HR 1728: Mortgage Reform And Anti-Predatory Lending Act
Seller Financing Nightmare

What's HR 1728?

The new HR 1728 Bill(which suffers the same legislative myopia as some previous similar efforts),was introduced by Rep. Brad Miller (D-NC) in March 2009, and is designed to bring new restrictions to mortgage loan providers and related professionals as well any others who "buy and sell mortgages on secondary securities markets".

It amends the "Truth In Lending Act" by creating greater restrictions for everyone who originates/creates residential mortgages. If you're an independent real estate investor, the stipulations of this proposed bill could be disastrous to you (and possibly an infringement of individual property rights).

Why Was This Bill Introduced?

Since the subprime lending crisis and the subsequent real estate market decline, politicians, Wall Street, community advocacy groups, and everyone else with a platform have been looking for who to point the proverbial finger at.

The sponsor of this bill, Democratic Rep. Miller, has apparently chosen the politically convenient (but simplistic) position that the "vulgar", "poor, poor, pitiful boys of Wall Street" were to blame, by exploiting a "grotesque asymmetry of information".

Here's this Congressman at his patronizing best: Notice in this video how he ties in the "Vulgar Compensation on Wall Street And In The Financial Industry" to the foreclosure problem and the real estate downturn.

I personally find this whole thing amusing because I still remember what it was like pounding the pavement in 2003, listening to property sellers who didn't think it strange that even the most wretched-looking properties saw double and even triple digit appreciation in a matter of months.

I remember the pervasive "Cash-In" mentality that saw prospective buyers knocking themselves out in getting their names on mortgages "at all costs" because appreciation was through the roof in markets all over the country.

The vast majority of distressed property owners I have spoken to in the aftermath of the lending crisis and real estate downturn, acknowledge privately that "they" made the wrong decision. While there's no doubt that many people were victimized by unscrupulous people throughout the lending industry, no reasonable and thinking person (farcical politicians aside) can claim that the current crisis is due strictly to "predatory lending".

In any case, the HR 1728 Mortgage Reform And Anti-Predatory Lending Act is Mr. Miller's way to make sure "this never happens again".

HR 1728: Most Interesting Features

• Blanket Restrictions on Originators of Residential mortgages (including regular mom and pop real landlords & real estate investors).
• Property owners/investors limited to 1 owner financed (seller-financed) property every 3 years if they don't follow proposed disclosure requirements.
• Mortgage Broker's License may be required for property owners who want to sell with installment sale, seller financing, etc (depending on which state you're in).
• Essentially forces loan originators (including you) away from any type of creative financing and into 30 year fixed by creating extreme liability exposures.
• Prohibits loan originator from offering loan that borrower does not have the ability to pay (If you're offering an installment sale, rent-to-own, or seller financing on your property, this could mean you).
• Essentially forces Non-depository Mortgage companies (all except the big banks) to stick to 30 year fixed loans by requiring 5-10 percent reserves on each loan they originate. (I'm sorry, if I were a mortgage broker, I'd just quit the business the day this bill becomes law.)

Who's going to like HR 1728?

• Short-sighted Borrowers:Since this is an Anti-Predatory Lending Bill (by name anyway), I would hope that borrowers would be happy...at least until the next big real estate boom when the demand for "innovative" residential mortgage financing products skyrockets again.
• Really Big Banks: After they get over the initial pain, they get to lock out mortgage brokers and completely control the residential financing industry, controlling mortgage rates, and mortgage offerings almost exclusively.
• A Few Opportunistic Congressmen: Having "protected" borrowers from themselves, crippled the rights of small real estate investors, mortgage brokers and appraisers, resulting eventually in less options for a substantial portion of the real estate marketplace, they'll climb the soapbox during the next election cycle and claim to have "restored" the real estate marketplace.

HR 1728: Who's going to suffer if it passes?

• Mortgage Brokers: Who completely lose flexibility in their ability to offer any loans other than the standard 30-year fixed without seriously hamstringing their business or exposing themselves to potentially catastrophic levels of liability
• Landlords/Real Estate Investors: You can't sell your own property on installment, through the sort of creative financing that make many win-win agreements possible, without running into impractical burdens imposed by this bill, or running afoul of the law period.
• Private Loan Modification Companies & Attorneys: This bill ridiculously restricts their ability to represent homeowners and negotiate on their behalf against the lenders. Anyone who has ever successfully negotiated a short sale, or loan modification knows that homeowners mostly fall through the gap when nobody has an incentive to work on their behalf

WHY HR 1728 IS BAD NEWS!

Contrary to the impression I may have given you, I'm neither classically conservative or classically liberal.

This bill is well-meaning but absolutely reckless.

It's a blatant attempt to take advantage of the current economic climate to legislate Subprime loans out of existence. It unfairly penalizes whole classes of real estate businesses, with little regard to the "market consequences".

It will resonate with those who would like to think that the deep systemic crisis currently facing the economy was caused in whole or in part by the subprime crisis. These people largely ignore the fact that even as late as 2007, Subprime Adjustable Rate Mortgages made up only 6.8% of outstanding mortgages in circulation...

The problems were, and are, deeper than Subprime loans!

From a property rights standpoint, this bill affects investors who try to dispose of property using Land Contract Installment Sales, Owner-held Mortgages, Wrap-around mortgages, and it's not certain whether lease options will be affected!

An individual should never need special licensing to sell their own property. In addition, taking away the option of seller financed purchasing from a whole host of Americans, precisely when they are frozen out of financing and will need as many options for re-entry as possible.

This artfully titled bill, in its current form, is definitely not ready for prime time.

I'm not an attorney, neither will I pretend to be an expert on lending industry issues but I hope that this piece will inspire everyone who reads it to investigate the details and implications of its implementation.

HR 1728: THE END OF NO-COST MORTGAGE LOANS
Mark Madsen gives a well-thought out analysis of HR 1728 and some of the problems mortgage originators and others face. His Vignette of YOUTUBE videos highlight congressional folly when it comes to subprime lending and the real estate downturn.

DO THE BIG BANKS OWN CONGRESS?
HR 1728 as seen from the viewpoint of mortgage brokers and loan officers. Dan Melson points out that yield spread restriction actually hurts borrowers and only helps the big banks and their politician friends.

READ COPY OF THE BILL
You can read the whole bill here on the Thomas Register Website. Anyone would agree with mortgage reform and regulations to control predatory lending. This bill however, ends up regulating the wrong thing.