All Forum Posts by: Dion DePaoli

Oh gosh.

The distinction here is different than what is being guessed.

If you loan me money which I then use as down payment, the first thing that happened is I entered into a loan with you (Senior) and the second is I gave a mortgage and got a loan from another lender (Junior). Violia, we have a conflict of seniority.

To avoid this, the money is merged into the transaction. In OO loans, the money is gifted. So this says the money does not have to be paid back and is not attached to the property.

They are calling it a gift because gifts do not establish ownership nor do gifts have to pay back. And that is what this is. The fact that you are allowing him on to title has no bearing to the mortgage. So while that idea makes it make sense to you, the Lender doesn't care and they do not want to know.

In regards to business relations, related to capitalizing an enterprise and title. Your ideas are not on line there either. You are not properly understanding what title is and how it works in short. The amount of capital you provide is not a determination for ownership interest in title at all. It is it's own idea.

In the same example, you provide the funds, title can be vested in any number of infinite ways frankly 90/10, 10/90, 50/50/ 60/40....infinite. You are likely confusing owner's equity in a company with title in real property. In short, they are not the same. Let's know worry about that for right now either.

I might have commented on this idea out of place or further down KMP. Seller paper does not trade for any type of premium. As you stated, you are hard pressed to simply get PAR.

The extrapolation you made at the end is on point. We have a undefined, defined idea. A borrower with 50% down is different than a borrower with 0% or 10% down. That is not me implying that folks can simply add the extra 10% to the 'folks who can afford it' type idea. However, that I would be interested in grabbing some popcorn a being a fly on the wall for those coversations.

Ok, I gotcha.

So his funds are precisely a gift. As such he needs to deliver a gift letter which says there is no repayment.

He can be vested onto title which can handle his interest in the real property subsequent distributions when sold. You can hold title a couple of ways that is going to affect you and your wife and he, you should speak to an attorney about the best methods. I am thinking you can do Tenants in Common where you and your wife are 25/25 and he is 50. Joint Tenants would mean each of you are equal 1/3 (provided your wife joins title). Three familiy members, one is your wife. Family matters can get sticky and should be planned for properly. Talk to some professionals in your area that help with estate planning and family trusts. Plan for the worst hope for the best.

Moral of the story, the funds you dad gave are a gift and the underwriter is requesting the letter properly per what you have described.

To speak to more of the heart of your observation and question Dave. I can't remember where I saw the data but it was pretty interesting to say the least. The general idea was that many of the science fields that had large cores of math relations have seen a drastic reduction in new graduates who seek employment in the field of study. For instance, physicists.

Many of those folks were being snatched up by large public companies and put into finance type rolls. The numbers were, like I said, pretty staggering. A little saddening too, if you have some compassion for science, which I do.

As @J Scott implies it is all about the money. Would you rather become go work in your field of study and earn $80 to $100k or would you like to work for Goldman Sachs and make 10 times that?

Synonymous names of large math companies would be some funny inside jokes one could use on their own holding companies. That made me chuckle.

If this property was not in the BK 13 plan, then this property was obtained post the plan altogether as there is no other way for your statement to be true. I am guessing you have not reviewed the BK file yourself and some of this is based on what the borrower has informed you.

Can I ask another question for the sake of the lords of questions?

What is the balance level you wish for BOA to drop to? (as a percent of today's as is value of the real property) Just curious.

All the good liberal arts jobs are taken?

@Aldolfo

If the borrower is currently in a BK plan. You need to get back any money you put in and stop messing with this. In the BK plan the borrower already agreed, as a function of the plan, to either keep the house or surrender it. If the home is being surrendered, the Trustee for the BK will have power of that taking place. You simply do not exist nor do you have any superior interests or powers here. If the borrower reaffirmed the debt, then she essentially said she does indeed owe the full balance back to the bank.

I suggest you go get any money back and move on to another asset. You are messing with things that matter that you do not fully understand and those are going to make this pretty impossible to do what you want.

Safe to assume I have some experience in these matters and thought I could add some commentary to the same.

First one of the elephants in the room is the notion that it is "OK" to sell a property with an inflated sales price. Now a defense of the idea that is often given, is a Buyer is free to pay what they are willing to pay for a property. Often times the definition of value is given is:

Value = the price a seller sells for and a buyer buys for in an arm's length transaction in the open market.

So can a 'Buyer' choose to pay a premium for a property? Yes, they can.
Can a mortgage (or DOT) secure a debt which exceeds the value (or price) of a home? Yes it can.

However, those are separate ideas that are being combined and then implied to have universal application and they do not. As soon as you extend credit, which is what you do with Seller finance, you fall into new requirements. Simply stated, this is why we have things like SAFE Act, which is the portion of Dobb-Frank that deals with license requirements in order to deliver credit to the public. The idea of predatory is not as much of a checklist as it is a set of circumstances and ideas applied to a situation. Predatory practices take advantage of situations and events and are not simply limited to a particular action per se. Even though it is easy to understand an action which is predatory.

And there in lies your slippery slope. A property worth paying a premium for is arguably not 'over-priced' to market. The buyer of said property would need to have their own means of capitalizing the premium. So in all conventional loans, a buyer may pay more for a property and still obtain finance, they simply have to put more money down to make up the difference. This is not an uncommon occurrence.

It is generally accepted that a buyer who has sufficient capital to afford paying a premium does so on their accord. As soon as a buyer lacks said capital to afford paying the premium on their own accord the ENTIRE game changes. The general idea about sophistication level of the buyer sort of drops (in layman's terms). To ignore this important distinction, of sophistication of the buyer, inside the guise of using the definition of value as justification for actions can be pretty dangerous.

Putting a borrower into a home which starts out with negative equity, who does not have sufficient capital to unleverage themselves is therefor the very definition of predatory. Ladies and gentlemen, this is very black and white. It is under this idea frankly that it is easier for industry folks who know what they are talking about to simply tell other folks to just stay away from the idea opposed to trying to get into all the nuances. (some may want to consider this one of those times) This is aside from the obvious issue with finding a sophisticated borrower with sufficient capital who will pay a premium for a property and not demand a better price based on their sophistication and capital. And with that idea, hopefully readers can start to or clearly see the distinction here.

If I stand in front of you asking for Seller finance with $1.0 Million in my hand and agree to 110% of value that is fine, if I stand in front of you with $1,000 and you write me a loan for 110%, I have no way to get myself out, not only is it is a poor, poor choice as a mortgagor (which is why we have regulations to protect folks of such things), but the Seller is implicated in the plan. The Seller is viewed as having the upper hand, taking advantage of the borrower's circumstances. Again, the definition of "Predatory Practice".

Now, that idea oddly enough, not only is missed in some of this commentary but is clearly skipped over when folks are talking about the new rule from Dobb-Frank this year which is "The Ability to Repay Rule". In short, the creditor must take steps to ENSURE the borrower has reasonable means to repay the mortgage. 110% LTV is not very defensible. 100% LTV is not very defensible. If the borrower has a hardship, they can not sell the property in line with the obligation. So on day one of period one, the Borrower does not have have the "ability to repay" since what is owed exceeds the collateral. This forces the borrower into negative situation which might be viewed as forcing foreclosure onto a borrower. (judges are wise to this)

For some of the rest, I am just going to quote and rebuttal. Grant (and readers) this is not an attack on your commentary as much as it is commentary for the reader to take into consideration, so that said please do not take my manner of addressing the statements personal. It will be easier for me to quote and rebuttal. (thanks in advance)

"....Dodd-Frank does a very good job of giving us a black and white of what the government deems acceptable vs unacceptable. There's not any mention of appraised values vs sales price in the laws,.."

Let us not assume that Dobb-Frank is within it's pages the entire body of law that deals with real property, real property finance, consumer credit, debt collection and ideas of the same. It most definitely and certainly is NOT (not even close). Dobb-Frank is a "reform" act, which means it is reforming other regulations already in place from the past. Dobb-Frank deals with the mortgage industry and also securities amongst some other ideas. The intention for the act was to reform capital markets on Wall Street which is believed to have lead us to the Mortgage Crash of 2007/2008. It is not a stand alone rule only dealing with real estate ideas.

"...There's not any mention of appraised values vs sales price in the laws,.."

This would be expected since the law did not set out to amend or alter those definitions nor inferences based on those concepts. For that matter, those ideas are understood just fine in compliance and regulation.

"All the rest of the laws pertain to interest rates and loan features."

I do not care for this statement because it is not true for Dobb Frank. That might be simply the case of the text used but I have issue with the diminishing effect of the way it is written. Dobb-Frank in it's entirety deals with all types of things from capital demands on lending institutions to ratios on SWAPS, to Mortgage Licensure, to Finance guides. To imply the entire content of DF is merely about rates and loan features if very far from the truth. I know to some REI it may come as a surprise that DF is not 'just for real estate', in fact real estate and matters of the same are actually more of a tangent of DF dealing with capital markets. Since RE assets roll up into Capital Markets and that is what the reform set out to deal with, naturally it is included.

Inside the portion of the Ability to Repay portion of Dobb-Frank, we reformed the idea of High Cost mortgage loans. High Cost loans have always been around and they are not going anywhere. These loans have been referred to as Section 32 loans, which means they deal with Section 32 of Regulation Z. One of the regulations that DF sets out to reform. Clearly, by my commentary the reader can infer that section of Reg Z deals with High Cost loans. So, what we have done is reformed some of the ideas within Reg Z.

"There are two thresholds to be aware of, the "higher priced" mortgage loan and the "High Cost" mortgage loan."

There is still more to be concerned with than this sentence (and section above) implies. Simply stated, Usury laws apply as the quickest example. We are in territory where details matter. Please do no think of DF as the conclusive rule to follow, that is is not.

As a Mortgagee or Creditor, disclosures do not remove the burden of liability for your actions. They only give you a fighting chance. Readers should not presume that simply disclosing things protects them. Just because you disclose a high cost loan does not mean that disclosure absolves you or indefinitely protects you from liability from the action which was disclosed. In that matter, it actually puts a bigger target on your head. You knew better and disclosed it.

"The typical owner financed purchase price is going to be 10% above what a retail sale would occur at, supply is much lower on an owner financed home than it is retail.

This is not a generally accepted idea. I have absolutely no idea what the inference of supply [of Seller Financed Property] has to do with anything. There is no standalone market for SF. It is a class within the market, not a market in and of itself. So therefore, we can assume the "typical" Seller Financed purchase price is within the market range. Whereas the market is made up of assets which are purchased using cash and credit (of all types).

"And on top of that there's going to be a 10% down payment associated with the purchase, which again puts us back to essentially the same terms as a VA loan with no money down, preserving refinance abilities."

This is just way off base and not remotely true. This is pretty easy to see I think. You sell for 110% FMV. Borrower puts down 10%. So the loan amount is PAR with the FMV. Who benefited from this? NOT the borrower. The Seller actually reduces their risk of loss by forcing the down payment to bring the debt in line with the collateral. While at the same time getting paid a premium. In other words, as a Seller, you didn't risk the 10% that would not be secured by the value of the property. You forced the Buyer/Borrower to pay that, removing your potential risk of loss. So Seller upper-hand, Borrower not so much. Textbook predatory practice, BTW. Further, implying this type of a loan has any remote affinity to a government guaranteed mortgage is ridiculous. VA and FHA loans carry higher LTV's based on the underlying incentives that are included with the loan. VA are guaranteed and FHA are insured. That is how we get higher than 80% LTV, the conventional standard. So, someone, somewhere, mainly the US Taxpayer, is at risk of loss (in case of default) for those loans in order for the high LTV to be given. Again, a key distinction in all of this and one that comes up in court.

"The only reason people feel like you can't sell houses above appraised value is that their used to those loans being denied."

This is an interesting one and likely the big fat core problem. DETAILS MATTER. Appraisals are opinions of value. In that, they are not the definitive value. Inside that abstract idea, we understand appraised value and market value may overlap but they are not always the same. This leads us to an important text book version of the definition of value:

The highest price a willing buyer would pay and a willing seller would accept, both being fully informed, and the property being exposed for sale for a reasonable period of time, fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular article or piece of property.

As soon as we include a proper definition, we actually (hopefully?) begin to see some errors in the quick and easy definitions that we try and use. Let me help you just in-case: "...highest price a willing buyer would pay" and "...not compelled to take the particular article or piece of property."

The guy with $1.0 Million in cash is not 'compelled' to do much of anything he does not want. The guy with $1,000 is not viewed under the same pretense. The poorer person's defense is actually they were compelled for economic reasons. [...which were then taken advantage of]

The "highest price" means, no price higher. So then, as soon as we imply the "highest price" and then proceed to condition it to the concept of more, such as in the idea of 110%, where 100% represents the idea of "highest price" and the added 10% includes the idea of more. We have an issue. The standard is actually there and pretty clear. It is from this that we get into the idea, that the ONLY person who pays more than 100% is a person who can afford to take the risk and is often times presumed to have done so on their own accord.

"Dodd-Frank does give very specific guidelines on ATR (Ability to Repay), so if you abide by those, there's not much of a legal footing for someone to stand on to say that you put them into a house they couldn't afford, and if you abide by the loan feature limits provided I see no footing that could say you've lend in a predatory manner."

Again, an improper statement which can give the wrong idea. The fact is, the "QM Rule" relates to the "ATR" rule in that, a Mortgagee who follows ATR has in effect, created a mortgage which "Qualifies [to the new standard]". The rule does not explicitly state, a Safe Harbor is created through presumption. Therefore it can be challenged. Thus, challenged by anyone which means a Mortgagee may have to defend the same. So to imply there is little footing for a borrower to charge with is grossly inaccurate and almost against what the rules and all follow up guidance on the rule has actually stated. To say it another way, just because you did abide by ATR doesn't mean your butt is in the clear. This is reasonable for us to expect since the rule is new and there is limited body of law challenging the concepts within.

As to the idea of challenges that can be created. I can think of many. This post topic being the easiest example of one. You would really need some pretty broad experience in mortgage litigation topics to make such a claim and if you had the experience you would not make such a claim.

"I always repeat that you've got to do the right thing. I don't see a problem with a 10% premium on the sales price legally or ethically. Especially with appraisal disclosures given to the buyer (even though appraisals aren't required, your borrower has a right to see the comps you've pulled or any other valuation models you used [depending on if your loan meets certain requirements])."

Now, in some states appraisals are explicitly required in seller financed transactions. No disclosure will ever resolve this. Disclosures often time mean nothing and are merely one part physiological warfare on a borrower/buyer and the other a paperwork version of crossing your fingers. A simple analogy for this, if I plan to shoot you dead, just because you sign a disclosure releasing me from the act does not mean I am released from the responsibility of the act. Same concept here.

There is a notion in the beginning of the thread about value of Seller Financed loans originated at high LTV and true accounting for the spread on a wrap mortgage. In general, and since Bill touched on it, the implied spread is not accurate. In reality it is half of what was stated if you set it up properly. A mortgage in period 1 has less principal allocation in payment to a mortgage in period X (where x is greater than 1). Not properly lining up the amortization of both loans can result in a capital demand on the wrapping Mortgagee. Not to mention have some net numbers that are just off base from the gross estimate. The general idea is beware of simplistic math in complex math situations. Stacking two mortgages really is not as simple as 5% plus 2% spread equals 7% new mortgage.

The other idea I wanted to give some light to is the value of a Seller Financed note in the secondary market. First, we see SF paper often. It innately carries more risk. Therefore it predominately carries a discount. Seller Financed paper with inflated sale prices and therefore loan amounts are literally EVERYWHERE. Grant's idea or defense of the same are not new. Been around for a bit. Lots of riders on that bandwagon. As a Seller, you would be relying on your counter-parties lack of understanding of this asset class, a.k.a. stupidity for no better word, to garner a sale remotely close to par or even the standard SF paper discount. When a price is inflated the loan is priced out with a greater discount to offset the known predatory risks that come with the origins of the loan. (I dunno, further proof of predatory?) So strategically and economically, I never tell my clients, friends or alike to over price anything. It is really a horrible idea. Majority of the time the overage is put in place to offset the discount that maybe forth coming but all it does is increase the delivered discount making the whole thing relative pointless except as to devalue what might have been a decent asset otherwise. In this idea, Bill's comment is the best, "Financing does not add value". The value of something is not increased or decreased based upon the finance structure of the thing.

In closing (yes, it's finally over), let me say. Caveat emptor. Any reader of this material needs to do more than simply listen to a podcast or read diatribes of folks on the internet as gospel. (mine included) It is always best to go to the state you wish to work in and read the statues yourself and then talk to proper counsel as needed. In much of these topics details matter. And they matter a lot. And there are many. Which means they are not simply complied into one set of papers or under one simple statue or regulation but rather are culmination of all of the many.

Repeating: None of this is an attack or otherwise on or against Grant. I found it easier and more efficient to format this post in this manner which involved quoting him and then saying my piece. That is a matter of efficiency not a targeted assassination of character.

Anytime a Mortgagee receives less than the amounts due in full under the terms of the note which results (or is intended) to satisfy the same note and security instrument it is a "Short". The mortgagee is "short" of Paid In Full.

A Short Sale and a Short Pay are both possible but carry different burdens stemming from the Mortgagee. A Short Pay, would refer to a refinance transaction where the borrower is allowed to pay less than what is due in order to have the Mortgagee satisfy the existing mortgage. The key here is the borrower remains on title to the property. Clearly a Short Sale, is where the property is sold and thus is conveyed to a new third party.

Short pays are hard from the big boys. Much of this has to do with some implications in the secondary market. When a short sale takes place, the borrower, who is not paying back all the money they borrowed is allowed to sell the property and the lender takes less while also making sure the borrower is not unjustly enriched as a result. In a refinance this line gets a little blurry.

It is important to note here, a short pay means a new Mortgagee will enter the picture. Often times, a Mortgagee who forgives principal will either want to stay in the loan to recover forgiveness (in idea not accounting standards, since once forgiven, it is written off) by collecting interest on the loan or they grant the reduction but expect to see the borrower sell the property.

The most recent examples of Short Pay transactions would be the many HAMP and HARP loans that are originate every day (hundreds of thousands or loans). Those programs required principal forgiveness in order to qualify for the loan. There is your short pay. The problem is/was those loans carried incentive to the Mortgagees to encourage the short. I am guessing yours does not offer such things.

So do Short Pays happen? Yes. They are not uncommon. Should BOA Servicing know of such things? Yes, but in my universe everyone has an equal opportunity to be stupid.

@Aldolfo Pontaza - what is your role here in dealing with such things? Are you a borrower or owner of the property?

Maybe we can give you some ideas of how to address if you share some of the detail here.