The current and previous administration’s alphabet endeavors brought us the largely unsuccessful TARP, HARP, HAMP and HAFA programs. Despite their good intentions, these programs all focused on a carrot-and-stick approach. The “carrot” was that homeowners might be able to avoid losing their homes to foreclosure. The “stick” was that their credit would be damaged for many years and they might wind up owing the Internal Revenue Service thousands of dollars on phantom income reported by the lenders forgiving bad debt.
These programs all essentially failed to accomplish their stated objectives because they relied on one flawed assumption: that by throwing taxpayer money at the existing lenders, bankers and quasi-governmental agencies that got us in the mess in the first place, they would voluntarily use their best efforts to extricate us from the real estate morass. This has proved to be a fatally flawed assumption.
What we have now is a patchwork of inconsistent and largely theoretical governmental programs with precious few practical success stories.
For example, under Home Affordable Refinance Program (HARP), borrowers are required to be current in their mortgage when they apply, with no late payments during the prior six months and no more than one late payment during the prior 12 months in order to be eligible for assistance. Conversely, under Home Affordable Modification Program (HAMP), a borrower must be delinquent in his mortgage payment or be in imminent danger of becoming delinquent in his payments.
Further complicating these eligibility requirements is the largely arbitrary loan to value ratios (LTVs). LTVs are the amount owed versus the home’s fair market value. This is not to say that LTVs are not a critical factor in underwriting loans, refinances or modifications; it’s just that the fair market value can vary considerably during the refinance or modification process using government program.
Borrowers seeking help from these programs are now waiting nine to 12 months or longer for the lender’s decision. Until recently, borrowers who owed more than 115 percent of their home’s fair market value were unable to obtain any benefit from these programs. Only recently were these loan to value ratios relaxed, which allowed many more real world borrowers to start to take advantage of the HAMP modification and HARP refinance programs.
My second resolution would be for Fannie Mae, Freddie Mac and the nation’s other holders of real estate owned (REO) to resolve to dispose of that vast real estate portfolio in a prompt, orderly and efficient manner. Adopting and rigorously following some simple guidelines would go a long way to resolving our real estate stalemate.
For example, all lenders participating in HAFA should be required to provide definitive guidelines for what properties would be eligible for short sales or deeds in lieu of foreclosures. Short sale and deed in lieu applications should be deemed approved unless the lender provides a written denial that states the reason for such denial.
Properties that are acquired either through foreclosure or deed in lieu of foreclosure should be returned to the marketplace either by sale or lease within 90 days of acquisition. Local taxing authorities could enforce this by taxing those REO properties at a much higher rate unless sold or leased within that 90-day window.
Currently, the District of Columbia already taxes vacant properties at a tax rate more than five times the owner occupied rate. Blighted properties are taxed at more than 10 times the owner occupied rate. This change could provide local jurisdictions with much needed real property tax revenue while also providing the REO lenders with serious incentives to put their REO to productive use.
Finally, Congress and the states should once and for all abolish affiliated business arrangements. Under current law, referral payments simply for referring real estate services are illegal violations of the Real Estate Settlement Procedures Act (RESPA).
The logic for this prohibition, of course, is that the consumer will ultimately be paying inflated settlement charges to cover these referral fees. Unfortunately, when affiliated business arrangements became legal, those previously illegal “kickbacks” became legal so long as those “kickbacks” are spread among affiliated businesses and those affiliations are disclosed to the borrower.
Affiliated businesses are also required to adhere to strict regulations regarding the splitting of those settlement service fees. For example, the fee splitting cannot be merely for referring the borrower.
Actual services must be provided to the borrower and the fee splitting cannot be based on a per-transaction basis. The fee splitting can be based only on each party’s equity participation in the service provider.
But frankly, regardless of the hyper technical rules relating to fee splitting, if a kickback “quacks like a duck and walks like a duck, it’s a duck” and the consumer is paying for that duck.
Harvey S. Jacobs is a partner in the Rockville law firm of Joseph, Greenwald & Laake, P.A. He is an active real estate investor, developer, landlord, settlement lawyer and lender. This column is not legal advice and should not be acted upon until legal counsel has been consulted. Jacobs can be reached at firstname.lastname@example.org.