Washington Update: March 3, 2008
Find the latest legislative news updates from Washington, D.C., that impact Resort and RLI.
In This Issue
Senate Considers Limit on 1031 Exchanges
Low-Risk Areas, a High-Risk Insurance Decision
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Senate Considers Limit on 1031 Exchanges
The Senate version of a major Farm Bill (H.R. 2419) included a limitation on some like-kind exchanges. This bill passed the House earlier in 2007. The proposed modification would disqualify exchanges of "improved real property" with "unimproved agriculture real property." Thus, the owner of a building could not use the 1031 exchange technique to acquire "unimproved agriculture real property." The provision would have the effect of imposing a "toll charge" on any person selling the affected property. The toll charge would take the form of either a reduction in the price that the seller could obtain on sale or the transaction would require a selling farmer/rancher to pay tax on the transaction.
NAR vigorously opposed this provision in the Farm bill. Other organizations followed NAR's lead. NAR is cautiously optimistic that this provision will not be included in any final version of the Farm Bill. Currently, a conference committee is scheduled to convene later in the spring to iron out the many differences in the legislation.
Low-Risk Areas, a High-Risk Insurance Decision
From the Washington Post
Sunday, March 2, 2008
Many homeowners have the decision about flood insurance made for them. If their houses are in high-risk zones, their lenders require insurance. So they buy it. But people with properties that the government deems relatively safe from flooding can also buy insurance, through the federal government's National Flood Insurance Program as well as from private insurers.
"You need to look at that as carefully as you look at your homeowners insurance," said Kimberly Lankford, author of "The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need." How much -- if any -- flood insurance homeowners should buy is based on their assessment of the likelihood of a flood, their tolerance of risk, and the affordability of the premiums. Keep in mind that damages from flooding aren't covered by regular homeowners policies, nor do they kick in immediately. A federal policy requires a 30-day waiting period.
To determine the chance your house will flood, start by checking the flood maps. The Federal Emergency Management Agency is revising many of them and risk zones have shifted, including many in the District. "We're in a flurry to update all the flood maps," said Eugene Kinerney, spokesman for FEMA's mitigation division, which runs the federal flood insurance program.
A high-risk property is one deemed to have about 1 percent chance of flooding in any given year. But about a fourth of claims paid by the National Flood Insurance Program have been on policies in areas considered low-risk. Being outside high-risk boundaries "doesn't mean you're at no risk," Kinerney said. "Just lower." That makes it your responsibility to figure out the likelihood of water damage. "Think about the history of your house," Lankford said. If it's a house you're considering buying or recently bought, "talk to neighbors."
In some cases, the geography is obvious, said Mike McCartin, an independent insurance agent in College Park. He lives high on a hill. "If my current house floods, you're going to need an ark." In other cases, the risk isn't known yet. Large new housing developments can be particularly prone to surprises, Kinerney said. Any area that years ago was a farm but now has a townhouse development and a Wal-Mart has a lot of water running off, not percolating into a field, he said. In such areas, "you've got to look at storm-water management plans. That's what changing flood plains around here."
Try to be objective as you assess the risk to your home. "That's the biggest problem with selling flood insurance," said Brad Reeves, an independent insurance agent in Leonardtown, Md. "People don't think it could happen to them." Under the National Flood Insurance Program, the federal government provides the insurance, but private insurance companies sell and service the policies. The government also sets the premiums, so there is no need to shop based on price.
If you use an agent for your other insurance policies and he offers flood insurance, stay with that person for simplicity's sake, Lankford said. Ideally, stick with the same carrier, Reeves said, to avoid turf battles in the event of a claim. "Because if it's something that might cross the line, it's the other company's fault," he said. How much coverage you need depends on the value of your property and how much it would cost to repair or replace it. Reeves said he encourages his customers to insure up to 100 percent of the replacement cost of their homes. The exact amount will depend on the value of the house and the stuff in it. The latter is something homeowners will have to calculate themselves, although a common ballpark figure is about 50 percent of the value of the house, he said. "I don't profess to be able to appraise your household contents."
Other experts say full replacement coverage is overkill in most of the Washington area. "Around here, you don't really worry much about homes being washed away," Kinerney said.
In most cases here, "it's more damage as opposed to the house being completely gone," McCartin said.
Flood insurance for homeowners in high-risk zones can cost thousands of dollars annually, but for those outside known flood zones, the rate drops significantly, Kinerney said. A preferred-risk policy providing $250,000 in coverage for damage to a building and $100,000 for its contents costs about $325 year. FEMA's online tool (http://www.floodsmart.gov/floodsmart/pages/riskassesment/findpropertyform.jsp) allows consumers to search maps to determine the risk for a particular property and estimate the annual premium for federal flood insurance.
"The key thing is not to assume that it's incredibly expensive," Lankford said. However, as property owners in high-cost areas can quickly learn, the federal policies have limits, in what they will cover and for how much. Damage in basements is limited under the federal policies, with an exception for certain types of equipment that is often placed below grade, such as heating and air-conditioning systems and electrical panels. Generally, finished basements and their contents aren't covered -- something to consider before setting up a media room down there.
A homeowner who isn't comfortable with those limits can buy "excess flood insurance" from private companies, such as Chubb and AIG. Those policies usually work in tandem with the federal coverage. "If the replacement value of your house is $500,000, you would first buy the federal insurance, then you could buy an extra $250,000" in coverage from a private firm, Lankford said. Private policies can cover more types of damage, including in finished basements. They can also have higher limits on certain valuables.
House-Passed Energy Tax Bill Faces Senate, White House Opposition; Includes Language to Promote Energy Efficient Homes, Commercial Buildings
Voting largely along partisan lines (236-182), the House on Wednesday approved a roughly $18 billion energy tax package (H.R. 5351) that would extend tax incentives encouraging renewable energy development and energy efficiency in homes and commercial buildings; the tax incentives are set to expire by the end of 2008. Real estate-backed provisions in the bill would extend for five years the $1.80 per-square-foot deduction available to commercial building owners to offset energy-efficiency investments that considerably exceed market standards. Also proposed is an eight-year extension of the 30 percent business tax credit for solar and fuel cell investment (and a 10 percent credit for micro-turbines). Another provision would create a new 10 percent investment tax credit for combined heat-and-power (CHP) property, which offers a way to recapture and reuse significant amounts of waste heat for generating electricity, steam and chilled water.
H.R. 5351, which won support from only 17 House Republicans, now faces strong opposition from Senate Republicans and the White House, who object to how the legislation would be paid for (i.e. largely by denying tax deductions to certain oil and gas producers). Even if the bill is given special handling in the Senate (requiring only a simple majority vs. the 60 votes normally needed to overcome a filibuster), and even if it clears the chamber, it will still face a possible veto from President Bush.
Mortgage Market Update
It has now been seven months since the private mortgage-backed securities (MBS) market seized up in late July and the mortgage market is probably in no better shape today than it was then. In fact, it could be argued that the market is in worse shape because of the price increases and credit tightening that have been instituted by Fannie Mae, Freddie Mac, the private mortgage insurance industry and many large mortgage aggregators in response to serious performance and credit concerns. On February 21st, Freddie Mac added the latest price increase with a 30 basis point surcharge on all loans for homebuyers with credit scores below 740 who are seeking loan-to-value ratios of 80 percent or higher.
We expect more tightening in the coming months. We continue to be on a roller coaster ---up one week and down the next one. The optimism from the unprecedented Fed’s rate cuts in late January was short-lived. Just last week, there was more bad news on the earnings front as Fannie Mae and Freddie Mac combined for almost $6 billion of losses in the 4th quarter. Friday’s sell-off in the stock market was triggered, in part, by AIG’s loss of $5.3 billion and a surprising $11 billion “write-down”. (AIG is an insurance stalwart and parent of United Guaranty Corporation, a large private mortgage insurer.) Add in Fed Chairman Bernanke’s somber assessment of the economy in his Congressional testimony and there is ample evidence that 2008 is going to be a challenging year.
Assistance from Washington is on the way w/ the taxpayer rebates and higher mortgage limits in the stimulus bill. It now appears that the FHA Modernization bill will also be enacted this month. Finally, the Fed rate cuts may begin having a positive impact throughout the economy.
What will it take to stabilize the markets?
In late November, we wrote the following,
“The markets can only be calmed and confidence restored by the elimination of further unexpected write-downs of losses and earnings disappointments in the next several months.”
Unfortunately, as was stated in the introductory section above, mortgage default problems persisted for many industry players as losses and write-downs continued in the most recent quarter. A possible indicator of market improvement in the coming months will be a “pick up” of merger and acquisition activity in the financial sector. It could demonstrate to the broader market that the industry is getting “its arms around the scope of the credit problem” and industry leaders are seeing business opportunities in the “beaten down” share prices of their brethren. However, that is unlikely to occur until the industry believes the unexpected losses are behind us.
What is NAR doing?
NAR continues to pursue a multi-pronged agenda.
1. Promote legislative and regulatory initiatives to stimulate housing
NAR has been the leader in the fight to increase mortgage limits for FHA and Fannie Mae and Freddie Mac. NAR used a “fly-in” of members to target key Senators in early December to highlight the importance of this issue. NAR has also been a leader in pushing final passage of the FHA modernization bill that will make mortgage limit increases permanent and lower cash investment requirements on FHA loans to 1.5% (currently FHA has a 3% requirement)
NAR has also been aggressive in promoting the immediate publication of the new mortgage limits writing letters to HUD Secretary Jackson and OFHEO Director Lockhart (Fannie/Freddie’s regulator) underscoring the importance of prompt implementation to the marketplace. NAR President Gaylord also sent a letter to HUD Secretary Jackson offering suggestions to increase the usage of the FHASecure refinancing program. HUD expects to announce program changes this week.
2. Educate the members on FHA
With the ongoing problems in the nonprime market and the credit tightening and price increases being implemented by Fannie Mae, Freddie Mac and the private mortgage insurers to stabilize their companies, the importance of FHA lending to the housing markets around the country cannot be overstated.
FHA’s market share, which was less than 3% in 2006 and approximately 10% at the end of December 2007, will likely increase to 25% -35% of the entire mortgage market in the second half of 2008 and will stay at those levels until liquidity and more flexible credit standards return to the rest of the market.
NAR recognizes that many companies and agents are not experienced in FHA lending. NAR is planning conference calls and other training vehicles to advise you of the latest information on FHA changes as well as the basics of the FHA program for those who would like a refresher course on FHA lending. The “good news” is FHA has made a lot of positive changes in recent years that has made its loan process comparable to the process for conventional loans.
NAR is planning training sessions in two general categories. They are:
Timely updates of the latest news on FHA lending
The first session will be on the new mortgage limits as soon as they are announced. NAR is also preparing to hold sessions on the provisions of the FHA modernization bill as soon as it is signed by the President and monitor HUD’s implementation process for these provisions keeping you and your agents apprised of the implications of these changes.
Basics of FHA lending
NAR is also preparing detailed training packages on the basics of FHA lending to assist you in educating your agents. As was noted above, FHA has made many positive changes including a streamlined appraisal process to eliminate unnecessary and minor repair requirements that frustrated sellers and buyers. FHA now also permits the buyer and the seller to negotiate the payment of various closing costs. Previously, FHA limited the closing costs paid by the homebuyer.
NAR would be glad to work with you to devise a special training program for your firm and/or its subsidiary mortgage company that can then train your agents. Please contact Ken Trepeta, Director of NAR’s RES initiative to discuss. Ken can be reached at 202-383-1294.
3. Continue to meet w/ Fannie Mae and Freddie Mac to ensure the adequate availability of mortgage financing
NAR has been meeting with these companies regularly to voice your views on the need for reasonable credit standards particularly in this unstable environment. NAR has discussed their declining markets policy and steps that can be taken to avoid applying declining markets criteria on too wide of a geographic area. NAR has emphasized there are many neighborhoods and properties that still are appreciating even though the larger area (e.g. MSA) may be viewed as a declining area. Fannie Mae did tell NAR that 37% of all properties were receiving a declining markets message.
NAR also met w/ the GSEs to encourage the implementation of the new mortgage limits quickly. NAR is also concerned that the GSEs may impose additional underwriting requirements that will reduce the benefit of the higher limits.
Finally, NAR is also planning to meet with the Mortgage Insurance Companies of America (MICA) to discuss the underwriting practices of private mortgage insurers.
Conclusion
In March, we expect good news in the form of implementation of higher mortgage limits for FHA, Fannie Mae and Freddie Mac and the enactment of the FHA Modernization legislation. NAR will be implementing a detailed education initiative to ensure that you and your agents are abreast of the latest information.
