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Dodd-Frankenstein: State Outlaws Seller Installment Sales w/o A Broker

The state of Hawaii now prohibits homeowners from using “seller financing” without a licensed broker.

According to a Hawaii real estate attorney, “The statute now requires any “seller financed” transaction to be handled by a licensed or registered broker, even in a family situation. I hear the registration process is too involved for most one-time sellers.

Our Government Affairs Committee has begun to look at options to get clarification and see if legislation is needed during the next session to provide appropriate exemptions.

Actually, the prior law allowed seller financing by exemption, but the new law removed the exemption. On that basis, the Hawaii State Bar has concluded that it now prohibits unregistered seller financing.”

This is a commentary by the Political Affairs Director of the Maui Realtors Association: December 03, 2014:

“This one appeared out of the blue. Or out of the telephone. About two weeks ago a long-time Maui agent called to complain that he was being told that the State Legislature wiped out the owner’s right to finance the purchase of the owner’s property.

“That was news to me, HAR (the Hawaii Association of Realtors), our attorney and a variety of other people one would expect to know these types of things.

“The agent said he was working on a deal involving family-held property in Olinda and the owner was offering financing. The buyer liked the proposal but wanted to ask her attorney. And that attorney informed the buyer that the State Legislature removed that owner’s right in its last session and that action went into effect on July 1.

“How can that happen without responsible persons knowing about it, you might ask? The answer is: easy, because our state legislative process resembles an organized train wreck. With 3,000 bills being reviewed in 60 days, seemingly innocuous measures that are depicted as “housekeeping” by the proposing agency, get a lot less review than more notorious measures. There are always goofs. Given the amount of material blasting through the State Capitol in such a short time, it’s just a wonder that there are not a lot more goofs.

“This particular action – removing the exemption in the state’s mortgage loan origination act (aka Hawaii SAFE Act or HRS 454) that allows owners to finance the sale of their own homes or for family members to finance the sale of property within the family – was a one-liner in an eight-page bill that dealt with a variety of adjustments to the SAFE Act. The SAFE Act was written to tighten up Hawaii’s mortgage origination laws and licensing requirements after the 2008 mortgage meltdown. It is a consumer protection measure and the decision to eliminate the owner’s right to finance fell into that category.

“Mortgage loans involved substantial assets and should be handled by qualified licensees,” DCCA said in its testimony on the bill. That one line is the sum total of the discussion on removing the owner’s right to finance that could be found in the testimony and committee reports on Senate Bill 2817, later to become Act 198-14.

“While not much of an argument, it did include a fundamental flaw in logic. Because the statement was not specific, there is no way to tell who the department was referring to by “qualified licensees.” Was the department referring to licensed mortgage originators or were they referring to licensed Realtors and attorneys? The bill was mainly about mortgage originators. But the DCCA bill did not request that the Legislature remove other existing exemptions for Realtors and attorneys if they are working on behalf of their clients who want to finance.

“It appears from later statements, that the Department wanted to eliminate the owner’s right in total and force them to take the mortgage originator licensing test if they want to make loans. But they apparently inadvertently left in place the other Realtor and attorney exemptions. And those exemptions imply that the right of owners to finance still exists as long as they are working with a Realtor or an attorney.

“Why did DCCA believe this action was necessary? Apparently because in the few years since the Hawaii SAFE Act when into effect, there had been a handful of owner-financed deals that had blown up. That was a handful too many for DCCA. The state was looking to update the SAFE Act anyway, making timely adjustments, and decided to include this minor adjustment.

“While HAR missed this one (that includes me), this action flew so far under the radar that even Senate Judiciary Committee Chairman Gil Keith-Agaran did not know about it. For some reason this measure did not go through his committee, so Gil never saw the bill’s details. When he figured out what had happened, the Senator spoke to DCCA to get their side of the story and then wrote a letter to the State Attorney General to get an official opinion: no owner financing is allowed or only with a Realtor or an attorney? He hopes to have an answer from the Attorney General by the end of the month. If not, then he will start writing a bill to amend HRS 454.

“HAR is also studying its options and getting ready to use its resources to get this fixed.

“So the question…is: what sort of amendment do we want? If the owners’ right remains, as long as they get an attorney to bless the deal, maybe an amendment is not necessary. Or do we want to go back to where the law was last year with called-out exemptions for owners selling their own homes or family members financing family members? But now that the door is open for this discussion, why not broaden the law so that an owner can finance the sale of any kind of property they own as long as they work with an attorney? Whatever the conclusion is, the resulting law definitely needs to clear up the current conflict.”

There is one organization fighting for the right of property owners to sell with installment sales (“seller financing”): www.SaveSellerFinancing.org Please visit the website, read the issues, sign the petition and support them by donating generously.

THE Cash Flow Event of the Year:  The Paper Source Note Symposium April 30 – May 2, 2015.  Learning, networking…Vegas!
Info and Super early-bird registration:  

http://papersourceseminars.com/paper-source-note-symposium-cash-flow-profits-2015/

US Supreme Court Rules Against Mortgage Originators

United-States-Supreme-Court

WASHINGTON (Reuters) – The U.S. Supreme Court on Tuesday (1/13/15) ruled in favor of homeowners seeking to back out of mortgages when lenders are accused of failing to follow the federal “truth in lending” law.

On a 9-0 vote, the court handed a win to an Eagan, Minnesota couple, Larry and Cheryle Jesinoski, over the $611,000 loan they obtained in 2007 from Countrywide Home Loans Inc, now part of Bank of America Corp.

On the technical question before the justices, the court said homeowners need only write a letter to the lender, as the Jesinoskis did, and do not need to file a lawsuit in order to benefit from a provision of a federal law known as the Truth in Lending Act.

The law allows consumers to rescind a mortgage for up to three years after it was made if the lender does not notify them of various details about the loan including finance charges and interest rates. The Jesinoskis filed their notice right before the end of the three-year period and filed a lawsuit a year later after the bank said it was disputing the claim.

The language of the law “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind,” Justice Antonin Scalia wrote on behalf of the court.

The provision is typically used by homeowners who are struggling to pay their mortgages. Lawyers for consumers say mortgage companies routinely violated the law in the years prior to the 2008 financial crisis. Lenders contend that notice is not enough if the bank in question disputes the homeowners’ claim.

Appeals courts had been split over what homeowners have to do to trigger this rescission process. The Jesinoskis appealed a lower-court decision that favored Countrywide. The Supreme Court reversed that lower-court ruling.

The case is Jesinoski v. Countrywide, U.S. Supreme Court, No. 13-684

Note:  Those who sell property via installment sale notes (“seller financing”) are generally exempt from the Truth in Lending law disclosure requirements.

THE Cash Flow Event of the Year:  The Paper Source Note Symposium April 30 – May 2, 2015.  Learning, networking…Vegas!
Info and Super early-bird registration:  

http://papersourceseminars.com/paper-source-note-symposium-cash-flow-profits-2015/

Don’t Buy Notes Or Lend On Nevada HOA Properties

 

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The Nevada Supreme Court has ruled that a note “super priority lien” held by a homeowners association can extinguish a first deed of trust on a property.

The Sept. 18 ruling is a victory for a group of real estate investors called SFR Investments Pool 1, which foreclosed on such a super priority note lien held by the Southern Highlands Community Association on a foreclosed home for $6,000. The investors argued in the case that the foreclosure wiped out a note debt of $885,000 on the property, which was held by U.S. Bank as a first deed of trust.

The court agreed with SFR Investments.

“With limited exceptions, this lien is prior to all other liens and encumbrances on the homeowner’s property, even a first deed of trust and note recorded before the dues became delinquent,” the majority said.

The holding by the court that the lien is a “true” super priority lien was supported by the full court.

In its brief filed with the Nevada Supreme Court, attorneys for the bank argued that if a lender cannot adequately protect its substantial residential loan investment, the lender will either cease lending in Nevada, or charge higher interest rates to protect itself against greater uncertainty of the borrower’s repayment of the loan.

“In addition, if the court finds SFR’s position persuasive, it would reward speculators purchasing valuable real estate properties for pennies on the dollar. Our state’s housing sector can ill-afford another speculator-generated shock,” the bank said in its brief.

Jonathan Friedrich, a member of the board of the Commission for Common-Interest Communities and Condominium Hotels, called the ruling a potential disaster for the residential real estate business in Southern Nevada.

“If a bank cannot protect its investment, then what bank or lending institution would ever lend money in this state?” he said. “It will hurt home builders and resales and be disastrous to our economy.”

The court majority wrote that U.S. Bank’s objection that it is unfair to allow a relatively nominal lien stemming from nine months of HOA dues to extinguish a first deed of trust overlooks the fact that the bank could have paid off the lien to avert the loss.

“The inequity U.S. Bank decries is thus of its own making … ” the majority said.

Subscribers to THE PAPER SOURCE JOURNAL knew about this from reading the October, 2014 issue.  If you’re not a subscriber, you’re not keeping up with the latest news of the note industry.  See 
http://papersourceonline.com/paper-source-journal/infosubscribe/ for information.  A $79.00 subscription includes access to THE PAPER SOURCE REGISTRY OF NOTE INVESTORS: 
http://papersourceonline.com/registry-of-investors/note-investor-registry/

 

Meet A Note Holder’s “Impossible” Expectations With The Reverse Partial

How many times have you lost the opportunity to purchase a note because the note seller needed or wanted more money than the quality of the note justified?

reversebulbIf the note seller wants an amount of cash equal to 75% LTV, but the property and/or purchaser supports only a 60% LTV, the deal will probably not be made.

This might be just one of the cases where a Reverse Partial can be structured that will give the note seller a substantial amount of cash at closing and the balance over the next year or so.

Suppose you are negotiating with a seller who holds a note secured by a single family residence in a stable market. The home sold 18 months ago for $75,000 with $5,000 down, 10% interest, and $636.09 monthly P & I. The current balance is $68,980.03, and the note holder tells you he will not take a penny less than $55,000.00. The 18  month pay record is good; however, you discover that the purchaser has poor credit.

You then discuss the note with your investor (if you are brokering), and he or she tells you that the most they can pay is $45,000.00 because of the poor credit risk. You talk about a  partial with your note seller and he is not interested. He wants $55,000.00 and will not budge.

How about trying this approach? Ask your note seller if he will accept $43,551.00 cash now and then receive the next 18 months of the $636.09 monthly payments. The 18 payments the note seller receives amount to $11,449.62 and, when added to the buy price, total $55,000.62 to the note seller! The note seller assumes the risk that the payments will be made over the next 18 months, but he is comfortable because of the previous 18 month pay record. The following is a summary of the transaction:

SALE PRICE $75,000

DOWN PAYMENT $5,000

INTEREST RATE 10%

PAYMENT $636.09

PAYMENTS MADE 18

PAYMENTS REMAINING 282

CURRENT BALANCE $68,980.03

CASH TO SELLER AT CLOSING $43,551.00
+ 18 PAYMENTS TO SELLER 11,449.62
TOTAL CASH TO SELLER $55,000.62

NOTE BROKER’S COMMISSION:

INVESTOR’S BUY PRICE $45,000.00

CASH TO NOTE SELLER AT CLOSING ($43,551.00)

NET TO NOTE BROKER $1,449.00

A Reverse Partial can be a particularly useful tool when negotiating the purchase of a note secured by commercial property. Mortgage financing is not readily available for commercial property and does not exist in some areas of the country. Thus many commercial real estate sales are put together using seller-financing.

Suppose that you are negotiating with a seller who holds a note on a well-located office/warehouse building and has a payor with good credit. The note holder sold the property 28 months ago for $400,000 with $75,000 down. The seller financed the $325,000 balance at 10% with monthly payments of $3,136.32. A balloon payment of $273,234.84 is due seven years from the sale date. The principal balance on the note is now $311,565.57. You call your investor and they tell you that they can only pay $190,720 for the whole note because a certain amount of the sale price was allocated to personal property.

You don’t even present an offer to your note seller because you know he is not about to take a discount in excess of $120,000, and he already told you to forget about a straight partial because he does not want to wait almost 5 years for the rest of his money.

How about offering him a Reverse Partial? Your investor says they will pay $133,170.00 now for the balloon payment that is due in 56 months. They will take a full assignment of the mortgage and pass through to the note seller the 56 payments up to the balloon. The payments total $175,633.

You tell the note seller that you will pay $126,500 for the balloon that is due almost 5 years down the road. The total payout to the note seller is $302,133, which doesn’t look too bad for a $311,565 note secured by commercial real estate. It may be one of the few offers he receives at any price. A significant amount of cash NOW, plus the luxury of continuing to receive large monthly payments, is a situation that should be attractive to many holders of commercial real estate mortgages.

The following is a summary of this example:

ORIGINAL SALE

SALE PRICE 28 MONTHS AGO $400,000.00

DOWN PAYMENT $75,000.00

ORIGINAL NOTE BALANCE $325,000.00

INTEREST RATE 10%

MONTHLY PAYMENT $3,136.32

BALLOON PAYMENT IN 84 MONTHS $273,234.84

TODAY

CURRENT BALANCE $311,565.57

PAYMENTS REMAINING BEFORE BALLOON 56

CASH TO SELLER FOR THE BALLOON $126,500.00

56 PAYMENTS TO SELLER $175,633.00

TOTAL CASH TO SELLER $302,133.00

NOTE BROKER’S COMMISSION:

INVESTOR’S BUY PRICE $133,170.00

CASH TO NOTE SELLER AT CLOSING ($126,500.00)

NET TO NOTE BROKER $6,670.00

An additional selling point for the above example is to show the vendor the total cash that will be received from the sale of the property:

DOWN PAYMENT $75,000.00
+ 84 PAYMENTS @ $3,136.32 $263,450.00
+ SALE OF BALLOON PAYMENT $126,500.00
TOTAL CASH RECEIVED $464,950.00

Even when the seller understands the time value of money (which many do not), the realization that he is receiving $64,950 more than the sales price may somewhat counteract the concerns associated with discounting.

The Reverse Partial is a creative way to purchase a note that might not otherwise be sold.

(This article was originally contributed by Metropolitan Mortgage & Securities Co., Inc.)

Learn much more about investing in and brokering cash flow notes and network with the best in the business at the annual Paper Source Note Symposium April 30-May 2 in Las Vegas!  Visit http://papersourceseminars.com or call 800-542-2270.  Take advantage of super early-bird registration going on right now.

The Power of Partials For Cash Flow Note Investors & Brokers

by Jeff Armstrong

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Most note holders initially ask for a full purchase. Many of them have
just discovered the fact that they have the ability to sell their note and have no idea that alternate purchase options are possible or are even available. As a result, many note investors and brokers only focus on full purchases the majority of the time and fall back on a partial purchase option only on inferior quality notes where ITV limitations are in order.

But in a tight and competitive market, as we are experiencing now, creativity and flexibility are a note broker’s best assets. I have always believed, and have the statistics for my business to prove it, that utilizing a variety of purchase options helps note brokers to better meet the needs of a wide array of note holders.

The Most Money Not Always Best
It may seem that in this tough economy getting the seller as much money as possible by utilizing a full purchase option is the best way to go, but it may not always be the best option. Offering only full purchase quotes is like having a toolbox that contains only a screwdriver. It’s terrific for tightening or loosening a screw but hard to use on a bolt.

Discovering a seller’s true needs and structuring a transaction specifically designed to meet those needs can mean the difference between success and failure.

Likewise, offering an alternative can sometimes help a note broker stand out from the crowd. 

One of the most common partial options is a Straight Partial (also known as a Front Partial). A straight partial is the purchase of the right to receive a number of payments amounting to less than the full remaining term of the note, most importantly, the NEXT number of payments. For example if the note is amortized for 30 years (360 months) we might buy the next 60 payments; not 60 payments at the end of the note or in the middle of the note but the next 60 payments.

Why Partials?
Partials are always a great tool to use when the note holder has an immediate cash requirement and only needs a specific amount of money to cover a specific situation or for a specific purpose; when the seller is reluctant to take the necessary discount on the full purchase option; or when the quality of the transaction limits investment exposure.

Partials can be much easier to sell to the note holder by emphasizing the combined amount of the pay price for the partial and the residual interest they may receive in the future. You can also stress the possibility of selling the remainder of the payments if additional cash is needed in the future. Finally, you can demonstrate how the specific partial option meets the specific cash need of the note holder.

For Example
Mrs. Walker wants to sell a note in order to help pay for a new car. However, she does not want to take a large discount. She is friendly with the payor and feels they are solid and the property is well maintained.

Her note looks like this: owner-occupied single family home valued about $90,000. The current balance of the note is $78,591.58; payments are $538.90 at 7% interest with 327 payments remaining.

We could structure a partial purchase of 120 payments of $538.90 at a 14% yield for $34,707. The amount purchased would be approximately $46,413 and the residual balance after the ten years of payments would be approximately $64,667.

She gets the money she needs now for her new car and retains the residual balance on the back end of the note for the future. Ms. Walker is happy; she got exactly what she needed to buy a new car.

The investor is happy with a 14% yield and an ITV of about 39%. If there had been a note broker involved, the broker might have offered her $32,207 and been able to make $2,500.

Don’t get stuck on only offering note holders a full purchase option. Successful note brokers and note buyers know how to offer partial purchase options to get more transactions to close.

Remember, success demands action! Keep on marketing, it’s going to work! TWITA!
(That’s What I’m Talking About!)

Jeff Armstrong of Armstrong Capital has been a note broker and investor specializing in the seller carryback note industry since 1991. For information on how he can help you with your note business, your note investments or to request a quote on a note you currently have visit www.armstrongcapital.com

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