Do You Feel SAFE Now? The Fair Mortgage Act Not So Fair For Owner Financing

Well, those regulators should feel proud of themselves… do you think they just have to make it look like they’re justifying a paycheck or something?

Perhaps there is some good that will come out of the SAFE Mortgage Licensing Act, but the inclusion of owner financing in an effort to clean up all the hooyah that the big banking systems and Wall street created themselves is probably one of the most harmful attacks on the real estate industry I’ve seen.

All you buyers out there who can’t get a loan? Your government just made it a whole helluva lot harder for a seller to offer you financing so you can enjoy home ownership. Nice.

[Agents… you just lost out on some hard-won commissions. There are many agents who have businesses largely involved in dealing with owner financing. Call and thank NAR for helping you out. As far as I know, they did nothing to remove owner financing from the legislation… are there heavy mortgage interests whispering in their pocketbooks, or is there something else I don’t know?]

According to the regulation, if you’re an investor, you can’t sell your own residential properties (1-4 units) and offer terms to take advantage of IRC 453 (installment sale) unless you get a mortgage originator’s license. You can’t even get around it by hiring one to negotiate it for you (although I hear that lobby efforts have rallied this concession in Texas).

Isn’t this a nice attack on personal property rights?

This supposedly applies to you even if you’re not in the business of buying lots of properties and turning them around with owner financing like a lot of the guys buying REOs and short sales by the dozens.

You may only own one duplex, or you may be liquidating your family’s estate upon the death of your parents…

If the property is not your primary residence, or you are not selling to a family member, you have to have a license to sell your property with owner financing (but I guess you could get your attorney to negotiate the terms for you, as long as he’s not being paid by a licensed mortgage originator… heck, here’s what we do: have the attorney pay the LMO or note professional to negotiate the terms of the loan to make sure the paper will sell for the highest possible price in the secondary market!!!).

I can’t imagine that this is enforceable or that it would stand up in court. Going back to this: SAFE Mortgage Licensing Act… there seems to be a distinction between those engaged in a ‘commercial context’ and those who aren’t.

So, based on the perceived intent, it’s probably fair to say that it might be ‘safe’ to sell your own portfolio of properties (as long as you did it legally and ethically – and if you did it intelligently, you could even sell the paper down the road!). Or go the extra mile and have a licensed mortgage originator process the paperwork and put together all the Truth in Lending and other standard docs for your buyer.

If you’re in the business of buying and carrying on your properties, seems like there’s no way around needing to get a license. Hogwash. Pure hogwash. And I didn’t even grow up on a farm.

My take…

When you’re selling a residential investment property that you own and you want or need to offer terms to get a fair price, and/or defer capital gains, here’s what you could do…

just do it, business as usual (some people in the business are so convinced that it’s unconstitutional to restrict this basic right, that they’re not giving the whole conversation a lot of thought or concern… they’re just ethically putting their deals together for their investors and the grateful home owners that come to them)
hire a Licensed Mortgage Originator to negotiate and produce all the typical disclosures for the buyer – complies with the intent, if not the letter of the law (if they got this to fly in Texas, then it’s likely a precedent that will be followed). Ideally, this LMO understands the secondary trust deed market so they know how to craft a note that can be sold for the highest possible price (I’m in the process of getting my license in CA… what are the rest of you doing out there?).
I like my attorney play… that was kind of an accidental thought, but I think it could be a good one
get yourself licensed
use a Title Holding (Land) Trust instead (all the benefits without the risks of carrying paper – you just don’t have a note to sell)
I think the main intent of the regulation is protect homeowners from being taken advantage of when they’re buying a home to live in for themselves and their families. Investors buying with owner financing would probably be considered to be savvy enough to take care of themselves, just my opinion.

So, if you want to play it super safe, just use the Title Holding Trust when selling residential properties on terms.

If you’re an agent, you can do all your regular listing and sales activities on residential properties offering owner financing as long as the seller is licensed – (yeah, right) – you just can’t be involved in negotiating the terms… (which might not be a bad thing because agents don’t tend to know about crafting healthy notes for the secondary market).

For me, there is so much work to be done with:

the sellers of high-end primary residences, and
commercial properties, and
small business owners,
that there’s no way we’re going to run out of business.

I’d love to hear your thoughts… drop me a comment down below!

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