Seller financing is about to get ugly on Jan 10 2014

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Seller financing is about to get ugly on Jan 10 2014

Ann Bellamy
Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes

Great article about new restrictions when selling a property and providing financing to the end buyer. These restrictions go into effect under Dodd-Frank on January 10. These are federal restrictions, not limited only to a particular state, and thanks to @William Crocker for providing the link:

http://clintcoons.wordpress.com/2013/10/16/seller-financing-is-about-to-get-ugly-on-january-10/?utm_source=Coach+Carson%27s+E-Newsletter&utm_campaign=d4d7a6f657-Enewsletter_3_practical_tips_grumpy_old_pro&utm_medium=email&utm_term=0_ff82b2a4cc-d4d7a6f657-317307093

This site does sell the authors books and services, and I have no affiliation. Never heard of him, so I'm putting it out there for what it's worth.

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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y

Maybe this thread should be renamed "this thread is about to get ugly once people start a political debate in it".

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  • Bryan L.
    Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    12y

    "my rights as I see them"? The constitution is really not that hard to read and understand. Especially the bill of rights. And this portion of the law is very obviously a violation of the 10th amendment (and the 4th and the 9th).

    I appreciate your approach, but what do we do once we who are freedom loving are no longer in the majority, and we lose election after election. Look what happened a few years ago when one particular group controlled all branches including having 60 in the Senate (I refer to Obomacare). Then it went all the way to the Supreme Court where it was wrongly decided.

    What's next?

    0Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y

    Maybe this thread should be renamed "this thread is about to get ugly once people start a political debate in it".

    Podcast Guest on Show #29
    6Reply
  • Bryan L.
    Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    12y

    Politics has a big influence on how we run our businesses. We should all be concerned. But I will stop now.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Bryan, that's funny, "our freedom" as we the few define them, I always thought the majority was to rule in a democracy, I'd say many really want more of the Russian version of an election wanting the minority to rule. Adapt, deal with it, convince others to join you and become the majority. I'm all about individual freedoms too, but not going back to the wild west either.

    Let's take this to the Off Topic thread, if you like, politics are not allowed in the forums, for good reason, and we are off topic.

    Point is, regardless if I like a law or not, it's the law and either I follow it or get ready for the consequences, which includes more than any fine or jail time, there are also society issues and professional considerations to accept, many people don't deal with persons who have violated laws or positions of trust, so the SAFE Act is what it is, if it applies I'd suggest compliance. :)

    0Reply
  • Bryan L.
    Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes
    12y

    Ahhh, sorry ... I said I would stop, but just one more. You make my point exactly about the majority rules thing. So basically, as long as the majority wants something, then it's OK even though it's unconstitutional. The only protections for the minority in our system of government is the Bill of Rights, and our ability and freedom and willingness to stand up for those rights. OK, I'm done. Really. Enough said.

    0Reply
  • Ann Bellamy
    OP
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    12y

    Well, since I started this thread, I guess I can make a political comment too.

    It is true that the majority rules, and in the case of the US, unfortunately I think that government has intentionally grown to the point that the end game is to make more and more people dependent on government. They buy votes by providing entitlements. And therefore self perpetuate. The most inefficient manager of any resources we have is the federal government. With the possible exception of a few corrupt local governments.

    Inserting government into anything results in waste, abuse of power, corruption, graft, incompetence and entitlement. Again, with the possible exception of our military, which was always designed to be a federal responsibility.

    I think it's pretty funny to advocate obeying laws enacted by the government, when it is becoming apparent that the government is the biggest lawbreaker out there. Look at the NSA spying issues.

    Although I used to believe in gun control, I now believe that the Second Amendment was designed not to allow people to protect themselves from outside forces, but to protect themselves from the government. And that need is becoming more urgent.

    Done with rant.

    5Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    You can't control what the morons do in Washington. You can only seek out the opportunities and take advantage of those to the benefit of your business.

    Podcast Guest on Show #47
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  • Ken Rishel
    Specialist · Springfield, IL · Member since 2011 · 700 posts · 479 votes
    12y

    Oct 31, 09:21 AM

    "There are a lot of hype on this subject. Can someone show a official government document stating the rules not from someone trying to make a penny selling books about it" - Joe Gore

    No one that has spent the time or money to get the education and the expertise to give correct answers is going to hang out here offering to share all of that with you for free. There are over 200,000 pages of documents on the Federal level that regulate lending and they are constantly changing. They are not organized for your benefit, nor are they easy to understand and interpret. To add to that, most states also regulate lending and what one state allows, another will not. To confine your focus on proving there is a problem rather than seeking intelligent solutions is a waste of time.

    Now I would be among the first to not recommend buying a book for the answers, even though we do sell a book on one very specific piece of this puzzle. Why? Well the book we do sell has been revised three times in three years just to keep up with that very narrow topic it focuses on. If we didn't keep a purchaser list and send them the revised versions every time we update it (for free) that book would be of little value. I also constantly warn about people setting themselves up as self appointed experts because they usually do not get it right. We do workshops on seller finance and often more than 1/2 the room attendees are practicing attorneys who freely admit they can't keep up with regulatory laws.

    On the other hand, there are intelligent solutions out there but the people who have them expect to be paid both for the time and money they spent getting qualified and prepared to give you answers and for helping you find the right solutions for your specific needs. I just spoke at the New York association on the topic of different solutions for different people, and briefly outlined three different solutions for different sized operations and that is a very important thing to understand. What works for ELS (the largest community operators in the US) is not the same solution for the guy who controls 1000 pads, nor are either of those solutions right for the operator who controls 100 pads. If the Lonnie Dealer tries to use the wrong solution, they usually give up because it is too costly in terms of both cash and time, so it is important to figure out which solution is right for you, before moving into investing in any solution.

    As much as you would like it to be, there are no easy answers or simple solutions. Getting emotional about it only makes it worse. It makes it worse because emotions cloud judgement and interfere with solving problems.

    Bill G is very valuable to this forum because he has the right background to understand the problem and he is willing to take the time to warn people when he sees them headed down the wrong path. You should listen to him - he isn't selling solutions. You and everyone else should join your state manufactured housing associations, because they are a valuable source of information. The Chattel Finance Newsletter goes to over 20,000 readers every month and it is also free. Trade shows like the Louisville Show coming up in January are also free to community owners and retailers and they offer valuable information.

    Instead of disparaging people who might be able to help, or posting for the world to see taunts to the government daring them to catch you, try getting control of your emotions and doing what is really right for you. Remember that Al Capone didn't listen when people tried to warn him about income tax either.

    2Reply
  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y
    Ken,

    Thanks for a long post and I never bought any books and want start now, and I think Lonnie is snake-oil salesmen. I take everything on the Internet with a grain of salt.


    Joe Gore
    0Reply
  • William Robison
    Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
    12y

    I just this response from another investor. Does anyone with great knowledge of the Dodd-Frank want to chime in with a response?

    "DF has placed a lot of fear in investors. However, it only applies if you are a dealer or doing more than 3 land contracts per year. Also, many of the states are not paying any attention to DF. One way out is by placing the land contract properties in separate land trusts with you or your LLC as the beneficiary."

    0Reply
  • Mary B.
    Real Estate Investor · Lansdowne, PA · Member since 2013 · 1k+ posts · 656 votes
    12y

    Thanks a bunch for sharing this, Ann.

    Kudos,

    Mary

    0Reply
  • William Avery
    Investor · Austin, TX · Member since 2013 · 49 posts · 17 votes
    12y

    If you read the article and listen to the radio interview you will see that Mr. Coons believes that this is one of the worst pieces of legislation ever. But, with that said, he also says this bad legislation has some very bad teeth and some people are going to get bitten. He has a fairly simple solution, cluster your seller financing deals into groups of three and put them in an LLC. Put the next three in a new LLC, etc. Each LLC is a different entity (person) and each is entitled to three a year. This does have some cost but I would think it would be cheaper than the fines.

    I purchased a Living Family Trust from Mr. Coons about 10 years ago and was very pleased. He also updated it a few years ago when HIPAA regulations created a situation where my spouse would not have access to my medical records if I became incapacitated.

    Mr. Coons is a real estate investor and an attorney that has spent his career researching real estate law.

    William Avery

    3Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Yes, I had conversations with Chris when he was getting onto this area of RE financing a couple three years ago. He's a sharp guy.

    I believe what is being missed is the SAFE Act has a very broad reach as it includes "any method or scheme" that is seen as an attempt to circumvent the intent of the law. I'd say that catches doing SF deals and tossing them into an LLC and calling them separate transactions that are exempt, looking behind the door to one individual with various entities I don't think is a real solution. :)

    0Reply
  • Mark F.
    Investor · Orange County, CA · Member since 2009 · 230 posts · 138 votes
    12y

    Anybody aware of the impact of the new CFPB Ability to Repay (ATR) rules on investment property financing? I'm a loan officer and I was digging into the new ATR rules to find out more about them and it appears they apply to investment property financing as well. The problem is that investment property loans often are more expensive than the new rules allow to be considered a "Qualified Mortgage" that gives lenders special legal protections. I'm afraid that many lenders may not want to do non Qualified Mortgages because the CFPB has opened them up to more liability if the loans go sour. I'd be interested to hear if anybody else has dug into this.

    I did a detailed write up on what I found out about these new rules taking effect on 1/10/14 and I'd be happy to send you the link if you want it.

    0Reply
  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    @Mark F.,

    Can you post the link?

    Joe Gore

    0Reply
  • Mark F.
    Investor · Orange County, CA · Member since 2009 · 230 posts · 138 votes
    12y

    It's actually my own link, so not sure that's kosher. It's the latest post on my blog at Mortgages By Mark though.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    12y

    The CFBP Ability to repay rules apply to CONSUMER purpose loans only. Technically, a commercial or investment property loan if a refi can be for a consumer purpose, but in that case having the borrower signing a statement declaring that the proceeds are to be used for business or investment purposes should suffice.

    Private Mortgage Financing Partners, LLC
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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    @Don Konipol , it is wise to have that statement signed but I'm not positive that will cover you. I have purchased notes that were originated as investment property loans and the borrower moved into them anyway. I had to initiate foreclosure on one and since the borrower filed a homestead exemption (probably illegally) my lawyer would only proceed as if this were a residential note. In Michigan that means a lot more time between filings, etc. It is way too early to know how the CFBP will act if a similar situation occurs. Anyone want to volunteer to be a test case?

    1Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    12y

    And similarly, if you were crazy enough to consider doing one, a loan against a primary residence could be for a business purpose.

    To be more specific, you really want the borrower to state what he/she will do with the money so you can judge if it’s for business purpose or not. A simple declaration that it’s for business and/or that the borrower will not move in is not acceptable. One lawyer I heard recently suggested you have the declaration handwritten on a clean sheet of paper and in detail. Occupancy, while relevant, has little bearing on determining a business purpose.

    1Reply
  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    Occupancy is a very big factor. None of the private lenders I know (myself included) will touch an owner/occupant loan now no matter what the stated purpose is. I only know a couple hard money guys. Both ceased all owner/occupant lending also.

    Neither would I purchase a note on an owner occupied property. The rules may allow this if the loan was originated before 2014 but it is not worth the risk. The potential penalties are severe and the CFPB instructs borrowers on how to sue a lender.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    12y

    @Jeff Rabinowitz @Jeff S. good points. I myself lend and buy on commercial properties almost exclusively. The only SFR I will lend on are multiple units owned by one investor - so if an investor owns 8 sfrs I will consider a loan on all eight - as long as he has declared a homestead on a different property.

    Private Mortgage Financing Partners, LLC
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  • Mark F.
    Investor · Orange County, CA · Member since 2009 · 230 posts · 138 votes
    12y

    Maybe having somebody sign a letter will work in a private lending situation, but I highly doubt that would suffice if you were getting a standard Fannie loan from a traditional lender for an investment property.

    This is the problem that I see: the fee new limits starting Jan 10 include any lender fees AND pricing adjustments imposed by the investor. For example, if you were refinancing an investment property 4-unit building for $150,000, 75% LTV and a 740 score, the new Fannie LLPA matrix imposes these pricing adjustments:

    • 740 credit score and 75% LTV: 0.50%
    • Investment property: 1.75%
    • 4-unit: 1.00%

    That's a total of 3.25% of the loan amount in pricing adjustments. If the lender has around $1500 in lender fees for processing, underwriting, etc. (which is another 1% in costs), you're already at 4.25% of the loan amount for pricing adjustments and lender fees. The max that the new CFPB rules allow is 3% of the loan amount for a $150,000 loan. If the lender can't absorb at least 1.25% of these costs with lender credit, the deal doesn't work.

    If this same deal had a loan amount of $99,000, then the CFPB caps the lender fees and pricing adjustments at a flat $3,000. Because of the smaller loan, it's possible additional pricing adjustments would be assessed by the lender for loan amount - perhaps another 0.50%. Now you're at 3.75% of the loan amount for pricing adjustments, plus another 1.50% for the lender fees. That's 5.25% of the loan for lender fees and pricing adjustments. Unless the lender can absorb a good chunk of that and get below the $3000 limit, they probably won't bother to do the business.

    Both of these scenarios assume good credit and no cash out. If you threw lower credit scores and cash out into the mix, now you're really screwed because even more pricing adjustments would apply.

    These new fee rules are probably just going to make it impossible for many borrowers with smaller loans to qualify. So stupid.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Mark, you're mixing apples and oranges, those fee structures apply to regulated lenders and dealers, not mom and pop or private lenders who are and have been for decades restricted from charging "lender fees".

    I disagree that making a loan to a guy who owns a shirt shop for his inventory and taking his primary residence as collateral is exempt, there are more issues in loan classifications than intentions claimed. Once that borrower deposits that check in his bank account funds have been comingled it also releases him from the use of other funds, so the effect of obtaining the loan is a consumer benefit. Now, if the guy is a rehabber and uses his own residence that can also be an issue, using the SFD being rehabbed can be a clean commercial loan.

    I'd suggest no HML or private lender ever take a primary residence, just avoid the issue and don't try to get into the mind of some regulator or judge with your opinion. What you want to call it is irrelevant and as mentioned, if you must foreclose, you'll be going down the residential path. :)

    2Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    12y

    While "loan purpose" can make a loan against a homestead the proceeds of which are used for a business purpose a commercial loan, I'd hate to argue the case in a "liberal" or debtor friendly court.

    @Bill Gulley is as usual correct in his analysis; the bottom line is why take on the risk, hassle and potentially negative outcome. Look, here are the facts; the borrower faced with foreclosure in this situation will probably answer one of the many letters, postcards etc being send to him by attorneys who handle bankruptcies when his foreclosure is listed. The attorney will then decide that the best case for his client is to claim the loan residential - and that his client didn't understand the documentation he signed or was under duress to sign it.

    Another issue is that state law can still be used - for instance a homesteaded property in Texas; or for that matter any primary residence, is a persons personal homestead, purpose of loan not withstanding.

    IMO, lenders who think that they will be able to do "work arounds" the consumer finance legislation are in for a big awakening. At worst their investment will lose the property securing the loan, at best they will be tied up in expensive litigation for years. Only when consumers unable to obtain home loans start to complain en mass, AND the liberals first choice of having the Government give them loans out of the Federal Treasury is shot down, will the legislation be somewhat modified to bring credit for less creditworthy borrowers back into the market. The case for the positive aspects of sub prime residential loans will have to be greater than the case of the many consumers who lost their credit, life savings and homes because of an inability to afford high interest, large fees, floating rates, and short term payoffs.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    You know, if I'm Harry Homeowner selling my house and I want to seller finance, I can do that. I just posted one of my record setting long posts in another thread, it applies here as well.

    I don't think the government is very concerned about Harry, they are concerned about lenders, be them HMLs, private lender guys operating out of their pocket, dealers and operators that use seller financing in the course of doing business.

    I said a year ago or so, that the SAFE Act was going to cause issues in the note business. So will DF. Just get a servicer. But 3 years from now, there will be some note floating around made by some Harry that will be fine, but without it having been originated with proof of the exemptions in making that note, there can be issues and/or it may be worthless as no note buyer will want to touch it.

    Another issue, when a transaction was not at arm's length, a lender would not underwrite a refinance just because there was some agreement, the deal had to be redone and accomplished as a purchase, equity established was not considered for the buyer. We could see similar issues, if a note is illegally originated in a transaction or some rent to own deal is not compliant an institutional lender may not recognize that transaction and may require funding as a new purchase. Meaning you might not get a bad deal refinanced, then what?

    Point being, get compliant if you aren't Harry but it's in his best interest to follow the guidelines as well, exempt or not. :)

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