The real estate industry is facing monumental issues in Congress, in the regulatory agencies that govern mortgage financing, in the statehouses that are dealing with critical budget crises and declining property tax revenues, and in municipalities and counties. Each of these issues impact Realtors®’ ability to do business and serve clients.
Mortgage Interest Deduction (MID)
The scenarios most commonly mentioned include caps on value of the deduction, limitation to mortgages on a single property, and elimination of deductibility of equity lines. Others in Congress may well have differing proposals. It is suspected that the recent Republican budget proposal, while now vague, will likely have a form of MID reduction. The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years. In a new survey commissioned by NAR and conducted online in October 2010 by Harris Interactive of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.
Recent progress has been made in bringing stability to the housing market and any changes to the MID now or in the future could critically erode home prices and the value of homes by as much as 15 percent, according to NAR research. This would negatively impact home ownership for millions of Americans, including those who own their homes outright and have no mortgage.
Government Sponsored Enterprise (GSE) Reform
Some in Congress have proposed eliminating Fannie and Freddie in as soon as two years. This comes after the administration in February proposed three possible options for the enterprises. Cutting back significantly on Fannie Mae and Freddie Mac’s involvement in the mortgage market will (1) reduce housing access and affordability for those who are able to become homeowners, (2) create higher profits for America’s big banks, (3) create more “too big to fail” banks, leading to greater consumer risk and taxpayer exposure, and (4) hurt the economy and hinder job creation and growth.
GSE Down Payment Requirements
The Obama administration has proposed to gradually raise GSE down payment requirements to 10%. There is no timetable for this to occur, though the expectation is that this would be a gradual process.
Higher GSE Fees
The administration has called for raising the fees Fannie and Freddie charge in order to make the cost of securitizing through the enterprises closer to the cost of securitizing through investment banks. This will eventually raise the cost of getting a loan.
Conforming Loan Limits
Unless extended, the higher conforming loan limits of $729,750 will expire on September 30, thus making the purchase and sale of homes within our more expensive markets that much more challenging. While NAR has worked successfully to extend the limits in the past, it is not believed the political will exists to get the limits extended again. On October 1, the maximum loan limit drops to $625,500, even in the most expensive housing markets in the country. In addition, while more unlikely, some House Republicans would like to further shrink the conforming loan limit. What’s more, lenders will likely enact this rule sooner so they are assured of compliance by the expiration date.
National Flood Insurance Program (NFIP)
This program has been extended several times and now expires September 30 (for the tenth time in two years). Flood insurance is required in nearly 20,000 communities nationwide. NAR endorses efforts to renew and strengthen the long-term viability of the NFIP for at least five years; improving the accuracy of flood insurance rate maps used to determine which properties require flood insurance; continued inclusion of comprehensive coverage for non-primary residences (e.g., rental properties and second homes); and reforms that provide “full risk” premiums for most repetitive loss structures in many states.
FHA Down Payments
The administration and some Republicans would like to raise FHA down payment requirements to 5% from 3.5%. An increase to as high as ten percent is not out of the question.
Risk Retention Rules
The financial regulators in the coming weeks are expected to propose Dodd-Frank rules requiring those who originate or securitize a residential mortgage to retain 5% of the risk. Reports indicate that the administration, to avoid an immediate shock to housing, will propose a zero risk retention requirement for loans sold to Fannie and Freddie while they are in conservatorship. The GSE zero risk weight prevents an immediate hit to housing finance availability and preserves for at least a few years the need for the private mortgage insurers. The concern is only the biggest banks would have the ability to compete in this new business, thus limiting competition, straining brokerage affiliated mortgage companies and raising rates.
Qualified Residential Mortgage Test (QRM)
The QRM will be the type of mortgage that is exempted from the 5% risk retention requirement under Dodd-Frank as discussed above. FHA and VA loans are also exempted. This test will contain the basic underwriting requirements for mortgages. It includes the reasonable ability to pay standard and the prohibition on equity stripping, income verification requirements, and restriction on fees and prepayment penalties. This is intended to ensure that lenders do not extend credit based solely on the value of the collateral, a practice that during the latest crisis led to a housing asset bubble. Down payment requirements for these mortgages will be 20% and, worse, max ratios would be 28/36. Because two-thirds of buyers put down less than 20%, it is expected that this rule will force more borrowers into FHA, putting further strain on that program. Industry experts estimate that the difference between the cost of a QRM and non-QRM could be as much as 300 basis points, meaning some consumers could have to pay an 8% interest rate when others only pay 5%.
FHLB (Federal Home Loan Bank) Advances
The FDIC frowns upon the use of wholesale funding and is tailoring the deposit insurance assessment system so banks relying heavily on advances pay more than other banks. The Obama administration also has proposed limiting the ability of the biggest banks to use the FHLB system for advances, a move that could reduce advance volume and cause smaller banks to pay more for advances. This is something that could be done without legislation.
HUD’s interpretive ruling on home warranty fees last Summer has created confusion amongst the brokerage community and caused brokerages and members to lose revenue. The lack of clear guidance has also opened home warranty companies and brokerages to liability.
NAR and VAR are taking a variety of steps to address these issues with Congress and the Virginia delegation, respectively. Watch for updates on these issues in your Commonwealth magazine and on www.VARealtor.com as they make their way through Congress.