Federal Issues Committee
Marriott Hotel
San Jose Ballroom V/VI
San Jose, CA
Thursday, October 8, 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.  NAR Update – Jerry Giovaniello, NAR Senior Vice President & Chief Lobbyist

III. Member Mobilization – DeAnn Kerr

IV. 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

V. First Impression Issues

A. Discussion Items:

1. Healthcare Reform
The healthcare reform debate heated up over the summer; however, very little was truly accomplished.  As Congress returned to session in September healthcare remained their primary legislative effort and is likely to remain so through October at the least.  The House is still working on reconciling their two versions of healthcare reform with a floor vote expected sometime now in October.  The Senate also has to reconcile their two versions of healthcare reform and will face a tougher challenge due to slimmer margins of majority, the cloture threshold, and legislation that caries greater than the two competing House bills.

Currently C.A.R. is monitoring provisions in the bills that would affect REALTORS® and small businesses.  This includes items such as an individual mandate, an employer mandate, tax breaks to purchase insurance, and exceptions to the mandates.  C.A.R. has the healthcare working group’s principles that it is also using as a template when evaluating legislation. 

As of now predicting a timetable for this legislation is near impossible.  Even if the House and Senate quickly reconcile their versions of healthcare reform, they will still have to pass both of them and end up in a conference committee to reconcile the House and Senate versions.  If this process drags on too long or if it is viewed that the minority is stalling instead of negotiating, there is also the chance that Congress can turn to the reconciliation process and pass healthcare legislation with a simple majority in both the House and Senate. 

Information on healthcare reform is rapidly changing and being updated.  Please check back for updates of this agenda summary and keep in mind that this information is current from when written and may have to be updated during the meetings themselves by committee leadership. 

VI. Taxation Issues

A. Discussion Items:

1.   Homebuyer Tax Credit
The current First-time Homebuyer Tax Credit (HTC) expires on November 30, 2009; meaning that in order to be eligible for the HTC the escrow cannot close past November 30, 2009.  The current HTC is:

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.

C.A.R. and NAR are working diligently on both expanding and extending the HTC.  C.A.R and NAR want to see the tax credit expanded to all homebuyers and extended until the end of 2010. Currently, the information we are hearing is that it is more likely to see an extension of the HTC through 2010, but not an expansion to all homebuyers due to the increased costs and need to find offsets.

The HTC has accomplished its primary goal; it has helped create homeowners and has helped stabilize housing prices.  C.A.R’s research on the use of the tax credit in California showed that 39% of homebuyers said that they would not have purchased a home without the tax credit.  Additionally, 52% of homebuyers making under $100,000/year said that they would not have purchased a home without the tax credit.  Furthermore, of those first-time homebuyers who planned to apply for the tax credit, 40% of respondents said it was the “most important” factor in their purchasing of a home. 

Senator Cardin (D-MD) has introduced S. 1678, which would extend the current HTC until June 1, 2010, a 6-month extension.  No other provisions of the HTC would be amended as S. 1678 is currently written.  Some Senators advocating for a longer extension and/or an expansion of the HTC have recently starting backing S. 1678, including Senator Isakson (R-GA), who is one of the four cosponsors.  S. 1678 is currently in the Senate Finance Committee.

2. Mortgage Interest Deduction
The Congressional Budget Office (CBO) has prepared a report that suggests ways for Congress to raise revenues. One key suggestion is that Congress cut the mortgage interest deduction (MID) from the present $1.1 million cap ($1 million for a home and $100,000 for a home equity line of credit) to $500,000, phasing in the reduction by $100,000 annually starting in 2013. This would generate an additional $41 billion in revenue over 10-years.

Another option proposed by the CBO, which we have heard before, would replace the MID with a flat tax credit that is 15% of mortgage interest paid.  This would increase revenue by about $390 billion over six-years.

Other proposals include eliminating the deduction for all state and local taxes, including property taxes, which would increase revenues another $862 billion by 2019.

These types of ideas have been floated before and in the past have died quickly because MID has been considered sacred; however, with the current economic climate and the over-extension of housing being seen as one of the causes of the financial turmoil, analyst believe that this might be a year where a change in the mortgage interest deduction could be possible.  C.A.R. will monitor and continue to oppose, in align with our policies, any proposals made.

B. Reporting 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.

Originally it seemed as if Congress was going to address the issue of the estate tax in 2010, before the tax rates and exemptions returned to their old levels.  However, with the current economic downturn Congress is looking for an extension of the 2009 levels or a permanent compromise to the estate tax.

Currently the Administration wants to make the 2009 levels permanent while indexing the exemption for inflation.  However, with the short legislative calendar and other pressing issue, there may have to be a 1-year extension of the 2009 levels.  Many advocates will continue to push for a full repeal instead of a compromise and are hoping that the fact that 64 of the House’s 256 Democrats have at some point voted for full repeal will propel their cause.  Nonetheless, the current economic climate and need for more revenue, not less, may impede their endeavor.

2. Expiring Tax Breaks
Congress is going to face a slew of expiring tax breaks in 2010.  These tax breaks include: the expiring Bush income tax cuts, the capital gains rate possibly returning to 20%, the 1-year elimination of the estate tax – with 2011 returning to a $1,000,000 exemption with a 55% tax rate, the expiration of tax extenders –which includes the leasehold improvement, state and local taxes, and the Brownfield deduction.  In addition to these expiring tax breaks there are going to have to be other tax breaks looked at in order to offset some of the spending that has been incurred in 2009 in order to bring the federal budget and deficit in line. 

Congress is going to be hard pressed to deal with all of these looming tax issues, especially with so many other issues still on their table and 2010 also being an election year.  There is a chance that many of these tax breaks will get temporary extensions because it would be politically expedient as well as less cost prohibitive then permanent fixes.  Nonetheless, these tax breaks can also be used as political capital both during an election, as a campaign issue, or as bait to try to pass other non-related legislation.

VII. Real Estate Finance Issues

A. Action Item

1. FHA Anti-Flipping Rule

B. Discussion Items

1. Home Valuation Code of Conduct
Since the HVCC went into effect on May 1, 2009, consumers in California and across the country have seen the cost of appraisals go up, the quality of appraisals be questioned, and the real estate transaction encounter greater delays.  Legislation has been introduced, HR 3044, that would create an 18 month moratorium on the HVCC to allow Congress and the GSE regulator to examine the difficulties that the appraisal industry was experiencing during the housing boom and what may be done to properly address them. 

On September 22, 2009, HR 3044 had 91 cosponsors, including 16 from California.  It is unclear if HR 3044 will be attached to other legislation as a means of moving it through Congress, or if this is the stick necessary to force Cuomo and the GSEs to modify the HVCC.

Now that roughly two out of every three loans is required to comply with the HVCC guidelines, the FHA has come under pressure to adopt rules that will protect the appraisal process for FHA loans. 

2. Regulatory Reform
In June, the Administration unveiled its regulatory reform proposal.  It then began to release proposed draft legislation for members of Congress to consider.  The first piece of proposed legislation was the creation of a Consumer Financial Protection Agency (CFPA). 

On July 8, Congressman Barney Frank, Chair of the House Financial Services Committee introduced HR 3126, the Consumer Financial Protection Agency Act. The intention of the legislation is to create a new agency responsible for consumer protection, thus all but removing this responsibility from the financial industry’s current regulators.  The argument being put forth for this proposal is that regulators who are charged with the safety and soundness of a financial institution can not adequately protect consumers.  Proponents of the CFPA believe these goals run counter to each other in many instances.

The House seems content with moving regulatory reform one piece at a time, the CFPA being the first piece.  The Senate is expected to move all the pieces at once in a single large bill.  However, due to Senator Dodd’s role as a leader in the health care issue, it will be difficult for Dodd’s Banking, Housing, and Urban Affairs Committee address this issue before the end of the year.  Dodd has just released details of his regulatory reform proposal which includes the creation of one single regulator for the entire financial industry and thus eliminating the current alphabet soup of regulators. 

3. FHA Update
a. FHA Appraisal
Under pressure to come closer in line with the GSEs and their Home Valuation Code of Conduct, the FHA has adopted new appraisal requirements to go into affect on January 1, 2010.  While not completely identical to the HVCC, the new requirements will implement many of the same guidelines, these include:

• Prohibiting mortgage brokers or commission based lender staff from choosing the appraiser,
• Allowing for the use of AMCs or other third party organizations for appraisal ordering, and
• The prevention of improper influences on appraisers.

To address REALTORS®’ greatest concern with the HVCC, HUD reaffirmed in their Mortgagee Letter that an appraiser should have knowledge of the market area and have geographic competency for where the home is located.  However, there doesn’t appear to be anything in FHA’s mortgagee letter that will prohibit lenders from merely extending their current HVCC practices to FHA loans; except for allowing FHA appraisals to be portable.

b. FHA Reserve Fund
The FHA is expected to report their reserve fund has dropped below the two percent level required by Congress.  FHA Commissioner, David Stevens has stated that while the reserve must get above that threshold again, the FHA’s total reserve is more that $30 billion, or about 4.4 percent of its book of business.  Stevens noted that the study will project the reserves should rebound above the two percent threshold within two years. 

To address the reserve problem, FHA will hire a chief risk officer, and will likely take additional steps in the future.  The FHA does not anticipate raising borrower premiums or minimum down payments for now.

c. H.R. 3146
On September 16, 2009, the House passed H.R. 3146, the 21st Century FHA Housing Act.  As FHA gains a larger share of the nation’s housing market and plays an ever more important role in its recovery it became important for Congress to take action to ensure FHA has the resources and tools necessary to meet these goals.  This includes the ability to expand their staff and upgrade their technology, target reviews of loan performance to better protect the financial health of the program, and provide the HUD Secretary with authority to implement new programs to minimize foreclosures, which may include short sales and deeds-in-lieu.

Lastly, the legislation will fix technical errors from the Housing and Economic Recovery Act that passed in 2008.  These errors include streamlining condominium purchases and implementing the new dollar limit on energy efficient mortgages.

4. GSE Reform
Many people expected the Administration to announce its plans to address the future of Fannie Mae and Freddie Mac when they released their regulatory reform proposal in late June.  Instead, the Administration has stated they will release their plans for the future of the GSEs around the time they release their proposed 2011 budget in February of 2010.  It is still unclear how or if the Administration or Congress will restructure the GSEs, and what role government is to play in the future of the nation’s housing market. 

The first detailed proposal for the future of the GSEs and the nation’s mortgage capital markets has come from the Mortgage Bankers Association.  Their proposal would create new privately owned, government-chartered and regulated, mortgage credit guarantor entities (MCGEs).  These would be very similar to Ginnie Mae and would guarantee timely interest and principal payments to bondholders. 

With Congress still focused on other priorities, it is doubtful this issue will pick up much momentum prior to the Administration releasing their proposal.  However, we can expect other interested parties to continue to put forth ideas and for hearings to be held in both chambers of Congress.

5. GSE and FHA Loan Limits
Included in the House passed Transportation, Housing and Urban Development appropriations bill (THUD) was a provision that would extend the current loan limits until the end of the fiscal year 2010 (October 1, 2010).  The Senate passed version does not include this provision.  There is still a great amount of support for it and both NAR and C.A.R. will work to ensure it is included in the final version that comes out of conference.

6. Foreclosures and FICO Scores
At the June Business meetings, staff was asked to investigate the impact that a foreclosure, short-sale, or deed-in-lieu has on a consumer’s credit report and FICO score.  A foreclosure will remain on a consumer’s credit report for seven years.  If the consumer stays current on other debt obligations their FICO score can begin to rebound in as little as two years.  According to myFICO.com (FICO’s official website), “a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score.” 

A short sale and deed-in-lieu are considered the same as a foreclosure by FICO, “not paid as agreed” accounts.  These may be a better option from a personal financial standpoint to the consumer, but their impact on a consumer’s FICO score should not be any different than a foreclosure. 

How a mortgage modification affects a borrower’s FICO score will be determined by how the lender reports the information.  If the lender reports to the credit bureaus that the borrower has not made payments on a mortgage as originally agreed, that information will likely result in a decrease to their FICO score. 

C. Reporting Items

1. RESPA
After years of proposals and debates, the new RESPA proposal will be effective on January 1, 2010.  For consumers this means a new good faith estimate (GFE) and new HUD-1/HUD-1A.  REALTORS® had originally opposed this proposal because it complicated the transaction (including a closing script), contained government price controls, and didn’t take into consideration the full cost of implementation.  HUD was able to address these concerns and NAR is not opposing RESPA’s implementation. 

New RESPA Rule FAQ

2. TILA, Regulation Z
On October 1, 2009, the new Regulation Z rules adopted by the Federal Reserve Board will take affect.  The intent of the new regulation is to protect consumers from predatory loans.  The regulation addresses the advertisement of loans, loan servicing, the appraisal process, and defining higher-priced mortgage loans and what extra protections for consumers these loans will carry. 

A “higher-priced mortgage loan” is defined as a first-lien that is at least 1.5 percent or more above the average prime rate as calculated by the Fed.  For subordinate-liens the spread will be 3.5 percent or more.  Rules for higher-priced loans:
• Prohibits a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.  A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven-years of the loan.
• Prohibits a lender from relying on income or assets that it does not verify to determine repayment ability.
• Bans any prepayment penalty if the payment can change during the initial four years.  For other higher-priced loans, a prepayment penalty period cannot last for more than two years.
• Requires that the lender establish an escrow (impound) account for the payment of property taxes and homeowners’ insurance for first-lien loans.  The lender may offer the borrower the opportunity to cancel the escrow account after one year.

Rule for all closed-end mortgages secured by a consumer’s principal dwelling:
• Prohibits certain servicing practices: failing to credit a payment to a consumer’s account as of the date the payment is received, failing to provide a payoff statement within a reasonable period of time, and pyramiding late fees.
• Prohibits a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.
• Creditors must provide a GFE of the loan costs, including a schedule of payments, within three-days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Rule for all mortgages:
• Requires advertising to contain additional information about rates, monthly payments, and other loan features.  The Rule also bans seven deceptive or misleading advertising practices, including representing that a rate or payment is “fixed” when it can change.

3. 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, the new Regulation Z rules, and the tighter underwriting standards lenders are voluntarily now using, there is not an immediate need for the legislation.  It is unclear if Dodd intends to work on this legislation prior to the end of the 111th Session of Congress.

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.

4. Foreclosure Rescue Scams
The government continues to look at ways to crack down of foreclosure rescue scams.  At the federal level there have been many ideas put forward in Congress and multiple hearings held.  To date there is no foreseeable movement by any piece of legislation that would directly prohibit individuals or firms from collecting fees for foreclosure avoidance assistance. 

On the regulatory side, the Federal Trade Commission (FTC) has filed multiple civil actions against companies charging upfront fees and performing little to no assistance.  The FTC is contemplating a full ban on these companies that would prohibit them from advertising upfront fees. 

The government continues to advertise and encourage consumers to take advantage of the free resources made available to them through the HopeNow alliance and HUD approved counselors.

5. Making Home Affordable Program
In August, the U.S. Treasury Department released their first statement on how the President’s Making Home Affordable Program is performing.  At that time, the Treasury reported that more than 230,000 trial modifications had begun.  They believed this would put them on pace to assist 3 to 4 million homeowners over the next three years.  The Administration has set a goal of having 500,000 trial modifications started by November 1, 2009.  One of the problems that plagued earlier attempts at loan modifications was a high re-default rate.  It is still too early to know what the re-default rate will be with this program; however, it is hoped that by focusing on permanently reducing the debt-to-income ration of the homeowner this program will have a much higher success rate.

More than 85 percent of the mortgage market is covered by participating servicers.  Some in Congress have stated that if lenders are not working hard enough to modify loans, they will bring bankruptcy cramdowns back to the floor for another vote.

6. National Flood Insurance Program
The House has passed legislation that would extend the NFIP until the end of March 2010.  The legislation is now waiting for the Senate to take action, which it will have to do prior to September 30, lest the government program run out of funds. 

Still feeling the financial effect of Katrina and Rita, the NFIP is still financially insolvent.  Congress has attempted multiple times to reform the NFIP but has been unsuccessful at passing a comprehensive reform package that would make the program financially viable again.  Congress has consistently passed short term extender packages since the hurricanes to ensure the continued availability of the insurance, which is mandatory for federal mortgages on properties in flood planes.

7. Lockhart Steps Down
James Lockhart, Director of the Federal Housing Finance Agency, stepped down from his position in August.  Originally appointed under the Bush administration, many had hoped that he would remain as director until the end of the year so the current administration would not have to focus on replacing the head of Fannie’s and Freddie’s regulator.  It is not yet known who will replace Lockhart.

VIII. Land Use & Environment Issues

A. Reporting 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, which became H.R. 2454.  H.R. 2454 passed the House on June 26, 2009 by a vote of 219-212.

Part of the original proposal included a Point-of-Sale (POS) program that would require an energy label on real property.  C.A.R. and NAR opposed this legislation since it included POS which adds unnecessary costs to transactions and has been show to be an ineffective tool for implementing changes in energy efficiency.  However, REALTOR® opposition was removed when Rep. Waxman agreed, as part of a manager’s amendment, to greatly amend the POS labeling language so it would only apply to new construction, and NOT to existing homes. Additionally, the bill does not include any retrofit mandates at POS. 

What the bill does do is provide financial incentives, such as grants, loans, loan guarantees, and/or mortgage interest rate buy-downs, for property owners who voluntarily make energy efficiency improvements.  As these voluntary improvements would be incentivized by federal tax dollars, the energy efficiency of the property would require an audit before and after the improvement.

The legislation will create a national building code standard that states will have to adopt or the federal government will set and enforce the state’s building codes.  Although California’s code already would be in compliance with the provisions of the legislation, C.A.R. has historically opposed federal preemption of state laws.  Both C.A.R. and NAR will continue to work with the Senate to amend this section of the bill.  Currently, the Senate is delaying their hearings on energy legislation as they attempt to finish healthcare legislation first.

More information on the “Myths and Facts” of H.R. 2454.

IX. New Business

X. Adjournment