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.