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RESPA Proposal Would Harm Housing Affordability

Written by Peter L. Mosca on Tuesday, 23 September 2008 7:00 pm
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A Department of Housing and Urban Development (HUD) proposal relating to the Real Estate Settlement Procedures Act (RESPA) "would result in significant increases in home purchase costs and undermine critical financing support at a time of severe mortgage and housing market turbulence," according to the nation's home builders.

Testifying on behalf of the National Association of Home Builders (NAHB) before the House Subcommittee on Oversight and Investigations, Debra Still, president and CEO of Pulte Mortgage LLC in Englewood, Colo., told lawmakers that HUD's proposal to change its regulations relating to RESPA would "have an immediate negative impact on many consumers who purchase new homes."

In 1974, Congress enacted RESPA to address problems in the real estate settlement process including abusive practices that increased costs to homebuyers, and lack of understanding about the settlement process and its costs. RESPA's purpose is twofold: 1) to provide consumers with information about the real estate mortgage transaction and the costs associated with it, and 2) to prohibit certain practices, such as referral fees between settlement service providers, that result in higher costs and reduced quality to consumers.

At issue with the HUD proposal is an attempt to alter the definition of "required use," which would prohibit a home builder from offering any incentive in exchange for a home buyer's use of the builder's affiliated mortgage or title companies or any other affiliated business. Home building companies that have affiliated mortgage and title companies have formed these entities primarily to offer consumers better finance choices and improve the likelihood that the home sale closing occurs as promised and in a timely manner.

Under the market conditions that have prevailed during the past year, where mortgage financing has become unstable and uncertain, these relationships have taken on greater importance, said Still. "Many home builders can document sales numbers in the hundreds that were originally scheduled to have been financed by outside lenders that failed to take place as promised and were subsequently 'saved' by the builder's affiliated mortgage and title company at the eleventh hour," she said. "If they had used non-affiliated lenders, their mortgages would have had much less favorable terms." Contrary to HUD's assertion, Still said that homebuilders in general do not increase selling prices of homes to offset these incentives.

"The competitiveness of the marketplace simply does not allow this to occur," she said. "If a home builder does not offer consumers new homes at fair prices, combined with settlement services at fair terms, these consumers will choose a more desirable alternative."

In addition to the NAHB, the National Association of REALTORS® also called for concern in its recently released "The Estimated Costs of HUD's Proposed RESPA Regulations" report that found HUD "significantly underestimates the costs of implementing the new requirements."

We want to see reform to the Good Faith Estimate that simplifies the closing process, allows borrowers the opportunity to shop around for the best mortgage for their situation, and ensures that they fully understand the terms of their chosen mortgage," said NAR President Dick Gaylord.

The NAR report, conducted by Dr. Ann Schnare, a respected housing economist, highlights several key considerations that HUD does not address in its calculations that could well produce compliance costs that are four times higher than those derived by HUD. "My report demonstrates that HUD is ignoring several key factors in its analysis that could have a major financial impact on consumers and could likely add an average of more than $400 to a borrower's closing costs if implemented," said Schnare.

"After accounting for additional hedging and underwriting costs, and applying more realistic assumptions regarding the expected number of GFEs, projected costs could well exceed $300 per loan," Schnare said. "HUD also underestimated the cost of the proposed closing script." The report estimates that the cost of the closing script would probably be about twice the amount estimated by HUD, and those costs would most likely be passed on to the homebuyer.

"In the end, a proposal that is supposed to save consumers could wind up costing more per transaction, and reform that is supposed to make the transaction safer and easier to understand for consumers could end up more confusing and more complicated. To protect consumers in the real estate transaction, NAR has asked HUD to rescind and revisit the current proposal and have asked that HUD reissue a rule that focuses on simple disclosure that allows the GFE to mirror the HUD-1," Gaylord said.

All this on September 16, 2008 news that builder confidence in the market for newly built single-family homes rose for the first time in seven months, according to the NAHB/Wells Fargo Housing Market Index (HMI). The HMI gained two points to 18, rising from its record low of the previous two months.

"Builders have several reasons to be more optimistic at this time," noted NAHB President Sandy Dunn, a homebuilder from Point Pleasant (WV). "Many are sensing that home sales are nearing a turning point with the support of the newly enacted first-time home buyer tax credit. Meanwhile, with the government's explicit backing of Fannie Mae and Freddie Mac now assured, this should help keep mortgage rates at very favorable levels going forward."

"Nearly half of the builders in our September survey indicated that they expect to see a positive impact from the tax credit in their market areas," said NAHB Chief Economist David Seiders. "Of those respondents, 20 percent said their market has already experienced some of this effect. Meanwhile, consumer confidence has risen and more households are saying that now is a good time to buy a home. All of these factors, along with the recent downward movements in mortgage rates, suggest that new-home sales will be stabilizing in the final quarter of the year."

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three of the HMI's component indexes registered gains in September. The indexes gauging current sales conditions and traffic of prospective buyers were each up a single point, to 17 and 14, respectively. Meanwhile, the index gauging sales expectations for the next six months rose by six points, to 30 - which was four points higher than its year-ago level.

All regions also posted some degree of improvement in the September HMI, with the Midwest, South and West each up two points, to 15, 22 and 12, respectively, and the Northeast posting a six-point gain to 22.

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