MBA (8/16/02) Murray, Michael
HUD’s proposed new rules to the Real Estate Settlement Procedures Act (RESPA) have sparked a wide variety of reactions, based on comments made in a national audio conference Wednesday. While HUD sees the proposed rules as a much-needed consumer-friendly reform, industry officials warned of a number of potential unintended consequences.

The conference comes just as the Mortgage Bankers Association of America holds its own national audio conference next Thursday, August 22. That audio conference will further examine and discuss the proposed RESPA rules. John Courson, MBA chairman-elect, Kurt Pfotenhauer, senior vice president, government affairs at MBA and Rod Alba, director, government affairs at MBA, will be speaking and answering questions on the proposed rules. (Additional information about the audio conference is available at the MBA Web site, www.mortgagebankers.org/conferences.)

Speaking at Wednesday's conference, produced by the October Research Corp., HUD Associate General Counsel John Kennedy defended the proposed rule, saying that the department's recently issued "Homeowners Bill of Rights" served as a guiding principle in drafting the proposed rule.

“Homebuyers have the right to receive settlement cost information early in the process allowing them to shop for the mortgage product and settlement services that best meet their need,” Kennedy said. “Homebuyers have the right to benefit from new products, competition and technological innovations that could lower settlement costs.”

The MBA has pushed RESPA reform as a method to curb predatory lending since the issue started to surface in the late 1990s. “MBA has long advocated that mortgage reform is necessary to effectively ensure that consumers are protected and that they receive full and meaningful disclosures throughout the mortgage process,” said MBA Chairman-Elect John Courson.

But several provisions of the proposed rule, including a “Guaranteed Mortgage Package Agreement (GMPA),” have caused major concerns in the title industry. The provision could have potentially take $2.6 billion a year nationwide from settlement services, according to industry analysts.

“The package concept would clearly encourage more alliances, partnerships [and] possibly some mergers and consolidations as companies realign to provide the full package,” said Don Blanchard, assistant general counsel at Countrywide Home Loans, Plano, Texas.

Grant Mitchell, an attorney with the Washington law firm Reed Smith, said that large mortgage bankers could see good prospects for the proposed rule and consumer groups might see the rule as making the process more understandable.

Blanchard, however, pointed out that a major risk for lenders could be in the guarantee of a particular interest rate before having an application, especially in a rising rate environment.

HUD has acknowledged to a certain degree that although the services and products would remain the same in a mortgage, there would be some financial impact on providers. But Kennedy said the consumer must be well informed on costs before they can shop and companies can compete for business.

“Competition is only possible if the consumer has firm and early information on which to make his or her decision on a mortgage product and settlement services,” Kennedy said.

But Ann Vom Eigen, legislative and regulatory counsel at American Land Title Association (ALTA), said that the “bundled” costs might come at price.

“The price may be the availability of service and the ability to provide that service on a timely basis,” Vom Eigen said. She noted that it needs to be determined if the consumer could choose a particular vendor for title insurance and return to that provider to reissue the title insurance on a refinance.

Vom Eigen asked a number of questions as to how the industry could carry out the proposed rule and if the proposed rule is actually “workable.” She also pointed out that the disclosures might not be simpler to understand.

One aspect of the rule ALTA will be looking at is whether the Good Faith Estimate (GFE) under the proposed rule is going to provide an option to the consumer or whether the GMPA, marketed at a particular price, will force consumers to go into that direction, Vom Eigen said.

HUD’s philosophy is that a “very simplified” cost comparison sheet might be most helpful where the lender and borrower interact since the lender directs settlement service providers to consumers, according to James Dufficy, vice president and regulatory counsel, First American Corp., Santa Ana, Calif.

“[HUD] may be right,” Dufficy said. “And certainly, we can all accept that HUD has a laudable goal. And in certain markets and in certain segments of the real estate business, they may actually achieve their goal.”

A number of vendor management services have already been packaging settlement services to lenders, but Dufficy said the rationale behind the proposed rule stems from a closer scrutiny of settlement costs due to the recent refinance booms. But Mitchell said that predatory lending is the major reason for the proposed RESPA rules.

The MBA will also hold seminars on the proposed RESPA rules September 16 in Chicago and September 18 in Los Angeles. The MBA will also sponsor a special session discussing the proposed rules during MBA’s Regulatory Compliance conference September 30 to October 1 in Washington, D.C.

Comment for the proposed rule ends on October 28.

October Research Corp. publishes The Title Report, The Legal Description and Appraisal Intelligence newsletters. Audiocassettes of the RESPA seminar are available by calling 877-6-OCTOBER.
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In a statement, FHFB Chairman John Korsmo said that HUD, which has a seat on the agency’s five-member board, had asked for additional time to review the proposal. Korsmo said that HUD wanted to make certain that the proposed standards would not affect duties of HUD employees outside of their FHFB duties.

Though the FHFB regulates the 12 Federal Home Loan Banks under standards covered by the Office of Government Ethics, the FHFB designed the proposed standards of conduct to further ensure the integrity of Finance Board decision-making. The Gramm-Leach-Bliley Act, passed in 1999, removed FHFB authority from a number of aspects of Federal Home Loan Bank operations.

The FHFB proposed the Standard of Conduct to promote fairness, objectivity and impartiality in reviews of FHLBank petitions and other matters, avoid inappropriate interference with or involvement in the FHLBanks’ internal operations and business and avoid giving the appearance of impropriety from failing to maintain a “proper distance” from the FHLBanks.

“Because the statutory role of the Finance Board is to regulate the Federal Home Loan Banks, the Finance Board must remain at arm’s length from the Banks,” Korsmo said.

The new standards would prohibit FHFB directors, officers and employees from attending any official business meeting of a board of directors, committee or advisory council meeting of an entity regulated by the board. The standards also re-affirm government rules on gift-taking and reimbursement for travel, food or entertainment.

Korsmo said he expected HUD to finish its review shortly and that the FHFB could act on the standards at its next meeting on September 12.
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“It clearly is turning this into a seller’s market,” said Jeff Hudson, chief executive officer, George Elkins Mortgage Banking Co., Los Angeles.

Investors have been getting out of the stock market during its recent freefall and moving toward real estate—the so-called “flight to quality”—and gaining confidence in the asset as an investment vehicle. Sellers are looking to gain 70 percent or 80 percent of the value out of the property tax-free through refinancing, according to Hudson.

Owner motivation to sell property remains low in this environment because it makes “prime property” more valuable, and, with variable interest rates in the 3 percent range, owners could use financing vehicles to carry them through the difficult times, Hudson said. “The pressure on the market right now is on the sales side,” he added. “Anybody who can refinance today is refinancing.”

In the refinance market, lenders are looking at the loan to value (LTV), debt coverage ratios (DCRs) and loan stress-constant, which is an arbitrary loan constant put onto the DCRs. In this case, however, the constant is going as high as 10 percent to 11 percent rather than 1 percent above the current rate.

“It’s basically a double debt coverage ratio,” Hudson said, adding that the three factors are balancing out. “The limiting factor in more cases is the loan to value or the stress constant and basically never the debt coverage ratio.”

But as rates drop, capital is not flowing into projects or creating increased proceeds, according to Hudson. He expects to see a widening of spreads as rates continue to go down and lenders should not be going below that threshold.

“Virtually all Wall Street lenders are putting floors on their loans today, although they’re rolling over and giving them up pretty quickly,” Hudson said.

The bid-ask spread between borrowers and sellers continues to remain wide, leading to more refinancing. Buyers believe that prices are artificially high and a disconnect between price per foot and the actual market rent, according to Hudson.

“The buyer would prefer mark-to-market,” he said. “There is that disconnect that will work itself out over the next few years.”

But existing CMBS borrowers who took out loans in 1993 when large amounts of capital went into the CMBS market could have problems refinancing. “Most of those loans were 10-year fixed rates with either very onerous prepayments, loss of yield or defeasance which precludes anybody’s ability to refinance the property before the maturity of the loan,” Hudson said, adding that most life companies have defeasance or loss of yield in their prepayments making owners unable to refinance.
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