Congress Passes Financial Regulatory Reform Legislation

On Thursday, July 15, 2010, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) by a vote of 60-39. The President is expected to sign the bill shortly. A large financial regulatory reform measure, the bill includes a number of provisions that will affect the real estate and real estate finance industry, as well as real estate professionals. The bill also creates a "Consumer Financial Protection Bureau" (CFPB) to regulate a broad range of activities.

Other provisions affecting the real estate and lending industry include:
• New rules on seller financing with regard to predatory lending,
• Creation of new anti-predatory lending and risk retention rules,
• Establishment of a "Qualified Mortgage" safe harbor from risk retention rules,
• Rules governing risk retention for commercial mortgage backed securities,
• Changes to rules determining who is an "accredited investor",
• Sunset of the Home Valuation Code of Conduct (HVCC),
• New minimum standards governing the operation of Appraisal Management Companies (AMCs), and
• A 3% cap on fees and points for lenders and affiliates as part of a qualified mortgage safe harbor

Source: NAR 7/2010

House Passes Flood Insurance Reform Bill; Senate Still Needs to Act

By a vote of 329-90, the House of Representatives approved H.R. 5114: the Flood Insurance Reform Priorities Act, sending the legislation to the Senate for its consideration. The bill would reauthorize the National Flood Insurance Program (NFIP) through September 30, 2015. It would also institute financial reforms to address the NFIP's nearly $20 billion in debt, including gradually phasing-in actuarial rates for some older properties. NAR policy supports the long-term reauthorization but not the phase-in provisions, and we will continue to work on these provisions in the Senate, which is expected to develop a different version of the legislation. The outlook for Senate consideration is not clear at this point.

Unless a longer term reauthorization is enacted, Congress will again have to consider another short-term extension before September 30 2010, when NFIP authority is next set to expire. Since September 2008, the House and Senate have not been able to agree on the NFIP debt reforms and thus has resorted to approving a series of short-term extensions. There have been eight such extensions so far and, twice, the NFIP authority has been allowed to expire.

Source: NAR 7/2010

Debate on Bush Tax Rates Begins

The Senate Finance Committee held hearings July 14 to begin the debate about the fate of the Bush tax cuts. At issue is whether they will be extended in all tax brackets or whether the extension will be limited only to those individuals with less than $200,000 of adjusted gross income ($250,000 on a joint return). Also in question is the fate of the 15% capital gains tax rate. President Obama has proposed that it revert to its pre-2001 level of 20%. The hearing was a broad-ranging policy discussion only. Markup on these issues is not anticipated until fall.

Concurrently, ranking Ways and Means Republican Dave Camp (MI) has sent a letter to Treasury Secretary Geithner asking for clarification of the Administration's proposal on capital gains. Mr. Camp has asked the Secretary to state its intent as to whether the 20% rate would include the 3.8% Medicare tax on unearned income for upper income taxpayers and whether it would include the indirect tax rate increases related to the reinstatement of limitations on itemized deductions and personal exemptions that affect upper income individuals.

Notably, the dividends-paying community has a major stake in this debate, as well. If Congress does not act, the top tax rate on dividend income will revert to 39.6%. Current law taxes dividends at a top rate of 15%.

Source: NAR 7/2010

Freddie Mac Announces Florida Condominium Effort

On March 31, 2010, Freddie Mac announced a "Florida Condominium Effort" to increase financing in that hard-hit state. Under Bulletin 2010-8, lenders selling mortgages to Freddie Mac are exempt from certain condo project requirements, representations, and warranties if:

1. The file documents that the existing first mortgage is owned or securitized by Freddie Mac.
2. The property seller's note date is on or before December 31, 2009.
3. The settlement date for the new mortgage is before April 1, 2011.

In another change, condominium unit mortgages secured by units in Fannie Mae-accepted projects that receive the Fannie Mae special approval designation for established Florida condominium projects are not eligible for sale to Freddie Mac.

Source: NAR 4/2010

HAFA Takes Effect on April 5, 2010

April 5, 2010, is the deadline for participating servicers to implement the Home Affordable Foreclosure Alternatives Program, known as HAFA. The program reportedly covers servicers handling more than 90 percent of all mortgages.

Home Affordable Foreclosure Alternatives Program (HAFA)
To help homeowners who are unable to keep their homes under the Home Affordable Modification Program, the HAFA program may make a short sale or a deed-in-lieu of foreclosure a viable option to help them avoid foreclosure. The HAFA Program, which will take effect on April 5, 2010, provides servicer, seller and junior lien holder incentives for these transactions and is designed to simplify and streamline use of short sales and deeds-in-lieu of foreclosure.

HAFA Forms Updated
The HAFA forms and guidelines (Supplemental Directive 09-09) have been updated as of March 26, 2010.

Source: NAR 4/2010

Budget Includes Capital Gains Modifications

The newly-released Fiscal Year 2011 Budget proposal addresses the 2011 expiration of the 15% tax rate for long-term capital gains. Legislation in 2003 reduced the rate from 20% to 15%, effective through December 31, 2010. The proposed change would leave the 15% rate in place for those who file single tax returns with adjusted gross income (AGI) of no more than $200,000. The 15% rate would be retained for married couples filing joint returns with no more than $250,000 AGI. The proposal would become effective January 1, 2011.

Source: NAR 2/10

Administration's Budget Proposes $38.5 Billion for Housing Programs

President Obama is requesting $48.5 billion for the US Department of Housing and Urban Development (HUD). The HOME Program includes a request for legislation that will provide $1 billion for the Housing Trust Fund. HUD expects Hope Bonds to generate $2.37 billion for administrative costs of the Hope for Homeowners Program (H4H) in anticipation of $14 billion in loan volume in 2010 and 2011.

The Federal Housing Administration (FHA) Mutual Mortgage Insurance Program account requests $400 billion in loan guarantees. The budget proposes a statutory revision to allow FHA more flexibility in setting annual premiums and incorporates underwriting changes to improve risk management. The improvements focus on three primary criteria:

1. effect on broader housing market stabilization and recovery;
2. effect on specific targeted populations;
3. effect on the FHA's capital reserves.

The budget requests a $250 million credit subsidy for the Home Equity Conversion Mortgage (HECM) Program. The administrative budget is $207 million, an $18 million increase to allow for the implementation of risk management enhancements.

Source: NAR 2/10

New Incentive for Buyers of Fannie Mae-Owned Properties

On January 28, 2010, Fannie Mae announced incentives for buyers to help clear its inventory of homes listed for sale on HomePath.com. To be eligible, a buyer must be the owner-occupant (not an investor), have the offer accepted on or after January 28, 2010, and close before May 1, 2010. Buyers may receive an incentive of up to 3.5% of the sales price for closing costs or the purchase of a new Whirlpool® appliance by Fannie Mae, or a combination at the option of the buyer.

Source: NAR 2/10

More than 5 Million Homes Will be Worth Less than 75% of Their Mortgage
By DOUGLAS MCINTYRE

About 5.1 million mortgage holders (or roughly 10% of Americans with mortgages) will own homes that are worth 75% or less than what they owe on their mortgages by mid-June. This is the conclusion of a new study by First American CoreLogic given exclusively to The New York Times. One of the firm's senior economists, Sam Khater, told the paper, "People's emotional attachment to their property is melting into the air." The most astonishing number in the study is that it would take $745 billion to get mortgages to the point where no home loans in the U.S. were underwater.

This research is another example of why the housing problems in the U.S. are so intractable. Building permits rose 11% in December, but housing starts were down. RealtyTrac recently forecast that about 3 million homes will go into foreclosure this year, up slightly from the 2009 numbers. A large number of interest-rate only mortgages will reset higher in the next two years, raising monthly payments on those loans.

Despite low mortgage rates, which have in some cases fallen below 5%, and tax credits for some home buyers, people are reluctant to purchase new houses. Some fear that they could become unemployed like 10% of the full-time work force. Others are concerned that home prices will continue to fall and that even a home bought in 2010 could have an underwater mortgage of its own in 2011.

The likelihood that homeowners will reach a point of despair also increases as more homes drop below the value of the mortgages that their owners carry. That in turn makes it more likely that people will hand their keys over to the bank. And troubled banks, particularly regional and community banks, are often not in good enough financial shape to handle mass mortgage defaults, which then puts pressure on the FDIC's resources.

The federal government is left with few options. Even if it saw fit to put $745 billion into programs that would reduce mortgages on homes with underwater loans, the cost is too high with the federal budget deficit for this fiscal year projected to be nearly $1.6 trillion.

Without a solution, and there are almost certainly no solutions forthcoming, home values will continue to drop this year and probably into next.

Source: The Daily Finance 2/10

Congress Urges Solutions to Commercial Real Estate Crisis

Last week 79 Member of Congress wrote to Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke, urging them to take a more active role in commercial real estate markets. While residential markets recover, commercial real estate markets continue to suffer from a scarcity of credit, ballooning delinquency rates and nearly $1.4 in commercial real estate debt coming due in the next three years. The letter, lead by Reps. Kanjorski (D-PA) and Calvert (R-CA) was bipartisan, and asked the agencies to establish clear methods for loan modifications, develop metrics to differentiate performing and non-performing properties, and take other steps to provide investor confidence in commercial real estate markets.

Source: NAR 2/10

Congress Allows Estate Tax Repeal

Throughout 2009, tax professionals insisted that Congress must act on the estate tax. Efforts for a compromise failed at year-end, however, so the scheduled repeal of the estate tax has now occurred. Repeal, however, is a mixed blessing. During 2010, those who die with substantial estates will transfer their assets to their heirs tax-free. However, the value of the assets in the hands of the heirs (their "basis") will be the same as the original owner's basis. If the heirs later sell those assets, the heirs will pay capital gains taxes on any gain at the rate in effect at the time of the sale. No guidance has been provided for heirs who are unable to determine the basis of the inherited assets.

In 2011, the pre-2001 law will be reinstated so that the estate tax exclusion would be $1 million and the maximum tax rate would be 55%. Before Congress adjourned for 2009, the House passed a permanent rule that would have left 2009 law intact with a $3.5 million exclusion and a maximum rate of 45%. To facilitate this change, the Senate Budget Resolution included a so-called "unfunded reserve" that would have allowed this change to be made without a "pay for." The Senate was unable to reach agreement on the terms of either a permanent or temporary estate tax rule, however, so repeal is now in effect.

Some legislators have said that Congress will act in 2010 to make 2009 law (or something slightly more generous) permanent, and that the changes would be retroactive to January 1, 2010. Other commentators believe that it would be unconstitutional to make retroactive changes to the estate tax, however, because the estate tax is driven solely on the question of the date of death.

Source: NAR 1/2010

Fannie Mae Launches Special Condo Project Approval Designation for Florida

On January 7, 2009, Fannie Mae announced a new program to help increase the availability of mortgages in the Florida condo market, which is probably the hardest hit condo market in the nation. Fannie is conducting a review of hundreds of established condo projects that are not otherwise approvable, to determine which may receive a "Special Approval" designation. For projects meeting the criteria designed to measure stability of the project, lenders will be able to deliver mortgage loans for units in these projects. Projects that receive "Special Approval" will be listed on www.fanniemae.com. The News Release includes a quote from NAR's First Vice President Moe Veissi supporting "this important step to make condo loans more readily available in Florida." NAR immediately contacted both Freddie Mac and HUD asking them to take similar action for their own condo programs.

Source: NAR 1/2010