Senate Committee Moves to Break Logjam on Housing Bill

The rapid-paced Capitol Hill action to address the housing mortgage crisis continued to the eve of the Memorial Day recess, with the Senate Banking Committee reaching an agreement on a committee package. The agreement was assembled by U.S. Senator Chris Dodd (D-CT), Banking Committee chairman, and U.S. Senator Richard Shelby (R-AL), ranking committee member.

At press time, the future for a bill remains unclear as the Bush administration hints at a veto.

The Senate’s Dodd-Shelby Amendment to the Federal Housing Finance Regulatory Reform Act of 2008 includes several provisions that are intended to restore stability to the housing market and to help get the market moving again.

Among other things, the Senate agreement would —

• Establish the high-cost loan limit for Fannie Mae and Freddie Mac of 132 percent of the conforming loan limit. Currently, this would allow for the purchase of loans up to $550,000.

• Authorize the Treasury Department’s Office of Financial Education to take expanded steps to improve homeownership counseling services.

• Dedicate a certain percentage of funds from the Government Sponsored Enterprise Securities’ (GSEs) new affordable housing allocations to cover projected costs of the HOPE for Homeowners Program.

The Senate bill contains a provision similar to one previously passed by the House in that it would provide $300 billion to help more than 500,000 homeowners in deep mortgage distress.

The future of the legislation will hinge on whether the bill is characterized as a necessary infusion of relief for beleaguered homeowners in danger of losing their homes, or as a taxpayer-funded bailout for investors and speculators.

The White House has threatened a veto, but its rhetoric has softened recently. Congressional Republicans are warning the White House against opposing a housing crisis package with a difficult election on the horizon.

At press time, the Senate agreement is expected for floor action in June. Proponents hope to send a consensus bill to the president for signature by the 4th of July recess.

ASHI, housing proponents push housing tax credit

ASHI and other realty-related advocates have sent a letter to the leadership on Capitol Hill supporting passage of a tax credit to help stimulate home sales.

Legislation has been introduced on both sides of the Hill to provide such a credit. The Senate version would provide a $7,000 tax credit over two years for the purchase of a foreclosed home. The House proposal would provide first-time homebuyers with a $7,500 tax credit that would have to be repaid over 15 years. The House tax credit would be phased out for individuals and couples earning more than $70,000 and $140,000 respectively.

The coalition supporting the concept is urging lawmakers to make the home purchase tax credit as broad as possible. Proponents urge that the tax credit not discriminate on the basis of income, prior homeownership or foreclosure status of the home purchased.

Such a tax credit would provide several policy advantages:

• It would directly target the housing market, which has been a major drag on the economy.

• It would encourage prospective homebuyers who have been holding back on purchasing decisions to enter the market.

• It would help make homes more affordable by effectively putting cash in the pockets of home purchasers, thereby helping homebuyers ease into their new mortgages.

• The benefit would go directly to individuals and families who buy homes, not to developers, real estate agents and brokers, mortgage companies or banks.

• The housing tax credit coalition continues to educate members of Congress on the merits of the concept and is lobbying for its inclusion in a must-pass bill.

ASHI briefs House committee staff on Home Inspection Counseling Bill

ASHI’s representative has met with House Banking Committee staff and with U.S. Rep. Nydia Velazquez’s (D-NY) staff to discuss possible “fast-track” consideration of HR4776, the Home Inspection Consumer Protection Act, as a possible amendment to another piece of must-pass legislation during the current Congress.

ASHI and Velazquez, the bill’s sponsor, favor the expedited method of redrafting the bill as an amendment and moving it sooner rather than later.

The bill would greatly enhance the U.S. Department of Housing and Urban Development’s (HUD) housing counseling programs to include focused, direct counseling on the advantages of obtaining a home inspection. Of course, the home inspection message would be targeted to homebuyers in HUD housing counseling programs, but would generate messages and materials that would be available to all homebuyers.

The Housing Financial Services Committee’s staff believes the fast-track option deserves consideration and is looking at possibilities for execution during the current Congress. ASHI agreed to not push the issue in relation to the highly controversial housing reform package, which remains under veto threat, in exchange for consideration in some package of lesser controversial provisions that several FSC members hope to build later this session.

ASHI understands that it may be necessary to continue pursuing the legislation in the normal course, as a freestanding bill, and will be urging its membership to ask their elected representatives to cosponsor the bill.

RESPA deadline extended, ASHI SUBMITS comments

HUD’s May deadline to submit public comments on its proposed amendments to the Real Estate Settlement Procedures Act (RESPA) regulation was extended for one month, to June 12. ASHI leadership reviewed the HUD RESPA proposal and submitted comments before the new deadline for consideration as the rule-making moves forward.

The modification of the deadline was expected due to the complexity of the regulation and the simultaneous crush of housing issues on Capitol Hill. 

In brief, the chief concern presented by the proposal thus far with respect to ASHI members is that it would encourage bundling of services by large realty conglomerates and might threaten the independence and objectivity of home inspectors as they act in the best interests of homebuyers.

Following is the entire text of the comments submitted by ASHI.

Comments by

The American Society of Home Inspectors

regarding

24 CFR Parts 203 and 3500
[Docket No. FR-5180-P-01]
RIN 2502-AI61

Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs

Part III

73 FR 14030

June 12, 2008

The American Society of Home Inspectors (ASHI) is pleased to offer comments regarding the proposed rule to amend regulations implementing the Real Estate Settlement Procedures Act.

ASHI, founded in 1976, is North America’s oldest and most respected professional society of home inspectors. ASHI’s goals have always been to build customer awareness of the importance of a quality home inspection and enhance the professionalism of home inspectors.  ASHI is an industry leader in the home inspection profession, requiring its nearly 6000 members to adhere to a rigorous Standards of Practice and Code of Ethics, demonstrate high proficiency in home inspection and maintain/expand skills through continuing education and professional development programs.  ASHI’s objectives include promotion of excellence within the profession and continual improvement of its members’ inspection services to the public.

These comments will be confined to specific impacts of the proposed regulation on home inspection, the services afforded to homebuyers by home inspection, and the unique relationship between home inspectors and homebuyers. 

Proposed “packaging” provisions

Home inspection fees are a settlement cost as defined in 24 CRF 3500.2 Definitions and are subject to RESPA as such:  

“Settlement service means any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following:

…

8) Rendering of inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title;”

In the rule published for comment today, the Secretary is proposing to use the authority under section 19(a) of RESPA to permit pricing techniques using average cost pricing and certain discounts, consistent with RESPA’s GFE and settlement statement requirements, and with section 8.  HUD’s rationale in support of the “packaging proposal” is that it will inure to the benefit of homebuyers in the form of lower pricing, and is summarized in the following excerpt from the proposed regulation: 

“HUD believes that consumers will ultimately benefit from negotiated pricing among and by settlement service providers. This proposed rule seeks to lower consumer costs by permitting settlement service providers who procure, or who help consumers to obtain, third party settlement services, to negotiate the pricing of those services by the third party provider. By using average cost pricing, settlement service providers could avoid having to track individual prices paid for third party services on a transaction-by-transaction basis, thereby lowering administrative costs that would be passed on to consumers.”

This rationale is incomplete and does not account for unintended consequences that would work to the substantial detriment of homebuyers in terms of the quality, completeness, frankness, accuracy and veracity of certain key information derived from home inspections that is very important in helping homebuyers make sound, knowledgeable purchasing decisions.  Whereas this aspect of the proposed regulation is offered as a means to benefit homebuyers in lower pricing, in practical application, it would compromise consumer interests and violate concepts of consumer protection with regard to home inspections. 

ASHI recommends that the regulations be redrafted to disallow packaging, or at the least, to exempt home inspection services from packaging arrangements so as to not interfere with the special business relationship between home inspectors and homebuyers.  

Should the packaging provisions survive as currently drafted in the proposed regulation:  a) entities that offer packaging, and home inspectors whose services would be offered as part of a realty packaging arrangement, should be required to disclose the business relationship between packager and home inspector to the homebuyer, the potential for conflict of interest that it presents, and that as a result the home inspector may not be independent of the outcome of the transaction; b) the packager should certify that it has affirmatively informed the homebuyer that he may alternatively choose to retain his own home inspection from an independent home inspector that he may hire without prejudice or penalty in the transaction; 3) if the homebuyer chooses to retain his own independent home inspection, the package settlement fees will be reduced by the value of the packaged home inspection that would otherwise be included in the settlement package. 

—–

Packaging would allow settlement services providers to exert downward pricing pressure on services suppliers, regardless of whether the reduction in costs is attributable to favorable reasons such as economies of scale, or instead to unfavorable reasons such as a decline in the quality of services. 

Further, there is no guarantee that these savings, in whole or in part, would be passed on to the consumers. 

ASHI presumes that HUD will receive similar negative comments from many small business/self-employed businesses and their representatives based on an economic argument, that packaging will favor very large realty-related businesses that have the size and economic power to overwhelm small businesses in local markets and force smaller entities to either join, partner, or collaborate in some fashion — or face untenable competitive pressures.  These economic arguments, while focused on the interests of real estate-related companies, are sound and ASHI joins in them.  Packaging of services is a substantial threat to the small business/self-employed services industries, and to the extent that the providers in this market are important contributors to robust local communities, the indirect impact on localities would be important and negative as well.    

However, there is a consumer protection argument against packaging as well for its negative service impact on homebuyers.  That negative impact is perhaps most starkly apparent in the potential effect it could have on homebuyers who seek home inspections.   

Home inspectors occupy a special position among the realty-related services in that home inspectors are usually selected, hired by, paid by and work for the sole interest of the homebuyer. 

In most realty transactions, the home inspector is the only realty-related professional whose loyalties flow solely to the interest of the consumer/homebuyer, and no one else, without regard for the interests of other realty-related parties whose overriding economic interests are to complete a sales transaction. 

Home inspectors are paid by homebuyers to conduct a thorough technical evaluation of a home and provide a full, frank report to the homebuyer, regardless of the potential impact of the report on the outcome of the transaction.  This independence is essential in encouraging a frank report. 

In cases in which the homebuyer has secured a contract contingency based on a home inspection, the message in the home inspection report has a clear impact on the outcome of the negotiations and ultimate resolution of the sales transaction. 

In terms of discovering hidden defects or other important technical concerns that would escape the untrained eye, the home inspector, acting independent of the outcome of the transaction and speaking in complete candor to the homebuyer without any taint of future business at stake, can be the homebuyer’s best, and often only, ally in achieving a good outcome for the homebuyer.

In fact, members of the American Society of Home Inspectors pledge to accept no arrangement that would compromise their loyalty to act in the interests of the homebuyer.  ASHI members’ commitment to independence allows them to provide thorough, candid home inspection reports to homebuyers that are not influenced by any factors other than the condition of the home under consideration and the best interests of their homebuyer clients. 

The proposal offered by HUD would upset the loyalties for those home inspectors who wish to do business under the umbrella of large settlement service providers.  Home inspectors would face pressures not only to reduce prices, but perhaps more importantly, to surrender their professional objectivity and render opinions that are more likely to lead to sales and future business opportunities with the packagers.  Those home inspectors who scrupulously avoid conflicts of interest, guard their loyalty to the homebuyer and refuse to allow the economic power of settlement service providers to use them for future business would be the most likely home inspectors to be left out of packaging arrangements.  The consumer homebuyers, whom are purported to benefit from packaging according to the proposed rule, would actually be hurt in the form of home inspections that might not candidly disclose material defects that should be and would be disclosed to the consumers if packaging did not create conflicts of interest. 

Therefore, in terms of home inspection, the packaging provisions in the proposed regulation would create and exacerbate business conflicts of interest for home inspectors that would have a detrimental impact on homebuyers at a sensitive time regarding technical issues material to the sales transaction.  The ultimate impact of these conflicts, should they taint the quality and candor of the home inspection reports on key defects that are the subject of a home inspection, could far outstrip any potential incremental savings that might be achieved from packaging. 

Changes to the HUD-1 and GFE forms    

The foregoing discussion of the relationships among the parties to home sales transactions, specifically between home inspectors and homebuyers, plus the need for better early disclosures as evidenced by the current mortgage/foreclosure crisis, indicates an imperative that homebuyers be informed of their options, and have the opportunity to exercise them, as early as possible in the process. 

HUD advises homebuyers to obtain home inspections.  ASHI has enjoyed a good relationship with HUD in revising the disclosure document, titled “For Your Protection – Get a Home Inspection (HUD document 92564-cn), to make this communication as clear and unavoidable as possible.  ASHI applauds HUD for its efforts working with ASHI to improve significantly the clarity of the HUD message on home inspection.

The most significant remaining problems with HUD’s home inspection message are not the content or the appearance, but rather the timing and certainty that the message is being conveyed to homebuyers.  It is not clear that all homebuyers applying for HUD/FHA financing are seeing the “For Your Protection…” form.  For those who do see it, the timing may be such that certain opportunities that might be available, such as seeking a contract contingency based on a home inspection, become apparent too late to have the contractual impact that might be of greatest benefit for the homebuyer. 

In order for home inspections to have maximum utility, homebuyers should be triggered to consider obtaining a home inspection at the earliest possible opportunity.

Under current law and with the changes anticipated under the proposed regulation, the most reliable means to trigger homebuyer consideration of home inspection would be to include a query on the HUD-1 and GFE forms.  The HUD-1 and GFE forms would be seen, and reviewed in detail, by the homebuyer in every case seeking HUD/FHA financing.  The forms should trigger the consideration process of the homebuyer and require responses that show that at least a minimal degree of consideration has taken place. 

For these reasons, ASHI recommends that HUD add the following query, or a functional equivalent, at an appropriate place to the HUD-1 and GFE forms:

Buyer(s) intend to exercise their option to have a home inspection.
> Yes____    No____

While HUD would determine the appropriate location to add a home inspection query, ASHI would recommend consideration of the form section titled “Getting More Information”.

Recommendations:

1.  ASHI recommends that the regulations be redrafted to disallow packaging, or at the least, to exempt home inspection services from packaging arrangements so as to not interfere with the special business relationship between home inspectors and homebuyers.  

2.  Should the packaging provisions survive as currently drafted in the proposed regulation:  a) entities that offer packaging, and home inspectors whose services would be offered as part of a realty packaging arrangement, should be required to disclose the business relationship between packager and home inspector to the homebuyer, the potential for conflict of interest that it presents, and that as a result the home inspector may not be independent of the outcome of the transaction; b) the packager should certify that it has affirmatively informed the homebuyer that he may alternatively choose to retain his own home inspection from an independent home inspector that he may hire without prejudice or penalty in the transaction; 3) if the homebuyer chooses to retain his own independent home inspection, the package settlement fees will be reduced by the value of the packaged home inspection that would otherwise be included in the settlement package. 

3.  ASHI recommends that HUD add the following query, or a functional equivalent, at an appropriate place to the HUD-1 and GFE forms:

Buyer(s) intend to exercise their option to have a home inspection.
> Yes____    No____

Thank you for this opportunity to comment on behalf of the American Society of Home Inspectors.

Respectfully submitted,

Randall G. Pence, Esq.
President
Capitol Hill Advocates, Inc.