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Phillip C. Querin
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Housing News and Views
[May 2008]
Here's a snapshot of what's happening nationally and locally on the housing front.
RESPA Reform
The Real Estate Settlement Procedures Act or “RESPA” has been in existence since 1974. One of its primary purposes was to assist consumers in understanding the costs associated with the closing or “settlement process.” To that end, HUD requires that a form known as the “Good Faith Estimate” or “GFE” be provided to borrowers within three business days of receiving the loan application. This GFE can be replaced and superseded by one from the lender, which is again replaced by the final figures on the HUD-1. Since some figures cannot be known at the time of issuance of the GFE, the law provides that it merely be an estimate. There is really no legal liability if the GFE is wrong. As a result, some maintain that there isn't a lot of good faith in good faith estimates.
Additionally, one of the most significant costs borrowers should know about when comparing loan brokers and loan programs is the amount the broker is actually being paid by the lender for securing a particular loan. This is called the “yield spread premium” or “YSP.” Oftentimes, the higher the interest rate on the loan, the higher the YSP to the broker. Currently, how the YSP should be disclosed on the GFE has been the subject of much controversy and confusion.1
Now HUD is once again2 involved in attempting to pass RESPA reform.
…is to protect consumers from unnecessarily high settlement costs by taking steps to: improve and standardize the Good Faith Estimate (GFE) form, to make it easier to use for shopping among settlement service providers; ensure that page one of the GFE provides a clear summary of the loan terms and total settlement charges so that borrowers will be able to use the GFE to comparison shop among loan originators for a mortgage loan; provide more accurate estimates of costs of settlement services shown on the GFE; improve disclosure of yield spread premiums to help borrowers understand how they can affect their settlement charges….
Will the current effort at reform be successful this time? It is doubtful. Since the RESPA law touches so many different settlement service providers, such as title companies, Realtors®, lenders, mortgage brokers, etc., many different industries are weighing in on those regulations they regard as particularly burdensome. For example, one portion of the proposed law requires that title companies orally recite a “closing script” to the consumer, which has been estimated to take 45 minutes.3 Not unexpectedly, if something is to pass, it will likely entail some significant horse-trading. Hopefully, what is in the consumer's best interest – which is supposedly the ultimate goal of RESPA reform - will not be forgotten in the process.
Oregon's New Mortgage Foreclosure Consultant Law
In a statewide effort to promote consumer protection, the Oregon Legislature passed HB 3630 in the 2008 Session.4 The primary goal of the bill is to assist homeowners who are facing an actual or potential foreclosure. Realtors® should be aware of this law, since it indirectly may affect a portion of their business, the short sale.
The bill defines a “mortgage consultant as “…a person that directly or through association with another makes a solicitation, representation or offer to a homeowner to perform, for or with the intent to receive compensation from or on behalf of the homeowner, a service that the solicitation, representation or offer indicates will accomplish one or more of the following: (a) Prevent, postpone or stop a foreclosure sale. (b) Obtain a forbearance from a beneficiary or mortgagee….” (Emphasis added.) If one meets the definition of a mortgage consultant, they automatically become subject to a variety of legal requirements that must be met before they are able to provide, or be paid for, mortgage consulting services. These requirements include such things as a written contract (written in a language that is spoken by the homeowner and that was used in discussions between the homeowner and foreclosure consultant) and a full disclosure of “…any compensation the foreclosure consultant or a person working in association with the foreclosure consultant is to receive….” and contain an explanation of certain rights of cancellation. The failure to comply with this law may constitute an unlawful trade practice, which could result in the assessment of damages and an award of attorney fees.
Clearly, the short sale process is, in some cases, intended to prevent, postpone or stop a foreclosure sale. Since licensed real estate agents engaged in professional real estate activity are expressly excluded from this law,5 at first blush it should seem to pose no particular risk to them. However, since HB 3630 prohibits “direct or indirect” foreclosure consultant activity, agents who contract with third parties - such as private companies purporting to have short sale expertise - could inadvertently become subject to the new law if the third party was not a licensed broker, or qualified under a permissible exception.6 Furthermore, although not addressed in HB 3630, brokers who contract with third party short sale companies in consideration of a share of the commission, could be in violation of ORS 696.290, which prohibits the sharing of a commission with an unlicensed person.
Accordingly, while real estate licensees engaging in short sale transactions themselves , are at comparatively little risk of running afoul of the new foreclosure consultant law,7 those contracting with third party non-licensed short sale service providers are at a greater risk of inadvertently becoming subject to it.
Housing Bubble or Credit Bubble?8
While many people are fond of talking about the “housing bubble,” by itself, such a characterization is overly simplistic, since it implies that the phenomenon occurred in a vacuum, independent of external forces.
In reality, the housing “bubble” was primarily the result of high demand fueled by questionable activities of all of the major players in the credit and finance markets. Loan underwriting standards became lax or nonexistent when banks and other lenders discovered that they could bundle and sell their non-conforming loans to Wall Street. This resulted in less attention being paid to underwriting standards, because once a loan was made, an unqualified borrower became someone else's problem. Wall Street became enamored with these collateralized securities because of the higher yields, especially on the riskier subprime and Alt-A loans. Along with the relaxation of underwriting standards came the proliferation of mortgage products such as option-ARMs and negatively amortizing loans, which permitted borrowers, even those with good credit, to frequently purchase more home than they could have afforded in a more cautious credit market. Add to this the easy availability of home equity lines of credit, or “HELOCS,” which gave homeowners quick and easy access to money for virtually any reason,9 and you had a recipe for disaster. As long as credit was easily available and housing prices increased, there was a belief that one could always re-finance out of a bad borrowing decision. Today, subprime and Alt-A loans are virtually a thing of the past, and lenders are now freezing their borrower's lines of credit on some existing HELOC loans.
Along with the credit bubble came the flippers, investors, and fast-buck artists. Nationally and locally, we saw the run-up in construction and prices, especially in the ubiquitous condominium market, fueled, in part, by speculation and flipping. As a result, the concept of “home” began to change from being a place to live, to being a commodity - not unlike stock - that could be bought and sold quickly for a fast profit. Even the mainstream press has now adopted a market timing mindset, opining to whoever will listen, when homeowners and purchasers should make their sell and buy decisions. All the while, interest rates remain at historic lows, and intrinsic residential home value has never really changed.
The task for the Realtor® industry is threefold: First, understanding that the “problem” was not really real estate, but credit. Secondly, getting the word out to homebuyers that with the tightening of lender underwriting standards, the rampant speculation that fueled the housing boom has largely disappeared. And third, convincing consumers that the decision to buy a home should be based more upon lifestyle decisions and less upon making a fast buck.
Supervising REOs
For those Realtors® who are involved in REO property, short sales and foreclosures, you have undoubtedly noticed not only an influx in banks REO departments, but an increase in the number of REO properties with jumbo loans – i.e. those in excess of the FNMA limit of $417,000. No longer are REO properties limited to lower priced or run-down homes. Bank inventory now consists of higher-end and luxury homes, whose borrowers, some of whom climbed on the easy-credit gravy train, have now found that they could not get off in time. For lenders this poses a different sort of problem than in year's prior. The carrying costs for higher-end homes are different. As noted in a recent Housing Wire article:
For lenders, a growing glut of high-end REO can be particularly problematic, according to IAS CEO David McCarthy. “The carry cost is so much greater,” he said. Carry cost typically refers to the amount of money needed to “carry” an asset on the lender's books, and includes accrued taxes, property maintenance, and the like; traditional cost of carry can run roughly 2.5 percent of a property's value. The result, McCarthy said, is that many servicers and their investors are placing extra attention on the valuation of higher-end properties, in an effort to make sure that they can sell more quickly and keep loss severity as low as possible.10
For Realtors®, this information should be taken to heart. Not only is it a potential source of inventory for buyer agents, but those looking for listing opportunities may consider talking with some of their lender contacts.
FOOTNOTES
1 This is putting it mildly. For those interested in better understanding the issue, read the article by Jack Guttentag, aka “The Mortgage Professor,” entitled “Eliminating Yield Spread Premium Abuse” at www.mtgprofessor.com. In fairness, however, there are many in the mortgage industry that favor better YSP disclosure, since it enables consumers to more accurately compare the true cost of one broker's loan program with another.
2 “RESPA Reform” has been an ongoing, and unsuccessful, endeavor since at least 2002. For a review of the proposed legislation in its entirety, go to the Federal Register / Vol. 73, No. 51 / Friday, March 14, 2008 / Proposed Rules.
3 See, “Industry Slams HUD's RESPA Proposal” Inman News, May 22, 2008.
4 The full text of the law can be found at http://www.leg.state.or.us/08ss1/measpdf/hb3600.dir/hb3630.intro.pdf.
5 Caveat: Real estate agents engaging in short sales in Washington State are at far greater risk, since that state's version of the foreclosure consultant law does not – inexplicably - exclude real estate licensees.
6 Moreover, some third-party contracts with brokers provide that the licensee will hold the short sale expert harmless of all liability.
7 However, licensees should nevertheless be careful in their advertising. It is one thing to promote your skill in short sales – but quite another to suggest that you can assist homeowners in preventing, postponing or stopping a foreclosure.
8 The opinions expressed below are solely those of the author.
9 The New York Times reports that with the drying up of HELOC money, auto manufacturers and dealers are seeing significant sales declines. “Auto Industry Feels the Pain of Tight Credit” May 27, 2008.
10 Inside Look: Real Estate Owned Gets Jumbo-Sized, Housing Wire, May 23, 2008.
© Copyright 2008. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.
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