Daily Development for Thursday, April 1, 1999
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
BANKING; "FEDERAL INTERMEDIARIES"; FNMA:FNMA Proposes "Cradle to Grave" Home Finance programming, eliminating third party intermediaries.
1999 Fed. Reg. 3/29/99 at 139578.
In an "informational report" filed simultaneously with HUD, the Comptroller of the Currency, and Banking Committees in both houses of the U.S. Congress, FNMA indicated that it is planning a pilot program to provide a "cradle to grave" housing supply chain that will put FNMA into a direct selling mode with prospective home purchasers and borrowers.
Under the proposal, FNMA would acquire title to residential real estate and then market it through seller financing systems, creating mortgage paper which it then would package and market on the secondary market. FNMA marketing and legal departments would handle all of the sales and closings, and FNMA mortgage underwriters would handle all financing work. The proposal would eliminate the functions of independent brokers, lawyers and mortgage brokers in this aspect of FNMA's program.
Initially, FNMA will limit its activities to condominium conversions of multi-family properties it has acquired either through foreclosure or through acquisition from REITs. But the plan includes a study of whether FNMA can institute a "home relocation program" whereby FNMA would actually acquire properties from homeowners who wish either to sell directly to FNMA or to exchange for residential real estate FNMA already owns and is selling. There are also rumors in Washington that FNMA is exploring the possibility of subdivision development as well, but there was nothing in the informational report about this part of the plan.
The report indicates that FNMA's actions have been triggered by the long period of low interest rates that has persisted in the U.S. markets for four years. Because of the low interest, there is insufficient return on mortgage products that FNMA now acquires to insure an adequate return after costs of acquisition and remarketing, which involve a virtual army of independent "middlepersons," each of whom takes some share of profitability from a home sale transaction.
By dealing directly with housing consumers, FNMA proposes to make use of its huge reservoir of expertise in housing development and finance, insuring quality housing and safe underwriting, while reducing substantially the cost of home acquisition.
The report estimates that housing costs to American consumers will be reduced by approximately 20% in those market areas that FNMA enters, due to cost savings resulting from elimination of brokers, attorneys and mortgage brokers from the typical housing transaction.
FNMA reports that it is considering self insuring the title to the properties it acquires and the mortgages it makes, again making use of its prodigious expertise. Should this occur, the estimated cost savings passed on to the consumer would reduce housing costs by another 10%.
The immediate response from brokers and homebuilders associations, reported in the Federal Financial News, was cautious, but not panicky. NAR spokesperson Nikki Cansel stated: "We welcome FNMA to the business of housing marketing. We are certain that all FNMA marketing reps will become REALTOR's and will abide by the high ethical standards we set for our members." Ms. Cansel indicated that private real estate brokerages are growing larger daily, and it may be that some of them will follow the FNMA model by acquiring, remarketing and financing home purchases themselves. National Home Builder's Association Buck Bildyew was a bit more skeptical. "FNMA will find that life here in the trenches, dealing with local zoning, fluctuating materials costs, and uncertain subcontractors is a lot more difficult than peddling paper on Wall Street."
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