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).

The HUD proposals under the Safe Act are all part of the fall out from the failed lending institutions and related to HR 1728 and HR 4173.

It makes me wonder…

If the property owner must become a licensed loan originator to offer a seller carry back, will we now be eligible for the TARP bailout should the mortgage fail? (Just couldn’t resist that comment.)

So what can we do?

The first step is to make your voice heard at www.regulations.gov.

Here are some helpful steps that were outlined in a memo from the National Real Estate Investors Association entitled “HUD Issues Problematic Rules Interpreting SAFE Mortgage Licensing Act”:

1. Log on to www.regulations.gov. You will see two white boxes for searching

2. On the left box labeled “Document Type”, pull the menu down and select “proposed rules”

3. On the right box labeled “Enter keyword or ID”, enter “safe mortgage”. Then, press search

4. Locate the blue search result “FR-5271-P-01 Safe Mortgage Licensing Act: HUD Responsibilities Under ….” To read the rules, click on this title. You will be taken to another page. You will see “views”. You can click on PDF file or another symbol, which will show you the rule document online.

5. On the right of the screen, click on “submit comment”

6. Complete the form providing required information and your comments and then submit

What do you say?

Say what you feel, but say it politely! The message should include that you would like the definitions in the proposed rules to be changed so that private individuals can originate and service loans on properties they personally own. Some ideas from others:

• bank loans are not available on some types of properties
• the tight lending climate has made bank financing “out of reach” for many
• seller financing is an “age old” tradition based on private property rights
• these rules would prohibit even partial seller financing – i.e. a “seller second”
• according to HUD’s “Residential Finance Survey” in 2001, roughly 40% of all non-farm residential properties in the US are owned free and clear
• an estimated 6 million Americans own a property other than their own primary residence
• an estimated 4.5% of Americans own three or more properties, many purchased solely as investment properties
• 40% of non-owner occupied residences are mobile homes which are more difficult to sell with bank financing
• approximately 5% of homes in US are for sale or for lease… seller financing may be key to liquidating this inventory.

The continued success of our industry as we know it is threatened by these proposed regulatory changes. Please do not hesitate to follow the steps above and make your voice heard.

Long-time seller financing professional Ric Thom of Security Escrow shared this helpful comment:

“Seller financing is an installment sale. The exemption should apply to any property that an individual owns, i.e. second home, rental house, vacant land, not just a person’s individual residence.

Not everyone owns stock. People have invested in real estate with the intent of reselling using owner financing to supplement their retirement income with this cash flow. Thousands of people have property in their IRAs for this very purpose. To require this class of private property owners, who offer their own property and negotiate the terms of an installment sale to become a mortgage loan originator, is onerous.

This exemption should be broadened beyond just a seller’s residence.”

Comments are due at www.regulations.gov by 2/16/2010 so we urge you to take action now.

Important Update: The time for comments on the HUD Safe Act has been extended to 3/5/10.

Rather than embracing the safety net offered by private parties the government wants to severely restrict the owner financed installment sale.

In May NoteInvestor.com reported the potential disaster that would ensue if the current version of HR 1728 The Mortgage Reform and Predatory Lending Act was enacted (Read: How Congress Wants to Change Seller Financing).

The response and concern has been encouraging with many readers requesting sample letters to use in communication with their State Senator.

We are pleased to share this sample letter provided by Clint Hinman, Editor of the NoteWorthy Newsletter:

Sample Letter – Please Vote No on HR 1728

Dear Senator [name];

My name is Clint Hinman and I have been a resident of Washington since 1993.

I am writing to encourage you to vote NO on HR 1728, the “Mortgage Reform and Anti-Predatory Lending Act”.

While many of the provisions of the act are positive steps toward mortgage reform, the inclusion of private property owners in the Act (see section 101(3)(e)) will enormously reduce the housing choices of Washingtonians and the ability of homeowners to sell properties in a market already languishing from an abundance of unsold properties.

As someone who buys and brokers owner financed notes, I encounter hundreds of instances every year where home sellers and buyers came to an agreement for an installment sale on a property that the owner desperately needed to sell (often to avoid foreclosure) and the buyer desperately wanted to buy, but could not raise the down payment needed for conventional financing.

In every situation, these sales were win-win deals for the buyer and seller:  The seller was able to get rid of an unwanted property to a buyer who loved it, and the buyer was able to get a new home at an affordable payment and interest rate with none of the usual costs (points, application fees etc) inherent in conventional mortgage transactions.

In Washington, these transactions are already regulated by state law.  A low maximum interest rate is already in place, and both the buyer and seller are protected by other regulations at the state level.

In defense of private property rights, owners should be exempted from the burdensome and unnecessary rules that this law foists upon them. In its current form, it would all but shut off the “owner financing” market, which is often the only option for many sellers to sell and buyers to buy right now.

PLEASE DO NOT LET THIS RESTRICTION ON PRIVATE PROPERTY RIGHTS PASS THE SENATE. It is unnecessary to stop private buyers and sellers from transacting business that is beneficial to both of them – -they do not cause the problems this bill seeks to solve. They do not originate these notes to sell to government-sponsored entities (Fannie Mae, Freddie Mac, FHA, etc.), but instead hold them as investments, often as a source of long-term income.  HR 1728 would be extremely harmful to thousands of your constituents if passed as currently worded.

This legislation will exacerbate the problem OF foreclosure, as fewer sellers will be able to sell their homes to avoid it, and CAUSED BY foreclosure, as fewer buyers who have recently experienced foreclosure will be able to re-start the process of home ownership inexpensively and easily by negotiating owner financing.

Thank you for your consideration.

Respectfully,

[Name and Contact Information]

Rarely does legislation have the potential to impact the world of seller financing as severely as HR 1728: Mortgage Reform and Anti-Predatory Lending Act.

This informative article by Ric Thom helps explain the ramifications of this proposed bill and what action we can take now to protect owner financing and our private property rights.

HR 1728: The Taking of Private Property Rights, by Ric Thom

Congress is trying to greatly restrict seller financing. This is a taking of our private property rights. The US House recently passed HR 1728 which limits you as an individual to sell real property using seller financing to only once every 36 months (HR 1728 Sec 101 Definition (3)(E)).

This bill was written to amend the Truth-In-Lending Act to regulate residential mortgage loan originators. This stems from the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, or S.A.F.E, which established a national registry and standards for mortgage brokers.

This is all directed at mortgage brokers, mortgage companies and banks. These are third parties that provide loan proceeds to the buyer to purchase property. That’s a good thing, but for some reason Congress has included private property owners who wish to sell their property using seller financing.

Seller financing is where the buyer and seller negotiate a price, a payment plan, and interest rate. It’s an installment sale where the buyer pays the seller monthly and the buyer gets the use of the property. This is a frequently used method of buying and selling real estate especially in this economy of tight money. Banks are just not lending on, or are requiring huge amounts of cash down on, certain types of properties.

Seller financing is used tens of thousands of times every year, if not hundreds of thousands of times, to sell real estate. In New Mexico alone, with a population of fewer than 2,000,000, it is used over 5,000 times a year.

These acts are over-reaching and will have unintended consequences. The definition of a residential mortgage loan according to the Housing and Economic Recovery Act of 2008 means any loan primarily for personal, family or household use that is secured by a mortgage, deed of trust or other equivalent consensual security interest on a dwelling or on residential real estate upon which is constructed or is intended to be constructed a dwelling (Sec 1503 Definition (8)).

This means any vacant land would fall under this act. A dwelling can be a house, condo, or mobile home. Here are just a few examples of the consequences:

Scenario #1 - Let’s say you are about to lose your home and you need another $1000 a month to make ends meet. You decide to sell your five acres in the mountains and your 1982 single-wide mobile home on one acre by the lake to make your mortgage payment. Banks are not lending on these types of properties and you need a quick sale, so you use seller financing. The problem is you need to sell both to get an extra $1000 per month, but the government has prohibited you from doing so because of the one every 36 month rule.

Scenario #2 - Suppose you have a self-directed IRA. Every year you buy property with cash out of the IRA. You then sell it using seller financing so you can get a 6% interest rate. You will be prohibited from doing so under the Act.

Scenario #3 - Let’s say you have four rental houses that you own free and clear. Part of your retirement plan was to sell them using seller financing with a 6 to 7% interest rate and a 30 year amortization providing a nice, monthly income. You don’t want cash because CDs only pay 2% and you already lost money in the stock market. But, under this act you are prohibited from selling them now. You can only sell one every 36 months.

These scenarios go on and on. They are as unique as the individuals and the properties. Real estate is not just a house in a California suburb. It is also vacant land, non-conforming housing, land and mobile home, duplexes, triplexes, farms and ranches, and recreational properties. These types of properties would fall under the Act.

Not everyone invests in the stock market. A lot of people invest in the above types of real estate. Not everyone wants to cash out when they sell their property; some people like seller financing for the income stream. Most states have escrow companies that hold the deeds or releases for buyers and sellers. They also keep track of the principal and interest and report interest to the IRS.

This bill takes away our right to use seller financing as we see fit. House Bill HR 1728 should exempt anyone who offers or negotiates terms of a real property sale financed in whole or in part by the seller and secured by the seller’s real property.

Why should individuals who had nothing to do with this crises be punished for the sins of the greedy Wall-Streeters? These acts are for mortgage machines, not Ma and Pa. I know the government is concerned about predatory practices, but is seems the local district attorney would be a more effective hammer than to regulate, restrict, and police every real property owner in America.

Besides, seller financing is not lending. It is an installment sale. The seller has agreed to receive their equity over time, plus a negotiated interest rate.

House Bill HR 1728 is headed for the US Senate. Please write your senator and have them exclude seller financing from these acts that are supposed to regulate the previously unlicensed mortgage brokers.

Write your state’s Realtor Association and the National Association of Realtors and ask them to help stop the government from taking away our right to sell our property the way we want to and when we want to. There should not be any restriction on how many properties we sell during a certain time period.

What’s next – just one transaction every 5 years, or no seller financing at all? This restriction is the last thing America needs in this great real estate compression. Please act now. Exempt Seller Financing From HR 1728. Please forward this to anyone you think should know about this issue.

To locate your Senator go to http://www.senate.gov/senators

To locate your state’s Realtor Association go to: http://www.realtor.org/leadrshp.nsf/webassoc

To read HR1728 go to: http://www.house.gov/apps/list/press/financialsvcs_dem/1728.pdf

About the Author: This informative article was written by long time note professional Rich Thom. For further information contact: Ric Thom, President of Security Escrow Corporation, Albuquerque, NM, Phone: (505) 266-3487, Email: ricthom51@yahoo.com, Web: http://www.securityescrow.com/about/

Note Investor Update: Please visit “Why Save Owner Financing From HR 1728?” for a sample letter to use in communicating with your State Senator.