Grassroots Alliance Urges Improved Antitrust Enforcement
AHGA presses for greater
enforcement powers, resources in March 7 Senate testimony.
In testimony submitted to the Senate Subcommittee on
Antitrust, Competition Policy and Consumer Rights hearing on
Oversight of the Enforcement of the Antitrust Laws, AHGA
called for more powers and resources for federal consumer
protection agencies. The Alliance strongly supports the
important mission of the federal antitrust enforcement
agencies. AHGA believes that both the Federal Trade
Commission and the Department of Justice’s Antitrust
Division are doing an outstanding job of protecting
consumers’ interests in the real estate services arena, but
they are hampered by limited resources and constraints on
the scope of their efforts. Additional funding for both of
these agencies, and a broader mandate for action, are
important to enable them to fully protect the interests of
homeowners and other consumers.
DoJ’s Antitrust Division filed suit in September, 2005
against the National Association of Realtors (NAR) to
prevent the implementation of proposed industry rules that
would restrict competition from real estate brokers who use
the Internet as their primary tool to serve American
homeowners. Because 80% of home buyers use the Internet in
their home searches today, the rule, if implemented, would
have greatly disadvantaged those home sellers who use
Internet-based real estate brokers. Internet-based brokers
often offer real estate services at a fraction of the cost
of traditional full service brokers. The savings can be
substantial - in some cases a home seller can list their
home in the local multiple listing service (MLS) through a
discount broker for as little as $200. This is a significant
savings compared to the traditional 5-6% commission on the
home’s selling price (the median priced U.S. home now sells
for more than $200,000).
NAR’s proposed Virtual Office Website (VOW) rules include an
“opt-out” provision that would allow traditional full
commission real estate brokers to prevent Internet-based
competitors from providing the same listing information over
the Internet that other brokers can access from their
offices. This would greatly diminish the effectiveness of
Internet-based competitors’ business models and help
preserve higher commission rates. DoJ also challenged NAR’s
membership rule denying MLS listing access to brokers
offering referral services, which can in some cases
facilitate partial rebates of commissions to home buyers as
well as increasing the Internet exposure of sellers’ homes.
The lawsuit is proceeding.
As a result of the joint efforts of the FTC and DoJ, several
state real estate boards have eliminated regulations
prohibiting sales commission rebates to home buyers. These
rebates, which can amount to as much as 2% of a home’s
selling price, are an excellent inducement to home buyers
and can be very helpful to sellers in the current weak
residential real estate market. A study by the Consumer
Federation of America revealed that a large share of state
real estate boards are dominated by traditional full service
real estate brokers, who are using their influence to
preserve high real estate sales commissions, despite the
boards’ charter to protect the interests of consumers. More
needs to be done however. In some states those antirebate
laws have been enacted into law by the state legislature. As
a result those state legislatures will need to repeal those
laws.
The FTC and DoJ have had a similar experience with proposed
“minimum service” regulations requiring home sellers to pay
for real estate services they neither want nor need. These
regulations raise the home seller’s cost and undermine the
Internet-based real estate services business model. Under
pressure from both agencies they have also been withdrawn by
state real estate boards. As in the case of antirebate laws,
some of these withdrawn regulations have been enacted into
law by state legislatures. Those laws will have to be
repealed as well.
The Federal Trade Commission has taken the lead in
addressing anti-competitive practices of local multiple
listing services (MLSs). MLSs are local entitities,
typically owned by real estate brokers, that share every
brokers listings on the web sites of all of their members.
In 2006 the FTC brought eight enforcement actions against
MLS’s that limited the dissemination of the types of real
estate listings used by Internet-based discount real estate
brokers. This diminished the value of those types of
listings to sellers by limiting their exposure on the
Internet. Limits on Internet exposure are also unfair to
prospective buyers who may be interested in those homes as
well. Thanks to the FTC’s aggressive defense of the rights
of homeowners, seven of those MLS’s have withdrawn the
anticompetitive rules. The FTC is currently proceeding with
the remaining case against Michigan-based Realcomp II.
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Both the FTC and DoJ have undertaken wide-ranging and
effective competition and antitrust initiatives across their
respective spectrums of responsibility. Nevertheless, there
remain other problem areas affecting American homeowners
that are either outside the scope of the agency’s authority,
or beyond the capability of their thinly-stretched
resources.
Neither the FTC nor the DoJ are currently empowered to
address these state laws, which have been authored and/or
promoted by state real estate associations. These state laws
are no different than the state regulations that the
agencies have been addressing most effectively, and they are
costing American homeowners millions of dollars every year.
AHGA urged the Subcommittee to hold additional hearings on
this problem and consider ways to address these
anticompetitive state laws which the FTC and/or DoJ have
been able to eliminate in their regulatory form.
There are several other areas of real estate services that
also deserve the subcommittee’s scrutiny and the scrutiny of
DoJ and FTC. Last year the House Financial Services
Committee held hearings on real estate title insurance
industry practices. Title insurance is very expensive, and
only 2-4% of premiums collected are paid out. The current
primary title insurance industry business model involves the
payment of substantial, and usually undisclosed, referral
fees to mortgage brokers or other real estate service
providers. Surprisingly, until very recently there was no
Internet-based or other vehicle for consumers to buy title
insurance directly from insurers, and AHGA believes that
title insurance is still not available to home buyers
directly from insurers in most of the country. There is no
mechanism on the websites of major title insurance companies
for a home buyer to elicit a price for title insurance from
them. This is particularly curious given the availability of
such direct business-to-consumer vehicles on the Internet
for other real estate services, as well as many other
consumer services and products.
Another anticompetitive real estate services practice is
“dual agency”. Home buyers and sellers have inherently
opposing interests. Home buyers want the lowest price and
the most favorable terms from their perspective, and home
sellers want the highest price and most favorable other
terms from their perspective. Historically most real estate
brokers exclusively represented home sellers. Both the
broker and agent who represented the seller, and the broker
and agent who worked with the buyer were all paid by the
seller and owed a fiduciary duty to the seller. The buyer
was not represented by any agent or broker.
This imbalance changed with the advent of “exclusive buyer
agency” in the 1990’s. These brokers and agents represented
only buyers, never sellers. As a result home buyers using an
exclusive buyer agent/broker were able to achieve equality
in the process. Like the seller, the buyer now had a broker
and agent adviser who owed their fiduciary duty only to the
buyer.
Unfortunately the growing practice of exclusive buyer agency
was undermined by state real estate associations who
successfully sought changes in state laws and/or regulations
to allow the same broker, and in some cases the same agent,
to simultaneously represent both the buyer and seller of the
same home. This is akin to a single law firm representing
opposing parties in a civil lawsuit, and calls into question
the ability of the real estate broker and/or agent to carry
out all of their fiduciary responsibilities to both parties.
Among those fiduciary responsibilities are assisting their
client negotiate the most favorable price and terms. AHGA
urged the subcommittee to study these state laws to
determine whether they are anticompetitive and to undertake
remedial action if appropriate.
There are related compliance problems with state real estate
consumer disclosure regulations, which are intended to help
make home buyers and sellers aware of potential conflicts of
interest in dual agency and other areas. Although these
regulations require that home buyers be told whom the agent
represents, less than one-third of real estate agents
comply, according to the National Association of Realtors'
2005 Profile of Home Buyers and Sellers. AHGA believes that
as a result many home buyers mistakenly assume that the real
estate agent and broker they are working with will be
exclusively representing their interests and providing the
full range of real estate services under all circumstances.
This lack of consumer understanding undermines competition;
for without a full understanding of constraints on an
agent’s and broker’s ability to represent them under all
circumstances, a home buyer is unable fully gauge a critical
factor in deciding upon representation.
NAR’s general counsel Laurie Janik was quoted in the real
estate trade publication Realty Times that “These statistics
say that people are being sloppy. They need to take agency
disclosure requirements seriously; it is a critical element
of consumer protection. I don't think it is good for
practitioners or consumers that the trend line is going
down. We aren't going in the right direction -- compliance
is worsening." NAR’s 2005 Legal Scan, an annual compilation
of the thousands of lawsuits related to real estate
transactions, also confirmed the problem – 24% of the
lawsuits related to home purchases and sales were over
disclosure issues. Despite the widespread knowledge of
declining compliance with state disclosure regulations, few
state real estate associations, state real estate
commissions, or state legislatures have undertaken
aggressive steps to reverse the decline in compliance with
disclosure laws and regulations.
Since this problem directly impacts competition, AHGA
suggested in the testimony submitted to the Senate
Subcommittee on Antitrust, Competition Policy and Consumer
Rights that the Subcommittee undertake further study of this
issue. To read AHGA’s complete testimony go to
www.AmericanHomeowners.org .
The Greening of
American Homes
American homes are getting greener thanks to greater
environmental awareness, new technologies, and tax
incentives.
A recent survey by Green Builder Media and Imre
Communications determined that more home buyers will pay
more for “green” homes. While there is no generally accepted
definition of exactly what makes a home “green”, it
generally refers to homes that are more energy efficient and
friendly to the environment in terms of components. More
than half of the builders responding to the survey believe
that buyers will pay from 11 to 25 percent more for
green-built homes, which can reduce heating and cooling
costs by as much as 1/3.
According to the builders, the typical green homebuyer is
between the ages of 35-50, has a college degree, and has a
good understanding of environmental issues and
environmentally friendly building products with long and
efficient life cycles. Green products are often made from
renewable or recycled resources and/or contain fewer toxic
substances.
Another factor in the increase in energy efficient homes is
cost. As more energy efficient home building products are
produced their unit prices go down. Also helping are tax
credits for builders of energy efficient homes meeting the
federal “energy star” criteria.” Add to that recent
increases in most energy prices, and the payback - the time
it takes to erase the additional cost through monthly energy
cost savings – is dropping rapidly.
Several states are helping to reduce home energy costs as
well. Since 1974, California has kept per capita energy
consumption constant compared to overall U.S. per capita
energy use, which has increased by more than half.
California adopted stringent appliance energy standards in
the 1980’s – long before the federal government did.
California also adopted an innovative approach to utility
regulation called decoupling, linking the utilities' profits
to other factors besides increased sales. The California
Public Utilities Commission set separate targets for
electricity usage and utility sales. Under the arrangement
excess utility revenue would be returned to consumers. Any
revenue shortfall would be added to consumer bills the next
year. Utilities could increase profit margins by improving
efficiency.
As a result, California and its utilities spend $700 million
annually promoting energy efficiency. California remains the
only state to have adopted decoupling, though proposals are
pending in a number of other states. Solar-energy panel
installations in American homes are starting to take off, in
part due to government incentives such as California's $3.2
billion solar initiative. Other states are also offering
generous state rebates. Some utilities offer buy backs of
solar power from homeowners in order to meet their state’s
renewable-energy mandates.
On the federal level, homeowners are eligible for a one-year
tax credit for 30% of the cost of a residential solar-power
system up to $2,000, through 2008. Congress is now looking
at the decoupling model, which is getting increased support
from environmentalists as well.
Despite the recent technological advances, a continued
decline in the price of solar-power systems, and federal and
state incentives, solar energy source is still very
expensive and has a long payback on the investment. However,
as energy costs continue to rise, and technology and
widespread adoption by homeowners continue to drive solar
energy costs down, home solar energy systems will become
much more common. BP PLC provides a cost calculator on its
Web site (www.bp.com) which calculates the cost to install a
solar energy system based on available rebates and other
incentives.
Another online resource is the Consumer Electronic
Association’s MyGreenElectronics. Consumer electronics –
TVs, personal computers, etc. - consume 11 percent of all
residential electricity. And while consumer electronics are
becoming more energy efficient, homeowners are using more of
them (the number in the average home has doubled since
1997). Despite the energy efficiency improvements, today’s
bigger TV screens and computer monitors compared to those
available in years past offset many of the efficiency gains.
Among other things, CEA urges homeowners to look for “Energy
Star” products, unplug mobile phone, DVD players, and PDA
chargers when not in use, do your banking and shopping at
home using your computer, consider telecommuting if your
employer will support it, fully utilize your computers power
management features, and consider home-networking products
and services.
One energy efficiency improvement for single family homes
and townhouses that will add substantial aesthetic
improvement and financial value is landscaping. Shrubs and
evergreens around a home’s perimeter keep the sun from
heating up the parts of the home they shade in the summer
and help reduce the effect of cold winter winds.
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Congress Poised to Regulate Mortgage-funding Companies
New legislation has many good points, but improvements are
needed.
Efforts to tighten oversight of Fannie Mae and Freddie Mac
advanced on March 29 as the House Financial Services
Committee passed a bill that would create a new Federal
Housing Finance Agency to regulate Fannie Mae and Freddie
Mac. These Government Sponsored Enterprises (GSEs) have been
under Congressional scrutiny as a result of their financial
practices and the lobbying pressure from competing mortgage
lenders intent on reducing their market share.
Fannie Mae and Freddie Mac buy mortgages from lenders. This
provides lenders more money to make mortgage loans. The GSEs
also package mortgages into securities that they sell to
investors. Because of the widespread belief in the faith and
credit of the GSEs, mortgage rates on their loans are
typically a quarter percent less than the rates on other
similar conventional loans.
The legislation would require the GSEs to contribute to a
new fund for affordable housing. The funds collected would
be distributed to states, which would pass them on to
buyers. The initial funding would be dedicated to helping
areas severely damaged by Hurricane Katrina.
It would also create a new GSE regulator with the ability to
limit GSE mortgage investments, put the two companies into
receivership, prohibit new products, and impose additional
capital holding requirements. Both the new affordable
housing fund and requiring additional capital could also
reduce GSE profits, thereby undermining their existing
pricing advantage.
A benefit for middle class homeowners in areas with high
housing costs is that Fannie Mae and Freddie Mac would be
able to provide larger mortgages in those areas. The bill
would raise the current $417,000 lending cap by up to 50
percent, allowing homeowners to get the better rates on GSE
mortgages as large as $625,500 in high-price markets.
The legislation passed the House Financial Services
Committee by a vote of 45 to 19, More than a dozen
Republicans joined the Democratic majority, so the outlook
for House passage is excellent. The Treasury Department’s
support will also help in the Senate where there is
substantial conservative opposition to the creation of the
housing fund. Nonetheless this bill, or something close to
it, will likely become the model for reform of the GSEs.
AHGA believes the GSE reform bill is a substantial
improvement over earlier versions, and a reasonable approach
save for several concerns that should be addressed. The
mandated 1.2 % GSE contribution to the affordable-housing
fund is a good idea. Whether that amount is too high or not
high enough is a fair matter to debate, but at least the
set-aside will do much to expand affordable housing and
counteract the effect of the needed tightening of subprime
lending standards. It will also help homeowners in New
Orleans and surrounding areas who need help recovering from
the ravages of the last hurricane.
One reason the GSEs were created was to reduce the impact of
the kinds of problems the mortgage marketplace is presently
experiencing. Since GSEs provide funds for mortgage lending
when they are most needed, this is a bad time to restrict
that ability. Last week a study was released that estimated
that for every 1% further decline in home values, another
70,000 foreclosures will result. Higher mortgage interest
rates would only help drive home values further down and
cause more foreclosures.
The biggest problem in the GSE reform bill is the very broad
arbitrary authority it provides to the new Federal Housing
Finance Agency to limit or substantially reduce the size of
GSE portfolios. For many years a lobbying coalition of major
mortgage lenders (FM Watch and its successor FM Policy
Focus) has sought to reduce the size of the GSE’s
portfolios. While it’s understandable that the banks want to
grow their market share by reducing the lending capability
of the GSEs, the practical effect of restricting that
ability will be higher mortgage interest rates for more
borrowers.
We should all therefore be very concerned that FM Policy
Focus has endorsed this GSE reform bill. It can only mean
that the coalition believes that the regulatory latitude the
bill provides is enough that FM Policy Focus can effectively
lobby the new regulatory agency into limiting or
substantially reducing the size of GSE portfolios, achieving
the same results FM Policy Focus has thus far been unable to
achieve directly in other legislation.
The main change that needs to be made to this otherwise
reasonable legislation is to set realistic and specific
stress tests for determining Fannie and Freddie's minimum
and risk-based capital requirements. Since banks finance
many types of riskier debt, including credit card and
automobile loans, the GSE stress tests should be less
restrictive than those imposed on banks. The new Federal
Housing Finance Agency should be allowed to intervene only
if the GSEs fall below those minimum standards. This would
prevent home values from being further undermined by
arbitrary restrictions on the lending ability of the GSEs
imposed as a result of regulatory lobbying by the banks.
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More Homeowners
Find Net Benefits
The Internet is becoming an ever greater friend for home
buyers and sellers.
Today more than 80% of home buyers do a lot of their looking
on the Internet. The myriads of real estate listing web
sites enable home buyers to identify the vast majority of
homes available in their targeted price range and geographic
area. Some even offer rebates of part of the sales
commissions to buyers who agree to referrals to buyers
agents. Other web sites offer home valuations and help
buyers determine how much mortgage they can afford.
Recently, for the first time, a title insurer began selling
title insurance directly to buyers for the first time.
If the practice of selling direct to home buyers expands,
home buyers may soon save substantially on title insurance
costs. Normally title insurance is very expensive, often
$1,000 or more, yet only 2-4% of title insurance premiums
are ever paid out. Most of the premiums (up to 70%) go to
referral fees from the title insurer to mortgage brokers or
other service providers. Home buyers aren’t aware that a
service provider is getting a huge referral fee because
presently it isn’t shown on the HUD-1 form.
The Internet has helped sellers as well. Internet-centric
real estate brokers in many areas will list homes in the
local MLSs for as little as a few hundred dollars. That’s a
big plus, because it’s the MLSs that distribute the listings
to their member-brokers’ web sites and national real estate
websites. Efforts of some MLSs to withhold those types of
listings have largely been crushed by the Federal Trade
Commission. Many of the MLSs abandoned the discriminatory
practice, and the FTC’s antitrust case is proceeding against
the lone holdout.
The current modest cost of wide Internet distribution of a
home for sale is a bargain by any measure, but there’s now
an even lower price for MLS listings. IggysHouse.com, which
debuted recently in 20 states, is now offering MLS listings
for free. IggysHouse.com is giving away MLS listings as
promotion to entice sellers to use the company's sister
site, BuySideRealty.com when they buy their next home.
BuySide is one of a growing number of Internet based real
estate brokers that offers commission rebates to home
buyers.
BuySideRealty.com will rebate up to 75 percent refund of the
commission they get from home sellers, typically 3 percent
of the sales price. The company generates revenue from sales
commissions if a home seller uses an agent it suggests and
from other BuySide Realty products, such as mortgages and
sales tools such as yard signs.
More new Internet-based real estate service models are no
doubt under development. Home buyers and sellers need to
consider such arrangements with their eyes wide open,
according to Bruce Hahn, President of the American
Homeowners Foundation. “They can provide substantial savings
for home buyers and sellers, but they are best suited for
those with a good understanding of the real estate
marketplace and the available time to do much of the work on
their own.”
You can’t be assured that a buyers agent your are referred
to through a rebate web site will be well qualified. If you
are a first time buyer and haven’t done substantial research
about the home buying process, the last thing you need is a
rookie real estate agent with a GED that somehow managed to
pass their real estate exam on the third try. Even if you
have done your homework you should still interview the
proposed referral agent at length to determine their
professional qualifications and local market knowledge, and
ask for references. If the rebater can’t provide a qualified
agent, cancel the agreement (and make sure you have the
right to do so in advance).
Smart home buyers and sellers do considerable research
before they are ready to buy or sell. Both should take the
time they need and not let Internet-based real estate
service providers short circuit the process. Many real
estate related web sites seek to collect personal contact
information. It is best to avoid them. Even if you indicate
on the online forms that you aren’t currently in the market,
or won’t be for many months, that information will be sold
as a referral to many service providers. American Homeowners
Foundation staff recently tried some of the sites that
require you to provide personal contact information as a
requirement in order to get their home valuation or mortgage
rates, indicating in every case that they were not currently
in the market. They were soon deluged by real estate agents,
mortgage brokers and other service providers who apparently
didn’t bother to see if our staffer was on the FCC’s “do not
call” registry and wanted to know what day this week they
can stop by to sign him up.
More tools are in the works, and they will continue to drive
down real estate transaction costs. Not only will they save
money for home buyers and sellers, but the savings will also
have a positive effect on bolstering home values, something
that is also badly needed due to the current turmoil in the
mortgage market.
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Mortgage
Woes Hurting More Homeowners
The current mortgage market turmoil is hurting millions of
homeowners, but there are solutions.
The current mortgage environment is causing untold grief for
many innocent homeowners, undermining the equity of the
nation’s 75 million homeowners, and threatening the ability
of potential homeowners to take part in the American dream.
The challenge is not just ending abuses, many of which have
already been abandoned (at least temporarily), but perhaps
more importantly taking proactive steps to assure that the
values of American homes do not decline further.
The current mortgage market turmoil has been caused by a
number of circumstances, most notably the greed of some
companies that function primarily as mortgage
intermediaries. For many of them the lure of substantial
immediate profits outweighed the importance of sound
mortgage underwriting practices, ethical treatment of
consumers, and/or risk to their businesses’ viability. Some
of the consequences in human and economic terms have already
become evident. Both the scope of the problem and its long
term impact on consumers and the economy will largely be
determined by the actions of Congress on a number of current
policy issues that will impact home values and mortgage
lending liquidity. Mortgage lending liquidity and home
values are inextricably tied to each other, and home values
will be the single most important factor in determining the
severity and length of the current mortgage market turmoil.
An outcome of the mortgage lending practices that have lead
to the current turmoil is that a large number of
unsophisticated home buyers, who were advised to take out
types of mortgages they could not afford over the last few
years, now face mortgage foreclosure. The personal tragedy
suffered by homeowners who have lost or will lose their
homes as the result of poor guidance from mortgage brokers
they had trusted and who knew better, must be prevented in
the future. Appropriate steps must be taken to assure that
this scenario does not repeat itself. It is also absolutely
essential that other parallel steps be taken simultaneously
to assure continued liquidity in mortgage financing and
mitigate the potential impact of the problem.
A recent study by First American CoreLogic Inc predicted
that in the next six years, 13 percent of the 8.37 million
adjustable-rate mortgages (or 1.1 million mortgages)
originated between 2004 and 2006 will default, destroying
$112 billion in home equity. The study, “Mortgage Payment
Reset: The Issue and the Impact," also projects that for
each 1 percent increase in home values, 70,000 homes can be
saved from foreclosure, and conversely, that for each 1
percent decline in home values another 70,000 homes will
face foreclosure. In a more disturbing report issued on
March 20, "Dissecting the Mortgage Distress," BAS analysts
noted an excess supply of 800,000 existing homes currently
on the market, and predicted that another 300,000 new
foreclosures will soon be added to inventories. This will
likely depress home values by another 5% in 2007, according
to the Bank of America subsidiary.
Former Federal Reserve Chairman Alan Greenspan and many
other economists believe that the current level of
foreclosures can be absorbed into the market with relatively
little impact on home values. It is important to note that
many of those mortgages will automatically adjust to higher
interest rates in 2008, so the value of homes next year will
be extremely important in determining whether the problem
will worsen or improve. Actions of Congress in a number of
areas, including needed steps to prevent a recurrence of the
recent problems, can have a significant aggregate impact on
home values. They can range from a net positive effect,
helping to further mitigate the problem, to a net negative
effect, which will increase the number of foreclosures, the
heartaches to foreclosed homeowners, and the threat to the
overall economy.
Some steps are already being taken by the private sector to
minimize the problems and prevent their recurrence. Many
mortgage lenders and servicers are working with homeowners
to restructure mortgages in manner that will be affordable
to homeowners, and some have been willing to forgive part of
the mortgage balance. The latter makes it possible for
distressed homeowners to avoid bankruptcy and sell their
homes, and saves mortgage lenders much higher costs of
foreclosure.
In addition, lending standards have already been tightened
by GSE’s and other mortgage lenders. This step was obviously
needed. Many of the marginal mortgages that have been
packaged and sold on the stock market have ended up in the
hands of deep pocketed international and domestic investors
who had the sophistication to understand the risks and deep
enough pockets to absorb the losses. This is fortunate
because, unlike the naïve home buyers who are also victims,
there is neither any reason nor any need to bail out
sophisticated and wealthy mortgage investors. The losses by
both investors and mortgage holders who have been burned in
the recent turmoil will provide them a strong disincentive
to not make the same mistake again. Bailing them out would
only lessen their resolve to avoid the same mistakes in the
future.
The real victims are the homeowners who were talked into
mortgages they shouldn’t have accepted and now face
foreclosure. Of course foreclosures occur even in the best
of times. Some home buyers who finance their homes with
fixed rate conventional mortgage lose their jobs or
experience other unanticipated personal tragedies that often
lead to foreclosure of their home. No doubt many subprime
borrowers also experienced personal traumas, and there is
nothing Congress can or should do in either case.
There are positive steps that Congress can take to address
the current turmoil. In AHGA’s March 22 testimony submitted
to the Senate Committee on Banking, Housing, and Urban
Affairs hearing on Mortgage Market Turmoil, we made a number
of constructive recommendations. Some of the subprime home
buyers, who bought at the top of the market and now face
foreclosure, might be able to afford a conventional mortgage
on their home today at their home’s foreclosure auction
price. AHGA recommended that Congress study the possibility
of establishing a guarantee type program that would allow
threatened subprime borrowers to buy their own homes at
foreclosure auctions, using traditional mortgage financing
methods, in those cases where the auction price is low
enough that the homeowner could afford to refinance the home
in that manner. In cases where lenders are unwilling or
unable to work out a solution with a homeowner, this could
save the homes for some homeowners.
One way such a program might work is that if the homeowner
who is threatened with foreclosure would be prequalified by
a government approved lender for a conventional mortgage up
to a limit based on the homeowner’s current income and
assets. Government backing would be essential as homeowners
facing foreclosure would understandably otherwise have a
very difficult time qualifying for a mortgage from any
lender. The homeowner could then use the government-backed
guarantee to bid up to that amount for their home at a
foreclosure auction. This program would help homeowners who
had been put in the wrong kind of mortgage stay in their
home and would also mitigate further declines in home
values. In addition it would offer some help to mortgage
holders (an additional higher bid on the foreclosed
property) while avoiding the counterproductive problems of
direct lender subsidies.
A pernicious problem is that many mortgage brokers have had,
and still have, insufficient incentives to discourage them
from putting naïve home buyers in unsuitable mortgages.
Mandatory disclosures on subprime and other risky loans is a
partial solution, which we endorse. More funding for
consumer education and counseling is another partial
solution that we also endorse. Unfortunately, the
professional entry standards for mortgage brokers are very
low. Until those standards are raised, the ability of
mortgage brokers to effectively educate consumers will
remain inadequate. The incentive of mortgage brokers to
protect their investments in time and money necessary to
become professionally licensed will also remain inadequate
to offset the temptations of the quick money to be had by
putting consumers into unsuitable mortgages.
Therefore, a key part of the solution must be to
substantially increase the professional entry standards for
qualification as a mortgage broker. The mortgage brokerage
industry has not addressed this obvious need. It is unlikely
that this problem can be addressed quickly or effectively at
the state level. In the real estate services sector,
research by the Consumer Federation of America has
identified a significant amount of regulatory capture at the
state level. State real estate commissions and boards are
often dominated by traditional real estate brokers, and
those organizations rarely propose substantially
strengthening entry standards despite both much evidence
supporting that need and much sentiment within the real
estate services profession for strengthening entry
standards. A similar threat of regulatory capture would
exist at the state level for mortgage broker entry
standards, and the results could be uneven and take a long
time to materialize. For this reason we recommend that
Congress set a reasonable but substantial national minimum
standard for entry into the mortgage brokerage profession,
which states may have the option to strengthen but not
reduce.
AHGA urged the Senate committee to be very wary of
disallowing certain types of home financing and/or mandating
minimum qualifications for specific types of home financing
at this time. If Congress errs on the side of being overly
restrictive, such standards may substantially diminish the
availability of mortgages, particularly to first time buyers
and those with blemished credit histories. An outcome of
such restrictions could very likely be further declines in
home values and as a result, far more foreclosures. If the
Committee feels such restrictions may be needed, it would be
better to initially take a very small step in this
direction, to be followed by stronger measures later if
necessary.
Congress needs to be mindful of other current policy issues
that will impact home values. They are critical to
maintaining the values of American homes, which in turn will
play a major role in the recovery from the mortgage market
turmoil. There are a number of other concurrent steps that
Congress should take to improve mortgage liquidity and home
affordability. This will help offset the current problems
and prevent more foreclosures in the future. The Federal
Home Administration (FHA) could play a stronger role in
funding mortgages if some of the restrictions and regulatory
red tape on its programs are lifted. AHGA supported changes
proposed by FHA include eliminating FHA’s statutory 3%
minimum cash down payment requirement and offering down
payment flexibility; increasing the FHA loan limits; and
allowing FHA to use risk-based pricing.
Late last year Congress passed legislation allowing for the
deduction for private mortgage insurance by home buyers who
earn less than $100,000 annually. This new deduction lowers
the effective cost of home ownership which will also help
maintain home values. For that reason it should be made
permanent (it expires at the end of 2007) in order to help
maintain home values. Hearings by the House Financial
Services Committee last year on title insurance revealed
that only 2-4% of title insurance premiums are paid out in
claims. Congressional action to reduce abuses identified in
those hearings has a substantial potential for reducing
consumer transaction costs, and thereby contributing to the
stabilization of home values. Another House Financial
Services Committee hearing (and a GAO study) last year on
the real estate services sector revealed that home sellers
are often forced to pay for real estate services they
neither want nor need. If Congress acts to remove
unnecessary costs from home sale transactions, allow home
buyers to save money through such steps as real estate
commission rebates (currently prohibited in some states) it
would further help stabilize home prices and limit the
impact of the current mortgage turmoil.
Eliminating real estate market inefficiencies through
precisely targeted surgical reforms of the real estate
lending and services marketplace, combined with improved
consumer education, disclosure, home ownership tax
incentives, and the elimination of unnecessary transaction
costs will enable homeowners, mortgage lenders, and the
economy to weather the current mortgage turmoil quickly.
AHGA urged the Senate Banking Committee and other oversight
committees to act quickly and decisively to take the
following steps to reduce the impact of the mortgage market
turmoil:
· Fund consumer education and require specific clear plain
English disclosure of the inherent risks of certain types of
mortgages to all consumers contemplating those mortgages.
· Impose substantially higher professional entry level
requirements for mortgage brokers and sales representatives
that may be further strengthened, but not reduced, at the
state level.
· Be cautious and initially minimalist on restrictions on
types of mortgages that may be offered, because the
restrictions could undermine home values and drive up
foreclosures.
· Be cautious and minimalist in the regulation of GSEs, in
particular avoiding imposition of restrictions on their loan
portfolios which could also undermine home values and drive
up foreclosures.
· Look for additional ways to increase mortgage liquidity
through such vehicles as an expanded role for FHA and other
entities.
· Reduce the costs of home ownership through such steps as
permanently extending the mortgage insurance tax deduction.
· Reduce the transaction costs of home purchase/sale through
such steps as reform of anticompetitive title insurance
industry marketing practices, the elimination of state laws
outlawing real estate commission rebates, and state laws
mandating that home sellers to pay for services they neither
want nor need.
To read AHGA’s complete testimony go to
www.AmericanHomeowners.org .
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Help Reduce
Healthcare Costs
New legislation will help
reduce prescription drug prices.
Prescription drug costs are very expensive for many
homeowners, especially retirees. Their costs continue to
rise far faster than inflation. Younger homeowners
frequently help out cash-strapped retired parents with
prescription drug and other medical expenses. Currently,
Medicare is prohibited by law from directly bargaining
with pharmaceutical companies for lower drug
prices. Recently the House of Representatives passed a
bill that would give Medicare this important
ability. The Senate will soon be voting on this
legislation, which will affect most of us sooner or
later. However drug companies are doing all they can to
stop this legislation.
AHGA urges its members to contact both of their U.S.
senators today to urge them to support legislation
giving the Secretary of Health and Human Services the
authority to use the bargaining power of 43 million
Medicare beneficiaries to help make prescription drugs
more affordable. The Senate has the opportunity to build
upon the strengths of the Medicare Modernization Act of
2003 (MMA), and our Senators should take this
opportunity to do so.
The Medicare prescription drug benefit has helped tens
of millions of
Medicare beneficiaries, and Part D plans are achieving
some notable
savings. Given the high cost of prescription drugs, and
the critical impact these
high costs have on overall health care costs, we should
ensure that the
Secretary has the tools necessary to achieve lower drug
prices.
Numerous polls have demonstrated that the American
public -
regardless of party - overwhelmingly supports giving
Medicare the power to
bargain with manufacturers for lower drug prices on
behalf of
beneficiaries. AHGA members can look up their Senator’s
email address, phone number, and fax number on the AHGA
website link to
contact your Federal and State Legislators. We urge
all AHGA members to express their views to their
senators on this important legislation.
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Please take
the time to contact your legislators and express your views
on the policy issues covered in this month’s Home Base. It's
easy - you can reach your legislators by email in a couple of
mouse clicks, and you can use the content in Home Base and
elsewhere on our website to help you develop your message.
To look up the phone number, email, and/or postal address of
your U.S. Representative or your two U.S. Senators, or, your
state representative or state senator
click here.
The site can look them up by zip code for you if you don’t
recall their names.
Many legislators are also happy to meet personally with
their constituents when they are back home on weekends or
when Congress is not in session. There is a spring District
work period April 2-13. A personal meeting is a
particularly effective way to get their attention and
reinforce your message, so please consider also requesting a
follow up face-to-face meeting in their home state or home
district offices near you when you contact them on policy
issues.
Is there a policy issue that is particularly important to
you which significantly impacts homeowners or home
ownership? Any member may propose a position on a policy
issue, so please check the American Homeowners Grassroots
Alliance's 2007 policy priorities to see whether it’s
already on our list. If it isn't on the list, we invite you
to send us an email and tell us why you think the American
Homeowners Grassroots Alliance should be working on it.
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