June 01, 2009
Do You Hear That Whooshing Sound?
HR 1728 is legislation written to insure all the egregious predatory lending practices of the mid-2000's will never happen again. However, shortsightedness on its sponsors' behalf would make ordinary citizens (maybe even YOU) offenders. Two weeks ago, I attempted to make some inroads with my Senator's office to find someone that could speak intelligibly (and objectively) about the bill and its ramifications. To date, I have had zero success. (and we wonder why politicians get such a bad rap)
Clearly, HR 1728 focuses on abusive lending practices of the past few years and attempts to eradicate them by addressing the root causes of the subprime meltdown. However, the right to privately finance the sale of a property is being lumped in with the underhanded lending practices of yesteryear, and that causes me great concern.
I have bought, brokered, and sold hundreds of millions of dollars in seller-financed notes in my career. The secondary market for such notes consists mostly of niche buyers that buy, hold, and service the notes themselves. The sellers of these notes understand installment contracts and the fact some people need financing assistance that traditional lenders (banks, mortgage companies) simply aren't willing to provide.
The way I understand the amendment to the Truth In Lending Act (HR 1728), property owners would be limited to seller-financing only one property every three years. A real estate investor who wanted to sell a couple rental properties to his tenants and carry back the notes, then, would be required to be a licensed mortgage originator according to HR 1728. One has to wonder why the government would require the owner of a property be a 'licensed mortgage originator' if he is holding the financing (and therby absorbing all the risk of default) of his buyer? Who is the government protecting in this situation? Moreover, if a note investor buys the notes at a future date, the files must meet all internal underwriting requirements before any funds are advanced to the seller. Again, who is the government trying to protect here?
I'm not naive enough to think the sponsors of this bill would ever put enough thought into it to cover everyone that will be affected by its passage. Barney Frank himself acknowledged the legislation was "vague." The fact is, we could effectively be making offenders of the very people who are trying to help prospective borrowers buy a home, yet can't qualify for traditional financing. They can't qualify for this financing because most every bank and mortgage company in the county has slammed their vaults shut to all but the lowest risk (read: 720+ credit score & a hefty down payment) borrowers.
I have witnessed firsthand the benefits of seller-financing for 16 years. I have reached out to several entities with vested interests in this bill (National Association of Realtors, Congressman Brad Miller's (the bill's sponsor) office, etc.), but cannot even manage a return phone call. In fact, Miller states on his website that he will only respond to constituents in his district. Amazing how he can propose legislation that will affect all of us but won't answer to anyone but the people that voted him in.
I have asked my own Senator to vote against this bill as it is written - its ambiguity makes violators out of everyday Americans who may have no other method to sell their properties than to finance them themselves.
A perfect example involves two land lots my aunt owns in Montana. No bank will lend on raw land, so unless she can find a cash buyer (highly unlikely) how will she ever sell her properties? Under this bill, she can't even offer seller financing without becoming a licensed mortgage originator in Montana, which requires a $25,000 surety bond, an physical office in the state, a minimum of three years as a loan originator, continuing education requirements, etc. Other states are even more onerous in their requirements. Is this really what this bill is trying to accomplish? Restricting the sales of properties in an already depressed real estate market?
If you hold a note or are possibly planning to sell a property on seller financing at some point in the future, this bill will limit your rights to dispose of your property (and/or your note) as you see fit. I urge you to contact your local senator and voice your opposition. But first, read the legislation in its entirety. (Google HR 1728 for a list of sites with the verbiage) Yes, it will take some time (it's 216 pages, after all), but you need to know how all this poorly thought-out legislation will affect you in the long run.
Truth be told, I'm OK with much of the language of this bill. If it cracks down on the unethical and the undisciplined, more power to it. Just don't pretend it's a bill for the consumer when you are taking away the rights of a consumer to sell their property and another consumer to buy it. Call your Senator and let him/her know you're paying attention to how they vote, and will remember it when re-election time comes around.
Make it a great week.
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