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.
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.