Worried about the effect of toxic mortgages on the overall economy, the Federal government is pulling out the checkbook to help bailout failing mortgage companies. It started with Fannie Mae and Freddie Mac and now includes a proposal for another $700 billion infusion of funds. Why is the government involved and what does it mean for seller financing?
In order for banks to lend money they must have an outlet to sell loans. Fannie, Freddie, and other financial companies help provide necessary capital by buying the loans from banks. The loans are held in portfolio or packaged as mortgage-backed securities and sold to investors around the world.
With rising foreclosure defaults and decreasing values, investors became understandably nervous about buying these securities leading to a large dry-up of lending funds. This squeeze on liquidity is partly to blame for the shrinking number of institutional investors currently buying private mortgage notes.
The government intends to increase certainty in the credit markets by providing funds to purchase mortgages. They hope to ultimately add stability to the ailing housing market.
Results of any bailout plan will not be felt overnight. In the meantime, demand continues to increase for alternatives to conventional bank loans. Creative financing techniques utilizing seller financing and private lending are on the rise.
A quick glance in the real estate section of the classifieds will reveal a multitude of ads including the words: “Owner Will Finance.” It’s quite possible the inventory of owner-financed notes will swell to levels last experienced in the late 1980’s.
With the increase of private mortgage notes there is also a surge of activity for note professionals. Make sense deals with strong security and higher returns appeal to private investors and pension funds.
The cycle is coming full circle offering moneymaking opportunities to note brokers and investors alike. The key is to develop funding sources that rely on in-house funds to hold notes in portfolio until the institutional money is once again flowing.
Another investor has asked me to help him purchase a note from a seller who has a Fannie Mae mortgage. I am sending him a form to get the loan information from the seller, but want to know of any watchouts in him purchasing this note. He plans to buy and hold the property (if I understand him correctly). Just would like to be informed about how different it is to buy a note with this type of loan vs. a conventional home loan. If there is a balance due on the mortgage, would the buyer just “take over” payments to Fannie Mae or is there a need to convert the loan to a conventional one? Of course, if he is going to pay cash and it is a whole purchase, he would not be making any payments. This is a case of “I don’t know what I don’t know” about this type of purchase. Any help you can give would be appreciated. He would like to close in about two weeks.