by Will Fits, First Imperial Mortgage -with- Lynn Dee Murrow, Lifestyles Unlimited, Inc.®
- Real Estate Investors and those seeking to buy their own personal residence are significantly impacted by The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173), commonly referred to as Dodd–Frank. This Act was signed into federal law by President Barack Obama on July 21, 2010. At a lengthy 2,319 pages, Dodd-Frank was created as a response to the financial crisis that began in 2007, and implemented the most sweeping changes to financial regulations in the United States since those following the Great Depression. One of the goals of the Dodd Frank Act in Title XIV was to protect consumers from getting into “bad” loans, and to minimize the cost of loans. There is no area of American finance left untouched by Dodd-Frank. Although our legislators may have had good intentions with this Act, the outcome has hurt all consumers including the very people they sought to protect.
- To date, 271 Dodd-Frank rulemaking deadlines have passed. Since its inception, and due to some of its vagueness and large penalties for non-compliance, financial institutions have been forced to limit lending to the “cream of the crop”. Those in most need of a loan, and the very people Dodd-Frank was supposed to help, have been left out of the housing recovery. While most real estate investors have been able to continue to buy properties under Dodd-Frank, they have certainly felt the financial impact. Dodd-Frank has also influenced the types of properties investors choose to purchase.
- Dodd-Frank regulations have increased the cost to consumers, caused a decline in service quality, and have limited home buying options, especially for low and middle income borrowers. An example of the higher cost of services is appraisals, which used to cost around $300 and now average around $550. As the costs associated with buying a home have risen, the quality of service has deteriorated substantially across the industry. This decline in service can be attributed to the increase in administrative requirements and paperwork Dodd-Frank has enacted. Consumer choice has been limited as well. Many lenders do not lend on properties with a purchase price below $100k. Those that do, charge higher interest rates and fees that often make these properties unattractive to borrowers. As a result, borrowers either forgo their purchase, or stretch themselves financially to buy above the $100K purchase price. This encourages lower income consumers to buy above their means, increasing the likelihood of financial failure in the future.
- One of the first major changes that happened as a result of Dodd-Frank was in May of 2009. It implemented a program that eliminated the ability of Conventional Lenders to choose a specific appraiser. For real estate investors, this part of Dodd-Frank may have the largest impact. Lenders are now required to order appraisals from an Appraisal Management Company (AMC), and that company assigns an appraiser for the transaction. The lender is not allowed to speak directly with the appraiser. The result has been increased costs to cover the additional overhead of the AMC’s; longer wait times to schedule an appraisal, often taking up to 2 weeks instead of the previous 3 day average response time; and a shift in responsibility for communication with appraisers from lenders to borrowers, who are often ill prepared to provide appraisers with information critical to determining the value of a specific property. Since the loan is based on the lower of sales price and appraisal, lower overall appraisal values can cause transactions to fall apart when the buyer unexpectedly needs extra funds to close.
- First Imperial Mortgage overcame these challenges and provides our borrowers with the best service and pricing possible in this regulatory environment. We are a 100% “referral based” company, we do not advertise to gain new clients. Our success is based on consistently exceeding the expectations of our clients and referral partners which inspires them to send others our way. When we began to experience the effects of Dodd-Frank on appraisals, we did our due diligence to find a local AMC with better procedures in place, and competent appraisers, to provide better results for our borrowers.
In working with real estate investors who participate in the education and mentoring programs available through Lifestyles Unlimited®, another appraisal challenge surfaced. As a result of their education and the availability of ongoing mentoring from experienced and successful investors, members of Lifestyles Unlimited® will often purchase property that needs significant repairs. These properties cannot be purchased with Conventional financing. Instead, these borrowers obtain short term financing (also known as a Hard Money Loan) and refinance this loan within a few months of purchase, after all the repairs are complete and the property qualifies for a Conventional loan. In these transactions, it is important that the refinance appraisal is very close in value to the original after repaired value (ARV) provided by the appraiser at the time of the initial purchase. Otherwise, the borrower will need to bring additional funds for the closing of the refinance loan. Through our research, we found an AMC that would allow us to provide the initial appraisal with the order for the refinance appraisal. In many cases, the AMC will assign the same appraiser to the refinance appraisal request since they are familiar with the property and its value. This allows us to refinance properties for real estate investors with little to no additional cash out of pocket.
As a small family owned business First Imperial Mortgage has been able to respond quickly to Dodd-Frank by making the changes necessary to help our borrowers continue to purchase property. We have been able to streamline our loan process and close initial loans and refinances in 3-4 weeks in spite of the additional processes and paperwork required under Dodd-Frank. Compare this to larger institutions that now require 45-60 days, and in some cases even longer, to close your loan. Our owner constantly reminds us of our mission statement: C.E.R.T. – Communication, Efficiency, Responsiveness and Tenacity. Those are the words we live by, and the qualities you need in a lender to navigate the real estate investing environment under Dodd-Frank. You can find out more about First Imperial Mortgage and their loan products by contacting William Fitts, Branch Manager 713-703-2043 NMLS 278134.
If you would like more information about the real estate education and mentoring programs provided by Lifestyles Unlimited® please call 866-945-6565, take a free class with the button above or simply keep exploring the website!