All Forum Posts by: Stan Johnson

A loan underwriter's primary purpose is to discern risk, then to mitigate or avoid unacceptable risks.  If a Real Estate Purchase Contract ( REPC) mentions evidence of a possible adverse condition, then an underwriter would have a duty to demand clarification of that situation before approving the loan.... My own career history includes a related incident,  a low-income customer was scraping for every penny to get into a very old farm home that shared a septic system with the adjacent newer home built by the same farm family.  A generation later the two properties were divided and sold to separate non-farm families as the farm land became a residential subdivision.... My underwriter asked for an inspection of the septic system.  The Borrower ( loan applicant ) wanted to avoid the $200 fee and negotiated to have the lending stipulation changed so that funds could be released only after the Borrower signed a  " Hold Harmless Agreement" addressing the septic system....  Later the larger neighboring property was acquired by a family with several children.   The additional sewage flow from the new neighbors overloaded the septic system and caused sewage backup into the older residence when the new family did laundry...   My Borrower went to her Realtor to seek damages for "being sold a defective property."   The Realtor, in turn, sought to indict me, the lender as the culprit.  The Realtor said " The mortgage lender should have demanded and inspection of this property before making the loan. "....  Happily,  I maintain logs of my customer interactions,  I showed my history of the underwriter's  loan stipulation --originally demanding an inspection (which the Borrower protested ) and the eventual  Hold Harmless agreement....  The end result:  The Borrower had to pay the full cost of installing a separate septic system for her home.  ( That cash cost  was  about twice the amount of her initial out-of-pocket investment to acquire the property.  It was more than 400% of  her monthly gross income and probably about  20 times her monthly discretionary income. ).....  This could have been a situation where the financially overwhelmed homeowner/mortgage borrower elects to walk away from the house-- that would result in a significant loss to the lender.   This situation also demonstrates how all parties were forced to abandon their productive efforts (seeking new business ) as they were forced to devote their time into the non-productive time spending in defending their position from the accusations of the aggrieved owner of a defective property.....  All parties will benefit by addressing any defect up front  ( except the dishonest property who seeks to obtain more than the true value of his property by concealing a defect ).. As Billy Joel sang..  DO  IT RIGHT THE FIRST TIME, THAT'S THE MAIN THING ;-)

For Matt from Licensed Mortgage Loan Originator ( >24yrs. experience): If the Seller will give you any form of Deed (QCD, SWD,WD...) even without paying off the existing mortgage then you may save costs by not obtaining new financing UNTIL AFTER you complete the necessary rehabilitation. Getting new financing now would be a waste of thousands of dollars of closing costs... Also, your long term financing would probably be granted with more favorable terms after the rehab because the loan would be considered favorable security ( lower LTV ) by the ultimate lender

CONSUMER " PROTECTED"  OUT OF HER HOME.

SUBTITLE:  BE CAREFUL WHAT YOU WISH FOR, YOU MIGHT GET IT

An actual case history- A home owner rendered homeless as a consequence of  a mortgage regulation--  HOEPA  ( Home Owner's Equity Protection Act )

The mother of  three school age children provided in home medical assistance for an elderly resident of a small Idaho mining town.  Upon his death the old man demonstrated his gratitude by bequeathing his home to the caregiver so she could vacate her mobile home and become a real property owner.   The caregiver was not family and the old man did not want to disinherit his biological heirs  so he provided the home at a modest price but he made the estate the beneficiary of a modest  private money mortgage to provide a monthly remainder for his own adult children who already owned other residences in the same community.

All parties were served by this arrangement until the nurse's own son developed leukemia brought exorbitant demands for both money and time causing. The homeowner was unable to make mortgage payments to the estate for over a period more than 24 month by the time she approached me as a mortgage broker for help. At that time she owed less than 30% of the home's market value. Medical costs caused unpaid loans and collections to accumulate and to created a credit profile of a borrower who did not pay any of her legal obligations. Bank regulations simply would not allow FDIC-insured money to be invested in such a poor credit risk but the beneficiaries of the deceased man's mortgage deserved payment so they sold the non-performing mortgage to a Boise " Private Note Purchaser" for a small fraction of its face value because the heirs lived in a small community and did not want the infamy of being the ogres who would compound the misery of an unlucky family by seizing the home through foreclosure after the occupants had suffered the loss of their son to childhood disease.

The Boise opportunist had no such inhibitions.  He immediately initiated foreclosure proceedings.  Either way he would profit immensely  1) if he could force a payoff of his note through refinancing he would  receive a payoff  of more than 250%  of the money he paid for the discounted note, or 2) if he acquired the property through foreclosure his profits would be several times greater.  

The homeowners came to my mortgage brokerage company but their poor credit history prevented me from doing anything.   A few years earlier I could have helped them obtain a "second chance" mortgage.  Several lenders would lend up to 55% of a home's value without requiring proof of income and to even the poorest credit risks.  Of course a prospective lender would not lend to a borrower whose credit history demonstrates chronic pattern of disregarding credit obligations on the same terms they would extend to unblemished credit.  Such Sub-Prime lenders deserved and expected higher rates to compensate for the extra risk and the probable higher costs of recovering their money.  

The Home Ownership Equity Protection Act ended this class of loans.  HOEPA imposed onerous penalties for loans that were classified as " High Cost Loans"   HOEPA would also rescind (write off) a loan if it was determined that the lender had not documented the Borrower's Ability to Repay. 

This ill-fated family was "protected" from paying high costs to a mortgage lender but their home equity was extinguished.  They were forced to sell the home, to incur costs of moving an entire household and to become renters for several years until they could recover from the financial burden associated with their son's chronic illness and death.

To all who wish that government would protect them, I cite this example as I remind you  BE CAREFUL WHAT YOU WISH FOR,  YOU MIGHT GET IT

I discovered BiggerPockets as I searched for a HardMoney Lender to fund a deal involving a Farmington HIlls, Michigan office building.  I was excited to discover a treasure trove of valuable information in the Forums, Podcasts. etc.  Ann Belamy's  BP 09  Hard Money Lending was a terrific introduction.   I was excited to get more insight with another hour of great ideas in  BP 16-- dealing with Seller-Financing, Private Money, etc. but to my dismiss  I heard only a 4minute announcement that "We had to remove this program because new legislative ' Dodd-Frank' rendered many of its recommendations illegal."  

To any who have ever thought,  " There ought to be a law....."  I would respond that our Patriot - Founding Fathers were compelled to a revolutionary war because their overseers imposed too many laws that impaired their ability to realize their desired liberty and pursuit of happiness. 

In Fall 1978 my Real Estate Finance professor made a political announcement to our class as a preface to that day's lecture.  " Today it is now illegal for any lender in our state (Idaho) to make a mortgage at prevailing market rates."  Well-intentioned but informed lawmakers had determined that no lender should ever charge more than 10% for a mortgage loan so they wrote Usury Laws that forbade any higher rate.  The problem with general price inflation greater than 10% no rational entity would commit money to loan when economic conditions rendered his transaction a certain loss.   The Idaho State Legislature was called to an emergency session to change the statutes or else the state's economy would grind to a halt.

I eventually made Real Estate Finance my full-time profession. During that time I have witnessed many  new laws championed by idiotic politicians.  Without exception, every one of those laws has denied access to funds and denied home ownership to people who could have enjoyed property ownership if there were a free market.

The number of workers in my chosen profession, mortgage brokerage, is down by nearly 80% from its  2007 peak.  Without exception profitability of each transaction has been slashed because of the ramifications of Dodd-Frank and its associated Consumer Finance Protection Board.   To those that say " They had it coming" mortgage brokers earned too much.  I respond that transaction costs did not get reduced to benefit consumers.  The net result is that big banks, especially those that were deemed  "Too Big to Fail" were empowered to grow even larger as they were actually given money to devour their former competitors.

Chances are that the readers of my post did nothing to stop this terrible development because they believed that they were not being harmed.  

If you did not protest when my business was being harmed by over-reaching regulators because your business was not directly targeted,  I ask you .  " WILL YOU BE THE NEXT TARGET ? "