Phil Querin Q&A: Selling a home in your park acquired through abandonment without having to hire a mortgage broker. Can you explain the new law?

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December 12, 2013

Question: I understand that today I may sell a home our park acquired back in an abandonment without having to hire a mortgage broker. Can you explain the new law?

Answer: I assume you are referring to a sale where you carry back the security obligation (as opposed to the buyer paying cash or securing third party financing). In this respect, you are correct, subject to several limitations. MHCO worked extensively with the Oregon Department of Finance and Corporate Securities (“DFCS”) and others to develop an exemption to the Oregon law that would permit park owners to engage in the sale of formerly abandoned homes to purchasers for the purpose of a primary residence without having to use a broker (referred to as a “Mortgage Loan Originator” or “MLO” under the new law). Here is a summary of the new exemption law which will be found in ORS 86A.203. • Here are the rules for those licensed as a manufactured structure dealer under ORS 446.691. o They may offer or negotiate the terms of the loan three or fewer times in a 12 month period; o They must use a written sale agreement that complies with certain requirements, or with DFCS rules . o The dealer may not hold more than eight residential mortgage loans without securing a MLO license under ORS 86A.203(1). [Presumably, this means “at one time.”] • Here are the rules for those licensed as a limited manufactured structure dealer under ORS 446.706. o They may offer or negotiate terms of the loan five or fewer times in a 12 month period: o They must have an ownership interest in a manufactured dwelling park; o They must use a written sale agreement that complies with certain requirements, or with DFCS rules. o They may not hold more than twelve residential mortgage loans without securing a MLO license under ORS 86A.203(1). [Presumably, this means “at one time.”] But here’s the rest of the story: Just because you are exempted from the MLO licensing requirements for a limited number of sales, does not mean that you are free from the tentacles of the Dodd-Frank Act. No, indeed. In fact, there are two new rules that still will apply. 1. Ability-to-Repay (“ATR”) Rules. A creditor is prohibited from making a residential loan (this includes your sale of the formerly abandoned home) unless it first makes “…a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” [See CFPB Summary, here.] In complying with the ATR rules, you must consider and verify the following borrower information: a) Current or reasonably expected income or assets [other than the value of the home that secures the loan]; b) Current employment status; c) Monthly payment on the mortgage loan; d) Monthly payment on any simultaneous mortgage loan that the creditor knows or has reason to know will be made; e) Monthly payment for mortgage-related obligations [e.g., insurance, taxes, assessments]; f) Current debt obligations; g) Monthly debt-to-income ratio, or residual income; and h) Credit history. In making the loan you will be required to calculate the mortgage loan payment based on: • The fully indexed rate or any introductory interest rate (whichever is greater); and • Substantially equal monthly installment that will fully amortize the loan amount over the loan term. At first blush, perhaps these requirements don’t seem so burdensome, since one would think any smart lender would follow these protocols anyway. But remember, back in the easy money days, lenders were not keeping most of their loans on their own books; instead, the loans were “securitized”, i.e. bundled and sold as securities to investors all over the world. This meant that circa 2004 – 2008, the originating banks that funded these residential loans were quickly repaid by investors and were never going to have to deal with them if and when they failed. Hence, bank underwriting was virtually nonexistent back then – except, of course, for those loans the banks were going to keep on their own books (sometimes referred to as "portfolio loans"). 2. Qualified Mortgages. The Dodd-Frank Act has established a term, “Qualified Mortgage,” or “QM,” that provides a safe harbor for lenders. That is, if the loan is a QM, there is a legal presumption that the lender complied with the ATR underwriting rules, and therefore the penalties for non-compliance are either eliminated or substantially reduced, as discussed below. If a presumption is “conclusive,” no amount of evidence to the contrary will defeat it. But if a presumption is “rebuttable,” the party opposing the presumption has an opportunity to rebut it by introducing evidence to the contrary. For a mortgage to be a “Qualified Mortgage,” it must meet the following requirements: • All of the “Non-Traditional” Loan Features Must be Removed – This refers to features that we saw in the past, e.g. negative amortization, interest-only payments, and certain balloon payments.[5] • The loan may not exceed 30 years. • If the loan is for $100,000 or more, it cannot have points or fees greater than 3% of the total loan amount. There are different and stricter limits for smaller loans. Certain “bona fide discount points” for prime loans are not included in these limits. • There is an Income Verification and Monthly Debt-to-Income Ratio Cap; The borrower’s total monthly debt-to-income ratio (i.e. all housing and non-housing expenses, such as food, automobile, child care, etc.) can be no greater than 43%. • Monthly payments must be based on the highest payment that will apply during the first five years of the loan. The presumptions afforded to lenders making QM loans gives lender protection as follows: • Safe Harbor QM loans – Conclusive Presumption. These are prime loans that (a) Meet the ATR compliance rules including the underwriting requirements above; (b) Are secured by a first lien on the residence; and (c) Carry an interest rate that is less than 1.5% higher than the average prime rate available.[7] The presumption of ATR compliance is conclusive. It is a complete safe harbor. • Higher-Priced QM Loans – Rebuttable Presumption. Here, the presumption of ATR compliance is rebuttable. These loans include first-position liens with an interest rate of equal to or greater than 1.5% over the available prime rate. Essentially, these loans are “higher priced” because the borrowers’ credit is less than prime, i.e. the loan is, in the vernacular, “sub-prime.” Noncompliance with the ATR Rules. Violations of the ATR rules are harsh, and likely to stifle any types of loans that hint of non-compliance. If a material violation is established, the borrower would have the ability to recover back all of the finance charges and fees paid, plus actual damages, statutory damages, attorney fees and court costs. The plaintiff’s bar and the class action bar must be sharpening their knives. There is a three year statute of limitations from the date the violation occurred. Conclusion. I marvel at the complexity of these laws which have been implemented to “protect” consumers by confusing creditors – especially small creditors, such as park owners selling formerly abandoned homes to fill a space and provide affordable housing. If these small transactions caused the credit and housing crisis of 2008 and the ensuing Great Recession, perhaps I could understand. But they didn’t. What we’re are seeing is a huge net of bureaucratic regulation that has been cast over even the smallest of transactions under the guise of consumer protection. Going forward into 2014, my suggestion is for park owners to decide if: (a) They want to handle these transactions without the use of a MLO (which will add several hundred dollars to each sale) or (b) Go it alone, with knowledge that they will still be expected to comply with the ATR and QM rules. If the latter, my suggestion is to create the simplest of paper transactions, with a market rate interest, no adjustable rates, and a balloon that is not less than five years.

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