Denise L. Evans' Real Estate Advice
Alarmist Emails Regarding Seller Financing
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I’ve been seeing some emails about the Federal Reserve killing off seller financing through changes to the Dodd Frank Act. I don’t think the sky is falling. Please let me know if I’m wrong, or you disagree.
The proposed change is the Truth in Lending Act. It would require borrowers to meet certain underwriting requirements and be considered “credit-worthy” before a mortgage loan could be extended to them. If the lender does not comply, the borrower could have three years to rescind—or “un-do”—the loan.
The emails say this law will apply to seller financed transactions, and will effectively destroy seller financing.
I admit, I might be wrong. BUT, according to my interpretation and that of many experts, Truth in Lending laws apply to people who finance six or more home mortgages during any twelve month period. Most of the financing sellers don’t fall into that category. Of the ones who do, they are truly in the business of extending credit, not just selling real estate. They should have to meet the same requirements as larger lenders, in my opinion.
HERE is a link to the Federal Reserve Board press release.
Truth in Lending applies when “the offering or extension of credit is done regularly.” 12 CFR Part 226.1(c)(ii)
A person “regularly extends credit” only if “it extended credit … more than 5 times for transactions secured by a dwelling … in the preceding calendar year.” [with different rules if you use a mortgage broker] 12 CFR Part 226.2(a)(17)(v)
I know what you are thinking. Really, I do! You’re thinking, “But, the SAFE Act requires me to use a licensed mortgage originator if I do seller financing for anything except my personal residence. So, does that take me out of the “more than 5 times” requirement for Truth in Lending?”
I have two answers for you:
- Right now, Alabama has a temporary rule that allows you to do up to five seller financed transactions a year without needing a mortgage loan originator’s license or hiring someone who does;
- A licensed mortgage loan originator for purposes of the SAFE Act is not the same thing as a mortgage broker under Truth in Lending.
I think you don’t have anything to worry about.
Tags: dodd-frank, seller financing, Truth in Lending, underwriting
Who Is Entitled to Surplus Funds After Tax Sale?
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On June 30, 2011, the Alabama Supreme Court considered a case in which a mortgage lender and the property owner both claimed surplus funds after a tax sale. Thank you to Gary Boyd, with Alabama Tax Properties, for letting me know about this decision.
In a nutshell, Summers mortgaged his property. Ultimately, First Union National Bank of Florida ended up owning the note and the mortgage. Summers didn’t pay his real estate taxes, which amounted to $447. At the tax sale, the winning bid was $9,600. That resulted in an “excess” or “surplus” amount of $9,153.
Later, the bank redeemed. In some counties the redeeming party receives a credit for any surplus funds. In other counties, you must redeem and then apply for the surplus funds. In Lee County, where the tax sale occurred, First Union had to pay the full redemption amount of $17,380.69.
Afterwards, First Union and Summers both applied for the $9,153 of surplus funds. Lee County said that under the statute, only the “owner” was entitled to the surplus funds. As a result, it denied First Union’s claim and approved Summers’. First Union appealed to the Alabama Supreme Court.
First Union had two arguments:
- The result wasn’t fair, since First Union was the one who paid the redemption amount and ought to be the one to get the surplus funds; and
- Because of technicalities in Alabama mortgage law, when Summers gave a mortgage on his property he actually deeded it to his lender. Yes, the legal title would in effect “pop back” to Summers when the debt was paid in full, but in the meantime the lender was the “owner” and the one entitled to the surplus funds.
The Court said they weren’t going to get hung up on teeny technicalities about where title might be resting. What was important was, “What did the legislature intend when they passed the law about surplus funds?” After considering other statutes, and the overall picture of the tax sale laws, the court decided that “owner” meant the person in whose name the taxes were assessed, not the mortgage lender.
As a result, Summers was entitled to the surplus funds, not First Union. If you want to read the decision yourself, you can click HERE.
This still leaves open some other questions.
- What if Smith sells to Jones, but Jones forgets to assess the property in his name. Jones’ property is sold for unpaid taxes, with surplus funds. The property was assessed in Smith’s name. Is he entitled to the surplus funds, or is Jones? Actually, that tax sale is void because the notices didn’t go to the current owner, they went to Smith. So, this is a non-issue regarding surplus funds.
- What if the taxes are assessed in Smith’s name, but he doesn’t pay? His property is sold at the annual auction. Afterwards, Smith sells to Jones, or Smith gets foreclosed on by Jones Bank. Either Jones or Jones Bank will have to redeem if they want the real estate. Who gets the surplus money? We don’t know.
I know some of you out there have a tax sale investment strategy that targets making claims for surplus funds. This might change your strategy. Others of you sell real estate and hold the financing. You might want to take the Court’s suggestion and protect yourself by escrowing taxes and insurance, just like the big lenders.
Tags: alabama, excess funds, surplus funds, tax sale
New Mortgage Clauses Re: End of World; Death
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I belong to a listserv that covers real estate issues. There are some pretty lively discussions, but many of the topics are technical and dry. This morning there was some fun waiting in my “inbox” and I wanted to share it with you.
The writer said he found the following mortgage clauses in a PBI coursebook. I’m willing to be bet if we read our Bank of America or Regions Bank mortgages all the way to the end, we might find similar language:
“35. Death. Upon the death of any individual Borrower, the lien of this Instrument will extend to, and include, any cemetery plot, crypt, or other place of final interment of such deceased Borrower, together with any and all rents, issues, incomes and profits arising therefrom, and any and all renewals, replacements, accessions, improvements, and substitutions thereof and therefor, and a prior perfected security interest in and to any and all effects, articles of personal adornment, gold fillings and caps, and other things of value severed or capable of severance without material injury or desecration to the corpse of the deceased Borrower. The foregoing lien and security interest may be enforced and realized upon by any lawful procedure and will continue until the first to occur of the following: (i) full payment of the Indebtedness, or (ii) Lender is furnished with substitute collateral of equal or better class, quality, usefulness and value of the deceased Borrower.
36. End of the World. Upon the occurrence of the end of the world before full and final payment of the Indebtedness, at Lender’s option, the unpaid principal balance of the Indebtedness and all accrued and unpaid interest, fees, and prepayment or yield maintenance charges thereon shall become immediately due and payable in full, and the obligation to repay the same, with or without demand my be enforced by Lender by any available procedure. For such remedial purposes, Lender will be deemed aligned with the forces of light, and Borrower with the forces of darkness, regardless of the parties’ actual ultimate destinations, unless and until Lender elects otherwise in writing. Notwithstanding anything contained herein to the contrary, Borrower shall have a period not to exceed seven (7) days in which to effectuate a cure; provided however, that Borrower shall perform no servile work on either the first (1st) or seventh (7th) day of such period, as Borrower shall in good faith elect.”
Maybe you blog readers interested in Seller Financing issues might want to add these clauses to your mortgages 
No, don’t take me seriously!!
Seller Financing: Good News re S.A.F.E. Act
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The State of Alabama Banking Department has issued an Interim Rule that allows up to five (5) seller-financed transactions per twelve month period, exempt from the S.A.F.E. Act licensing requirements. This rule is in effect only until HUD issues final regulations on the subject. Please continue to follow this blog for any word from HUD and/or our Banking Department. To read the Interim Rule, click here.
Buy Property “Subject To” Mortgage
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Here’s the best-kept secret of the last thirty years: You CAN buy investment real estate with no money down and no credit. The secret comes from understanding WHY mortgages contain “due on sale” clauses and WHEN lenders won’t enforce them.
Before 1980 or so, it was common for people to sell their property, and the new owner would just take over the mortgage payments. The seller either received cash for their equity, or took back part of the financing with something called a “wrap around mortgage.” Everything was fine until the federal government de-regulated the maximum interest rates that could be paid on savings accounts and CDs.
Typically, savings and loans originated mortgages and kept them until paid in full. S&Ls received interest income from the loans, and they paid interest on savings accounts. If competition forced them to pay 12% interest on savings, they’d get killed if assumable mortgages continued to earn only 6%. To solve the problem, lenders added due on sale clauses to mortgages. With such a clause, lenders were able to demand payment in full whenever a property was sold. It became virtually impossible to buy a property “subject to” an existing mortgage.
Fast forward to today. In this environment, do lenders WANT to “call” a mortgage loan and force default, foreclosure, write-offs? Of course not. If a property owner could not make his or her payments, would you be a HERO if you bought the property and started making the payments? Of course you would!
The due on sale clause is not usually automatic. The lender has the right to call the note. They don’t have to, if they don’t want to.
You should target properties advertised as “possible short sale” or similar words. Sign a purchase contract that includes a contingency for lender forbearance from exercising the due on sale clause AND an agreement to tack past due payments onto the end of the mortgage term.
Explain to the seller that this will be “subject to” and not “assumption.” With an assumption, the lender typically releases the seller from liability on the promissory note, but adds the buyer. With “subject to,” the seller still remains liable on the note and the buyer’s name is not added. In other words, with a “subject to” sale, timely payments by the buyer show up on the seller’s credit report. Past due payments by the buyer will hurt the seller’s credit. If the buyer defaults, the foreclosure will show up on the seller’s credit report. If the lender sues for a deficiency after a foreclosure, it will sue the seller, not the buyer.
In a “subject to” transaction, the buyer is invisible as far as the loan is concerned. Selling property subject to a mortgage requires a great deal of faith and trust, or a great deal of desperation. I think many sellers today are desperate for a chance to preserve their credit, for an opportunity to avoid the humiliation of foreclosure, and for freedom from lender’s collection calls. I think many lenders are desperate to keep performing loans on their books but can’t allow true assumptions because of outdated regulations. It is the perfect time to invest with no money down and no credit.
One last piece of advice: Don’t try to hide this from the lender. Be up front and honest. You both want the same thing: a performing loan. Good luck, and good investing!
Seller Financing: More From Alabama Banking Department
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Alabama Banking Department reaching out to industry trade groups to see if there can be some latitude on the “seller financing” issue. Stay tuned for developments. (Click on title to read entire article.)
Seller Financing: Alabama Banking Department Speaks Out
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Alabama Banking Department says ALL seller financing of a “dwelling” requires a mortgage loan originator’s license EXCEPT when the seller’s personal residence is the property being sold. (Click title to read entire article.)
Tags: alabama, banking, loan, mortgage, orginator, seller financed, seller financing
Seller Financing and Mortgage Loan Originators License: Part II
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I’ve requested clarification from the Alabama Banking Department regarding seller financing and the need for a mortgage loan originator’s license.
Tags: alabama, mortgage, orginator, S.A.F.E, seller, seller financed, seller financing
Seller Financing and Truth in Lending Requirements
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Seller financing of a dwelling may need to meet the requirements of the Truth in Lending Act, in addition to the new mortgage loan originators license law.
Tags: loan originator, mortgage, rescission, seller financing, TILA, Truth in Lending
