Much has been written on the ongoing push for legislation to protect consumers in the wake of the unfolding sub-prime collapse.  The House of Representatives recently passed H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007.  Commentary on this legislation most often focuses on the restrictions that it would place on lenders seeking to make loans. 

But there is another important feature in this bill which will be of interest (concern) to investors.  In case of foreclosure, the entity reclaiming the property will have to honor all preexisting leases.   And you thought that banks used to be annoyed about that REO bouncing back onto their books - now they get the property and the tenant. 

This, potentially, is a two-edged sword for investors.  On the bright side, while a tenant-occupied property is a pain for a bank, it can be a good thing for an investor (assuming the tenant is one that you'd want to keep).  Furthermore, it restricts the bank's options for selling the property - your competition in bidding for the property is pretty much restricted to other investors. 

On the flip side, though, this will make the banks take a second look at their policies for lending money to investors.  This change represents an additional risk and cost for the banks, and they're gonna pass it right along to you and me. 

If you're interested you can read the press release and the bill itself, along with a related article from the New York Times. 

I got some interesting emails from readers responding to my recent posts on real estate fraud. Here’s one of them (posted w/ permission from the author, with names and minor details changed):

________________________

Chris,

I was approached by an acquaintance, Phil, to invest into a get rich quick scheme. I was to be the buyer and mortgage holder for two houses, but all documents and paperwork would be mailed to Phil’s residence and Phil would be responsible for all mortgage payments and monthly maintenance fees. I was promised a gift of cash in exchange for using my good credit. All was good for several months, and then I started receiving calls from American Servicing Company for non-payment.

Unfortunately, being very trusting of Phil, I did not ask for copies of any documents that I originally signed. Phil kept everything. At this time, I don’t know what to do. Phil does not return any phone calls. As of today, the two residences are unoccupied. Please, any advice is welcome.

___________________________

First of all, I'm not a lawyer and laws/property codes vary from state to state. This shouldn't be considered legal advice. You need to contact a lawyer.

A couple of things that I would do were I in your situation.

1) Don't ignore the mortgage company. Regardless of what happened between you and Phil it appears you’re currently on the hook for these mortgages. Call the lender.

2) Get ready to go to trial. I understand that you don’t have the paperwork, but you must have some documentation that a deal was done...receipts for cash payment, etc. Get these together, along with a written narrative of what occurred, and discuss these with a lawyer.

Now I'm guessing that one of two things might have happened here....

• Non-evil Phil case: Phil got all fired up from attending one of those Rich Dad Poor Dad seminars or some other such motivational pep rally. Then, realizing he had no credit, talked you into backing one of his deals. Phil overpaid for the houses, realized he couldn't lease them out, ran out of money, and buried his head in the sand. Now your phone is ringing off the hook as the bankers are looking for their money, which you owe.  It's possible that Phil didn't set out to rip you off, but he abused your trust and, in the end, skipped town. 
• Evil Phil case: Then again there are lots of ways to rip someone off in a case like this. Example...Phil found a seller selling his house for $100k. Phil offered $110k on the condition that the seller kicked back $10k at closing. The seller got his price, Phil pocketed $10k, and you’re stuck with a $110k mortgage on a house that's only worth $100k. There are many, many other schemes.  It's possible that Phil is a genuine scumball. 

In hindsight (not helpful, perhaps) there are lots of problems that led to this. The most important are a) you got into a deal that you didn't really understand, and b) you can't rely on trust; you need a contract.

This probably isn't much help, but at this point the horse is out of the barn.  Call a lawyer, deal with the mortgage companies, and good luck.

Related Posts

• Why I don't like Rich Dad Poor Dad
• Real estate investing psychology
• How contracts help me to build solid relationships
• Real estate shell game :: Recognizing fraud
• Real estate shell game :: Part II
• Real estate shell game :: Part III

Yesterday I posted a YouTube video about a sting operation busting some shady "Investment Advisors" who had defrauded a group of investors using a common tactic.  This was a variation on the standard buyer-seller kickback scheme that I previously wrote about.  Here's how it works:

I love real estate.  There are millions of honest, ethical investors out there making prudent, informed responsible investments to secure their financial future, but there are also a brigade of scumballs busying ruining it for the rest of us.  Keep your eyes peeled. 

I grabbed this YouTube video from Chris Lengquist's real estate blog.  This one is a little different from the real estate scam that I recently wrote about but you could consider it a variation on the general theme. 

A couple of rules of thumb:

• If it looks lucrative and easy then you're about to be taken for a ride.
• Beware of "package deals" where an advisor delivers the property, the lending, the appraisal and the tenants.  These parties, if delivered as a combo deal, will always collude against you. 
• Don't sign anything you don't understand.  Loan documents can be intimidating for new investors - but if it smells fishy then ask questions until your gut tells you everything is ok. 
• Any counterparty who is willing to be dishonest on your behalf will cheat you in the end.
• These people in this video aren't necessarily dumb.  The scam artists are pros, and they look for amateurs as their victims. 

Don't miss the article in today's New York Times about three Atlanta ladies who got together to expose rampant mortgage fraud in their leafy suburban Atlanta subdivisions.  Conventional wisdom has always held it that the primary loser in these deals is the lender, but these three crusaders helped show that there are real quality of life issues that are the colateral casualties of these crimes.  One woman joined the fight when illegal flipping contributed to an artificial 30% rise in the tax assessment of her primary residence.

The article does not take any pains to discriminate between illegal fraud-based flipping and the the perfectly legal brand practiced by ethical real estate investors, but it was an interesting article nonetheless.

In recent posts I expressed frustration with USAA's mortgage service. First for a $50 fee per-property for pre-approval (I was negotiating on three properties, so the agent quoted me $150), then for their $350 fee to take an application and lock in a rate.

I don't believe in hogging the mic here at EquityScout, so it's only fair to give equal airtime to the response that I recently received from Chris Sandoval at USAA:

 Hello – this is Chris Sandoval with USAA. In addition to seeing your recent posts about USAA, we also received your letter detailing some pretty frustrating experiences you’ve had with USAA. I wanted to get in touch with you and your readers, and your blog seemed like the quickest way.

 

It looks like you have two main concerns stemming from your recent interaction with USAA:

 

 - A $50 fee to receive a mortgage pre-approval.

- A $350 application fee for a mortgage pricing quote.

 

 Regarding your first concern, we do collect a deposit to provide a true credit-approved pre-approval if you choose to do so over the phone – we do not collect this deposit when members seek a pre-approval on usaa.com (which most of our members choose to do). This deposit is applied toward a member’s cost when they close their loan with USAA.

 

 Regardless of whether or not you used our online pre-approval process, you would not incur a $150 charge for three pre-approvals. When we pre-approve a member, we approve the member’s credit in general. If I understand your situation correctly, you requested pre-approval for three properties by contacting us on the phone. This process should have incurred only one $50 deposit - again, the pre-approval process does not incur this deposit at usaa.com. I apologize if we did not accurately convey that to you at the time.

 

 In response to your second concern, members do not have to submit an application or a $350 fee simply to obtain a pricing quote. When members choose to apply for a mortgage with us (not when they ask for a quote), we do collect a $350 good faith deposit that is credited toward their costs at closing. This sort of deposit is common in the industry and is sometimes known as an appraisal fee or underwriting fee. Again, I apologize if we provided you with inaccurate information.

 

 I hope this information helps clarify some of the confusion caused by your latest correspondence with USAA. If you have any further questions, please don’t hesitate to contact me. Just log into usaa.com and use our secure message feature: click "Contact Us" and then click "Email Us." Start your message with "Attention Chris Sandoval, eCommerce" and paste in the URL of this blog post. I’m more than happy to help with any other questions you may have.

 

While we failed to win your recent mortgage, we value your business and the opportunity to serve all your financial needs.   ### end message

• No fee for online pre-approval; USAA only charges for pre-approvals given by phone. Fair enough, but the competition doesn't charge me to talk to them on the phone. This is an annoying policy and isn't investor-friendly.
• The $50 fee should have been a one-time charge instead of three seperate fees applied against three seperate properties. Again, not happy about paying a fee for a representative's phone time, but a one-time general fee is much more investor friendly than having to pony up for each property considered.
• No fee to "obtain a pricing quote." I'm going to interpret this to mean that USAA will be willing to give me a firm rate at no charge. Note that this isn't the story I got from the representative, who told me that she couldn't give me a firm rate unless I paid; that she could only give me a general idea.

There’s a multi-factorial equation brewing out there that is going to impact real estate investors. 

Concerns about flatting property prices tend to get the most press time, along with the ongoing sub-prime lending soap opera. And we’re all keeping an eye on interest rates and hang on Bernanke’s every word. But in my opinion the real story will be how all these factors impact all those risky loans out there, and this is a die that has yet to be cast. 

First American CoreLogic recently released a study on Mortgage Payment Reset and the potential impact that it will have on our economy. Note that First American CoreLogic is an arm of First American – and many visitors will be familiar with First American Title, one of the nation’s largest Title companies. The point being: just like the National Association of Realtors the title industry has a dog in this fight so be careful about taking all of CoreLogic’s conclusions without a bit of scrutiny. But that said, there’s a lot of good data in this report. 

Here’s something that jumped out at me. In 2006 lenders issued $200 billion in ARMs w/ their first reset in 2006. Of that $200 billion worth of quick reset mortgages the vast majority was at super-low teaser rates of less than 2%. Seemed like a good idea at the time: rising prices and brisk home sales made the risks easier to stomach.  Now that market has cooled those 2006 resets are causing problems for many buyers who were overstretched in the first place, and that’s what’s triggering the current wave of foreclosures. 

But, there’s more to come. Most of the ARMS originated in 2006 w/ 2008 resets ranged from 6% to 9% initial rates. Sub-prime territory. And these folks, based on CoreLogic’s assumptions, will be facing increases of from 30% to 50%. The second half of this story is that 23.9% of ARMs originated in 2006 have negative equity, versus only 10.3% of fixed rate loans taken in the same period. 

So not only were ARMS used by the most vulnerable buyers, they were also more than twice as likely to be used for properties in which the owners had no equity. The punchline: during the run-up ARMS were used as an instrument to buy homes that people couldn’t really afford. 

The New York Times ran an interesting article today advising those homeowners who are about to get into trouble to negotiate with their lenders. Many owners don’t realize what we do as real estate investors: the bank doesn’t want your house. Foreclosure is a disaster for the homeowner, but it’s no picnic for the bank. Expect troubled owners to take a page out of the short-seller’s playbook.

I wrote recently about how I was annoyed at USAA's excessive fees for pre-approving a mortgage (fifty buck fee to fax me, their member of seventeen years, a mortgage pre-approval.)

Well I decided to give 'em another chance.  I actually want to be a USAA customer.  I've been with them for seventeen years.  So now that I have a property under contract I gave them a call for a quote.

Yeah, they'll quote me a rate.  But first I'd need to fill out an application for a $350 fee.  And if I don't like the rate?  That's fine - I could simply go with another lender and they'll keep my $350.

What?

So unfortunately this is the second and last strike for USAA as a mortgage lender (this ain't baseball).  Was hoping to be writing a happy post about how the company that serves our nation's servicemen and women came through in the end, but unfortunately it wasn't meant to be.  Oh well.   Looks like I'll be going with Wells Fargo (who I've also done business with in the past, and who treats me like a repeat customer.)

The Federal Open Market Committee kept the fed funds rate target rate at 5 1/4 . Lots of the standard boilerplate comments made it into the short press statement that they put out after the meeting:

• Reference to inflation concerns:  check
• Reference to housing market concerns: check
• Reference to economic expansion: check

Notably absent: any reference to the ongoing meltdown in the sub-prime market.  Perhaps they're simply trying to avoid throwing more gasoline on the fire, but the non-cynical view is that the sages at the Fed just see this as more noise in the data. 

For now investors should still be concerned that the fall-out of the sub-prime train wreck might hit the low end of the market as liquidity dries up and pulls buyers out of the market...but...

...it remains possible that this shake-up just weeds out a few of the more aggressive of the sub-prime lenders - bad apples with flawed business models.  Like a forrest after a fire the system as a whole will be healthier after the purge, and  the surviving companies will hop in to pick up the slack.  To be determined...

I’ve been a USAA member for seventeen years, since I was a junior at West Point (USAA is the financial institution dedicated to serving our Armed Forces). Great service. Always. That’s why I’ve stuck with them for all these years on an almost no-bid basis, and have done a number of mortgages there. 

I’m in the middle of a 1031 exchange – selling a property and putting the proceeds into a tax deferred account to invest in another property. I’ve done the sell part, now I need to buy something. 

I put offers in on three small multi-family properties this week and needed pre-approvals to submit along with the contract. So I called USAA. The fee to fax me three pre-approvals: $150 bucks. $50 bucks per property, which would be refunded only on those contracts that closed and were financed via USAA. 

I called PHH mortgage. They took my info and faxed me the three pre-approvals for free. And fast.  I’ll do the loans with them. 

Strikes me as peculiar that USAA would chase off a customer w/ great credit and a seventeen year track record. I wrote them a letter of complaint; I’ll let you know if I get a response.