I'm a realtor in Oregon. My principle broker last week dropped a bomb on us, saying that balloon payments are going (have gone?) bye bye, and that most people who are going to carry notes on their own properties, will now have to be licensed.
First of all: What? -- In doing my searches of the two acts, I can't find a single thing about balloon payments. Is he confusing these for something else?
Second, Has this impacted your business? If so, how? And what workarounds have you found?
Bill Gulley your replies are much appreciated and expertise in this business evident. Are you for hire regarding creative financing options to help others to continue to run business as normal? i.e. How can one obtain your advice regarding compliance with these and other issues in their (my) real estate business. There are very few attorneys with knowledge of this stuff in my area...(Virginia)
Bill Gulley, thanks for the tips. I spoke with a Texas attorney on this and he referred me to Chapter 180 (http://www.statutes.legis.state.tx.us/Docs/FI/htm/FI.180.htm) of the Texas Finance code. Basically as long as I make 5 or fewer loans then I am clear. No balloon payment restrictions are mentioned in the Texas code update. Personally, I wouldn't foreclose on balloon note if it was performing anyway. I'd simply offer a refinance option for them.
I asked the attorney how using separate entities for properties affects the 5 loan limit rule. He said since I am sole owner of the entities the limit would still apply, although he sounded a little unsure about that at first. I'll get more advice on that part whenever I get close to the limit.
So, when he says "everyone" that wasn't just everyone on his distribution list of selected addressees, or his clients, okay.....the rest of the world can't tell that from just the greeting. Thanks again for the links! :)
I asked the attorney how using separate entities for properties affects the 5 loan limit rule. He said since I am sole owner of the entities the limit would still apply, although he sounded a little unsure about that at first. I'll get more advice on that part whenever I get close to the limit.
Pretty lax, thanks for posting, but one rather strange aspect is that an attorney can't take an application for the loan and negotiate, but acts only in thier capacity as counsel. Seems they really can't advise without information contained in an application, and "application" wasn't defined as I recall.
I could take an "application" of sorts on a legal pad, you don't need a 1003 form (which I know they see as an application). So, I don't see that good advise being given without someone collecting that information.
It will be interesting to see how many attorneys will feel comfortable getting into this.
I also see Habitat For Humanity is exempt, any non-profit with zero interest loans where the borrower performs sweat equity. I was on the Board of Directors here and wrote the note for them, I was concerned about the IRS and imputed interest and they just said...oh no, we won't do that to you!
After seeing the statute, looks to me like investors should see if the could get with a non-profit that is involved with low-mod housing, the Texas Home Investment Program....probably a grant program, if not otherwise restricted.
Those saying they only do commercial as they loan to investors or contractors, well, there is no specific exemption to commercial there, defined as any residential home, being property oriented, I do see the argument both ways, I'd tend to look at the bigger picture, a contractor in construction would be commercial, but to an investor who allowed a wrap or lease/option (6 month limit in Tx.) with a homebuyer assuming that loan , may not fly, certainly not after 5.
Lastly, my above post concerning prudent lending, I'll guarantee you that exemption at 5 is not a license to do charge high rates, set early balloons or offer loans without any qualifying due diligence, don't need rare occassions and wild scenarios to demonstrate the need for fair and prudent conduct or the need to live in fear while doing RE.
Overall, looks like it's locked up with the exception of selling your own home
Such financing is more difficult but not impossible as you can go throgh a mortgage broker/originator or an attorney.
Hey Bill,
I have not seen anywhere in the SAFE Act that references vacant land. Could you please shed some light on this?
Thanks,
Rick
Maybe this helps. Here is info from Virginia. You can also click the link at the bottom and find your state (CA) to get more information. At one point it did call out directly vacant land but I could not find that particular instance this time when returning to the site.
VIRGINIA MORTGAGE LOAN ORIGINATOR LICENSE
Definitions
A mortgage loan originator is defined as an individual who takes an application for or offers or
negotiates the terms of a residential mortgage loan, as defined by the federal Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E).
S.A.F.E. defines a residential mortgage loan as any loan primarily for personal, family, or household
use that is secured by a mortgage, deed of trust, or other equivalent security interest on a dwelling or
residential real estate upon which is constructed or intended to be constructed a dwelling.
A dwelling is a residential structure that contains 1 to 4 units, whether or not that structure is attached
to real property. The term includes an individual condominium unit, cooperative unit, mobile home,
and trailer, if it is used as a residence.
http://mortgage.nationwidelicensingsystem.org/slr/Pages/default.aspx
Maybe this helps. Here is info from Virginia. You can also click the link at the bottom and find your state (CA) to get more information. At one point it did call out directly vacant land but I could not find that particular instance this time when returning to the site.
VIRGINIA MORTGAGE LOAN ORIGINATOR LICENSE
Definitions
A mortgage loan originator is defined as an individual who takes an application for or offers or
negotiates the terms of a residential mortgage loan, as defined by the federal Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E).
S.A.F.E. defines a residential mortgage loan as any loan primarily for personal, family, or household
use that is secured by a mortgage, deed of trust, or other equivalent security interest on a dwelling or
residential real estate upon which is constructed or intended to be constructed a dwelling.
A dwelling is a residential structure that contains 1 to 4 units, whether or not that structure is attached
to real property. The term includes an individual condominium unit, cooperative unit, mobile home,
and trailer, if it is used as a residence.
http://mortgage.nationwidelicensingsystem.org/slr/Pages/default.aspx
Sam, thanks for the info! California has the same definition as far as I can find. The section from above that I was wondering about is:
"residential real estate upon which is constructed or intended to be constructed a dwelling."
This sounds to me that they are addressing construction loans here and not vacant land but I was wondering if anyone out there has gotten confirmation.
The part that
'which intends'' to be built, in the federal version it is defined and adopted, that any land zoned for residential or upon which a residence may be constructed...
Meaning that lots in a subdivision are included as they are zoned for occupancy, but also if you have 20 acres in an agriculturally zoned area, if a residence can be built on that land then the Act applies. The intent will be assumed if it is permitted. If you have a quarter acre in a business area zoned commercial it won't be assumed that a residence would be built on that property (it's also not the highest and best use) so the Act would not be applied in reality.
Hey guys, my real opinions are that road blocks can provide opportunities if you consider the big picture and seek options to solve the problems. I don't get to this side often as pointing out the restrictions is a full time task here.
If you need cash in three years, make the loan initially that gives a great incentive to the borrower to refinance, a window of opportunity that if missed in a time frame it closes. You borrower should be qualified to ensure they can perform so that refinancing is not impossible.
Next notes can be divided in principal parts and sold to gain liquidity, has nothing to do with the borrower. The discount could be much lower on a well structured, processed and underwritten note where the buyer has recourse limiting the risks.
Investors may begin to specialize in those types of purchases, selling the yield over a certain period of time.
I have also traded notes making up differences, some investors/note holders don't want to be paid off in two years, the other holder may want cash payoffs, so work together in your network and you can devise the maturities. Some loan servicers may facilitate these trades.
If you have a long term plan for the note it can be constructed to support your plan instead of just getting a note off the internet. Stay in bounds of usury issues, but you can adjust future interest down as well as up, it can be a carrot or a stick.
I'm no longer an originator or broker, being retired, so that means I'd be breaking the law if I were to facilitate or originate or underwrite a note. I can give advice in general but not to a specific deal so much, sorry. I could give examples, I could express underwriting issues, but in general. :)
Sorry I missed this. The Act will apply if you file a new security agreement under any future modification. A modification will need to be compliant under the current requirements. A note made prior to the law will be grandfathered. Take care in redoing any loan or making modifications and especially in filing any replacement notes. It may be better to leave notes as they are and modify or make agreements by letters of understanding, agreeing to allow something or not to do something if payments are caught up, such letters would not be filed, but they can still be viewed as a modification by agreement. Really need to see your attorney. :)
Do either of these Acts apply if the seller sells to an individual who holds the property in an LLC?
Good question, while everyone likes to think making a loan to an LLC is a commercial loan and exempt, that may not be the case. An LLC may be used as an estate planning tool or a property may be placed in an LLC that really doesn't meet the business requirements (look to piercing the corporate veil issues). If the sole owner(s) of the LLC are living in the property you can have issues, if it's rented, probably not an issue.
There is also the catch all aspect in the SAFE Act wrapped in the Dodd-Frank blanket, that the Act will be applicable to any method or scheme devised to avoid compliance with the law. I can see a regulator calling a deal that was put in an LLC that serves no real business purpose as a ploy to call the deal a commercial transaction as an avoidance tactic, especially if the borrower/guarantor is living in the property.
The IRS disallows business entities all the time, so to could the CFPB. :)
It is no mystery there is a lot of confusion over Dodd-Frank. This always happens with bad law implementing bad policy.
If your business depends on what Dodd-Frank is trying to stop you should seek out an attorney who is knowledgeable in this subject and follow their advice. They are the ones with the license and the malpractice policy.
Now, if your business depends on being you a sleezy scum who took advantage of your tenant buyers, then I do hope you get smacked down hard.
But, if you don't fit that mold, I now know for a fact there are several loopholes in law and the enacting regulations. They have not been tested in court and unless you have deep pockets I would not recommend you stepping up to the plate to be a test case.
But, this will be settled within 2-3 years one way or the other.
Just for the sake of conversation, just what are those loopholes, besides the exemptions stated in the law? I doubt even a scum bucket landlord selling with predator terms would go to jail, his first time, someone doing 50 seller financed transaction might. And, there's not much money lost if you simply comply and do your deal, the loss comes from a buyer who isn't qualified anyway, so the only money "lost" is from your poly to pick pockets, not from closing a real deal.
I agree with you, don't test the waters unless you have the pockets to float your way back to shore. :)
I love it when everyone thinks they know how the Dodd Frank act will work. And yes testing the DF act then you will know. Like I said last year I will test the major banks to see whether they will play by the DF act and at this time, four mortgage applications out of 12 were rejected because the consumer did not qualify for the mortgage loan.
Joe Gore
Joe, that's not bad, pretty good if you were pulling applicants from junk notes to refi. 75/80% off the street applications are about the same. Good luck with your "testing" :)
I'm just a sideline observer - for the moment - of these new regulations ... I was still not at the conversant level with the 'former' practices in the U.S.A. :-)
I do find the balloon payment restriction puzzling. Does this automatically force OO buyers into long-term (15 - 30 yr) mortgages? How could you have a 5-yr ARM (aka variable rate) w/o a balloon payment?
Roy, you can have a 5/1 ARM without a balloon required. They may be amortized to any term, so long as the borrower qualifies. You could amortize the loan for 12 years, first five fixed, the adjust ever year thereafter, so long as the borrower qualifies there is no issue. There are restrictions to ARMs, the index, margin and ceiling as with Fannie Mae which is a standard. Here, conventional loans are set at 15 or 30 years (except there are new products, that's another joke). 60/360 loans, as they are called, are set at the first 60 months and adjust with a 360 amortization, fully amortized.
When an ARM adjusts the unpaid amount is re=amortized over the remaining term. A 60/360 would adjust in 5 years and re-amortize the balance over the remaining 25 year period, the next year, over 24 years until it is extinguished fully.
You can have a balloon under the new rules, at least half the original principal must be paid under the amortized schedule before a balloon is required. Amortizations can not exceed 30 years. These are non-qualifying loans, meaning non-qualifying as for the lender to fall under exceptions given to them under the new law. There are exempt lenders, banks for example can have a 3 year balloon under certain circumstances. It's pretty convoluted. :)
Thanks Bill,
Once again, I was inferring too many similarities between a 5-yr term ARM and a Canadian 5-yr variable rate mortgage. Since our mortgage terms (regardless of the amortization) are seldom longer than 5-yrs {and never longer than 7-10 years), there is always a balloon payment at the end of each term. Much of the time the mortgagor simply takes out a new note with the same lender an renews/extends the mortgage, but they can also establish financing with a new lender and payout the ballon on the expiring mortgage.
Once again, I was inferring too many similarities between a 5-yr term ARM and a Canadian 5-yr variable rate mortgage. Since our mortgage terms (regardless of the amortization) are seldom longer than 5-yrs {and never longer than 7-10 years), there is always a balloon payment at the end of each term. Much of the time the mortgagor simply takes out a new note with the same lender an renews/extends the mortgage, but they can also establish financing with a new lender and payout the ballon on the expiring mortgage.
Talk about churning accounts, wow, new originations every 5 years, that's a lender's paradise. :)
Once again, I was inferring too many similarities between a 5-yr term ARM and a Canadian 5-yr variable rate mortgage. Since our mortgage terms (regardless of the amortization) are seldom longer than 5-yrs {and never longer than 7-10 years), there is always a balloon payment at the end of each term. Much of the time the mortgagor simply takes out a new note with the same lender an renews/extends the mortgage, but they can also establish financing with a new lender and payout the ballon on the expiring mortgage.
Prior to the Great Depression those types of loans were common in the US as well.
Bill,
We do not have quite the thicket of origination costs, & no points, up here as you do in the U.S.A. If you "renew" a residential mortgage with the same lender you will probably get hit with a $200 - $500 "administration" fee, but you will not have to register a new mortgage, so will save on legal.
If you switch lenders, you would have the added costs of registering the new mortgage - though, we've often been able to get the new lender to absorb those costs as part of wooing our business.