Articles Posted in Real Estate News

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As a Texas real estate and development attorney, I am concerned that Texas real estate lending suffered some unwelcome notoriety recently when the Dallas Business Journal, quoting an announcement by the online publication, Mortgage Daily, announced that Texas had the fourth highest level of fraudulent real estate loans in the country.

Mortgage fraud in Texas has elicited a strong response from the Texas Attorney General. In July, 2007, the Attorney General announced a judgment against Ameriquest Mortgage Co. in which Ameriquest must return $21 million to Texas residents as restitution for deceptive practices by Ameriquest. The deceptive practices alleged to have been committed by Ameriquest include not adequately disclosing whether loans carried fixed or adjustable rates, charging excessive origination fees and prepayment penalties and using inflated appraisals that qualified borrowers for loans.The Texas Legislature has responded to the fraud crisis by enacting new rules governing loan officers and mortgage brokers and by requiring loan applicants to sign a notice that they are aware of the severe criminal penalties that apply if they are providing false information as to their identity, income, employment and/or intent to occupy the collateral. These rules are enforced by the The Texas Department of Savings and Mortgage Lending (formerly the Texas Savings and Loan Department).

The primarily vehicle for the fraud, from what I have read so far, is an inflated appraisal by a broker complicit in the fraud. Inflated appraisals were also one of the vehicles for the Texas savings and loan scandal of the 1980s. It seems we just don’t learn. Or maybe the problem is that we learn, but greed wins out anyway!

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The digital age has profoundly impacted the way real estate attorneys and real estate brokers do business. For example, in the case of my real estate law practice, I recently represented the seller in connection with the sale of a shopping center. The property, the title company and the seller’s attorney (i.e., me) were located in Texas, the seller was in Arizona, the buyer was in New York City and the buyer’s attorney was in Atlanta, Georgia. We used email or ftp sites to transmit and review title commitments and surveys and to send drafts of conveyance documents and closing statements back and forth until closing. The closing was done by the title company via Federal Express. Current federal legislation, the Digital Signatures in Global and National Commerce Act (E-Sign), will allow even the closing to take place electronically, and Texas title companies are beginning to move in this direction. However, despite the ease and swiftness of the Internet, nothing, in my opinion, can replace that personal connection between an attorney and their client, and the trust, professionalism and camaraderie that flows from that relationship.Real estate brokers have also realized great efficiencies in using the Internet as part of their service to their clients. First, of course, they use the Multiple Listing Service to list and identify properties for clients, and they use email to keep in touch with often far-flung clients. However, as in the case of real estate lawyers, there are limits. A recent news story illustrates these limits.

A Newsday story by James Bernstein chronicled the demise of Foxtons, a New Jersey based residential broker. Based on Mr. Bernstein’s story and other news reports, it appears that Foxtons entered the brokerage market in the New York City/New Jersey area in a big way in 1999, introducing themselves with an expensive advertising campaign. They used Internet listings and a paid staff to sell property, instead of commission-based brokers or agents. They paid commissions to buyers’ brokers (according to Bethany Marten with the Home Buyer’s Resource Center, quoted in Newsday) of only 1 to 2%, compared with the somewhat standard commission of 6%. Once a house was listed with Foxtons, while it was entered into the Foxtons database on the Internet, Foxtons clients complained that there was little or no personal contact with the staff, and that the house they were trying to sell was not even shown to prospective buyers. There were reports that buyers’ brokers did not like to show houses listed with Foxtons to their clients, because the commission was such a pittance.

I have worked with many real estate brokers over the years, and there are many good ones out there. A good real estate broker is invaluable in buying or selling either commercial or residential real estate. A good broker assists their client with proper pricing, with the best timing for the sale, with packaging the property so it will bring the best return, and with addressing buyers’ concerns. On the buyer’s side, a good broker helps a client not only find the property, but can assist with appraisers, inspectors, engineers and financing. I have bought and sold many properties of my own over the years, and even though Texas law allows me to act as a broker for myself or for a client, I do not. In fact, I have used a broker each time, not only because they are an invaluable partner in any transaction, but also because I can count on them to be objective.

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The recent media attention to the problems in the subprime mortgage market, both in Texas and nationally, may hide the fact that subprime mortgage loans serve a valuable purpose: they are loans to low-credit households that could not previously afford to own a home.

First, it is important to put this situation in perspective. Subprimes make up 13% of all Texas residential mortgages, and only 4.3% of those mortgages were in default by the end of 2006. Nationally, subprime loans make up only 14% of all mortgages, and the national foreclosure rate on subprime mortgages at the end of 2006 was approximately 14.3%. (Statistics courtesy of Texas A&M Real Estate Center). Market Pulse reports in its June 2007 issue that nationally the subprime foreclosure rate as of June 2007 is 10.11%.

Despite the issues with subprimes, real estate markets are generally healthy throughout the country. For example, U.S. office vacancy rates are declining and commercial real estate investment reached record levels in 2006, according to the National Association of Realtors. Commercial rents nationally for the first half of 2007 recorded their largest increase in six years, according to a recent report by CNNMoney.com. Delinquencies among commercial borrowers continue to fall, according to Fitch Ratings U.S. CMBS loan delinquency index. According to Housing Intelligence, new home sales remain healthy, even though they may be down from the feverish pace of 2002 to 2006. Finally, the Mortgage Bankers Association reports that, while residential foreclosures are up, national residential delinquency and foreclosure rates are being driven by what is happening in four states: California, Florida, Nevada and Arizona. If the rates in these states were not considered, national residential delinquencies and foreclosures would be down.The issues in the subprime mortgage market are serious, of course. The National Real Estate Investor estimates that hedge fund investors could lose up to $125 million, that there could be almost 12,000 layoffs due to bankruptcies of subprime lenders, and indicates that by August, 2007, there was a backlog of $35.2 billion in unsold commercial mortgage-backed securities. These statistics, however, should not cause us to lose sight of the importance of subprime mortgage lending.

Dr. James Gaines, a research economist with the Texas A&M Real Estate Center, tackles this issue head-on in a recent issue of Tierra Grande. He notes that “(t)here is no reason to overreact and kill something that has served, and could continue to serve, a useful purpose”. Dr. Gaines goes on to say that “(t)he private sector found a way to make loans to low credit, previously unfinanceable, households so that they could own homes. While this effort was spurred by profit, not altruism, the effect on home ownership throughout the country was nevertheless profound”.
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Congress may soon get a chance to approve the creation of a new national park in the Waco, Texas, area. This development may prove a real boon to the local real estate market. A new park will generate the need for tourist related facilities, such as gas stations, motels and restaurants. Expect an increase in land prices in the area surrounding the proposed five acre national park. Local attorneys who practice real estate and construction law may find themselves in the midst of some interesting negotiations between the big city gas station and motel franchisors and the local landowners.

The possible new park centers on the discovery and excavation of the bones of 25 Columbian mammoths. The Columbian mammoth is a warm weather cousin to the woolly mammoth, with which some of us are more familiar.

Baylor University and the City of Waco are preparing to allow the public to have their first look at the “Waco Mammoth Site”, after several decades of clandestine work uncovering the remains. The National Park Service has indicated that the site meets its criteria for a national park, although the final decision will be made by Congress, and funding for a park may be hard to find.It is hard to overestimate the significance of this site. The Waco Mammoth Site, along the Bosque River, was first discovered in 1978, but has been kept quiet until now due to fears of theft or vandalism. The site is believed to be the largest known concentration of prehistoric mammoths perishing from a single event. It appears that the animals may have been caught in a flash flood and then a mudslide that killed them all at one time. The first fifteen mammoths uncovered were grouped in a circle, facing outward, protecting young mammoths in the center. Two adults were found with juvenile mammoths in their tusks, as if they were trying to raise the youngsters above the mud.

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