Real Estate Finance Committee
San Jose Ballroom III
Marriott Hotel
San Jose, CA
Thursday, October 8, 2009
9:00 AM – 11:30 AM

Presiding:
Skip Zeleny, Chair
Ed Herold, Vice Chair
Linda Lee, Vice Chair
Bill Jansen, Executive Committee Liaison
Jeannette Way, NAR Committee Representative
Bielle Moore, GAD Liaison

Staff:
Stan Wieg, Staff Vice President
Matt Roberts, Federal Government Affairs Manager

I. Opening Comments

II. REO Advisory Group Report: Robert Bailey, Chair

III. State Issues
A. Action Items
1. Portable Appraisals* Please see included Issues Briefing Paper that discusses the proposal to consider sponsoring legislation to force a lender to accept an appraisal ordered by another lender in connection with a loan application.  Please see also federal issue update on FHA adoption of  HVCC principles.

2. Appraisal Management Company regulation* Please see included Issues Briefing Paper on SB 237 (Calderon) which subjects Appraisal Management Companies (AMCs) to Office of Real Estate Appraisals (OREA), and whether C.A.R. should consider additional regulatory authority based upon OREA reactions to the new bill. 

B. Discussion  Items
1. Mortgage Loan Originator Update
a. SB 36 (Calderon), AB 34 (Nava) License Endorsement. Both bills utilize a license endorsement approach to implement the S.A.F.E. Act requirements regarding real estate licensees. C.A.R. has supported both bills and both are awaiting action by the Governor.

b. AB 33 (Nava) Financial Services "super agency." The Administration sponsored bill to consolidate all financial services within a new "super agency" Department of Financial Services has been amended at C.A.R. request to preserve the separate identity of Department of Real Estate, but would transfer regulation of mortgage loan originators to the new agency.  The bill has been held in the senate as a 2-year bill pending resolution of objections by banks and other lender groups.

c. AB 260 (Lieu) Higher cost loan regulation. The bill is a re-introduction of legislation by the same author that was vetoed last year because it created an unlevel playing field and because it contained one-sided plaintiff attorney fee provisions. C.A.R. had requested the veto in 2008, and remains opposed to the current bill. The current bill has been amended to remove the attorney fee provisions, but still unequally burdens mortgage loan brokers and C.A.R. remains opposed.  The bill has passed and is awaiting action by the Governor.   

2. Loan Modification
a. SB 94 (Calderon). The bill prohibits "cash up front" loan modification contracts. Based upon the authors addition of C.A.R. requested language to clarify the definition of an advance fee, the inclusion of the flexibility to engage in fee for service contracts and a 2013 sunset date, C.A.R. supports the bill.  The bill is awaiting action by the Governor. 

b. AB 764 (Nava). The bill prohibits any advance payment for loan modifications, but contains no flexibility to allow fee for services contracts and prohibits any compensation until the borrower is bound in a new loan. C.A.R. opposes; the bill is awaiting action by the Governor.

IV. Federal 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. Financial 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.

V. Other Business

VI. Adjournment