Much is being said about upcoming changes in the mortgage industry due to the Dodd-Frank Act. The date of January 14, 2014 is mentioned with Frankenstein-like dread. In our opinion, the fear about the additions coming up in January 2014 it is a bunch of cow-poop, hype and media drama. Before we go on we need to add some disclosures. We not attorneys, we are not loan originators and we have not read all the 1000’s of pages of regulations, interpretations and re-interpretations that make-up the mostly unintelligible Dodd-Frank Act.
However, we do know some pretty smart people and one is real estate attorney Dax Watson shared his wisdom and thought about what will occur when the latest elements of Dodd-Frank are enacted on January 14th 2014. Fundamentally, the changes affect homes being sold by seller originated financing. In other words, if you are selling a home and are financing the sale personally, you’ll need to follow specific guidelines set up in Dodds-Frank. As a buyer, you will be offered some protections offered by the legislation.
How Many Homes are Sold with Seller Carryback Financing?
At this point one may ask why we say the Dodd-Frank Act is all hype and media drama. Basically, the Seller Financing provisions affects a minuscule portion of residential real estate transactions. According to ARMLS (Arizona Region Multiple Listing Service) there were nearly 33,000 transactions between January 1st and December 18th, 2013. Of those 74,600 sales about 455 were owner carry backs or about .6% of the deals. Interestingly, nearly a quarter of the owner carry backs were for mobile homes. Thus, if you are buying a home, condo, loft or townhouse less than 1/2 of 1% of those sales are owner carry backs. Do you now see why I say Hype and Media Drama? Hardly anyone in Phoenix will be affected by the additional Dodd-Frank rule changes as they apply to seller carry backs, yet there are lots of scary articles.
What Does a Home Seller Offering Owner Carry Back Financing Have to do under Dodd-Frank?
In order to conform to Dodd-Frank requirements, home sellers in Arizona will be required to use some additional forms. One form, Seller Attachment, outlines a number of conditions the seller must meet to move forward with an owner carry back. In some cases an home seller can proceed without much constraint provided he or she meets 5 conditions including:
- The seller originates financing for only one property in any 12-month period.
- The seller is a natural person, estate or trust.
- The seller did not construct the residence on the property.
- The financing does not result in negative amortization.
- The financing has a fixed rate or does not adjust for the first five years.
If the seller can not satisfy the above conditions, he or she may still offer seller financing if a new set of conditions is met (See Seller Attachment and Requirements of Second Exemption.) The challenge, at this point, is the new conditions demand a lot of work. According to Dax Watson, most people would be well advised to seek legal counsel and the help of a professional loan originator as navigating the additional requires a lot skill-sets most do not possess.
Conclusions Regarding Dodd-Frank Act Rules Additions in January 2014
We believe the additional requirements of Dodd-Frank being imposed in mid-January 2014 will not affect many people. Most likely people who build and self-finance spec homes and those who provide owner carry backs on flips will be most impacted. Since few people, 1/2 of 1%, buy a home or condo using seller carry back financing, few will be touched by the changes.
However, we believe the public is better protected from unscrupulous people who prey on home buyers with poor credit. Even with Dodd-Frank in place, home buyers using seller originated financing are HIGHLY ADVISED to seek legal counsel prior to signing any loan documents. A few hundred bucks spent upfront can save you thousands down the road. If you don’t know a good real estate attorney, we’ve used Mack, Watson and Stratman and found them to consistently ahead of the crowd.
Best to you,
Gene Urban & Ron Urban
The Urban Team at Realty Executives