HUD's Proposed Rule Could Kill Seller Financing (and your home's value!)
The Secure and Fair Enforcement Mortgage Licensing Act is about to have a huge negative impact on the value of your home, and I bet you have never even heard of it! That's right, the U.S. Department of Housing and Urban Development has put together a proposed rule, that if adopted, is going to cause significant damage to an already crippled housing market, but there is time for you to change it!
The new rule has been proposed in the enforcement of the Secure and Fair Enforcement Mortgage Licensing Act. The SAFE Act is actually a good thing, and was passed in July of 2008 requiring lenders to get licensed and be accountable (gross over-simplification, download SAFE Act here for details). So how does a good law go bad ...?
The proposed new rule helps identify parties who are affected by the SAFE Act and those who are not. For the most part, the rule is fairly benign. The rule even goes to the extent to point out that homeowners who hold "seller financing" (also known as a purchase money mortgage or a second mortgage) are not subject to the licensing requirements of the SAFE Act. The rule states:
“The commercial context implied by the taking of an ‘‘application’’ is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence. The frequency with which a particular seller provides financing is so limited that HUD’s view is that Congress did not intend to require such sellers to obtain loan originator licenses. Accordingly, this rule would provide in § 3400.103(e)(5) that such individuals are not subject to State licensing requirements.” (click here to download the entire Proposed Rule)
Unfortunately, this does not address those property owners who are selling a home that is not their primary residence. Imagine somebody who has moved to a new city and purchased a home, thinking their old home would sell in a short period of time. Since it no longer is their residence, would they have to obtain a license to hold some financing in order to get it sold?
You might not think this issue affects you if you have no plans to move, but think again! Anything that makes it harder to sell a home, brings down property values in a buyers' market. Some experts suggest that 30% of the home sales over the next year will require at least a portion of seller assisted financing, will this new rule change take this part of the market away?
What would happen if 30% of the buyers were forced to leave the market? We already have a glut of homes and too few buyers, I would venture to guess that home values could plummet. We have to speak up and make sure our law makers know that we want this proposed rule on the Secure and Fair Enforcement Mortgage Licensing Act to be amended to include exemptions for all seller financing!
Fortunately, they are asking for us to do just that. You can click on this link to provide feedback to HUD about this proposed rule. Tell HUD to amend the rule to exempt all homeowners who are doing seller financing at any level. Let's keep as many buyers in this depressed real estate market!
Your Opportunity To Be Heard In Washington, DC
I've already made my comment known to HUD. I followed the link to the HUD feedback portal and you can too! After you do, the site will give you a confirmation code so that you can see your comment. Post your confirmation code in the comments below and let us know our voices in Tallahassee are being heard in Washington! Here is what I wrote:
I own a residential real estate company in the State of Florida and have been involved in thousands of home sales over the past 20 years.
There is a lot of concern in my industry about the interpretation of this proposed rule regarding seller financing on investment properties. The proposal clearly states that individuals selling their own residence would not be subject to this, but it does not address the many situations where a seller needs this to procure a buyer that needs some help. The people who will harmed the most by this proposal do not even know that this is happening. I am hoping to raise awareness and to stimulate more comments on your site through an article on my real estate blog (http://www.manausa.com).
Our market is down over 60% in the past three years, and it would have been far worse if we make it "harder" to sell a home. It seems like the intent of this proposal is sound, but I suspect no consideration has been invested in the resulting affect on a market that is trying to enter a recovery period.
Bear in mind, banks have more stringent lending requirements now, so the need for owner assisted financing will be at an all-time high. The shadow inventory of foreclosed and withheld homes is just starting to enter the market, and experts predict owner financing at some level could occur in over 30% of the sales over the next few years.
Seller assisted financing adds buyers to the market. Buyers with good credit, but no cash, use this creative technique to buy homes. Are we going to limit home sales to just individuals who have a lot of cash? That is what this proposal might do.
Please accept this plea, from a seasoned real estate broker, to amend the proposal to provide an exemption for all owner financing. The market does not need another hurdle right now.
Thanks you for your consideration.
Comment Tracking Number: 80aa6b6d
So, did you let your voice be heard? You have until March 5, 2010 to leave your comment, but don't wait until the very end, do it today!
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Discussion
80aa7661.
I am always impressed with your sound analysis of the real estate market and current events, including legislation and rulemaking, which affect the market. You are vigilant, and that benefits all the readers of your blog. I appreciate your concern with this proposed rule and write only to make a couple of points of clarification. First, your quote regarding the seller financing comes from the agency's summary of the rule. The actual rule language that would pertain to the licensure exemption for family-member and seller financing is, "(4) An individual who only offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member of the individual; (5) Any individual who only offers or negotiates terms of a residential mortgage loan secured by a dwelling that served as the individual’s residence." The rule language does not require that the dwelling was the primary residence, nor does it require that the dwelling be the current residence of the individual negotiating financing. In addition, the use of the word "served" indicates that the residence is no longer serving as the financer's residence. So, it appears that your first scenario, a person has already purchased a new home without first selling the previous residence, is contemplated in the rule language. Second, I applaud your request of the agency to further clarify its intent to avoid the unintended consequences of requiring licensure for the sale of investment properties that may not have ever been the financer's residence, i.e. rental properties. However, the rule agency may intend to require licensure from such people. Imagine the individual, a developer perhaps, who has a high volume of rental properties. If the rule is written to exempt all sellers of personally owned investment property, those sellers, who are quite possibly as powerful as a bank or other traditional lender, will be exempted. Providing a broad exemption like that would, in my opinion, be contrary to the purpose of the statute, which I see as protecting the lay-person consumer from the savvy mortgage lender. If you want the agency to take your comment seriously, dial back on the rhetoric, acknowledge all possibilities, and give the agency some ideas (actual proposed rule language) about how to accommodate those owner-financing situations that should not require licensure.
Thanks Patty. The clarification makes sound sense.
As far as "Providing a broad exemption like that would, in my opinion, be contrary to the purpose of the statute, which I see as protecting the lay-person consumer from the savvy mortgage lender," I'm not sure I would know how to draw the line between somebody who owns a lot of rental properties that she/he is trying to sell and a "developer."
I personally would rather the clarification made based upon the organizational intent. Selling properties versus lending money.
Thanks Kevin!
There may be no way to clarify based on organizational intent. If a property owner is selling investment properties utilizing seller financing on a large scale, that person is both selling properties and lending money. If the agency had wanted to exempt those people, it would have used the word "property" instead of "residence." Perhaps the only acceptable change is to substitute the word property for residence, but place a limit on the number of properties that can be sold (or financed) in a given time period before the need for licensure would be triggered.
Patty, that sounds like a great solution. Any party financing property they own will need to be licensed if they are writing more than "x" loans per year. I like "x=10"
I added my comments. Thanks for making it easy.
Comment Tracking Number: 80aaa18b
Meh
Not too worried about this one; this is designed to catch short sellers and those looking to game the housing market. Considering what just went down in the last few years this is necessary and unfortunate to those caught in this scenario by mistake. But I woldn't imagine it affects too many people beside the a fore mentioned snakes and crooks that have to ruin it for honest home owners.
As for the value of homes going down; hate to break this to you but homes prices are still artificially inflated. Anyone who bought a home in the last 10 years should not expect their home values to go up any time soon. As it stands, if you bought a home for 500k that was selling for 250k before the bubble you made a bad investment.
Thanks Darin. I believe every little bit could help.
Thanks for stopping by Hurricane. I wish you would have read the entire article, because I'm not sure the "design" matters in court, but rather what it allows to be done.
Joe: If this passes, would this apply to private investors who invest in 2nd mortgages for qualified buyers and good properties?
Great question Anna. My read on it would be "no" if the investor is buying and selling existing notes, but "yes" if the investor is creating new notes. I'm pretty sure the intent of the rule was not to discourage this type of "market assistance," but that could very well be the result.
Raz, I would think it all depends on how the transaction is structured. If there is equity (which most people using contract for deed these days don't have), and if that equity is financed, this bill would come into play.
This is so sad that it's almost funny. I privately secured note from the seller should not require that the seller obtain a mortgage license. What happened to all the standard exemptions? Are banks and attorneys the only priviledged class?
What about this. A land developer subdivides land, and sells lots with seller financing. The s/d is restricted to residences. The developer has nothing to do with the house that the buyer may want to build, or a mobile home the buyer may put on the lot. Does that fall within the "residence to be constructed"? If covered, can the developer qualify and get licensed as mortgage lender?
I'm not sure Ralph, but scenarios like you mention are why I was calling for action from our readers when I wrote this. In my opinion, in your scenario, there is no way the developer should be deemed a mortgage lender.
But the real question is ... did you let your voice be heard?
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