Housing Issues Active in Congress

Congress faces some emotional arguments as lawmakers conduct ongoing hearings on two separate housing proposals.

Tempers are flaring on Capitol Hill, as Congress collects testimony from industry experts about the Real Estate Settlement Procedures Act (RESPA) reform and seller-funded down payment assistance programs. As the late Paul Newman's legendary character Cool Hand Luke would say, "What we've got here is a failure to communicate."

RESPA reform lacking popularity

The Department of Housing and Urban Development (HUD) wants to reform existing RESPA mortgage legislation to provide enhanced protections for borrowers. RESPA was originally passed in 1974, to outlaw kickbacks between lenders and settlement service providers. The legislation also requires lenders to provide borrowers with a good faith estimate of closing costs.

HUD says its proposed mortgage legislation changes will save consumers money and facilitate better understanding of loan terms. But certain industry groups, including the Mortgage Bankers Association, the National Association of Realtors, and the American Land Title Association, have taken a strong stand against the proposal.

A primary point of contention is HUD's desire to provide incentives to lenders for packaging settlement services, such as title insurance and appraisals. The spirit of the provision is to encourage lenders to negotiate lower closing costs for their borrowers. Critics fear this will backfire miserably by driving the smaller, independent service providers out of business, since they wouldn't be able to meet the low prices demanded by lenders. That would reduce competition, and result in higher prices down the road.  

Even as Congress continues to weigh both sides of the debate, HUD has vowed to push through its proposed reform by year's end.

To assist or not

Another hotly debated topic is the use of seller-funded down payment assistance (DPA) programs with FHA-backed mortgages. The Housing and Economic Recovery Act of 2008 will prohibit FHA borrowers from using seller-funded DPA beginning on October 1 of this year. At issue is the abuse of seller-funded down payment assistance programs, which ultimately costs homebuyers more by artificially inflating home prices.

The DPA bill currently under consideration would allow for the use of seller-funded down payment assistance with an FHA mortgage, but under more restrictive terms. Borrowers would have to qualify for DPA based on credit score, in an effort to minimize free funding for those who are more likely to default. The bill also allows for the use of risk-based pricing, which is the practice of charging higher mortgage insurance premiums to less qualified borrowers.

This revised proposal has the support of the National Association of Realtors, the Mortgage Bankers Association, and the National Urban League, among others. The naysayers are primarily lobby groups that represent rental property owners.

Lawmakers will have to straighten out the communications and sort through the emotion to come to a consensus about what's best. Until that happens, the proposed RESPA and DPA changes will keep getting kicked back to the drawing board, just as Cool Hand Luke kept getting kicked back to jail.