Jul 28

It appears that the Wisconsin Legislature snuck their version of the SAFE Mortgage Licensing Act into the 2009 budget, effectively making seller financing illegal for 1-4 family buildings.  Exceptions to this rule are sellers who are owner occupants, people who hold an expensive mortgage broker license and a few other limited exceptions that will not effect most of us.

The effective date of the law was 1/1/2010.  Yet nearly seven months into it none of the real estate pros I spoke to knew about it.

I accidentally stubbled upon the  WI law while researching the HUD proposal to prohibit seller financing.  Low and behold on one of the HUD pages WI and TX were listed as states that had enacted their own version of the Safe Mortgage Act.

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What is the need for such a law?

Was the mortgage meltdown caused by seller financing?  Of course not.  When a seller financed deal falls apart the loses are suffered solely by the seller, with no effect on the general economy.  Quite unlike the securitized mortgages that put our nation’s economy into the mess we are in today.

However when reading the law there is one advantage to the state in passing it… that is the $775,000 a year in new fees they hope to collect.

Why is seller financing important?

Seller financing has always been the exit strategy of choice for owners of small residential rental properties.  There are tax advantages to installment sales plus mainstream banks during most economic times do not write mortgages for small rentals or homes located ‘not in the best of neighborhoods.’  The banks did make exceptions to this durning the wild west days of 2003-2006, but that obviously did not turn out well for anyone.

In fact seller financing is probably more necessary to sell properties today than anytime since the early eighties.

Who should be concerned?

  • Obviously owners of one to four family buildings that are considering selling and possibly holding paper.  But the effects are far more ranging.
  • Do you do rent to own/rent with option?  If you use the broadest reading of the law these too are prohibited.
  • Real Estate Brokers/Agents are protected when:

“… negotiating, on behalf of any party, any portion of a contract relating to the sale, purchase, lease, rental, or exchange of real property, other than in connection with providing financing for the transaction;”

So this means as soon as a broker gets involved in a seller financed deal they need to become a license mortgage broker. This may also mean that brokers and agents who help secure financing for deals are subject to these rules.

  • Every city, town and village in the state should be up in arms as reducing financing options for many properties obviously reduces sale prices, which reduces the tax base, which increases the tax mil rate, which makes homes less affordable , which reduces sale prices …. ∞
  • Mobile homes are specifically included.  Mobile homes are more often seller financed than other types of owner occupied housing.
  • And the real kicker… those that have existing owner financing may run afoul of the rule if they renegotiate the terms, such as extending a balloon payment date or lowering an interest rate.

What should I do today?

For now I would recommend that owners of small residential properties either sell only for cash or sit tight and hope a correction is made to this legislation or an administrative clarification is made in writing by the folks given the duty to enforce this rule, which is the Wisconsin Department of Financial Institutions.

Reading the legislation in the strictest terms would make rent to own arrangements illegal unless the person negotiating the terms holds a mortgage broker’s license.  So I would stay away from these.  There are other reasons to avoid rent to own as well, such a problems evicting the tenant when they don’t pay.

‘I’m still going to do seller financing.  What can they really do?’

Under the act, any violation of this state regulation would subject to a fine of up to $25,000 and / or imprisonment up to nine months.

The borrower]may also recover the aggregate amount of costs and expenses which the court determines were reasonably incurred by the person in connection with the action, together with reasonable attorney fees. The act expands this private cause of action to cover any violation of state regulation of these professions, including any rule promulgated under these regulations. In addition, the act increases the possible recovery associated with loan origination costs from not greater than $2,000, to not greater than $25,000 for each violation.

Plus there could be a strong argument that violating this rule when selling to an owner occupant could result in double damages under the consumer protection laws.

Where can I read find out more?

A fairly plain english overview on the HUD SAFE Mortgage Act is available here.  (Seems HUD may have removed this document – too bad as it was the only easy to read version out there) One of the more important points from their page is the clarification that the only exemption for seller financing is for folks selling their primary residence:

The commercial context implied by the taking of an “application” is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller’s own residence.

The Wisconsin version of The SAFE Mortgage Licensing Act can be found here. (Beginning at page 55, which is page 59 of the PDF) It is very convoluted and difficult to read.  This, of course, will make the law quite profitable for attorneys.

While there has been little if any written about Wisconsin’s version of the SAFE Mortgage Licensing Act, there is a large body of articles on a similar Texas version of the Act.  Do a Google search to see what Texas Realtors and owners are saying about these rules.

How can we stop “stealth” legislation in the future?

We need to prevent important legislation from being buried in the middle of the budget bill.  Remember this is how ATCP 134 came to be.  Legislators may be quite willing to pass something onerous that is buried well inside a large bill like the budget as they can say ‘Gee, it was 1500 pages. I might have missed something in there.’  Our elected officials would be more accountable if bills had to stand on their own and be voted upon individually.

Truth in titling: Laws must titled in a manner that no one will know the true impact.  For example this bill’s title should have indicated that it included a prohibition against seller financing, rather than simply a law to regulate mortgage brokers.

Finally, when state legislation is based on federal rules, the state legialtaion should be writtn in a manner that the repeal or delay of the federal law should result in a similar change at the state level.  For example EPA has extended the lead paint training until October.  This does not affect WI’s deadline.  Likewise there is a move afoot to modify HUD’s SAFE Mortgage Licensing Act to permit some seller financing.  If adopted will Wisconsin follow by changing their law? They may, but they are not required to.

8 Responses to “Is Seller financing now illegal in WI?”

  1. J. Tagami says:

    This another form of government taking away our basic rights to buy or sell our own property in any manner the owner chooses. This methods been practiced since almost the begining of civilazation and to take away this rights in underhanded manner is unforgivable and it should be repealed by the citizens of WI and get rid of people responsible, all the state’s elected officials who voted for this bill.

    The rate we are going some states government will start taxing or require people to breath air within the state to raise revenue.

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  3. James Felix says:

    What ramification ,if any, would this law have on an individual who homesteaded 80 acrears (2 separate 40 acrea parcels for real estate tax purposes-one parcel with the individual’s home on it and the other adjoining parcel a wood lot) , and sold the wood lot using seller financing?

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