First I must admit I just saw this and am ALARMED based on my skimming of the facts… or at least the rumors…
It appears on the surface that this new bill would largely prohibit creative financing often used by Sellers to entice or enable buyers to purchase their real estate.
As I understand it, if a property owner wanted to “wrap” their mortgage or do a “Lease Option” or a “Lease Purchase” or probably even a “Land Installment Contract”… that they could only do one in three years or they would be classified as a Mortgage Broker and would need to be licensed and comply with all these laws.
I am sure whomever wrote this bill HR 1728 had good intentions, BUT, if the above is true… I feel it will be devastating to our already “fragile” or “weak” Real Estate Market.
I also think it is just more segmenting of the “classes”, forcing the poor to be poor forever… I am not endorsing “crazy lending”, some of which got us into this mess, but I am endorsing and do endorse creative solutions to problems… These often include some creative financing.
On top of that there are many industrious folks out there trying to make a living by buying and selling homes and many of them use these strategies to sell their homes. This would devastate small and large rehabbers… but mostly the small ones.
Typical isn’t it! Lets pick on the little guy and kick him when he is down. Its what the banks already do to us. The Banks assess their risk based on the borrower’s ability to repay. This hinges on Job Stability, Disposable Income, some metrics relative to Gross Income, other debts and obligations. So based on the typical American the Bank looks at their less than ideal borrowing ability, due to their poor credit history or weak job history or likelihood of future employment, or a common one these days… their lack of enough gross income. Then the Bank calculates how it can screw us harder if we are “down”… more upfront, prepayment and administrative fees, a higher interest rate, stricter default terms, adjustable rates with higher caps or more frequent adjustments.
The law is supposed to protect us in the U.S. from the Banks “predatory lending” practices that have gotten us into this mess. Essentially what happened is: One bank, who got all the upfront money from the borrower (more than normal - predisposing the buyer to failure), justifies doing this based on the risk, then these banks “re-packaged” these “risky loans” with some other “less risky loans” and then they resold them as a “package” (fraudulent package in my mind) without passing on the premium or giving enough of a discount to offset the risk and in this case the eminent and subsequent failure of these large packages are what is causing the problem with liquidity.
But it appears this well intentioned protectionist bill is also taking a whack intentional or not at Private Financing and Creative Financing.
We need Creative Financing! If the Banks become the sole means of financing business and life, then we shall surely get screwed with or without laws on the books… Don’t get me wrong, I am not anti-bank, I am anti bank bad behavior and anti monopoly or oligopoly. I am very much for Private Money Lending and for Seller Financing and Creative Financing in general. These are ways you solve problems, not create them…
As far as risk to the consumer or the bank for that matter, I would postulate that the current actuarial (statistical) tables and formulas didn’t take into account the current recession/depression we are in… The massive job loss, the steeply increasing gas prices we experienced and will likely see again…
In today’s American economy it doesn’t matter if you are a new employee or a lifelong employee. It doesn’t matter if you are a Manager or one of many lower level worker-beings. Anyone that doesn’t own their own company could be laid off or fired in short notice based on any number of circumstances, well beyond their own control. Economic changes, new laws, shifts in technology, shifts in demand, foreign competition, current competition’s advances, mergers and acquisitions. The point is no ones job is safe and no one is looking out for us.
Owning your own company isn’t a lot better, if you quit paying your creditors and suppliers, then you will soon be out of business and have no income.
The banks have known the risk of self-employed individuals for years. This includes people like me… A Realtor. It is harder to get a loan from a bank right now if you are self employed, you need to have two years of tax returns to prove your ability to repay and these days they scrutinize the numbers more closely. So if you have just left your job to do your thing… Start your own business, you likely cannot get financing from a bank.
This isn’t intended to be a rant, but the point is many people cannot get or use traditional bank type financing to purchase a home and if non-traditional financing is essentially outlawed then it will prevent these people from buying.
Home ownership is the American Dream! So why should we prevent it?
We should do what we can to enable Creative Financing.
We possibly need some structure and approved forms and methods to better standardize the owner financing, but I hope we do not create some huge behemoth regulatory agency and/or prohibit or even discourage it. We already have laws on the books for fraudulent practices.
It is frustrating as a licensed Colorado Real Estate Broker that I cannot prepare the forms for lease options and mortgage wraps or subject to type deals. The banks have mostly stopped assumable mortgages, because they got abused, but where they exist, they are a form of creative financing themselves, because the seller usually or presumably has equity and carries back a second mortgage (note and deed of trust) for some of the equity and the buyer takes over their payments where they were in their existing loan. (NOTE: The banks stopped because they weren’t getting as many fees, in many cases there were no fees to the buyer to assume the loan…)
Some would say this is the Governments job to protect us… Other than protecting our country and our borders, I disagree! I think it is our own job. We need to Read, Write, Talk and learn about what we are going to do. Math skills help to! In other words, if you only earn $10 you cannot spend $12 without creating debt… If you repeat this for very long you will quickly become insolvent.
We shouldn’t trust wholeheartedly anything we are told, we should investigate and check it out. But often we are lazy, don’t have time, or we just really trust someone… This is how people get scammed and get into trouble. With the availability of the Internet, if a person has basic reading and writing skills (that many don’t - taught and graduate from our Government managed schools), then they should be able to research just about any topic with a few hours a day for a week or so and get a good general understanding of the subject matter at hand.
Maybe I am weird, but I don’t think the concept of a loan or terms of repayment are by themselves all that complicated and actually most owner financed deals are much more straightforward, easier to understand and actually save the consumer/buyer money with simple interest (lack of compounding interest, which makes the loan seem cheaper than it actually is). In my opinion, it’s the complicated legalease of the bank notes or mortgages that creates the need for all the regulation that this law is trying to further regulate…)
So I don’t think ”Creative Financing” is bad in any form. Its ”Creative” after all…
I do think that most Realtors ought to be able to understand and even fill out the forms if they existed. As it is now, you often have a buyer with poor credit or little cash, or a seller with no equity but a sweet loan that someone else would like to take over and neither side usually wants to pay an attorney. But at least in Colorado a Realtor cannot complete these forms (or even a lease for that matter), because they (the forms) don’t exist. Realtors (in Colorado) are only licensed to fill out State Division of Real Estate Approved Forms.
Now for commercial Real Estate it’s different… I think a lawyer is key to making the deal work and both sides can usually afford one.
But for residential as much as we suggest lawyers to people, in my experience, few use them.
So often the seller drafts the paperwork (by copying something they don’t understand), since the seller can act legally on his/her own behalf. The buyer just signs, probably often doesn’t even read the document. THIS IS HOW PROBLEMS HAPPEN! If these parties even had the “non-legal” assistance of a Realtor or even a Title Company acting administratively to ensure the forms were filled out correctly and all the pertinent issues discussed and addressed, then I doubt we would have many problems with this.
I would be suspicious of the Bank and Mortgage Lender lobbyist on this one, but the sad thing is, I really doubt it would bring them more business… They are already denying people the money, they don’t want this business, what will really happen is that the rich will get richer and the poor will get poorer or have more of a hurdle to climb to get out of their situation.
More Americans will be forced to rent where they could of otherwise purchased a home. This bill will increase the number of Americans who cannot buy a home.
Since the Government is trying to help us… Maybe the Government should give people a skip a payment coupon once a year as an advanced tax credit as a way to get the money to the banks or private lenders… and prevent the home owner/buyer from entering into default and/or foreclosure. Few people WANT to lose their home…
Many Real Estate Investment courses teach purchasing properties with no money down using lease options and wraps and many energetic entrepreneurs go out there and make it happen just like that. You can do sandwich leases, down payment second mortgages, etc. and these people turn around and finance their buyers with wraps. These can work just fine, or they can default just like a regular Note and Deed of Trust from a bank.
People seem to forget or are maybe unaware that creative financing has existed for as long as money has, but the protectionist groups are pushing for more consumer protection in order to really strip us of more of our legal rights to buy and sell Real Estate.
Here is a link to the Bill Summary:
http://www.govtrack.us/congress/bill.xpd?bill=h111-1728&tab=summary
The full length version is here:
http://www.govtrack.us/congress/billtext.xpd?bill=h111-1728
I honestly haven’t read it (the full bill). I am also afraid few of the representatives did either (usually important things get left out of the summaries that they do read.)
Here is what got me riled up and made me write today:
Excerpt from an Email from Peter Conti - A Real Estate Investor and Trainer from Denver, CO
Dear Fellow Real Estate Entrepreneur–
A New Federal Law Will Make it Impossible For You To Sell Properties Creatively!
HR 1728, which has already passed in Congress, will effectively keep you from:
- Selling properties with owner-carry back or wrap-around mortgages
- Selling properties using land contracts or contracts for deed
- Selling properties using lease/option
- And, possibly, borrowing private money to buy properties
Please Join Us for a CRUCIAL Conference Call to Learn What You (and all your colleagues)
Need to Do TODAY to Stop this Bill from Becoming Law!
We’ll outline what the proposed bill says and what you need to say to your elected officials to get it STOPPED.
Sorry this post was a little unorganized but I am short on time and cannot edit any further.
Please post a question if you want further answers and I will try to dig it up for you to the best of my ability.
Remember also that if you or someone you knows needs to buy or sell a home or any type of property, please have them call or call us with their number.
Chris Ormsbee - Realtor & Broker Associate - licensed in the State of Colorado. (970) 209-0252
Diane Haynes - Realtor & Broker Associate - licensed in the State of Colorado (970) 596-3521
I will try to edit this later to add the write your local congressman link… We really do need to voice our concerns or they will surely be ignored or forgotten…
