In the letters to Senate Finance Committee Chairman Charles Grassley, R-Iowa, and Ranking Democrat Max Baucus, D-Mont., MBA Senior Vice President for Government Affairs Kurt Pfotenhauer said the mortgage industry wants to see the Gulf Coast region prosper again. But to do so, Congress would need to engage in tax policy changes to benefit both the residents of those areas and the abilities of the lending industry to provide support.

The mortgage industry will face its own challenges, especially those companies heavily invested in the affected communities,” Pfotenhauer said. “Those challenges include, among others, maintaining liquidity to provide temporary and long-term forbearance to borrowers, dealing with conflicts among insurance companies over coverage, managing properties that have been or will be abandoned, gaining access to properties to perform inspections and emergency repairs and the resulting costs and losses associated with all of these activities.”

Among the changes MBA proposes:
 
• REMIC Amendments. Congress should include in any tax-related hurricane relief the Real Estate Mortgage Investment Conduit (REMIC) Modernization Act (S. 580 and H.R. 1010). These bills reform the REMIC loan modification requirements, which would benefit real estate owners and tenants, as well as suppliers of real estate design, construction and renovation services, MBA said. Under these bills, property owners who have suffered damage to their commercial or multifamily structures that are financed through a REMIC would be permitted to rebuild, improve or increase space to suit new or returning tenants without causing the REMIC trust to be engaged as an active business, which alters the tax treatment of the REMIC vehicle.

• Low Income Housing Tax Credits and Mortgage Revenue Bonds. The Low Income Housing Tax Credit program could be an effective rebuilding resource and a means of providing new housing for those relocating after the storms, MBA said. In addition the Mortgage Revenue Bond allocation in the affected areas should be increased for the next three years to facilitate rebuilding efforts and existing waivers under program regulations for disaster areas should be extended from two to three years.

• Economic Depreciation. Current IRS code authorizes 39 years for depreciation of non-residential structures. MBA supports permitting property owners of the Katrina and Rita-affected areas to depreciate their buildings based on the true economic life–just slightly over 20 years on average. Allowing property owners to depreciate their buildings over the true economic life of the asset would encourage economic development and reflect the realities of the asset’s utility.

• Accelerated Depreciation for Leasehold Improvements. MBA supports allowing a five-year depreciation for leasehold improvements in the hurricane-affected areas, which is analogous to the treatment in the New York City Liberty Zone (for property that was placed in service after September 10, 2001 and before January 1, 2007). Current law, which expires this year, allows for 15-year leasehold improvement depreciation.

• Restoration of Contaminated Properties. “The situation in New Orleans especially will have sweeping environmental implications,” MBA said. “There will be many newly contaminated properties that will fit the Environmental Protection Agency (EPA) definition of brownfields properties. Brownfields are real property, the expansion, redevelopment, or reuse of which may be complicated by the presence of a hazardous substance, pollutant or contaminant. Cleaning up and reinvesting in these properties will take development pressures off undeveloped land and both improves and protects the environment. MBA encourages Congress to provide funding for and permanent extension of the brownfields provisions in current law.”

Additionally, MBA supports H.R. 877 and S. 398, which provide for expanded expensing of environmental remediation and clean up costs and broadens the definition of “hazardous substances” to include “toxic substances” (notably, petroleum) contamination.

“In New Orleans alone, there are currently 66 known contaminated petroleum sites and that number is expected to climb into the hundreds,” MBA said. “The total number of brownfields sites in post-flood New Orleans will be in the thousands.”
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“HELOCs continue to be the product of choice for consumers and lenders—they represent the lion’s share of the current portfolio,” Yaeger told MBA NewsLink. “One of the main drivers we see for that success is customer experience that is quick and easy. They are looking for something that is fairly straightforward and quick to execute. And that is becoming easier as lenders use technology.”

The HELOC process has become almost painless, Yaeger said, particularly in comparison to the paper-burdened mortgage origination process. “From a consumer view, it’s the difference between night and day,” she said. “We’re also seeing products that have become increasingly flexible. You can draw on the line for a fixed period for any number of loan items. It almost starts to resemble a commercial obligation, where borrowers can draw on a credit line.”

According to industry research, last year Americans took out $431.3 billion in home equity loans and lines of credit—nearly 35 percent more than in 2003. As interest rates, consumer debt and new home purchases continue to escalate, the growing demand for HELOC products holds enormous potential for higher returns and thus warrants particular attention, according to a BenchMark white paper.

BenchMark research found that in home equity lending the two key drivers differentiating organizations—and determining success—are driven by technology convergence, in particular, processing speed and customer relationships.

“These drivers are really two sides of the same coin–as consumers become more and more educated about the lending process, they are demanding faster service,” according to the BenchMark white paper. “Delivering on this requires lenders to embrace more automation as a way of closing loans faster and more economically.”

“Mortgage lenders have provided a wealth of new products to meet the affordability requirements, cash flow needs, and risk tolerances of a range of borrowers,” said Mortgage Bankers Association Chief Economist Doug Duncan. “This range of choices is a clear benefit to consumers. Mortgage borrowers are more educated about the lending process. Since they stay on average in their home only 5-7 years, many mortgage products are geared toward that stay.”

Yaeger said customer demand, driven by the ability to research over the Internet, has in turn driven the process in HELOCs, much more so than the yet-unfulfilled widespread electronic mortgage.

“Consumers will go where it is easier,” Yaeger said. “Cost is a second factor—lenders are driving down costs by going electronic. But technology is also a double-edged sword. “Lenders have to drive their costs down by being more competitive; one way to do that is to charge fewer fees.”

But the efficiencies outweigh the drawbacks, Yaeger said. “There are interesting technologies that enable bankers to re-evaluate and monitor their practices over time, and respond more quickly to change. Technology allows lenders to spot trends that could have caught them off guard a few years ago. They can re-evaluate almost instantly and respond effectively.”

And in the long run, the ease in providing quick and efficient HELOCs could drive the eMortgage process more quickly, Yaeger said. “I have great hope for an eMortgage. The industry is way overdue,” she said. “I think HELOCs provide lenders with the opportunity to see how it can be done. Banks are comfortable with the model, and they continue to invent new products and take advantage of the technology.”
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Executives from 298 companies responded to the survey, conducted in early August. It focused on the second year costs of implementing SOX 404 and streamlining its implementation.

The survey also found that auditors have improved their performance since SOX was first implemented. Companies said their auditors are qualified to complete the implementation of 404, in contrast to findings in an April survey when 30 percent of the respondents said the accounting industry had sufficiently trained staff to implement 404.

The costs of implementing 404 are serious for smaller companies. As a percent of revenue, smaller issuers in 2004 spent nearly 11 times more on SOX implementation compared to larger companies.

Additionally, the surveys found that 74 percent of the respondents said that the SOX legislation was necessary, but the concern was in the implementation of the legislation.

"The survey confirms what we have been hearing, particularly from the small- and medium-sized companies," said William Archey, president and CEO of AeA. "Auditors are treating these smaller companies as if they were multi-billion dollar businesses and imposing the same auditing requirements. AeA has argued that a 'one size fits all' approach to SOX 404 imposes unnecessary and costly burdens on smaller companies without improving investor confidence."
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This year’s program incorporates both commercial/multifamily and residential sectors in the real estate finance industry. Sessions are designated by sector, while other sessions are appropriate for both. This conference provides up-to-date information on critical accounting, tax and other financial developments affecting large and small mortgage banking companies.

Go to http://events.mortgagebankers.org/accounting2005/agenda to view the program agenda.

Accounting and tax experts who serve in the real estate finance industry, as well as seasoned financial analysts, deliver presentations that contain current information relevant to help you work more effectively and understand the latest industry developments. Topics covered include: regulatory trends; economic and mortgage market environment; SEC Regulation AB; and accounting for loan transfers and securitizations.

We still have speaking opportunities available for the following sessions:

The Hierarchy of GAAP
• Pronouncements that constitute GAAP today and their position in the hierarchy;
• The new FASB standard on the GAAP hierarchy;
• SEC releases, including staff speeches, that are related to GAAP; and
• Software and other tools available for researching GAAP.

Accounting for Loan Transfers and Securitizations
• Determining when a transfer of a loan is a sale for accounting purposes;
• Implications of the FASB project on "Qualifying Special Purpose Entities and Isolation of Transferred Assets" on reporting loan transfers;
• When a legal "true sale" opinion is necessary in a loan transfer; and
• When a securitization vehicle is a QSPE and why it matters.

If interested please contact Rebecca Vandall by Wednesday, October 12 at (202) 557-2748 or rvandall@mortgagebankers.org.

Who should attend:

• Chief Financial Officers
• Financial Officers
• Comptrollers
• Internal Auditors
• Independent Accountants
• Accounting Policy Managers

This year’s location is at the beautiful Boca Raton Resort & Spa (Web site: www.bocaresort.com). MBA discount room rates for the conference are $199 single/double with a $9 resort fee apply until the hotel cut-off date of Monday, October 17; early registration discount is valid through Monday, October 24.

Sponsorship opportunities are still available; call (202) 557-2790 or e-mail mbrady@mortgagebankers.org.

For additional information, visit http://events.mortgagebankers.org/accounting2005/default.html, or call (800) 793-6222, 9:00 a.m.-5:00 p.m. Monday-Friday EDT.
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In addition, MBA said members of the Senate Republican leadership reported that they are close to a deal with the minority (Democratic) leadership regarding the timing and parameters of floor debate on a TRIA bill. Senate Majority Whip Mitch McConnell, R-Ky., reportedly said he is “confident that the Senate will complete work on TRIA legislation prior to Thanksgiving.”

MBA staff, along with some of MBA’s commercial members, will meet in the coming weeks with House majority and minority leadership to impress the importance and urgency of renewing TRIA and to ask them to schedule floor time for TRIA.

MBA favors extension of TRIA’s provisions and a permanent solution to a federal terrorism insurance backstop. MBA has said that while terrorism insurance coverage assures stability and continuity for the commercial real estate industry, TRIA and terrorism insurance defends the U.S. against physical and economic consequences. MBA is an active participant in the Coalition to Insure Against Terrorism (CIAT) http://www.insureagainstterrorism.org/.

MBA sits on CIAT’s 10-member Steering Committee and plays an integral part in leading the coalition’s 75 member organizations in the quest to renew TRIA.
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Vinay Kapoor, president and CEO of IPC US REIT, said proceeds from the sale would be in excess of $85 million, representing more than a $36 million gain and a 54 percent internal rate of return on its preferred equity investment.

“Over the last 12 to 18 months the REIT has widened its investment strategy by adding structured investments to its investment objectives, mainly in response to escalating real estate values,” Kapoor said. “These investments can provide significant profit while at the same time protect the downside and enable us to participate in trophy buildings in the largest markets with better risk adjusted returns. We are very pleased with the significant profit that we have realized in one year from this investment.” 

The net proceeds from the deal will be re-invested the REIT. 

In September 2004, IPC invested $49 million, net of fees earned, of preferred equity in the Bank of America Center, which entitled it to an annual return of 12 percent. IPC owned a 10.5 percent interest in the property.

The $1.05-billion sale of the Bank of America Center to an unnamed buyer represents a “significant premium” over last year’s purchase price of nearly $875 million, and, Kapoor said, reflects the increase in the value of real estate in the U.S.

The purchase agreement is subject to rating agency approval of the buyer and is expected to close before the end of the year.

IPC US REIT is the only real estate investment trust in Canada that invests exclusively in U.S. commercial real estate. The REIT beneficially owns an 86.4 percent interest in IPC (US) Inc. and IPC (US) II Inc., which, including two recently announced acquisitions, have ownership interests in a portfolio of 39 office and retail buildings comprising 11.3 million square feet of rentable space.
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Lowrie, president and managing director of Gateway Funding, Horsham, Pa., was keynote speaker yesterday at the first annual Mortgage Lending Industry Diversity Conference in Arlington, Va. She said automated underwriting poses a challenge in lending to a diverse community which includes minority, ethnic and first time borrowers.

“Not every individual, particularly the changing population that you will be serving over the next decade, will fit into that black box,” Lowrie said. “It is a challenge that we as an industry have to deal with. We are going to need to understand, as an industry, that you just cannot put their information into an automated underwriting system and expect to get a fair decision on the loan. This is something that I will be talking about over the next 12 months [as MBA chairman].”

Lowrie said the industry needs more loan officers from diverse backgrounds, and that businesses need to plan for more diverse loan officers as immigrants, particularly among the Hispanic and Asian populations, will account for one-third of net household growth in the next decade.

“The biggest challenge facing the housing industry over the long term is to help meet the needs of this growing and ever changing nation,” Lowrie said. For example, a Portuguese loan officer who worked at Gateway Funding generated $50 million per year in loan volume; however, from a customer service standpoint, the company needed someone to speak Portuguese to help the borrowers with any questions about loan payments after closing.

Researchers estimate the market to grow by 30 million people with the forecast of 13 to 15 million new households, according to Lowrie. She said it will also require lenders to find $6-$7 trillion more in international credit markets than in 2000 as minority household growth outpaces white household growth by two to one.

“Minorities will represent 80 percent of the population growth,” she said. “The 69 percent of the majority white population today is expected to move to 50 percent by the year 2030. That is astounding. That is an astounding statistic and we need to be ready. We need to be prepared as an industry.”
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