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Nothing Simple With Real Estate

Changes in laws and policies create more challenges in transactions

By BRUCE R. PEABODY

Residential lending remains trapped in a vicious circle.

As houses continue to be foreclosed on and then listed for sale by lenders, these foreclosed houses come on the market and add to the supply of homes for sale. So there are now more houses on the market.

Lenders—driven in part by new Federal Housing Administration, Housing and Urban Development, and Federal National Mortgage Association rules and in part by fear of future loan defaults—have tightened their lending requirements, keeping potential buyers out of the markets. This means that the remaining buyers who do qualify for loans have more houses to choose from and can play sellers against each other, driving down the prices for the houses.

And then, back to the beginning, if sellers cannot sell in the current market, they get foreclosed on and there are more bank-owned properties for sale.

The 2010 calendar year will bring a continuation of this circle, because of the tensions that arise from competing federal goals—the tightened-credit actions required to strengthen the banks and FNMA are exactly opposite those loosened-credit actions required to bring more home purchasers into the market.

Compounding the problems caused by more houses on the market, Congress, FHA, FNMA and HUD all took steps in 2009 to try to halt lender mortgage abuse and to provide consumers with more information about their new mortgage. These rules have required the tightening of lending requirements and so have dropped potential house buyers from the market.

In the past, many lenders, despite FNMA guidelines for FNMA mortgages, would routinely waive any deficiencies in procedures or documentation in order to close on the loans; presumably, lenders were not worried about losses arising in the event of a foreclosure because of continually increasing home values.

Now that there are foreclosures occurring in which lenders do not get paid in full and now that FNMA has refused to buy some mortgage loans which have documentation deficiencies, lenders have begun to seek total compliance with all FNMA rules and regulations, out of fear that, if a loan goes bad, the lenders will not be able to get FNMA to take a non-compliant loan.

While there is no question that following rules is a good thing, this has created a mortgage approval process slower and more complicated than it was before and with potential borrowers now denied who would have been approved before.

For example, starting Dec. 12, 2009, FNMA’s automated loan approval guidelines required that even borrowers with a 20 percent down payment had to have at least a credit score of 620 out of 850 to be approved; before that date, the required score was only 580.

At the same time, even for borrowers with a 20 percent down payment, FNMA decreased the amount of gross monthly income that could be used for monthly payment calculations down to 45 percent. Again, more potential homebuyers were cut out of the market.

Condo Considerations

As of this past July, FNMA began requiring that condominium purchasers buy property insurance for all internal improvements in the unit, such as walls and kitchens; in the past, most lenders were satisfied with the condominium association having insurance on the exterior parts of the unit; now all lenders are requiring this “interior betterments” coverage. Again, this is a good consumer requirement but it has made purchasing a condominium more expensive.

Another new requirement is that condominium associations have mandatory manager’s liability and defalcation coverage. Again, this is a good thing long-term for the unit owner, but, if the association currently does not have this kind of insurance, the buyer will not be able to purchase the unit because the buyer cannot force an association to change coverage.

FHA has revised one of its long-standing condominium procedures. For any unit owner to receive an FHA mortgage, FHA has required that the entire condominium complex be approved for FHA mortgages, pursuant to a complicated and time-consuming application process supervised by the association’s board or manager. FHA mortgages are crucial for condominium unit purchasers, because such units are frequently bought by first-time homebuyers who qualify for the low down payment financing FHA makes available.

In order to get around the lengthy full-approval process, FHA permitted what were called “spot approvals,” in which a lender could make a loan on a unit which the lender reasonably believed would comply with FHA requirements. This spot approval process will expire on Jan. 31, 2010. If the spot-approval process deadline is not extended again, sales of units to first-time buyers will slow considerably, hindering move-up buyers.

The 2009 Home Valuation Code of Conduct adopted by lenders prohibited bank personnel from directly contacting any loan appraiser. The policy goal was to eliminate artificially high appraisals due to fraud. Many lenders have complied with this code by hiring a national appraisal management company, which then hires the appraisers without any contact with the lender.

This has indeed led to lower appraisals in many cases. However, many local appraisers have blamed the low appraisals on the management companies, claiming that those companies hired lowest-cost appraisers, ones not necessarily familiar with local market nuances or neighborhoods and who do their property valuation comparisons based upon computerized databases only. Obviously, if the lender receives a low appraisal, it will be unwilling to loan the requested amount. This can cause transactions to fall apart or prices to need to be renegotiated to a lower level, once again contributing to the cycle of low prices.

Tax Credit

One piece of good news for borrowers in 2010 is the extension of the $8,000 federal tax credit to first-time home buyers with contracts signed by April 30, 2010, who close on transactions by June 30, 2010. The extension also provides a new $6,500 credit for certain repeat home buyers.

Real Estate Settlement Procedures Act reforms passed in 2009 have brought a number of changes for 2010. For example, as of Jan. 1, 2010, there are HUD rules regarding the disclosure to borrowers of settlement charges as set forth in the good faith estimate of closing costs. Formerly, closing costs had to be disclosed to the borrower by the lender within 48 hours of application, but there was no penalty to a lender when there was a difference between the closing costs as initially disclosed and those paid at closing.

Under the new rules, the originally-disclosed charges must be shown at closing in comparison with the actual charges. If the at-closing charges are higher than those originally disclosed, such that there is an increase of the annual percentage rate for the loan of more than 0.125 percent, the borrower must be given a new disclosure and the closing may be delayed by up to seven days to meet disclosure notification requirements. In addition, there are penalties to lenders for violation of this disclosure requirement.

While no one can predict exactly what will happen in the next year, 2010 should continue to be a year of change, as the balancing act between the continued need to jump-start the economy with home sales and the need to put banks on a secure financial footing continues to play out. •