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New Lending Rules & the Need for “Creative” Financing

There may never be a better time for real estate investors to use creative seller financing strategies… and here’s why:

Since the Consumer Financial Protection Bureau’s implementation of the new TRID mortgage loan disclosure form rules on October 3rd, 2015, the reported net gains by loans funded by mortgage banks and their affiliates sank by 60% in the 4th Quarter of 2015.

The number of funded conventional loans (and profit margins) for many smaller to mid-sized mortgage loan firms have fallen dramatically since the introduction of the Qualified Mortgage and TRID rules in 2014 and 2015.

The big banks, in turn, have increased their mortgage market share over the past several years.

My CRE Online Blog article from December 2015 included statistics from the National Association of Realtors (NAR) and the California Association of Realtors (CAR), which reported that existing home sales fell by 10.5% nationally and 28.5% in California in November 2015 compared to the previous month.

Mortgage Professionals’ Falling Profit Margins

The Mortgage Bankers Association’s (MBA) report entitled Quarterly Mortgage Bankers Performance Report noted that the net gains on each mortgage loan funded in the 4th Quarter plummeted to an average of a $493 profit for each funded loan compared to a much higher net gain of $1,238 per loan in the 3rd Quarter of 2015 just a few months earlier.

Marina Walsh, a Vice-President at the MBA, was quoted in the report as saying:

  • “Production profits dropped by over 60% in the fourth quarter of 2015 compared to the third quarter.”
  • “With the ‘Know Before You Owe’ rule going into effect last October 3rd and declining production volume compared to the third quarter of 2015, mortgage bankers saw their total loan production expenses climb to $7,747 per loan, from $7,080 per loan in the third quarter.”
  • “The average production volume per company was nearly double the first quarter of 2014, when production expenses reached a study-high of $8,025 per loan. The increase in total production expenses per loan in the fourth quarter of 2015 cannot be explained solely by volume fluctuations.”

(Sources: https://www.mba.org/ and http://www.thetitlereport.com/)

More Paperwork & Less Profits

The Consumer Financial Protection Bureau (CFPB), a financial protection entity created within the Dodd-Frank Wall Street Reform and Consumer Protection Act (enacted on July 21st, 2010), wants lenders to better inform their borrowers about new mortgage loans with important details like the true interest rate, closing costs, and loan terms.

The theory behind the new TRID disclosure forms seems quite valid and understandable. TRID is also referred to as the “Know Before You Owe” rule.

TRID is a merger of the old TILA (Truth-In-Lending Act) and RESPA (Real Estate Settlement Procedures Act) with paperwork, rules and regulations, and similar acronym letters.

The two main disclosure forms from TRID are called the Loan Estimate and Closing Disclosure forms .

Here is a short two minute video from the CFPB in regard to the new “Know Before You Owe” or TRID rule: https://www.youtube.com/watch?v=AwZERLDHJf0

Can Your Buyers Qualify?

Mortgage rates at or near all-time record lows for conventional mortgages are worthless to a mortgage applicant who can’t qualify.

Some of the key items banned by the Consumer Financial Protection Bureau were most balloon loans, adjustable loans, and loans for borrowers over 43% debt-to-income ratios for mortgages loans under the Qualified Mortgage (QM) and the Ability-to-Repay rules (began in January 2014).

A Qualified Mortgage is also one that is saleable to secondary market investors like Fannie Mae and Freddie Mac. If a lender can’t sell off enough loans to the secondary market, then they will eventually run out of cash.

For more details on these Qualified Mortgage and Ability-to-Repay rules, here are the highlights provided by the CFPB website:

“Generally, the requirements for a qualified mortgage include:

  • Certain harmful loan features are not permitted, such as:
    • An “interest-only” period, when you pay only the interest without paying down the principal, which is the amount of money you borrowed.
    • Negative amortization,” which can allow your loan principal to increase over time, even though you’re making payments.
    • Balloon payments,” which are larger-than-usual payments at the end of a loan term. The loan term is the length of time over which your loan should be paid back. Note that balloon payments are allowed under certain conditions for loans made by small lenders.
    • Loan terms that are longer than 30 years.
  • A limit on how much of your income can go towards your debt, including your mortgage and all other monthly debt payments. This is also known as the debt-to-income ratio.
  • No excess upfront points and fees. If you get a Qualified Mortgage, there are limits on the amount of certain upfront points and fees your lender can charge. These limits will depend on the size of your loan. Not all charges, like the cost of a credit report, for example, are included in this limit. If the points and fees exceed the threshold, then the loan can’t be a Qualified Mortgage.”

 The Opportunity for Creative Financing

With falling profit margins for conventionally funded mortgage loans partly due to allowable capped mortgage fees, there may be fewer mortgage professionals willing to work on conventional loans.

Since 2014, the surge of private or non-Qualified Mortgage lenders has rapidly increased due to the need for much easier mortgage capital options.

Non-Qualified Mortgage money can still be very cheap and easy to fund, and nothing like the old private or hard money loans once in the double-digit rate ranges.

More sellers today are willing to consider creative of finance options such as lease options or wraparound mortgages like AITDs or Contracts for Deed.

It’s much easier for a borrower to qualify for a creative financing option as opposed to one funded by a bank. As a result, there may never be a better time to use creative financing strategies!

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About the Author...

Look for Rick's ebook on Amazon Kindle: The Credit Crisis Deals: Finding America's Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

Comments

  1. Thomas Sarver says:

    Why. Did they not have set up these rules before the housing g market crashed,I tried to obtain a morgage and was turned down because of these new rules, those rules should of been in place before the situation started there would been no problems,or could of been less of a problem

  2. Rick Tobin says:

    Lending guidelines have tended to swing from one extreme to the other over the past several decades, for better or worse. Hopefully, we can find a middle ground somewhere so that more people can qualify while rates and fees are still very affordable.

  3. Jim Ingersoll says:

    Great job as always Rick!

    Jim

  4. Rick Tobin says:

    Thank you for the kind words, Jim.

  5. Jamie Tran says:

    HI Rick,
    I am a newbie to real estate investments. Sn “interest-only” loan is no longer existing at all banks?

    I was thinking about that for my quick flip properties that I want to buy. I’m looking for creative financing such as borrowing money from business credits to buy good deal homes to sell for quick turnaround.
    Any tips or where I should look for more information?

  6. Mike Baker says:

    Rick, these new consumer protection rules work just the opposite making it impossible for an investor, which happens to be the consumer of a loan, to work with a small bank like we did in the past. At the risk of sounding upset, the “too big to fail” Wall Street banks are doing just great while the small lenders who didn’t cause the problem in the first place are feeling the pain. So now as a consumer I’m forced to go to a hard money lender and pay 18% to 20% annual rate. So much for consumer protection! If these geniuses that wrote these new laws and regulations had a clue how small business operates it would surprise me. Sorry for the rant but somebody needs to get a clue in Washington DC.

  7. Rick Tobin says:

    I agree, Mike. “Consumer Protection” is a contradictory oxymoron, from my perspective, while Big Banks continue to receive the main protection and profit potential.

What do you think? We would love to hear your opinion.

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