Industry Watch: Fannie, Freddie Expand Disclosure

Two major secondary-mortgage sources respond to government concerns and expand the data they’ll make available about the mortgages that back their securities.

February 1, 2003

Fannie Mae and Freddie Mac have agreed to share more information with investors about their mortgage-backed securities. The companies made this announcement on the same day as a report from several governmental agencies finding that data supplied by the two secondary mortgage companies didn't include data investors want to determine the risk of mortgage-backed portfolios was released.

Although the federal report didn't specifically request that they provide more data, Fannie Mae and Freddie Mac said they would follow recommendations to provide more information about downpayment size, whether loans were to buy homes or to refinance an existing mortgage, and borrower credit scores. The companies also said they would adopt suggestions to share data about who would be collecting payments for mortgages, whether the owners lived in the properties they were financing, and more details about the type of home securing a loan.

Regulators found no evidence that either entity was unfairly using its knowledge of individual mortgages to keep the best mortgages for their own portfolios, as rivals had alleged. Nor did it suggest that either company give up its exemption for registering under federal securities laws.

The courts may stymie U.S. Department of Housing and Urban Development efforts to control closing costs. According to a recent article by widely syndicated real estate columnist Ken Harney, a federal appellate court decision could derail HUD's efforts to ban “markups” on home closing costs by lenders, title companies, mortgage brokers, or other service providers. Overruling a lower court decision, the appellate court ruled that HUD has no statutory right to ban surcharges above the actual cost of providing the service under existing law. The court said that current laws prohibit “kickback,” payments to persons who haven't actually provided a service but have only provided a referral, violating RESPA.

The decision, rendered by the 8th U.S. Circuit Court of Appeals, applies to only seven Midwestern states (Minnesota, Missouri, Iowa, Arkansas, Nebraska, North Dakota, and South Dakota), but according to Harney, it follows on the heels of two similar appellate court decisions covering an additional eight states ( Maryland, Virginia, North Carolina, South Carolina, West Virginia, Illinois, Wisconsin, and Indiana).

Harney notes that in states not covered by the recent rulings, the presumption is that the HUD ban remains in effect, but that the department may not attempt enforcement for fear of again losing in court.

Manhattan condo and coop prices fell 4.8 percent in the fourth quarter of 2002, and sales declined 9.5 percent as a slowing economy pushed New York City residents to search for smaller and cheaper apartments. The average price dropped to $808,657 from $849,013 in third-quarter 2002, according to appraiser Miller Samuel Inc.and Insignia Douglas Elliman, a Manhattan residential brokerage. The number of sales fell to 2,028 from 2,241, the lowest since 2001's third quarter.

In its continuing effort to bring closely-related companies under its corporate umbrella, Cendant Corporation has acquired the common interests of FD Development Company, LLC from an independent business trust. The purchase price was approximately $27 million in cash, plus approximately $58 million of acquired debt, according to the company officials. The transaction was announced February 4.

FFD is the primary developer of timeshare inventory for Fairfield, a company acquired by Cendant in April 2001. FFD was spun off as a separate entity at that time with its preferred interests owned by Cendant.

Cendant officials said the acquisition of FFD's common interests reflects the company’s efforts to simplify its accounting and provide its investors with transparent financial information. The transaction is similar to last year’s folding of NRT under the Cendant umbrella.

Commercial property owners can expect insurance rates to continue climbing well into 2004, although thee insurance market will probably be more stable than it was in 2002, according to a story in the Wall Street Journal. The story predicts that largest hikes will probably be in the casualty and liability lines, which haven't escalated as quickly as property lines in the last few years.

Willis Risk Solutions Global Chairman Mario Vitale states that owners of commercial properties could expect everything from no increase to a 15 percent jump in premiums in 2003. He added that "the slightest event could trigger a new round" of rate hikes.

The U.S. Veterans Administration is no longer providing direct financing for the purchase of VA-owned properties. The change became effective for all listings dated on or after January 31, 2003. For a listing issued prior to January 31, 2003, offers submitted with VA financing will still be considered, and deals with VA-provided financing will be closed. All future listings will offer VA-acquired properties for sale using cash or with outside financing.

Builders are buying into the power of the Internet to sell directly to consumers. Builder Homesite Inc. (BHI), a consortium of 31 of America's largest homebuilders, has begun providing new home listings on Yahoo! Real Estate from BHI's online new-homes portal, www.newhomesource.com. Under the agreement between BHI, Yahoo! Realty Inc., and Yahoo! Inc., the site will display new home listings with details including price, floor plans, elevations, and community information. Interested consumers will be able to request additional information directly from the builder by using an automated online request system.

Lending for U.S. commercial real estate will probably decline in 2003, due to a slowing economy that has hobbled corporate spending as well as a poor employment picture, according to Douglas Duncan, chief economist of the Mortgage Bankers Association of America, speaking at the recent Mortgage Bankers Association annual conference in San Diego.

"In 2002, commercial mortgage lending was up 5.2 percent, to $86.5 billion from 2001's $82.2 billion, but 2003 will be a tough year,” Duncan predicted. He based his conclusion primarily on a recent survey conduced by MBA among commercial property lenders.

Duncan notes that much of last year's commercial lending was driven by refinancings as commercial property owners took advantage of historically low interest rates to save on borrowing costs. "At the end of the day, what has got to happen (in 2003) is an upturn in corporate profits to get business investment and employment. Employment drives demand for retail and office space," he noted.

The real estate industry is broken and terribly misaligned,” according to the president and CEO of one of the nation’s largest franchise organizations. Speaking at GMAC Home Services Annual Business Conference in Las Vegas, John Bearden noted that “The numbers alone speak to the industry's misalignment: Brokers across the nation today average just $137.50 in net profit for each transaction--despite several of the best years in the history of the industry.”

Bearden went much further in his broadside, stating that “our industry today is awash in intellectual dishonesty by some franchisors. Instead of dedicating themselves to the growth and success of their franchisees--and ultimately, the services they provide consumers--they seem motivated more by a desire to simply sign more franchisees and then sell them superfluous 'stuff' that boosts their profit margins but does nothing to improve customer service or spark genuine, productive relationships."

Bearden contended that the industry would right itself only by devoting total attention to clients and customers. "Over the past year and a half, our research into the needs and desires of consumers has shown that they want more, not less, from their real estate professionals," he said.

Thus far, no official representative of another large franchise or brokerage organizations (most of which offer extensive ancillary services to consumers) has commented on Bearden’s remarks.

Licensing regulations in 23 states and the District of Columbia now recognize some form of “nonagency” relations between licensees and consumers, according to the Association of Real Estate License Law Officials. These relationships are identified by a variety of differing terminologies--including “transaction broker,” “intermediary,” and “transaction coordinator.”

Over the past several years, the number of states permitting nonagency relationships between licensees and consumers has grown slowly but steadily. However, in the states that have such provisions, approaches to such relationships vary substantially. In other states, regulators have rejected a non-agency approach to representation, contending that it is inconsistent with the fiduciary relationship of licensee to client upon which the real estate brokerage industry is based.

Veteran industry observer Tom Dooley is president of TWD Associates, a real estate consulting firm in Arlington Heights, Il., and editor of two monthly newsletters. Contact him at 847/398-6410; tdoo@aol.com.

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