Seller financing to buyers is an essential tool for many real estate investors, but proposed regulations from HUD could create big problems.
That's the view of industry groups ranging from the National Association of Realtors to the National Real Estate Investors Association.
The HUD proposal, which is open for public comment through March 5th, sets up standards for state laws regulating mortgage originators under the so-called "SAFE" Act, the Secure and Fair Enforcement Mortgage Licensing Act.
Congress passed the law in 2008 and gave HUD authority to step in with its own rules when state laws are seen as too weak to properly regulate mortgage brokers and others.
In HUD's interpretation of who is, and who is not, a "mortgage originator," it exempts individuals who offer seller financing to homebuyers.
However, the proposed regulation appears to limit the exemption to just one group -- people selling their own primary residences.
That cuts out investors who offer seller financing on rental houses or second homes and condos. Under HUD's proposal, they'd have to go through the same registration, licensing, fingerprinting and other licensing hoops required of fulltime mortgage brokers.
Such a rule not only would be overkill, say investor groups, but would be counterproductive in terms of stimulating real estate and the economy.
In a four page letter sent to HUD Secretary Shaun Donovan last week, the National Association of Realtors argued that seller financing of investor units "can be crucial in certain markets, especially in times of economic stress," when unsold inventories threaten to depress prices further.
Most investors who provide notes to buyers are small scale -- not the sort of fulltime, commercial loan originators targeted by Congress for licensing and regulation.
Also last week, the National Real Estate Investors Association sent out an alert to its members urging them to write to HUD seeking a modification of its proposal. HUD's plan would "eliminate all seller-financiing" by investors, the group warned, no matter how few loans an investor made during a single year.
In its letter to Donovan, the National Association of Realtors mentioned what may prove to be an acceptable threshold: Investors who only "occasionally ... provide financing for property … should be exempt" from state registration.
For example, sellers who provide financing for "five or ten" properties a year" should not be treated as mortgage originators under the SAFE Act rules, said Vicki Cox Golder, president of the National Association of Realtors.
HUD is expected to come out with final rules later this year. But so far it's giving no hints on how it plans to handle the investor seller financing issue.
Published: February 19, 2010
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