creating paper for refi...? - Posted by Steph

Posted by David Butler ANN on November 15, 2000 at 13:52:47:

Hello Steph,

Yes, the “Search Archives” button at the beginning of this page will pop up instructions. The easiest search criteria may simply be author’s name in this instance, and then when it pulls up posts under my name for the past year, you might look for subjects that include “simultaneous closings” or “creating notes” in the subject headings.

Also, we have numerous related discussions on ANN’s messageboard at: http://notenetwork.com/at.cgi?a=118510&e=Messageboard

This comes to mind because whenever someone goes in and replies to a post, it brings the topic back up to the top of the ANN board… and it so happens that a fellow did that this morning on one I did last June in reply to a post BROKER BUYING NOTES AT CLOSE. Because of a change over in our board software in September, this was one of several that had to be reposted as Archives… in any event, it is now third or fourth from the top of the page, and has some further discussion about seller’s exemptions and so forth. And again, their is a lot of ground covered in relation to Creating Notes, and Simultaneous Closings sprinkled throughout the discussion and archive material.

Hope this helps, and best wishes

David P. Butler VP Broker Relations
America’s Note Network

creating paper for refi…? - Posted by Steph

Posted by Steph on November 13, 2000 at 07:26:09:

here’s what i have:

lady with credit scores in the 700s.
has lived in her house for 20yrs.
owes 7K.
wants to pull out 15K
FMV 85K
no brainer right?
we tried to run through a straight cash out (TX) but the
closing cost exceed what she can come out of pocket. In TX
3% can be rolled in, but with these small numbers it puts her coming out of pocket, an increase in the loan amount didn’t work for her,and the loan officer wants to get paid… yada yada… everybodys cryin over this little one.

so question:

I thought we’d just create a note and sell it off at a slight discount.
We post the paper, get a buyer (several) …
Everything looks good until the title company says we have to be a lender to do this in TX and they won’t do it.
I must have missed something along the way. Do I just need a new title co, if I need one at all, or is this really a big issue with a cash out in TX?

Can anyone advise?

thanks in advance

Re: creating paper for refi…? - Posted by David Butler ANN

Posted by David Butler ANN on November 13, 2000 at 23:43:44:

Hello Steph,

Well, there are a lot of big issues in Texas lending law… but everything’s bigger in Texas, right :wink:

However, the heart of the issue is pretty much the same in every state… when you “manufacture” a note, such as the example you have illustrated, you have created a loan, rather than created a note sale… and I have made several long posts in the past year related to the various factors that go into the equation. Possibly, you can pull one of them up through the archival search engine facility here on CREO.

But, it seems to be an ongoing point of confusion, so I will try to cover the simplest basics. The act of manufacturing a note by itself is not illegal, and chances are, in many states, you can shop around until you find a title company that will insure title in such a transaction. But title companies are getting wiser, so you may have to shop harder - and getting the title on the SALE of that note will be very difficult, so far has you have described the transaction.

And note buyers are getting sharper too… although the very experienced ones have always known what to look out for. In an article I published some four years ago regarding “Due Diligence” so far as it applies to note investing, one of the primary points I included was the necessity of determining “how the note was created”.

There are a whole slew of reasons why this is important, but perhaps the most important one is related to usury. And there are exceptions, or at least “practical” exceptions to some of these rules. For example, as a private property owner, I want to borrow $15,000 against my house here in California. I approach you for a loan, and I agree to create a note against my house to secure the deal. If you are a private party, not licensed to make loans in California, the maximum interest rate you can charge on the face of the note itself is 10%. And, if you are not in the habit of regularly making such loans (which is not specifically spelled out in many state codes by the way), you technically don’t need a license, nor do you need to prepare the mountains of paperwork and disclosures normally required in a loan transaction.
The chances improve somewhat if you are also related, or close personal friends, with the borrower.

However, if you quickly turn around and sell THAT type of note to an investor, at a discount that results in the note investor earning more than a 10% yield on that specific note (again, in California), chances are extremely high, under the circumstances you describe… that the note buyer would be construed to be a lender, and as such, he would be in violation of licensing law violations (if he is a private party buyer)… and even if he was licensed, he would run into disclosure violations under several state and federal consumer lending laws, the 3 day right of rescission requirements, and of course the usury defense, which can be quite ugly for the inexperienced note holder.

Now, the truth of the matter is, there is no government agency out there policing the matter. Leave it to private businesses to solve the problem (in your case, the title company who won’t insure the transaction).

But, when it does come up, it matters. And when it comes up, is usually the result of an unhappy borrower sometime down the road. And it doesn’t matter if he was a willing participant at the time the note was created. And it doesn’t matter if the whole thing was his idea (except for the punitive damage award - he won’t get that over and above his new “interest free” loan).

To be sure, the sale of an existing, non-usurious note at a discount which boosts the rate of return above usury limits does not, in itself, make the loan usurious (and in the case of a bona-fide purchase money mortgage resulting from a seller-financed sale of real property, it has the all-important “sellers exemption” so dear to private note buyers) - it is the circumstances under which the note was created that will determine the outcome.

A full blown discussion is impossible, yet it is required to achieve total clarity… and I don’t know how we can accomplish that completely in this type of forum… but I hope this helps clear up some of the points you are pondering. Best of luck

David P. Butler VP Broker Relations
America’s Note Network

Where did you learn all this stuff? (smile) - Posted by vince

Posted by vince on January 07, 2001 at 23:35:38:

Wow!!! Sometimes the level of knowledge on these message boards blows my mind! It’s so overwhelming. Makes me say to myself, “how can I ever learn all this stuff?” So, how DID you get so smart? Did you go to school, or is it mostly just from being in the business for a bunch of years? How do I acquire that knowledge in less time? Is that even possible?

At any rate, Kudos to you for your depth of knowledge and thanks for sharing it with us here.

Vince

Re: creating paper for refi…? - Posted by Steph

Posted by Steph on November 14, 2000 at 14:21:19:

David,

Thank you for your detailed response.
Any helpful hints for finding the posts
you mentioned?
Thanks again.
Steph