Never underestimate the creativity of mortgage and real estate professionals, especially players that are privately held and hate dealing with multiple levels of regulation.
A case in point is the re-emergence of "contracts for deed," in which a home is sold by a private entity to a buyer that doesn't take out a "real" mortgage but instead contracts to buy the property — eventually.
Generally, the "buyer" makes a small down payment and the seller retains legal title. Usually the deed cannot be executed for at least the first year.
The play is this: Someone looking to buy a home or investment property doesn't have to hassle with the homebuying process, credit checks, and all the new rules and regulations driving the mortgage process.
Gordon Albrecht, executive vice president of FCI Lender Services in Anaheim Hills, Calif., said private contracts for deed "have been scorching the past four months." Albrecht should know. FCI is the nation's largest private-money servicer of real estate-backed loans.
The foreclosure crisis is the catalyst in the increased use of private deeds, Albrecht said. "With a contract for deed you don't need to foreclose. It's an eviction. The use of these is being driven by the long foreclosure time lines we're seeing."
Though Albrecht would not identify any of the investors he is working with in the private-deeds market, he hinted that some of the money behind these deals is coming from developers and former home builders. (Some are mortgage bankers, too.) "These are guys with 15, 17 years of experience. The have money they want to put to work," he said.
Just how much the use of private deeds has shot up is hard to say. Government agencies and even private data collectors either don't track the business or have no easy way to count volume. Howard Lax, a real estate and mortgage attorney in Bloomfield Hills, Mich., pointed out that no mortgage, per se, is filed in a county courthouse. "What you do with these is file a memorandum on the land contract," he said.
For the lender the beauty of these deals is simple: Some of the paper on such contracts yields up to 11%. "Those are the numbers we see in Michigan," Lax said. But he noted that factored into the yield are an array of fees that might include appraisals and title insurance.
It also appears that the private deed market is being driven by investors whose goal is to buy homes on the cheap and rent them out. (Owner-occupants appear to be a small portion of the business.)
Traditional mortgage lenders (mortgage bankers, commercial banks and thrifts) have tightened their investor loan standards, so much so that many would-be landlords don't even consider going to a bank anymore.
"I know one guy who has 200 houses he rents out," Albrecht said. "I know another who has 335 houses. Over the next five to eight years we are going to have tons of renters."
Ben Ramos, a loan broker in Southern California, says the beauty of these deals is the ability of the borrower to purchase a house (although at a high note rate) because a Realtor may not be involved. "Most people do not realize that in real estate, just about anything can be negotiated and agreed upon by two parties," he said.
Players in the market aren't blind to the risks. Usury laws on how much interest they can charge apply. (Usually it's tied to a certain amount of basis points over the prime rate — but only for lenders that make more than five loans a year.)
Also, the "buyer" entering into the private deed has little in the way of property rights. Perry Hamilton, a private-money lender in Hilton Head, S.C., said such arrangements are "predatory in nature." A default on a contract "cancels the deal and gives the seller back the real estate with no equity" — or equity of redemption — for the buyer."