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Real
Estate Laws
Dual Agency
The American Homeowners Grassroots Alliance urges
the repeal of recent changes in state real estate laws that
would allow a real estate broker to represent both a buyer
and a seller simultaneously. Until recent years traditional
real estate brokers represented only home sellers. In
addition to their marketing services, their fiduciary duty
included helping the seller maximize the net proceeds by
assisting the seller in negotiations and sharing any
relevant intelligence about negotiating strategy or price
flexibility the potential buyer may have shared with the
real estate agent. All the real estate agents involved in
the transaction worked for, and were compensated by the
seller. Consumers value these fiduciary services highly. In
1993 the National Association of Realtors (NAR) commissioned
a Gallop opinion poll on real estate agency and service
options. When alternatives were explained, buyers and
sellers both said they preferred to have a true fiduciary
agent on their side during a real estate transaction.
Unfortunately it is not possible for a real estate broker to
represent buyers and sellers simultaneously, since a real
estate broker can’t effectively help the seller get the
highest price at the same time they help the buyer get the
lowest price. The result is that critical services provided
by sellers brokers, such as assistance in negotiations,
etc., are eliminated, and brokers become more facilitators
than agents. The common law of agency has been undermined by
legislation that permits dual agency, because it creates
circumstances where consumers expecting full fiduciary
service receive less than they expected. Unfortunately dual
agency clauses in standard real estate listing contracts do
not provide for reduced commissions when dual agency
circumstances preclude brokers from providing full fiduciary
services.
With the emergence of exclusive real estate buyer brokerage
in recent years there is now a level playing field where
both home buyers and sellers can receive the full fiduciary
services both need. Buyers may now avail themselves of the
full fiduciary services previously provided by traditional
sellers agents, so there is no reason to continue to allow
dual agency.
Private Mortgage Insurance
The American Homeowners Grassroots Alliance recognizes the
importance of private mortgage insurance (PMI) to home
financing. It protects lenders from economic losses when
foreclosures are necessary and there is the likelihood that
the proceedings will be insufficient to cover the loan
balance. PMI insurance adds about $43 per month to the
payments on a $100,000 mortgage. Lenders generally require
homeowners to pay for PMI if the loan is for more than 80%
of the purchase price. AHF believes that it reasonable for
lenders to require PMI in such circumstances. While they
claim the PMI insurance may be canceled once the loan is
below 80% of the fair market value, in fact few will allow
homeowners to cancel PMI when that occurs.
Many
lenders have been reluctant to allow homeowners to drop PMI
even in the face of clear and convincing evidence that
appreciation has raised their equity to well above 20% of
the home's fair market value. They have refused to allow
homeowners to drop PMI even when presented with real estate
assessments from cities or counties, comparable selling
prices, or other data demonstrating that their loan balance
was less than half the fair market value.
A
modest improvement was achieved with the passage of the
Homeowners Protection Act of 1998. The law allows homeowners
to request mortgage lenders to cancel the PMI insurance once
the mortgage balance drops to 80% of the original purchase
price. However, based on economic history, in practice this
means that a typical homeowner will attain about 44% equity
in their home before the PMI insurance can be dropped (See
Chart.)
Example of a Typical Transaction
Purchase Price $100,000
Amount Financed $95,000
Req. loan balance to cancel PMI $80,000
Yrs. to reduce loan balance to $80,000 (30 yr. loan, 7%
fixed) 10.5 yr.
Home value, after 10.5 years of appreciation at 3.5%
$143,500
Homeowners equity after 10.5 yr. ($143,500-$80,000)
$63,500
Equity as a % of home value in 10.5 yr. 44%
The
problem with the new law is that it uses the home’s
purchase price as basis for measuring equity rather than the
home’s fair market value. This ignores the fundamental
reality that most home equity is achieved by appreciation
rather through the reduction of mortgage balances. Even at a
modest rate of annual appreciation (3-4%), a typical
homeowner will reach 10% equity from appreciation alone in
3-4 years, and 15% equity in another year or two. By
contrast it would take many more years to pay down a
mortgage balance from 95% of the purchase price to 80% of
the purchase price (10.5 years on a 30 year 7% fixed rate
mortgage with 95% financing, 8.5 years with 90% financing).
Assuming a modest 3.5% appreciation, a home purchased for
$100,000 will be worth $143,500 after 10.5 years.
What is needed is an additional accepted means of measuring
the fair market value of a home. Fortunately there already
exists an available, conservative measure of a homes fair
market value. The real estate valuation assessed by the
local county or city for the purposes of determining annual
real estate taxes is almost invariably conservative. Because
most local governments also provide residents an assessment
appeal process, they have learned that it they will deal
with numerous appeals from homeowners if they don’t keep
the assessments somewhat below true market values. Better
still a homeowner would not have to pay for a real estate
appraisal if they use this tool.
The
Alliance supports the new regulations in effect 1/1/2001
that reduce FHA insurance premiums from 2.25% to 1.5% and
provide PMI premium refunds averaging $700 to homeowners who
pay off their mortgages through refinancing or home sales.
Unfortunately the new regulations do not apply to pre-2001
FHA loans and do not provide a mechanism to eliminate PMI
when a homeowner's equity exceeds 20% of the mortgage
balance. AHGA supports legislation that would permit
homeowners to cancel private mortgage insurance when their
equity exceeds 20% of their mortgage balance based on
appraisal, or 25% of their mortgage balance based on the
assessed value as determined by their city or county
government.
Note
to homeowners: There are other alternatives for homeowners
in the meantime. Certainly a homeowner can request that a
lender or loan service drop its PMI requirement if a local
real estate assessment or other evidence reveals that you
have 20% or more equity in your home. They make money on the
servicing of the loan and may be willing to do so to keep
the account and to maintain good customer relations. If they
decline there's another way homeowners may be able to save
even more than the monthly PMI payments. If you know you
have more than 20% equity, you could refinance you current
loan without having to pay PMI on your new loan (saving $43
per month per $100,000 of mortgage amount). You may also be
able to get a better rate, since current mortgage rates are
low compared to recent years.
Lending
and Title Insurance
Specific attention should be paid to lending practices.
Realtors or other professionals who arrange home financing
should be subject to all Truth-in-Lending Act (TILA)
requirements. Residential mortgage lenders should be
prohibited from collecting any fees before essential TILA
disclosures are presented and agreed upon. Credit scores
should be made available to borrowers and a means to
challenge potentially erroneous scoring of mortgage
applications. Financial and other personal information (such
as medical records) should not be shared with other parties
except with express permission of homeowners. Mortgage
prepayment penalties should be prohibited or limited to
demonstrable administrative termination costs.
State
legislatures should reform the costly title insurance search
system by instituting a compulsory “Torrens” record
system, modernized record-keeping, and “marketable title
acts”, and/or other methods. Homeowners should be able to
direct portions of their homeowner property and liability
insurance payments now used to fund “Boards and Bureaus”
to be directed to consumer organizations that deal with home
ownership or consumer organizations. Each state should
create and fund consumer insurance boards to facilitate
homeowner representation. Any federal catastrophe insurance
plan should have as its priority mitigation of laws
guarantee of insurance availability to homes built to
mitigation standards but should otherwise not interfere with
the development of private insurance and reinsurance
markets.
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