New mortgage lending rules bring mixed results

Kenneth R. Harney on May 27, 2016

WASHINGTON – Eight months into the most comprehensive and challenging set of rule changes affecting home buyers and sellers in more than four decades, how’s it all going?

Are the federal government’s revised procedures governing mortgage lending and closings doing what they promised- improving consumers’ ability to understand the fees they’re being charged by lenders, title insurance companies and others at settlement?

Have the changes, which took effect Oct. 3, led to the delays and chaos in home mortgage transactions that were widely feared? Or have they amounted to a Y2K pseudo scare – no big deal?

The preliminary results are rolling in and they’re mixed. There’s strong evidence that average times to close loans are longer than they were under the old rules. Rather than estimating roughly 30 days to final settlement, most realty agents are writing sales contracts with extended closing deadlines.

The average time to close on a home purchase mortgage nationwide last month was 45 days, according to loan technology company Ellie Mae. That’s down from the 51 days average in January but above historical norms.

But a new study gauging consumers’ experiences before and after the new rules took effect suggests that things may be looking up. It found that 92 percent of buyers are taking time to review their mortgage documents in advance of the settlement – making use of the three days they’re now allotted to do so.

Under the old rules, just 74 percent said they had taken time to study fees and look for overcharges or errors. The study, conducted among 800 buyers who settled before the rules changed and 700 who went to closing after the rules took effect, was sponsored by the American Land Title Association.

Meanwhile, a separate survey of 1,000 buyers who had purchased and settled on homes under the previous rules and purchased another house more recently reported drawbacks and benefits. Nearly two-thirds said it was “easier” to close under the old system, and nearly 60 percent said the process now takes longer.

But 68 percent said the new disclosures – one that replaced the Truth in Lending and Good Faith Estimates forms, and a second that replaced the “HUD-1″ settlement document – “did a better job preparing them for the closing costs they would have to pay.” Sixty-five percent said the costs and fees are now “explained better.”

Buyers also were pleased by being encouraged to shop for settlement services such as title insurance. Three quarters said they took advantage of the opportunity to comparison shop and 55 percent said they saved money as a result. The study was conducted by ClosingCorp, a technology and data company.

Elizabeth Weintraub, who bought a home last winter in Hawaii, illustrates the mixed feelings some consumers have about the rule changes. Although she is a real estate agent in Sacramento, California, and believes that “most lenders” have adjusted to the new forms and procedures, the loan officer who handled her island purchase made mistakes that led to a four-day closing postponement. He emailed key documents to the wrong place, she said, and missed the three-day deadline for providing closing information in advance. To remedy this, she said, he altered the date on the Closing Disclosure – a violation of federal regulations.

“It was a comedy of errors throughout,” she told me.

Lise Howe, a realty agent with Keller Williams Capital Properties in Rockville, Maryland, said that things got bumpy in the early months – she had two settlements delayed in December alone – but most closings since then have proceeded relatively smoothly. But errors on settlement documents continue to be a problem. In a closing in mid-May, she said, a major national bank miscalculated fees and ultimately had to provide a $2,000 credit to the buyers.

Lenders, for their part, say compliance with the extensive changes – the regulations issued by the Consumer Financial Protection Bureau run to nearly 1,900 pages – has been a massive and costly challenge. According to a survey of 548 banks by the American Bankers Association, lenders are being forced to charge more at closing to compensate for the added staffing and training needed to adhere to the rules. The added costs average $300 but some lenders are charging up to $1,000 more.

Bottom line- Be aware of the pluses and minuses of the rule changes. Expect greater transparency about costs – and more time to check them out – but also maybe a little longer time to close and increases in fees.

Is FHA reviving its condo financing?

Kenneth R. Harney on May 20, 2016

WASHINGTON – Could the Federal Housing Administration (FHA) finally be opening its doors again to financing more condominium units? If so, that could be excellent news for young, first-time buyers and for seniors who own condo units and need a reverse mortgage to supplement their post-retirement incomes.

Here’s why- FHA financing offers not only 3.5 percent minimum down payments but is far more lenient than other options on crucial issues such as credit scores and debt-to-income ratios. Plus FHA is the dominant source of insured reverse mortgages – the only game in town for the vast majority of seniors.

But if a condo building is not certified as eligible for financing by FHA, all the individual units in the project are ineligible for mortgage financing as well. Young families can’t buy using FHA loans, sellers can’t sell and seniors can’t tap their equity through a reverse mortgage. It used to be different – for years FHA allowed so-called “spot” loans on individual units – but no more.

But maybe things are about to change. In a speech last week to the National Association of Realtors, Housing and Urban Development secretary Julian Castro said revisions to controversial FHA rules on condos have been completed and only await final Obama administration approval. The changes would simplify controversial certification procedures for condo buildings and amend other rules that have knocked thousands of condominium buildings out of eligibility.

Since adopting highly restrictive qualification rules early in the current administration, FHA – once a major player in the condo field and the go-to source of financing for moderate-income purchasers – has steadily seen its market share shrink. FHA once financed 80,000 to 90,000 condo units a year, but last year volume fell below 23,000. Many condo homeowner associations began losing their eligibility several years ago, and because of what they consider onerous recertification requirements, have never sought to reapply.

Castro provided no details on what changes are coming. But real estate and condo industry sources say they could build upon reforms announced last November that appear to have had at least modest success in encouraging condo homeowner boards to get onboard again.

Two California-based consultants who help associations and community managers work through the certification hoops told me they’ve seen a jump in activity in recent weeks. Condo boards that had been resistant to the FHA rules “aren’t fighting them as much any more,” says Natalie Stewart, president of FHA Review. “People need to sell their homes, people need to buy” affordable condo units, so some associations grudgingly are returning to the FHA fold.

Jon Eberhardt, president of Condo Approvals, LLC, said “we certainly have seen an uptick” in FHA certification applications. “I wouldn’t call it monumental, simply a steady growth” in the wake of last November’s changes, he added.

Dawn Bauman, senior vice president for government affairs at the Community Associations Institute, a Virginia-based group that represents 33,000-plus condo and homeowner associations and managers, confirmed that she’s also detected “an increase in the number of applicants” for condo certification and that regional FHA offices have been “more flexible” in recent months in evaluating applications.

What will be crucial to continuing the positive trend, industry experts say, is for the upcoming guidelines to make changes beyond simply streamlining condo certifications.

On the list of needed reforms-

- The return of spot loans. That alone would significantly expand opportunities for millennials, minorities and seniors.

- An end to FHA’s blanket prohibitions against community-benefit homeowner transfer fees collected by some condo associations when units change hands. In California, this ban alone has led to the loss of thousands of units from FHA financing – a huge problem in areas where affordability is tough and condos are the lowest-cost alternative for many consumers.

- Relaxation of strict limits on commercial space in residential condo properties. Revenues from commercial leases are important to the financial health of urban condominiums, but current FHA caps render many buildings ineligible.

Since officials at FHA are mum about what’s in the upcoming package of regulations, it’s not clear how much – if any – of this might be included. But the same officials have to know there’s congressional action hovering in the wings- Bipartisan remedial legislation (H.R. 3700) passed the House in February by a 427-0 vote and is now pending in the Senate. The bill would require a dramatic streamlining of current rules and other changes designed to revive the condo financing business at FHA.

Realtors face legal challenges over web sites

Kenneth R. Harney on May 13, 2016

WASHINGTON – It hasn’t gotten much public attention, but here’s something that has the real estate brokerage industry upset- A sudden wave of potentially costly and embarrassing legal challenges to companies’ websites, alleging violations of the federal Americans with Disabilities Act.

Lawyers representing visually impaired, hearing-impaired and other clients say the vast majority of realty sites don’t offer features needed to allow handicapped individuals to shop for homes and absorb content like other visitors. These include alternative texts accompanying images, transcripts for audio-visual content, descriptive links and resizable text, and a variety of others.

Attorneys at one firm alone – Carlson Lynch Sweet Kilpela & Carpenter LLP in Pittsburgh – have sent out as many as 25 so-called “demand letters” to realty and home building companies in recent months. The letters threaten lawsuits if the firms do not agree to modifications of their sites, plus the prospect of hefty financial penalties.

Benjamin J. Sweet, a Carlson Lynch partner, says website inaccessibility “is an epidemic in this country” in almost every segment of the economy. He added that his firm has “more than 100 clients in 40 states” who either have been plaintiffs in various suits or are being represented through demand letters. Sweet declined to identify specific realty brokerages, citing the potential for litigation. Other law firms reportedly are gearing up legal attacks – a prospect that has the National Association of Realtors worried enough that it recently pleaded with the Department of Justice to accelerate its timetable for releasing long-awaited guidance on the standards that commercial websites must meet to be compliant with the disabilities law.

In a letter to the head of the Department of Justice’s civil rights division April 29, Tom Salomone, president of the Realtors group, said the “lack of federal regulation governing website accessibility” has “left our members confused about how to mitigate legal risks in this area or what is even required of their websites” under the law. In the meantime, “plaintiffs are using the ADA (Americans with Disabilities Act) to demand restitution from businesses.”

The Justice Department, which had been expected to release proposed rules this year, instead postponed them until fiscal 2018. In the meantime, real estate companies say, they are in the dark on precisely how to make their websites accessible to disabled persons.

This issue extends far beyond real estate sites. For years, there have been lawsuits filed against prominent firms and organizations alleging website violations of the disabilities law. Target Corp., Hard Rock Cafe, Home Depot and dozens of other retailers have been sued or have entered settlement agreements. Major cases are pending in Massachusetts against Harvard and MIT for alleged failures to provide adequate captioning on audio and audiovisual material in their websites. Those suits were filed by the National Association of the Deaf.

The focus on realty firms is new and, in the opinion of some companies, unfair given the absence of regulatory guidance. Matthew Rand, managing partner at BHG Rand Realty in Westchester, N.Y., says that while his firm has not been a recipient of a demand letter over its website, “obviously we want to make our site work for everybody.” However, he is uncertain about what is expected given the dearth of “clear communication” from the government.

Alisa N. Carr, a partner specializing in disabilities issues at the Leech Tishman law firm in Pittsburgh, says the lack of regulations “makes it difficult for my clients who want to comply with the law.”

But Sweet says that in several settlements and statements, the Justice Department has made clear that owners of websites need to base their modifications on a widely-recognized Web Content Accessibility Guidelines standard published by the World Wide Web Consortium. “It’s no secret” the department favors this, he said, and the businesses and groups who claim they can’t act until the department finalizes its rules are “shedding crocodile tears.”

Several major real estate companies I contacted, including Long and Foster, the country’s largest independent brokerage, and Redfin, declined to comment on whether they have received demand letters regarding their websites. Other firms, including RE/MAX; Keller Williams and Better Homes and Gardens (BHG), said they have not been targeted to date. RE/MAX said it had launched a new website last month whose designers assured the firm that “we shouldn’t have any issues,” said spokesman Shaun White. One RE/MAX broker in Florida confirmed that “ADA issues” are “popping up in the state but provided no names of targets.

Congress weighs tax bill to help community associations

Kenneth R. Harney on May 6, 2016

WASHINGTON – They are a giant presence in American real estate, but they get short shrift in the federal tax code- the estimated 340,000 communities across the country that are governed by homeowners associations and are often subject to a form of double taxation.

Upward of 67 million people live in these communities – ranging from sprawling master planned subdivisions down to individual condominium or cooperative developments. As of 2014, they contained nearly 27 million housing units. Their homeowners associations often provide the functional equivalents of municipal and county services, and residents nationwide pay roughly $70 billion a year in regular assessments to fund road paving and maintenance, snow removal, trash collection, storm water management, maintenance of recreational and park facilities, and much more.

The same residents also pay local property taxes to municipal, county or state governments. But unlike other homeowners, only their local property tax levies are deductible on federal tax filings. Their community association assessments that pay for government-type services are not.

Now a bipartisan group of congressional representatives thinks that’s inequitable and needs to be corrected. Under a new bill known as the HOME Act (H.R. 4696), millions of people who live in communities run by associations would get the right to deduct up to $5,000 a year of assessments on federal tax filings, with some important limitations-

- Deductions would phase out if their incomes exceed $115,000 for single filers, $150,000 in the case of joint returns.

- The property would have to be their principal residence, not a vacation or rental home.

- To qualify for write-offs, the assessments would have to be “regularly occurring,” mandatory levies that directly benefit taxpayers’ properties and that exist solely because of their automatic membership in the homeowners association.

The bill’s primary author is Rep. Anna G. Eshoo (D-Calif.). Co-sponsors include Reps. Mike Thompson (D-Calif.) and Barbara Comstock (R-Virginia). Though the bill has little chance of moving through the House or Senate during this election year, it sends a message to the legislative committees now working on possible tax code changes for next year- Congress needs to acknowledge the role the country’s community associations play in providing municipal-type services. The way to do it is to allow deductions on a capped amount of the money residents are required to pay to support community services.

Proponents of the HOME bill say these assessments often enable local municipal and county governments to avoid having to raise property tax rates to pay for the infrastructure improvements and services many associations provide. Yet homeowners in association-governed communities pay local municipal, county or state property taxes on top of their association assessments, which can be substantial but cannot be deducted.

“It’s a fairness issue,” said Marilyn Brainard, a homeowner and former board member of the Wingfield Springs Community Association in Sparks, Nevada. “It’s also an affordability issue,” she told me in an interview, “especially for young, ‘starter’ families” and older residents on fixed incomes who sometimes struggle with rising taxes and assessments.

Some homeowners pay assessments for services to multiple associations, said Nancy M. Jacobsen, a consultant to homeowner-run communities in Maryland, Virginia and the District of Columbia. She said she knows of residents who pay local property taxes plus assessments for what are essentially municipal services to three or more different associations with none of the levies deductible on federal taxes. Some of these residents are economically-struggling families “who are saddled with excessive assessments,” and would greatly benefit from the ability to deduct them, said Jacobsen.

“This is a bill whose time has come,” says Andrew S. Fortin, senior vice president for Associa, a Texas-based company that manages 8,000 homeowner associations with 2.5 million residents. At the least, “it should start a dialogue on the contributions these (associations) provide” to local governments.

Dawn Bauman, senior vice president for government affairs at the Community Associations Institute, a trade group, told me the HOME Act may need some fine-tuning to clarify which assessment-funded services or facilities qualify as tax deductible. For example, private golf clubs that are closed to the public might not make the cut.

So where’s all this headed? Assuming that the new Congress takes up tax code changes sometime in 2017, and the co-sponsors refile the bill and can muster grass roots support from the 67 million members of homeowner associations, there’s a chance it could end up in much larger legislation. Don’t bank on it. But it’s possible.