- Today the primary sources of mortgage credit are government agencies, all with relatively rigid standards.
- There are private sources, but they are rare.
- Today, since investors desperate to earn something on assets, all sorts of private financing should appear. But it has not: The reach of regulation has crushed even private parties.
Lenders are often asked, “Aren’t there any private lenders?” (Realtors and borrowers often ask us shortly after we have told the applicant, “Fannie says no.”)
Where does mortgage credit come from in 2016?
Today the primary sources of mortgage credit are government agencies, all with relatively rigid standards. Jumbo lending is similar, a narrow and shallow side-pocket.
“Portfolio” lenders do still exist, making their own rules, but nearly all are heavily regulated financial institutions with credit standards tougher than Fannie except in two respects: non-warrantable condos, and borrowers who are asset-heavy (very!) but light on traditional income.
“Yes, but I have a friend who heard about a client who got a private loan. Do you have any of those?”
“Private” in that sense usually means a person, not an institution. To keep it all as murky as possible, there are — have always been — “hard money lenders,” which are small corporations sometimes called “finance companies.” “Hard money” refers to how hard it is to get, and hard feelings about the interest rate.
There are private sources, but they are rare. Last week’s Wall Street Journal had an article about private lending in which nearly every paragraph is mistaken, but they did find a few actual private sources (no contacts given).
Where’s all the private financing?
Interest in private money rises, and supply should appear in these market circumstances: when rates are very high and no one qualifies at Fannie rates (’80-’83); when rates are very low and investors are desperate to earn a return (now); and when credit is cramped by regulation (now!).
In the early ‘80s I arranged as an employing Realtor-broker hundreds of wraparounds (a form of owner-carry), private seconds and assumptions of existing loans.
Today, since investors desperate to earn something on assets, all sorts of private financing should appear. But it has not: The reach of regulation has crushed even private parties.
Private financing today: Common and uncommon
The most common form of private lending is the owner-carryback to facilitate sale of a property. Sellers seldom prefer carrying paper instead of cash, but the difference in price they can get for the property often changes their minds — especially for properties inherently difficult to finance.
That list begins with vacant land, and then the improved but unusual: a farm, or a nice house with huge kennel or barn and riding arena, or bed-and-breakfast, or restaurant under an apartment….
The most common form of private financing, going back centuries: the installment land contract (ILC), also known as “contract for deed.” In this structure, the buyer makes payments until the loan is retired and then gets the deed. Since the buyer is not the owner until the debt is paid, if the buyer misses payments, a foreclosure is not necessary, just an eviction, and the buyer loses all money paid.
As far back as the 1970s in my home state (Colorado) the authorities took a dim view of ILCs, saw them as abusive, advised Realtors away from them, and courts found that buyers had “an equitable interest” in the property even without a deed. ILCs have returned today in inner-city flips of distressed houses scooped up by entrepreneurs, and abused again.
The regulatory changes today crushing private lending — even well-intended loans — is an outgrowth of the hysterical response to the Bubble. TILA, RESPA, TRID and SAFE are a deadly minefield.
There are federal exemptions and safe-harbors, and wide variations state-by-state, but here’s how tough it is: No Realtor should advise a client about an owner-carry in any way — neither the seller nor the borrower. Refer them to an attorney.
No owner should agree to carry without an attorney’s advice and document preparation. Theoretically, licensed lenders may give such advice, but don’t be stupid. Recommend an attorney. Very few of the new rules have been litigated, and nobody knows where the safe edges lie.
Borrowers are probably in safer position than lenders or advisors — from regulatory assault, but no buyer/borrower should enter private financing without an attorney’s opinion of the risks in the loan itself.
By now you get the drift. If one property sells by private financing, word spreads through a seven-state region — but nobody knows exactly who the lender was.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at email@example.com.