Last week, the House of Representatives passed, and the President signed, The Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155). The Act rolls back several provisions of The Dodd-Frank Act, the law that was enacted to regulate banks following the financial crisis to help assure that tax payers would not have to bail out banks again. With the economy continuing to strengthen, smaller banks have argued that the tight regulations imposed by Dodd-Frank have made it difficult to compete. Wall Street concurs and argues that loosening restrictions would generate growth in underserved areas allowing community banks and credit unions to free up capital to lend to smaller borrowers who might not otherwise qualify for loans from larger banks.

The Act removes stress test requirements for banks with assets of less than $250 billion. This provision alone should help consumers in rural areas because credit will free up for community banks and credit unions according to Redfin chief economist Nela Richardson. Lawrence Yin, NAR chief economist expects that there will be a rise in regional construction because small, local home builders will be more likely to obtain construction loans from community banks.

The Act is getting praise across the board from the real estate industry. But there is concern that the Act opens the door to the old practices that brought about the crises in 2008. The “Volcker Rule”, which prohibits financial firms from investing proprietary funds, was eliminated for banks with less than $10 billion in assets. This could cause banks to lose federally insured money on risky investments. Fannie Mae and Freddie Mac are now required to consider alternative credit scoring models. This could open the door to loans to borrowers who don’t have the ability to repay loans. Small banks are exempt from certain disclosure requirements. Redfin’s Richardson says that this could lead to racial inequality in lending.

The result of the Act is that only the 10 biggest banks in the country remain subject to full federal oversight. House Minority Leader Nancy Pelosi (D-CA) says “it’s a bad bill under the guise of helping community banks”. Pelosi said that the Act will take us back to the pre-meltdown days.

The biggest critic of the Act and the biggest advocate of banking reform, Senator Elizabeth Warren (D-MA) said the bill would “bail out big banks again” and would increase the likelihood of taxpayer bailouts. Senator Warren argued that the Act exempts 2 dozen financial firms with assets from $50 billion to $250 billion from the strictest rules imposed by Dodd-Frank. These banks received billions of dollars in bailouts and should not have oversight relaxed says Senator Warren.  Although she supports helping community banks, Senator Warren believes the Act goes way too far.

However, the Congressional Budget Office report says that the relaxation of the regulations creates a “slightly greater risk” of another crash and bailout”. Currently, CBO says, we are at only a “small risk”. Barney Frank, one of the authors of Dodd-Frank says that there is “nothing” in the legislation that damages the regulations intended to curb risk taking by large banks. Those regulations were not weakened for the largest banks. While Frank believes the $50 billion threshold is too low and the $250 billion threshold is too high, the overall risk of harm caused by the new Act is low.

It might be too early to understand the overall effects of the new Act, but it appears that more money will be infused into real estate. If the Act is not the fore runner to further loosening of Dodd-Frank restrictions which allow reckless practices, then the Act could be a good thing. However, if it is used as a crack that Wall Street uses to burst through to fully de-regulate and return banks to the days of the Wild West, we need to be vigilant.

Investors in residential house flipping have made a big come back the last few years. Much of the popularity of this can be attributed to the many TV shows dedicated to renovation, repair, investment and flipping. I’ve written on this topic before (see post HERE). However, I did not focus on the other side of the transaction, the end buyer. There is risk that buyers of this type of property should be aware of and look for. These issues were prevalent in the foreclosure crisis and the bursting of the housing bubble in 2008-10. This is not to say that investors haven’t learned their lesson. But, some people are dishonest and greedy. Pay attention to these 6 potential risks.

  1. Financing – yours and your seller’s. Make sure that you are solely responsible for selecting your lender, completing your loan application and providing the lender with all requested documentation. The foreclosure crisis was caused, in part, by unscrupulous investors who falsified buyers’ loan applications without buyers’ knowledge, thus committing mortgage fraud. Also, look at the seller’s existing mortgage. This will show on your title commitment/report. Is it in the same name as the entity selling you the property? Is there only one mortgage? Is the mortgage for less than the purchase price? Any of these can be indicators of an earlier fraud. If you are paying cash, get an appraisal to assure that you aren’t over paying.
  2. Title – Review the title commitment carefully. Make sure that the seller owns the property. Look at the 24-month chain of title. Has there been an unusual amount of conveyances prior to the conveyance to the seller? Has the seller made other conveyances prior to your closing? Have all prior mortgages been satisfied? Do not allow the seller or the seller’s title company handling the title for you to close without allowing you AND your attorney to review before closing.
  3. Seasoning – Some Fannie Mae, Freddie Mac and FHA loans prohibit the sale of a property for a period of time (60-180 days) following the date of the mortgage. This would be in the seller’s existing mortgage. Make sure that all such provisions have expired.
  4. Redemption Rights – if seller purchased the property at foreclosure, make sure prior owners’ right of redemption has expired. In Florida, the right of redemption expires on sale, so if a certificate of title has been issued, there is no right of redemption.
  5. Permitting – make sure that all improvements made by the seller have been properly permitted and all permits have been properly closed and certificates of occupancy issued. This holds true for improvements made by prior owners.
  6. Other Issues Regarding Improvements – Inspect, inspect, inspect. Make sure all of seller’s improvements and repairs have been properly made. Although this goes with number 5 above, just because the work has been permitted and a certificate of occupancy issued (hopefully), you should assure the quality of the work. Warranties should be assigned and where possible, get warranties from the seller.


If all house flippers were like the ones on TV, none of this would be necessary and every house bought from a flipper would look like a celebrity’s mansion. But that is not the case. There are many good, even great flippers. But there are many poor and dishonest ones as well. Beware.


        The Federal Home Finance Administration (FHFA) recently announced that it is extending HARP, the Home Affordable Refinancing Program until September 30, 2017. The program, which was set to expire at the end of 2016, has been effect for over 7 years and was created to help borrowers with no equity or negative equity in their homes and who could not afford to make monthly payments, refinance at affordable rates and write off or re-amortize debt so as to create an affordable monthly payment. This allowed millions of homeowners to keep their homes during the mortgage crisis. To date, over 3.4 million homeowners have refinanced using HARP.

             To qualify for a HARP loan, the loan being refinanced must have been originated before May 31, 2009 and must be insured or originated by Fannie Mae or Freddie Mac. The new LTV must be 80% or higher. The borrower can have no late payments on its existing loan during the 6 months preceding the loan closing and no more than 1 late payment during the 12 months preceding the loan closing. A borrower must have a source of income and must benefit from a HARP refinancing by either the reduced principal and interest payment, the lower interest rate, the shortened amortization term or the better mortgage product.

             FHFA is extending HARP as a bridge until its new “streamlined” higher LTV programs go on-line in October of 2017. The LTV will be as high as 95% in these new programs and there will be no minimum credit score or maximum debt to income requirements and no appraisal requirements. After the housing and foreclosure crisis, it would seem that FHFA and banks would be much more weary about these types of loans. The lack of verification of borrowers’ ability to pay looks a lot like the “no doc” loans that led to the bursting of the bubble in 2009. If these streamlined loans gain popularity, could another crisis be far behind?

             Extension of HARP is a good idea, but lenders need to be careful about streamlining the approval and verification process going forward. Lower down payment loans are also a good thing. A borrower’s lack of ability to save is not necessarily an indication of an inability to pay. However, good underwriting is and should always be a given.


        HUD Secretary Julian Castro recently announced that the FHA will, for the second consecutive year, reduce its multi-family insurance rates. The rate reductions will directly affect low and moderate income families and will also be available to projects installing energy-efficient systems.  The reductions are intended to help developers renovate existing housing and to use their available capital to build new units.  Secretary Castro said “[B]y reducing our rates, this administration is taking a significant step to encourage the preservation of affordable and energy-efficient housing in communities large and small.  This way, hardworking families won’t have to make a false choice between quality and affordable housing.”

       The rate reduction takes affect April 1, 2016. Rates will be lowered by 25 basis points for housing classified as “broadly affordable”.  This classification mostly covers Section 8 or Low Income Housing Tax Credit (LHITC) housing.  Rates will be lowered by 35 basis points for “Affordable” mixed use property which includes partial LHITC, partial Section 8 and inclusionary zoning units.  Rates for energy-efficient units will be reduced by 25 basis points.  The rate reductions are expected to boost loan volume by $400 million per year and allow for as many as 12,000 unit rehabs per year.  Taken together, HUD hopes to improve rental affordability.

       Joseph Pigg, Senior Vice President of the American Bankers Association, believes that the rate reductions make it more likely that the FHA will cut single family premiums in the near future and that Fannie Mae and Freddie Mac will feel the pressure to follow soon. The ultimate result will be that loans should become more affordable for everyone very soon.

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         When the Federal Reserve finally raised interest rates in early December, borrowers across the country promptly began receiving notices from mortgage and credit card lenders of increases in their mortgages, equity lines and credit cards. While the Fed increase and corresponding consumer increases were only .25%, industry experts believe that 2016 will see a shift in consumer focus to a desire for low down payment mortgage loans.  Borrowers seem to have the income to be able to handle the small payment increases caused by the current and possible future rate increases.  However, the ability to obtain credit due to perceived lender requirements of large (typically 20%) down payments, coupled with the increasing cost of housing is causing potential new home buyers to rethink whether they can afford to get into a new home and risk becoming “house poor”.

            The fact is that lenders do not “require” a 20% down payment.  Rather, 20% is generally the threshold that exempts a borrower from having to pay PMI.  Payment of PMI is distasteful to most buyers as it benefits only the lender or loan guarantor (Fannie Mae, Freddie Mac, etc.) in case of a default and is not otherwise tax deductible.  But if the option is to expend your entire savings on the down payment, payment of PMI might be a better option.

            Recognizing the need to make lower down payment loans more readily available, in late 2014, FHFA Director Mel Watt instructed his company and Freddie Mac to begin buying loans with as low as 3% down payments.  This should encourage more lenders to offer more lower down payment products in 2016.  Of course, these loans will require PMI, but if home values continue to increase at their current rate, the PMI requirement could be eliminated within 4 to 5 years thereby reducing a borrower’s monthly payment.

            In addition to lower down payment products, borrowers need the ability to use their equity more readily.  And, products need to be created that make it easier for self-employed individuals to obtain credit.  Because these borrowers often have irregular income, the self-employed often do not meet federal underwriting standards.

            Although more products are needed, the following are a few low down payment programs that are currently available:

  • FHA 3.5% down payment loans – the down payment may be entirely gift funds, borrower’s credit score can be as low as 500, allows recent short sales, foreclosures and bankruptcies through the “Back to Work Program”, may borrow up to $625,000 in high cost areas.
  • Home Ready Mortgage – 3% down payment – through Fannie Mae, income of all occupants in the home is considered. Perfect for multi-generational home as income of parents would be considered as would the income of working children. Broader income is also included such as non-zoned residential units.
  • Conventional 97 – 3% down – through Fannie Mae and Freddie Mac. Gifted funds from relatives allowed. $417,000 cap. Only for single family homes. Fixed rate loans only.


        As housing prices and interest rates increase in 2016, lenders will look for different ways to help borrowers make the best choices to make new homes affordable. Borrowers should study their options carefully and make sure that the loan product matches their financial goals.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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