2017 Legislative Session – The Texas Real Estate Investors Legislative Advocacy Group – was formed – To Address “The Wrap Bill”
As real estate investors, we always strive to create winning positions for everyone involved in our transactions. Wrap-around Mortgages are one of the strategies in our tool belt that allows a win-win-win for the seller, the buyer, and the investor. It is a simple, yet elegant strategy.
As investors, we help homeowners in financial distress who are, in many cases, facing foreclosure on their home. Essentially, an investor steps in to offer assistance to the homeowner, so that the homeowner can avoid foreclosure. Using the Wrap-around Mortgage strategy, the investor purchases the home by reinstating the underlying loan on the home and taking over the monthly payments on the loan. At the same time, the investor finds a buyer and sells the home to the buyer by offering owner financing. The buyer is someone who would otherwise not be able to get a conventional loan to purchase the home. These are typically people who have cash to be able to put down a substantial downpayment, but they do not have the necessary credit to qualify for a conventional loan. Quite often, these are business owners who have fluctuating income from year to year – they are perfectly able to afford the mortgage payments, but they simply do not fit into the model required by a conventional loan qualification process. This is a win-win-win scenario – the seller is relieved of his financial distress and often, walks away with some money to move on in life, the buyer is afforded the opportunity to fulfill the American Dream of home ownership, and the investor makes some money by facilitating the sale of the property with owner financing.
As in any industry, unfortunately, there can sometimes be bad actors who prey on those in times of need for personal gain. In recent years, there were several cases of such abuse in Texas. The perpetrators’ mode of operation typically revolves around abusing this strategy by taking the down payments and monthly payments from the end buyer, but not making any payments on the underlying loan of the original seller. This results is the lender foreclosing on the property even though the end buyer has been making timely payments. This is an instance of fraud.
As a result of such abuses, by a few bad actors, a bill was drafted in 2017 in the Texas Senate with the intention to protect consumers from such fraudulent practices.
However, that Senate bill had the effect of killing the entire wraparound mortgage industry with it. It was essentially throwing out the baby with the bath water. The Texas Real Estate Investors Legislative Advocacy Group – was born to address this bill.
Texas REIAs, the largest network of Real Estate Investor Associations and Investors in Texas with over 87,000 member, participants, and attendees raised tens of thousands of dollars to hire a top lobbyist, Janis Carter, and enroll the services of the state’s top real estate attorney, Alan Ceshker, to give a strong voice to the many ethical real estate investors in the State of Texas.
Through Janis, the team worked closely with the bill author to educate them on the good that wraparound mortgages can bring to Texas sellers, the buyers, and investors alike. Over 100 members of Texas REIAs appeared at the Senate committee hearing, and many delivered powerful testimony as to how the Wrap-around Mortgage strategy has helped both buyers and sellers. The testimony detailed how when investors used this strategy it helped saved many homeowners from an inevitable foreclosure. The testimony also outlined how investors were able to connect buyers to the homes to create opportunity that previously did not exist for homeownership. These efforts resulted in the bill being improved to protect consumers, while still allowing ethical investors to use Wrap-around mortgages to benefit sellers and buyers.
While the bill was being re-worked, through these legislative lobbying efforts, the legislative session ended, before the bill could be voted on.
2019 Legislative Session – “The Wrap Bill” Returns
For the 2019 legislative session, the bill resurfaced in the Senate. The bill retained some of the gains/changes made in 2017, however, some of the languages reverted back to an undesirable state that would have logistically made all Wrap-around Mortgage transaction illegal or at least had too much encumbrance on all parties to be practical.
For example, while the bill allowed an investor to be exempted if, for example, the investor carries out 5 or less Wrap-around mortgage transactions in a rolling 12 month period, anyone doing more than 5 transactions are required to be licensed as a Residential Mortgage Loan Originator (RMLO), and the original lender’s consent is required for the transaction to go through. Having to be licensed as an RMLO to carry out Wrap-around Mortgage transactions is like having to be a CPA in order to file your own taxes, an onerous and unnecessary requirement.
To require consent from the original lender in order for the transaction to be permitted, is a fool’s errand, as there is no practical way of achieving this, because lenders do not even have a process to do this, and frequently a seller is selling to avoid a foreclosure, and does not have time to get permission.
The Texas Real Estate Investors Legislative Advocacy Group – again working with Janis, Alan, and others continued to work with the Senator who authored this bill as well as with the Bank’s lobby. This effort led to success in getting the language revised to be more industry friendly while still providing stronger protection for the consumers. Consent from the original lender was struck out from the bill, and instead of having to be licensed as an RMLO to carry out more than 5 transactions in a rolling 12 month period, an investor simply has to hire an RMLO to originate the wraparound mortgage – something which we strongly encourage everyone to do anyway.
Through these efforts, all parties were able to craft a good bill that was delivered to the senate for vote. Unfortunately, the bill did not pass the House Committee.
2021 Legislative Session – “The Wrap Bill” Final Return
The wrap bill is being prepared for the 2021 legislative session. The senator’s office plans to introduce the bill early in the session, so that it has time to pass. Once again, The Texas Real Estate Investors Legislative Advocacy Group will be working with lobbyists and the industry to work on this bill specifically as well as other bills affecting investors in Texas. The current form of the bill retains most of the verbiage that we contributed in 2019, and has some new verbiage we are reviewing.
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