- May 5, 2020
- Posted by: august19
- Category: Podcast
Are you considering converting a CFD, or a contract for deed, into a note? Converting a CFD can be a long, tough, and arduous process because of the many regulations in place – depending on where you are – but if you know the direction to go in, the process definitely isn’t as daunting. Russ O’Donnell is the Founder and CEO of Call the Underwriter. Joining Chris Seveney, Russ discusses the process and nuances of converting a CFD into a note. It always pays to have knowledge about processes like this in your back pocket, so don’t miss this!
Listen to the podcast here:
Converting A CFD With Russ O’Donnell
We’re going to talk about converting a contract for deed into a mortgage or a deed of trust, whichever avenue that state has. As part of this, we have a special guest, Russ O’ Donnell from Call the Underwriter. Russ, how are you doing?
I’m great, Chris. Thanks for having me.
I’ll let Russ do an intro, but for those who don’t know a little bit about me, I co-host this show and I’ve been in real estate for many years. When I was doing construction management, I had managed over about $700 million in place on some cool large projects. These days, I’m managing a portfolio of about 200 active notes, including having a 506(b) and 506(c) funds to run those through. My goal is to share experiences and educate people in the note space. That’s the reason why I want to have Russ, so we can have some good dialogue on converting a CFD to a note from that perspective. Why don’t you give people your background and why I have you here?
I started back in the lending business. I’ve been doing this for many years when I started back in 1997 as a loan originator. I did that for several years. I ran branches and did some originating. I worked with some builders and then the crash happened and nobody was originating anything. At that time, I was out developing some land. I grabbed a couple of partners and we bid some land development for a few years. I came back into the business as an underwriter for a large bank. I’ve got a bunch of certifications and underwrote for big banks and big mortgage companies until after Dodd-Frank hit. We created Call the Underwriter to help small lenders and investors with Dodd-Frank and TREAD compliance.
I didn’t take off until when we met a couple of guys named Dave Franecki, Eddie Speed, Dickie Baldwin and got introduced to the right people. We met you through those lines of communication and we’ve been doing that for a couple of years. We then added to our portfolio of products and services that do convert CFDs over to notes mortgages and notes deeds of trust. We don’t do that on every deal, but we do it as lead arises. I’m glad you’re having this interview because it’s a great thing to talk about. There’s so much going on with CFDs that the people don’t have answers. It’s awesome that our industry has somebody like you who’s taking the time to talk about this.
One of the questions that I want to throw out there right off the bat is, can you explain the difference between an underwriter and a mortgage loan originator?
A mortgage loan originator, by definition, is somebody who takes an application and/or negotiates the terms of a potential new mortgage. An underwriter is somebody who takes something that a loan originator originates and does a compliance review to make sure that the terms of that mortgage and the buyer meet Dodd-Frank and other lending requirements.
This is a question that people are going to get more education than they’ve probably gotten throughout this whole process of people looking at CFDs. Everyone always says, “If you’re converting or originating a CFD, you need a mortgage loan originator.” Is that the case or do you need an underwriter to come to confirm you’re compliant?
That’s the million-dollar question. The short answer is you need both. Somebody has to originate the deal and that’s usually the investor. If you’ve gone out and you’ve acquired property, you’re trying to fill it with an owner-occupied buyer, the first compliance piece is originating that deal. Dodd-Frank Act and the SAFE Act govern originators when you have to be licensed and how many you can do without a license. The SAFE Act will tell you how many you can do, when and where, and that’s the origination piece. Once you get it originated, Dodd-Frank says, “You have to meet the ability to repay requirements.” Originator falls under the SAFE Act. That’s one requirement. An underwriter falls under the Dodd-Frank Act. Dodd-Frank is underwriting to make sure that your borrower meets the ability to repay requirement. There is no exemption from Dodd-Frank. Every owner-occupied deal in a 1 to 4-unit dwelling has to meet Dodd-Frank requirements.
There are exemptions in the SAFE Act to where you don’t need an RMLO if you’re doing many. It depends on where you are if the state you are in has an overlay to the federal SAFE Act. The Fed SAFE Act says you can do up to three without a loan originator. There are attorneys. We deal a lot with Bill Bronchick, who’s an attorney and well-versed in Dodd-Frank. There was a lot of seller finance and how he structures his stuff is he puts no more than three assets into a single entity, which allows him to stay exempt from the SAFE Act as he keeps going and he can create an unlimited number of deals. Bypassing on information, you need to check with your attorney before you go down that road. Hopefully, that will explain the difference between SAFE Act, Dodd-Frank, RMLO, and an underwriter.
In this instance, when you’re converting an existing contract to a deed of trust and mortgage, typically it’s the underwriter because everyone keeps saying, “I’ve got to get my RMLO to approve the buyer.” They’re technically using the wrong term, it’s the underwriter.
You were right. RMLO are not underwriters. They are the originators. They are the salespeople. I’m licensed in Arizona to be an RMLO and we are salespeople, but it’s the underwriter that’s going to verify those terms meet by Dodd-Frank requirements.
Can an RMLO qualify a borrower’s ability to repay?
Technically, if the RMLO is familiar with Dodd-Frank and with the lending guidelines, knows what the FHA and Dodd-Frank requirements, if they’re well-versed in Dodd-Frank and lending guidelines, then yes. RMLO couldn’t affect that, you just have to verify it going upfront.Dodd-Frank is underwriting to make sure that your borrower meets the ability to pay. Click To Tweet
One of the questions that get posted to me a lot is, “Why would somebody want to convert a contract for deed to mortgage or deed to trust?” In a contract for deed, any equity in a property, if they default, you could potentially recover that. For me, in certain states, there are no added benefits over a CFD versus a mortgage or deed of trust in, like Maryland, Missouri, Virginia, Georgia, Florida and all these states. CFDs are worse off than a mortgage or deed of trust, in that case. Another one is you want to be a good lender and give them the equity they deserve. I think it reduces risk by not owning the property and having your name on it. I viewed mortgage or deed of trust is more valuable than a contract for deed. Is that what you hear from people out there as well?
Yes. It’s like doing a 180 CFDs. They’re not giving investors what they thought they would give and more people were converting over to mortgage, notes and deeds for some reason.
I’ve got a slide of the conversion process and the way I look at it is, you need to reach out to the borrower to see if they want to convert. I have only had one instance of the borrower who said no. That’s the first thing. You can’t force somebody to convert. You then send the package. They execute it. You have to board the loan and then record the documents. This whole process is not simple by any means. I’ve got at least several out there floating, where people can’t even get a statement saying that their car payments are current, as an example of one we’re dealing with.
One thing I want to spend one quick moment talking about is when you do reach out to a borrower to ask them if they want to convert. I put together some things that you should do and what you say to them. What you should do is explain why and the benefits, and be honest with them. Once they start hearing the benefits, this is where the potential tax credit savings, they can turn around and sell the property without your permission. Essentially, because the deed is in your name, they can turn around and refinance it a better rate. Here are the things that we’ll touch base, the cost and the timing.
I’ll pick your brain on this because there are some cost and time that involves. Typically, you do give them time to think if they want or what not to do. One of the common mistakes that I see is saying, “It will cost nothing,” because if you do, then you’re eating those costs so make sure you understand who’s paying for them. Another component is the type of deed, which is, “Are you getting title insurance?” Most borrowers have no clue that they don’t even own the property. They don’t even know that it’s on a CFD. Another is setting a time period for this. What’s your average time period to get this process done?
From the time the borrower says yes, then you need to submit who’s ever going to draw up your new closing documents at the closing package, the note and the mortgage, or note and deed of trust, depending on where you are. Whatever their turnaround time is, you’ve got to factor that in. If the borrower’s not local, you’ve got to make arrangements to get the documents out to a mobile notary who can meet with the buyer. I would say you’re probably at a week already from the time you get it all done and notarize, assuming it’s all done correctly. It then has to get recorded. I think most states allow you to work more electronically. Maybe two weeks to be safe.
I would say, once the package is approved, how long does it take you to get a package approved?
On a simple conversion from CFD to note and deed of trust, from the time we get the order, it’ll take us up to 48 hours to produce that loan closing package. Fortunately, on a simpler CFD conversion, they don’t have to go through underwriting as long as you’re not changing the terms. It’s a simple security instrument switch. We can pump those out in about 48 hours, get them over to the investor, and then the investor takes it from there and coordinates with the buyer to get him signed, notarized, and then record it. If say, we’ve got a CFD and the borrower wants to pull out $5,000 to fix the roof or whatever, it then becomes a refinance. We would then need about 72 hours to do the underwriting, certify the ability to repay requirement, and punch out the new set of closing documents.
Where I always find the sticking point is when you’re doing that component and the documentation from the borrowers and getting that from them. Sometimes you may do this as a mod and the payment goes up by $50.00 and you have to go through this process. I’ve started one in early March 2020 and we’re still not through yet and the first payment was due April 1st, 2020. You have to be careful in some of these processes to make sure that you leave adequate time. If you say, “I was converting somebody,” and you put the mortgage and note on first payment due May 1st, you’re nuts. You have to think of it as if you’re closing on your property in your own house.
It’s probably six weeks and from that component. One thing I want to mention, when you’re going through this process, make sure you let your servicer know what you’re doing because they need to be in the loop and I’ll explain why. We talked about the application process. On a simple conversion, I’m taking this UPB of $20,300 a month from John Doe, who’s been paying and converting it over. From your perspective, if I said, “Russ, I want to use your services,” for the most part, you create the closing package. You can also write or provide the mortgage and note from that perspective. Is that correct?
Yes. When we get a call and investor says, “I want to convert this CFD,” we have a separate website that we use for that process. What the investor does is they walk through. It’s easy to follow the bouncing ball, fill in the blanks, and that upload your original CFD, the legal description if it’s not already there. With those documents, we can then create the new set of documents and that document package is going to mirror exactly what Fannie Mae would require in a typical mortgage loan. Every single disclosure, state required disclosure, anything to the minute compliant is going to be included in that package. You don’t want to miss anything. When that’s done, we then email that document package back to the investor for a double check to make sure that everything that the investor is expecting is correct and needed. Maybe they forgot something, but they’re going to go through that package and make sure that it’s all correct. Any changes, then they get it back to us, we then have a 24-hour turnaround time on a final set of closing documents for them to then arrange for the borrower to get signed.
The information you need from the lender, like myself when you fill out that simple form is long-terms, borrower information, and proper property information.
Also, what entity you want it titled in. Sometimes, if you bought a note, your entity isn’t yet reflected. Our application process, we are going to ask you for what’s the name of the lending entity that you want this in if it’s being transferred to because you bought the note from somebody else. We’ve got all those questions to make sure that when we punch out that initial set of documents is complete, with the exception of a final review from the investor to make sure that it’s all correct before we give them a final.
For you to do that, what’s a cost?
Our cost is $249 for that document package. We have a website called ConvertCFD.com and they would start there. They would fill out the form that takes them to a payment portal. They pay for it, and once we get it, we punch out the documents. They’ll get them in 48 hours. We will review for corrections and then 24 hours, they will have the filing.
If somebody wanted to get the mortgage and note along, that’s an extra cost to it.
The note and mortgage or note and deed of trust, depending on the state is included.
Is it the deed? I thought that was something that was an extra cost.
If we’re doing a simple conversion that the total cost is $249 unless you’re thinking about the tip. I do accept tips. The only extra cost would be if we’re not mirroring the terms from CFD. If we’re raising the loan amount and pulling out cash, it becomes a refi. We then recharge underwriting fees on top of that.
One of the big things is getting this package executed. Who do you use? How long? What’s it cost and some common pitfalls and stuff? In the past, I’ve tried to get title insurance on some of these properties. I can’t recall if you were on one of the calls that I had with a title company. The challenge has been the title companies view it as a sale of the property so they’re expecting a full-blown closing. By doing that, all of a sudden, your closing costs double. This is not a refinance. I’ll let you talk about the difference in that when you’re converting a CFD to a mortgage, deed of trust from that perspective because it’s viewed differently in the eyes.
I have lots of great friends in the title business and my heart goes out to them because people have no idea the amount of work that it is, but it’s all about who we’re doing business with. There are some title companies that are investor-friendly, and there are a lot of title companies that are not. You don’t understand what we do and they’re not investor-friendly. When a title company begins to look at it as a refinance, then they begin to move into a full-blown new mortgage loan, wire funds. They’re looking at it through the wrong set of eyes. The insurance goes through the roof, there’s an escrow fee and there is the stuff that they don’t normally need to do. It’s all about finding the right people.
That has been the challenge I’ve had trying to find a title company because that has been the limit of like, “We need the prepaid taxes. We need a year prepaid insurance.” It’s like, “No, we’re only transferring this.” That has been one of my bigger challenges. Here’s another question that has come up in the past, too. If it’s a contract for deed before Dodd-Frank when you convert them, do you need to get them compliant versus if the CFD was after Dodd-Frank? Is there a difference?
CFD conversion and Dodd-Frank compliance are two separate issues. For us to convert a CFD into a mortgage note and deed a trust, we’re not concerned about whether or not the loan was Dodd-Frank compliant because that’s a whole other issue. All we’re doing is changing and switching the security instruments. We’re replacing one security instrument for another. When you’re converting a CFD to note and deed of trust, we don’t need borrower documentation because we’re not verifying their ability to repay. If for some reason, and we know that probably most seller finance notes on the market are not Dodd-Frank compliant.
They were not underwritten. It doesn’t require compliance to convert that security instrument. It does if you’re wanting to re-qualify the borrower. Maybe you’re switching the payments up. Maybe you’re trying to get a nonperforming note performing. Maybe you want the buyer to be Dodd-Frank compliant from this point forward, which has other benefits, but to convert the CFD, if you’re not changing the terms to a mortgage note and deed, we don’t need to collect those documents. We don’t provide that type of Dodd-Frank compliance.
Part of this transfer or execution, can your costs be charged to the borrower?
Yes. It’s a bonafide cost. We will always invoice the lender because we have to be compliant on our side as well. We always work for the lender. However, that borrower, when they come to sign those documents can bring those funds to closing to reimburse you for that cost.
A lot of times, a borrower may not have the money for the downpayment. Can that money be rolled into a loan and still keep it compliant without increasing the balance?
If you begin to roll fees into a loan, in essence, you are making a new loan. When you make a new loan, it’s not classified as a refinance. You will have a full-blown mod, you come under Dodd-Frank compliance, and we’ve got a whole new underwriting. For investors and simplicity purposes, if the borrower can’t or you can at least have them bring in, there are enough benefits in this where I would think that somebody would at least willing to pay that construct half and finally get on the title and have those benefits. If you can’t, it may be something that the investor needs to eat or maybe there are some other options that I’m not aware of.When you make a new loan, it's not classified as a refinance. Click To Tweet
In all my cases, I’ve always picked up the cost. I’ve done it and I view it as the cost of doing business, in that sense, from that perspective. One of the other components is when you go to record the deed in the borrower’s name and then making sure that’s discussed, who’s going to be paying for that bill because that’s a different animal? In certain states it is cheap, but if you get into Maryland or Pennsylvania, it could be $600, $800. It can be thousands of dollars to record some of these deeds. That’s one thing people got to be careful when you’re doing this. It’s my understanding that if they would’ve paid off the land contract, you give them the deed and it’s up to them if they’ll go record it. That is something that needs to be discussed upfront of how that’s being handled. You got to be careful because if they don’t have the money and you roll it into the loan, you’re right back to that. What have been some of the common pitfalls for us? Have you seen any of these conversions, anything that could have gone wrong?
I think where these things go wrong because remember, we’re producing a Fannie Mae, Dodd-Frank compliant set of closing documents. These documents are the most popular closing documents on the planet. These are documents that Fannie Mae requires when they buy the loan. Any other investor, we’ve never had an issue where an investor buying at a deal that we did a CFD conversion. We never had an issue with the documents. It all goes back to what you said, Chris, setting up expectations at the beginning of what are the fees, depending on your state. I wouldn’t assume that recording fees are $100 like in Arizona. I would call and find out or get on the message boards or social platforms. There are many people willing to help to figure out, who’s gone down this road before, “What am I supposed to expect? How do I negotiate this out with the borrower so I know who’s paying for what?”
We had a large note selling platform company reaching out to us and they converted about a dozen, between 10 and 12. I’ll put a large order into us to convert all of the documents and so we did. This took us probably about a week and a half to get them all done. We get them over there and then we got a call that said, “What’s next?” I said, “You get together with your borrower and you get these signed and get them notarized.” They said, “What if they don’t want to do it?” I go, “Didn’t you figure that out before you ordered the conversion documents?” They said, “No, we figured everybody would want to do it.” They put the cart before the horse on that one. I love your approach, Chris, in making sure that the borrower wants to do it.
That’s the biggest thing. When CFDs were originated back in the heyday, they typically have a lot of problems, paperwork wise. Whether it’s missing, lost documentation, documentation isn’t correct, or whatever it may be. By doing this, it also allows you to correct any of those sins. Sometimes it’s easier than they’re trying to hunt down a certain company that may be out of existence for three years in that individual. Sometimes it’s easier to call the borrower and say, “Let me convert you.” All those sins with that CFD go away and you have to brain fresh new documentation.
I love that approach. It amazes me when I look at collateral files at some of these. There are lots of lending laws centered around everything that we do. One of the laws as a lender that you have as a lender is that when you do a transaction for somebody, and this goes back to some of the notes that note investors buy. They get this collateral file and it’s got two pieces of paper. There’s no credit report, there’s no application, nothing. Everything that’s done with a buyer on a new loan, all of those records have to be kept on file, readily accessible for three years. That violation alone comes with a fine and can get you kicked out of many states on not keeping records on one deal. That conversion in that instance takes a note, performing or non-performing from a place of documentation far down the value path for sure.
At the end of the day, it’s not that difficult to process. One thing that I’ll ask you, Russ is, in certain states, like North Carolina and Georgia, technically, you need an attorney to do any type of closing or execution of a deed of trust and note when a property is somewhat sold. Do you still have to follow that in this instance or is it like, “I quick claim deeding this over to my brother?” I didn’t get an attorney involved because I hear it in certain states an attorney has to be involved. Is that only involved if you’re getting title insurance?
It’s probably outside of my area. I’ll tell you what I see, whether or not you can or wouldn’t go this route between you and your attorney, for sure. Keep in mind that when you start bringing up things like Dodd-Frank to attorneys, you’d be amazed at how many attorneys can’t answer questions. They won’t answer questions. Hopefully, you can find somebody that’s Dodd-Frank compliant. It goes back to the issue that you had at the title company where they are looking at this like a refinance of a brand-new loan. In fact, what we’re doing, if we’re not changing the terms, you come along the lines of modification.
Let me explain one quick thing and then we’ll jump back to this. You are exempt from Dodd-Frank. You don’t need to follow any kind of ability to repair requirements when you’re doing a loan modification. Meaning, the payments remain the same or the payments go down. There’s no Dodd-Frank requirement. There’s no going back to the closing table. The note and the deed don’t change. If your mortgage company does a mod, they send you two pieces of paper, they explain the terms, you sign it and send it back. It’s not notarized. It’s nothing and it is that easy.
If I understand this properly, if the modification keeps a payment the same or drops it, Dodd-Frank does not apply. If it goes up, it does.
If you raise the payment by a penny, Dodd-Frank applies. If you don’t, it is not.
That’s raising only the principal and interest because escrow may change and go up. That escrow is exempt.
Principal and interest only. Coming back to the original question, “Do we need an attorney to convert a CFD over to a note and a mortgage?” It goes back to the title company situation where they’re going, “Is this a new loan or is it not a new loan?” The attorney then looks at it and goes, “Is this a new loan or is it not a new loan?” In essence, what we’re doing is if we had to go one way or the other and we aren’t, we’re simply changing the securities. If we had to go one way or the other and we’re not changing the terms, we’ve fallen into the line of a loan modification. You have to go back to that state statute and go, “If I do a loan modification, do I have to use an attorney to sign, execute, and prepare these new sets of loan documents? Whatever that answer is, is the way you proceed in that state.
That was a challenge I was having with the title company is we view it as a mod. They’re viewing it as a new origination or refinance. Here’s a question for you. In a contract for deeds, there are two ways I’ve seen them in the past. One is you have the contract for deed that acts as the note. In some instances, they issue a contract for deed and a note. Every attorney I ask, says that it’s completely confusing and it should be one document. In that instance, we are canceling that land contract, that note goes away as well and we are issuing a new note, but it’s a continuation of that existing one essentially. You are issuing a new note, technically, but it’s not a new note.
Whoever put a CFD with a note didn’t go above and beyond. They created a hot mess because they’re one and the same. All note is as a security instrument like the CFD, but there are state laws that say if you create a new note over an existing note, is this a new loan? Is it a modification? It all goes back to, did you change the terms? When we do a conversion on the new note at the bottom of everything, right above where the borrower signs the new note, we insert a paragraph with verbiage that says, “This note supersedes the existing CFD, Contract for Deed dated blah, blah, blah, with an original balance of blah, blah, blah. The unpaid balance as of today is blah, blah, blah.” There’s a specific language in there that reinforces the fact that all we’re doing is simply replacing for another security instrument and the note in the terms haven’t changed.
One thing I want to quickly talk about as well is, there’s a whole other side of this, which is dealing with your servicer. Russ, I’m working with you who get this in the borrower and so forth and you got your servicer out there. Some people will try and have their servicer manage this process as well. I recommend against that, honestly because you’re bringing too many people into it. It’s like, “I get the information from Russ and I’m going to send it to the servicer to get the borrower to execute this.” Trust me, don’t do it. My recommendation is you let them know what’s going on. You send them drafts of things and you send it directly to the borrower. What I usually do is find a local mobile notary and I send it to them. They then coordinate with the borrower to get that date, to get them over there to sign it. They return all that stuff to me. They scan it, then I make sure I send it to the servicer because one of the things people don’t understand what the servicer is.
Everybody views what this is, differently. A servicer views this as a new loan. They don’t view it as a modification. What they do is they close out that old loan and then they put a new loan in the system. They charge you the boarding fee. Sometimes, they’ll even be like, “Do you have the borrower’s contact information and the escrow information?” I tell them, “It was a loan, XYZ123, now it’s XYZ234. You have that information.” They’re like, “Okay.” This is something you got to take into consideration because when you’re doing all this, there are more costs involved that those costs you can’t charge a borrower. One of the things I want to mention to people is you don’t want to do this on a loan with a $5,000 balance on it because you may end up paying a $1,000 in costs on a $5,000 loan that’s left. It’s something that you have to understand throughout this process.
That’s why I mentioned, you need to reach out to everybody, including your underwriter, like you Russ. The county that’s getting recorded, the servicer, and put all this little together because paying $295, you get the recording fees, which could be $300 to $400-plus if you use a third party like Katie-K or Orion, there’s another $175. You’ve got a $50 deed board plus a $100 board. There’s a $150. The next thing you know, you’re at $600 to $700 without blinking an eye. Let’s say you’re doing ten of these, that’s $6,000 to $7,000. It starts to add up. Someone did ask a question about online notaries is an option that’s state-specific. During this time, potentially you could use an online notary, but it depends on the state. I’m using one but in Maryland, where I’m in Virginia because they don’t recognize them. It is a good question but you’ve got to check. What I would do is I’ll call a local notary and see if they could take into them online as well.
The other component to this and what most people forget is if the CFD is recorded, which in some instances it isn’t, you have to get the cancellation of that CFD. A lot of people forget that and if it’s recorded, you want to make sure that gets recorded. Another component is people record stuff out of order. You’ve got to record the deed before the deed of trust. One thing I’ll mention is never to let the borrower record the documents. Why do I say that? What if they record the deed and not the deed of trust? They own a property and they just took the mortgage and ripped it up. The last one, and I made this mistake once. I waited until they get the documents recorded before sending them to the servicer and the person kept making payments and it was getting credited to the CFD and not the mortgage.
That creates complete chaos and that was 100% on me. Think about it this way. I have the CFD which I canceled, but the servicer was putting the payments there and I have this new loan. The service is mine, which is the modification in our world. I had to cut the checks back to the servicer for them put in the system and then send me the money back. That’s one of the things. We’ve gone around a little bit on things. If I understand this process and breaking it down to simple terms, somebody reaches out to a borrower, “I want to take your $300 a month payment. Keep everything the same, but I want you to be on the title to the property.” They say, “Yes, I’m good.”
I go to your website, fill out all the information, send you the $295 plus a tip and you create a compliance package that includes the mortgage and the notes. I’ve got a 58-page document that has these closing instructions. This is what you provide, essentially. This was from you. It’s got the loan amount. I send you the information and you spit out this 50 to 60-page document that includes all this information in that, essentially. I take this information and print out the mortgage, deed of trust, get it signed as well as get a cancellation of the contract, which you don’t do. That’s another component to it. Get all of this stuff signed. Get it recorded and you’re good to go.
It’s basic. Where people get tied up a little bit is when they go for the title insurance component because it can start to cause heartache. That’s where I was getting caught a little bit for a time being on things and having the challenges from that. That’s the one place that if you’re not going or going that route, that comes back to cost as well because there’s a lender’s policy and you are getting an owner’s policy on top. You are getting it for the owner because you can’t add it to the loan. There is that whole component. Any final thoughts for us from things that you see or from people or things that could make things more efficient?
There are a couple of things. One was to recap one thing that we talked about. This is to make sure that if we’re doing a conversion of a CFD to a new note in a mortgage or a note in a deed of trust. If we’re not changing terms, the only thing you need from the borrower is a signature and to find out what portion of the fees they’re going to pay and have them bring them to closing. We don’t need a bunch of borrower documents. There is no application. We’re going to get that information off the original CFD and when you fill out the form. You don’t have to tap the borrower for all their loan docs, their pay stubs and all that. There’s no qualification on changing the CFD to a note and mortgage and deed of trust.
The second thing would be going back to why they might do it. One of the benefits that you can talk about when the buyer is thinking about whether or not they can do this. We had an investor called us to convert the CFD to a note in a mortgage because the borrower had gone down to their bank to get a second mortgage to do some home improvements. They had good credit. They were lendable, but the bank would not lend on top of the existing CFD. They would not give them a new second mortgage until they had it converted over to a note and deed of trust. One of the components I think sometimes we skip is, “This borrower maybe has 20%, 30%, 40%, 50% equity in this home, but can’t get to it if the underlying mortgage or the underlying security instrument has a CFD.” We ran to that.
A lot of times when people do these modifications or these conversions, they do increase the price or they roll in the fees. In that instance, that is the full-blown application process.
When you do that, once we get them through underwriting and we provide that Dodd-Frank ability to repay certification, once that’s done we can then print the new note, mortgage note and deed of trust so when they execute that they are doing a brand new loan but they’re doing it the right way.
When I talked earlier on, that’s what I was referring to everyone about. I’ve got one converting from the husband to the wife. It’s technically a brand-new origination, so we had to go through the loan application process and that’s the process that takes a long time to do. Probably, I’ll have you come on again because we can talk through that process. That’s a whole other animal that we can talk about. There are a lot of people on here who take back these properties and they turn around and they can’t sell them on some owner finance. It’s a good tool and that’s something else you do or service you provide as well for people, which is beneficial. A question came through, “Is it only a security instrument conversion if the payment interest rate and borrower and months remain stayed the same?” The question is the months remaining. It can change.
You can change it as long as the payment doesn’t go up.
The payment can’t go up and the UPB or Unpaid Balance can’t go up, correct?A note is a security instrument, just like a CFD. Click To Tweet
Here’s a question for you and this is hypothetical. You’ve got that $20,000 at 6% at $300 a month. Could you do $20,000 at 10% but keep it $300 a month and extend the loan? To me, that seems a no-no. The UPB stayed the same. The payment stayed the same, but your interest rate went up so it technically extends the term.
You don’t have a Dodd-Frank issue ability to repay because you’re not changing the payment. However, I believe that you would qualify as a new loan by increasing the total amount of borrowers coming back or paying back. You have a new APR, you have a new everything. I would argue to say that you would need to get that done with a good explanation.
The simplest way to break this down people is if you are taking everything that is there and keeping everything the same and behind the scenes, instead of it saying “CFD” on the top, it just says “Mortgage and a Note.” That’s it. For example, if the payment was $302.27, it’s like, “Let’s make an even $300 for simplicity.” The UPB is $22,216.91, “I’m going to make it flat, $22,000.” You drop it down to keep the numbers a little. From that perspective, that’s a small adjustment scheme, but you adjust everything down a little bit, “If the payment’s $302.21, I’m going to get $302,” or something along those lines.
You want to keep everything status quo. You can go in another direction and change from the status quo, but you’re kicking yourself into a whole different ballgame. You’re kicking yourself into a new origination at that point in time. That’s a whole different process as well as more cost involved and other things. From there, I’d say you’ve got to be careful because this goes with experience in doing these things. If you tell the borrower, “It’s not going to cost anything, but your payment’s going to go up. We agreed a $50 payment increase.” All of a sudden it’s like, “You have to go through that new origination.” You’ll go back to them and say, “We need your bank statements, your 1003 application, your W-2, your taxes and stuff.” They’re going to be like, “What are you doing?” Think about when you are applying for a loan, that’s a lot of stuff you’ve got to provide. Someone said, “If you are already considering doing a mod on a CFD, will you do that first, keeping a CFD and then later do a conversion?” Here’s a thing that I don’t think most investors know. When you do a loan modification no matter what the instrument is and you increase that borrower’s payment, technically you should be going through the ability to repay a process.
When you raise the payment, you have to verify the ability to repay. You can call it a loan mod, but it’s not a loan mod. It’s a refi.
Let’s say you’ve got to a borrower who misses six months of payments and those $300 a month. Sometimes a borrower will say, “I’ll pay an extra $150 a month until you caught it up.” The borrower agrees that, but you didn’t put anything in writing or anything. If you give them an actual loan modification that says, “Your new terms are $450 a month, I’m going forward from $300,” you should be getting that borrower approved based on the ability to repay.
If they had a problem making the prior payment.
Here are the truth and reality for everybody out there. I don’t know one person that does that. On the flip side, it’s not too often you have a borrower who you take who wasn’t paying and increase their payments, but there are times when a borrower hasn’t been paying and then they get a new job and say, “I can pay.” It’s $200 a month and they say, “Can you make it $300 a month?” “Yes, I can afford that.” Most of the time, the lenders are like, “That’s great,” then they’ll send it to the servicer and say, “Do the loan modification. It’s going to be $300 a month. Here’s a new payment.” Nobody has gone through that process. It’s a dirty little secret and the question is like, “How did you know?” If that’s the case, for the ability to repay, in that instance, you should have somebody taking a look at that. If somebody wanted to go through that, what documentation would they need?
It’s just four items. It’s the application, the borrower’s authorization so that we can pull credit, the income documents, which is a pay stub and two years of W-2s, and then the terms of the new loan.
This rolls into someone who asks, “If I keep the payment the same, but raise the principal balance on the loan through the modification.” That’s the question I would say if it was done before Dodd-Frank, would you need to versus after? Let’s say somebody had $20,000 and you had to pay the taxes and all these other payments for some period of time. Their advances are $4,000 and you’re like, “Your payment is $300, but I’m rolling that $4,000 into the unpaid balance, the $24,000.” The payments and interest rates stayed the same, but the balance went up on the loan on the modification. That is still technically considered a refinance.
It is still a new loan. You can always raise the balance and even with the lower payment, if people have been paying on it for a while and your rate goes down and they’re paying off some stuff and rolling in some fees, it’s still a new loan when you do that.
To answer your question, technically yes. How many people do it or get to approve it? Let’s ask this question, Russ. The ability to repay, can that be done by the lender or by somebody who’s an underwriter or does it have to be an underwriter in that state or is it federal? How does that work?
The CFPB requirement, we keep a copy of the CFPB guide on how to comply with the ability to repay on our website. The guide is good and it simply says that if you’re ever hauled in before a regulatory committee or there’s an audit, or the borrower challenges and says, “You didn’t make sure I could afford it because that’s our responsibility.” You’re going to be asked two questions and those are, “What underwriting method did you use to ensure that the borrower has an ability to repay?” The answer to that question is you don’t have to hire an underwriter. You can underwrite your loans. However, the CFPB does go on to say that how you calculate income has to mimic the FHA guidelines. How you do residual income has to mimic VA guidelines. If you’re familiar with those things, maybe you’ve got some underwriting experience, you can do your own stuff and the guide will make perfect sense to you. If you don’t, it’s cheap enough to hire somebody else to get it done and get it certified.
I saw in a package that you provided that the VA residual component is you take the gross income, you take their expenses and then you take the square footage of the house times $0.14 for maintenance costs or something. Each region with the VA says, “How much disposable income they should have?” and throw all that out there. I’ve used that in the past on mediation cases with borrowers who I’m going to foreclose on. They asked for a loan modification and they want to know, “I know that question is going to come and it never has, did you consider a mod?” I said, “Yes, but they weren’t approved.”
Nobody’s ever asked me, “What criteria did you use?” I’m surprised honestly, but I have that in my back pocket and say, “I used the FHA and the VA.” This VA template to show, whether it’s 30% or 41% with debt to income on the VA or whatever it is. I show that form and 99% of times, their tax income is 60%, so they’re not even close. When you’re doing a mod, think about from this perspective. The person has been paying $300. They want to pay $400. Do you take their word for it? I don’t. You’ve got to prove to me and show me you can afford $400 when you couldn’t afford $300. That’s what you’re doing. There are certain steps to go through that, which we may have a whole other episode on that, Russ. I’ll keep you busy on some of these things. Russ, thank you for being on and what’s the best way for people to reach out to you?
The phone number is (480) 388-6018 and the email is Russ@CallTheUnderwriter.com.
Thank you, everyone, for joining us. Take care and stay safe. If you have any other questions, I strongly recommend you reach out to Russ. He is informative. Use him as a client, not only as a resource.
Thank you, Chris. I appreciate you having us.
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