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Real Estate: Could Realty Brokers Have Prevented the Mortgage Meltdown?

Part of the puzzle of the mortgage meltdown has been the role of real estate brokers. Could real estate brokers have done more to prevent home buyers from making inappropriate purchases or using loans which were inherently too risky?

The question has now been raised by the National Association of Exclusive Buyer Agents. NAEBA surveyed members about their closings during the past three years, then verified those findings with public records. Of the 1,849 closings, there were 15 foreclosures. President John Sullivan said “these survey results show what I have always known, NAEBA members take their fiduciary duties to their clients seriously. Troubled times have revealed that the higher standards provided by the Common Law of Agency provided better results for consumers.”

I first wrote about buyer brokerage in 1982 for the Washingtonian magazine. In 1986, attorney Douglas M. Bregman and I wrote Buyer’s Brokerage: A Practical Guide for Real Estate Buyers, Brokes and Investors. The reason to prefer buyer brokerage is very simple: If sellers can be represented by real estate brokers, then why not buyers? Seen the other way, buyers without representation are likely to be at a great disadvantage, yet even in 2008 according to the National Association of Realtors, only 42 percent of all buyers had written buyer brokerage agreements.

NAEBA says that its survey shows “a foreclosure rate of just 0.8%, compared to the nationwide rate of 1.84% in 2008 (the last year for which there are complete numbers). Clearly, respondents to this survey have found that transactions in which the buyer is adequately represented tend to result in much fewer foreclosures than are found in nationwide averages.”

But are the results really so clear? Are 1,849 closings over three years a big deal in the context of a marketplace with millions of annual transactions? Were the purchased properties in the study located in high foreclosure areas to the same extent as home sales generally? How do the NAEBA results compare with buyers who were represented by non-exclusive buyer brokers; that is, brokers who represent sellers in some transactions and buyers in others? What percentage of the 1,849 closings involved subprime loans and ALT-A financing?

The obvious question raised by the study, of course, is this: Could mortgage loan officers — not just real estate brokers — have prevented the mortgage meltdown if under federal rules they were required to represent the best interests of borrowers?

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Appraisers Seek Sensible Reform

There’s been considerable debate regarding the Home Valuation Code of Conduct (HVCC), the agreement to curb appraisal abuses worked out between New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac and their then regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).

A number of leading real estate and lending trade associations are seeking an 18-month HVCC suspension — which no doubt will be followed by another suspension and another suspension so that the consumer protections in HVCC are never implemented. Of course, if we get rid of HVCC entirely then rules that would ban lender conflicts of interest would also be thrown out.

Now, however, several appraisal groups have come out with a proposal which would keep HVCC while getting rid of the elements which are actually causing problems.

As you read the letter below you can see what the appraisers are getting at: In the same way that HMOs add to medical costs so do appraisal management companies (AMCs). Essentially the appraisers want to dump the AMCs, their hidden fees and their absurd rules.

The full letter is below:

July 1, 2009

The Honorable Shaun Donovan
Secretary
Department of Housing and Urban Development
451 7th Street, SW
Washington, DC 20410

Re: Mortgagee Letter 97-46

Dear Secretary Donovan:

On behalf of the more than 35,000 members of our respective professional appraisal organizations, please accept our congratulations on your appointment as Secretary of the Department of Housing and Urban Development. We are confident that your service will prove valuable as our nation works through the challenging times we face.

As you know, real estate appraisers play an important role in the mortgage finance system. Appraisers are independent third-party professionals who deliver unbiased opinions on the market value of real estate held as collateral for mortgage loans. Recent changes in appraisal requirements stemming from an agreement between Fannie Mae and Freddie Mac and the New York Attorney General (i.e., the Home Valuation Code of Conduct) have so greatly worsened a flaw in past guidance received from the Federal Housing Administration (FHA) [i.e., Mortgagee Letter 97-46] that we believe it requires your immediate attention.

Mortgagee Letter 97-46 revised the Department’s policy governing appraisal fees and the use of third-party entities providing appraisal services. In earlier guidance (Mortgagee Letter 97-22), FHA stated that it no longer would establish maximum dollar limits on appraisal fees, but would limit the fee that could be charged to a mortgagor to the amount actually paid to the appraiser when a third-party appraisal management firm was used.

Yet, later in Mortgagee Letter 97-46, HUD states:

“[T]he Department will allow the mortgagor to pay a fee for the appraisal which may encompass fees for services performed by an appraisal management firm as well as fees for the appraisal itself. However, the total of these fees is limited to the customary and reasonable fee for an appraisal in the market area where the appraisal is performed.–

Given the rapidly growing reliance by residential mortgage lenders on appraisal management companies (AMCs) to provide appraisal services, the restriction on total appraisal fees to “no more than– the customary fee for an appraisal has driven down the fees paid to large numbers of appraisers to well below what has been customary and reasonable in given market areas. This has become a problem of enormous proportions because the Home Valuation Code of Conduct (HVCC) has caused a significant transfer of appraisal orders from mortgage brokers to AMCs. Mortgagee Letter 97-46′s pricing restriction is causing many experienced and qualified appraisers decline FHA appraisal assignments ordered by AMCs because of their below market appraisal fees., adding unnecessary and substantial risk to the FHA program. While the HVCC does not directly impose rules upon FHA appraisal ordering practices, many lenders are now applying the same standard to their entire appraisal ordering practices.

Further, regarding HUD-1 reporting, the Mortgagee Letter makes no distinction, as we believe it should, between the fee paid to the individual who performs the appraisal (in compliance with the Uniform Standards of Professional Appraisal Practice) with fees charged for the administration of the appraisal process (the AMC charges). Traditionally, appraisal administration functions of lenders/banks were paid for through overhead costs (i.e., loan processing charges, interest rates, etc.) and reported on the appropriate line of the HUD-1. However, with lenders increasingly outsourcing these functions to AMCs, the costs are being passed through the Appraisal line of the HUD-1 statement. This leaves consumers with the mistaken impression that they are paying the customary fee for the highest level of service from an appraiser who has substantial experience in performing appraisals in their geographic area when, in fact, the consumer is receiving a much lower level of service — often from appraisers who do not know the local market — in many cases. This is not transparent and should be remedied as soon as possible.

The procedure is compounded by a common practice among AMCs to instruct the appraiser not to have any conversation with the homeowner about the actual fee paid to the appraiser. HUD has a rule requiring that the lender pay the appraiser. Some AMCs managing FHA appraisals reportedly have instructed appraisers to collect a fee at the door (despite this being a violation of the HVCC and HUD regulations), keep a part of the fee, and send the remainder to the appraisal management company. In at least one instance that we are aware of, an appraiser blatantly was instructed to commit fraud by submitting an invoice with the appraiser’s name, firm name, date and address, while leaving the amount of the fee blank, which the management company intended to fill in and submit to the lender.

The consequences of this are dire for FHA, mortgagors, and terrible for the mortgage process. With Mortgagee Letter 97-46, many highly qualified and experienced appraisers are declining to perform assignments for AMCs. In many instances, those companies are being forced to use appraisers from distant locations with less experience and training, or more pointedly: those who will work for less. Using less experienced and less qualified appraisers to perform FHA assignments is not a good business practice and is not good public policy.

We know that it was not the intent of these directives to create these issues, and we respectfully would like to request that you review this policy and take immediate action to rescind Mortgagee Letter 97-46. Further, we would like to request that the HUD-1 be revised to include a separate line for all AMC related fees such that the appraisal fee might
be separate from non-appraisal fees. Finally, we request that the Department follow through on a commitment to propose rules for public comment relating to AMCs that would ban inappropriate practices, such as hiring an appraiser primarily on price or turnaround time, without consideration of competency or qualifications. The positive impact of such rules on the lending community, consumers, and the appraisal community would be profound.

Thank you, in advance, for your consideration of this request. If you need additional information, please contact Bill Garber, Director of Government and External Relations, Appraisal Institute at 202.298.5586 or bgarber@appraisalinstitute.org, or Peter Barash, Government Relations Consultant, American Society of Appraisers, at (202) 466-2221 or peter@barashassociates.com.

Sincerely,

Appraisal Institute
American Society of Appraisers
American Society of Farm Managers and Rural Appraisers
National Association of Independent Fee Appraisers

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Since When Are Appraisal Conflicts Okay?

On RealTalk, a listserve with some 30,000+ agents and brokers, several relate that they have had bad experiences under the new Home Valuation Code of Conduct (HVCC) concept, something which only began May 1st.

Why is anyone amazed? Combine a new and different program with a huge number of interactions and there are certain to be bumps in the road.

That said, why don’t we get to the core issue? Is it really a good idea for bankers, brokerages, lenders and builders to have captive appraisers? If not, what are we going to do about it?

Any Conflicts Here?

Let’s imagine this situation: Smith is a buyer broker. Smith has an agency obligation to his client. A home is found. The deal is funded by the lending affiliate of Smith’s broker. The lending affiliate has a record for pressuring appraisers — remember that 11,000 appraisers signed an online petition saying that they had encountered pressure to come up with a “right” price, so such pressure is not unknown. After closing, the purchasers come down with buyer’s remorse. They feel they over-paid for the property. They’re attorney connects the dots — a pressured appraiser produces the “right” valuation, which allows the broker’s lender to justify the funding of the property, which permits the broker to collect a commission, the lender to get a fee, buyer broker Smith to get paid and the buyer to get screwed. All get sued.

Not a plausible claim? No conflicts of interest, real or imagined? Want to test this idea in court?

The point is not that the HVCC is perfect or can be perfect, but then that was not the standard we used previously. Instead, the idea is that we should try to make the marketplace better and more transparent to assure that purchasers do not overpay, lenders do not lend more than they should and mortgage investors do not overvalue mortgage-backed securities. Gross and overt conflicts should not be applauded merely because they’re faster, more convenient and long allowed.

We need independent appraisers and by independent I mean appraisers who are licensed, qualified, local and not pressured into coming up with the “right” valuation to keep their jobs and their livelihoods.

Suspend the HVCC

There is now an effort to “suspend” the HVCC for 18 months, after which there will no doubt be more pressure for additional suspensions. If this comes about, ask yourself if borrowers and mortgage investors benefit. If not, who does? And if we tilt the system so that buyers and mortgage investors feel less comfortable than they should, then who will buy real estate and who will fund mortgages?

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Making The First-Time Buyer Tax Credit Better — Or Worse?

There is now a new effort on Capitol Hill to increase the first-time buyer credit from $8,000 to $15,000. Under S1230, first-time buyers would be able to get a credit equal to as much as 10 percent of the purchase price, up to $15,000.

Not only that, but the time the home would have to be held would be reduced from three years to two years.

This would be a fabulous — with two huge caveats — deal for first-time purchasers. The caveats? It stimulates the wrong side of the marketplace and it costs Uncle Sam too much.

More Inventory

The biggest problem we have in real estate today is too much inventory. There are too many homes for sale, especially too many foreclosed homes for sale by lenders. Home prices cannot stabilize much less rise until we get rid of our excess inventory.

Thus, the problem with the $8,000 credit that we actually have for first-time buyers and the $15,000 credit which is being proposed is that they can be used to buy new homes, homes which do not yet exist. And what’s wrong with that? New homes are additions to the housing stock, they are more inventory — the very thing we don’t want.

The conflict here is that the home building industry has taken a beating in the current recession. It would generally be good policy to help that industry and put people back to work. But what would normally be a good idea simply clashes with the need to cut the stock of homes, not add to it.

Taxes

Republicans and conservatives have been screaming about the cost of bailing out Wall Street, costs made necessary by the failure to regulate banks and real estate brokerages under the Bush Administration. If you can get past the politics and the denial of responsibility, there is cause to worry about increased government spending. Given a $15,000 grant to every qualifying first-time buyer also means that other households will have to pay the tab.

The $15,000 credit has some bipartisan support at this moment, but you have to wonder how many additional homes would be sold. Some percentage of first-time buyers are going to purchase homes anyway, especially with the $8,000 credit which is now in place. In effect we would be giving those buyers an additional $7,000 for doing what they would have done anyway. As to whether we will also have a sufficient number of additional sales to justify the cost of the new program, that’s unknown — you can always find an economic study to support any view you prefer.

If the $15,000 proposal becomes a big deal in Washington, if there is a lot of debate and noise, then savvy buyers are just going to sit back and wait for such a proposal to pass. In the meantime, home sales will lag, inventory will build, and there will be great pressure to knock down home prices. If the bill does pass qualified buyers who wait will be rewarded while sellers will be hurt. If it does not pass, then huge numbers of sales will be lost for nothing.

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500,000+ Grab First-Time Homebuyer Credit

More than 500,000 buyers have used the first-time homebuyer credit to purchase a home. Amazingly enough, more than 38,000 buyers have already claimed the write-off but do not qualify. Why? In most cases because they owned a home during the past three years.

Figures from the Treasury Inspector General for Tax Administration show that a lot of people are using the new tax credit to buy homes.

  • As of March 6, 2009, 567,685 buyers claimed more than $3.9 billion under the First-Time Homebuyer Credit program.
  • Of the 567,685 claims, 38,158 may be disqualified because the buyer had an ownership interest in a personal residence within the past three years, meaning they could not be identified as a “first-time” buyer under program rules.

Bush First-Time HomeBuyer Program

Under the Bush Administration first-time homebuyers were offered a $7,500 tax “credit” to encourage more buying. In fact, the $7,500 was not a true credit, it was actually an interest-free loan that had to be repaid to the government.

While $7,500 in any form could help some first-time buyers, the Bush plan actually created more debt, money that had to be repaid over a 15-year period whether or not the value of the property went up or down.

The Obama First-Time Homebuyer Credit

The Obama plan is substantially different from the Bush program.

First, the credit amount has been increased from $7,500 to $8,000.

Second, the Obama credit is an outright grant. First-time buyers do not have to repay the money.

  • Under the Obama plan buyers get a credit equal to 10 percent of the purchase price but not more than $8,000.
  • If your tax bill is less than the credit, then you pay no taxes and Uncle Sam sends you a check for the balance between what you owe and your credit.
  • You don’t qualify if you’re a nonresident alien, you or your spouse have had an ownership interest in a home during the past three years or your adjusted gross income is $95,000 if single or $170,000 if married. (The credit phases out if your income is above $75,000 if single and $150,000 if married.)
  • You can’t qualify for the credit if you buy from a close relative such as a parent, grandparent or child.
  • If you sell or rent the property within three years then the credit must be repaid. No flippers allowed.

First-Time Buyers

The National Association of Realtors reports that in 2008 “forty-one percent of recent home buyers were first-time buyers.” This percentage is within the typical range seen each year, thus in 2005 when 7,076,000 existing homes were sold you could expect that roughly 2.9 million were purchased by first-time buyers.

First-time buyers are enormously important because they’re a big part of the marketplace. Without first-time buyers moving into the marketplace many existing homeowners could not sell their homes.

Today we have a situation where home sales by unit volume are very much lower than during the past few years, thus anything which encourages sales should be seen as helpful. That said, it will take some time to determine how many additional sales have been created by the federal program for first-time buyers or whether we are just rewarding real estate decisions which would have been made anyway.

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Uncle Sam’s $8,000 For First Time Home Buyers

The government is hoping if you don’t now own a home that you’ll make the logical choice and buy one this year. If you do, there’s an $8,000 credit from Uncle Sam available to help you out.

Last year the government announced that if you were a first time buyer and bought a home that you could get a $7,500 tax credit. However, this was one of those deals with more fine print than a credit card offer.

Under the 2008 program you got a credit equal to 10 percent of the purchase price of a prime residence up to $7,500 — but you had to pay it back either from profits when you sold or repaid at the rate of $500 a year beginning in 2010. In effect, it was an interest-free loan. Good, but not good enough to attract much interest from first-time buyers.

Now we have the 2009 version of the program. The dollar amount has been upped to a maximum tax credit of $8,000 and qualified borrowers do not have to repay the money.

In other words, an outright gift. Real money from Uncle Sam.

Let’s look at some specifics:

___ You have to buy a prime residence, not an investment property or second home. The property can be a single-family home, condo, townhouse or co-op.

___ Your credit is equal 10 percent of the purchase price of the property up to $8,000. The credit is used to reduce your federal tax bill. If the credit is bigger than the federal taxes you owe, you get a check from Uncle Sam for the difference.

___ Not everyone can play. The credit phases out above $75,000 for singles (and is gone at $95,000) and $150,000 for married buyers (and is gone at $170,000).

___ Generally, you’re a “first-time buyer” if you did not hold title to a principal residence for three years prior to buying in 2009.

___ You can buy using funds from a state-run first-time buyer program, money which is typically available with little down and at low rates. Buyers who used state funds were banned under the 2008 program. Be sure to ask brokers and lenders about these programs.

___ You have to own the property for at least three years. If you sell before three years the entire credit can be recaptured; that is, you have to pay it back. There are exceptions according to the IRS:

* If you sell the home to someone who is not related to you, the repayment in the year of sale is limited to the amount of gain on the sale. (See item 8 under Who Cannot Claim the Credit for the definition of a related person.) When figuring the gain, reduce the adjusted basis of the home by the amount of the credit.

* If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within 2 years of the event, you do not have to repay the credit.

* If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit.

* If you die, repayment of the credit is not required. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the credit.

___ To claim your credit you have to file IRS Form 5405.

___ You have to buy after January 1st 2009 and before December 1, 2009. Caution: IRS Form 5405 says the date you acquired the home “is the date you purchased it (or the date you first occupied it if you constructed your main home).” Do they mean the day the sale agreement was signed and accepted, the date of settlement, the day you moved in or the date that the transfer of title was recorded in public records?

For specifics and updates, please get a copy of IRS Form 5405 and see a tax professional.

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Should I Buy With A Land Contract?

A “land contract– — also known as a “contract for deed” or “agreement for sale” — is a way to buy property on an installment basis. You make payments and then after some or all payments are made you get title.

This form of buying raises a number of concerns:

  • Suppose you miss just one payment — do you lose your entire investment?
  • Suppose the place burns down — who gets the insurance money?
  • Is a land contract being used in an effort to avoid a due-on-sale clause with an existing loan? If yes, what happens if the lender calls the mortgage?
  • What if the owner does not pay the mortgage or property taxes and the place is foreclosed? What happens to the equity interest held by the land contract purchaser?

Installment contracts are often used with timeshare sales. The logic is that if someone does not make a payment or pay maintenance it’s easy for the developer to re-sell the timeshare.

Buyers are best-served by holding title and getting a mortgage. If you need to buy with a land contract, at least have a real estate attorney review the paperwork before signing anything.

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Syndicated originally by Content That Works and posted with permission.

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What If We Find Termite Damage?

Question: What happens if a termite report shows termites or termite damage?

Answer: You need to look at the specific terms of the sale agreement. If there’s an active pest infestation, many standard agreements require treatment by a licensed pest controller. Because poisons are involved this is not a do-it-yourself job for sellers. A professional is required and a savvy buyer will accept nothing less.

If there is no active infestation but damage from the past, then some contracts require repair, some require repair up to a certain dollar amount and some require no repair — just notice to the buyer that there has been damage. The bottom line: See what the agreement requires.

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Syndicated originally by Content That Works and posted with permission.

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Should I Buy A House In “As Is” Condition?

Question: We’re considering the purchase of a home on an “as is– basis. We understand that we should get a home inspection and other checks before we buy. However, isn’t the seller also supposed to tell us about any problems?

Answer: Both “as is– and seller disclosure rules vary by state. In the general case you’re right to make the purchase dependent on a home inspection and other checks “satisfactory– to you.

Owners are required to provide seller disclosure statements in virtually all jurisdictions. Even in the case of an “as is– sale, a seller should still explain the problems with the home.

The catch is that the seller may not know what’s a problem and what isn’t. There’s also debate regarding what is big enough to warrant disclosure and what’s so minor it should be ignored. Because no home is perfect, everyone does best when sellers fully explain a home and its quirks and buyers bring in independent inspectors.

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Syndicated originally by Content That Works and posted with permission.

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What is “buyer’s remorse?”

With some frequency it happens that buyers often have a sense of remorse after contracting to buy a home.

Why?

A home is a very large purchase. Not just in terms of dollars, but also in the sense of status, ego, and commitment. And because buying a home is such a transforming event, it naturally and reasonably causes some concern.

But, not to worry. Buyer’s remorse typically passes in quick order.

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