Safe Act and HR 4173 Update – Is it Good News for Seller Financing?

A new law exempts up to 3 seller-financed transactions in a 12-month period from mortgage originator licensing requirements. Bill HR 1473, now known as the Dodd-Frank Wall Street Reform and Consumer Protections Act, was signed into Public Law No: 111-203 on July 21, 2010.

A loud outcry was heard across the nation from real estate owners, investors, and note buyers on any restrictions that would limit sellers from using owner financing on property they owned.

It seems the lawmakers have listened… well, sort of.

The changes probably fall into the category of “something is better than nothing.” You can read the new language below and be the judge.

Excerpt pertaining to exemptions from Mortgage Originator definitions in:

HR 4173 Dodd-Frank Wall Street Reform Act

TITLE XIV–MORTGAGE REFORM AND ANTI-PREDATORY LENDING

Subtitle A–Residential Mortgage Loan Origination Standards, SEC. 1401. (2)(E)

(E) does not include, with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 3 properties in any 12-month period to purchasers of such properties, each of which is owned by such person, estate, or trust and serves as security for the loan, provided that such loan–

(i) is not made by a person, estate, or trust that has constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of such person, estate, or trust;

(ii) is fully amortizing;

(iii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;

(iv) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and

(v) meets any other criteria the Board may prescribe;

To Read the Full Bill visit: http://www.govtrack.us/congress/billtext.xpd?bill=h111-4173

So is it an improvement?

Yes, since the previously proposed language had only exempted 1 seller carry-back transaction every 3 years. This makes the exemption for 3 in 1 year slightly more palatable.

You’ll also notice it requires the real estate note to be fully amortizing (no balloons), fixed rate for first 5 years, and the buyer showing an “ability to repay.” It does not require the seller to have lived in the property as his own residence.

If a seller financed transaction falls outside the set parameters then it has to meet the mortgage loan origination licensing requirements. That means getting a license or using a licensed mortgage originator to handle for a fee.

This also appears to be good news for loosening restrictions placed by the HUD Safe Act. As the law is implemented it should revise the minimum standards set for states under the Nationwide Mortgage Licensing System Registry. Certain states, such as Texas, are already incorporating seller-financing exemptions into their laws.

It’s hard to declare a victory for any law that chips away at our private property rights. However, the changes are welcomed. Or as one investor said, “Weekly beatings are better than daily beatings…”

Top 5 Ways to Buy Mortgage Notes

One of the things that make buying and selling notes so appealing is the multitude of ways an investor can purchase a note.

Frankly, you are limited only by your imagination. Well, maybe imagination and reaching a desired yield.

Here is a quick look at calculating the cash flow business that even those with math phobias will like.

The Top 5 Ways to Buy Cash Flow Notes

1. FULL – A full is just that. Buying the entire note.

If the seller has 322 payments remaining, the investor purchases all 322. The full purchase is the most popular way to buy mortgage notes.

Even though it may not be the best choice for a seller, many sellers just want to be completely done with the note.

2. PARTIAL – Anytime an investor purchases something other than a Full it’s referred to as a “Partial.”

Typically when someone uses the term “Partial” we are talking about purchasing the next immediate “X” Number of Payments. This can be any number of payments.

The most common partial purchases are 60 months, 120 months, and 180 months.

If the investor purchases the next 60 payments, the promissory note reverts back to the seller on payment 61. The seller, at their discretion, may choose to sell more payments or keep the remaining payments.

3. PAYMENTS ONLY – This type of partial purchase involves a balloon mortgage note where the seller is due a large balloon payment at the end.

For example, the note holder is to receive 120 more monthly payments and then a balloon payment of $50,000.

“Payments only” would be when the investor purchases just the remaining 120 monthly payments but none of the balloon payment. The seller of the note would retain future possession of the balloon.

4. SPLIT BALLOON – Very much like the “payments only” option except in this case the investor purchases all of the monthly payments (120) and a portion of the balloon.

For example, the investor purchases all the remaining 120 payments and $30,000 of the balloon payment.

This would leave the seller the remaining $20,000 due of the balloon payment.

The seller and investor have effectively “split” the balloon ($30,000 to the investor, $20,000 to the note holder).

5. SPLIT PAYMENTS – In this type of partial, the investor purchases a portion of each monthly payment.

It is typically reserved for when the seller of the note is receiving a sizeable amount each month (although it really could be implanted at any time).

For example, let’s say the note holder is due 145 payments of $2,500.00 each month.

The investor may elect to purchase $1,750 of each month. This would leave the remaining $750.00 each month for the seller of the note.

Typically the payer mails the full $2,500 each month to the investor and then the note investor forwards the $750 to the seller. This avoids confusion among the payer of the note as well as helps the investor make sure the note is being paid in full each month.

The “amount” of each monthly payment that is purchased is completely up to the agreement of the investor and seller. It just needs to be worth the extra handling efforts.

MAKING THE CHOICE

As you can see, there’s more than one way to buy mortgage notes. Matter of fact, there may just be literally hundreds of ways to purchase notes since many of the methods can be used in combination with each other (including Reverse and Split Disbursement partials)

As long as the deal can fit into the best financial calculator, there is a mathematical way to purchase the note.

So which method is best?

The best method is dictated by the needs of the note seller and how best to meet that need while still protecting the yield and exposure requirements of the investor.

3 Notes Mortgage Buyers Just Aren’t That Into

Private mortgages aren’t going to be perfect. Note buyers know this and that makes them pretty good at finding creative ways to safely buy mortgage payments.

But there are some notes and land contracts that just don’t make good investments. Save yourself time and marketing dollars by knowing the three notes that investors just aren’t that into. Read more

HR 4173 and Seller Financing – Get the Facts

Legislation and owner financing are in the news again as the House and Senate look to work out differences on HR 4173.

The House first passed the bill in December 11, 2009, entitled Wall Street Reform Act, that included provisions to limit seller financing from HR 1728 Mortgage Reform Act. The Senate then passed their version of HR 4173 on May 20, 2010, entitled Restoring American Financial Stability Act.  Once differences are worked out in conference the bill would go to the President before becoming law.

Here is an important fact sheet we were asked to share with readers:

Fact Sheet for HR 4173

Wall Street Reform and Consumer Protection Act

Restoring American Financial Stability Act of 2010

Sections 1073 and 1074 of the Senate Version contain sections that will impose severe restrictions on “seller carry-back” financing of real property (commercial, residential and agricultural), i.e. such a seller will only be allowed to finance one property every 36months. Seller financing is a successful financial tool for small businesses and minorities alike.

The unintended negative consequences of these 2 sections are enormous:

1) Limits credit in urban and rural areas where institutional financing is scare.

2) Many times, seller financing is the only alternative available on properties in need of rehabilitation and renovation. Banks and institutional lenders are wary of lending on such properties. With less properties being renovated, less jobs in the construction trades will be needed, leading to even more unemployment and blight.

3) Many seniors contemplating retirement were counting on selling their rental properties and holding the mortgage (owner financing) and living on the monthly payments received. As bank accounts are paying 1-1.5%, the opportunity to earn 5-6% on Seller carry-back financing can be the difference between living their golden years independently or living in poverty.

4) Real estate will soften even more as there will be less capital and / or credit available to keep the market moving. Property under $60,000 is not likely even to be considered by financial institutions for loans.

5) Houses will become less affordable. Banks charge points, application fees; escrows, etc that often exceed $7-$10,000 or more in closing costs. Seller carry-back financing rarely involves points, application fees, etc.

Currently there is a bill in the House Ways and Means Committee; HR 3440 “The Installment Sale Bill” that would have the opposite effect of the two sections described above than HR 4173. This bill would allow “dealers” to take installment sale tax treatment. It would have the effect of opening credit at no cost and expense to the US taxpayer, create jobs and increase revenues to the government. Rep. Bill Pascrell and Rep. Peter Roskam are the primary sponsors. Other sponsors include Rep. Adler and Rep. Andrews from NJ and Rep. Eric Cantor from VA.

We would urge the members of the Conference to seek to have the provisions discussed above eliminated from the final draft. Allowing them to remain will cause financial problems our nation can ill afford and is contrary to public statements of opening the financial markets to the public and the importance of helping small businesses.

Modifications supported by:

• NJ Assoc. Real Estate Professionals
• National Association to Protect Private Property Rights
• Seller Financed Note Industry
• Texas Land Developers Assoc.
• Real Estate Investor Organizations

What Can We Do?

We once again need to make our voices heard by the Congressmen that represent us! Contact a Senator from your state, or in state where you do business.  Contact a Representative if you have property or do business in their district.  If you are not sure check this site: http://www.congress.org/congressorg/dbq/officials

A sample letter has also been provided by NAPPPR to help in the efforts.  Please be sure to personalize the sentence in bold to fit your situation.

SAMPLE LETTER

Date:

Dear:

With a bill as large as HR 4173 I need to make you aware of a couple of sections that have a large impact on the real estate industry.  This is especially true for my small business, which utilizes seller financing.

As an example Sec. 1074 Minimum standards for residential mortgage loans provides language that requires buyers to be qualified for the sale of real property or dwellings. The definition of real property includes farm land, commercial property, residential property, unimproved residential lots, apartments, etc. even though the heading calls for minimum standards for “residential” mortgage loans. I also understand it includes a prohibition of owner financed sales.

The operations of members of the National Association to Protect Private Property Rights (NAPPPR), the Texas Land Developers Association, Seller Finance Note Industry and numerous professional real estate investment organizations are centered on owner financed property.  Much of the property is purchased, improved and resold with owner financing. Another practice is to develop real property and sell that property for future home construction.

HR 4173, specifically Sec. 1073 and Sec.1074, will have an additionally debilitating effect on the economy.  With the current credit crises, conventional forms of financing are unavailable.  Further restrictions of owner financing, a common alternative to bank loans, will limit development, slow a recovery, and put additional downward pressure on property values.  It is counterintuitive to include these sections in HR 4173 as these provisions go too far.

Please see the attached fact sheet on as to what this bill will do to the real estate industry, alternative credit markets and the economy overall.  We serve thousands of people without cost to the government while providing stability and security to the banking industry through capitalization of individually financed real estate transactions.  My small business has financed XX of transactions over the past XX years, and holds the notes on these contracts.

These 2 sections of a very large bill targeted at the banking industry over reach and have the unintended consequence of strangling private equity markets as well.  Please oppose the inclusion of sections 1073 and 1074 in the final version of HR 4173.

Sincerely,

PYC56S3DHZQM

How Falling Home Prices Hurt When Selling Mortgages

Try to sell a mortgage note lately?

Chances are the pricing was hit by property value in one of three ways. Read more

How to Calculate Interest Only Owner Finance Payments

Calculating the payment needed to cover just the interest on an owner-financed contract or promissory note is simple. Just follow three easy steps and avoid two common pitfalls.

Follow 3 Easy Steps

Step 1: Obtain the current principal balance and interest rate from the land contract or promissory note

Step 2: Times the balance by the interest rate

Step 3: Divide by 12

In fact it is so simple you don’t need the best financial calculator, any standard calculator will suffice.

Here are the steps in action:

Step 1: A seller-financed note has a balance of 100,000 at 8% interest

Step 2: $100,000 x 8% (or .08) = $8,000 (interest for the year)

Step 3: $8,000 divided by 12 = $666.67 (monthly interest only payment)

What It All Means

If the buyer pays just the interest every month then the balance stays the same and does not decrease.

If the buyer makes a payment that is more than the interest only portion then there is a principal reduction and the balance goes down.

Unfortunately there are two common mistakes people unknowingly make with interest only payments. Read more

What is a Land Contract?

A Land Contract is a type of owner financing that allows the buyer to make payments to the seller for a home or land purchase. The buyer gets to use the property but the seller hangs onto official title until paid in full.

The contract comes under several names including Real Estate Contract, Contract for Deed, Installment Sale, and Land Contract. It is an alternative way to document the seller financing arrangement from the more common Note and Mortgage or Note and Deed of Trust.

One big consideration with a Land Contract is that the buyer will not receive the Warranty Deed to the property until the purchase price is paid in full. That means the seller stays in control as official title holder while the buyer makes payments. Think of the contract like a layaway program for the Deed.

So what’s the big difference? Well with a Deed of Trust or Mortgage the seller provides a Deed to the buyer at closing, transferring title to the buyer. Then the buyer simultaneously gives back a Purchase Money Mortgage (or Deed of Trust in some states) to the seller for the portion financed. When the amount financed is paid in full the Lien is simply satisfied.

When the seller holds fee simple title using a Real Estate Contract the buyer is holding equitable title. Since the buyer does not yet have the Deed it is almost impossible for the buyer to obtain any type of secondary financing unless the Contract is paid off.

The buyer also risks the seller encumbering or clouding title before the Contract is paid and the Deed released. To provide greater protection, the Fulfillment Warranty Deed can be held in trust by a third party escrow servicing agent

If the buyer quits paying and the seller needs to take back the property, a Real Estate Contract has the advantage of being faster and less expensive than a drawn out foreclosure process on a Mortgage or Deed of Trust.

The accepted use of a Real Estate Contract varies by state. They are common in many Western states like Washington, Oregon, Idaho, and New Mexico along with some Mid-Western states such as Michigan and Wisconsin. However a few states, like Texas, have passed regulations to prohibit use of Contracts for Deed.

A Real Estate Contract can be unrecorded or recorded at the county level depending on local practices. A seller can also sell contract payments for cash now. Just know that some investors may require conversion to a note and mortgage or a note and deed of trust.

A knowledgeable title company or real estate attorney can assist in selecting the best method of documenting the seller-financed transaction.

For more information on buying or selling with contracts read Personal Profit Series: Notes – The Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!

How HUD Safe Act Will Hurt Seller Financing

Be afraid!

HUD is poised to take away our rights to offer owner or seller financing on property we own. Under the Safe Mortgage Act proposal, you can only offer owner financing on the home you live in or you must become a licensed mortgage originator.

Here’s how I see it. If we own a property, ANY property (whether it is our residence or not), we should be able to sell to a buyer with owner financing.

HUD’s proposal is to provide an exemption to “where an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence” (Item F Page 66551 of the HUD Summary Comments).

Unfortunately, this exemption does not go far enough. What if you bought the property lived in it and then moved? What if it is now a rental property, inherited, or simply bought for investment purposes?

At a minimum the exemption should be extended to include any transaction where the seller provides financing to a buyer pursuant to the sale of property the seller owns (regardless of whether it is the seller’s residence). Read more

Top 5 Articles on Seller Financing

Owner financing was a hot topic in real estate last year and all indicators point to increased demand in 2010.

In search of alternative financing methods, Read more

Obtain Pricing on Notes in 3 Easy Steps

What is a fair price for a cash flow note in today’s market? Here are 3 easy steps that brokers and sellers can use to receive pricing before they sell a note. Read more

Next Page »