Closing costs: The mortgage finance industry could be greatly affected by new regulations that would make it more expensive and more difficult to purchase a home.
The mortgage finance industry is keeping a close eye on triple threats that could punch an already wobbly market.
For one thing, Congress is taking a look at whether to reduce the caps on Federal Housing Administration-backed mortgages, which could make it more expensive and more difficult for some buyers to finance their purchases.
The federal government raised FHA limits in 2008 in an effort to stabilize housing prices and ensure the availability of credit to keep the housing market afloat. As a result, FHA’s share of loans nationwide increased from 7% in 2007 to 36% in 2010. The current intention in lowering the limits is to see whether the private financing industry will pick up the slack.
Paul Burns, president of Burns & Co., says mortgage limits in the Capital Region will fall by about $8,950, to $271,050. New Orleans will be hit a little harder, with loan limits dropping by $16,450 to $271,000.
The U.S. Senate voted to extend the higher limits through 2013, but the House did not take acton.
“I don’t think it’s going to be a major impact. It just doesn’t help us in any way, shape or form,” Burns says of the proposed cap reductions. “It’s going to adversely affect the purchasers and sellers in that range.”
The mortgage finance industry also is paying close attention to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is undergoing a two- to five-year rulemaking process, requiring a dozen regulatory agencies to research and write some 250 new regulations for financial reform.
“The regulators have gone from loose regulations and now they’re becoming so restrictive, it could strangle the lending process,” Burns says. “These lenders are going to have to hire more staff to comply, and if they make the slightest mistake, there are huge fines. It’s just one of those things where it was loose, and the pendulum has swung all the way to the opposite, and we’re concerned that it’s going to be too restrictive.”
Meanwhile, industry representatives expect little change to the local market in 2012.
“As far as the Baton Rouge market, I don’t foresee any great changes,” says Sharon Jenkins, mortgage production manager for Regions Bank. “I would say it will be very similar to what we’ve seen this year. We saw purchases increase this year, and I think that trend will remain pretty steady.”
The possibility of a real estate transfer tax could become appealing to state and local governments that are strapped for resources and looking for new sources of revenue.
To avoid stacking the additional fee onto the already costly mortgage process and possibly pushing more potential borrowers out of the market, real estate interests are hoping to sway voters this month to back constitutional Amendment No. 1, which would prohibit governmental entities from levying new taxes or fees on the sale or transfer of real estate. If approved Nov. 19, it would take effect 11 days later.
Louisiana is one of 13 states that does not charge a transfer tax. Arizona, Missouri and Montana prohibit RETTs in their state constitutions, as this state seeks to do. The remaining 37 states and the District of Columbia, however, impose a tax on the sale of real estate.
“Voter turnout will be critical at this point,” says Larry Dietz, an associate broker at Saurage Rotenberg Commercial Real Estate, in a message on the company’s website. “If approved by Louisiana voters in November, this will be an extremely positive development for residential and commercial real estate owners.”
Buyers and sellers already pay closing costs that cover fees for private services, such as attorneys and title research, as well as fees paid to a government agency or clerk of court to maintain a record of the event.
But on top of that, according to research by the Public Affairs Research Council of Louisiana, some state and local governments charge a special conveyance tax on a transfer to supplement their general revenue. The fee is typically calculated as a percentage of the property value or loan amount, and charged to the buyer, seller or both. As an example, a 1% real estate transfer tax on a $200,000 home would be $2,000.
“We’re talking about a lot of money, and we certainly don’t need anything like that in our market now,” Burns says, noting that neither neighboring Mississippi nor Texas imposes transfer taxes.
“This tax would target those who buy and sell real estate and put an unfair burden on a group to produce tax revenue for the broader population. It could really limit affordability for moderate- and low-income homebuyers—particularly first-time homebuyers—and it could shut some of them out of the market altogether.”
Louisiana currently charges no such fee, but the constitution does not bar it. By a two-thirds vote, the Legislature can pass statutes creating new statewide taxes or give local governments the approval to do so.
If Amendment No. 1 passes, neither the state nor local municipalities could levy real estate transaction taxes, with the exception of fees that cover the costs of recording and maintaining documents, records of transfers, annual parcel fees and impact fees for the development of property.
A real estate transfer tax can generate significant revenue for state and local governments, particularly in lean times, without cutting services or increasing another tax.
New Orleans has charged a documentary transaction tax on all property transfers since the 1950s. In 2010, the flat $325 tax generated $3.6 million in revenue, according to PAR, and will likely generate $4.4 million in 2011.
Livingston Parish tried to implement a real estate conveyance tax of $300 per transaction in 2004, but the state attorney general issued an opinion that it was unconstitutional because the Legislature had not given the parish the authority to do so. Livingston eliminated the tax.
In the most recent legislative session, however, state Sen. Eric LaFleur, a Ville Platte Democrat, proposed the bill to eliminate such fees that passed the Legislature with unanimous support.
“A real estate transfer tax is effectively taxing Louisiana homeowners or property owners twice,” he says. “Louisiana property owners already pay annual taxes on the value of their property, both personal and business. I think that it is fundamentally unfair to hit property owners again at the time that they choose to sell their property or transfer it to a loved one.”
Supporters of Amendment No. 1 include Louisiana Realtors, the National Association of Realtors, the Louisiana Home Builders Association, the Louisiana Land Title Association, the Louisiana Association of Business and Industry and a number of chambers of commerce and economic development agencies around the state
Louisiana Realtors has an entire website devoted to the cause, staytaxfree.com. The organization says it commissioned a study in 2010 that concluded a 1% real estate transfer tax would have resulted in 5,000 fewer home purchases, based on 2008 housing figures.
“Louisiana’s fiscal constraints and pending deficits are creating extremely difficult situations on the local and parish levels,” Dietz says. “Quite often, instead of cutting costs, legislators would rather increase revenue.”