Federal Legislative Update Ken Wingert Senior Legislative Representative National Association of REALTORS® [email protected] What Happens in Washington Matters • 5 Year Extension of Flood Insurance • Changes to USDA Rural Housing • Mortgage Cancellation • Rise of the Regulators: Alphabet Soup = Future of Mortgage Finance • Lame Duck & The Fiscal Cliff • 2013: Tax Reform & GSE Reform • Your Questions National Flood Insurance Program The Biggert-Waters Flood Insurance Reform Act of 2012 National Flood Insurance Program - Background • Flood insurance is required to obtain a federally backed mortgage and by almost all private lenders • National Flood Insurance Program (NFIP) had been subject to 18 short term extensions since 2008 • Twice lapsed, causing a nationwide delay of over 40,000 home sales or 1,300 closings per day • NFIP was $18 billion in the debt • Repetitive loss properties made up over 30% of all NFIP claims • Ongoing taxpayer subsidies first enacted in 1975 meant two houses on the same block with the same value and risk could be paying different insurance rates • The question of wind vs. water continued to plague coastal areas prone to hurricane damage Biggert-Waters Flood Insurance Reform Act of 2012 • Reauthorizes the NFIP through September 2017 (sec. 100203); • Establishes a formula for NFIP and wind insurers to pay where property damage cannot be attributed to wind or water, settling a long-standing dispute and avoiding further lawsuits (sec. 100253); • Eliminates rate subsidies on severe repetitive loss properties that have made repeated claims on the program (sec. 100205); • Improves the accuracy of floodplain maps by establishing a technical council of experts to review and set the standards (sec. 100216); • Establishes an independent appeals board for homeowners and communities to resolve their flood map disputes with FEMA (sec. 100218); Biggert-Waters Flood Insurance Reform Act of 2012 (Continued) • Reimburses homeowner’s appeal expenses when successfully challenging a flood map (sec. 100246) • Studies expanding coverage to include living and business-interruption expenses (sec. 100233); and • Studies the availability and affordability of property insurance for natural disasters (in addition to floods), which could justify a broader federal insurance program (sec. 100247 • Raises $3 billion in revenue to help pay down the outstanding NFIP debt NFIP Reform – Flood Mapping Changes • Sec. 100215. Creates a Technical Mapping Advisory Council made up of federal, state, and local experts to review and recommend flood map standards. Requires progress reports by FEMA to Congress. • Sec. 100216. Creates a National Flood Mapping Program: Establishes a process for local communities to request a remapping based on the standards recommended by the Technical Mapping Advisory Council; and Requires communication and outreach to affected communities and members of Congress. • Sec. 100217. Clarifies that appeals of FEMA determinations in the flood maps will be based solely on whether the determination is technically or scientifically correct. • Sec. 100218. Establishes an independent appeals board for communities and homeowners to resolve their flood map dispute with FEMA. • Sec. 100219. Permits states to invest unlimited additional funds in flood mapping by deleting the limitation that states may only contribute up to a maximum of 50 percent of the cost of mapping. NFIP Reform – Commercial & Multifamily • Sec. 100204. Clarifies that multi-family property owners with 5 or more units are eligible for up to $500,000 in structural coverage under the NFIP, the same as a business property. This does not preclude individuals residing in those properties from buying their own NFIP contents coverage. • Sec. 100214. Clarifies that the NFIP may not deny claim payments to condominium owners with flood insurance that is separate and apart from the condominium association’s policy. • Sec. 100228. Clarifies that the aggregate coverage limit is $250,000 for each 1-4 unit multifamily building, and $500,000 for each business structure and $500,000 for the contents. NFIP Reform – Subsidy Phase Outs & Rate Increases • Prior to passage of the bill, it was estimated by the Congressional Budget Office that subsidized properties were only paying 40% of their true actuarial risk. • 80% of properties covered by the NFIP are already paying full actuarial rates • With the NFIP $18 billion in debt and federal deficits at an all time high – subsidies of any kind are on the chopping block • So who is affected? NFIP Reform – Subsidy Phase Outs & Rate Increases • IF YOU HAVE ANY TYPE OF PROPERTY – PRIMARY OR SECOND HOME THAT IS NOT PRE-1975/NOT SUBSIDIZED (80% of all properties with flood insurance) – You will most likely see nominal rate changes similar to before the legislation • IF YOU HAVE A SECOND HOME, BUSINESS, OR REPETITIVE LOSS PROPERTY BUILT BEFORE 1975 THAT WAS STILL RECEIVING A SUBSIDY: – Your premium will increase by no more than 25% a year over 4 years until you are paying “full actuarial rates” • IF YOU HAVE A PRIMARY RESIDENCE THAT WAS BUILT BEFORE 1975 THAT WAS STILL RECEIVING A SUBSIDY: – Your premium will increase by no more than 20% a year over 5 years until you are paying “full actuarial rates” • IF YOU ARE NEWLY MAPPED INTO A FLOOD PLAIN: – The initial rate for any property newly mapped or updated/revised into a mandatory purchase area would be subsidized (50 percent of actuarial) but then increase by 20 percent per year thereafter, until premiums reach the full (actuarial) cost. NFIP Reform – Bottom Line • No more short term extension or coverage lapses – one less worry in a fragile market • All policy holders with the same risk will be paying the same rate • Taxpayers will not be subsidizing certain properties over others • Flood mapping will be modernized with more recourses for owners to dispute maps • Improved coverage for commercial and multi-family properties • Resolution to Wind vs. Water disputes • Reduced debt for the program USDA Rural Housing Loans • Reduced Budgets mean less staff, less offices, longer closing times • Without legislative action fewer communities will be eligible for USDA loans because of the 2010 Census USDA Rural Housing – Budget Cuts • As part of efforts to reduce the overall federal budget, USDA’s funding amounts have been decreased • Each state was given a reduced allocation and given leeway as to how to meet the new budget • Some states closed offices, some bought-out older staff, some did both • NAR is working with USDA, but up to states to work with their respective rural housing agencies • Let lawmakers know how these cuts have impacted closing times and service USDA Loans & The 2010 Census • Under current law, the United States Department of Agriculture (USDA) has until October 1, 2012 to revise the list of communities eligible for rural housing loans based on the 2010 census data. By that date, USDA will revert to using a definition not updated since 1974 which requires communities to: 1) be outside of a metropolitan statistical area (MSA), 2) be “rural in character”, 2) have a serious lack of mortgage credit, and 3) have a population under 20,000. • More than 900 communities are now at risk of losing their eligibility for rural housing loans • Need to ask Members of Congress to grandfather in existing communities or change definition of “rural in character” which has not been updated since 1974. USDA Loans & The 2010 Census South Carolina Counties/Towns which could lose eligibility: • • • • • • • • • • • • SC SC SC SC SC SC SC SC SC SC SC SC Aiken County Anderson Conway Town Florence County Fort Mill town Greenville Greenwood Lexington County Pickens Richland County Spartanburg Sumter County Aiken Anderson Horry Florence York County Greenville Greenwood Lexington Pickens Richland Spartanburg Sumter USDA Loans & The 2010 Census NC Towns/Counties which could lose eligibility NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC Archdale city Guilford/Randolph Barker Ten Mile Robeson Belmont city Gaston Brices Creek CDP Craven Clayton town Johnston Coover Catawba Eden city Rockingham Fuquay-Varina town Wake Gibsonville Alamance/Guilford Half Moon CDP Onslow Harrisburg town Cabarrus Havelock city Craven Hendersonville city Henderson Holly Springs town Wake Hope Mills town Cumberland NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC NC King Mountain city Cleveland/Gaston Knightdale town Wake Leland town Brunswick Lenoir city Caldwell Lewisville town Forsyth Lumberton Robeson McLeansville CDP Guilford Mebane city Alamance/Orange Mooresville town Iredell Morganton city Burke Morrisville town Wake/Durha Mount Holly city Gaston Murraysville CDP New Hanover Newton Catawba Piney Green CDP Onslow Reidsville city Rockingham Riverbend Town Craven USDA Loans & The 2010 Census NC Towns/Counties which could lose eligibility (Cont) NC NC NC NC NC NC NC NC NC NC NC NC NC Sanford Sedalia town, Shelby city Smithfield Spring Lake town Stallings town Summerfield town Tarboro town Thomasville city Vander CDP Wake Forest town Winterville town Wrightsboro CDP Lee Guilford Cleveland Johnston Cumberland Union Guilford Edgecomb Davidson/Randolph Cumberland Wake/Franklin Pitt New Hanover Cancellation of Mortgage Indebtedness A tax on money you lost – to pay with cash you never received Cancellation of Mortgage Indebtedness Current Law for Mortgage Debt (January 1, 2007 through Dec 31, 2012): A borrower can be excused from paying tax on forgiven mortgage debt, so long as the debt is secured by a principal residence and the total amount of the outstanding does not exceed the original purchase price plus improvements. Cancellation of Mortgage Indebtedness • • • • PROTECT HOME OWNERSHIP TAX BENEFITS Congressional Action Needed: Cosponsor Mortgage Cancellation Tax Relief Legislation Secure its timely passage • • • What to Tell your Senator: Cosponsor S. 2250 introduced by Senator Debbie Stabenow (MI) Urge Chairman Baucus to act quickly on this bill. • • • What to Tell your House Republican Representative: Cosponsor H.R. 4336 introduced by Representative Tom Reed (NY-29) Urge Chairman Camp to act quickly on this bill. • • • What to Tell your House Democratic Representative: Cosponsor H.R. 4202 introduced by Representative Charles B. Rangel (NY-15) Urge Ranking Member Levin work with Chairman Camp to secure this tax relief as soon as possible. Rise of Regulators… Alphabet Soup & The Future of Mortgage Finance • CFPB – Consumer Financial Protection Bureau – The new home of RESPA (Real Estate Settlement & Procedures Act) & TILA (Truth in Lending) – CFPB just issued an 1100 page proposed rule to “streamline” the closing process • QRM – Qualified Residential Mortgage – What requirements will be placed on lenders to avoid having to keep 5% “risk retention?” – Will 10% down be the new normal? • QM – Qualified Mortgage – How do you determine a borrowers ability to repay? – Safe Harbor vs. Rebuttable Presumption • Basel III – Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. CFPB RESPA/TILA Harmonization Proposal • “Know Before You Owe” - combines the Good Faith Estimate (GFE ) and TILA disclosure (TIL) into one document known as a “Loan Estimate” – While upfront disclosure is good, instead of combining into a one page form – we now have a 4 page disclosure • Attempts to combine the HUD-1 and final TIL into a “closing disclosure” – With a few exceptions the items contained in this document must be in place and in the borrowers’ hands 3 days prior to closing • Comments are due November 6th. NAR plans to comment extensively and is working with a coalition of other housing/lending groups to work through the problems in the proposal • The proposed rule is so complex it is unclear at this point if we can do a widespread CFA or involve Congress QM & QRM • QRM – Qualified Residential Mortgage – If banks do not make a QRM they will be required to retain 5% of the risk on their balance sheets – Many standards make up QRM – LTV, DTI, but downpayment has been the biggest fight. – NAR & Coalition successfully fought back against a 20% downpayment requirement – awaiting a new rule – Concern is a “compromise” regulation that would impose a 10% requirement with still onerous DTI requirements. • QM – Qualified Mortgage – How do you determine a borrowers ability to repay? – Safe Harbor vs. Rebuttable Presumption – Without a safe harbor a lender could be liable to buybacks and lawsuits years after a loan is made – No lender will lend outside of the “QM Box” • Final Rule expected in January Basel III • Basel III proposed rules will significantly increase the amount of capital necessary to support most mortgage loans, whether held on portfolio or securitized. • The increase will be felt by both large international banks subject to the so-called “advance approaches” and to regional and community banks using a simpler framework. • Higher capital charges will result in either higher interest rates for mortgage loans, or less availability of mortgage finance, or both. • The new rules will favor loans that are supported by large cash down payments and meet other underwriting criteria. As a result, generally available mortgages are likely to fit into one or two specific “plan vanilla” molds. • The hardest hit will be first time home buyers and others who cannot afford cash down payments of 20 percent or more. • Also hard hit will be specialized loans, such as those with balloon payments, and home equity lines of credit. Basel III • Basel III proposed rules will significantly increase the amount of capital necessary to support most mortgage loans, whether held on portfolio or securitized. • The increase will be felt by both large international banks subject to the so-called “advance approaches” and to regional and community banks using a simpler framework. • Higher capital charges will result in either higher interest rates for mortgage loans, or less availability of mortgage finance, or both. • The new rules will favor loans that are supported by large cash down payments and meet other underwriting criteria. As a result, generally available mortgages are likely to fit into one or two specific “plan vanilla” molds. • The hardest hit will be first time home buyers and others who cannot afford cash down payments of 20 percent or more. • Also hard hit will be specialized loans, such as those with balloon payments, and home equity lines of credit. The Fiscal Cliff The Fiscal Cliff - Bush Tax Cuts Expire AMT Patch Expires Payroll Tax Cut Expires “Doc Fix” for Medicare Expires Debt Ceiling will be reached again “Sequestration” from Deficit Reduction Act kicks in The Fiscal Cliff What’s likely to happen? - Depends on Election - A short term extension with promise of tax reform or - Let everything expire Looking Ahead: 2013 Dominated by Budget Deficit & Economy Election will only matter so much NAR Focus: • Tax Reform • GSE Reform • Dodd Frank Implementation Also on the Radar: Implementation of the Affordable Care Act 2013 – Tax Reform & GSE Reform • Tax Reform – There is NO WAY to get to a 15/25% individual rate without making changes to the MID – • Most talked about proposals: eliminate deduction for: • Home Equity Loans • Second Homes • Lower Cap from $1 million to $500,000 • Convert the deduction to a credit GSE Reform – There will be an effort to move GSE Reform in the House next year but there is little consensus – Expect a flurry of bills but GSE Reform to be overshadowed by Tax Reform and Deficit Debate. Questions? 3.8% Tax Top 10 Questions • 1) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will NOT be subject to this tax. • 2) The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, so you’ll NEVER pay this tax at the time that you purchase a home or other investment property. • 3) You’ll NEVER pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income. • 4) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will NOT pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment. • 5) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses). 3.8% Tax Top 10 Questions • 6) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed. • 7) In any particular year, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you have millions of dollars of other types of income. • 8) The formula that determines the amount of 3.8% tax due will ALWAYS protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would NEVER be imposed on more than $1000. • 9) It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. BUT: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities. • 10) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.