June: National Home ownership Month

This special month – Home ownership Month – is being observed by real estate organizations and firms in a variety of ways. For example, Freddie Mac selected this month to kick off their hosting of training sessions for housing counselors. The sessions are designed to enhance the skills of counselors in communicating financial information to consumers.

The projected up-down real estate market

A group of economists surveyed by the National Association for Business Economics reported that “residential investment remains a dominant force dampening growth in 2007.”  Almost half of those surveyed expect the bottom in housing will not be reached until the fourth quarter of this year.  A third of the survey respondents think problems in the subprime market are delaying or deepening the housing correction.

Despite such dire predictions, sales of new single-family homes are on the increase.  In April (the most recent month where data is available), new home sales were up by 16.2 percent over the previous month, according to a report from the U.S. Commerce Department. “Builders are pulling out all stops to work down heavy inventories in the face of weak demand that's been exacerbated by the subprime-related tightening of mortgage credit conditions,” said Brian Catalde, president of the National Association of Home Builders.

“Our surveys show that the majority of builders are cutting prices and offering substantial non-price sales incentives, and their efforts are bearing fruit.  We're also seeing buyers gravitating toward lower-priced homes to counter their affordability problems.”

Nonresidential and rental apartment construction up

Another segment of the real estate market that's still thriving is nonresidential construction, especially in the West and Midwest , according to a report from the American Institute of Architects. With about nine to twelve month lag time between architectural billings and construction spending, current data indicates a favorable market for nonresidential construction at least through this year.

The planning and construction of rental apartment buildings also looks very promising in coming months, due to growing demand for rental units. “We've seen the national vacancy rate for rental apartment developments drop more than two percent between the first quarter of last year and the first quarter of this year,” said David Seider, chief economist for the National Association of Home Builders. “Despite some competition from unsold condo units that have come onto the market as rentals in recent months, demand is still outpacing supply for rental apartments.”

The ominous transfer tax reviving

In an effort to beef up tax revenues, an increasing number of government entities are reviving the old technique of imposing a special tax on all property transfers. It seldom works in areas where many residents actively express their negative feelings about such a tax – but does work in other areas.

Real estate transfer taxes are state and local taxes assessed on real property, including homes, when ownership is transferred between parties. In some cases, these tax monies are used to fund programs designed to preserve depleting open spaces in commercial or residential areas, and to fund housing programs for low-income residents. These are very worthy investments in communities. But collecting the needed funds by imposing a real estate transfer tax creates a real problem for home buyers and sellers – especially in cases where first-time buyers are barely able to come up with needed cash to cover the required down payment and basic closing costs.

Most real estate organizations vehemently oppose such a tax. The National Association of Realtors, for example, opposes transfer taxes or fees under any condition, whether as a general or earmarked revenue source. “Transfer taxes are a burden to buyers and sellers, particularly at time of closing,” NAR stated in a report. They noted several specific problems created by the imposed taxes, such as the following: The taxes have a negative impact on housing costs and economic development. They reduce housing opportunities across the income spectrum. They are a particularly poor revenue source for the general operating budgets of state and local governments because of their extreme volatility.

Another even more devious tax collecting plan is targeted at home builders. They have long been charged fees by local governments and agencies to cover costs of roads, schools, parks and other community assets in areas where residential developments are planned – costs that are passed on to buyers. When those fees became so large they couldn't be further increased, a new plan was implemented in some areas. Builders must attach a transfer fee requirement to the deed of each sold home. It mandates that every time the home is sold for a specified number of years a transfer fee must be paid – typically 1 to 2 percent of the sales price.

This simply passes on the tax burden to future home buyers, making it more difficult for sellers to sell, and buyers to afford, the home. This could continue for decades and generations.

Realtors taking mortgage applications

Considering the sluggish home sale market, it's not surprising that some real estate brokers are seeking other ways to supplement their sagging income.  Some are turning to selling and originating mortgages. Some mortgage firms are quick to harness this large manpower pool and potential sales force.  Below is a span e-mail message recently sent to Realtors:

“Hi, Good news. eMyLoan.com is paying Realtors/agents to originate loans. They allow the Realtor to drastically undercut the mortgage broker's rate thus saving the Realtor's customers in closing costs and interest rates. You don't need to be told this will also double your revenue stream. You can originate in all 50 states. No licensing needed.”

An attorney associated with the National Association of Realtors commented on the legality and ethics of such an arrangement. “As to whether the proposal is legal, that's a RESPA (Real Estate Settlement Procedures Act) question,” he said.  “Any payment for the referral of settlement service business is going to be illegal under Section 8 of that Act unless it falls within one of the exceptions described in the Act.  The most common ones referred to in the mortgage origination situation are the employer-employee exception and the reasonable value of goods or services actually provided exception.

“Regarding its ethics, it should be noted that Article 7 of our NAR Code of Ethics states, 'In a transaction, Realtors shall not accept compensation from more than one party, even if permitted by law, without disclosure to all parties and the informed consent of the Realtor's client or clients'.”

The NAR attorney also noted that the Department of Housing and Urban Development (HUD) has issued guidelines related to mortgage companies paying a third party a fee for loan origination work without violating the RESPA Act.  It made it clear that the mere taking of a loan application is not sufficient work to justify a fee being paid.

Speaking for eMyLoan, Tim Noonan said this: “Having Realtors originating loans is nothing new. As long as the Realtor has the customer sign an affiliated business disclosure agreement most states have no issues with this concept. We have been around for a couple of years and just recently started calling on Realtors.  The response has been good.  We are hopeful that we will be able to sign-up 50 to 100 realty organizations within the next year.”

Most consumers who are selling or purchasing a home want to work with a Realtor who works full-time in the professional marketing of real estate -- not one who dabbles in other industries to create extra profit-centers.  By the same token, when they are shopping for a mortgage, they want to deal with a full-time mortgage professional. Fortunately, most Realtors are still serious full-timers.

The positive side of subprime mortgages

There's been so much negative news in recent months about problems related to subprime mortgages it has eclipsed the positive benefits of such loans. Subprime mortgages are designed for individuals and families with no credit or poor credit history. They have made it possible for millions of Americans to purchase a home who otherwise would be unable to do so. Without the availability of a subprime mortgage many families would likely remain as renters for years to come, being unable to attain their dream of Home ownership

“Almost 81 percent of subprime borrowers are making timely payments and are building a sound credit rating,” said John Robbins, chairman of Mortgage Bankers Association. “They are helping strengthen the communities in which they buy homes. However, potential new laws now being discussed by some legislators and regulators may result in tightening access to credit, robbing prospective home buyers of the benefits of subprime loans as well as closing the door to current subprime borrowers wishing to refinance.”

Robbins noted that MBA is in the process of establishing foreclosure intervention programs in cities at high risk by helping to train and certify more foreclosure counselors.

2007: Turnaround year for mortgage products

This may be the year when the home mortgage market returns to more traditional loan products, according to a survey released by the National Association of Mortgage Brokers. The survey findings represent the first results in what will be an ongoing effect by the association to investigate trends and practices in the mortgage industry, it was announced.

Prime loans made up the largest sector of the mortgage lending marketplace, the survey results indicated. More than 60 percent of all loans originated by brokers were at prime, where customers had a FICO credit score of 650 or greater. Fixed-rate mortgage also gained in frequency. Last year, fixed-rate products accounted for less than half of the loans originated by brokers. This year, nearly 54 percent of new loans feature fixed interest rates.

“The research shows that mortgage brokers react quickly to changes in the marketplace,” said David Olson, president of Wholesale Access, a research firm that conducted the survey. “Brokers have moved away from high-risk subprime mortgages toward more fixed-rate loans requiring higher down payments and higher FICO scores.”

“60 Minutes” TV program off-base

A recent report on the CBS television program “60 Minutes” has sparked quite a furor within the real estate brokerage industry. Leslie Stahl interviewed a representative of the now-defunct eRealty and others. The consensus of their remarks included the assumption that the going commission rate charged by brokers is 6 percent and that the governing body for the industry is the National Association of Realtors. The interviewees also asserted that new rules threaten to block Internet discounters' access to multiple listing services (MLSs).

After the program aired, NAR pointed out that all commissions are negotiable. The average rate today is not 6 percent, since an increasing number of Realtors are charging a lesser percentage rate in the wake of rising property values. The overall average rate is now close to 5 percent, according to a study by Real Trends, a research and publishing firm.

Also, NAR is not a “governing body” for the real estate industry. It's a trade association – owner of the registered term, Realtor. Local boards of Realtors are member organizations of NAR, and most MLSs are owned and operated by local boards. Not all brokers are Realtors – only those who are members of local boards and NAR.

NAR has sent a strongly worded letter to CBS correcting some of the statements made on the “60 Minutes” broadcast, and requesting the opportunity to provide a spokesperson to correct the misrepresentations on a future program. Prior to the airing, NAR offered to provide representatives to participate in the discussion, but CBS declined to accept their offer, according to NAR.

Mortgage fraud on increase

An ominous report on the increasing frequency of mortgage fraud cases was recently released by the Mortgage Asset Research Institute, LLC. “Fraud against mortgage lenders is a growing concern to all who have a stake in our industry, said John Robbins, chairman of Mortgage Bankers Association. “While we continue to try to get our arms around the full scope of the problem, the MARI report significantly helps the industry better understand where we need to focus efforts in defending companies and communities against mortgage fraud as it increases in frequency across the nation.”

The most common types of fraud found in mortgage originations over the past year are in areas of employment history and claimed income, according to the report.

Tax deductibility spurs PMI sales

The new tax deductibility of private mortgage insurance (PMI) premiums has produced a boost in sales for the PMI industry. However, many prudent home buyers still go to great lengths to avoid the high cost of that insurance. The coverage protects the mortgage lender, not the borrower. It's often required when the mortgage loan exceeds 80 percent of the property's market value. A typical scenario is for a home buyer to pay 10 percent as down payment and obtain a 90 percent mortgage (with PMI coverage).

The insurance fees can be paid in several ways, depending on the company used. Borrowers can choose to pay the first-year premium at closing, then an annual renewal premium is collected monthly with the regularly mortgage payments. Or the borrower can pay no premium at closing, but add on a higher monthly premium charge to the principal, interest, tax and insurance payments.

Buyers who want to avoid paying for PMI at closing and not increase their monthly payments can finance a lump-sum PMI premium into their loan. There are various options available to the borrower, but all are expensive. Costs vary, of course, with different insurers and plans offered. A highly leveraged adjustable-rate mortgage would require the borrower to pay a higher premium to obtain coverage. Buyers with 5 percent down payment can expect to pay a premium of about 0.78 percent of the annual loan amount. But the premium would drop to about 0.52 percent if a 10 percent down payment was made on the purchase.

As mentioned, those PMI premiums are deductible cost items on this year's tax returns – at least partially so. That is, if the home buyer and property qualify. Borrowers can qualify for the write-off only if an itemized return is filed. And the deduction is limited to borrowers with adjusted gross incomes of $109,000 or less. The write-off applies only to a mortgage on a principal residence and one vacation (second) home held with certain personal use requirements. Investor mortgages are not eligible. It applies to PMI premiums on refinance mortgages up to the original loan amount – not cash-out refinances. The deduction does not apply to lender-paid mortgage insurance where the premiums are built into the loan.

How banks' commercial mortgage portfolios are backed

On May 31, the Federal Financial Institutions Examination Council (FFIEC) released new data that details, for the first time, the shares of banks' commercial real estate mortgage portfolios that are backed by income-producing properties and the shares that are backed by owner-occupied commercial properties. The data shows that a large portion of bank loans backed by commercial real estate are not CRE loans.

As part of a recently developed series by the Mortgage Bankers Association called MBA Research PolicyNotes, this topic has been explored in the current edition. MBA Research PolicyNotes is written by MBA's research and economics staff to provide an explanation for some of the most important policy topics affecting the real estate finance industry. The Research PolicyNotes is available on MBA's website, www.mortgagebankers.org .

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.