Texas Attorney Blog

When the federal government began giving billions of dollars to the banking industry through the Troubled Asset Relief Program (TARP), we discovered that many financial institutions had gotten themselves into their dire situations by making or investing in high-risk home loans. Subsequent to that discovery, there was a push to reform residential lending practices.

One piece of legislation aimed at curbing such high-risk lending for homes is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In part, this law gives federal bank regulators the authority to set mortgage lending standards to attempt to prevent the lending mistakes of the past. Using this authority, the newly empowered regulators have created a new Qualified Residential Mortgage (QRM) standard and proposed guidelines to govern it. This standard is meant to increase the number of loans that are of high credit quality and have a low likelihood of default.

According to the Community Associations Institute, as proposed, these QRM loans require that a person be able to provide a 20 percent down payment (or more), pay full closing costs out-of-pocket, provide full income documentation, and be current on all existing debt payments. Additionally, applicants are subject to strict debt-to-income ratio limitations, must not have been more than 60 days delinquent on a debt obligation for two years, have had neither property repossessed nor been party to a bankruptcy proceeding, foreclosure, short-sale, or deed in lieu of foreclosure within the last three years, and have never been subject to a Federal or state judgment for collection of any unpaid debt. QRM loans are also only available as first-lien mortgages for a purchaser’s primary residence or second-liens for refinancing existing loans. Finally, adjustable rate mortgages are only to be adjusted only twice per year, and those adjustments cannot exceed six percent during the life of the loan.

The new guidelines impose much stricter standards than previous lending practices. For example, previously closing costs (which can be several thousands of dollars) could be financed. The 20 percent down payment requirement is perhaps the greatest change, as it doubles the 10 percent down payments that were routinely made by first time home buyers in previous years. What is so onerous about saving up the amount needed for closing costs and down payment, like we all used to? In addition, if buyers have more invested in their home purchase, they are less likely to just walk the loan, as so many have done.

The Dodd-Frank Act, ironically, was brought to you by the same legislators who forced Fannie Mae and Freddie Mac to lower their standards for the mortgage loans they purchased in the first place. Those decreased standards bear the primary responsibility for the housing "boom" and subsequent bust. This Act has many, many problems, but increasing the investment needed for a house purchase is not one of them.

Texas real estate attorneys who practice residential real estate law in Texas will want to be sure to tell their clients about a new tax credit available to first time home buyers. As part of the Housing and Economic Recovery Act of 2008, first time home buyers get a credit against income taxes of 10% of the purchase price of the home, up to a cap of $7500.00. The credit applies to new or resold housing, and the full credit is available to single taxpayers with incomes up to $75,000.00 and married couples with incomes up to $150,000.00.

There is a partial credit available for single taxpayers with incomes between $75,000.00 and $95,000.00 and married taxpayers with incomes between $150,000.00 and $170,000.00. If the taxpayer does not have sufficient income to be able to use the full credit, they will receive a check for the balance. There is no special form; the credit is simply deducted on the taxpayers’ federal income tax return. Home buyers will be required to repay the credit to the government without interest over 15 years, or when they sell the house if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. The credit expires on June 30, 2009.

For additional details, go to: http://www.federalhousingtaxcredit.com/faq.php.

As a real estate attorney representing clients all over the world in connection with their real estate interests in Texas, I am naturally following the current economic challenges and their impact on Texas real estate very closely. Dr. Mark Dotzour, with the Texas A & M Real Estate Center, was speaking at the national convention for Commercial Real Estate Women ("CREW") recently in Houston, Texas. According to the Real Estate Center’s chief economist, investors will return when:

1. they can believe bond ratings agencies again;
2. they can believe corporate accounting again;
3. they think the recession is nearing an end;
4. they think house prices are stabilizing nationally;
5. they regain confidence in the value of a contract and that the federal government will not change the terms of mortgages the investors may have invested in;
6. there is clarity regarding what the income tax rates and capital gains taxes will be in 2009 and beyond;
7. they have sorted out the massive government intervention and determined the unintended consequences; and
8. the return on short-term cash gets so low that corporate dividends and corporate bond interest become attractive again.

Dr. Dotzur's full presentation can be found here. His comments are well worth your time.

Texas lawyers and real estate brokers have by now, along with other Texas business owners, filed their first return under the revised Texas Franchise Tax. It is described by the Texas Comptroller as a "privilege tax", paid for the privilege of doing business in Texas, but it is an income tax, nonetheless.

One of the frustrating and, in my opinion, inequitable, aspects of the new tax is that companies that produce tangible goods are able to deduct the cost of making those goods, under the "cost of goods sold" deduction. Those of us who are in the business of providing a service, whether lawyer, broker, physician, hair stylist, health care worker, massage therapist, etc., do not get this or any comparable deduction.

Nationally, service businesses account for 55% of all economic activity, according to the 2006 Service Annual Survey by the U.S. Census Bureau. Does it make economic sense to discriminate against this segment of our state's economic base? I think not!

One of the things I love about being a Texas real estate and development lawyer is that Texans are so open to innovative real estate developments. Practicing real estate and development law in Texas is great fun and very satisfying for this reason. A recent real estate development in Texas illustrates the point: co-housing, while not invented in Texas, has come to Texas. As a recent article by Bob Moos in the Dallas Morning News online entitled "Co-Housing Catching On in U.S." explains, the first elder co-housing development in Texas is being built in Duncanville, Texas, called Wildflower Village.

The members of the Village have been meeting together over the past two years to get to know one another, and to design their community. Some arguments have occurred, but they also meet socially to have fun as well. They like to arrive at decisions by consensus, rather than a "majority rules" vote. The development is limited to adults over 50 years of age. They plan to individually own their own single-story home. However, they will collectively own a common building that will have a gourmet kitchen, dining room, living area, home theater, craft room and two guest bedrooms.

This is an incredible concept and I wish them all the best of luck. They have gotten to know each other before they even hired a builder or an architect, and so have created a community for themselves, meaning "community" in the sense of a village with neighbors and friends, not just buildings. For more information, visit their website.

As a Texas real estate and development attorney who has represented lenders, commercial borrowers and developers for years, and as someone who has been critical of the "band-aid" solutions to the sub prime delinquency problem proposed by some politicians, I am heartened when I see solutions that appear to actually address the problem. Recently, an article by Karen Freifeld and Sharon L. Lynch in Bloomberg reported that Fannie Mae and Freddie Mac have reached an agreement with Andrew Cuomo, New York's Attorney General, regarding appraisal standards. The agreement provides that Fannie Mae and Freddie Mac will buy mortgages only from lenders that adopt new standards that are meant to make sure that appraisals for home mortgages are independent and objective. Specifically, the new standards would prohibit mortgage brokers from selecting the appraiser for a loan, and would also prohibit lenders from using in-house staff or lender-owned appraisal companies to do appraisals for home loans.

Fannie Mae and Freddie Mac are two federally chartered but privately operated organizations that buy real estate loans from banks. A large percentage of United States banks do not keep each home mortgage that they make for the full term of the loan. Instead, they sell their loans to Freddie Mac or Fannie Mae for a discounted amount of the full loan. Once the banks get paid by Freddie Mac or Fannie Mae, they can go out and make new loans with that money. Obviously, Fannie Mae and Freddie Mac are crucial to the liquidity of the United States mortgage industry. Banks will have to comply with standards set by Freddie Mac or Fannie Mae in order to sell loans to them.

From what I have read about the sub prime delinquency situation, inflated and even fraudulent appraisals appear to be at the heart of the current problem, just as they were for the Texas savings and loan debacle of the 1980's. I suggest that the adoption on a national basis of the rules that are going into effect in New York will go a long way towards preventing the sub prime loan problems we see now.

As a Texas real estate and development attorney who has represented lenders, borrowers and developers in Texas for years, I find the current debate over sub prime mortgages to be especially interesting. Sub prime loan foreclosures in Texas are not as extensive as they are in other states, however, they are still of concern in Texas and certainly nationally. Hillary Clinton has proposed a ninety day moratorium for foreclosures on sub-prime loans, according to her web site. Manny Fernandez in a recent article in the New York Times online describes how politicians in New York are pushing for a one year moratorium on sub-prime mortgage delinquencies in that state. One of these politicians, James Brennan, a Brooklyn Democrat, is quoted as saying: “There’s nothing wrong with giving people some time to see if better arrangements can be worked out.”

Will someone please send these politicians to economics school? Their proposals may be designed to get votes, but they do not appear to deal in an educated way with the current sub-prime mortgage issues. For one thing, these proposals are based on the assumption that all sub-prime loans were made by evil, greedy lenders who imposed fraudulent terms on unsuspecting borrowers. I doubt that this is the situation for every sub prime loan out there. Secondly, a certain portion of these borrowers will not be able to pay any type of reasonable monthly payment, and should not have qualified for these loans in the first place. Giving them more time to "work things out" may be a fantasy. Thirdly, who is going to be responsible for deterioration in the condition of some of these homes while payments are not being made (since the threat of foreclosure often serves to dampen homeowner maintenance and repair)? Fourth, have these politicians calculated the cost to the economy of the mortgages to qualified borrowers that do not get made because of the chill this "solution" has on the mortgage lending market? And finally, do we really want government to step in and rescue people who have, in many cases, made an uninformed or inappropriate financial decision?

This kind of mass moratorium is calculated to wreck havoc with financial markets (can you say recession?). So in answer to James Brennan's comment that there is nothing wrong with a moratorium, I would have to respond: think again! These proposals seem to illustrate what our form of government does best: create ill-considered quick-fixes to complicated problems in the hopes that voters will buy in to the illusion that something is being done.

As a Texas real estate and development attorney, I am concerned that Texas real estate lending suffered some unwelcome notoriety recently when the Dallas Business Journal, quoting an announcement by the online publication, Mortgage Daily, announced that Texas had the fourth highest level of fraudulent real estate loans in the country.

Mortgage fraud in Texas has elicited a strong response from the Texas Attorney General. In July, 2007, the Attorney General announced a judgment against Ameriquest Mortgage Co. in which Ameriquest must return $21 million to Texas residents as restitution for deceptive practices by Ameriquest. The deceptive practices alleged to have been committed by Ameriquest include not adequately disclosing whether loans carried fixed or adjustable rates, charging excessive origination fees and prepayment penalties and using inflated appraisals that qualified borrowers for loans.

The Texas Legislature has responded to the fraud crisis by enacting new rules governing loan officers and mortgage brokers and by requiring loan applicants to sign a notice that they are aware of the severe criminal penalties that apply if they are providing false information as to their identity, income, employment and/or intent to occupy the collateral. These rules are enforced by the The Texas Department of Savings and Mortgage Lending (formerly the Texas Savings and Loan Department).

The primarily vehicle for the fraud, from what I have read so far, is an inflated appraisal by a broker complicit in the fraud. Inflated appraisals were also one of the vehicles for the Texas savings and loan scandal of the 1980s. It seems we just don't learn. Or maybe the problem is that we learn, but greed wins out anyway!

The digital age has profoundly impacted the way real estate attorneys and real estate brokers do business. For example, in the case of my real estate law practice, I recently represented the seller in connection with the sale of a shopping center. The property, the title company and the seller's attorney (i.e., me) were located in Texas, the seller was in Arizona, the buyer was in New York City and the buyer's attorney was in Atlanta, Georgia. We used email or ftp sites to transmit and review title commitments and surveys and to send drafts of conveyance documents and closing statements back and forth until closing. The closing was done by the title company via Federal Express. Current federal legislation, the Digital Signatures in Global and National Commerce Act (E-Sign), will allow even the closing to take place electronically, and Texas title companies are beginning to move in this direction. However, despite the ease and swiftness of the Internet, nothing, in my opinion, can replace that personal connection between an attorney and their client, and the trust, professionalism and camaraderie that flows from that relationship.

Real estate brokers have also realized great efficiencies in using the Internet as part of their service to their clients. First, of course, they use the Multiple Listing Service to list and identify properties for clients, and they use email to keep in touch with often far-flung clients. However, as in the case of real estate lawyers, there are limits. A recent news story illustrates these limits.

A Newsday story by James Bernstein chronicled the demise of Foxtons, a New Jersey based residential broker. Based on Mr. Bernstein's story and other news reports, it appears that Foxtons entered the brokerage market in the New York City/New Jersey area in a big way in 1999, introducing themselves with an expensive advertising campaign. They used Internet listings and a paid staff to sell property, instead of commission-based brokers or agents. They paid commissions to buyers' brokers (according to Bethany Marten with the Home Buyer's Resource Center, quoted in Newsday) of only 1 to 2%, compared with the somewhat standard commission of 6%. Once a house was listed with Foxtons, while it was entered into the Foxtons database on the Internet, Foxtons clients complained that there was little or no personal contact with the staff, and that the house they were trying to sell was not even shown to prospective buyers. There were reports that buyers' brokers did not like to show houses listed with Foxtons to their clients, because the commission was such a pittance.

I have worked with many real estate brokers over the years, and there are many good ones out there. A good real estate broker is invaluable in buying or selling either commercial or residential real estate. A good broker assists their client with proper pricing, with the best timing for the sale, with packaging the property so it will bring the best return, and with addressing buyers' concerns. On the buyer's side, a good broker helps a client not only find the property, but can assist with appraisers, inspectors, engineers and financing. I have bought and sold many properties of my own over the years, and even though Texas law allows me to act as a broker for myself or for a client, I do not. In fact, I have used a broker each time, not only because they are an invaluable partner in any transaction, but also because I can count on them to be objective.

At least one New Jersey broker, James Boyer, on his blog at Real Estate Webmasters, opines that the demise of Foxtons won't have much impact on the local market. He notes that he has watched a majority of Foxtons listings expire without a sale. The Foxtons experience may be a lesson that clients of real estate brokers, like clients of real estate attorneys, expect and need that personal relationship with their professional. That relationship pays off, and is worth paying for!

The recent media attention to the problems in the subprime mortgage market, both in Texas and nationally, may hide the fact that subprime mortgage loans serve a valuable purpose: they are loans to low-credit households that could not previously afford to own a home.

First, it is important to put this situation in perspective. Subprimes make up 13% of all Texas residential mortgages, and only 4.3% of those mortgages were in default by the end of 2006. Nationally, subprime loans make up only 14% of all mortgages, and the national foreclosure rate on subprime mortgages at the end of 2006 was approximately 14.3%. (Statistics courtesy of Texas A&M Real Estate Center). Market Pulse reports in its June 2007 issue that nationally the subprime foreclosure rate as of June 2007 is 10.11%.

Despite the issues with subprimes, real estate markets are generally healthy throughout the country. For example, U.S. office vacancy rates are declining and commercial real estate investment reached record levels in 2006, according to the National Association of Realtors. Commercial rents nationally for the first half of 2007 recorded their largest increase in six years, according to a recent report by CNNMoney.com. Delinquencies among commercial borrowers continue to fall, according to Fitch Ratings U.S. CMBS loan delinquency index. According to Housing Intelligence, new home sales remain healthy, even though they may be down from the feverish pace of 2002 to 2006. Finally, the Mortgage Bankers Association reports that, while residential foreclosures are up, national residential delinquency and foreclosure rates are being driven by what is happening in four states: California, Florida, Nevada and Arizona. If the rates in these states were not considered, national residential delinquencies and foreclosures would be down.

The issues in the subprime mortgage market are serious, of course. The National Real Estate Investor estimates that hedge fund investors could lose up to $125 million, that there could be almost 12,000 layoffs due to bankruptcies of subprime lenders, and indicates that by August, 2007, there was a backlog of $35.2 billion in unsold commercial mortgage-backed securities. These statistics, however, should not cause us to lose sight of the importance of subprime mortgage lending.

Dr. James Gaines, a research economist with the Texas A&M Real Estate Center, tackles this issue head-on in a recent issue of Tierra Grande. He notes that "(t)here is no reason to overreact and kill something that has served, and could continue to serve, a useful purpose". Dr. Gaines goes on to say that "(t)he private sector found a way to make loans to low credit, previously unfinanceable, households so that they could own homes. While this effort was spurred by profit, not altruism, the effect on home ownership throughout the country was nevertheless profound".

Continue reading "Subprime Lending Woes: A Needed Correction in Real Estate Lending Practices?" »

Congress may soon get a chance to approve the creation of a new national park in the Waco, Texas, area. This development may prove a real boon to the local real estate market. A new park will generate the need for tourist related facilities, such as gas stations, motels and restaurants. Expect an increase in land prices in the area surrounding the proposed five acre national park. Local attorneys who practice real estate and construction law may find themselves in the midst of some interesting negotiations between the big city gas station and motel franchisors and the local landowners.

The possible new park centers on the discovery and excavation of the bones of 25 Columbian mammoths. The Columbian mammoth is a warm weather cousin to the woolly mammoth, with which some of us are more familiar.

Baylor University and the City of Waco are preparing to allow the public to have their first look at the "Waco Mammoth Site", after several decades of clandestine work uncovering the remains. The National Park Service has indicated that the site meets its criteria for a national park, although the final decision will be made by Congress, and funding for a park may be hard to find.

It is hard to overestimate the significance of this site. The Waco Mammoth Site, along the Bosque River, was first discovered in 1978, but has been kept quiet until now due to fears of theft or vandalism. The site is believed to be the largest known concentration of prehistoric mammoths perishing from a single event. It appears that the animals may have been caught in a flash flood and then a mudslide that killed them all at one time. The first fifteen mammoths uncovered were grouped in a circle, facing outward, protecting young mammoths in the center. Two adults were found with juvenile mammoths in their tusks, as if they were trying to raise the youngsters above the mud.

Baylor University, the City of Waco and the Waco Mammoth Site Foundation are working hard to raise the funds to build a visitor's center, roads, and a climate-controlled pavilion for display of the bones. As Jim Vaughn, the president of the Greater Waco Chamber of Commerce has pointed out, this will be a unique draw for the Waco area, and is likely to attract many visitors because it is so accessible. Ellie Caston, director of the Mayborn Museum in Waco, estimates that tourists to the site could number between 50,000 to 300,000 a year.