Marijuana & the Title Industry: Where Are We Now?

The country is a lot greener than it was just a few years ago, and not just in terms of renewable energy. Forty-seven states, the District of Columbia and four U.S. territories have legalized some form of recreational or medical marijuana, including cannabidiol (CBD). Fourteen states have legalized it in some form in the past two years alone.

Despite growing state support, marijuana remains illegal at the federal level, continuing to expose title professionals who handle transactions involving marijuana farms, dispensaries, or extraction facilities to a myriad of risks. However, that could all change if landmark legislation to reform federal cannabis laws clears the U.S. House of Representatives (House) and Senate and is signed into law by President Biden.

This article will briefly explore proposed legislation, how it could impact the title industry and why nearly a century of federal cannabis prohibition could soon come to an end.

Marijuana 1-to-3 Act of 2023

This act, reintroduced in January 2023, is designed to move marijuana from a Schedule 1 drug to a Schedule 3 drug under the Controlled Substances Act. Schedule 3 drugs have less potential for abuse, accepted medical application and low to moderate risk of dependence if abused.

Moving marijuana to a Schedule 3 drug would not completely mitigate risk for title professionals working with state-legal marijuana-related businesses (MRBs), but it would significantly reduce the likelihood and severity of associated penalties and fines.

The MORE Act

The Marijuana Opportunity Reinvestment and Expungement Act, better known as the MORE Act, was originally introduced to Congress in July 2019. It cleared the House but not the Senate. Democratic Senators have announced plans to reintroduce the bill this year.

The MORE Act is a historic bill that would remove cannabis from the list of scheduled substances under the Controlled Substances Act, eliminating criminal penalties for any individual who manufactures, distributes or possesses marijuana.

Decriminalizing marijuana would also make it easier for title insurance companies and title agents to do business with licensed MRBs. Under the Controlled Substances Act, the Drug Enforcement Administration currently has the authority to prosecute any entity that knowingly or unknowingly participates in unlawful activity (i.e., making Schedule 1 drugs available to the public). Removing marijuana from that list would allow title professionals to close transactions and insure title for properties that grow, sell or process cannabis where it is legal, without fear of penalty.

The SAFE Banking Act

The Secure and Fair Enforcement Banking Act, or SAFE Banking Act, was reintroduced in March 2021. It also passed in the House but stalled in the Senate. Democratic Senators have also announced plans to reintroduce the bill again this year.

The SAFE Banking Act would permit state-legal MRBs to access the federal banking system – something many have trouble doing now. That’s because most major financial institutions want to avoid the risks of dealing with funds generated from MRBs or complying with the U.S. Dept. of Treasury’s Financial Crimes Enforcement Network (FinCEN) guidance.

Proponents of the SAFE Banking Act argue that forcing MRBs to operate on a cash-only basis makes them sitting ducks for robbers. It also keeps them from holding checking accounts, getting loans, or wiring money, and it creates headaches for tax collectors and vendors who have to count bags of cash.

The SAFE Banking Act would keep banks from being penalized for working with MRBs under the Money Laundering Control Act. It would also alleviate similar concerns for other entities handling or settling financial transactions on their behalf, including title insurance companies and title agents. If MRBs gain access to banking services, it may also make it easier for title professionals to transfer real property (by working directly with lenders and customers to wire electronic funds and process checks).

Why Now?

After years of failed attempts to reverse or reform federal cannabis laws, you may be wondering, “Do these bills actually have a shot at becoming law?” That remains to be seen. A lot has changed in the last few years. Here are just a few drivers behind the momentum.

• Health and wellness. While only a fraction of states have legalized recreational marijuana, 38 of them have adopted it for medical use. Physicians prescribe medical marijuana to treat a variety of illnesses and conditions, and CBD products have become popular as a natural way to reduce anxiety, pain and inflammation in humans and their pets.

• Economy. The U.S. cannabis industry is a multi-billion dollar industry and is expected to grow exponentially over the next seven years. If marijuana is legalized and taxed on the federal level, it could provide a significant boon to the economy in terms of revenue and job growth.

• Environment. Hemp (which is low in THC, the ingredient that gets you “high”) is widely considered a sustainable and eco-friendly crop. It can be used to produce fabrics, paper, pharmaceuticals and much more.

• Increased pressure from constituents. Some form of marijuana is considered legal in 47 U.S. states.

• Growing acknowledgement/support in Congress. The Congressional Cannabis Caucus was established in 2017. Congress passed the FARM Bill in 2018, which removed hemp from the list of controlled substances. The MORE Act and the Safe Banking Act were both introduced in 2019 and passed the House in 2020 before stalling in the Senate. The Marijuana 1-to-3 Act of 2023 and the Veterans Medical Marijuana Safe Harbor Act were both reintroduced. More bills like these are expected to follow, with growing bipartisan support.

While the tide may be turning, until the gaps between state and federal cannabis laws close, title professionals are urged to continue carefully weighing all the risks before determining whether to handle marijuana-related business transactions.

Four Takeaways from NAR’s New Generational Trends Report

The National Association of REALTORS^® (NAR) recently released its latest report on Home Buyers and Sellers Generational Trends for 2023, reviewing market trends for 2022. Check out our summary of four major takeaways from this year’s report and what they mean for the real estate industry:

1. Baby Boomers overtook Millennials as the largest demographic of home buyers, making up 39 percent of the market in 2022, compared to 29 percent in 2021. They also remained the largest demographic of home sellers, jumping from 42 percent in 2021 to 52 percent in 2022.

One reason for this rise is, as NAR deputy chief economist Dr. Jessica Lautz explains, "Baby Boomers have the upper hand in the homebuying market. The majority of them are repeat buyers who have housing equity to propel them into their dream home…[and] they are living healthier and longer and making housing trades later in life.” Younger Boomers (ages 58-67 in 2022) may be seeking larger multigenerational homes or are choosing to move closer to family and friends, while Older Boomers (ages 68-76) may be seeking less property maintenance responsibility as they enter retirement.

2. First-time buyers made up only 26 percent of all home buyers, a sharp decrease from 34 percent last year, and the lowest number since NAR began tracking data in 2013. Seventy percent of Younger Millennials (ages 24-32) and 46 percent of Older Millennials (ages 33-42) were first-time home buyers. Behind these groups, 21 percent of Gen Xers (ages 43-57) were also first-time home buyers.

3. When relocating, all generations are moving farther distances, with Millennials typically moving the shortest distance of just 15 miles and Younger Boomers moving the furthest of 90 miles. The most common reason for such a move is to be closer to family and friends.

4. Gen Z (ages 18-23) now makes up 4 percent of buyers, an increase from 2 percent in 2021. Thirty percent of Gen Z buyers are moving directly from a family member’s home into their own first home and many are relying on family support systems to make the purchase. Gen Z also surprisingly expects to reside in their first home for 19 years, a much-longer stint than previous generations. As the most internet-savvy and climate-conscious generation, Gen Z buyers have likely done their research and are seeking a home that will sustain them for as long as possible. One thing is for sure: this generation is no longer “statistically irrelevant” and is gaining traction in the market.

Industry professionals can continue to cater to each generation by using data to create a good first impression, understanding and honoring customer preferences, and offering care and respect to the values and needs of each. For example, Baby Boomers will appreciate careful assistance with paperwork and inspections, touring areas that offer criteria that they value (e.g., affordability, lower tax rates, ample access to health care, moderate climates and low crime rates) and personalized touches, such as a hand-written thank-you note upon closing. For more ideas, check out our flyer on understanding generational trends.

There’s a reason countless Americans have relied on Old Republic Title for over a century. Through changing markets and generational trends, we continue to offer personalized service and a variety of title insurance resources designed to help our customers protect one of their biggest investments. Whenever you’re ready to buy or sell your home, Old Republic Title will be there to help.

Copyright ©2023 “Home Buyers and Sellers Generational Trends Report 2023.” NATIONAL ASSOCIATION OF REALTORS^®. All rights reserved. Reprinted with permission. March 28, 2023. https://cdn.nar.realtor//sites/default/files/documents/2023-home-buyers-and-sellers-generational-trends-report-03-28-2023.pdf

The General Economy

The economy in the fourth quarter showed signs of the battle against inflation. Steep mortgage rates hobbled the residential construction and home improvement industries, which weighed down overall growth. Despite smoother supply chains, businesses were hurt by costlier financing options. Painful interest rates were on the minds of consumers as well, who also felt less wealthy as the stock market wobbled and home values declined.

But inflation finally eased meaningfully, helped by lower energy and car prices. The Consumer Price Index (CPI)’s annualized rate for the quarter was projected to have been 7.4 percent, down almost a full percentage point from the previous quarter. Unemployment, despite headline-grabbing layoffs, ended at 3.5 percent, better than it began the year. Consumer sentiment and spending reacted positively, shaking off prognostications of a recession. Holiday travel was on par with 2019 levels and eating out remained the bright spot of retail sales, growing over 14 percent since last year. Better-stocked inventories, Black Friday deals that spanned a month, and increased reliance on credit cards¹ supported a 3.6 percent rise in Personal Consumption Expenditures – the best showing for the year. With consumers as a counterweight to faltering sectors, annualized Gross Domestic Product (GDP) growth was forecast to be below the long-term average, but still positive at 1.1 percent.

The Real Estate Sector

Residential

With the Federal Reserve (The Fed) boosting its rates to combat inflation² by another 1.25 percent during the quarter, its restrictive efforts were apparent in the extended housing market downturn. The 30-year fixed mortgage rate reached a multi-decade high of over 7 percent in late October and early November, before settling into the mid-6 percent range by quarter end. Consequently, the drop in single-family home sales persisted, albeit at a less severe rate than in the third quarter. Talk of next year’s recession and the prospect of being saddled with homes that reached completion but are not selling due to rising interest rates further dampened builder confidence, single-family starts and permits. The softening market was also evident in the continued slide in the median price of existing homes and subdued growth in new home prices.

Despite these lackluster numbers, there was not much talk of a bubble bursting as with past downturns. Demand has been driven by millennials reaching their prime homebuying years, not by speculation. Furthermore, builders were able to boost purchases through non-price concessions. Both builders and buyers found ways to take the bite out of interest rates through mortgage rate buy-downs and paying points up front.

Source: Survey for the NAHB/Wells Fargo Housing Market Index, November 2022

Commercial

Commercial Real Estate (CRE) experienced further contraction due to rising interest rates and uncertainty. A significant fall in office deals drove down the average. The office sector was plagued with persistent haziness in the new normal for business space. Even hot sectors were impacted; industrial properties lost sizzle as ecommerce demand normalized, venture capital funds became more tightfisted with life science companies and the crypto implosion shook the data center market.

While not immune to general economic forces, the retail sector was resilient and saw rising rental asking rates³. Businesses that survived the pandemic did so through adaptation. Landlords changed their store mix to include more medical and wellness providers, restaurants and pop-up retailers. With their location close to residential areas, some companies leveraged their storefronts as quasi-industrial space, using it as the “last mile” for online sales.

Particularly effective was the integration of in-store and online shopping. Within this, perhaps the biggest adaptation was the embrace of Buy Online, Pickup In-Store (BOPIS) by even the smallest of establishments. BOPIS has been growing steadily in popularity since 2019 and saw a solid 4.1 percentage-point gain from last year’s holiday season, according to JLL. Focusing on customer service helped retailers as well. Neighborhood centers that offered more in-person services were an area of growth; net absorption³ rose by 35 percentage points in the third quarter from the previous quarter. Home improvement stores, reeling from the drop in residential renovation spending, highlighted their knowledge and targeted professionals.

Source: JLL Research, Holiday Survey 2022

A Glance Forward

Forecasts show that the first quarter of this year will be the beginning of a recession (with GDP falling and unemployment rising). Whether moderate and prolonged, or short and shallow, it all hinges on consumer spending. Many people have drawn down their savings⁴ and will be handling high interest on their holiday credit card purchases while facing more unemployment. However, businesses won’t see much immediate relief from wage pressures as the job market loosens, even as demand falters. The explosion of COVID cases in China could subdue purchases and again impact supplies. In CRE, there was a surge in redemption requests in December for non-traded private Real Estate Investment Trusts (REITs), driven mostly by concerns over increasingly challenged credit conditions. A few large players limited withdrawals. Now market participants are watching closely for contagion to other CRE investment vehicles. With many areas of the economy sputtering, GDP could fall by 1.5 percent in the first quarter.

Although the residential housing market’s negative momentum will carry into the first quarter of 2023, some forecasters believe that this may be the bottom. Single-family existing and new home sales are forecast to decline only slightly (-1.5 and -3.3 percent, respectively) compared to drop offs seen last year. Housing prices – even for new homes – should move in the right direction to support a rebound. The Mortgage Bankers Association (MBA) foresees a small bounce back in single-family home starts. Encouragingly, in December, the National Association of Home Builders registered an improved expectation for future sales for the first time since April. More builders reverted to the trend of offering smaller houses. This is good news for downsizers and millennial first-time homebuyers waiting on the sidelines for prices and rates to come down.

With inflation anticipated to bump down 1.7 percent from the last quarter, continued moderate rate hikes are expected by The Fed. The MBA forecasts that 30-year fixed mortgage rates peaked in late 2022 and will decline through 2024.

Source: Federal Reserve Board, Freddie Mac, MBA Forecast, 2022

So, while the first months of 2023 certainly will have bad news as we move through consumer, labor and real estate market corrections, there may be more normalcy evolving as well.

¹ Board of Governors of the Federal Reserve System (US), Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks [CCLACBW027SBOG], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CCLACBW027SBOG, January 3, 2023.

² Board of Governors of the Federal Reserve System (US), Federal Funds Target Range - Upper Limit [DFEDTARU], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFEDTARU, January 4, 2023.

³ Copyright ©2022 “October 2022 Commercial Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. January 2023, October 2022 Commercial Market Insights (nar.realtor)

⁴ U.S. Bureau of Economic Analysis, Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PSAVERT, January 4, 2023.

Recently, we have received numerous inquiries pertaining to title insurance coverage. Please refer to the information listed below from the Department of Insurance that explains title insurance coverage areas in more detail.

• Protection from financial loss (up to the face amount of the policy) due to covered claims against your title;
• Payment of legal costs to defend against covered claims;
• Payment of successful claims against your title (up to the face amount of the policy).
  Read your title insurance policy carefully and note possible exclusions and exceptions, which may include:
• An unrecorded title defect you knew about;
• Condemned land;
• Building and zoning ordinance violations;
• Payments required (except for legal access rights) because your deed failed to provide rights of use to adjacent land, streets, alleys or waterways;
• Conveyance of title irregularities arising from a deceased person's estate, a bankruptcy estate or trust;
• Restrictive covenants limiting your use of the property;
• Discrepancies, conflicts or shortages in area, boundary lines, encroachments, protrusions or overlapping improvements;
• Right of usage claims arising if your property is on or near a body of water, river or stream; or,
• Renter or adverse possession claims from "parties in possession" of all or a portion of your property.

A federal program was established to help borrowers that owe more on their mortgages than the home is worth......HARP.  The program is limited to mortgages that were sold to Fannie or Freddie on or before May 31, 2009.  If your loan was made after that date, then you are not eligible.

A few things to consider about HARP:

1. You do not have to upside-down on your mortgage to be eligible for HARP refinancing.  The program is open to borrowers with loan-to-value of 80% or more.

2. To be eligible, you must first ask your lender.  However, one of the requirmements is not missing a payment in the last few years.

HARP allows lenders to orginate a new loan with an interest reate about 0.25 percentage point above the market rate.

If a HARP loan fits your needs, please consider requesting Legacy Title Company, LLC to assist you with the closing process.