Your Property Rights Under Attack – Action Required NOW

This just in from The Paper Source Journal – Proposed changes to Regulation Z could threaten the future of property ownership in the United States.   Imagine selling a property and giving the buyer three years to change their mind?

RED ALERT — Seller Mortgages May Be Effectively Outlawed…You Must Act NOW!

by W. J. Mencarow

July 13th, 2011

From THE PAPER SOURCE JOURNAL, July, 2011:

The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held (a.k.a. purchase money) mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!

What’s more, Ma and Pa Homeowner, who create 95% of seller-held mortgages, won’t be able to qualify buyers under the same underwriting standards that banks are required to perform, and therefore the cash flow notes won’t be created.

If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.

Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.

We have precious little time to try to stop this. The deadline to comment is FRIDAY, July 22. See the information below, then go to snipurl.com/AbilityToRepay Please do it TODAY!!

(Thanks to Ric Thom [www.SecurityEscrow.com] for alerting us.)

Submit your comments at snipurl.com/AbilityToRepay — scroll down that page for the comments link.

THE DEADLINE IS FRIDAY, JULY 22!

Here Are Some Points You Can Make In Your Comments:

  • Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
  • Homeowners are not bank officers or mortgage lenders.  By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing.  Thus millions of people will be deprived of home ownership.
  • Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
  • Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
  • This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
  • By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
  • The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A  five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
  • There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
  • It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.

My Comments To The Federal Reserve

By Ric Thom, www.SecurityEscrow.com

The Dodd-Frank Act does not exempt property owners who wish to use seller financing (installment sale) even though no money is lent, there is no table funding, and under the Truth and Lending Act they are not considered creditors. The Dodd-Frank Act (ACT) does exempt property owners who offer seller financing from having to become Mortgage Loan Originators (MLO) provided they only sell 3 properties or less in a 12 month period and they follow the restrictions below. Yet, the Act subjects the property owner to the same liability as an MLO:

Title XIV Section 1401 (2) (E)

1. The seller did not construct the home to which the financing is being applied.
2. The loan is fully amortizing (no balloon mortgages allowed).
3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.
4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.
5. The loan meets other criteria set by the Federal Reserve Board.

Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need.

Seller financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.

The following is a breakdown of these restrictions. I listed them in order of greatest impact on property owners, buyers and the economy:

The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan. The implication is that the seller must use the ability-to-repay underwriting requirements when offering seller financing consistent with the Dodd-Frank Act which amends the Truth in Lending Act. This new, proposed rule is 169 pages long: snipurl.com/fedrule

The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank that takes the note as a collateral assignment.

This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities, but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.

Unlike banks and mortgage lenders, both the buyer and seller are consumers. They should both be equally protected. The buyer is purchasing real property and the seller is investing in/creating a financial product where they receive their equity over time. The seller is relying on the buyer to make monthly payments and maintain and protect the property. Terms are not dictated to either party, but rather they are negotiated between the parties.

Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.

Furthermore, why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.

This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.

The SAFE Act does not put in place the ability to repay requirements, or any other requirements, unless the individual habitually and repeatedly uses seller financing in a commercial context. It is HUD’s position that Congress never intended under the SAFE Act to restrict private property owners from using seller financing, unless they did it as a business.

The loan is fully amortizing (no balloon mortgages allowed). By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.

The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. Obviously the Act does not recognize that a five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.

The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps. This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate even if they believe they can afford any rate increase. This is again inconsistent with the SAFE Act.

Moreover, if the seller does not know about the ability-to-repay requirements and that they are not able to have a balloon, they certainly will not know that you have to have a fixed interest rate for the first five years.

The seller did not construct the home to which the financing is being applied. There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy. There is also that group of unemployed construction workers who built their own homes when times were good and now need to sell. This takes away their ability to use seller financing.

Builders are in the business of building; not of originating loans.

Using a mortgage loan originator to facilitate a seller-financed transaction creates additional risk and expense for both the buyer and the seller. It has been said that a seller financing the sale of his or her own
property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.

Furthermore, there is no provision in a MLO’s errors and omission insurance that covers seller financing. None of the continuing education classes or the exams that an MLO must complete has a single chapter or question regarding seller financing.

Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3% of the transaction. The only advertisements I have seen so far advertise a flat nonrefundable fee of $450. This fee has to be paid in advance, which makes sense, because why would a MLO spend hours and hours on an installment sale transaction which might not close? If the buyer pays the fee, then this is a forced origination fee never before imposed on buyers seeking seller financing. Why should the buyer have to pay money just to have an offer presented to the seller?

A lot of buyers use seller financing because they are low income individuals, and seller financing, up to now, has been an inexpensive way to purchase property. If the seller pays they will have to pay money for the simple act of the MLO forwarding them the installment sale offer. If the seller receives multiple offers this could easily run into thousands of dollars in MLO fees just to sell their property.

A lot of sellers are also low income individuals. The MLO will have to be a part of every offer and counteroffer because the sale and terms of an installment sale are one and the same and cannot be separated. For instance, the buyer might be willing to pay a higher interest rate if the seller is willing to come down on the price and down payment.

A lot of seller financing takes place in rural areas that are underserved by mortgage lenders and banks. It is going to be very difficult to find a MLO in those areas who are also willing to take the risk facilitating a seller financed transaction.

This has the potential of pushing seller-financing underground – not a desirable result.

The Dodd-Frank Act allows a property owner to use seller financing without having to become a mortgage loan originator as long as they don’t use it more than three times in a 12 month period and comply with the above restrictions. In the SAFE Act there are no restrictions to the number of times seller financing can be used as long as you are not in the business of being a mortgage loan originator. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging it to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or
having other restrictions on them, at five in a 12 month period. I would propose that the Dodd-Frank Act adopt that same number and place no restrictions on seller financing until 5 is surpassed. The only restrictions that should apply to 5 or less are those restrictions that the states already impose either through state statute or case law.

Under The Act loan officers at community banks do not have to become a Mortgage Loan Originator if they originate 5 or less transactions in a 12-month period. The rationale is that this is burdensome, costly and there is not enough volume to create a systemic risk. Ma and Pa on Main Street should be granted those same allowances. The Act puts more restrictions and risk on Ma and Pa than it does on financial institutions.

In watching the debates in Congress last summer it was repeatedly said that the Wall Street Reform and Consumer Financial Protection Act would not negatively affect or over-regulate Ma and Pa on Main Street. If this doesn’t negatively affect and regulate seniors, minorities, and lower income individuals on Main Street I don’t know what does. These restrictions will all but do away with seller financing, which will have a negative impact on housing, existing property owners, those desiring to be property owners and the economy.

Ric Thom is owner and president of Security Escrow Co. He is recognized as one of the leading authorities in seller financing on real estate contracts. www.securityescrow.com

Many thanks Bill Mencarow and Ric Thom and to all of you who submit comments seeking protection to property owners who are also consumers and who also deserve to be protected, not penalized for providing seller financing.

Previous Foreclosure Not A Problem for Renters

According to a report released by the National Association of Independent Landlords 82% of the 582 landlords polled would rent to someone who lost a home to foreclosure, assuming that the applicant previously had a good credit history.

Landlords won’t typically rent to applicants with poor credit – and a foreclosure can have a devastating affect on a credit score.  The exception appears to be when someone has paid their bills their whole life but either lost a job or could no longer meet their mortgage and had the hand their keys back to the bank according to Tracy Benson, president of The National Association of Independent Landlords.

The poll was conducted between March 21 and March 25, 2011.

Would you rent to someone with a previous foreclosure?

8 in 10 Americans Believe Homeownership A Good Idea

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Believe it or not, 8 in 10 Americans believe that purchasing a home is still a good idea, even in the face of the economic challenges facing the housing market. According to the 2010 National Housing Pulse Survey, which is a report sent out by the National Association of Realtors. The survey takes a look at how finding housing affects people. Nearly 80% of respondents reported that job layoffs and unemployment are huge concerns that they feel is barring them from homeownership.

Foreclosures and REOs are locked down, and banks often won’t lend to individuals such as this. Regardless, 68% of those polled believes that his is a great time to purchase a home. In 2008, only 66% believed this to be true. People recognize that low home prices and mortgage rates make a steal, and nearly one-fourth of people who are renting said they would consider buying a home now.

As investors, these lower home prices has changed the perception of our inventory favorably. Yet, only 2 in 10 renters responding felt they had a large enough down payment to cover the down payment and closing costs. Would’t a lease option be an ideal situation here? By providing a “homeowner in training” an option would provide them with a timeframe to build up this important cash reserve.

Another obstacle facing would-be homeowners is a lack of confidence that they would be approved for a loan. The beauty of being an investor is that we can be our own banks and create our own loan standards…we offer options to people who have few choices.

The market is ripe with opportunity for those who know how to capitalize on these changing trends. Have you learned how to take advantage of these ideas yet? Anyone can do this, you simply have to have the right education. There are still a handful of seats remaining for the REI Rainmaker Retreat, where Steve Zehala, Eddie Speed, Walter Wofford, and myself will be showing you how to cash in, right here in this market. The theme for the event is “Alternative Financing: Finding What Works Today”, and we’ll cover sandwich options, creative financing, notes, seller financing, lease options, wrap mortgages, and more. All the tools you need to prepare yourself for the alternative financing boom will be at your fingertips.

I like to reward action-takers. And by making it to the end of the article, I know you’re someone who cares about their education. Tickets for the event are selling for $297, and I’d like to extend you a $100 discount to encourage you on your path to knowledge. Visit http://www.reirainmaker.com and add a ticket to the shopping cart. Enter this code to get your $100 discount: RRFB197.

Don’t delay! As of this morning, two seats remained. TWO. The size of our room is limiting how many students we can accept, so act now.

Foreclosure freeze holds open door of opportunity

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Three major banks are freezing foreclosures, and in turn, are giving distressed homeowners extra time (often months) to remain in their homes and stall the process of being removed from their home.

However, this new development also is threatening to gridlock already fragile home sales in a fragile market.

REOs (“Real Estate Owned”) properties comprise nearly 40% in the Florida market, and actions taken by Bank of America, GMAC, and JP Morgan Chase could prove to be a major blow to this battle-hardened segment of the residential real estate market.

Right now, REOs are one of the few types of property that is selling. As this process gets slowed, the housing recovery will further be delayed. However, for investors, there is a small silver lining. The window of opportunity to continue picking up deals at historically low prices will be extended. For investors getting started, that means more time to learn the ropes. And for experienced investors, it’s simply more time to do what they already know is working.

As reports of foreclosure sales that are being stopped in their tracks before closing, buyers are being shut out as the banks try to resolve issues brought on by “robo-signers” and unverified paperwork.

Many banks have put the brakes on foreclosure proceedings after it was discovered that personnel had been signing thousands of legal documents monthly without verifying case details. These documents contained critical details to each property, such as the amount owed and owner of record. The fallout from this discovery has opened the floodgates, with people nationwide asking if the paperwork is tainted by forgery and fraud.

There is no definitive consensus on when this issue will be cleared up. As it plays out, a slowdown in the bargain basement prices from bank-owned properties will further depress existing home sales. And so one of the hottest techniques in real estate investing now runs the risk of going cold.

So, what’s the best way to proceed in the face of the unknown? Educate yourself. This fiasco sheds light on why it’s so important to stay up-to-date on industry issues. Things can change at any time, and the successful investor is always prepared to change directions to move with market conditions.

This is why I emphasize “transaction engineering”. Once you have the tools and confidence to work directly with homeowners and craft creative solutions, you hold the key to your own destiny. When the banks falter, you can keep going. When the market changes, you can be excited to take advantage of new opportunities. Most importantly, you get the staying power to remain in the business and build a portfolio for the long-term.

Are you prepared for anything the market can throw at you? If not, take a step in the right direction and learn how to successfully invest without bank interference by “becoming your own bank!”. On October 23-24, I’m hosting the REI Rainmaker Retreat, an event focusing on alternative financing where you can learn how to succeed in a troubled economy. You’ll learn how to leverage creative financing, notes, seller financing, subject-to, and more.

The window of opportunity for great deals has been extended, but it won’t last forever. It’s time to take control of your future, and I hope you’ll join us.

When there’s blood in the water…smell opportunity!

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The latest mess in the mortgage, foreclosure and banking industries is the fact that title insurers are backing away from foreclosed properties. One of my title companies shot me an email about the fact that one of their closings was stopped in mid-stream when the underwriter called to pull the plug on a JP Morgan/Chase REO transaction. So far the list includes some major players including GMAC, JP Morgan/Chase and Bank of America.

It seems that a number of major lenders may have failed to follow proper procedure in their foreclosure process and as a result the entire industry may fall under review. This is impacting pending foreclosures as well as transactions where properties have already been taken back and resold as REOs. You can read more here.

It is exactly situations like this that make Transaction Engineers salivate, make their blood race just a little faster. Chaos creates opportunity! We don’t rely on any one strategy or investing technique. When a market changes (and boy, is this one going to change) we can change with it! Options, leases and other means of control without ownership don’t require new title policies. They don’t require us to get involved with banks and their rules and restrictions…or be tainted by their poor business practices.

As real estate entrepreneurs and transaction engineers using our intellectual capital, our creativity and knowledge, we are prepared to build our own economy. Creating profitable transactions one deal at a time…that’s what we do. You can do it too!

I will be covering how to adapt in this market at the REI Rainmaker Retreat on October 23 & 24 at the Celebration Ramada Resort in Kissimmee, Florida. Learn more at the REI Rainmaker Retreat.

This may be the best opportunity you’ll find to change the course of your financial future this year. Join me and my friends Eddie Speed, Walter Wofford and Steve Zehala as we give you two full days of creative investing content. This is where you’ll learn the tools, tips, and secrets of alternative financing.

The banks and the government are changing the game. Are you committed to keeping up on the trends and changing with it? Five years after this event you’ll be saying one of two things about your decision to attend, “I wish I had” or “I’m glad I did!”

I hope to see you there!

How to beat the banks at their own game

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When the banks won’t lend, why not beat them at their own game and lend from yourself? Or better yet, coordinate deals where you bring together private lenders with underperforming investments, and pair them with below-market real estate properties? The playing field has changed my friends, and for those who know how to take advantage of it, fortunes will be made!

Most people you meet are sick and tired of the rollercoaster ride the stock market has taken them on. And, many people are also wary of real estate with its plummeting values. However, nearly everyone understands the value of a ‘hard asset’ like real estate, if it’s explained to them correctly. The next time you’re talking to a potential private lender, ask them “How would you like a return OF your money as well as a return ON your money?” Most stock brokers never ask that question!

Nearly 97% of all IRA investments are in traditional stock and mutual fund accounts. The rest of this article is for the other 3% who want better control of their financial destiny, leveraging self-directed IRAs and creative finance to build their retirement portfolio.

There are three primary models for self-directed IRA investing:

  • Assignment of Contract to Purchase Real Estate
  • IRA Lending
  • Purchasing Long-Term Real Estate to Hold

Model 1: Assignment of Contract to Purchase Real Estate
This is the simplest form of investing: You find something that someone else would like to purchase (a house, condo, duplex, building, etc.), and place a Contract to Purchase on it, naming your IRA as the buyer with the right to assign the contract before closing. Basically, you’re finding something to buy wholesale, and selling it at retail! Any profit you make will be tax free forever if it is a Roth IRA, and tax deferred if it is a Traditional IRA (or a plan taxed like a Traditional IRA).  You can quickly build up investment capital with this method.

Model 2: IRA Lending
You can keep your IRA money working all the time at a predetermined interest rate with this technique. You loan trustworthy individuals with your IRA funds which is secured by real estate at a safe loan-to-value, earning a competitive interest rate.

Model 3: Purchasing Long-Term Real Estate to Hold
Most people aren’t aware that their IRA can borrow money to purchase real estate. This means you can allow your IRA to enjoy the same leverage as you (the IRA owner) might have. There is no limit to the number of houses your IRA can own.

These three models just scratch the surface, and as you can imagine, there’s much to learn to employ each strategy successfully. My goal is to get your wheels spinning so you can begin to see the possibilities of what is available once you know what to look for.

Combining creative financing and IRA investing provides an unbeatable strategy for today’s liquidity crisis . . . and it can be successfully used in all areas of the country. Walter Wofford will be teaching these topics and more on October 23-24 at the REI Rainmaker Retreat.

He has been successfully investing in residential real estate in the Jackson, Mississippi area. In his 29-year investing career, he has bought and sold over 1,000 houses and renovated 200 houses, upgrading whole neighborhoods at a time. He is a real-life real estate investor who works every day in the business and teaches basic and advanced IRA education involving real estate, notes, options and wraps throughout the country. Walter combines real estate knowledge with practical experience, and mixes it with a sense of humor that will keep you glued to his every word. And, he’s a hoot to listen to…come prepared to be taught AND entertained! It’s a rare case where you can have your cake and eat it too.