How the New Proposed Mortgage Reform Act Impacts Seller Financing?

I just wanted to clarify the confusion on the status of the proposed Mortgage Reform and Anti-predatory Lending Act, part of HR 1728, which was passed by Congress on May 27, 2009. It was never passed by the Senate and has not been enacted into law yet. The newest version which incorporates the 200 pages of Title VII of the Mortgage Reform Act has been added to The Wall Street Reform and Consumer Protection Act, HR 4173, which was passed by Congress on December 11, 2009, and now goes to the Senate to be voted on.

The bill would significantly limit private owners and investors from selling property using an installment sale land contract on residential properties including homes, condominiums, mobile homes, and residential land lots, seller financing on second mortgages, wrap-around-mortgages and possibly lease options.    Here is an excerpt of the bill that defines who is not considered a mortgage originator and affects private sellers and investors:

“101(3)(e)

with respect to a residential mortgage loan, a person, estate, or trust that provides mortgage financing for the sale of 1 property in any 36-month period, provided that such loan meets the following criteria

(i) is fully amortizing;
(ii) is with respect to a sale for which the seller determines in good faith and documents that the buyer has a reasonable ability to repay the loan;
(iii) has a fixed rate or an adjustable rate that is adjustable after 5 or more years, subject to reasonable annual and lifetime limitations on interest rate increases; and
(iv) meets any other criteria the Federal banking agencies may prescribe”

So what this basically means is if you are not a mortgage originator, you cannot offer seller financing more than once every three years. Otherwise you must meet the same licensing, testing and other guidelines of a mortgage originator. One way to get around this is to get a mortgage brokers license. Another idea is to switch to commercial property investment. The government should not be interfering in private property owner sales.

This is terrible news for investors, homeowners and buyers. It’s going to hurt investors, buyers and sellers significantly. Buyers who don’t qualify for traditional financing won’t be able to achieve the American dream of home ownership. With traditional mortgage guidelines and tight money, this is a recipe for disaster for the small business investor, sellers and buyers.

Yes everyone agrees that mortgage reform is necessary. That is why it makes absolutely no sense to include individual property owners and small investors under these regulations. With the down real estate market and economy right now, this proposed law will only hurt the people that it is trying to protect.

We all know how important seller financing is to our business. Think about all the buyers and sellers that investors are helping now with installment sales and/or seller financing. There are so many sellers facing foreclosure that won’t be able to get out of their desperate situations and buyers with less than perfect credit that cannot qualify for a conventional or FHA loan who won’t be able to buy a home.   Other mortgage law protections are available to the individual buyer and seller that protect them. It is completely unnecessary to get rid of the owner financing alternative.

If you want to do something about this now, please write to your Senator and ask them not to vote for this bill. Owner financing did not cause the current financial mess or have a role in sub-prime mortgages.  It was big banks and Wall Street. Yes they should be accountable, but not the little guy.  Owner financing should exempted from the HR 4173 Act.