Are you the next target?

Question

I discovered BiggerPockets as I searched for a HardMoney Lender to fund a deal involving a Farmington HIlls, Michigan office building. I was excited to discover a treasure trove of valuable information in the Forums, Podcasts. etc. Ann Belamy's BP 09 Hard Money Lending was a terrific introduction. I was excited to get more insight with another hour of great ideas in BP 16-- dealing with Seller-Financing, Private Money, etc. but to my dismiss I heard only a 4minute announcement that "We had to remove this program because new legislative ' Dodd-Frank' rendered many of its recommendations illegal."

To any who have ever thought, " There ought to be a law....." I would respond that our Patriot - Founding Fathers were compelled to a revolutionary war because their overseers imposed too many laws that impaired their ability to realize their desired liberty and pursuit of happiness.

In Fall 1978 my Real Estate Finance professor made a political announcement to our class as a preface to that day's lecture. " Today it is now illegal for any lender in our state (Idaho) to make a mortgage at prevailing market rates." Well-intentioned but informed lawmakers had determined that no lender should ever charge more than 10% for a mortgage loan so they wrote Usury Laws that forbade any higher rate. The problem with general price inflation greater than 10% no rational entity would commit money to loan when economic conditions rendered his transaction a certain loss. The Idaho State Legislature was called to an emergency session to change the statutes or else the state's economy would grind to a halt.

I eventually made Real Estate Finance my full-time profession. During that time I have witnessed many new laws championed by idiotic politicians. Without exception, every one of those laws has denied access to funds and denied home ownership to people who could have enjoyed property ownership if there were a free market.

The number of workers in my chosen profession, mortgage brokerage, is down by nearly 80% from its 2007 peak. Without exception profitability of each transaction has been slashed because of the ramifications of Dodd-Frank and its associated Consumer Finance Protection Board. To those that say " They had it coming" mortgage brokers earned too much. I respond that transaction costs did not get reduced to benefit consumers. The net result is that big banks, especially those that were deemed "Too Big to Fail" were empowered to grow even larger as they were actually given money to devour their former competitors.

Chances are that the readers of my post did nothing to stop this terrible development because they believed that they were not being harmed.

If you did not protest when my business was being harmed by over-reaching regulators because your business was not directly targeted, I ask you . " WILL YOU BE THE NEXT TARGET ? "

Stan Johnson · Answer

CONSUMER " PROTECTED" OUT OF HER HOME.SUBTITLE: BE CAREFUL WHAT YOU WISH FOR, YOU MIGHT GET ITAn actual case history- A home owner rendered homeless as a consequence of a mortgage regulation-- HOEPA ( Home Owner's Equity Protection Act )The mother of three school age children provided in home medical assistance for an elderly resident of a small Idaho mining town. Upon his death the old man demonstrated his gratitude by bequeathing his home to the caregiver so she could vacate her mobile home and become a real property owner. The caregiver was not family and the old man did not want to disinherit his biological heirs so he provided the home at a modest price but he made the estate the beneficiary of a modest private money mortgage to provide a monthly remainder for his own adult children who already owned other residences in the same community.All parties were served by this arrangement until the nurse's own son developed leukemia brought exorbitant demands for both money and time causing. The homeowner was unable to make mortgage payments to the estate for over a period more than 24 month by the time she approached me as a mortgage broker for help. At that time she owed less than 30% of the home's market value. Medical costs caused unpaid loans and collections to accumulate and to created a credit profile of a borrower who did not pay any of her legal obligations. Bank regulations simply would not allow FDIC-insured money to be invested in such a poor credit risk but the beneficiaries of the deceased man's mortgage deserved payment so they sold the non-performing mortgage to a Boise " Private Note Purchaser" for a small fraction of its face value because the heirs lived in a small community and did not want the infamy of being the ogres who would compound the misery of an unlucky family by seizing the home through foreclosure after the occupants had suffered the loss of their son to childhood disease.The Boise opportunist had no such inhibitions. He immediately initiated foreclosure proceedings. Either way he would profit immensely 1) if he could force a payoff of his note through refinancing he would receive a payoff of more than 250% of the money he paid for the discounted note, or 2) if he acquired the property through foreclosure his profits would be several times greater. The homeowners came to my mortgage brokerage company but their poor credit history prevented me from doing anything. A few years earlier I could have helped them obtain a "second chance" mortgage. Several lenders would lend up to 55% of a home's value without requiring proof of income and to even the poorest credit risks. Of course a prospective lender would not lend to a borrower whose credit history demonstrates chronic pattern of disregarding credit obligations on the same terms they would extend to unblemished credit. Such Sub-Prime lenders deserved and expected higher rates to compensate for the extra risk and the probable higher costs of recovering their money. The Home Ownership Equity Protection Act ended this class of loans. HOEPA imposed onerous penalties for loans that were classified as " High Cost Loans" HOEPA would also rescind (write off) a loan if it was determined that the lender had not documented the Borrower's Ability to Repay. This ill-fated family was "protected" from paying high costs to a mortgage lender but their home equity was extinguished. They were forced to sell the home, to incur costs of moving an entire household and to become renters for several years until they could recover from the financial burden associated with their son's chronic illness and death.To all who wish that government would protect them, I cite this example as I remind you BE CAREFUL WHAT YOU WISH FOR, YOU MIGHT GET IT

Matt Sicignano · Answer

I agree that the "too big to fail" banks got a pass, and are back to old tricks because they don't have to worry about competition from the "too little to bail out" ones that went under. But you have an oversimplification of the Dodd Frank Act. And the reason 80% of the mortgage brokers are gone is that part of the Act that says, in effect, "if you buy it you eat it"! I can imagine the conversations that took place after that. "You mean if I originate a bad loan, with lax documents, unverified income, shaky credit and a sky high reset down the road, I'll have to bear the risk!?!?!! Wahhhh...no fair!

Jay Hinrichs · Answer

@Stan Johnson I am NMLS licensed and have been a HML for many years starting in the mid 80's.what went on in the mortgage industry and especially sub prime was not to the benefit of the public.. I like to think that borrowers could read the small print and understand the ramifications.. But the reality is with so many they just don't understand what they are signing and just go with the idea of whats it going to cost me a month without any after or forethought to cost over the life of the loan.Not to mention no money down or cash back loans.. all of this was just a ticking time bomb.And of course with the backend commissions available to mortgage brokers on the sub prime deals and the fact that in most states MLO were not even licensed. you just had a recipe for bad behavior... and failed industry... I like the good ole days were you had to have at least 10% down and HML was one who did 10% seconds and the banks were never in the deals more than 80%. also when dealing with a big bank they state a rate today that they lend at its not some mortgage broker trying to up sell the borrower by 1/2% so they get a bigger kickback on the loan... that's is counter intuitive to taking good care of borrowers.

Bill Gulley · Answer

Another one bites the dust! We don't get political in the forums, but laws are passed based on social as well as economic aspects. The consequences are weighed and some win and some lose. Try doing RE in China or N. Korea and let us know how that goes.....I'd rather accept the ground rules here myself. :)