FIXING DODD-FRANK/SELLER FINANCING

[Bill Gulley]

I'd like to get ideas from BP members on the topic of seller financing under the new laws.

Not looking for smart comments from several we already know don't like the changes but here's the fact:

It's the law and we need to follow it.

The CFPB is accepting comments from the public. I'd think it would be naive on our part to think that any regulator dealing with this issue would not be aware of the largest RE investor site on the internet, don't you?

I have kept saying "prudent lending practices" I realize about 5% here understand what that is, we can touch on that later.

But where do you feel you could actively participate in:

1. Gathering supporting documents and information for extending credit. We will assume you'd have a list of documents and simple instructions.

2. How important is a balloon payment to a seller in 3 years, in 5 years and 7 years. There may be some acceptable ways to ensure the ability to meet such requirements.

3. Would you use a standard note and deed of trust or mortgage if one existed?

4. Would you use a standard Lease-Option allowing the option price to be financed if one existed?

5. Would you agree to use a mortgage servicing company, your choice as to who?

6. Would you be willing to (or pay the servicing company or split servicing fees under certain circumstances with a borrower) to complete an annual report of payments and loan activity to be held on file?

7. Would you be willing to attend a class of instruction of 20 hours supervised by the state and pay a fee similar to that of a real estate agent?

8. Would you be willing to obtain a license for RE dealers similar to that of an RE agent?

9. How many RE financing deals would you really expect to do as a seller or buyer?

10. As a seller/lender, would you agree to LTV and CLTV requirements or an equity amount established by a borrower to extend or modify any obligation under certain default instances that would be reasonable and that would require performance of a borrower?

What are your real concerns? Be reasonable keeping in mind the reasoning behind all the changes. Constructive input.

I'd be interest in compiling the information and supporting suggestions for modifications and exemptions that may be allowed by the CFPB.

The BP community could have thousands of justifications and in support to allow modifications, I'm sure that big brother will listen if requests are reasonable, keep within the purpose of the law, place sufficient safeguards in business to be conducted and that can be managed or overseen with little or no additional costs.

Any takers? Any suggestions? I'd like to see an attempt at some constructive measures rather than folks crying about, and trying to circumvent, the laws.

[Dion DePaoli]

This is constructive but I am not entirely sure I follow. I will just comment on your numbers.

1. A more standardized list of particulars would help educate the public and could help curtail less, to some degree, abuses. However, can a simple list be created or does it instantly turn into a 100 page underwriting book?

Some of this could be counterbalanced with a standard set of documents. Then of course the documents to collect can simply be included. Perhaps with standardized definitions and utilities. As a for instance of the need and the low level of competency, many private loans I have reviewed fail to clear the borrower's identity. What documents can a private person use to do such a thing and are those documents then required to be held in file? It's possible but it needs to remain 'skinny' but adequate.

2. The balloon problem, while I understand it, seems to be more of a political response to mortgage problems rather than a solution. Let's not forget our neighbor to the north uses a 5 year balloon as a part of their promissory notes on a regular basis. They suffered seemingly less than us in the mortgage crisis. Certainly it is easier for them since they have a system which deals with it, everyone does 5 year balloons as a standard. I think balloons have a practical place in lending, which includes short term balloons. I suppose there is not much need for anything less than a 3 year balloon. I would also presume a 5 year would be the more prefered term. Opening these back up, would require having more active participation from private lender/sellers. They can mandate 15 year or 30 amortization, remove any interest only feature. If the market has some folks willing to extend this, then the borrower will not be left in the cold for a refinance, which I think is more of what they were trying to deal with.

3. This is a No Brainer. They need to standardise the documents across all the states. This will give them greater regulatory control I think as well since it will eliminate poorly written documents and or predatory documents. A full standard loan packet, just like conventional lenders use. Free to download and easy to use.

4. No Comment

5. This really needs to be mandated and minimal standards of servicing for this type of requirement should be looked at. For instance, I know of some servicers which offer services but the services are so limited that a private lender really stands a higher chance of breaking a collection law than not. I hate to say it, but FCI comes to mind. Anyone can board a loan, they are willing to take the loan on and as a function trying to keep the cost low, they are pretty hands off. This really leaves the private guy to fend for himself in terms of the creation of borrower correspondence and enforcement of remedies. That then turns into violations pretty quickly. The market needs small servicers for small lenders. The small servicers need some help covering the services gap between being a small servicer and being a large full service servicer. Perhaps require the servicer to provide template documents which the private person downloads from their website or similar. Education maybe?

In addition, they need to clean up who is the direct line of contact. The public needs a better understanding of the difference between the investor and the servicer. I think this becomes confusing for folks. To some degree the public may want a more private lender opposed to being put into a securitized trust. The investor needs to be able to correspond and make decisions but through the servicer so the loan gets back that personal touch. I am sure the servicers who accommodate the little guys don't want to see their burdens increased but this is a growing problem. Folks use a servicer like FCI and then FCI doesn't really help them service, it is more like renting their license.

This likely needs more in depth review and a series of proposed solutions.

6. This too is an issue. Borrower servicing history is obtained from the current servicer but there is no mandate to hold that servicing history from previous servicers and owners as a permanent part of the file. Honestly, I think this is pretty dumb and creates issues in the secondary market and primary market. If I buy Bill's loan and Bill bought it from someone else, usually he doesn't have the old servicing file and payment history. So we are constantly starting over on each file. This can be used to hide factors of the borrower's history to create a sort of dupe on me the new investor. It also eliminates the ability for a new mortgagee to relate to past events in the borrowers file which may be relevant such as hardships. The entire servicing history and payment history needs to be completely portable from investor to investor and servicer to servicer. This actually will help deal with the idea that many private loans and small servicers do not report to any credit agency. So then, this history can also be used for such underwriting situations, perhaps a small fee for the report if you are a credit extender to offset the administrative costs.

The servicer should be required to give an annual report. That too is a no brainer. This will help keep borrowers on top of their accounts to some degree and will give them a better chance to actively manage their loans as a consumer.
7. I don't know if I am on board with this idea. We have to be cautious of turning private folks into institutional folks. Did private lender/sellers crash the market? Certainly some bad apples are out there but the central idea I support is a push back to localized lending not lending with intent to distribute. If I want to sell my house and I am willing to offer financing to do so, it is impractical to expect me to decide such a thing and then go to a class in order to do one transaction. I would think this can be normalized better in a different way. To that regard, we want less of an obstacle/burden to the private person to lend not more. Frankly, the banks need some good private competition. If my tax dollars already act like a backstop for banks and GSE's, it seems like I am already "in the business".

The standardization of documents and perhaps procedures can offset this educational need since the professionals used in the transaction would have that education.

8. Don't like this idea.

9. I don't like the limitation here either. This number needs to increase not decrease. If they properly counterbalanced private folks in the marketplace with standard documents, standard procedures and standard professional services to use to close these transactions then who cares how many a person does? They will pay taxes on their gains and interest. Why do we want to limit credit to the public. This idea of pushing out the private guy creates a gaping hole which can only be filled by institutional lenders who frankly have not proven they can write a better loan than private folks.

Looking at it from a different angle, let's be honest, doing 12 of these deals a year doesn't make you an institutional lender. Perhaps I am unaware of the harm these transactions have done to the public over the years but again, to me, more harm has come from the institutional folks rather than the private folks. These types of restrictions just create market place ruled by the same class of titans.

10. 100%. A standard can be set and implemented. This is wise and offsets the lack of underwriting skill a private person would have. However, caution here, as too high of a barrier and it just pushes the private guy out again.

In general, I have am a huge fan or private loan creation and ownership. In the past I put together some presentations around this idea and used scenes and ideas from "It's A Wonderful Life". Sounds corny, but if you think about (or rewatch, tis the season) George Bailey comes to find toward the end of the movie the greater good he serves to the community opposed to Mr. Potter. As a nation, we want local credit extensions. A more hands on approach to credit in a local market only serves to help the community not hurt it. The large institutional lenders have no need nor duty to really serve the public, they serve their shareholders. The fact that we actually have discussions about how broken mortgage servicing is a clear sign to this. If they wanted to fix it, they could, they don't.

Much of our national response to the mortgage crisis has not or will not solve the problem. Institutional originations are made with an intent to distribute the risk and those originators really only set out to earn fees. Creating a platform for more private folks to get involved will allow for more active participation in the loans being held by those folks. It can bring in more compassionate and responsive reactions to hardship and common sense approaches to credit extension. I don't have the numbers but would love to see them, which has more delinquencies and defaults, institutional loans or private loans? I am guessing, institutional by a fairly large percent. Since we don't have a system in place to monitor that, it is tough to quantify but that too speaks, to some degree, about the need and the direction we are pointing ourselves in. Gearing more toward institutional, where institutional actually caused the spike and the problems.

An interesting tangent that sits on the fringes of many of our conversations here. There is a market place here, around the idea. Where underwriters could earn a living underwriting private loans. I am all for a person getting a license for such and then offering that service to the public for private originations. Same thing with Mortgage Brokers. The mortgage brokers trying to take advantage of this space, in my opinion, seem to be trying to be predatory. For instance Bill, the guy who wanted to charge 4.0% in a recent thread. A cap on that fee to private folks and a clearly defined service role would be beneficial and I would think, fairly easy.

There is also a poor understanding of the professionals that a private lender/seller should use. So clearing that up will help as well. Often times, I see folks turn to title companies as the service provider, they are not my idea of qualified for such matters. In contrast, attorneys are not always either.

The general approach I have always walked away from with regard to regulation on these matters is protect the public by making a 'gatekeeper' who is properly licensed. This can be done by using Mortgage Brokers and Underwriters setup to help serve the private folks. License them but the let the private folks have more market autonomy, we want and need their capital in the market not to mention their prudence. I will care more about a $50k loan if I only have $60k to invest than Bank of America which has billions. If I put my money in BOA, they use my money to make the loan anyway, so why should they get the monopoly of being able to use my money? It ends up in the same place, a loan to a borrower. Only they care less and I care more.

OK, that is enough for now. Not sure if that is what you are looking for or not.