A great result which will be rare due to Dodd-Frankenstein.
Toward the end of 2012 I received a call from a man I had met previously at a local REIA. He was losing his home to foreclosure. The home had been in his family for more than a generation and he wanted to know if I could help. He was forthright about his situation and the sheriff sale was already scheduled. He saw an opportunity because the bank listed the opening bid at approximately half the outstanding mortgage balance which was also approximately half the current value of the home (this at the bottom of the housing collapse). He had spoken to banks and credit unions...no one would help. He needed a bit more than $30K...he had some funds but not enough.
I agreed with the caller that there might be reason to be optimistic. Unfortunately, I knew Dodd-Frankenstein was coming and though I did not know all the provisions at that time I knew that originating loans for owner occupants would be potentially hazardous for lenders. (I have never originated a loan with an owner occupant, only with investors). I knew of only one local hard money firm that was still making owner occupant loans and I had a good relationship with one of the owners. I explained to the caller that there would be significant expenses with a hard money loan especially in relation to the relatively small amount he needed but if he was interested and the hard money firm was able to originate the loan I would, most likely, buy the note that was created. (My offer to buy the note would make it easier for the hard money firm to originate this loan if the deal were marginal. This one wasn't. If I didn't buy the note the hard money firm would have been able to sell it in minutes with one e-mail blast).
The caller wanted to proceed so I introduced the parties and, as I suspected, the loan was made and the borrower was the only bidder at the sheriff sale where he redeemed his home. I immediately purchased the note through my IRA. The borrower now had a 5 year mortgage for half the amount he previously owned on his home and his monthly payment was several hundred dollars lower.
The borrower made every payment on time and after a little more than a year paid the entire note off (nearly 4 years early). He now owns his home free and clear. The hard money lender was compensated and I earned a nice return for a bit over a year. Unfortunately, thanks to Messrs. Dodd and Frank and all those who voted for their monstrosity which was designed to protect the banks (who never needed the protection) this option is no longer available as neither hard money nor private lenders would now do this deal.
Comments (2)
I don't know a single hard money lender or private lender who will make an owner/occupant loan now. There are provisions in DF which are almost impossible to comply with and the potential penalties are enormous. The risk/benefit does not justify playing this game. Since most banks will not make these small loans either it means that the effect of DF is to limit the consumer's choices and access to a product that may be appropriate under some circumstances. It also creates more paperwork, delay and expense when applying for a bank loan. The big banks are protected from many of the problematic provisions in DF.
Jeff Rabinowitz, almost 10 years ago
Yes hard to see how Dud-Fart is generally of any use to the consumer or non-bank lender. Well clearly never helps a small lender. I suppose there is a tiny percentage of "bad" lenders that might not make a loan. My thoughts are that most of the scumbags will do it anyway and only legit ones that don't want to deal with the hoops or the possible ramifications get out of the game. So sad that a bunch of dolts that messed up the economy with there stupid policy (Since Dodd and Frank, along with Bush were the main drivers to the poor housing policies that let lending go wild) now try to fix it by stifling people from providing a needed service.
Shaun Reilly, almost 10 years ago