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HUD Introduces New Good Faith Estimate and Proposes Other Changes to RESPA

Alphonso Jackson, Secretary of Housing and Urban Development (HUD), Friday released a proposed mortgage reform package designed to help consumers better understand the terms of the loans they are considering and offering guidelines for shopping for different products.

The changes, if enacted after a mandatory period of public comment, will reform the 30-year old Real Estate Settlement Procedures Act (RESPA). Chief among the reforms; for the first time HUD is proposing that mortgage brokers and lenders provide consumers with a standard Good Faith Estimate. Jackson said that by offering consumers clearer, more certain cost estimates the average borrower will save nearly $700.

"A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this (the home buying) process," the Secretary said. "Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices."

HUD said that the proposed Good Faith Estimate (GFE) will substantially enhance disclosure of all important aspects of the loan, including:

The interest rate and monthly payment;

Whether the interest rate and principal balance can increase and by how much; and

Whether the loan has a prepayment penalty or balloon payment.

HUD released a draft both of the proposed GFE and of a revised HUD-1, the settlement statement given to all borrowers at the closing on the loan. The GFE is remarkable clear for a government document. It consolidates closing costs into major categories to prevent "junk fees" and displays total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD's new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. Modifications to modify the HUD-1 settlement statement are mainly to assist consumers to compare actual charges on the HUD-1 with prior estimates on the GFE.

One feature of The Good Faith Estimate is not going to make lenders happy. It would require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. Lenders have already come out strongly against such a change since it was first proposed by consumer activist groups. HUD said it is its belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. However, to ensure that HUD's new proposal would not create a consumer bias against brokers, the Department said it did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker.

Finally, HUD is proposing that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower. Each proposed script - there is a different one for each loan type - restates in a clear and specific manner every loan term and also provides a graphic showing borrowers which numbers can change from that provided in the GFE and by how much. This script will provide a ready post-closing reference to the loan.

The proposed reforms go beyond the cosmetics of new forms. HUD is also proposing legislative changes to RESPA. HUD currently does not have an enforcement mechanism for some of the most important consumer disclosures and protections and so intends to seek the authority to impose penalties for violations of specific sections of RESPA.

Among the sections for which authority will be sought are those dealing with the provision of a uniform settlement statement, Good Faith Estimate, and settlement costs booklet; loan servicing; prohibition against kickbacks, referral and unearned fees; title insurance; and portions of the section regarding escrow accounts.

HUD will also ask that the Secretaries of and State and other regulators be allowed to seek injunctive and equitable relief for violations of RESPA; require delivery of the HUD-1 to the borrower three days prior to closing; and establish a uniform statute of limitations applicable to governmental and private actions under RESPA.

The proposed GFE, modifications to the HUD-1, and proposed settlement scripts can be reviewed in their entirety at www.hud.gov.

Title: HUD Introduces New Good Faith Estimate and Proposes Other Changes to RESPA

Date: Fri, 14 Mar 2008 11:32:03 EST

Location: http://www.MortgageNewsDaily.com/3142008_RESPA_Changes.asp

Date Printed: 3/17/2008

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Residential Condo Glut to Worsen

By Matt Hudgins

Mar 27, 2008 4:29 PM

Developers and owners of residential condominiums for sale in overbuilt markets would be wise to cut their losses and sell before a wave of construction adds another 100,000 units to the national inventory of this year, experts say.

“People don’t realize that prices are going to be trailing the market down,” says Gene A. Berman, managing director of broker Marcus & Millichap’s Florida offices. “Smart lenders and smart owners are cleaning up the books [to sell] now because they know that in the next six months to a year, it’s not going to get better for them.”

Nationwide, the supply of condos for sale totaled 604,000 units in February, according to the National Association of Realtors (NAR). That number is down 1.8% from the inventory a year ago and well below the peak inventory of 731,000 units measured last July. Due to a slower pace of sales this year, however, February’s inventory equates to a 13-month supply, an all-time high.

Overbuilding is concentrated in specific markets. Chicago, for example, will add 16,000 condos this year; 14,600 are slated for completion in New York and another 13,000 are coming online in Phoenix, according to Josh Scoville, director of strategic research at Property & Portfolio Research. “These are just being added to the glut of empty units in the markets.”
 
The oversupply will worsen this year with the delivery of new projects that started construction before the credit crunch hit last August, according to Matt Anderson, a partner at Foresight Analytics LLC. Of 120,000 units under construction at the end of 2007, the company expects approximately 100,000 to reach completion this year and another 77,000 to break ground.

The oversupply and its diluting effect on sales have been accompanied by soaring delinquency rates on condo construction loans. Of the $42.3 billion in construction loans outstanding for condos at the end of the fourth quarter last year, a whopping 10.1% were behind on payments by 30 days or more, according to Foresight Analytics, a real estate and economic research firm in Oakland, Calif. That’s up from 2.6% a year earlier and nearly double the delinquency rate of 6% in the third quarter of 2007.

“It’s striking how rapidly the market has deteriorated, but at the same time it’s not surprising given the general residential downturn across the U.S.,” Anderson says. Indeed, the inventory for single-family homes in February exceeded 3.4 million, an unhealthy 9.2 months of supply, NAR reported.

While Anderson expects construction on about 10% of the condos under construction to be halted before completion, most projects are barreling ahead. The large number of units in the pipeline is due in part to the all-or-nothing nature of condo development, which requires completion of an entire project in order to close the sales on even a fraction of units.

Developers midway through a project have few good options. Some are falling back on conversion of completed projects to rental units, but the more substantial building materials and luxury fixtures that go into most condominiums today come with a high cost of construction, making rental income a poor substitute for sales. “It doesn’t recoup all of the money they’ve put in,” Anderson says.

In markets like San Diego, Las Vegas, San Francisco and South Florida that experienced some of the largest residential construction bubbles, new units will find few interested buyers upon completion, according to Berman of Marcus & Millichap. That’s because potential buyers at this point in the cycle are more likely to be investors than residents, and investors will wait to see prices bottom out before they buy rather than risk purchasing an asset that may continue to decline in value.

Vulture funds are already hovering in overbuilt markets like Miami, which has 50,000 to 70,000 condominiums either under construction or completed and empty, according to a Marcus & Millichap estimate.

Since late February, condos in downtown Miami have gone to auction without a minimum bid requirement, a sure sign that some investors believe the time to hold out for a specific price point has passed. Investors who want to snap up some of those deals appearing at auction will need cash resources, Berman says, because sellers aren’t going to allow time for a buyer to line up third-party financing.

Having experienced the price declines and lengthy recovery of commercial real estate in the days of the Resolution Trust Corp., Berman believes investors that continue to hold out for better prices on their condo units are setting themselves up for more painful losses down the road.

“A lot of developers or people who have bought really nice units on spec are holding onto them and renting them out for next to nothing in hopes that the market will come back,” Berman says. “But there’s really no market for seven-figure condos.”
 

Home Price Decline Steepest in 21 Years

MoneyNews
Tuesday, March 25, 2008

Treasury’s Plan Would Give Fed Wide New Power

stoic little town faces tomorrow

By Scott Gold
Los Angeles Times Staff Writer

February 29, 2008

Sigfried Carrle angled his farmer's hat into a forceful wind roaring across the Antelope Valley. He did not blink, even when a fly bounced off his craggy cheek.

Dust curdled the air and shrouded the sun, and stalks of wheat trembled like the strings of a harp. The sign at Carrle's farm stand on the gravel shoulder of California 138, in the town of Neenach, read: "Last Chance Peaches." The landscape was so bleak it seemed prudent to ask: Before what?

But the produce was fresh and plump and grown in Carrle's backyard. So you picked through his crates -- a half-pound of green tomatoes at 50 cents a pound, a pound and a half of Fairtime peaches at $1.25 a pound, and on and on -- until your arms were full of a high school algebra question with no calculator in sight.

"What about five dollars?" Carrle shrugged.

Oh, it should be more than that. . . .

"Yes," Carrle said, then leaned in for effect. "It should, shouldn't it?"

What he meant, on the surface, was that there isn't a place for backyard farmers in modern commerce, that it costs him more to irrigate his tiny orchard than he could ever get for his fruit.

But it was a reminder, too, that the truly rural outposts of Los Angeles County -- the nation's top agricultural county not so long ago -- are withering away. And this one happens to abut the proposed site of the largest planned community in county history.

Neenach -- and a smattering of other forlorn towns hidden between Lancaster and the Grapevine -- will be the subject of a fierce dispute in the coming year over when enough is enough in Southern California.

On one side, advocates will wave studies showing that there are 6 million more people headed this way in the next 20 years, people who will need roofs over their heads. On the other side, activists will point out that once construction starts here -- above the historical northern boundary of the region's development -- there will be nothing to keep "Los Angeles" from turning into a vast, broken metropolis stretching from Tijuana to Bakersfield.

It would all be very apocalyptic-sounding, if only it was the kind of thing that got Neenach bent out of shape.

Life, by design, is gentle and dull here.

Eight hundred people, give or take, live in Neenach. Recreation consists largely of trying to grow a bigger squash than your neighbor or trying to buy his truck. One man races pigeons. The school closed a few years back when they ran out of kids, and its rose-painted walls are still the brightest thing on the prairie.

When the abutting development is built -- if it is built -- it will be called Centennial. It would be the end, for all intents and purposes, of Neenach.

Billed as a "new town," Centennial would be constructed on a chunk of the 165-year-old Tejon Ranch. There would be 23,000 homes, eight elementary schools, three fire stations.

Well aware of the lifestyle they are preparing to upend, managers of the project have launched a spirited marketing campaign to sell Centennial -- not to sell the houses, though that would come soon enough, but to sell the very idea.

They plan to pepper the development with open space and "gathering places" -- civic squares, parks -- intended to foster a small-town feel. Children would be encouraged to walk to school, which would indeed be revolutionary by Southern California standards.

In an effort to make Centennial "self-reliant" -- that's code for cutting down on commuter traffic -- they have pledged to create 30,000 local jobs. More than 1,000 would be required for construction alone: a new house every eight hours, on average, seven days a week, for 20 years.

Environmental advocates, suffice to say, are not impressed.

Ileene Anderson, a biologist with the Center for Biological Diversity, a leading advocacy group opposing the development, said Centennial would be built on rare ecosystems, including the largest swath of native grassland left in California.

Those ecosystems are home to animals that deserve protection, she said: condors that fly overhead, a species of mouse that lives only on the interface between the Antelope Valley and the Tehachapi mountains.

That battle will play out in the next two years or so, first in front of county regulators and then, chances are, in court.

Neenach is divided into two camps too, just not in the usual big-developer-meets-small-town way.

There are those who wish they'd just get on with it.

And those who figure they'll be dead before it happens.

Joe Stamback, 71, represents the first camp.

He grew up in Compton but moved here in 1975 to get away "from the hustle and bustle and drugs," Stamback said on a recent afternoon, relaxing on his back porch as his dogs -- Lily, Jacko, Humphrey, Gracie and Sarah -- vied for his attention.

He soon discovered that you can grow just about anything in Neenach's soil; a year after he arrived, he celebrated the nation's bicentennial by growing red, white and blue grapes: red Candace, white Thompsons, blue Concords.

Back then, Neenach was a little livelier. There were community-wide potluck dinners, and on occasion old-timey bands would play into the wee hours. There were almost 80 members in the local 4-H Club. Since then, many of the kids move away as soon as they are able.

Stamback spends much of his time making his tri-tip, a local legend, which he sells to raise money for sports teams at a high school 25 miles away. Gardening has taken an even more central role. He grows his own walnuts and throws them in a cement mixer with rocks to get rid of the husks.

Construction, he notes, could have started by now if there hadn't been such a stink about "condors and minnows and all that crap." It would be nice, he said, to have a few more restaurants to choose from, something other than the Sizzler up the road in Gorman, though he noted the Sizzler does offer a fine buffet. In fact, he said, the whole deal has started to sound pretty good.

"Schools?" he said. "Parks? Shops? I could go for some of that."

The headquarters of the second camp is down the road, at the home of William R. Barnes.

By the front door, there is a hand-painted copy of the Pledge of Allegiance. Over the fireplace, there is an old rifle. Outside, past the family's graveyard of rusted-out hay rakes and grain threshers, is the land Barnes men have farmed since the 1800s, when Barnes' grandfather homesteaded in Neenach.

Standing in the fields, there's not much to look at it. But you can, he points out, see the big picture. Barnes sees a queasy and turbulent real estate market, which could help buffer Neenach from substantive change for years to come.

In other far-flung suburbs, block after block is dotted with for-sale signs and mortgage default notices. Many of those spots are -- as Centennial would be -- marketed to families of teachers and firefighters. Barnes knows, too, that there are other big developments in the north end of the county that could break ground before Centennial.

"It all depends on the economy," Barnes said. "And it's been rough."

He's right, said Centennial spokeswoman Barbara Sayre Casey. The construction plan, she said, "could be elongated if the market stays down."

Farming the same land for more than half a century gives you some perspective, Barnes said. He's a "dry" farmer, which means he relies on the rain; he's learned not to get too excited about the wet years or too depressed about the dry ones. Sixty years of marriage, 23 grandchildren, four great-grandchildren -- that's the important stuff, he said.

"All the rest, it don't bother me," he said. "I don't look for much to change."

scott.gold@latimes.com

Starved credit wrecked housing, not vice versa Commentary: Mortgage rates fall while public policy still frozen Friday, February 29, 2008 By Lou Barnes Inman News

Mortgage rates have begun a decline from the irrational levels of the last month, now approaching 6 percent and says here likely to cross back into the fives. Part of the decline is due to deteriorating economic news. The toughest was a surge in new claims for unemployment insurance, up to 373,000, consistent with recession and suggesting that next week's payroll report will show February contraction. Orders for durable goods tanked 5.3 percent in January, as have February measures of consumer confidence. Inflation is worrisome, but a soon-to-blow commodity bubble will fix that. A two-part story today, housing as scapegoat for the failures of others. The real causes of this credit crunch -- still called "subprime" -- and the recession it has spawned are the grotesque failure of structured-finance products on Wall Street, and failure of oversight by their regulators. The strange story of mortgage-rate spike and reversal began with the January fable that mortgage-backed securities (MBS) issued by Fannie, Freddie and Ginnie (the "GSEs") had become too toxic for investors to hold. That notion made no sense here: These GSE/MBS are as good as Treasurys, no matter what the ultimate default rate of mortgages within (Ginnies are guaranteed by the Treasury, Fannie and Freddie clearly "too big to fail"). The GSE/MBS market is $4.5 trillion, the deepest and most liquid market for anything on the planet except U.S. Treasurys. Yet, traders said throughout February: "too many MBS sellers." The excess on the market was certainly not new loan production. Now we know who those sellers were: big banks and Wall Street dealers, capital impaired, dumping the only liquid assets they have to make room for trash flooding back onto their balance sheets. The backwash: the remains of deals they sold but agreed to support if "something went wrong." The February went-wrong: almost $1 trillion in "auction-rate" securities -- actually good-quality muni-bonds, but held in short-term rollover structures (note: nothing whatever to do with housing or "subprime"). When rollover failed in renewed crunch, an avalanche of illiquid paper hit banks, triggering MBS sales and higher mortgage rates. The financial press is having a wonderful time ginning-up a housing depression, this week shrieking about new-home-price data: "Decline in Home Prices Accelerates" (WSJ), emphasizing the Case-Shiller index, down 8.9 percent in '07. Case-Shiller is designed to magnify home-price declines. Robert J. Shiller correctly called the stock market bubble (his book "Irrational Exuberance" appeared on the day of '00 collapse), and has spent the last several years misapplying financial-market principles to real estate, gleefully predicting a 30-40 percent national crash in home prices. The design flaw: It captures only sales of homes, obviously heavy with distressed transactions. For the authentic story and great methodology, visit OFHEO.gov and its "all-transactions" House Price Index, which includes repeat appraisals in refinances, by definition free of distress. By that measure, national home prices in the fourth quarter rose by 0.8 percent. Prices fell in only 11 states, and in only five of those were declines in excess of 1 percent. See page 21 of the report for its critique of Case-Shiller. At the micro level, some spots are in horrible trouble: Of OFHEO's 291 metropolitan statistical areas, 15 had price declines last year in the 10-19 percent range (all in California and Florida). And the national market is decelerating: Of 39 states with positive appreciation in the fourth quarter, 32 had gains of less than 1 percent. The key to this unpleasant situation: Housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy. The public policy response is still frozen, Democrats trying to help families who cannot afford their homes to stay in them, and Treasury Secretary Henry Paulson refusing assistance to the financial system: "I'm not interested in bailing out investors, lenders and speculators." Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com. *** What's your opinion? Send your Letter to the Editor to opinion@inman.com.

U.S. Economy: Existing Home Sales Decline to Nine-Year Low

By Courtney Schlisserman

Feb. 25 (Bloomberg) -- Sales of existing homes in the U.S. fell in January to the lowest level since records began nine years ago and prices slid for the sixth time in seven months, posing a threat to consumer spending, the largest part of the economy.

Resales declined 0.4 percent, less than forecast, to an annual rate of 4.89 million from a revised 4.91 million in December that was higher than previously reported, the National Association of Realtors said today in Washington.

The figures indicate declines in home prices so far aren't sufficient to entice more buyers. Former Federal Reserve Chairman Alan Greenspan said today that the deepening rout in housing is having a ``broader effect'' on spending, and that a recession this year may be deeper than previous downturns.

``The Federal Reserve's efforts to restore the mortgage market so credit is available so people can buy houses has largely failed,'' Peter Morici, an economics professor at the University of Maryland, said in a Bloomberg Radio interview. ``There really isn't a lot of hope that things are going to turn around soon.''

Economists had forecast home resales would fall 1.8 percent to an annual rate of 4.8 million, according to the median of 63 estimates in a Bloomberg News survey. Estimates ranged from 4.65 million to 5 million.

The Standard & Poor's Supercomposite Homebuilding Index, which had fallen earlier in the day, rose following the report. The measure was up 0.4 percent at 11:37 a.m. in New York, at 341.21. Treasuries fell, with 10-year note yields rising to 3.86 percent, from 3.81 percent on Feb. 22.

Unsold Properties

Mounting foreclosures are adding to a glut of unsold homes that is driving down property values. The number of homes for sale at the end of January rose 5.5 percent to 4.2 million. At the reported sales pace, that represents 10.3 months' supply, compared with 9.7 months in December.

``The past five months' sales activity has been very soft, but stable,'' said Lawrence Yun, the real-estate agents group's chief economist. A fiscal stimulus that included tax cuts and relaxed restrictions on so-called jumbo mortgage loans may lead to better sales late this year, he said.

Elevated inventories are driving down prices and causing some potential buyers to stay on the sideline to see if prices will go down further.

The median sales price fell 4.6 percent to $201,100 from January 2007. The median cost of a single-family home decreased 5.1 percent to $198,700, while that of condominiums and co-ops fell 1 percent to $220,400.

``The general trend is down, especially in home sales,'' Anirvan Banerji, director of research for the Economic Cycle Research Institute in New York, said in a Bloomberg Television interview. ``There is quite a bit of overhang in inventory.''

Greenspan Remarks

``There is more adjustment that is required'' in housing, Greenspan told a conference in Abu Dhabi, United Arab Emirates, today. ``There is a broader effect on consumer expenditures.''

Resales fell in three of four regions, led by a 3.6 percent drop in the Northeast. They declined 2.1 percent in the West and 0.5 percent in the South. Sales were 3.4 percent higher in the Midwest.

Sales of single-family homes increased 0.5 percent to a 4.34 million pace from a 10-year low in December, according to today's report. Sales of condos and co-ops fell 6.5 percent to an annual rate of 550,000.

Housing ``is going to be subdued'' until inventories are reduced, Federal Reserve Bank of Minneapolis President Gary Stern told reporters Feb. 19 after a speech in Golden Valley, Minnesota.

The effects of the worst housing recession in 25 years have spread into other areas of the economy. The Fed Bank of Philadelphia's general economic index fell this month to minus 24, the weakest reading in seven years.

Recession Odds

Economists surveyed by Bloomberg News earlier this month put the chance of the U.S. entering a recession at 50-50, up from 40 percent odds a month earlier.

The Fed last week said it lowered its growth forecast and now expects the economy to expand 1.3 percent to 2 percent in the fourth quarter from the same period of 2007, compared with the 1.8 percent to 2.5 percent it projected in October.

The Commerce Department is scheduled to release the January report on new home sales on Feb. 27. While economists forecast a decline, some measures indicate demand for new homes may be near the bottom.

For example, confidence among U.S. homebuilders rose for a second straight month in February and companies said there were more prospective buyers touring properties, the National Association of Homebuilders said on Feb. 19. In addition, the Reuters/University of Michigan index of consumer sentiment showed a record number of Americans said lower home prices made home buying conditions favorable.

Back to 2002

``We're seeing prices now that are basically back to '02, '03 levels,'' Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said in a Bloomberg Television interview on Feb. 21. ``That begins to get compelling for customers.''

Even so, the housing market ``continues to be in a very difficult position right now,'' and weaker sales are cutting into builders' profits, Hovnanian said.

Lowe's Cos., the world's second-largest home-improvement retailer, forecast full-year earnings less than analysts' projections after reporting a drop in sales and profits in the fourth quarter.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: February 25, 2008 11:47 EST