The August 7th Note Investors Forum Meetup focus on:
TOPICS: Several New Case Studies
Where Does a New Note Investor Begin
Bring your questions, This will be an interactive meeting.
The August 7th Note Investors Forum Meetup focus on:
TOPICS: Several New Case Studies
Where Does a New Note Investor Begin
Bring your questions, This will be an interactive meeting.
Forbes Magazine published an article titled “How Do Homeowners Accumulate Wealth? ‘ October 14, 2015. The article was written by the chief economist for the National Association of Realtors, Lawrence Yun. He quoted the Federal Reserve…”The differences between buying and renting are massive. According to the Federal Reserve, a typical homeowner’s net worth was $195,400, while that of renter’s was $5,400. The data reflects 2013 and the next survey of household finances, which is conducted every three years..”…Based on what has happened since 2013 and projecting a conservative assumption of what could happen next year to home prices if we see only 3% price growth, the wealth gap between homeowners and renters will widen even further. The Fed is likely to show a figure of $225,000 to $230,000 in median net worth for homeowners in 2016 and around $5,000 for renters. That is, a typical homeowner will be ahead of a typical renter by a multiple of 45 on a lifetime financial achievement scale.”
To that Point, the Dodd-Frank Act is stunting this process. That is why the Seller Finance Enhancement Act — currently H.R. 1360 should be passed. This bill would make some minor focused and targeted changes to the rules governing the housing market to allow for more flexibility and greater consumer choice.
H.R. 1360 amends both the Safe Act and Dodd-Frank to allow up to twenty-four seller-financed transactions per year without the need for the seller to be licensed as a mortgage originator. It requires the Treasury Department to study the low-value home market over the next three years and report back to Congress with suggestions to improve the sales and financing of these homes.
What this bill does not do is remove any of the safeguards related to these transactions. Specifically, seller financers must still comply with the “ability-to-pay” portions of Dodd-Frank as well as the interest rate rules and the ban on balloon payments. Seller financers are currently limited to doing only three deals in a twelve-month period of time without obtaining licensing as a mortgage originator. This came as a result of the Safe Act taking us down to five and Dodd-Frank taking us down to three.
The key arguments in support of raising the number of seller financed deals to twenty-four per twelve-month period is that this number is a compromise reached after extensive negotiations in meetings between the National Association of Realtors and various mortgage and banking interests. Raising the number to twenty-four satisfies the needs of 85-90% of all those who do seller financing and allows the National Association of Realtors to remain neutral on the bill.
Some of the key proponents of H.R. 1360 are the original sponsor Roger Williams and original co-sponsor Henry Cuellar.
The Seller Finance Coalition is a lobbing group Capstone Capital USA supports and is a member of. It’s is to overcome the lack of knowledge as to how this problem is preventing people who, for various reasons, are not qualified by the banks to obtain capital needed to buy homes, or are looking to purchase a home in a market for which banks are either unwilling or unable to lend money.
A recent survey of consumers commissioned by the National Association of Realtors revealed that 80% believe that purchasing a home is a good financial decision (2015 National Housing Pulse Survey). Most consumers appear to already understand the simple math and the benefits of homeownership. Real Estate Market Place leaders all agree that home ownership steadily builds wealth. Seller financing is a way for more people to be able to accomplish this dream.
The Seller Finance Coalition http://www.sellerfinancecoalition.org/ is having a “FLY-IN” to lobby at Capital Hill July 18 – 19. Updates of that lobbying effort will be posted on this site. I will be a participant of that effort.
Last week, the U.S. House of Representatives voted to roll back a number of banking rules enacted in 2010 under the Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act, known simply as “Dodd-Frank” for short, was passed in response to the housing crash and subsequent financial meltdown in 2007 and 2008. The legislation was arguably the most significant financial regulation adjustment since the reform bills that followed the Great Depression. Dodd-Frank has been hugely controversial since its inception because of the extremely heavy oversight it placed not just on the financial industry, but also due to the far-reaching effects of the federal entities it created, such as the Consumer Financial Protection Bureau (CFPB). Last week’s passage in the House of the “Financial CHOICE Act” could, if the bill also passes in the Senate, roll back many regulatory changes that have not necessarily protected consumers and that have made getting a mortgage far more difficult for the average homeowner.
Individual real estate investors were caught in the crossfire, so to speak, when then-President Obama signed Dodd-Frank into law in 2010. One of the biggest ways in which it affected real estate investors revolved around new regulation of seller financing, which the law categorized (appropriately) as creating mortgage notes. When a property owner seller-finances the sale of their property, they allow the buyer to make payments to them on the property rather than requiring a traditional bank loan. Dodd-Frank placed stricter rules than had previously been in place on how sellers could finance properties that they were selling to owner-occupants and required that companies and individuals who made more than three home loans each year hire a mortgage loan originator (MLO) to complete transactions. Dodd-Frank also affected how private lenders made their loans and changed how a number of investors and real estate instructors who had previously offered students and colleagues valuable “proof of funds” letters for transactions did business.
On the whole, however, Dodd-Frank mainly affected conventional homebuyers who found themselves unable to finance their primary home purchases via traditional 30-year-fixed mortgages because lenders were wary of the regulations and legislation. Many analysts blame the act for the “credit crunch” that has existed since 2008 as lenders backed off lending practices that they felt might open them up to litigation or create another wave of foreclosures in the future, but smaller players were less affected than many had initially feared. By and large, real estate investors adjusted their practices and then continued with business as usual.
If it was largely “business as usual” for investors once the initial furor over Dodd-Frank passed, what happens now that the current administration might succeed in repealing the act? According to House Financial Services Committee Chairman Jeb Hensarling (R-TX), the biggest effect of the CHOICE act will be to strip a great deal of power from the CFPB. The CFPB was originally intended mainly to protect borrowers from unscrupulous lending practices, but it has extended its reach far beyond that and into all aspects of the nation’s credit industry and into other “consumer protections” as well. Not surprisingly, such federal reach (or overreach, as many see it) has not been well-received in many business sectors where entrepreneurs, small-business owners, and investors feel unfairly targeted. “We will replace Dodd-Frank’s growth-strangling regulations…with reforms that expand access to capital,” Hensarling promised last week. He introduced the CHOICE Act to the House and has promoted it as an avenue to increase small businesses’ options for obtaining capital.
Most real estate investors and, indeed, most of the financial industry, have instinctively applauded the notion of a Dodd-Frank repeal because this population generally supports lower levels of federal oversight. President Trump, an astronomically successful real estate investor himself, has said repeatedly that “tight lending practices” and overzealous bank regulation in the wake of the financial meltdown have hindered a true economic recovery in the United States. Opponents to the repeal like Pamela Banks, senior policy counsel for Consumers Union, say that it could cause another financial crisis by “leaving Americans vulnerable to financial fraud and rip-offs” such as poorly-backed mortgage loans that precipitated the housing crash in 2007.
If the CHOICE Act passes the Senate, which is the next step for the bill if it is to become law, it will move to President Trump’s desk for his approval, which he would likely give. In that event, here are three things that could happen that would directly affect your real estate investing business:
In 2016, first-time home buyers accounted for fewer than one-third of all home purchases for the previous year. That is historically low; the long-term average for this number is closer to 40 percent. Homeownership also was nearly the lowest since the federal government began tracking it, with fewer than two-thirds of the population owning rather than renting. If the Dodd-Frank repeal does loosen loan standards, there is likely to be a burst of buying activity as would-be owners try to make purchases before interest rates rise. The Federal Reserve has said it will raise rates a total of three times in 2017.
Opponents of the repeal say that loosening lending standards will precipitate another housing crash. In 2007, the housing market melted down in large part because homeowners had borrowed far more money than they could afford to pay back over the long-term due to easy access to subprime loans that required little to no money down and that had what housing advocates call “abusive” terms that required large balloon payments a few years into the loan or that allowed interest rates on those loans to rise abruptly and sharply after an introductory period of low interest. Homeowners took on these loans believing, in many cases, that they would be able to refinance their homes on better terms thanks to fast appreciation, but often failed to successfully do so, resulting in tsunami of foreclosures that culminated in the housing crash.
Most experts agree that another housing crash in the near future due to a Dodd-Frank repeal is unlikely because subprime lending is not incentivized as it was prior to the housing crash and lenders are unlikely to repeat those poor decisions without those incentives in place. Furthermore, tight inventory on the lower, starter-home end of the spectrum is likely to keep demand for real estate both for rentals and ownership strong. Finally, a stabilizing economy and improving employment numbers will probably counteract, at least in the short term, any instability that might result from easier access to mortgage loans.
While the repeal of Dodd-Frank will likely send an immediate flurry of buyers into the market, over the long term it is likely that single-family rentals in particular will continue to be big business for real estate investors. With millennials comprising the largest number of would-be first-time buyers, the amount of existing debt that this population will bring to the table when attempting to buy will likely interfere with their ability to actually land a traditional mortgage. Furthermore, thanks in large part to astronomical student-loan debt, millennials as a population are less likely to find homeownership and the mortgage loan that goes with it as appealing as older generations. The nearly 70-percent homeownership numbers that the U.S. posted immediately prior to the housing crash are unlikely to be repeated even if Dodd-Frank is repealed in its entirety (unlikely in itself), and rentals will quite likely continue to be a strong, stable source of income for investors around the country.
Perhaps most important for real estate investors to remember as Dodd-Frank dominates the headlines is this: at present, not much has actually changed. President Trump signed an executive order on Dodd-Frank back in March of this year basically demanding a “review” of Dodd-Frank in preparation for the rollout of some type of legislation like the Financial CHOICE Act, but so far, little has happened to really change financial regulation. The CHOICE act has a great deal of support, but it is highly partisan in nature, which will make it difficult for the bill to pass the Senate without being adjusted in order to avoid a filibuster. The Senate announced last week that it would begin work on its own version of the CHOICE Act this summer, and it seems likely that the CHOICE Act will not survive a Senate vote unless the repeal is “toned down” fairly significantly.
For now, the best thing that real estate investors can do is keep their cool and monitor the situation. Dodd-Frank was not the end of the industry, as doomsday-sayers predicted when it passed, nor will its repeal (or the lack of a repeal) save or condemn the national housing market. As is always the case, the true strength of our national housing market and the real estate industry lies in the investors who are active in the sector and who work creatively within whatever confines the government and the market set to generate housing opportunities for the public and new opportunities for success for themselves and others in the process.
A revised version of the Financial CHOICE Act is in the works, according to House Financial Services Chairman and bill author Jeb Hensarling, R-Texas. Hensarling announced at the American Bankers Association Government Relations Summit on Wednesday that a revised version of the act would be released “soon,” but gave no further details on how soon.
Hensarling first introduced the Financial CHOICE act last summer, in response to the 2010 Dodd-Frank act. The president’s team has already indicated support of the Financial CHOICE Act, which, among other things, would modify aspects of Dodd-Frank. The CHOICE Act would help to reform the Consumer Financial Protection Bureau, which, according to author and investment banker Chris Whalen, “has been especially harmful to the mortgage industry and has caused the cost of servicing a mortgage to rise several fold since 2008.”
Hensarling is confident that his legislation will win a vote in the House, however, he fears that it will face a tougher road through the Senate. Republican Senate Banking Committee Chairman Mike Crapo, R-Idaho, faces the challenge of getting at least eight Democrats on boards for large portions of the legislation, according to Hensarling.
“Right now, I fear that a number of Democratic senators are intimidated by their base,” Hensarling said.
Hensarling has not given a specific timeline for when he will release the new timeline, although he did state that the presidential administration views bank deregulation efforts as a priority. It is difficult right now, however, to determine when Congress will be able to fit financial regulation into its schedule, as other acts, such as the Affordable Care Act and Senate confirmations currently dominate Congress.
Despite the opposition, Whalen notes that now is the right time for Financial CHOICE to pass. “There are a number of other issues that may catch the attention of the new President next year, but an amended version of the Financial CHOICE Act has the highest probability of success in 2017,” Whalen said. “Needless to say, the financial services industry including banks, insurers and nonbank financial institutions will be very supportive of passage of some form of the Financial CHOICE Act.”
Editors Comment-This revision, if passed will be a real positive for the consumer and the small note buyer/sellers who work in the seller financed area. It will revise the up to 3 limit per 12 month period looking forward or looking back to 24 seller finaced transactions. When changed it will booste the real estate market. Because of the way this act is written, many servicers are pulling out of several states due to potential liabilities.
The Consumer Financial Protection Bureau is likely to be reigned in if not rendered impotent or even abolished under President Trump. He has said he would come “close to dismantling” it along with Dodd-Frank. That is good news for small business, consumers, the economy in general — and note investors.
The CFPB is the brainchild of super-liberal Massachusetts Sen. Elizabeth “Pocahontas” Warren, who never met a business she doesn’t want to regulate.
“At stake is the agency’s aggressive approach to regulating credit and prepaid cards, mortgages, payday and student loans, debt collection, credit reporting and other areas of consumer finance since opening for business in 2011.”
Never a stranger to controversy, the Consumer Financial Protection Bureau has been making headlines lately, perhaps less for its enforcement actions and rule-makings, and more for debates regarding its constitutionality.
As high profile court proceedings continue to unfold in the nation’s capital, there is a chance that changes may finally arrive to the CFPB’s structure and authority, suggests one recent editorial from The Wall Street Journal.
“In its short, unhappy life, the Consumer Financial Protection Bureau has compiled a record of abuse rivaling that of Washington’s most entrenched bureaucracies,” WSJ writes. “But there’s new reason to hope that this misanthropic creation of Dodd-Frank may not reach adulthood.”
The editorial points to the ongoing litigation between the CFPB and PHH Corporation (NYSE: PHH), a Mount Laurel, N.J.-based mortgage services provider, who the CFPB alleges broke the law when it referred customers to mortgage insurers that brought reinsurance from PHH.
The WSJ notes that the “unaccountable” CFPB overturned longstanding interpretations of law and specific guidance from the Department of Housing and Urban Development in its claims against PHH.
PHH is currently challenging the CFPB’s $109 million fine levied against it—roughly 18 times the amount determined by the Bureau’s own administrative-law judge.
For this “egregious” behavior, the Washington, D.C. Circuit Court of Appeals, as well as the WSJ, are wondering whether any of the CFPB’s actions are constitutional. More specifically, does this rogue agency have the authority to conduct such raids on American businesses?
“Judges on the D.C. Circuit asked because the consumer bureau is truly something new in Washington: a powerful independent regulatory agency run by a single federal official who cannot be removed from office at the will of the President,” WSJ writes.”The President can only fire the bureau’s director for cause.”
However, the editorial notes that the Constitution’s Article II gives the President authority to run the executive branch, and that includes the ability to fire top officers.
The CFPB’s single-director structure, along with the fact that the Bureau is not subject to Congressional appropriations, like other federal agencies, has long been a source of contention amongst agency opposition.
But while other federal agencies, such as the Social Security Administration, are also run by “one man exercising so much power,” according to the WSJ, the SSA “cannot tell business how to generate the cash to fund payroll taxes or tell beneficiaries how to spend them.”
“The consumer bureau, on the other hand, roams the financial landscape enforcing 18 statutes and bringing actions that can cost hundreds of millions of dollars,” WSJ writes. “It writes rules governing a wide swath of American business, has the power to define what is ‘unfair’ or ‘abusive’ in financial services, investigates companies and imposes penalties.”
Article II of the Constitution gives the President “not some of the executive power, but all of it,” noted Judge Brett Kavanaugh, one of the judges who is hearing the case between CFPB and PHH.
“For the sake of liberty and the integrity of the separation of powers, they should strike down this offense to constitutional governance,” WSJ writes
The following is an excerpt from The Paper Source
SETTING THE STAGE
The following applies to transactions on or after January 1, 2014.
None of it applies to any seller-carryback transactions where the buyer will not use the property as their personal residence.
When Dodd-Frank (“The Dodd–Frank Wall Street Reform and Consumer Protection Act”) was enacted into law on July 21, 2010, it said that you could only do three seller carryback transactions a year, and those transactions had to meet certain requirements:
The Consumer Financial Protection Bureau (CFPB), which was writing the regulations to implement Dodd-Frank, asked for public comments. I told Bill Mencarow about this, and he immediately (and repeatedly) alerted PAPER SOURCE JOURNAL subscribers and everyone else he could think of, urging them to submit their comments.
I also alerted members of Congress and got the National Association of Realtors on board and helped them write their comments to the CFPB.
Because so many people wrote comments to the CFPB —- and THE PAPER SOURCE took the lead — the bureau relaxed the seller financing restrictions. They came out with something that was a lot more relaxed than the Dodd-Frank law was originally.
The CFPB subsequently issued the following regulations. They apply to seller carryback notes created on or after January 1, 2014.
THE ONE PER YEAR CATEGORY
The CFPB broke seller financing into two different categories. One category is for those individuals, trusts or estates who do just one seller carryback transaction a year on a property that has a dwelling that the buyer will use as their primary residence.
Let me repeat that, because there has been so much misinformation circulated about it: this category is for those individuals, trusts or estates who do just one seller carryback transaction a year on a property that has a dwelling that the buyer will use as their primary residence.
That’s probably going to affect all but three to five percent of individuals who carry back notes.
Remember that these restrictions only apply to seller-carryback transactions on properties that have a dwelling that the buyer will use as their primary residence. A transaction on a lot or vacant land is exempt, even if the buyers plan to build a primary residence.
If the property has a dwelling, but the buyer is not going to use it as their primary residence — say they’re going to rent it or use it as a second home — then none of this applies, and you can offer seller financing with no restrictions.
Commercial property and multifamily that is five units or larger is also exempt from the restrictions.
Again, the one seller carryback transaction per year category applies to individuals, trusts and estates. It does NOT apply to corporations, LLCs, partnerships or other legal entities. In that case the second category applies (below).
Again, these rules only apply to what the CFPB refers to as a residential mortgage loan where the note is secured by a dwelling or residential real property that includes a dwelling.
Most people only carry back a note once in their lifetime, when they sell the big house, retire and move somewhere else. Some might do it a few more times. Even many real estate investors only do it once a year. These regulations are not a huge change for most people.
THE MORE THAN ONE PER YEAR CATEGORY
The second category applies to individuals, trusts and estates that do more than one seller carryback transaction per year when the buyers will use the dwelling as their primary residence.
It also applies to any seller-carryback transaction — even one — where the seller is a corporation, LLC, partnership or other legal entity and when the buyers will use the dwelling as their primary residence.
Just as in the “one per year” category, these restrictions only apply to seller-carryback transactions on properties that have a dwelling that the buyer will use as their primary residence.
If you have a rental house and the renters want to buy the house to use as their primary residence, and you want to carry back a note with a balloon (and you don’t do more than one seller carryback transaction per year), and that rental property is in a corporation, LLC, partnership or other legal entity, you’re going to have to move the property into a trust or into your personal name. Otherwise, you’re going to fall into the second category which says you cannot have a balloon unless you are an individual, trust or estate.
If you think about it, not having a balloon but being able to do an adjustable rate almost serves the same purpose. Let’s say you start out with an interest rate of 6% on the note and then after five years it goes to 8%, then it goes to 10% and then it goes to 12%. That’s a huge incentive for the buyer to refinance out of the property and pay you off. If they don’t, then you’re rewarded for your risk in carrying that paper; you’re now getting 12% for holding that paper, and there is no balloon.
ABILITY TO REPAY
The second category requires you to determine the buyer’s ability to repay, but the rules and the regs don’t specify any standards for doing it (such as the qualified mortgage standard, a 43% debt to income ratio, etc.). You don’t have to do any of that; you can just ask them if they have a job, can you see a paystub, can you see their tax return (which they may or may not give to you). All you are required to do is to make some good-faith determination that they’re able to afford that payment, and you do not have to document it.
It would be prudent to have some documentation in case there’s a default and the buyer’s attorney says “where’s the documentation?” and tries to create a legal defense against paying you. But there is no requirement that you have to document. All it says is that you should determine the buyer’s ability to repay.
I asked an attorney at the CFPB about how one should determine the buyer’s ability to repay. He said that if you fall under category two you have to determine the ability to repay, but he admitted that there are no set guidelines. You just have to show that you used good faith in determining, for example, that the buyer has a job, his rent was $1,000 per month, but the payment on the note is $900 a month and you think in good faith he can afford this property because he could afford the rental house he was in before.
WHEN YOU’RE BUYING A NOTE CREATED ON OR AFTER JAN. 1, 2014
You’re going to be able to tell from the note if the mortgagee is a private individual or an entity. If it is a private individual, trust, or estate, then ask them to sign an affidavit saying that they have not done more than three of these in a 12-month period and how many of them had balloons. If it’s an entity, an LLC, or a corporation, etc., ask for an affidavit saying how many it has done and how many of them had balloons.
If there is a balloon in that note that you’re buying from an LLC, corporation or partnership, etc., you know there’s not supposed to be one (again, if that note was created on or after January 1, 2014). You’ll have to have the note modified to remove the balloon before you buy it. Otherwise at some point the mortgagor could use the fact that the note was not in compliance when it was written as a defense against paying the debt or foreclosure.
In the Federal Register the CFPB wrote that they relaxed the rules on seller financing because of the numerous comments they received.