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PL PRIVATE LENDER

THE OFFICIAL EZINE OF AAPL JAN/FEB 2015

 

INCORPORATING CAPITALIZATION RATES PRIVATE LENDING LEGISLATION

CROWDFUNDING

V. HARD MONEY

TAKE THE GUESSWORK OUT OF RENTAL INVESTMENTS PROFESSIONAL ETHICS

IAN LENDER LIMELIGHT MCSEVNEY

21 Hard Money Lending Solutions


Private Lender January/ February 2015

CONTENTS 6

Lender Limelight Ian McSeveney

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Incorporating Capitalization Rates when Determining a Property value By: Dan Harkey

14

21 Hard Money Lending Solutions for Real Estate Investing in 2015 By: JJ Pawlowski

18

RentFax: Taking the Guesswork (and Homework) Out of Rental Property Investment and Lending Decisions By: Shane Sauer

22

Crowdfunding V. Hard Money Lenders By: Mark Masterson

25

Enhanced Private Lending Legislation Could be Coming By: Kellen Jones

29

Right For You and Me By: Chrissey Breault

32

Federal Tenant Protection Act Scheduled to Expire By Benjamin Hoen, ESQ

34

It’s the Politicians, Stupid. By: Benjamin Hoen, ESQ


•••CORNER OFFICE•••

Matt Benson, Executive Director

In this edition of Private Lender you can discover how our members give back to their professional community. Our members share their knowledge and experiences with other professionals and promote a stronger sense of community cooperation - which is so important as the awareness of unethical and fraudulent activity grows in the real estate finance world. Taking advantage of an ethical, industry association leads you directly to advanced education and training programs, which help you maintain your edge and keep your skills sharp. We encourage you to use the resources available to you to help you earn and maintain an edge over competitors and legitimize your business. We all know that visibility and networking are key for entrepreneurs and business owners so don’t skip the chance to discover who the talented contributors are that make Private Lender happen.

PRIVATE LENDER Jan/Feb. 2015 Production Manager/ Chrissey Breault CEO Michael Wrenn Art & Design Executive Director/ Matt Benson Advertising and Sales Linda Hyde Editor-in-Chief David Lang Private Lender is published semi-bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers. For Subscriptions: Visit www.facebook.com/aaplonline or email info@aaplonline.com. For Back Issues: Visit www.issuu.com, email info@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail info@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is expressly prohibited. Copyright © 2015 American Association of Private Lenders. All rights reserved.

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PRIVATE LENDER CONTRIBUTORS •••••MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE.••••• CHRISSEY BREAULT A Pittsburgh native and Hospitality major; Chrissey started a part-time photography and design business in 2009, while working full-time in local government communications. She is currently the Director of Marketing and Education Services with the American Association of Private Lenders. Follow Chrissey @CBExpressions or join her on LInkedIn. Beware: She takes too many pictures of her dog and does not have a filter! DAN HARKEY Dan Harkey is President and CEO at CalComm Capital, Inc. and National Financial Lending Inc. He has been active in the real estate and financial services industry since 1972. He has taught private money lending and underwriting of commercial/industrial properties at over 350 educational seminars. Dan has also authored a 250 page underwriting booklet which will be available on line. You may call him at (949) 521-7115, e-mail him at djharkey@calcommcap.com or join him on LinkedIn.

BENJAMIN HOEN, ESQ Benjamin Hoen practices in the Real Estate Default Group at Weltman, Weinberg & Reis, LPA, focusing on the Foreclosure & Eviction. He is based in the Cleveland office. Benjamin earned his J.D. cum laude from Cleveland State University, Cleveland-Marshall College of Law, and was selected for inclusion in the 2011-2015 Ohio Rising Stars list published by Thompson Reuters. Benjamin is also a member of the Cleveland Heights Board of Zoning Appeals, a member of the Board of Trustees of Congregation Zemach Zedek of Cleveland Heights, and volunteers for Friendship Circle of Cleveland.

KELLEN JONES Kellen Jones is President at FundingDatabase.com and Chief Operations Officer at Cache Private Capital. For the last decade, he has worked in lender relations, disposition, underwriting, marketing, fund management and origination-- culminating with influence in over $500 million in private loan transactions. Jones is a fixture in the Mountain West entrepreneurial community and active in the national real estate market, assisting borrowers, businesses and start-ups find access to capital. Jones mentors at Utah Business Week and consults with companies in several sectors. He holds a BS in Interpersonal Communications from Southern Utah University

MARK MASTERSON Mark Masterson is the Director of Debt Investments at RealtyShares, a San Francisco-based online real estate investment marketplace. Prior to joining RealtyShares, Mr. Masterson was an Associate at Dwell Finance (previously named 643 Capital Management). He was an integral part of the expansion of its debt platform, focusing on new borrower origination and research. Before joining Dwell Finance, Mr. Masterson was a Senior Analyst for the Capital Markets Analytics Group at New York City-based Ipreo LLC, where he covered the Real Estate and Financials sectors. In this role he also worked directly with the New York Stock Exchange to attract new listings. Mr. Masterson earned a BA from Bucknell University.

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Private Lender


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Ian McSevney PL: Welcome to Lender Limelight, Ian! Can you share what you do with the Private Lender readers? IM: Definitely! I operate two companies. One which is a mortgage brokerage and mortgage administration business known as Independent Mortgage Advisors Inc. and a second which is known as Altmore Mortgage Investment Corporation which is a pooled product or mortgage fund and is incorporated as a special status corporation under the Income Tax Act. I am the President of both companies and work strategically with a number of people in the course of operating the both companies. PL: Are there any special projects you are currently working on? IM: While I broker typical qualified mortgage deals on a daily basis. I am also working on launching a campaign to issue Altmore shares to U.S. investors under the SEC Regulation D, Rule 506 (c) exemption. I want to act as a bridge for U.S. investors to invest into Canadian mortgages. Beyond this plan I have some pet real estate development projects I am planning right now which I am working on bringing some investors together on. As well I am working on growing the loan servicing component of my business PL: Sounds like you have your plate full! What made you chose to work on those projects? IM: I suppose I would have to say for my unique circumstances of being one of the few Canadian members of the AAPL. I think I have shown some of the members that I have a keen interest in figuring out ways that like-minded people in the same basic business, who speak the same language can work together for a mutual benefit. While there are some challenges due the fact that we are separated by two distinct Federal Governments we can do business together. PL: It seems that you have found a great way to use

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Private Lender

your membership with the AAPL. Why did you choose this sort of business to be in? IM: While growing up I always had a keen interest in real estate and this led me to begin wondering how people buy real estate and where does the money come from. This led me to the discovery of something called “a mortgage”. It’s been an addiction ever since! After I attended university I began in consumer finance and moved along to mutual fund firm then the banks gradually concentrating more and more on mortgages, specifically, and moved out to various roles within the mortgage broker channel. It’s now been 20 years. PL: What kinds of mistakes have you seen professionals make when it comes to their investments? IM: I think it may depend on how you classify a mistake because many investments are made based on good research but nobody can predict the future. However, I think many players in various positions within the mortgage industry do not invest enough of their own capital in mortgages. Mortgages may not be sexy and may not be the next big thing like some of the former dot-com stocks. However, they are one of the oldest things and can offer growth through reinvestment of your returns. A fundamental difference is the legal contractual obligation of the borrower to pay versus a stock is issued by a company but they are not obligated to pay. Instead you are reliant on someone else buying it from you who value it more than you do. There is a saying, “invest in what you know,” I think mortgage industry players are uniquely position to do this. PL: What do you think are some of the biggest mistakes you made and how did you overcome them? IM: Like many of us I have made mistakes in my career, such as leaving a position somewhat prematurely before


“I want to act as a bridge for U.S. investors to invest in Canadian mortgages.�

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•••LENDER LIMELIGHT••• I learned all I could (from a great teacher). Then taking on obligations that I was not quite ready for yet - from a business stability point of view. In terms of overcoming them, I have learned to retreat when necessary and to work on being a long-term thinker when developing plans in all aspects of my life. I have tried to do this without destroying my intensity and ambition at the same time. It seems to be working. PL: Then what influences or motivates you? How do you keep from making those mistakes again? IM: This is a question I have answered for others before. What motivates me now is success defined in the way I define it. I want to be successful in my business ventures and this doesn’t necessarily mean only or primarily financial success but rather success in my own goals and my level of service to others. I still take great pleasure in sitting down with a nervous client who is buying their first home and saying with confidence. “I have obtained a mortgage approval for you.” That experience never gets old. PL: Reflecting back now, what you would do differently if you could do it again? IM: When it comes to what I would do differently there are some things that come to mind. One thing for sure is that I would have moved into the servicing side of the business earlier in my career. It quite simply has a more viable long term sellable value than the brokering side of the business which is transactional only. I would also have heeded the advice I mentioned earlier about investing in what you know and of course started doing so earlier. PL: Have you received formal recognitions? What where they? IM: I have received some awards in my career both individually and as a part of a group. I have earned a couple regional teams awards from the bank president in my banking days as a member of a very successful branch. I was elected as the president of the bank’s employee association which is not as glamorous as it sounds. At the time it offered me some unique perspective. I also have earned a number of individual Genworth Mortgage Insurances volume awards which I am very proud of. In more recent years - out of the corporate side of the business -and within the broker channel; most of the praise I receive is directly from clients and I always appreciate their feedback the most. PL: You are a very genuine person. So now we have to ask: what do you complain about? IM: (Laughing) Oh no! There are so many but honestly most are really just nuances in the course of living

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Private Lender

life like people who don’t signal when they drive. But really, I complain mostly about intolerance. All types of intolerance, it gets under my skin. It makes me think who are you? PL: Who are your heroes -who inspires you- and why? IM: I have many heroes for different reasons. Wayne Gretzky is one because he transcended sport and has lived up to the role. He is fiercely competitive while being sportsman like. He is humble despite his fame and never forgot where he came from. Coincidentally, he is from about twenty minutes away from where I live. I have others for various reasons like Nelson Mandela, Bill Gates, Elon Musk, Steve Jobs, the men and women of the military and so on. PL: What did you want to be when you grew up? IM: This answer can be different depending on what period of my life I apply it to. The usual choices were there but really I just wanted to do something along the lines or variation of what I am doing now. PL: What’s the best advice you’ve ever received? From whom? IM: I have tapped a lot of people for advice in my life. Back in my early days of banking, one old boss stands out – Gary Hapke. Gary always worked with his door open and impressed upon me to always be sure to return all your calls even if it took some extra time. PL: What is the funniest thing that has happened to you recently? IM: I have secretly been lightening my hair now and then to try and maintain my youthful looks. Well, maybe not so secretly. But like a typical guy, I figured I would attempt to save some money and go to the local cheap strip plaza hair salon. The result was me walking around like Ronald McDonald for the next couple of months explaining to everyone I know what happened. Turns out most knew my “secret” already and promptly laughed away. The moral of the story is, you get what you pay for! PL: (Laughing) Well, you look good! We want you to get back to work so we have just one more questions. If you could sing one song on The Voice, what would it be? IM: My daughter is the singer, not me. I can’t sing at all but if I had to imagine I could actually sing... I would pick either: Revolution by the Beatles, because as Lennon’s says, “We are all just doing what we can!” Or, Under Pressure by David Bowie and Freddie Mercury - because we are all under pressure!


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•••BUSINESS STRATEGY•••

INCORPORATING CAPITALIZATION RATES WHEN DETERMINING A PROPERTY VALUE BY: DAN HARKEY

W

hen considering making a loan against or investing in a piece of real estate, understanding capitalization rates (“cap rates”) is a critical component in the decision making process. An informed lender/ investor should understand that there may be dramatic variations in a property’s value when unsupported rates are applied.

Definition of cap rate Cap rates represent the ratio of net operating income (“NOI”) to the property asset value (NOI / Sales Price = cap rate). This income capitalization approach assumes the property is free and clear with no debt service. NOI is simply gross rents, less a vacancy allowance, less operating expenses. If you have similar properties with similar characteristics that have recently sold in arm’s length cash transactions, you can calculate the cap rate. Once the market cap rate has been determined, you can apply it to the NOI of the property under consideration to indicate its probable value. Knowing the market cap rates for the type of property can help determine what its value should be. For example: The market cap rate for a commercial property with triple net expenses (“NNN”) has been determined to be 8.21%. The 10,000 square foot property under consideration generates monthly rents of $1.50 per foot. After applying a 10 percent vacancy collection and loss factor and expenses of 5 percent for management and reserves, the NOI is $153,900.

10,000($1.50) = $15,000 per month $15,000(12) = $180,000 gross income $180,000 - $18,000 = $162,000 $162,000-$8,100 = $153,900 NOI $153,900 / .0821 = $1,874,543 asset value

From an investment standpoint cap rates can also indicate a prevailing rate of return before debt service, and can help a lender/investor to measure both return of invested capital and profitability based on cash flow.

Why do we use cap rates? The capitalization approach is used as a comparative method of valuing property based on similar geographic locations, similar properties, and similar risks that would yield a comparable rate of return. Once the value is established, the loan to value ratio can be calculated to determine if it falls within loan underwriting guidelines. Of course, cap rates are only one metric. They represent a snap shot of the market at the time of investment and they do not take financing costs into consideration. If your borrower is going to finance his investment, as most people do, then further analysis such as cash on cash return would be useful. Sophisticated loan underwriters and investors will also do an internal rate of return (IRR) calculation. These calculations assist in establishing that the collateral property is not only income producing but a worthwhile investment.

Cash on Cash Return Cash on cash return is a quick analysis that can be done to determine the yield on an initial investment. It is developed by dividing the total cash invested (the down payment for example), or the net equity into the annual pre-tax net cash flow. Assume the borrower wants to buy property which costs $1,200,000 and provides an NOI of $100,000, with a $400,000 down payment representing the equity investment in the project. The cash on cash return for this property would be: $100,000 / $400,000 = 25% If he buys that same property for all cash, his cash on cash return would be: $100,000 / $1,200,000 = 8%

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•••BUSINESS STRATEGY••• It is clear from this formula that a financed real estate transaction would yield a higher cash on cash return, provided the transaction is financed at a favorable interest rate.

Internal Rate of Return The IRR refers to the yield that is earned or expected to be earned for a given capital investment over the period of ownership. The IRR for an investment is the yield rate that equates the present value of the future benefits of the investment to the amount of capital invested. The IRR applies to all expected benefits, including the proceeds from resale at the termination of the investment. It can be used to measure the return on any capital investment, before or after income taxes. Ideally, the IRR should exceed the cost of capital.

Is there an ideal cap rate? Each lender/investor should determine what risk tolerance is ideal for their portfolio. A lower cap rate means a higher property value; a higher cap rate means greater net operating income. A lower cap rate would

mean that the underlying property is more valuable but that it might take longer to recapture the investment. Whichever cap rate is targeted will represent the annual return (before financing costs and taxes) an investor can expect to make on the investment at the time the property is acquired. If investing for the long term one might select properties with lower cap rates. If investing for cash flow, look for a property with a higher cap rate. It’s valuable to look at historical cap rates and cap rate trends on the specific property type. Declining cap rates may mean that the market for your property type is heating up. A cap rate that is either at the top of the range or at the lower end of the range is likely to change and it may be wise to adjust the analysis and/or investment strategy accordingly. And make certain, when comparing cap rates, to compare the same geographical locations and property types, apartments to apartments, for example. For cap rates to remain constant on any given investment, the rate of asset appreciation and the increase of NOI it produces will occur in tandem and at the same rate. On the next page are examples of the affect of changes in NOI and/or cap rates on asset values:

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•••BUSINESS STRATEGY••• As NOI increases and cap rates remain the same, asset value increases. NOI

CAP RATE

ASSET VALUE

$300,000

.06

$5,000,000

$350,000

.06

$5,833,000

$400,000

.06

$6,666,666

$450,000

.06

$7,500,000

The affect on Asset Value when the cap rate varies. NOI

CAP RATE

ASSET VALUE

$500,000

.05

$10,000,000

$500,000

.06

$8,333,333

$500,000

.07

$7,142,857

$500,000

.08

$6,250,000

It is prudent to look at the cash on cash return and the internal rate of return as well. Factors such as changes in NOI, vacancy rates, and changes in neighborhood property values are just a few other considerations. Also recognize that cap rates may vary widely in different geographic areas. Property appreciation, perhaps one of the greatest reasons for investing in real estate, is not part of the cap rate calculation. For investors, the tax benefits of owning commercial real estate may, in and of themselves, be the driving force to make such an investment. If the property is to be leveraged, then there may be write-offs for loan fees, interest expense, depreciation and investment expenses. Taking all these factors into account can help achieve the basis for making a sound business decision.

THE INDUSTRY LEADER Cap rates are driven by property type, geographic location and market sentiment. During the recent recession, as property values fell, cap rates increased dramatically for some property types in certain areas of the country. The improving economy has reversed that trend. According to the CBRE Cap Rate Survey for the first half of 2014, most commercial property types showed modest cap rate compression compared to the same period in 2013. The multi-family categories surveyed showed that the average cap rate declined from 6.41 in the first half of 2013 to 5.59 for the same period in 2014. When evaluating a real estate investment, consider using local sources for information on market cap rates. Reis Reports and CBRE Cap Rate Survey provide regular national summaries of cap rates.

Predicting cap rates by Watching Treasuries The US Ten Year Treasury Note (“UST”) is deemed to be the risk-free investment against which returns on other types of investments can be measured. Interest rates on UST have been on a broad decline for many years. There is now concern in the market that should interest rates begin to rise, so will cap rates and consequently there could be reduction in asset values. With so many uncertainties in the market, and growth projections constantly being revised, the spread between UST and cap rates have not remained constant.

Summary Cap rates are a good starting point in analyzing a property’s value but they should not be the only analysis.

12 Private Lender

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•••BUSINESS STRATEGY•••

21 HARD MONEY LENDING SOLUTIONS FOR REAL ESTATE INVESTING IN 2015 BY: JJ PAWLOWSKI

L

earn how to make 2015 your most successful year in real estate investing by avoiding the common mistakes outlined in this article. Hard money loans are valuable tools that investors of all types and experience levels can use to leverage the purchase and rehab of investment and commercial properties nationwide. Few things are “easy” when it comes to investing in real estate, but working with hard money lenders doesn’t have to be hard. Here’s a list of solutions to common mistakes investors make when working with hard money lenders to ensure a successful and smooth experience for everyone:

21 Hard Money Lending Solutions Mistake #1 – The loan to value ratio (LTV) is too high Solution: Understand how to accurately calculate the LTV and know the LTV the lender you are working with is using. Each hard money lender has it’s own LTV ration but a good rule of thumb is 65%-70% LTV. Mistake #2 – The investor can’t efficiently or accurately sum up the loan request in 2 minutes or less Solution: Prepare and perfect your elevator pitch. Be able to quickly and efficiently sum up your request in under 2 minutes. You may only get a few minutes with the lender to sum up the loan request. Get right to the specific and important information and portray it in an easy to understand way. Mistake #3 – The investor is expecting to do a loan with no money out of pocket (no skin in the game)

“Failure is simply the opportunity to begin again, this time more intelligently.” - Henry Ford

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Solution: While there are ways to invest in real estate with little to no money out of pocket, when seeking financing from a hard money lender you are usually going to need some money into the deal. This might be closing costs, down payment, LTV correction, appraisal costs, document fees or others. Mistake #4 – The exit strategy doesn’t make sense or is non-existent Solution: One of THE MOST important factors in a decision on whether or not to fund a loan is the borrower’s exit strategy. The exit strategy needs to make sense or the loan request will likely be denied. Worse, having no exit strategy. This will guarantee the loan request will be denied. Mistake #5 – The after repair value (ARV) is too high Solution: When calculating the ARV it is important to use ensure that you are using current or very recent sales comparable of similar properties. You might ask the lender directly the valuation parameters it uses for lending and LTV purposes. Mistake #6 – The investor is wanting a loan on an owner occupied property Solution: I don’t know any hard money lenders who lend to owner occupants. Don’t mislead a lender by indicating you are an investor when in fact you are hoping to reside in the subject property. Mistake #7 – The investor expects to receive all of the rehab funds at closing Solution: Hard money lenders will usually escrow the rehab funds and release on a draw basis as work is progressing or completed. This is because the lender has made the loan using the after repair value (ARV) which assumes the rehab work is completed. Mistake #8 – The investor does not want to sign a personal guarantee (PG) “aka” non-recourse loan Solution: While most hard money lenders will lend to either an individual or an entity, the common denominator will be that a personal guarantee is required. *Note: Some hard money lenders will lend to Self


•••BUSINESS STRATEGY•••

Directed Roth IRA/401K which would be non-recourse. Check with the specific lender you are working with. Mistake #9 – The investor complains the loan fees, interest or other costs are too high Solution: It’s a hard money loan. It’s typically easier and faster to get than a traditional bank loan, if you can even find a traditional bank to consider the loan, which is the reason fees are higher. Most banks will not consider the types of loans offered by hard money lenders. You are usually paying for convenience and to get the deal done. Mistake #10 – The investor pays for an appraisal or other services before having a commitment from the lender Solution: Let the lender order the appraisal. Don’t think by already having an appraisal it is going to speed up your loan processing. It’s typically a mistake and will ultimately cost you more money on another appraisal. Most hard money lenders have an approved list of or use just one appraiser or appraisal company. The lender is going to want to order the appraisal from an appraiser it has already selected and or done business with. Mistake #11 – The investor waits too long to make a decision on a lender Solution: Depending on where you are investing, there could be several lenders to choose from. It’s smart to shop around, but don’t wait until the last minute to make a decision.

Plan ahead. Give yourself some time to close your loan. Mistake #12 – The investor tries to fit the scope of work (SOW) into the loan Solution: Some investors will try to fit the scope of work into the loan. This means the investor will say “I can only spend $15,000 on the rehab because if I spend more I will have to bring money to closing”. Don’t try to “fit” the numbers. This will not work because the lender will eventually determine the scope of work is inadequate for the loan situation, usually during inspection/appraisal. Keep your LTVs as low as reasonably possible. Doing so not only helps you get a hard money loan, it’s usually going to be a better buy or investment for you too. Mistake #13 – The investor underestimates the scope of work (SOW) Solution: This may be unintentional (as opposed to Mistake #12) and is usually because the investor doesn’t understand the true needs of the property and rehab, or is missing key line items. For example, the roof has 5 layers but the investor doesn’t include a budget to tear off and replace the roof. Do your best to make sure the scope of work is appropriate for your proposed exit strategy and it is all inclusive of the real needs of the subject property based upon your exit strategy.

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•••BUSINESS STRATEGY••• How does an investor determine the estimated scope of work on the subject property? There are a number of common ways. One, the investor looks to a contractor or several contractors to provide a bid(s). Two, the investor does his or her own bid and estimation on the property. Mistake #14 – The numbers don’t make sense Solution: The happens when an investor submits a loan but the numbers don’t add up. For example, an investor indicates they are buying a property for $200k, needs $50k for rehab, has $5k to put down and is requesting a $225k loan. The numbers don’t add up. This initial problem is a red flag to the hard money lender that the investor doesn’t know what they are doing. Mistake #15 – The investor doesn’t have the ability to service the loan or interest payments Solution: Many hard money lenders require monthly (usually) interest only payments. The borrower will need to establish an excess in income monthly to be able to service this debt. An alternative might be to wrap the interest into the loan but doing this usually increases the borrower’s cash needed to close. Mistake #16 – The investor doesn’t provide the factual accurate information to the lender Solution: Don’t lie or try to mislead a hard money lender. Lenders are incredibly savvy when it comes to these investment loans and with the power of the internet it’s easy to access all types of information quickly. If the borrower has lied or attempted to mislead the lender the borrower will not (ever) get a loan. Mistake #17 – The investor doesn’t listen to the hard money lender Solution: Hard money lenders have usually looked at and funded a lot of deals. Most will be quick to offer suggestions or advice, whether solicited or not. Listen to what the lender has to say. Chances are the lender has more experience than the investor. Many deals die late into the process because the investor did not heed the advice of the lender from the beginning. Mistake #18 – The investor doesn’t have all of the paperwork in order Solution: Make sure you have

16 Private Lender

all of your paperwork in order (in the beginning, not the day before closing) to ensure a smoother process. For example, if your entity is registered in Nevada and you are looking for a loan in Missouri, you need to also register in Missouri. If you wait until the last minute it will (significantly) delay the closing of your loan. Mistake #19 – The investor doesn’t look at the lender’s website or information before submitting a deal Solution: Lenders usually have certain types of properties they are looking to lend on. More importantly, those they will not consider. For example, many lenders won’t do any raw land loans, some won’t lend on mobile home parks (MHP), others won’t do commercial property- only residential. Be sure to check the lender specifics before submitting a loan request. Mistake #20 – The investor needs or wants to close yesterday Solution: Hard money lenders will usually be able to close quickly, sometimes within a few business days. Most will probably require 10-14 days to close. It’s important to give yourself time for the process otherwise it will delay your closing and possibly kill the deal altogether. Mistake #21 – The investor shotguns the deal out to every loan broker or lender it can find Solution: It’s a small lending world. Actual lenders sometimes see the same deal over and over again because the borrower has shot-gunned the deal out to anyone who fogs a mirror. It’s best to seek out one or two options initially. You only need one lender. Shot-gunning is usually not a better option Here’s to a successful 2015!


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•••TECH TOOLS•••

RENTFAX™: TAKING THE GUESSWORK (AND HOMEWORK) OUT OF RENTAL PROPERTY INVESTMENT AND LENDING DECISIONS BY: SHANE SAUER

E

valuating rental property for investment and/ or lending purposes is a complex, involved and time-consuming process. As a lender, however, understanding the collateral securing your loan is critical. Historically, evaluating collateral has been comprised of two things: (i) an appraisal of value and (ii) a reasonable assessment of the income generation potential (i.e., rental income) of the property. It is the combined strength of the asset (value), the borrower (credit) and rental income generation of the property that prevents the default. Superior understanding of the rental income provides lenders a higher probability of performing notes and a strategic edge in garnering loan business. It is in this third category that RentFax, LLC excels.

Predictive Analytics

The result: faster, easier, and less subjective decision making for consumer credit. The process even became so transparent that consumers are very familiar with FICO and know the scores they need to obtain the credit or interest rates they desire.

Introducing RentFax™ and the RISC™ Score

The Rental Income Stability Composite (RISC) score was developed by RentFax, a data and decision tools company, to serve investors, lenders, and property managers in the residential real estate market. In this case, the RISC score applies to a specific location (not a tenant or applicant) and is based on factors that historically influenced rental property performance. Like the FICO score, the RISC score is This can save tens, proprietary, but it includes such factors hundreds or even as demographics, crime, schools, economics, and residential housing thousands of staff hours characteristics.

Before Fair Issac Corporation developed the FICO score in 1989, consumer credit reports consisted simply of pages upon pages of researching and analyzing payment history. How likely was The result is an index between 0 and a consumer to repay a debt? You deals... 100 that accurately predicts the stability simply looked over the payment of rental income from the property history and made an assessment based solely on its address. The implications of the RISC based on your own subjective opinion of the data. There score fall in two categories: pre-acquisition (investment was no rating system nor was there a straightforward decisions) and post-acquisition (management decisions). method to compare two files.

The process was far too time consuming and too subjective for most companies, so the FICO Score was developed as a ‘predictive indicator’ of credit, with scores ranging from a low of 350 to a high score of 850. For anyone who’s applied for a mortgage or financed a vehicle, the FICO score played a role in the transaction. Scores on the lower end of the range, say below 500, indicated poor credit customers. Scores on the higher end of the range (above 700) were good credit customers. Using the FICO score as a metric, companies could develop decision guidelines (i.e., accept if FICO score is 675 or higher) and quickly and easily compare applicant files.

18 Private Lender

Pre-Acquisition Use: Investment and Lending Decisions

The purchase of rental investment property has always been predicated on its income generation potential. Investors and lenders built financial models based on their best estimates of rents (income) and expenses. Even the best-laid financial models have always struggled to reflect the realities of income property, namely the potential for interruptions to the rental income stream. What about vacancy, and in particular, the costs associated with nonagreeable termination of tenancy? (evictions, repairs, etc.)


•••TECH TOOLS••• The RISC score provides an absolute and comparative index that reflects the stability of income generation from a given location. Given two potential deals with similar financial forecasts, which one is better? The one with a higher stability of income, or higher RISC score. RentFax provides a ‘local’ RISC score for comparison of properties in the same Metropolitan Statistical Area (MSA) and a ‘national’ RISC score for comparison of properties across

the United States. For example, you have loan applications from two borrowers for two different rental properties: one in Memphis, TN and one in Jacksonville, FL. Both are 3 bedroom, 2 bath homes in what appears to be good neighborhoods. Both comp out at $150,000 and should rent for $1100. If you could only make a loan to one of the borrowers, which would it be? Answer: the one with the higher RISC score. A higher RISC score simply implies a higher degree of rental income stability. Properties less likely to experience income interruption are ultimately more profitable and therefore less risky – both to lenders and investors.

Post-Acquisition Use: Property Management and Refinancing Decisions The implications of the RISC Score postacquisition are also of interest, although primarily to investors and property managers. Properties with lower RISC scores may be good candidates for heightened security measures, greater safety precautions (showings after dark, etc.), and more stringent tenant screening parameters. The burgeoning rental refinance industry would be well advised to consider RISC scores for their portfolio analysis and conversations are happening that impact the underwriting process as it has already with insurance companies (insurance losses are often tied to incidents of non-agreeable termination of tenancies).

Rent Radar™ from RentFax offers thorough, transparent rent profiling Another exciting feature offered by RentFax is Rent Radar, which provides not only highly accurate rent forecasts, but also a full analysis of the comparable properties used to obtain the rents. Much like an appraiser adjusts comparable sales for appraisals, rent comparables in the same zip code, same MSA, and same fixed radius from the subject are transparently reviewed and adjusted to derive the expected rent for a subject property. All of the adjustments made to derive the rent forecast are laid out for evaluation in the report. Another innovative feature of Rent Radar is

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19


•••TECH TOOLS••• the company’s treatment and presentation of tenancy duration and vacancy duration – a far different and more realistic approach to modeling financial performance of a rental property. Typical financial models assume a certain percentage of vacancy (i.e., 5%). The RentFax approach uses data analytics to derive the average tenancy duration and vacancy duration for a particular location.

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Real Results: the closest thing to a pushbutton pro forma available anywhere The third and final component of the RentFax offering is the pro forma and income modeling. If you love building intricate financial models, you’ll appreciate the level of detail and analysis that have culminated in RentFax’s efforts. The Real Results module pulls data from various sources to provide a true ‘net income’ proforma analysis that incorporates property management fees, property taxes and hazard insurance. The result is a monthly net income figure in seconds with no more than an address, and basic property configuration (beds, baths, and square footage). For lenders, this represents an ideal ‘validation’ of proforma figures submitted by a borrower. Taking this analytical approach one step further, the RentFax Income report simulates the performance of the rental property by running a 10,000 iteration Monte Carlo simulation, correlating the appropriate variables (e.g., higher rents typically result in lower tenancy duration, etc.) and plotting the results in a probability distribution. The result is the most statistically accurate forecast of the financial performance of a rental property available anywhere. Despite all of this data compilation and computational horsepower, RentFax’s reports are simple and easily understood. They are also quite inexpensive. In fact, they are so affordable that you can accomplish much of the front end decision-making processes of your business with repeated use of the company’s RISC index and other reports. This can save tens, hundreds or even thousands of staff hours researching and analyzing deals. Would you like to try RentFax? The company has a special offer for readers of Private Lender: to learn more go to www.rentfaxpro.com/ploffer. AAPL is an affiliate of RentFax.

Interested in writing for Private Lender and getting in front of thousands of real estate finance professionals? Contact Chrissey at cbreault@aaplonline.com to learn how!

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•••FINANCE•••

CROWDFUNDING V. HARD MONEY LENDERS BY: MARK MASTERSON

“T

ime is money” as it relates to identifying and closing on attractive real estate opportunities. Unless the borrower has cash available to close quickly on an acquisition, most borrowers need capital from third-party capital sources in order to complete their acquisition. Borrowers who can offer the quickest close are the most likely to have their offers accepted by motivated sellers.

standards enforced by the U.S. government pursuant to Dodd-Frank Act. But with hard money lenders charging interest rates in the high teens and hefty origination fees to originate short-term loans for borrowers, these same borrowers have begun looking for alternatives that offer the same speed and efficiency as hard money but at a more attractive cost.

From Private Money to Crowdfunding

Historically, financing options typically ranged from Crowdfunding for real estate was born during a time banks to mortgage brokers to hard money lenders. when banks and other funding sources, as mentioned Of these three primary lending options, banks usually above, could not or would not lend to offered the lowest rates and fees, but even prime borrowers. The industry took the longest to fund transactions. .too often investors emerged in 2013 as a way for real Meanwhile, mortgage brokers have looking for debt focus on estate borrowers and sponsors to historically offered the most funding raise capital from accredited investors. options from either their own capital max loan proceeds and Sourcing capital from accredited sources or from any number of lose sight of their true cost investors through online investment multiple third-party sources such as platforms introduced increased speed of capital. banks, credit unions, or investment and efficiency to capital raising as firms. Lastly, hard money lenders it allowed borrowers to leverage have been the most likely to fund technology to syndicate accredited investors into specific loans faster than anyone else but have offered the most investment opportunities. expensive financing.

“..

From Banks to Private Money After “The Credit Crisis” began to worsen back in the fall of 2008 for more and more financial institutions, private money lending options from either small local hard money lenders or large institutional funding sources moved from being a last resort to a primary funding source for a higher percentage of real estate borrowers. Many borrowers were tired of their local banks turning them down in spite of their perfect mortgage payment histories and years of loyalty to those same institutions. What became so appealing to borrowers who worked with hard money lenders was that the worth of the investment’s collateral was deemed tantamount to the borrowers’ creditworthiness. Many of these loans were truly “asset-based loans” with much more straightforward underwriting guidelines than offered by national banks, which needed to adhere to more stringent underwriting

22 Private Lender

As with hard money lenders, crowdfunding can offer speed and efficiency to borrowers looking to close quickly on an acquisition and often times can originate loans within 24-48 hours rather than the weeks on end it can take with a bank. The main difference then between crowdfunding and hard money loans becomes the cost. Debt originated from crowdfunding platforms is often several hundred basis points cheaper than private hard money lenders or funds. And what this means for a borrower is that he/she can keep more of the profit when the property is sold. However, too often investors looking for debt focus on max loan proceeds and lose sight of their true cost of capital. Although many hard money lenders may lend up to 90% and even 100% of cost, this type of leverage usually comes at a high price to the borrower. Unlike hard money lenders, borrowers looking for acquisition financing through crowdfunding are usually restricted to


•••FINANCE••• 80% LTC and 65% ARV but at substantially lower interest rates and origination fees than hard money. As the chart below clearly depicts, this usually means substantial cost savings for borrowers.

cost effective acquisition financing, make sure you weigh all your options rather than relying only on the lender that is willing to provide you with the highest leverage. That additional leverage can come at a huge cost.

Accordingly, if you are a borrower looking for efficient and

Crowdfunder

Hard Money Lender

(RealtyShares)

Purchase Price

$150,000

$150,00

$50,000

$50,000

Total Cost

$200,000

$200,000

As is BPO/Appraisal

$200,000

$200,000

$0

Expected Sale Price

$319,000

$319,00

$0

80%

95%

$0

$160,000

$190,000

$30,000

Renovation Budget

Loan-to-Cost Proposed Loan Amount - LTC Loan-to-As-Is Valule

70%

70%

$0

Proposed Loan Amount

$140,000

$140,000

$0

Loan Amount

$140,000

$190,000

$50,000

Interest Rate

11%

16%

5%

Origination Fee

2%

4%

2%

Daily Interest Payment

$42

$83

$41

Days Loan Outstanding

120

120

Total Interest Paid

$5,063

$9,995

$4,932

Origination Fee

$2,880

$7,600

$4,800

Total Debt Costs

$7,863

$17,595

$9,732

Gross Profit

$119,000

$119,000

Profit Less Debt Costs

$111,137

$101,405

($9,732)

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•••MANAGE & LEAD•••

ENHANCED PRIVATE LENDING LEGISLATION COULD BE COMING BY: KELLEN JONES

P

rivate non-consumer lending has been largely ungoverned—anyone wanting to lend a friend enough money to flip a house should be able to, right? Now the game has changed, and it’s no longer just a few local private-money lenders making small loans on single-family homes. Big money is now attracted to the model because of the collateral-backed security and typically attractive returns, and with more participants and money, legislators are now considering regulation using more traditional financial sectors as comparable examples of how private lending could be governed.

Take Cache Private Capital Diversified Fund (CPC) for example—a short-term, national private lender. Gauging local market indicators and many other risk factors, CPC underwrites with intense scrutiny, then prices its loans as an equity alternative. Borrowers with time constraints and challenging situations apply for capital that would typically be best structured as a partnership. Rather than taking 50 percent or more of a project’s equity (and thus half the profits), CPC makes its loans at rates ranging from 12 percent to 18 percent annualized with terms of 18 months or less. When fees and required reserves are grossed into the loan The best way to avoid amount, the rate can sometimes enter The 2008 mortgage crash spurred the twenties. Regulators comparing over-regulation is through regulators to ensure banks could this structure to federally insured not write blank checks to unqualified disciplined execution and bank rates may see this cost of capital borrowers, and Dodd-Frank aimed industry-wide integrity. as exorbitant, even though, when to create more transparency in the compared to equity, this is a bestfinancial system. Whistle-blowers and case scenario for project sponsors consumer-protection groups in many and borrowers. states are addressing payday-lending laws, and although

private lending has been historically linked to mortgages, payday lending, the introduction of crowdfunding and other technology-based lending platforms, now have legislators and regulators scurrying to find ways to keep lenders in line.

Let’s set the stage: countless funds, REITs and private lenders are making loans at terms ranging from prime bank rates to 100%+ per annum. Each raises money differently, and those trying to avoid trouble do so under state and federal regulation framework. How they place capital as loans and equity is also governed, typically by the state where the transaction is completed. Usury laws, lien-instrument types and foreclosure procedures vary greatly state by state. Some private lenders stay in the single family residence space, and are licensed as mortgage companies, while others are non-consumer commercial lenders, and rely on the local commerciallending laws where they write checks. The lengths of terms fluctuate, but are typically much shorter than banks offer. Origination and other fees differ as well. By rule, private lenders usually price and structure loans based on risk, but if that were all to consider, the industry would be relatively easy to regulate.

Crowdfunding and technology-enabled capital raising efforts drew attention when the kick starters of the world were joined by platforms like Realty Mogul—a leading real estate crowdfunding platform that presents investment opportunities to accredited investors. Rather than providing complementary gifts to start-up sponsors, this generates financial returns for investors. To the SEC and other regulators, the model looks much like selling unlicensed securities in need of further protection measures. Realty Mogul has a well-defined quality standard for the loans it puts on its platform, but all crowdfunders are not created equal.

So the quest to appropriately regulate an industry that takes so many new forms commenced with lightning speed in 2012 with passage of The JOBS (Jump Start our Business Startup) Act. This legislation was fiercely opposed by The Securities Exchange Commission and many traditional transactional attorneys. The financial industry’s prevailing opinion was that The JOBS Act was named to give politicians on both sides of the aisle reason to support it. The legislation defined capital-raising efforts for developers, public and private companies, and funds.

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•••MANAGE & LEAD•••

It allows deferment of registrations required under the SEC Act of 1954 and provides an on-ramp for emerging companies and those preparing to go public. The Jobs Act has five major provisions, it:

• directs the SEC to remove the conditions prohibiting marketing and general solicitation for those raising money under Rule 506-D;

• creates legislation akin to Regulation D that contemplates cap amounts of $50 million instead of just $5 million;

• allows intermediaries like online broker dealers or

new categories of lightly-regulated crowdfunding platforms to raise money for small amounts from several investors for a single purpose;

• establishes higher thresholds before companies are

required to register under SEC Acts. (The amount of capital will stay the same, but the law increased the limit of record shareholders from 500 to 2000. No more than 500 of the record shareholders can be non-accredited. This doesn’t include employees who are paid in interest under exempt compensation

26 Private Lender

plans.), and;

• provides relief through offering activity and reduces

ongoing disclosure. Any company with total revenue less than $1 billion can maintain EGC (Emerging Growth Company) exemptions for five years. Now, companies are free to test the waters with institutional (accredited investors) to determine the interest in their offering before filing.

While deadlines to make revisions are quickly approaching, the industry and regulators are only now discovering the JOB Act’s impacts. So far, the major effect of the law seems to be evident in the emergence of many more crowdfunding platforms and among EGCs. More companies will try to go public using the on-ramp because it saves costs and eases some of the DoddFrank and Sarbanes-Oxley requirements. Another sector affected by The JOBS Act and compared to private lending is the peer-to-peer space. Although this sector is more a predecessor to crowdfunding than private bridge lending, regulators have a hard time defining peerto-peer activity. The peer-to-peer model rightfully earned


•••MANAGE & LEAD•••

is probably inevitable -- and there is a place for winwin regulation. However, the industry needs to take a leadership role in proposing common-sense solutions. Institutions tirelessly supporting legislation calling for less transparency are helping write a recipe for disaster much like the one that culminated in 2008. Investors have a right to feel that someone beyond their advisor has their back. When investors lose hard-earned money because an alluring deal was bad to begin with, someone should have to answer, be it an inexperienced crowdfunder or a genuine bad actor.

Stock Photo

its billion-dollar annual market share. But with no major recourse or security on peer-to-peer loans, potential problems will draw yet more regulatory scrutiny to the lending industry. The fear of potential problems still plagues the crowdfunding sector. In the comfort of their own homes, accredited investors get regular emails from these platforms. Deals sometimes look too good to ignore— “Developer seeking 2nd Mezzanine Equity to Complete High-Rise Condos in Staten Island with a guaranteed 20% return.” It is great that technology allows investors the freedom to quickly and conveniently make their own decisions; but what happens when a deal goes south? Who is responsible to ensure that these financial platforms aren’t just enticing accredited (but unsophisticated) investors with high promised rates of return? When (not if) a contingent of poorly executed crowdfunded loans or equity deals default, regulators will become more serious about buttoning things up. So far, it is all about sexy deals on sexy platforms with very little history or data to suggest anything other than success, but when crowdfunding and other online capital-raising efforts eventually invite more scrutiny, the door to more regulation of private lending will get kicked open further. So far, most legislative efforts have focused on the raising of money, whereas the placement of money seems to receive less scrutiny. Regulation of both components

The traditional approaches of affecting legislation by writing representatives or joining other lenders to hire a K Street lobbyist may work—but it has not in most nontraditional financial sectors since 2008. The damage to traditional sectors was so deep, and so rooted in greed and misconduct that legislators are rightly wary. They do not want to be on the approving end of lax regulation that will enable another crash – or another type of crash. Most politicians are not trained in finance – especially nontraditional finance -- and form opinions based on the rare, negative experiences of some vocal constituents. But there are politicians who understand that there is a place in the industry for higher-risk/higher-reward financial models; that technology has made these alternate models inevitable; and that a healthy level of freedom combined with strict guidelines, where needed, will enhance the industry. There are between eight and nine million accredited investors in America. They are the private lenders’ partners. Private lenders who ethically and responsibly manage that wealth for a return should earn market share and continued confidence. Earning that confidence from financial allies makes them natural political partners. The best way to avoid over-regulation is through disciplined execution and industry-wide integrity. If private lenders want to continue to ultimately self-govern, they must lead an effort to expose errors that hurt those partners – the investors – and lead to reactionary and poorly crafted legislation tailored to failures in other finance sectors. Private lenders who damage the industry’s reputation by gouging or intimidating borrowers increase the risk that all private lending will be regulated like its peer industries. Because of the complex nature of our industry, educating Congress would be only possible with the support – financial and political – of those we ethically serve. The best way to protect the industry is by making loans that protect investors and enable borrowers to succeed and enlist their help in maintaining our business models.

aaplonline.com

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•••MANAGE & LEAD•••

RIGHT FOR YOU AND ME BY: CHRISSEY BREAULT

A

code of ethics is essential to a profession; the code will provide an ethical starting point for professionals and for others outside the profession. It ensures quality in treatment of other members and those the profession serves. The ethical conduct of private lending professionals is an affirmation of the critical values of service, respect for others, and the need to improve the profession. Ethics provides a framework for conducting essential function, instituting policies, and developing strategies for service. In recent years, there has been an increasing awareness of the ethical aspects of private lending. There isn’t much attention given by media but consumers are calling organizations – such as the American Association of Private Lenders – to verify the professionalism and ethical behavior of individuals or organizations they are considering to do business with. You’ve heard the saying ‘the best defense is a good offense.’ By looking out for predictable conflicts and discussing them frankly with colleagues and clients (because, let’s face it, they usually have no idea how things really work), you will evade misunderstandings and sticky situations that lead to hearings before ethics boards, lawsuits, loss of licenses or professional membership, or even more rotten consequences. When you do end up in an ethical jam, it will often because you unknowingly slid too far down a slippery slope--a result of unawareness about your ethical obligations or thinking you could handle a situation that spiraled out of control.

Organizational Ethics Ethical behavior in the workplace can benefit your career and improve your working environment. Understanding examples of professional and ethical behavior can help you to develop your own effective work habits. Be conscious

of how you treat co-workers and your workplace attitude and you can improve your productivity and effectiveness However, being vigilant doesn’t mean you should spend your days worrying about where the next pitfall could be. Instead of worrying about the ways you can get in trouble, think about ethics as a way of asking ‘How can I be even better in my practices?’ Good ethical practice is good professional practice, which is good risk management practice. “By providing employees with ethics standards, training, and resources to get advice, organizations seek to create a work environment where (1) it’s okay for employees to acknowledge that they have an ethical dilemma, and (2) resources are readily available to guide employees in working through those dilemmas before any decisionmaking,” says Gretchen Winter, vice president of business practices at Baxter International. The Ethic’s Resource Center’s National Business Ethics Survey (NBES) show that both formal ethics programs and information ethical practices are related to key outcomes. Employees who work in organizations with ethics programs, who see their leaders and supervisors practicing or modeling ethical behaviors, and who see values such as honesty, respect, and trust applied regularly at work generally report more positive experiences regarding a range of ethical outcomes that included:

• Less pressure on employees to compromise ethics standards;

• Less observed misconduct at work; • Great willingness to report misconduct; • Greater satisfaction with their organization’s response to misconduct reported;

• Greater overall satisfaction with their organization; and

One of the earliest examples of professional ethics is the Hippocratic Oath which medical doctors still adhere to this day.

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•••MANAGE & LEAD••• • Great likelihood of feeling valued by their organizations.

The relationships described in the report are even stronger among employees in transitioning organizations – those that had undergone a merger, acquisition, or restructuring. The findings suggested that organizations and employees drew the greatest benefits of ethics programs when times are toughest. However, it also meant that the foundations for ethics programs needs to be laid in good economic times when, ironically, some of the most valuable benefits of the program may be least apparent.

Ethics in Finance can be developed around three broad themes: 1. In financial markets 2. In financial service industries 3. By financial people in organizations

FINALLY Ultimately, a code of ethics serves to promote the values of the profession over the personal, general, and (sometimes) institutional values. It services as a guideline for professionalism and quality of service. However, it shouldn’t be confused with professional standards. A code of ethics does not set standards to which a professional must perform, but is a description of the values of the profession which members must consider in order to act in a consistent and professional manner.

Legal authorities define fraud as a crime that “involved the use of dishonest or deceitful conduct in order to obtain some unjust advantage over someone else.”

Addressing Misconduct that Led to (or Arose From) the Financial Crisis Number of Entities Charged: 175

and

Individuals

Number of CEOs, CFOs, and Other Senior Corporate Officers Charged: 70 Number of Individuals Who Have Received Officer and Director Bars, Industry Bars, or Commission Suspensions: 40 Gorilla Capital partners with fix & flip operators who require 90% funding for their projects.

Refer clients to us that do not meet your cash requirements for a hard money loan and we will provide the additional equity to make it work!

Penalties Ordered or Agreed To: > $1.87 billion Disgorgement and Prejudgment Interest Ordered or Agreed To: > $1.29 billion Additional Monetary Relief Obtained for Harmed Investors: $418 million Total Penalties, Disgorgement, and Other Monetary Relief: > $3.59 billion

541.393.9042 | amy@gorillacapital.com | gorillacapital.com

30 Private Lender

http://www.sec.gov/spotlight/enf-actions-fc.shtml


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“My experience with B2R has been exceptional. They want to make loans for rentals.” - Kurt Carlton

As a referring broker, you can help landlords free up equity from their existing properties, improve their cash flow, and build their rental portfolios. In the process, you’ll open up a new source of commissions for yourself. It all adds up to easier access to financing for investors – and more business for you. To find out how you can become a referring broker, contact B2R today.

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B2R Finance L.P., NMLS ID # 1133465, 4201 Congress Street, Suite 475, Charlotte, NC 28209. B2R Finance L.P. is not a residential mortgage lender. B2R Finance L.P. only makes loans with a commercial purpose and is not currently authorized to make such loans in all jurisdictions. Your specific facts and circumstances will determine whether B2R Finance L.P. has the authority to approve loans in your specific jurisdiction. B2R Finance L.P. operates out of several locations, but not all locations conduct business in all jurisdictions. Arizona Mortgage Banker License BK#0926974. Minnesota: This is not an offer to enter into an agreement. Any such offer may only be made in accordance with the requirements of Minn. Stat. §47.206(3), (4). Oregon Mortgage Lender #ML-5283.

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•••LEGAL•••

FEDERAL TENANT PROTECTION ACT SCHEDULED TO EXPIRE BY: BENJAMIN HOEN, HOEN ESQ

Stock Photo

I

n 2009, President Obama signed into law the federal Protecting Tenants at Foreclosure Act (PTFA), granting tenants, under certain circumstances, the right to live out their lease or at least 90 days’ notice before having to vacate a property sold at foreclosure sale. PTFA came at the height of the foreclosure crises, in response to a pervasive trend impacting renters living in mortgaged properties. Even though they paid rent each month, tenants were being evicted when the place they called home went through foreclosure, because their landlords failed to pay the mortgage. However, these protections will no longer exist when PTFA expires on December 31, 2014. In 2013, legislation was introduced in the House and Senate by a number of Democratic Senators and Representatives, seeking to make these protections permanent. The Bills received very little bi-partisan support, and as a result neither the House nor the Senate took a vote on the Bill prior to the December congressional

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recess. With the new Republican controlled Congress set to take office in 2015, it is not expected that a Bill to make these protections permanent will gain much traction in the next Congress. In a related matter, Congress passed a one year extension to the Foreclosure Relief and Extension for Servicemembers Act prior to the December recess. The Act ensures that troops on active duty are protected against losing their home for one year following the completion of their service. Previously, under the Servicemembers Civil Relief Act (SCRA), troops were only protected for 90 days. In 2012 those protections were extended to nine months, before being extended to one year in 2014. The Act was also set to expire on December 31, 2014, and if Congress had not acted, the protections would have reverted to the original 90 days. The temporary extension of these protections will remain in effect until December 31, 2015 and the Bill now awaits the President’s signature.


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•••LEGAL•••

IT’S THE POLITICIANS, STUPID. BY: BENJAMIN HOEN, ESQ

J

ames Carville coined the phrase “it’s the economy, stupid” during the 1992 presidential campaign. With this very powerful talking point Bill Clinton was able to defeat incumbent President George H.W. Bush who had enjoyed a 90 percent approval rating after Operation Desert Storm. According to Gallup, President Obama enjoyed a 53 percent approval rating just after the 2012 Presidential Election. This reflected his highest approval rating since 2009. In 2012, things were looking very good for the returning incumbent President. The Health Care Reform Act was in full gear, the economy was showing signs of an impressive recovery, the unemployment numbers were dropping precipitously, and the Consumer Financial Protection Bureau was formed in the wake of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Fast-forward now to 2015, following the worst recession since the Great Depression, the housing market and the economy appear to have stabilized. Additionally, oil prices are at record lows which only helps propel the economy through new consumer spending. But, the Republicans still stormed through the 2014 midterm elections and took control of both the House of Representatives and the Senate. Now it appears that Capitol Hill and the White House are on a collision course. Despite the optimistic economic outlook, American politicians are waging unprecedented political warfare in Washington. With two years left on his term, President Obama faces a very hostile Congress. Since returning from recess in January, the new Congress has already flexed its muscles by voting to approve the Keystone XL pipeline despite threats of a Presidential veto. It has been reported

“I predict a future of happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” -Thomas Jefferson

34 Private Lender

that the Speaker of the House, John Boehner (Ohio-R) went clandestinely behind the President’s back to invite the Israeli Prime Minister to address Congress on the issue of increasing sanctions against Iran, which the President vehemently opposes. There are also rumblings about repealing the Healthcare Reform Act, which seem certain to gain more traction as the 2016 election season draws nearer. So there is very little reason to hope that Congress and the President will see eye to eye on just about anything in the next two years. Will 2015 be the final gasp for James Carville’s talking point about the economy, and how will the new political landscape affect the mortgage industry? In a recent interview on Bloomberg TV, Secretary of Housing and Urban Development, Julian Castro was quoted saying that reforming the mortgage finance system would be a “priority” for the administration over the next two years. But, what kind of reform can we expect in such a divisive political climate? Some analysts suggest that Congress may seek to reform the Dodd-Frank Act by overhauling the CFPB. This would be attractive because consumer protection is a bi-partisan issue and Congress seeks to exert more influence over the CFPB. Over the next two years, Congress is expected to tighten the strings on the CFPB through oversight and accountability by appointing an independent Inspector General. It may also amend Dodd-Frank in order to loosen lending restrictions on larger banks, while at the same time enhancing regulators ability to monitor the financial system for signs of irresponsible lending practices. In 2015, we should expect to see a trend of increased mortgage lending on account of these initiatives as both consumers and lenders will have more confidence in the housing market. Perhaps it’s still the economy that needs to stay in focus in 2015. Lawmakers on both sides of the aisle should seek ways to improve these financial regulations, and this is very good news for those in the mortgage industry. Financial policy has always been the launching pad for bi-partisan efforts. And if Washington can find ways to keep the momentum of consumer spending going, then mortgage lending should boom, and that just might be the recipe to bridge some of the other broad divides facing Washington today.


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