The Fed’s Trying to Outlaw Seller Mortgages

By on July 18, 2011

From THE PAPER SOURCE JOURNAL, July, 2011:

The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!

If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.

Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.

The Fed is Soliciting Comments on the Proposal

The deadline to comment is FRIDAY, July 22.

Click here and scroll to the bottom of the page to submit your comments!

With your help, the Fed may at least decide that this does not apply to private transactions. Urge them to exempt seller installment sales from the rule.

Points to Make In Your Comments

  • Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
  • Homeowners are not bank officers or mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership.
  • Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
  • Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
  • This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
  • By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
  • The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
  • There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
  • It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.
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About Susan Lassiter-Lyons

Susan is the author of Mortgage Secrets for Real Estate Investors and founder of the award-winning real estate blog, TheInvestorInsights.com. A real estate investor since 1994, Susan has raised $26.2 million in private money and participated in more than 600 transactions as an investor, broker, lender, syndicator and advisor. Susan is a dedicated trainer and her training, seminars and coaching programs have transformed the lives and businesses of thousands of real estate investors worldwide.

3 Comments

  1. Rob Viglione

    July 19, 2011 at 8:25 am

    The Fed is grossly overstepping its bounds. We must not forget that the Federal Reserve is not a government organization, it is private!

    Interfering in the market for seller financing will just be another hit to demand; not necessarily a bad hit because it will target some of the less financially sound buyers, but that decision is best left to buyers and sellers freely interacting with each other.

  2. Caesar L.

    July 20, 2011 at 5:20 am

    Hi, Susan! At first reading this article/post, of course I was shocked to read that the Fed would be allowed to make such a gravely over-reaching recommendation to the Administration’s consumer protection agency. Of course, as you know, the Feds are so very cozy with the govt and have been for almost 100 years now, so it would be no surprise if the “recommendations” would find themselves in the final ruling. However, correct me if I am mistaken, but in actually reading the bulletin released by the Feds in April, I found that seller financing is specifically excluded from the proposed regulation and revision to Reg Z. Moreover, although the proposition would require creditors, originators and lenders to comply, seller-financiers are not considered to be originators of loans as defined in existing or proposed regulation.
    Here is the excerpt I am referring to:

    “Seller financing. In addition, the existing definition of “loan
    originator” in Sec. 226.36(a)(1) is consistent with the statutory
    definition of “mortgage originator” in that both EXCLUDE [emphasis added] persons and entities that provide seller financing for properties that they own.
    See TILA Section 103(cc)(2)(E); 15 U.S.C. 1602(cc)(2)(E). Under the
    definition of “loan originator” in Sec. 226.36(a)(1), these persons
    would be “creditors”–but they are not “creditors” that use table
    funding. As noted below, creditors that use table funding are “loan
    originators” under Sec. 226.36. However, all other “creditors” are
    not “loan originators.” See 75 FR 58509, 58510 (Sept. 24, 2010).” [end]

    Can you please confirm what I believe it says, and please clarify for all of us if we may be jumping the gun?
    Of course I am vehemently opposed to ANY law that would limit the RIGHT of a property owner to provide seller financing and restrict or do away with a MAJOR form of economic development and also a historical method of obtaining credit that would otherwise be too difficult or impossible to obtain for many, many would be home-owners and investors by conventional means.

    Thanks,
    Caesar L.

  3. Richard

    October 26, 2011 at 2:55 pm

    Impeach the federal reserve bank, It’s a corporation that the US govt. borrow’s money from by this the fraudulent income tax system can be eliminated.Which by the way was the 16th amendment that was never ratified by the state’s so it is unlawfull to require the collection of income tax.Call your tax representative,your congressman or any other govt.entity ask them for a nomenclature designating this law,they wont be able to give you one because there is no law to look up stating Income tax is a ratified law!How many IRS agent’s have quit the IRS and stopped filing income tax themselve’s many.Go to youtube check Sherry Jackson ex IRS agent also the Illigality of the income tax It’s all there.Let’s wake up America and take our country back,It’s time now!Let’s stop these socialist and communist law maker’s.

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