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Federal Issues Committee
Sheraton Grand Hotel
Grand Nave Ballroom, Gardenia Room
Sacramento, CA
Thursday, June 4, 2009
3:00 PM – 5:00 PM
Presiding:
Don Faught, Chair
Kathy Mehringer, Vice-Chair
Ray Karpe, Vice-Chair
Bill Jansen, Executive Committee Liaison
Allen Chiang, NAR Committee Representative
C.A.R. Staff:
Matt Roberts, Federal Governmental Affairs Manager
Jeff Keller, Public Policy Analyst
I. Opening Comments: Don Faught
II. Report of Action Items from Reporting Committees
A. Real Estate Finance
B. Taxation
C. Land Use and Environment
D. Equal Opportunity – Cultural Diversity
E. Housing Opportunity
F. Commercial Investment
III. Taxation Issues
A. Action Items:
1. Withdrawing From 401(k) Plan Without Penalty
As the housing market continues to face a tough decline, there has been a
rise in homeowners that are finding themselves struggling to pay their
mortgages. These troubled mortgages are leading to an increase in
loan modifications, foreclosures, and attempts to help people access cash
to help save their homes. One option proposed is allowing homeowners
to withdrawal from their 401(k), without penalty, to help pay their
troubled mortgage. (Please see IBP for further information)
B. Discussion Items:
1. Estate Tax
The Economic Growth and Tax Reconciliation Act of 2001 set in motion a
ten-year plan to increase the exemptions from the estate tax and lead to a
one-year full repeal in 2010. Effective in 2010, the estate tax will
be repealed, but only for 2010. In the interim, the amount of the exclusion
will gradually increase from $675,000 to $3 million and the estate tax
rates are gradually reduced from a maximum of 50% to a maximum of
45%. However, in 2011, the estate tax laws will revert to the laws
that were in effect on June 6, 2001.
As under prior law, the basis of assets received between 2001 and 2010 is
"stepped up" to its fair market value at the time of death. When repeal
comes into effect, the estate will not be taxed, but the basis of assets
that heirs receive will be "carried over" so that the basis in the hands of
the heir is the same as the basis of the previous owner.
Below is a chart showing the progression of the estate tax’s top rates and exemption maximum through its full repeal in 2010 and its reversion back to the old rates and exemption levels in 2011.
|
Year |
Exemption Maximum |
Top Estate Tax Rate |
|
2004 |
$1,500,000 |
48% |
|
2005 |
$1,500,000 |
47% |
|
2006 |
$2,000,000 |
46% |
|
2007 |
$2,000,000 |
45% |
|
2008 |
$2,000,000 |
45% |
|
2009 |
$2,000,000 |
45% |
|
2010 |
No Maximum |
0% |
|
2011 |
$1,000,000 |
55% |
There are numerous ideas being floated around ranging from a temporary extension of the 2009 levels to a permanent fix through compromise. One proposal that has already been introduced would be a permanent fix to the estate tax and would increase the exemption to $5 million (indexed for inflation) and decrease the tax rate to 35%. In an odd twist, the $5 million/35% proposal was included in the Senate FY10 Budget resolution as an amendment. However, immediately following the passage of that amendment another amendment was passed that provided a point of order against any estate tax provision (such as the $5 million/35% one) being passed until tax relief had been offered to lower-income individuals.
The Obama Administration seems to be seeking a permanent compromise that would have an exemption of $3.5 million for individuals ($7 million for couples) indexed for inflation with a tax rate capped at 45%.
2. Changes to Tax Deductions
The House and Senate have passed their FY10 Budget resolutions. While
these are just frameworks for the budget process and can change, they still
lay out the areas of key interest for the Administration and for
Congress. The largest real estate related issue in the FY10 budget is
a proposed change to the tax code that would limit the above the line
deductions for those in the highest income bracket (over $200,000/year
single filer and $250,000/year joint filer).
Currently, this tax bracket is taxed at 35%. When this bracket does an itemized deduction, that deduction reduces their income level, thereby cutting down their tax liability equal to their tax bracket. An example of this would be if a person made $500,000 of taxable income in 2008, but had $200,000 in tax deductions. Their original tax liability would be $175,000. With their deductions, their new tax liability would be $105,000 – taking 35% of their $200,000 in deduction off of their tax liability.
The new proposal would still tax the highest bracket at 35%, but would reduce how much their deductions can lower their tax liability to 28%. Therefore, in the same example above, the new tax liability after deductions would be $119,000, a difference of $14,000.
Itemized deductions include a variety of tax breaks including state and local taxes, charitable deductions, medical expenses, and numerous others. The reason this proposal concerns REALTORS® is that included in the tax deductions is property taxes and the Mortgage Interest Deduction.
While this proposal has been met with skepticism from both sides of the political isle, there is a strong push by the Administration and Democratic leadership to have this reform done as it would act as an offset for major proposals, including healthcare reform.
Both the House and Senate passed their budget proposals with this tax code change included. While this does not mean that it will be part of the final package, it does mean they are willing to give it serious consideration. C.A.R. and NAR have already contacted the California Delegation to express our objections to this change in the tax code, especially during the current housing climate.
C. Reporting Items:
1. Homebuyer Tax Credit
The First-time Homebuyer Tax Credit (HTC) was changed as part of the 2009
Stimulus Package. Below is a description of the previous HTC and the
updated HTC.
If the home was purchased between April 8, 2008 and December 31, 2008
- The tax credit is 10% of the purchase price, capped at
$7,500.
- The tax credit does need to be repaid, therefore working more as an
interest free loan. The credit is repaid out of your taxes over
15-years.
- You cannot get the credit if the property is financed by a tax
exempt qualified mortgage issue/bond.
If the home was purchased between January 1, 2009 and November 30,
2009
- The tax credit is 10% of the purchase price, capped at
$8,000.
- The tax credit does not need to be repaid – the only exception
being if the property is sold within 3-years of purchase.
- You can get the credit if the property is financed by a tax exempt
qualified mortgage issue/bond.
2. FY2010 Tax Rates
Part of the FY10 Budget proposal from the Obama Administration in a change
is some of the tax rates. Single taxpayers who earn more than
$200,000 (or more than $250,000 for couples) will see their tax rate return
to its previous level of 39.6% in 2011. Capital gains would also
return to their rate of 20%, from its current 15%. Dividends would be
taxed at 20% though, not at the income rate. Carried Interest will be
taxed as ordinary income, not as capital gains.
Those making $200,000 or less would not be affected by tax increases. The
budget also seeks to make permanent the $800 per family "making work pay"
tax cut, part of the recent stimulus bill, which the administration says
will go to 95% of working Americans.
IV. Real Estate Finance Issues
A. Discussion Items
1. Banking Bill
Congress has passed and sent to President Obama legislation that would:
• Extend the increase in the FDIC’s deposit insurance of $250,000
until the end of 2013.
• Ease eligibility requirements and fees for the Hope-for-Homeowners
program, which has failed to help keep people in their homes.
• Increase the FDIC’s borrowing authority from $30 billion to $100
billion.
• Protect lenders and servicers who participate in mortgage
modifications from lawsuits by investors.
What the final draft of the legislation does not include is a “cramdown” provision. A cramdown provision was included in the first bill that passed the House; stiff lobbying on the part of lenders was successful in stripping the provision from the Senate bill and final legislation. Both NAR and C.A.R. expressed to Congress our opposition to the House language.
This has likely bought lenders until the end of the year to prove they are able to make massive loan modifications without the threat of bankruptcy court judges being able to reduce the mortgage principal. If Congress feels lenders and servicers failed to voluntarily modify an appropriate amount of mortgages, they will likely bring the cramdown issue up again.
2. Mortgage Reform
On May 7, the House passed HR 1728, the Mortgage Reform and Anti-Predatory
Lending Act, by a vote of 300 – 114. While the legislation was
quickly moved and passed in the House, Senator Christopher Dodd, chair of
the Senate Banking, Housing and Urban Affairs committee appears to be in no
rush to pass the legislation. Dodd believes that with the current
lack of a subprime market and the tighter underwriting standards lenders
are now using, there is not an immediate need for the legislation.
Senator Dodd believes they will eventually work their way to the bill, but
he views other issues as more pressing.
HR 1728 would:
• Prohibit steering incentives in connection with origination of
mortgage loans (YSP)
• Prescribes minimum standards for residential mortgage loans,
including a mandatory net tangible benefit to the consumer for refinancing
a residential mortgage loan.
• Creates liability for assignee and securitizers.
• Prohibits certain prepayment penalties, mandatory arbitration,
mortgage loan provisions that waive a statutory cause of action by the
consumer, and mortgages with negative amortization.
• Requires lenders to maintain a 5% “skin in the game” of non-prime
loans. The hope of this provision is to force lenders to keep part of
the risk of a loan, thus encouraging them to do safer loans.
It is unclear when or if the Senate will address mortgage reform and what a Senate bill may or may not have in it.
3. Foreclosure Rescue Scams
On May 6, 2009, the Subcommittee on Housing and Community Opportunity held
a hearing titled “Legislative Solutions for Preventing Loan Modification
and Foreclosure Rescue Fraud.” Chairing the hearing was California
Democrat Maxine Waters.
Over the last two years, California and other states that have been hit hard by the housing crisis have seen a proliferation of mortgage modification and foreclosure avoidance scams. Often these scams require people to pay high fees upfront or even go so far as to have homeowners sign over their rights to the property.
While California has taken steps to crackdown on fraudulent activity, D.C.
has taken notice of the problem and there is strong support for Congress to
take action to protect consumers. There is however a divide over
whether or not to completely prohibit loan modification consultants or to
create minimum standards and regulations. It is unclear if Congress
will get around to passing legislation addressing this issue, though
several bill have been introduced.
4. Home Valuation Code of Conduct
On May 1, 2009, the Home Valuation Code of Conduct (HVCC) officially went
into effect requiring all Fannie Mae and Freddie Mac loans to abide by the
new appraisal standards. The new HVCC explains how appraisals must be
performed on all conforming loans for the GSE. While the intention of
the new rule is to prevent collusion and intimidation of appraisers by
outside parties, it remains to be seen what the long term benefits and
downside of the HVCC will be.
For more information, members may visit Fannie Mae’s HVCC FAQ here.
5. FHA Update
a. FHA’s market share of new mortgages has skyrocketed from approximately
two-percent in 2006 to roughly one out of every three loans today. In
California, there have been over 90,000 FHA loans performed in Fiscal Year
2009 (which started on October 1, 2008), this is almost double the FHA
loans originated in California for the entire FY 2008. This meteoric
rise in new FHA loans, while good for many homeowners, has created a
breeding ground for abuse and placed the U.S. taxpayer at risk.
FHA has seen an increase in both “delinquent” loans and “serious delinquency” loans (loans at least three months overdue). The FHA, which must carry a two percent reserve, now faces the serious possibility of having to ask Congress for funds; a first in the history of the FHA.
Because of this, Congress is likely to look at reforms for the FHA,
including:
• Premium structure
• Amount of downpayment
• FHA loan limit
• Underwriting standards
• And other factors that may be contributing to the problems at the
FHA
Another problem facing the FHA is an increase in fraud. Because lenders collect an origination fee on FHA loans and are 100 percent insured against losses on a default, many lenders are ignoring sound underwriting guidelines and some lenders’ FHA default rates are over 50 percent.
Because Congress spent a great deal of time and effort passing FHA reform in the 110th session of Congress, it is unclear if they will take up FHA reform again this session. HUD may decide to address some of these issues utilizing regulation.
b. FHA has recently announced they would begin working to accept the $8,000 first-time homebuyer tax credit up front through bridge loans or state Housing Finance Agencies. HUD Secretary Donavan made the announcement at NAR’s Midyear meetings in D.C.; though HUD has not released the full details of how the program will be implemented.
c. On May 15, 2009, HUD announced that it is temporarily extending the property flipping waiver to May 10, 2010 for FHA loans. Under the waiver, homes that were foreclosed on and are being sold by the mortgagee or on its behalf may be purchased by FHA borrowers without regard to the 90-day seasoning period. The waiver does not apply to entities that purchase foreclosures either singly or in bulk for resale. Subsequent sales of such properties will continue to be subject to the standard regulatory requirements.
HUD first announced the waiver on June 9, 2008, and the waiver was to be in effect for only one year. HUD exempted from the property flipping rules properties sold by HUD through its Real Estate Owned activities, new homes being sold by builders and properties being sold by relocation companies and the property owner's employer as part of a job relocation. Certain properties were exempted from this rule.
6. Making Home Affordable Program
In February, President Obama introduced his Making Home Affordable program;
his administration’s proposal to help ease the current housing
crisis. The original announcement contained two programs; the first
was a refinance program for homeowners with conforming loans that couldn’t
take advantage of the current low interest rates because their home had
depreciated in price. The second is a mortgage modification program
intended to get homeowners in default or at risk of default into mortgages
they could afford. Due to the flood of modification and refinance
requests lenders have been slow to get the program up and running at full
speed.
In May the President announced his Foreclosure Alternatives and Home Price Decline Protection. This program was intended to incentivize servicers to expedite short sales and deed-in-lieu of foreclosures, standardize the short sale process, address the problem with junior liens, and offset some of the loss to lenders who do loan modifications in areas with declining home prices. It is hoped that if homeowners are unable to keep their home, this program will move the distressed property quickly through the market.
Foreclosure Alternatives Program Summary
7. GSE and FHA Loan Limits
California Congressmen Brad Sherman and Gary Miller have introduced H.R.
2483, the Increasing Homeownership Opportunities Act. The legislation
would make permanent the current GSE and FHA loan limit formula and
caps. Currently these loan limits are set at 125% of a local area’s
median home price, capped at $729,750. The floor for the GSEs is
$417,000 and for FHA the floor is $271,050. These limits will expire
on December 31, 2009. The legislation also includes wording that
encourages the Federal Housing Finance Agency and HUD Secretary to not
decrease an area’s loan limit should that area’s median home price
decline.
If Congress does not pass this or similar legislation by the end of the year, the 2010 loan limits will fall to 115% of an area’s median home price capped at $625,500. The floors for the GSE and FHA would remain the same.
B. Reporting Items
1. Banks in Real Estate
On March 11, 2009, President Obama signed into law the FY2009 Omnibus
Appropriations Act that permanently prohibits banks from entering the real
estate brokerage and management businesses.
2. GSE Reform
While there are many ideas being floated about what Congress should do in
regards to the future of the GSE (Fannie Mae and Freddie Mac) now that they
are in conservatorship, Congress itself does not appear ready to begin
moving any legislation. Without proposed legislation introduced, it
is still too early to know how Fannie and Freddie will be brought out of
their current state of conservatorship. Making the issue more
difficult is the increased reliability by the housing market for the GSE to
maintain an affordable and stable supply of capital due to the lack of
private investors.
3. Regulatory Reform
While everyone agrees regulatory reform is necessary; it is almost as
universal that no one agrees how. Congressman Barney Frank and
Senator Christopher Dodd, chairs of their chambers’ committees that would
oversee the endeavor have failed to agree on the scope and speed at which
regulatory reform should move.
At the end of May the President signed into law S. 386, the Fraud Enforcement and Recovery Act of 2009. Included in the bill is a provision that will create a Financial Crisis Inquiry Commission to review and determine what the causes were of the financial crisis and to make regulatory recommendations. Due to the creation of this Commission we may not see Congress make an aggressive effort to move broad regulatory reform prior to the Commission’s report on December 15, 2010. Congress may address smaller regulatory issues this session, but they may choose to hold off on full regulatory reform until the 112th session.
4. National Flood Insurance Program
In March 2009, Congress passed the fiscal 2009 omnibus budget. The
bill included a provision to extend the National Flood Insurance Program to
September 30, 2009. The extension is needed to give Congress more
time to work through remaining differences over long term reforms to the
program. Without flood insurance, property owners in over 10,000
communities across the U.S. would be unable to finance a mortgage.
5. RESPA
On April 20, 2009 the United States District Court for the Northern
District of Alabama, Southern Division, filed a memorandum opinion in Busby
v. JRHBW Realty, Inc. d/b/a Realty South. The court concluded that a $150
Administrative Brokerage Fee charged by Realty South violated Section 8(b)
of RESPA. Below is a password protected link to NAR’s General Counsel
response to this ruling. Members who have questions regarding this
ruling are encouraged to contact C.A.R.’s legal hotline for assistance.
Laurie Janik’s response to Busby v. JRHBW Realty, Inc. D/B/A/ RealtySouth ruling
6. VA Loans
As the housing market works its way through the current crisis, many
veterans are facing housing problems that non-military homeowners and
homebuyers don’t have to. As such we are providing a list of links
that may prove useful to both REALTORS® who work with veterans and to the
veterans themselves. For additional information, the VA Regional Loan
Center for California is located at:
Department of Veterans Affairs
VA Regional Loan Center
3333 N. Central Avenue
Phoenix, AZ 85012-2402
http://www.vba.va.gov/ro/phoenixlgy/
General Eligibility Questions & Obtaining a Certificate of Eligibility
Veterans with Mortgage Problems
7. Natural Disaster Insurance
REALTORS® have work for a number of years to get Congress to pass
legislation that would create a federal Natural Disaster Insurance backstop
to the private market. Currently there is no proposed legislation in
the 111th session of Congress, but NAR is working with a number of
Representatives and Senators to craft and introduce legislation this
year. The purpose of the legislation will be to ensure that private
insurance companies are able to cover claims during catastrophic natural
disasters, such as large earthquakes or hurricanes like Katrina.
8. New Fannie Mae CEO
On April 20, 2009, Michael J. Williams was promoted by Fannie Mae as their
President and Chief Executive Officer. Williams was the executive
Vice President and Chief Operating Officer responsible for the functions of
Technology, Enterprise Operations, Hunan Resources, Community Charitable
Giving, Compliance and Ethics, Corporate Facilities and Security, and
Corporate Procurement.
V. Land Use & Environment Issues
A. Discussion Items
1. Climate Change, Energy Efficiency, and
Point-of-Sale
C.A.R. Policy: C.A.R. opposes the inclusion of any Point-of-Sale
requirements.
On March 31, 2009 Representative Waxman (D-CA) introduced a proposal for energy and climate change legislation. Part of the proposal included a Point-of-Sale program that would require an energy audit of real property. The purpose of this audit would be to “…require that labeled information be made accessible to new and prospective owners, lenders, tenants, occupants, or other related parties in such a way that information is more fully factored into market transactions.”
C.A.R. and NAR oppose this legislation as it includes POS which adds unnecessary costs to transactions and has been show to be an ineffective tool for implementing changes in energy efficiency. REALTORS® oppose mandatory POS energy labels for buildings and homes, but support legislation that provides financial incentives for energy retrofits, including: H.R. 1778 (Matching Grants) – Rep. Welch (D-VT) and H.R. 1573 (Zero-Interest Loans) – Rep. Van Hollen (D-MD). Energy labels will only stigmatize older properties, causing a loss in home value; further weakening the national economy. Labeling every home in America will not, in and of itself, save energy; providing incentives to property owners who make energy improvements will.
Within 5-years of passage of legislation there will be the creation of a commercial and residential database to hold the records of these audits.
Within 1-year of passage of legislation there would have to be a model uniform labeling program established that would allow owners/occupants to see their consumption of energy and results of efforts made in reducing in consumption. The creation of this uniform standard would take into account current state programs, such as the California HERS II program.
The goal of the legislation is to have counties and other local entities broaden access to energy efficiency information through disclosure of a real property’s energy efficiency in tax, title, and other records those localities maintain.
They propose providing this information during the following real estate
transactions:
- Building audit conducted with support from federal or state
funds;
- Building energy retrofit in response to such a building
audit;
- Final inspection of major renovations or additions made to a
building in accordance with a building permit issued by a local government
entity;
- A sale that is recorded for title and tax purposes;
- A new lien recorded on the property for more than a set percentage
of the assessed value of the property if that lien reflects public
financial assistance for energy-related improvements to that
building;
- A change in ownership or operation of the building for
purposes of utility billing;
- Other appropriate means.
VI. New Business
VII. Adjournment
