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Tag Archives: SB830 2017

SB 830 Requires a Level of Reporting on Mortgages

A beat up bill explains amendments.

Legislation seldom survives as introduced. Let’s see what happens with SB 830.

This post is part of my series on legislation in the Texas Senate that “Takes Aim at Wrap-around Mortgages.” I’m starting with SB 830 for a couple of reasons. First, I want to tackle these bills in numeric order. Second, I actually like this one. Here’s how it was described in Senator Judith Zaffirini’s press release:

SB 830 (Rodriguez) requiring all seller-financed lenders give borrowers annual statements that include how much money was paid and is still owed on a loan. This information, routinely given by banks and credit unions, often isn’t given by self-financing wrap lenders, leaving borrowers without proof of lost payments in cases of fraud.

As indicated in the blockquote above, Senator José Rodríguez authored the bill. You can find the full text of the introduced legislation here.

So, let’s talk about why I like SB 830 as introduced:

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How Do Investors Use Wraps?

For Sale By Owner with Financing

If you see a sign like this, you’re probably looking at a seller wanting to finance the sale of the house with a wrap.

This post is my third in a series sparked by pending legislation in the Texas Senate. Last time, I explained how wrap-around mortgages (or wraps) work. Today, I want to talk about how investors use them. I’m not going to sugar coat. Unscrupulous sellers can take advantage of unsophisticated or unwary people using this technique. So I want to explain how ethical sellers, including investors, can protect their buyers.

Based on our turducken example, investors would probably fall into the role of either John or Greta, owner-financing a house for someone who couldn’t buy it with more orthodox financing. They may also act as a third-party middleman who takes a fee for bringing together the seller and a buyer who needs financing under what Phill Grove calls the Assignment of Mortgage Payment System (AMPS).1

So here’s what to look out for. A reputable seller or investor will use a mortgage servicing company and close with a title company. A scammer, not so much. The title company issues a title policy on the property and handles all of the legal paperwork for the transaction. The mortgage servicing company provides a plethora of benefits to buyer and seller alike, including:

  • Collecting the payments from the buyer and ensuring all of the mortgage payments are satisfied.
  • Managing an escrow account for the buyer, if one is not part of the original mortgage, to ensure taxes, insurance, and other expenses are paid.
  • Notifying all parties if any payments are missed or late.
  • Reporting interest income and payments to the IRS.
    • The seller gets a 1099-INT to report interest income.
    • The buyer gets a 1098 to report interest payments and to document their potential deductions.
Cash flow diagram from borrower to servicer to recipients.

A mortgage servicing company protects everyone’s interests by collecting and distributing the monthly payments. It can also act as an escrow agent for tax and insurance accrual.

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What Is a Wrap-Around Mortgage?

Turducken

Like a turducken, a wrap-around mortgage is a mortgage inside another mortgage. Unlike a turducken, wraps don’t get more delicious the more you wrap them. They just get riskier.
Photo by Christopher “Pacula” Corkum

I introduced the topic of a wrap-around mortgage in my last post, what we in the real estate industry call a wrap. Today, I want to step back from the politics of this topic and simply discuss what a wrap is.

Simply put, a wrap is a financial arrangement where a homeowner agrees to finance the sale of their home without paying off the underlying mortgage. The purchaser agrees to make payments to the original owner, who then uses that income to pay off the original mortgage. Typically, the subsidiary mortgage includes more debt at a higher interest rate than the original mortgage, resulting in positive cash flow for the seller.

An Example Wrap

I’ve seen situations similar to what I’m about to present. It’s one reason I used the turducken metaphor above.

  • John bought a home for $150,000 a few years ago. He still owes $100,000 on a 30-year mortgage carried  at 4% for 30 years.
  • John now want to sell that home for $200,000.
  • Greta wants to buy the house, but for some reason she can’t get financing for the purchase price, even though she has a $20,000 down payment.
  • John agrees to accept the $20,000 down payment and finance the $180,000 balance at 7% for 30 years.
  • Greta makes monthly payments to John, who uses the money to pay his lower mortgage payment and pockets the remainder.
  • In a few years, Greta may decide to seller-finance the property to Henry for $240,000 carried for 30 years at 9%, completing our mortgage turducken.

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Texas Takes Aim on Wrap-Around Mortgages

Texas Capitol Building at Night

Several Texas Senators have introduced a package of legislation that could keep us from helping many people.
Photo by Kumar Appaiah/Wikimedia

Earlier this year, several Texas legislators introduced bills to protect home buyers from unscrupulous investors by making it more difficult, if not impossible, for investors to buy and sell homes with a wrap-around mortgage. While these bills are laudable in intent, they are rife with unintended consequences.

In fact, some of those consequences are so heinous, my first thought was that they were drafted by the banking industry. The effect is to protect bank profits and business models rather than “the little guy.” When I saw who had actually drafted the legislation, my fears were somewhat assuaged—I trust and support Kirk Watson, and I assume the others are well-intentioned, reasonable people—until I read the following statement in Senator Judith Zaffirini’s press release:

The bills were developed with assistance from the Texas Department of Savings and Mortgage Lending, legal aid attorneys, and banking groups.

As we saw in 2008, we can always count on banking groups to favor their own interest at the expense of everybody else, including the general economy.

I think understanding what the impact of these proposed laws will be and either fighting or supporting them as needed is very important—so important, in fact, that I’m interrupting two other series of articles to focus on understanding what they mean.

As we go into this series of posts, remember that I am not a lawyer. I don’t even play on on TV. But I am a concerned, ethical investor.

Tomorrow, I’ll start by explaining what a wrap-around mortgage (wrap for short) is and how investors use it. Later, I want to discuss each of the bills in turn. Hopefully, we can generate some healthy discussion in the comments. In the meantime, click here to see all of the published posts in this series.

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Lee Bruns is Director of Operations for Hermit Haus Redevelopment, LLC and sits on the board of several other investment companies. He grew up in the real estate business and continues to put off retirement because of his love for old houses and a desire to help people. His role models include Jimmy Carter and Richard Branson.

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