FIXING DODD-FRANK/SELLER FINANCING

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

I'd like to get ideas from BP members on the topic of seller financing under the new laws.

Not looking for smart comments from several we already know don't like the changes but here's the fact:

It's the law and we need to follow it.

The CFPB is accepting comments from the public. I'd think it would be naive on our part to think that any regulator dealing with this issue would not be aware of the largest RE investor site on the internet, don't you?

I have kept saying "prudent lending practices" I realize about 5% here understand what that is, we can touch on that later.

But where do you feel you could actively participate in:

1. Gathering supporting documents and information for extending credit. We will assume you'd have a list of documents and simple instructions.

2. How important is a balloon payment to a seller in 3 years, in 5 years and 7 years. There may be some acceptable ways to ensure the ability to meet such requirements.

3. Would you use a standard note and deed of trust or mortgage if one existed?

4. Would you use a standard Lease-Option allowing the option price to be financed if one existed?

5. Would you agree to use a mortgage servicing company, your choice as to who?

6. Would you be willing to (or pay the servicing company or split servicing fees under certain circumstances with a borrower) to complete an annual report of payments and loan activity to be held on file?

7. Would you be willing to attend a class of instruction of 20 hours supervised by the state and pay a fee similar to that of a real estate agent?

8. Would you be willing to obtain a license for RE dealers similar to that of an RE agent?

9. How many RE financing deals would you really expect to do as a seller or buyer?

10. As a seller/lender, would you agree to LTV and CLTV requirements or an equity amount established by a borrower to extend or modify any obligation under certain default instances that would be reasonable and that would require performance of a borrower?

What are your real concerns? Be reasonable keeping in mind the reasoning behind all the changes. Constructive input.

I'd be interest in compiling the information and supporting suggestions for modifications and exemptions that may be allowed by the CFPB.

The BP community could have thousands of justifications and in support to allow modifications, I'm sure that big brother will listen if requests are reasonable, keep within the purpose of the law, place sufficient safeguards in business to be conducted and that can be managed or overseen with little or no additional costs.

Any takers? Any suggestions? I'd like to see an attempt at some constructive measures rather than folks crying about, and trying to circumvent, the laws.

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Dion DePaoliPro Member

Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes

12y

This is constructive but I am not entirely sure I follow. I will just comment on your numbers.

1. A more standardized list of particulars would help educate the public and could help curtail less, to some degree, abuses. However, can a simple list be created or does it instantly turn into a 100 page underwriting book?

Some of this could be counterbalanced with a standard set of documents. Then of course the documents to collect can simply be included. Perhaps with standardized definitions and utilities. As a for instance of the need and the low level of competency, many private loans I have reviewed fail to clear the borrower's identity. What documents can a private person use to do such a thing and are those documents then required to be held in file? It's possible but it needs to remain 'skinny' but adequate.

2. The balloon problem, while I understand it, seems to be more of a political response to mortgage problems rather than a solution. Let's not forget our neighbor to the north uses a 5 year balloon as a part of their promissory notes on a regular basis. They suffered seemingly less than us in the mortgage crisis. Certainly it is easier for them since they have a system which deals with it, everyone does 5 year balloons as a standard. I think balloons have a practical place in lending, which includes short term balloons. I suppose there is not much need for anything less than a 3 year balloon. I would also presume a 5 year would be the more prefered term. Opening these back up, would require having more active participation from private lender/sellers. They can mandate 15 year or 30 amortization, remove any interest only feature. If the market has some folks willing to extend this, then the borrower will not be left in the cold for a refinance, which I think is more of what they were trying to deal with.

3. This is a No Brainer. They need to standardise the documents across all the states. This will give them greater regulatory control I think as well since it will eliminate poorly written documents and or predatory documents. A full standard loan packet, just like conventional lenders use. Free to download and easy to use.

4. No Comment

5. This really needs to be mandated and minimal standards of servicing for this type of requirement should be looked at. For instance, I know of some servicers which offer services but the services are so limited that a private lender really stands a higher chance of breaking a collection law than not. I hate to say it, but FCI comes to mind. Anyone can board a loan, they are willing to take the loan on and as a function trying to keep the cost low, they are pretty hands off. This really leaves the private guy to fend for himself in terms of the creation of borrower correspondence and enforcement of remedies. That then turns into violations pretty quickly. The market needs small servicers for small lenders. The small servicers need some help covering the services gap between being a small servicer and being a large full service servicer. Perhaps require the servicer to provide template documents which the private person downloads from their website or similar. Education maybe?

In addition, they need to clean up who is the direct line of contact. The public needs a better understanding of the difference between the investor and the servicer. I think this becomes confusing for folks. To some degree the public may want a more private lender opposed to being put into a securitized trust. The investor needs to be able to correspond and make decisions but through the servicer so the loan gets back that personal touch. I am sure the servicers who accommodate the little guys don't want to see their burdens increased but this is a growing problem. Folks use a servicer like FCI and then FCI doesn't really help them service, it is more like renting their license.

This likely needs more in depth review and a series of proposed solutions.

6. This too is an issue. Borrower servicing history is obtained from the current servicer but there is no mandate to hold that servicing history from previous servicers and owners as a permanent part of the file. Honestly, I think this is pretty dumb and creates issues in the secondary market and primary market. If I buy Bill's loan and Bill bought it from someone else, usually he doesn't have the old servicing file and payment history. So we are constantly starting over on each file. This can be used to hide factors of the borrower's history to create a sort of dupe on me the new investor. It also eliminates the ability for a new mortgagee to relate to past events in the borrowers file which may be relevant such as hardships. The entire servicing history and payment history needs to be completely portable from investor to investor and servicer to servicer. This actually will help deal with the idea that many private loans and small servicers do not report to any credit agency. So then, this history can also be used for such underwriting situations, perhaps a small fee for the report if you are a credit extender to offset the administrative costs.

The servicer should be required to give an annual report. That too is a no brainer. This will help keep borrowers on top of their accounts to some degree and will give them a better chance to actively manage their loans as a consumer.
7. I don't know if I am on board with this idea. We have to be cautious of turning private folks into institutional folks. Did private lender/sellers crash the market? Certainly some bad apples are out there but the central idea I support is a push back to localized lending not lending with intent to distribute. If I want to sell my house and I am willing to offer financing to do so, it is impractical to expect me to decide such a thing and then go to a class in order to do one transaction. I would think this can be normalized better in a different way. To that regard, we want less of an obstacle/burden to the private person to lend not more. Frankly, the banks need some good private competition. If my tax dollars already act like a backstop for banks and GSE's, it seems like I am already "in the business".

The standardization of documents and perhaps procedures can offset this educational need since the professionals used in the transaction would have that education.

8. Don't like this idea.

9. I don't like the limitation here either. This number needs to increase not decrease. If they properly counterbalanced private folks in the marketplace with standard documents, standard procedures and standard professional services to use to close these transactions then who cares how many a person does? They will pay taxes on their gains and interest. Why do we want to limit credit to the public. This idea of pushing out the private guy creates a gaping hole which can only be filled by institutional lenders who frankly have not proven they can write a better loan than private folks.

Looking at it from a different angle, let's be honest, doing 12 of these deals a year doesn't make you an institutional lender. Perhaps I am unaware of the harm these transactions have done to the public over the years but again, to me, more harm has come from the institutional folks rather than the private folks. These types of restrictions just create market place ruled by the same class of titans.

10. 100%. A standard can be set and implemented. This is wise and offsets the lack of underwriting skill a private person would have. However, caution here, as too high of a barrier and it just pushes the private guy out again.

In general, I have am a huge fan or private loan creation and ownership. In the past I put together some presentations around this idea and used scenes and ideas from "It's A Wonderful Life". Sounds corny, but if you think about (or rewatch, tis the season) George Bailey comes to find toward the end of the movie the greater good he serves to the community opposed to Mr. Potter. As a nation, we want local credit extensions. A more hands on approach to credit in a local market only serves to help the community not hurt it. The large institutional lenders have no need nor duty to really serve the public, they serve their shareholders. The fact that we actually have discussions about how broken mortgage servicing is a clear sign to this. If they wanted to fix it, they could, they don't.

Much of our national response to the mortgage crisis has not or will not solve the problem. Institutional originations are made with an intent to distribute the risk and those originators really only set out to earn fees. Creating a platform for more private folks to get involved will allow for more active participation in the loans being held by those folks. It can bring in more compassionate and responsive reactions to hardship and common sense approaches to credit extension. I don't have the numbers but would love to see them, which has more delinquencies and defaults, institutional loans or private loans? I am guessing, institutional by a fairly large percent. Since we don't have a system in place to monitor that, it is tough to quantify but that too speaks, to some degree, about the need and the direction we are pointing ourselves in. Gearing more toward institutional, where institutional actually caused the spike and the problems.

An interesting tangent that sits on the fringes of many of our conversations here. There is a market place here, around the idea. Where underwriters could earn a living underwriting private loans. I am all for a person getting a license for such and then offering that service to the public for private originations. Same thing with Mortgage Brokers. The mortgage brokers trying to take advantage of this space, in my opinion, seem to be trying to be predatory. For instance Bill, the guy who wanted to charge 4.0% in a recent thread. A cap on that fee to private folks and a clearly defined service role would be beneficial and I would think, fairly easy.

There is also a poor understanding of the professionals that a private lender/seller should use. So clearing that up will help as well. Often times, I see folks turn to title companies as the service provider, they are not my idea of qualified for such matters. In contrast, attorneys are not always either.

The general approach I have always walked away from with regard to regulation on these matters is protect the public by making a 'gatekeeper' who is properly licensed. This can be done by using Mortgage Brokers and Underwriters setup to help serve the private folks. License them but the let the private folks have more market autonomy, we want and need their capital in the market not to mention their prudence. I will care more about a $50k loan if I only have $60k to invest than Bank of America which has billions. If I put my money in BOA, they use my money to make the loan anyway, so why should they get the monopoly of being able to use my money? It ends up in the same place, a loan to a borrower. Only they care less and I care more.

OK, that is enough for now. Not sure if that is what you are looking for or not.

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Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Do I need to bum this down some more?

To difficult to understand? Please let me know.

The best time to seek solutions is now to Feb. 2014.

If you don't speak up, then I'd think you deserve whatever is dumped on you!
0 Reply
Mary B.
Real Estate Investor · Lansdowne, PA · Member since 2013 · 1k+ posts · 656 votes
12y
There are alternatives. Some times investors can get stuck in a rut when one strategy is going so well for them. Change is inevitable. We must adapt or business dies. This is one and there are more to follow. I'm not making light of the situation but I'm not the type to cry over spilled milk....

Kudos,

Mary
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Account Closed
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
I think the Dodd-Frank/Seller Financing will be just like the Red Flag and OFAC law when everyone was saying everyone must abide by the law, and today many do not follow the law and still nothing being done. I do agree everyone needs to follow the law, but you will have some that want follow the law.

Joe Gore

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Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Joe, agreed but you've mentioned that several times, it's still in effect and can be enforced, actually, all past regs can be prosecuted by the CFPB as well, so we will see. I'd say that if your opinion is this stuff will just fade away, IMO you're under some gross misunderstanding of the scope of the agency and the Act, this is no small deal.

I expect those that violate the law will likely be examples. And I agree, there will be some.

The opinions sought here are constructive to address proposed changes, not the so much on the denial side or the possibility of enforcement.

Mary, all good and true, I think you missed the point, they are willing to take public input concerning the changes, while such opportunities are a part of law requiring public input, it can make a difference.

Question is, are people willing to get off their crying towels and submit justifications to make changes, if not, swallow what you get. :)
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Account Closed
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
We will wait and see how well the government will enforce the law in 2014.

Joe Gore
0 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
You have til Feb 2014, to wait is really nonproductive to make any change.

I suspect there are those who actually advocate the wait and see, if they don't do anything, then we can just break the laws with little concern, I get it, but don't bet on it.

They already sent a broker here to prison, lets assume they are serious.

Now, suggestions as to what you all can live with, what you'd like to see and what changes you'd like to see.

Let's stay on topic. :)
0 Reply
Account Closed
Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
12y
You made a statement what is the brokers name?

Joe Gore
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Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
LOL, think you might know him? Actually, it was on the news here, I didn't know him, but the office was near the Navy recruiter on S. National, about two blocks south of James River.

Now, back on topic.

I'd think most anyone could answer many of the top questions with a yes or no.

I realize about 65-70% of the folks here are brand new, but that leaves several thousand that are better aware of the issues.

Input is needed as to a guide.

Investors are not going to be free to do what they use to, the best outcome I'd think would to have set forms that could be approved and several options available for origination tied to the number of deals done in a year.

I doubt anyone will be free to originate their own deal without a license and being financially responsible, that's for those who might do a lot of business.

At fewer deals, perhaps a different "approval" arrangement could be had as it seems there are limited RMLOs available to do deals.

Ken Rischel and his company are working on an advisory board addressing issue for the mobile home dealers, I doubt the old Lonnie Deals will ever be approved as those arrangements were much to the reason why investor deals were hammered in the first place. The finance, foreclose and repeat bunch.

@Karen Margrave can add her thoughts and with her magic monitor can mention some others who could add to the subject.

@Brian Gibbons and @Jon Holdman might have some ideas. @Dion DePaoli has the expertise to look at the possibilities to facilitate a loan under a supervised process. Not sure if our member attorneys would want to go there but their input is more than welcome.

Just saying, we have the expertise here to accomplish something.
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Dion DePaoliPro Member
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
12y
This is constructive but I am not entirely sure I follow. I will just comment on your numbers.

1. A more standardized list of particulars would help educate the public and could help curtail less, to some degree, abuses. However, can a simple list be created or does it instantly turn into a 100 page underwriting book?

Some of this could be counterbalanced with a standard set of documents. Then of course the documents to collect can simply be included. Perhaps with standardized definitions and utilities. As a for instance of the need and the low level of competency, many private loans I have reviewed fail to clear the borrower's identity. What documents can a private person use to do such a thing and are those documents then required to be held in file? It's possible but it needs to remain 'skinny' but adequate.

2. The balloon problem, while I understand it, seems to be more of a political response to mortgage problems rather than a solution. Let's not forget our neighbor to the north uses a 5 year balloon as a part of their promissory notes on a regular basis. They suffered seemingly less than us in the mortgage crisis. Certainly it is easier for them since they have a system which deals with it, everyone does 5 year balloons as a standard. I think balloons have a practical place in lending, which includes short term balloons. I suppose there is not much need for anything less than a 3 year balloon. I would also presume a 5 year would be the more prefered term. Opening these back up, would require having more active participation from private lender/sellers. They can mandate 15 year or 30 amortization, remove any interest only feature. If the market has some folks willing to extend this, then the borrower will not be left in the cold for a refinance, which I think is more of what they were trying to deal with.

3. This is a No Brainer. They need to standardise the documents across all the states. This will give them greater regulatory control I think as well since it will eliminate poorly written documents and or predatory documents. A full standard loan packet, just like conventional lenders use. Free to download and easy to use.

4. No Comment

5. This really needs to be mandated and minimal standards of servicing for this type of requirement should be looked at. For instance, I know of some servicers which offer services but the services are so limited that a private lender really stands a higher chance of breaking a collection law than not. I hate to say it, but FCI comes to mind. Anyone can board a loan, they are willing to take the loan on and as a function trying to keep the cost low, they are pretty hands off. This really leaves the private guy to fend for himself in terms of the creation of borrower correspondence and enforcement of remedies. That then turns into violations pretty quickly. The market needs small servicers for small lenders. The small servicers need some help covering the services gap between being a small servicer and being a large full service servicer. Perhaps require the servicer to provide template documents which the private person downloads from their website or similar. Education maybe?

In addition, they need to clean up who is the direct line of contact. The public needs a better understanding of the difference between the investor and the servicer. I think this becomes confusing for folks. To some degree the public may want a more private lender opposed to being put into a securitized trust. The investor needs to be able to correspond and make decisions but through the servicer so the loan gets back that personal touch. I am sure the servicers who accommodate the little guys don't want to see their burdens increased but this is a growing problem. Folks use a servicer like FCI and then FCI doesn't really help them service, it is more like renting their license.

This likely needs more in depth review and a series of proposed solutions.

6. This too is an issue. Borrower servicing history is obtained from the current servicer but there is no mandate to hold that servicing history from previous servicers and owners as a permanent part of the file. Honestly, I think this is pretty dumb and creates issues in the secondary market and primary market. If I buy Bill's loan and Bill bought it from someone else, usually he doesn't have the old servicing file and payment history. So we are constantly starting over on each file. This can be used to hide factors of the borrower's history to create a sort of dupe on me the new investor. It also eliminates the ability for a new mortgagee to relate to past events in the borrowers file which may be relevant such as hardships. The entire servicing history and payment history needs to be completely portable from investor to investor and servicer to servicer. This actually will help deal with the idea that many private loans and small servicers do not report to any credit agency. So then, this history can also be used for such underwriting situations, perhaps a small fee for the report if you are a credit extender to offset the administrative costs.

The servicer should be required to give an annual report. That too is a no brainer. This will help keep borrowers on top of their accounts to some degree and will give them a better chance to actively manage their loans as a consumer.
7. I don't know if I am on board with this idea. We have to be cautious of turning private folks into institutional folks. Did private lender/sellers crash the market? Certainly some bad apples are out there but the central idea I support is a push back to localized lending not lending with intent to distribute. If I want to sell my house and I am willing to offer financing to do so, it is impractical to expect me to decide such a thing and then go to a class in order to do one transaction. I would think this can be normalized better in a different way. To that regard, we want less of an obstacle/burden to the private person to lend not more. Frankly, the banks need some good private competition. If my tax dollars already act like a backstop for banks and GSE's, it seems like I am already "in the business".

The standardization of documents and perhaps procedures can offset this educational need since the professionals used in the transaction would have that education.

8. Don't like this idea.

9. I don't like the limitation here either. This number needs to increase not decrease. If they properly counterbalanced private folks in the marketplace with standard documents, standard procedures and standard professional services to use to close these transactions then who cares how many a person does? They will pay taxes on their gains and interest. Why do we want to limit credit to the public. This idea of pushing out the private guy creates a gaping hole which can only be filled by institutional lenders who frankly have not proven they can write a better loan than private folks.

Looking at it from a different angle, let's be honest, doing 12 of these deals a year doesn't make you an institutional lender. Perhaps I am unaware of the harm these transactions have done to the public over the years but again, to me, more harm has come from the institutional folks rather than the private folks. These types of restrictions just create market place ruled by the same class of titans.

10. 100%. A standard can be set and implemented. This is wise and offsets the lack of underwriting skill a private person would have. However, caution here, as too high of a barrier and it just pushes the private guy out again.

In general, I have am a huge fan or private loan creation and ownership. In the past I put together some presentations around this idea and used scenes and ideas from "It's A Wonderful Life". Sounds corny, but if you think about (or rewatch, tis the season) George Bailey comes to find toward the end of the movie the greater good he serves to the community opposed to Mr. Potter. As a nation, we want local credit extensions. A more hands on approach to credit in a local market only serves to help the community not hurt it. The large institutional lenders have no need nor duty to really serve the public, they serve their shareholders. The fact that we actually have discussions about how broken mortgage servicing is a clear sign to this. If they wanted to fix it, they could, they don't.

Much of our national response to the mortgage crisis has not or will not solve the problem. Institutional originations are made with an intent to distribute the risk and those originators really only set out to earn fees. Creating a platform for more private folks to get involved will allow for more active participation in the loans being held by those folks. It can bring in more compassionate and responsive reactions to hardship and common sense approaches to credit extension. I don't have the numbers but would love to see them, which has more delinquencies and defaults, institutional loans or private loans? I am guessing, institutional by a fairly large percent. Since we don't have a system in place to monitor that, it is tough to quantify but that too speaks, to some degree, about the need and the direction we are pointing ourselves in. Gearing more toward institutional, where institutional actually caused the spike and the problems.

An interesting tangent that sits on the fringes of many of our conversations here. There is a market place here, around the idea. Where underwriters could earn a living underwriting private loans. I am all for a person getting a license for such and then offering that service to the public for private originations. Same thing with Mortgage Brokers. The mortgage brokers trying to take advantage of this space, in my opinion, seem to be trying to be predatory. For instance Bill, the guy who wanted to charge 4.0% in a recent thread. A cap on that fee to private folks and a clearly defined service role would be beneficial and I would think, fairly easy.

There is also a poor understanding of the professionals that a private lender/seller should use. So clearing that up will help as well. Often times, I see folks turn to title companies as the service provider, they are not my idea of qualified for such matters. In contrast, attorneys are not always either.

The general approach I have always walked away from with regard to regulation on these matters is protect the public by making a 'gatekeeper' who is properly licensed. This can be done by using Mortgage Brokers and Underwriters setup to help serve the private folks. License them but the let the private folks have more market autonomy, we want and need their capital in the market not to mention their prudence. I will care more about a $50k loan if I only have $60k to invest than Bank of America which has billions. If I put my money in BOA, they use my money to make the loan anyway, so why should they get the monopoly of being able to use my money? It ends up in the same place, a loan to a borrower. Only they care less and I care more.

OK, that is enough for now. Not sure if that is what you are looking for or not.

4 Reply
Matt B.
Investor · Vincennes, IN · Member since 2013 · 223 posts · 108 votes
12y
I may try to chime in, but don't throw me under the bus for my ignorance or not understanding the question right. We have been trying to figure this out for better part of the last year and a half with our attorneys and the regulators in the states we do business in. I do not believe we are any closer to a solution than when we started. Anyhow here goes.

1. Gathering supporting documents and information for extending credit. We will assume you'd have a list of documents and simple instructions. Not that hard to implement if we are following prudent leasing practices to begin with.

2. How important is a balloon payment to a seller in 3 years, in 5 years and 7 years. There may be some acceptable ways to ensure the ability to meet such requirements. For us this is a non issue, we do not mind dragging payments out.

3. Would you use a standard note and deed of trust or mortgage if one existed? We would prefer to use some sort of lease option method as opposed to a mortgage.

4. Would you use a standard Lease-Option allowing the option price to be financed if one existed? Yes.

Questions 5-10 I will try to answer at the end.

5. Would you agree to use a mortgage servicing company, your choice as to who?

6. Would you be willing to (or pay the servicing company or split servicing fees under certain circumstances with a borrower) to complete an annual report of payments and loan activity to be held on file?

7. Would you be willing to attend a class of instruction of 20 hours supervised by the state and pay a fee similar to that of a real estate agent?

8. Would you be willing to obtain a license for RE dealers similar to that of an RE agent?

9. How many RE financing deals would you really expect to do as a seller or buyer?

10. As a seller/lender, would you agree to LTV and CLTV requirements or an equity amount established by a borrower to extend or modify any obligation under certain default instances that would be reasonable and that would require performance of a borrower?

To answer the last few questions and even to explain the first would depend on goals of your company, company size and investment strategy. Being an owner operator of manufactured housing communities, this hits to the core of our business as a strategy to fill spaces. Being slightly larger than a mom and pop, but not quite a national player, I don't see it making financial sense to adopt the necessary policies to comply (and I am not suggesting noncompliance) on our own.

Now if the process could be streamlined to where one could hire a professional (mortgage originator, attorney, whoever) to handle those details at a reasonable cost, then I would be game.
1 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Excellent thoughts Dion.

Most every word we are in agreement on, I'd say I didn't fully explain some issues such as those you skipped over.

Frankly, I'll bet the bank lobby is popping the corks and toasting over the limitations to private money being in the loop.

Dion, you were reading my mind as to a centralized or at least organized processing and origination aspect. Same in the servicing issues.

A small investor, or one who does one or two deals a year certainly can't afford the registration, licensing and compliance issues of someone doing 20/40/80 deals a year.

As to #8. That is for the operators turning out 20/40/80 deals a year. My assumption is that anyone turning out financing contracts as a business should be required to demonstrate at least a basic knowledge of mortgage origination. I took an online MLO examine on line last week, no study and got 94 out of the 100 in less than an hour, missed some new disclosures. It was not difficult at all.

I'd think the trade off in having a basic license would be to allow less restrictions, perhaps less liability or the presumption that originations are compliant in some areas as seen by originators of qualified mortgages. Meaning, cutting some slack as they do for institutional originators.

#9 was more to just asking how nay deals investors might do, just to get a count, it had nothing to do with restrictions, just the volume of expected business.

FROM HERE DOWN: all are welcome to read but it's in response to Dion and may not make sense to everyone.

Note purchases, interesting. Well, if someone is in the business, they need a license. I'd think an investor using their funds should be able to purchase, turn it over for servicing and the servicer would start any foreclosure process with a local attorney. I don't see where the holder would have any input to the process under written servicing guidelines, however, they could request it be modified or extended as an option. That alone keeps out the rinse and repeat types or predatory servicing by an individuals.

I agree, servicing should be another matter.

Another aspect, seller financing is not really nailed down for MLOs, we see a DTI of 43% now, processing is customary but the extent of subjective underwriting as to ability to repay is really lacking. It is not to be identical to FHA, so much, if that were the case borrowers would go FHA. Property condition is another issue.

Many SF deals are done due to property condition or due to the uniqueness of a property or the lack of qualified comps.

Dion, As to defaults in private lending. I don't have hard data, but I'd say it can be broken down as to the term agreed. 1-3 years I'd say half won't close, 3-5 years 30% fail as written. 5-7 probably increases the chances another 5% as would 7-10 years. That gets us up to a 20% default rate. 10% is pretty much from life events, divorce, death, going to jail, etc. That's about 5% higher than institutional types, that should be running at or less than 5%, that's a good portfolio. Mine was between 3 and 6% over the years. Add another 10% to those defaults for lease-purchases, less than half will close and for several reasons, the lack of the down is a big issue, lack of credit is top on the list, over priced properties being sold is the next most common issue, then personal issues where the buyer simply walks away is common....really a down payment issue. Contract for deeds are not much better than the lease purchase. Sub-2 about the same as the CFD. Sub-2s also had more underlying mortgage issues, threats of the due on sale as title was passed. All in all, seller financing in residential doesn't have a good track record. On SF deals I originated default was about 3 to 8% off hand, usually due to insufficient down payments and buyers just changing their minds.

Anyway, the issue is lack of down payments and slow appreciation that puts a buyer in a 3/4 year deal at a point where they see little reason to go through the efforts to sell on their own. That 3% default was largely due to buying the place to resell under loan guarantees, so others won't have that default experience.

I'll stop.

Other folks (and Dion) toss in your thoughts! Can we standardize this so that investors can have more options?
1 Reply
Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
1. I think this is good. If we had something we knew was comprehensive to start out with it helps us know that we have requested what is needed and keep everyone on the same page. Like Dion mentioned though, having a 100 page guide defeats the purpose for the little guy and former homeowner just trying to sell.

2. We absolutely would prefer to be able to write something with a balloon. We have a borrower with a foreclosure from 3 years prior that coincided with a job loss. After moving to another state and getting work again, he couldn't buy because of his foreclosure. Being able to sell to him OF got him into a home and time to get his credit score back up. We however would like to get our capital back to be able to do more with it, so a balloon is an option we would like to have.

3. Yes.

4. I prefer a straight sale and not a LO.

5. Our past loans were not serviced, but based upon @Bill Gulley recommendations as I attempt to truly learn more about notes, any notes we might make in the future will absolutely be serviced.

6. I'll defer to Dion's comment here since it sounds like a good idea to me, but I don't fully know what the potential impact would be to the industry as a whole.

7. If that was the requirement yes, but I think that this squeezes out the part time investors and small guys like myself. To Dions point, the loans I made there was a personal aspect to them. Even if I didn't know the borrower previously I had met them or talked to them and knew their situation their personality and what made them tick. I can bet that a loan I make is much less likely to end up in foreclosure than a big bank loan.

8. I think this is a bad idea. It only hurts those like myself that are not FT. If the license was required I would absolutely get it, but I might just choose to not do those deals anymore since the license to an extent regulates me out. Also since I am looking at this from my IRA perspective, would my license work for my IRA? And is that a prohibited transaction?

9. Me personally no more than 1-2/yr, I think a 5/yr limit could be appropriate. I can definitely see that later in life I could decide that this was my preferred method of transitioning from rentals to lending or notes ect. So even though I am not FT in RE I could still have the ability to sell several homes a year this way, and to have that regulated too tightly could really hinder the non FT investors out there.

10. Yes. I am ok with following guidelines, but they need to be appropriate and as Dion mentioned not squeeze out us little guys.

Now my issue here would be how is it ok for Fannie/Freddie to sell their REO's with no appraisal or inspection at 3.5% DP, if they then said I must have a current appraisal/BPO and no more than 90% CLTV. What is good for the goose MUST also be good for the gander.

This is where I begin to really have issue with all of this is my loans made to a person, who sometimes has been a tenant for a couple years and I have a personal feel for, are no longer allowed but GSE's can extend credit to any Joe they feel like at almost 100% LTV. The loans we made actually lowered the payment for the tenant by about 20-30% compared to their rent and gave us a very nice return all at the same time, but we are the ones penalized in this.
1 Reply
Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
Bill after reading your last post I'll sum up with this:

I am ready willing and able to comply with whatever the CFPB throws out there as being required to extend credit in a SF deal. However it must be done in such a way that small local investors can still play. For some this may be a part of their personal retirement strategy, or just a piece of their financial plan to not be completely dependent upon a W-2. Those (me) are the ones hurt by this right now, those are also the ones that will do more to stabilize a local market and be more likely to do an overall good for the economy than anyone else IMO.
1 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Thanks Matt.

Again, #8 is not about having to have a license, it's if you got a license life cold be made easier for those doing more deals.

No where would there be any pushing out the little guy.

It's all about making some concessions in some areas, like using a standard contract, meeting the same requirements, putting a loan servicer in the loop to be allowed more leeway for investors to do deals.

If a rental is being sold to a tenant with rental experience, that's a very good point!

If that tenant had no rental history, then that one time seller needs to comply with more requirements as, we have to admit, they don't have experience and this is where the feds really had issues. It's not about disallowing the deal, but making it possible too.

let's say that seller needs to do 7 things. Now, if you do 20 deals a year, you could get a simple license demonstrating knowledge and then only be required to do 4 things. It would be a benefit in the operations to get a license, but not a requirement.

As to your IRA question, that's an IRS issue, you need to comply, your source of funds really has nothing to do with making a loan.....and that's a cash lending operation, not seller financing.

Thanks for the input Matt.... :)
0 Reply
Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
12y

@Karen Margrave can add her thoughts and with her magic monitor can mention some others who could add to the subject.

@Brian Gibbons and @Jon Holdman might have some ideas. @Dion DePaoli has the expertise to look at the possibilities to facilitate a loan under a supervised process. Not sure if our member attorneys would want to go there but their input is more than welcome.

Just saying, we have the expertise here to accomplish something.

My 2 cents..

Thanks for asking..

0 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by Matt Devincenzo:
Bill after reading your last post I'll sum up with this:

I am ready willing and able to comply with whatever the CFPB throws out there as being required to extend credit in a SF deal. However it must be done in such a way that small local investors can still play. For some this may be a part of their personal retirement strategy, or just a piece of their financial plan to not be completely dependent upon a W-2. Those (me) are the ones hurt by this right now, those are also the ones that will do more to stabilize a local market and be more likely to do an overall good for the economy than anyone else IMO.

The way it is now, you're not prohibited from doing seller financing to a home buyer, you have requirement that can be met and you can go ahead. This is about trying to make those requirement easier to do. Your job status has nothing to do with your sales in this area, that impacts taxation, another issue. :)
0 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by Brian Gibbons:

@Karen Margrave can add her thoughts and with her magic monitor can mention some others who could add to the subject.
@Brian Gibbons and @Jon Holdman might have some ideas. @Dion DePaoli has the expertise to look at the possibilities to facilitate a loan under a supervised process. Not sure if our member attorneys would want to go there but their input is more than welcome.

Just saying, we have the expertise here to accomplish something.

My 2 cents..

Thanks for asking..

Thanks Brian, that's a first here in the forums I'm sure, guess I need to get some new toys.

My remarks above with Matt may be of interest in clearing up the license issue.

BTW, if you'r flipping an option you are not providing financing, the points and fees in origination don't apply to you so long as you're not financing the option price. Sounds to me like you're in the clear, that's my opinion. Thanks for the input. :)
0 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Originally posted by Matt Buckels:
I may try to chime in, but don't throw me under the bus for my ignorance or not understanding the question right. We have been trying to figure this out for better part of the last year and a half with our attorneys and the regulators in the states we do business in. I do not believe we are any closer to a solution than when we started. Anyhow here goes.

1. Gathering supporting documents and information for extending credit. We will assume you'd have a list of documents and simple instructions. Not that hard to implement if we are following prudent leasing practices to begin with.

2. How important is a balloon payment to a seller in 3 years, in 5 years and 7 years. There may be some acceptable ways to ensure the ability to meet such requirements. For us this is a non issue, we do not mind dragging payments out.

3. Would you use a standard note and deed of trust or mortgage if one existed? We would prefer to use some sort of lease option method as opposed to a mortgage.

4. Would you use a standard Lease-Option allowing the option price to be financed if one existed? Yes.

Questions 5-10 I will try to answer at the end.

5. Would you agree to use a mortgage servicing company, your choice as to who?

6. Would you be willing to (or pay the servicing company or split servicing fees under certain circumstances with a borrower) to complete an annual report of payments and loan activity to be held on file?

7. Would you be willing to attend a class of instruction of 20 hours supervised by the state and pay a fee similar to that of a real estate agent?

8. Would you be willing to obtain a license for RE dealers similar to that of an RE agent?

9. How many RE financing deals would you really expect to do as a seller or buyer?

10. As a seller/lender, would you agree to LTV and CLTV requirements or an equity amount established by a borrower to extend or modify any obligation under certain default instances that would be reasonable and that would require performance of a borrower?

To answer the last few questions and even to explain the first would depend on goals of your company, company size and investment strategy. Being an owner operator of manufactured housing communities, this hits to the core of our business as a strategy to fill spaces. Being slightly larger than a mom and pop, but not quite a national player, I don't see it making financial sense to adopt the necessary policies to comply (and I am not suggesting noncompliance) on our own.

Now if the process could be streamlined to where one could hire a professional (mortgage originator, attorney, whoever) to handle those details at a reasonable cost, then I would be game.

Thanks Matt, I missed yours until I got Brian's new video fixed

First, in your situation, You really need to talk to Ken Rishel as being a MH dealer.

Again, my comments to Matt D. might make things clearer too.

The way I see it, the biggest areas for abuse are in"

1, Seller failing to qualify a buyer as to the ability to pay

2. Along those lines setting terms that are not feasible for the circumstances as to balloon requirements.

3. Documenting the process and providing an audit trail to show lending prudence.

4. Servicing a loan and failing to follow collection practices that can;

5. Lead to wrongful foreclosures and circumventing equitable interest of a buyer.

These are areas as I see needing to be addressed to be in the good graces or the regulators. Curing these issues by other means may then allow certain exemptions as they now stand.

I was told long ago in government not to point out problems without solutions.

If you ask for something that makes an exception to a rule, it needs to; 1. Be a valid reason, showing a benefit or undue hardship. 2. The exception can't avoid responsibility in acting in that exception and 3. It still needs to provide reasonable safeguards to ensure that the requested exception does not pose any public harm or circumvent the intent of any restriction. There are other issues, like ease of oversight, cost benefit analysis, enforcement and how other regulation may be involved.

So, it boils down to, how can the regulations achieve the intended purpose with the least amount of pain and suffering in a way to all concerned?

Thanks for your insight, Matt.
0 Reply
Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
8. I think this is a bad idea. It only hurts those like myself that are not FT. If the license was required I would absolutely get it, but I might just choose to not do those deals anymore since the license to an extent regulates me out. Also since I am looking at this from my IRA perspective, would my license work for my IRA? And is that a prohibited transaction?

Using your license for your own transaction is a violation if it is not treated at an arms length. In other words, no discounts. This is why I recommend that you avoid that situation entirely to not leave any question.
[email protected]224-381-2660
0 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
LOL, Thanks Steve, perhaps "license" gave the wrong impression.

I've mentioned it several times, #8 was not intended as a requirement it was an option.

You're right to Steve, acting in some acts with a license is clearly a conflict.

But, consider an RE agent receiving a commission on a property they purchased and representing himself. Other licenses don't allow that.

#8 is more about showing competence, just a a mortgage broker would in lending their funds for their portfolio.

Never intended #8 to be seen as a license to do other deals for the public, but similar to an RE license......we could call it a permit.

Good thought!
0 Reply
Curt Smith
Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
12y
Thanks Bill for starting this thread.

We do 2-3 seller finance deals a year. The buyers want to own something but have problems in their recent past that prevents bank lending. We want the monthly payments vs a cash out sale in the first place.

- We use a LMO here in GA. A flat feel of $695. I need to find more LMO's in GA.

- We use FCI to service. There's too many reasons why investore But would like to have the buyer pay the $25/mo fee. How do I do this? Put it in the HUD addendum???

- I would be willing to take training for some sort of certification but the cost would have to be under $1k.

- Standard note / trust doc. Sure, give me one?

- 43%/abillity to repay. We do this now, and we are ok with keeping better records. What would be helpful if there where standard forms for building the picture of debt, income and the calc of DTI.

- Appraisal. This seems one of the more reasonable requirements to have a QM qualified mortgage but it's the one we have a problem with. We rehab in rural areas to much nicer than comps which means there are no easily obtained comps. We all know the risk in hiring an appraiser!! It's almost a certainty that you'll get back a price that will be much lower than your seller financed price, least in my area of GA. The crazed appraisers take distressed sales as comps or regardless of comparibility they take the same neighborhood sales for my fixed nice sale... Grrrrrr! One could say this is a problem with the appraisor you hire but I don't know who's going to screw my deal or who is reasonable. Does no appraisal cause serious problems for me re Dodd Frank? I suspect in time I'll find a "sane" appraiser who will work out.

- 5% down? No problem do this now.

- Under 6.5% over prime (3.25% today). We stay at this interest rate. But to go over just means you're not a QM and have to do what? Full doc, I do that, use a LMO, do this too. I'm not clear on what NEW requirements are needed if your note is not a QM qualified mortgage.

- We don't do balloons. We like 15 yr if they can afford the monthly, else we'll bump out to 20yr or +/-.

- Of course no prepayment penalty.

- Upfront points, expenses. We do a dirt cheap closing with nothing added. I think I'd like to add in a 1% closing cost though... But I don't know the math for Dodd Frank to know the line in the sand?

- #10 LTV/CLTV. I didn't understand the intent?

My real concerns is to be able to continue doing owner financing of low priced properties in a compliant way in the $40k to $90k range and not have my expenses explode or having to face predatory enforcement. Meaning fee hungry states. Especially if the expenses aren't paid by the borrower!!

The ney sayers don't know that Dodd Frank has $1M fines to the seller/loan originator that borrower's lawyers will start up suit mills to take advantage of. Also fee hungry states will start up enforcement shake down actions.... It's not the requirements I fear it's the opportunism for frivolus law suits that scare the hell out of us.
2 Reply
Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
Originally posted by Steven Hamilton II:

Using your license for your own transaction is a violation if it is not treated at an arms length. In other words, no discounts. This is why I recommend that you avoid that situation entirely to not leave any question.

Understood and absolutely agreed, I misunderstood Bill's original question to mean a licensing requirement. That is why I mentioned the IRA, because obviously how would the IRA get licensed as it is not a person? Now that I understand Bill to say that it is an option to allow you to bypass some of the requirements since you have been deemed educated, then it is not an issue. My IRA could SF a piece of property it owns, it would just have to perform the full set of requirements and comply.

Sorry if I brought some confusion to the issue. The reason I specifically mention the IRA is because that is where my current SF experience has been. I purchased the properties as rentals in my IRA, and when I sold them a couple years later I SF them to OO buyers. So my IRA is not acting just as a lender it is actually SF just as if I myself were to do it in my name. I haven't done any of these for a couple years as we've been negotiating the what ifs and figuring out Dodd-Frank, so I'm very interested in all of this.

Thanks Bill for starting the discussion, I think it will definitely help me with all of the issues, and may make things easier down the road if some of these fixes actually get implemented.
1 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Thanks Curt. I'm not sure the borrower can't pay the servicer if they qualify with the fee. Your MLO may not be aware how it would be figured, it should be included as PMI if it is allowed in your state.

Yes, liability is an issue, the reason your MLO is charging so much is probably their perception of liability, so long as you use them, yours should be lessened, they should be insured and bonded.

As to the appraisal, if you use one for loan purposes for your funding, that's one thing. But you paying for an appraisal won't really do anything for your buyer as the appraiser works for you if you pay his/her fee.

Thanks for your input! :)
0 Reply
Matt B.
Investor · Vincennes, IN · Member since 2013 · 223 posts · 108 votes
12y
One thing we individually need to decide on is at what point does the licensing and compliance issues make sense financially. I would think that less than 5 deals would definitely not be feasible and a different strategy may be in order. But even 10-20 deals seems like a small number to make it worthwhile.

For us, the financing is just a small part of the overall picture of filling lots, so our break even point on it may be different than a single family investor who is done with the transaction at the financing level.

What are the thoughts on how many transactions one must do, to still use it as a viable part of their business?
1 Reply
Bill Gulley
OP
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Yes Matt, you're in a little different boat with MHs and in acting as a dealer.

Everyone needs to consider the costs involved for them to even know where they need to be in accepting an offer and where they break even.

But again, it not that seller financing is dead, it just needs to be compliant and it will cost more, I doubt we can get past those two issues.

@Dion DePaoli I also had similar structure ideas of separate entities as employed by the MH guys. Ken Rishel (can' @ him) spoke to a clearing house I believe.

Regional origination operations? Note purchase-repurchase arrangements? Put the thinking cap on!

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Now, I'm off to the computer folks again, please carry on, I'll catch up, signing off for awhile :)
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