR are still working on some minor changes to the language. However, these changes will have to be in the Senate version of the bill as H.R. 1677 was put on the House calendar under suspension rules, which means no further amendments were allowed.
6. 1031 Exchanges The like-kind exchange provisions of Internal Revenue Code Section 1031 permits a taxpayer to defer taxation on capital gains if within 45 days of selling a "relinquished property," the taxpayer identifies a "replacement property" and closes on the acquisition of that property within 180 days of the sale of the “relinquished property”. The regulations for these rules provide a roadmap for securing the benefits of deferral and a well-established body of law governs these transactions.
The exchange rules have not been modified since 1991. Two developments; however, have brought new scrutiny of the rules. The first of these is an effort to repeal the exchange rules that has been mounted by farmers located primarily in Iowa and Illinois. They believe that the exchange rules have the effect of driving up the price of farmland. A second development is the rise of the Tenant-in-Common (TIC) market since 2002.
In the 110th Congress, the Senate Finance Committee is likely to review several aspects of Section 1031. There are numerous areas they will examine, ranging from the basic to the more complicated of matters concerning 1031 exchanges. The more basic issues to be examined are whether the IRS Form 8828, which is used to figure and report the recapture tax on a federal mortgage subsidy, should be made a mandatory filing; and examining how long a1031 exchange must be held before a replacement property can be purchased. They may also examine the issue of withholdings on boot. Boot is any part of a 1031 exchange that is not like-kind property. This can be either property or cash.
More complicated issues that may be addressed are the deferral of fees and collection of fees involved in TIC properties. The fees associated with TICs are said to range as high as 25% of the acquisition cost. Congress may examine whether taxpayers engaged in exchanges should be permitted deferral treatment for these fees. Congress will also examine whether deferral treatment is appropriate for collectibles.
C.A.R. will lobby to keep like-kind exchanges unchanged and retain the current laws. C.A.R. will also continue to lobby to have the 45-day deferral for finding a “replacement” property removed in accordance with our 2004 policy.Additionally, in May 2007 NAR’s Tax Committee decided to form an internal, informal task force that will explore issues concerning 1031 qualified intermediary (QI) (also known as exchange accommodators) as well as: risk management for real estate professionals who make QI referrals, new disclosures applicable to QIs, additional restrictions of QI funds, state v. federal regulation, and increased fiduciary standards for QIs. We are expecting a reportfrom this task force during the November NAR meetings.There have recently been some possibly unlawful activities in the like-kind exchange marketplaces that are creating challenges. Individuals and investors with funds ondeposit with these companies have been unable to complete their exchanges in a timely manner because the funds had, in effect, disappeared. Those individuals could face serious tax consequences because of their inability to satisfy the180-day test. Real estate professionals associated with those transactions are thus exposed to additional liabilities as well.7. Mortgage Insurance Premium Deduction C.A.R. Policy:“ThatC.A.R., in conjunction with NAR, ‘OPPOSE’ the introduction of income limitations on the proposed mortgage insurance deduction provisions of the Internal Revenue Code.”
In the last hours of the 109th Congress, H.R.6111, the Tax Relief and Health Care Act of 2006, was passed. Inside this tax extenders and Medicare bill, a new tax deduction for mortgage insurance premiums was included. This is a one-year-only provision that wouldallow some 2007 home buyers to deduct the cost of their mortgage insurance premiums (PMI). In order to qualify, the loan must originate in 2007 and can be applied to private mortgage insurance, FHA insurance, and VA and Rural Housing premiums as well. 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). Individuals who claim the deduction are not permitted to prepay premiums that are otherwise due after 2007. Currently this provision expires on December 31, 2007.
H.R. 1813 was introduced by Rep. Levin (D-MI) on March 29, 2007. H.R. 1813 currently has 36 cosponsors, including Reps. Calvert and Herger, and is in the House Ways & Means Committee. H.R. 1813 would allow for PMI to be permanently deductible and would remove any income limitations. The Senate companion bill is S. 1416, which was introduced by Senator Smith (D-OR) on May 16, 2007. S. 1416 is currently in the Senate Committee on Finance and has 12 cosponsors.Additionally, an extension of the current PMI deduction was added to H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. H.R. 3648 would extend the PMI deduction through December 31, 2014. H.R. 3648 passed the House Ways & Means Committee on September 26, 2007 by a unanimous voice vote.8. Employee Housing Downpayment Assistance C.A.R. Policy: “That C.A.R., in conjunction with NAR, support income tax-based incentives for employer-assisted housing as part of a housing affordability strategy.”Due to the high cost of housing, employee downpayment assistance programs are becoming more frequent among employers as a means of attracting and retaining employees. However, under current law there are no incentives for employers to offer this benefit and this type of assistance is often treated as taxable income to the employee.H.R. 1850,Housing America’s Workforce Act, was introduced by Rep. Velazquez (D-NY) on March 29, 2007. H.R. 1850 has been referred to the House Ways & Means and the House Financial Services Committees. H.R. 1850 currently has 10 cosponsors, including Rep Baca and Rep. Loretta Sanchez. S. 1078, Housing America’s Workforce Act, was introduced by Senator Clinton (D-NY) on April 10, 2007. S. 1078 is currently in the Senate Committee on Finance and has seven (7) cosponsors.
H.R. 1850 and S. 1078 would allow an employer a business tax credit for up to 50% of the qualified housing expenses paid for the benefit of their employees. The credit would be limited to the lesser of $10,000 or 6% of an employees home purchase price, or up to $2000 in rental assistance. The housing assistance would also be excluded from the employee’s gross income.9. Tax Reform and AMT The issue of fundamental tax reform has been in a lull since the release of the recommendations by the President’s Advisory Panel on Tax Reform. At this time, most talks concerning fundamental tax reform are taking place in the Presidential debates. Nonetheless, discussions concerning an AMT patch, AMT reform, and the repeal of the AMT are still hotly being debated in the Congress.So far no consensus has come out on what to do concerning the AMT. Possible solutions include: a one-year patch (at a cost of around $55 billion), full repeal without offsets (projected to cost $1.2 trillion over ten years) full repeal withoffsets (the elimination of other tax breaks to off-set the costs), and reforming the AMT by raising the tax bracket (topping out at 39.6%) and raising the trigger level so that no couple making less than $250,000 would be caught in the AMT.
No firm stances have been developed yet and both parties claim that the AMT is one of their top tax priorities and are diligently working on a solution. As is the case with most taxation issues, the major issue is whatto do about the lost revenue from either modifying or repealing the AMT.Most pundits believe that the Democrats will be forced to do a one or two year patch to the AMT in order to keep more middle class families from falling prey to this stealth tax, but still staying within the budget limitations and PAYGO. However, Democrats have been diligently attempting to find a more permanent fix that they can pass this year and gain a large tax victory before theelections. House Ways & Means Chairman Rangel (D-NY) has not ruled out a more permanent AMT reform, especially since he started to focus on changing the tax rules concerning carried interest as a potential large offset for AMT reform. C.A.R. will continue to monitor issues concerning the AMT and keep you updated on any changes.
10. Internet Taxation C.A.R. Policy:In 2000 C.A.R. took the policy that there should be no state/local taxes on internet access and that there should not be federal efforts to preempt states’ efforts to address sales and use tax issues.In 1998 the Internet Tax Freedom Act was passed, which created a moratorium on federal, state, and local government from imposing taxes on internet access, creating “internet only taxes” such as taxes on bandwidth or emails, and also restricted multiple taxes on e-commerce. Since 1998 the moratorium has been extended twice and is currently set to expire in November 2007.
There are two tracts of legislation concerning internet taxation. The first is an extension of the moratorium. S. 1453was introduced by Senators Carper (D-DE) and Alexander (R-TN) on May 23, 2007. S. 1453 would extend the moratorium for four more years and eliminate a tax loop-hole that allowed carriers to bundle internet access with other features, all tax free. S. 1453 is currently in the Senate Committee on Commerce, Science, & Transportation with four (4) cosponsors, including Senator Feinstein.The second tract would make the ban permanent. H.R. 743, the Internet Access Moratorium Tax Bill, was introduced on January 31, 2007 by Rep. Eshoo (R-CA). H.R. 743 is currently in the House Judiciary Committee and has 149 cosponsors, including 22 California Representatives. The Senate companion bill is S. 156, was introduced on January 4, 2007 by Sen. Wyden (D-OR). S. 156 is currently in the Senate Committee on Commerce, Science, and Transportation with 19 cosponsors.In late September Republicans made a push for the Senate to pass legislation, as the current moratorium expires on November 1, 2007. On September 27, 2007 the Senate Commerce, Science, and Transportation Committee was supposed to markup S. 1453, but the mark up was delayed over a dispute concerning a compromise on the length of the moratorium extension. Republicans are pushing for a permanent ban while Democrats are looking for an extension of the moratorium. There was a compromise proposed that would extend the moratorium for 6-years; however, the details were not able to be worked out. The Senate has postponed action on S. 1453 for now, but the delay should be fairly short asthe deadline to pass a new moratorium is fast approaching.11. Tax Gap The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time.
The tax gap can be divided into three components: non-filing, underreporting and underpayment.Currently, Congress is pushing the IRS toclose the “tax gap” in order to generate more revenue to cover the cost of programs. While no official decisions have been made as to how to close the “tax gap”, it seems that the ideas could mean more compliancerules being issued, which could prove to be a further burden on small businesses, as well as an increase in audits.VI. Real Estate Finance IssuesA. Discussion/Reporting Items:1. Subprime and Predatory Lending C.A.R. Policy:C.A.R. has addressed subprime and predatory lending issues multiple times, as well as 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, the Housing and Urban Affairs Committee and 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 were discussed; including federal preemption of state subprime and predatory lending laws, bail out of home owners, refinance assistance for homeowners, a one page outline of loan terms, and others.It is still too early to know what final legislation will look like. 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.CongressmanBarney Frank, Chair of the House Financial Services Committee, and Senator Christopher Dodd, Chair of the Senate Banking, Housing, and Urban Affairs Committee, are in the process of drafting individual bills.2. Federal Financial Regulatory Agencies Issue Final Statement on Subprime Mortgage Lending Describing “prudent safety and soundness and consumer protection standards that institutions should follow to ensure borrowers obtain loans they can afford to repay,”the regulatory agencies issued their final Statement on Subprime Mortgage Lending. The agencies hope the Statement will address issues in the subprime market dealing with adjustable-rate mortgage (ARM) products. Theseissues include:
Underwriting the borrower at a fully indexed, fully amortized interest rate,
Avoiding stated income and reduced documentation loans (commonly known as “liar loans”), unless mitigating factors reduce the need to verify the borrower’s repayment capacity,
“Clear and balanced” information for the consumer on the loan product, and
Limiting prepayment penalties so borrowers may refinance into new products BEFORE the interest rate resets.
Because this is a “Statement” as opposed to a rule many members of Congress, along with consumer groups, have been critical of the agencies’ response to problems in the subprime market. Regulators have preferred to let the market play out and address predatory lending and unsafe and unsound practices in a reactionary manner. But continuous problems in the subprime market and steady rising foreclosure rates may force their hand to do more or risk intervention from Congress.This statement was a joint statement by the Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration.3. FICO Piggybacks Rent your credit and earn thousands!” This is the headline on Tradelinebrokers.com’s website. This is just one of the many on-line companies that offer to “boost” the credit score of consumers with poor to no credit histories. Because Fair Isaac’s FICO model allows the good credit history ofa cardholder to flow into the credit files of all authorized names on the card, many consumers benefit from a boost in their credit score without receiving access to the credit card itself. Consumers can raise their credit score 100 toeven 200 points by having these companies place their names on the credit cards of cardholders with excellent credit histories. Then, these card holders receive monthly payments dependant upon the number of people placed on their card,the number of cards used, and their credit score.While considered unethical by many people, this practice does not appear to be illegal. Historically, parents would place their children on their credit cards as a way to build their credit history and teach the responsibility that comes with credit. The evolution of the internet has allowed FICO “piggybacking” to become widespread. In order to combat this trend, Fair Isaac’s is expected to launch “FICO 08” which will no longer consider authorized-user accounts in computing credit scores.4. 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.In recent years, the intensity of large natural disasters 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 12 times as much.In California, it is only a matter of time until a large earthquake hits a highly populated area causing incalculable financial damage along with personal casualties that follow such a 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, such as it is doing after Hurricane Katrina.On August 3, 2007, Representatives Ron Klein and Rim Mahoney of Florida introduced the Homeowners Defense Act of 2007, H.R. 3355. The legislation is the latest attempt to address the issue of natural disaster insurance. The legislation will:
Create theability for states to pool their catastrophe risk with one another,
Allow states to transfer risk to the private markets through catastrophe bonds and reinsurance contracts, and
Create the National Homeowners Insurance Stabilization Program to provide low interest federal loans to states impacted by severe natural disasters.
On September 6, Vince Malta testified in front of Subcommittees for the House Financial Services Committee in favor ofH.R. 3355 on behalf of the REALTORS®.5. 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, asthese are non-financial activities. 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.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 resulting in inherent conflicts of interest.The House introduced H.R. 111 and the Senate introduced S. 413, both of which would place a permanent ban on banks entering into real estate activities. Presently, H.R. 111 has 264 cosponsors and S. 413 has 21 cosponsors.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 passed a one-year moratorium on allowing banks in real estate. The Senate Appropriations Committee passed a permanent ban on banks in real estate, thanks in large part to the vocal support of California Senator Dianne Feinstein.6. 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. On May 10, 2007, Senator Sherrod Brown (D-OH) introduced companion legislation in the Senate, S. 1356. S. 1356 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.7. Flood Insurance C.A.R. Policy: C.A.R. supports reform of the 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 extended financial assistance to the NFIP; however, it 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,
Amend RESPA to require good 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
Authorize a 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.
On June 12, 2007, the House Financial Services Subcommittee on Housing and Community Opportunity held hearings on H.R. 1682; however, no action has been taken to move the bill.8. FHA Issuesa. FHA Reform C.A.R. Policy:C.A.R. supports increasing FHA’s loan limit to 100% of the conforming loan limit or above, allowing zero-down mortgages, allowing FHA to 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. Originally, the legislation would have increased the FHA limit to 100% of an area’s 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). But, on September 18, California Congressmen Gary Miller and Dennis Cardoza introduced an amendment to increase the FHA loan limit to 125% of an area’s median homeprice, capped at $729,750.
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.
On September 18, the House passed H.R. 1852 by a vote of 348 – 72. On September 19, the Senate Banking, Housing, and Urban Affairs Committee marked up their version of FHA reform. The Senate version differs from the House version in a few ways; a requirement for at least 1.5% down; and increasing the conforming loan limit to 100% of conforming, $417,000.b. FHA Manufactured Housing On June 25, 2007, the House of Representatives passed H.R. 2139, the FHA Manufactured Housing Loan Modernization Act, by a voice vote. The purpose of this bill is to, among other things:
Allow lenders to do more FHA insured manufactured loans,
Raise the loan limits from $48,000 to $69,678,
Index this limit for inflation on an annual basis, and
Increase the up front FHA insurance premium to ensure the program is sufficiently financed.
The Senate version of this bill is included in the Senate’s FHA Reform bill that passed out of Committee in September.9. VA & HUD Issuesa. National Affordable Housing Trust Fund C.A.R. Policy: C.A.R. has historically supported affordable housing efforts.California representatives Maxine Waters and Gary Miller have co-introduced, along with Chairman Barney Frank (D-MA), H.R. 2895, the National Affordable Housing Trust Fund Act. The bill, which was introduced in June,2007, and reported out of Committee in July, would establish the National Affordable Housing Trust Fund (NAHTF) to issue grants for the purpose of construction, rehabilitation, and preservation of affordable housing. The NAHTF would befunded by a portion of the profits generated by the GSE Reform bill (HR 1427), the FHA Reform bill (HR 1852) and any other sources subsequently identified. The money will be given out to states and local governments to be utilized andfurther dispersed. All NAHTF money must be used for low-income families (below 80% of state or local-median income) and 75% will go to extremely low-income families (below 30% of median income or national poverty level).Eligible recipients will be any “organization, agency, or other entity, including for-profits, nonprofits, and faith-based organizations, that have demonstrated the experience and the capacity to carry out the proposed Trust Fund Activity.”State, local and private recipients of NAHTF grants will have to match $1 for every $2 received. Unless they utilize federal money to match the NAHTF grant, then it is $1 for $1.H.R. 2895 was marked up out of the House Financial Services Committee and awaits a floor vote.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 expandopportunities 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 iscapped at the conforming loan rate of $417,000.”10. 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-controlled Congress 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 newlegislation 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 finalversion 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.Senator Dodd stated his intent to move a GSE reform bill in his Committee, though no timeline was set. The Administration stated its willingness to accept a high-cost conforming loan limit provision that is temporary to address the current housing crisis.VII. Land Use & Environment IssuesA. Discussion/Reporting Items1. Endangered Species On September 20, 2007 the Senate Finance Committee passed by voice vote the “Habitat and Land Conservation Act of 2007 (no bill number assigned yet). This bill was introduced by Sen. Crapo (R-ID) and cosponsored by Senate Finance Chairman Sen. Baucus (D-MT). The bill extends tax incentives for farmers and ranchers that establish conservation easements on their land, extends tax credits for taking voluntary measures to protect and restore habitats of endangered species and threatened species, and allows for tax deductions for environmental cleanup costs. This was a rare time where there was an agreement between property rights advocates and environmentalists.
This bill replaces aprevious bill introduced, S. 700. There was also a companion bill to S. 700, H.R. 1422. These two bills will likely be replaced with the “Habitat and Land Conservation Act of 2007”.
The “Habitat and Land Conservation Act of 2007” would make permanent the current provisions that allow ranchers and farmers the ability to deduct the contribution of property to a charitable organization and to carryover the amount above the allowed deduction for up to 15-years. Additionally, it allows the Treasury, Commerce, and Interior Departments to set up funds to allow taxpayers a credit against income tax for costs incurred when they setup a habitat restorationplan. Finally, it would extend the current Brownfield deductions for three more years, through December 31, 2010.2. Eminent Domain On May 17, 2007 the House Agriculture Committee passed H.R. 926, the STOPP Act of 2007 (Strengthening the Ownership of Private Property Act) by voice vote. H.R. 926 was introduced by Rep. Herseth (D-SD) and currently has 25 cosponsors. H.R. 926 would restrict federal agencies from providing funding to a state or local government under specified Federal economic development programs for two years if that state or local government uses the power of eminent domain to transfer property from a private entity to another private entity. H.R. 926 also restricts funds when a state or local government fails to provide relocation assistance to a person displaced by the use of eminent domain for economic development purposes.Exceptions to these rules include when eminent domain is being for: use by a public utility, for a road of common use, for an aqueduct or pipeline, prison or hospital, or for any use during and in relation to a national emergency or a natural disaster declared by the President.Since H.R. 926 covers issues that fall into numerous jurisdictions, the bill will be held up in numerous committees during the 110th session. While the House Agriculture Committee has passed H.R. 926, it is still sitting in the HouseCommittee on Transportation and Infrastructure, Financial Services, Natural Resources, and Education and Labor.During the 109th Congress, the House passed similar legislation, but the Senate never took action. Sofar there is no Senate companion bill to H.R. 926. Every state has different needs, and many question whether there is a proper federal response that can address the diversity of situations that will be experienced across all 50 states.