The foreclosure tsunami in California continues unabated. More foreclosures were started in California during the second quarter of 2007 than any comparable period in over ten years. We need to go all the way back to 1997 to see such record volume of foreclosures within the state. What has caused this tsumani? It has been caused by the “perfect storm” of depreciating home prices, anemic sales, re-setting adjustable rate loans, and the mortgage meltdown in the financing sector.
When we analyze the statistics, we can see that the vast majority of the loans that went sour were originated by lenders between the summers of 2005 and 2006. If you remember those halcyon days, real estate appreciation was still in double-digits and we were experiencing the tail-end of historically low interest rates. As a result, lenders liberalized their guidelines to maintain high loan volumes. But because interest rates had risen, lender utilized adjustable rates mortgages with artificially low “teaser rates” to qualify more borrowers. Property owners took advantage of those loosened guidelines and teaser rates to obtain loans in record numbers. Its those teaser rates, now adjusting up to higher market rates, that are causing the tsunami of foreclosures we are experiencing today.
Keep in mind, there are 8.4 million houses and condos in California. The vast majority of those properties are financed by mortgages that are current and continue to be current.
Nevertheless, the loans that did fall into default last quarter were mostly originated between July 2005 and August 2006, which was at the height of the mortgage frenzy. The median price paid for a California home purchased during that period was $460,000. In contrast, the median price paid for those properties where mortgages went into default last quarter was only $445,500. (This discrepancy is caused because there is a lower default rate with higher valued properties.)
The median mortgage for those properties is $342,000, and their mortgage payment is approximately $2,225 per month. Homeowners were five months behind on their payments (up from three months) when the lender started the default process. The borrowers owed a median $11,126 in unpaid mortgage payments. In other words, once the foreclosure starts, the borrower has the choice to either “reinstate” the loan by paying the $11,126 arrears, or “redeem” the loan (later in the foreclosure process) by paying the loan balance (i.e. $342,000) and the arrearage (i.e. $11,126). Obviously, reinstating is preferred to redeeming.
The median age of these defaulted loans is 16 months, which corresponds to the peak of loan originations in August of 2005. And, as we all know, the primary loan utilized for purchasing home during that period was the
1. Notices of Default.
The first step in the foreclosure process in California is the recording of a Notice of Default (“NOD”). There were 53,943 Notices of Default recorded in the second quarter of 2007 (April to June). That is a shocking number in itself, but even more devastatinging when you consider that it was 15.4% increase from the previous quarter, and up an earth-shattering 158% compared with the same quarter of 2006.
This was the highest levels we have seen in California since 1996, when foreclosures were at their worst. In 1996, for those of us that remember those dreadful days, 61,541 foreclosures were started. The lowest level recorded was in the third quarter of 2004, when only 12,417 NODs were filed.
Although 53,943 default notices were recorded in California last quarter, only 50,901 properties were affected. How is that possible? Many homes are financed using more than one loan, what are called “piggy-back” loans. Utilizing multiple loans on the same property helps homeowners avoid mortgage insurance. That is up 162.8% from the second quarter of 2006.
The default numbers reflect wide regional differences. The second-quarter numbers were a record in Riverside, San Bernardino, Contra Costa, Sacramento and most Central Valley counties. However, in Los Angeles County, the state’s largest, it was still less than half the first-quarter 1996 peak. This reflects the depth of the recession in the mid-1990s, as well as the relative strength of today’s housing market. At least so far…
On a loan-by-loan basis, mortgages were least likely to go into default in Marin, San Francisco and San Mateo counties. The likelihood was highest in San Joaquin, Merced and Riverside counties.
Overall, Southern California counties saw 30,828 notices of default recorded last quarter, a 151% increase over 2006! If you enjoy hanging out at county recorder’s offices like me, you will quickly notice that Los Angeles County has the largest volume of defaults in the state. While the percentage, at 126% is still lower than other counties, the sheer volume (10,393 NODs) during the second quarter is its own mini-tsunami. The recorder’s office had to open extra windows just to handle the onslaught.
The worse foreclosure county in California in terms of percentages continues to be Riverside where 6,648 NODs were filed this quarter, a 190% increase over 2006. It was just three years ago that Riverside County was the fastest growing county in the United States. Now it has the dubious distinction of having the highest percentage of foreclosures in the country. Not far behind is San Bernardino County, where 5,141 NODs were filed, a 179% increase compared to 2006.
California’s financial problems have been front and center in the media of late. This month, its credit rating was cut to the low end of investment grade. Facing insolvency, Governor Schwarzenegger and legislators have undertaken drastic action – selling off state assets, cutting the state’s university budget by 20 percent and releasing 27,000 inmates from prison. Already the state has given mandatory furloughs of three days a month to its 243,000 state employees. What is the impact on California’s crisis on the rest of the nation? What about the state’s municipal bondholders? Will Washington DC have to bail out the nation’s largest state? This edition of the newsletter will examine these questions and try to provide some helpful guidance.
Current State of Affairs
California now carries the lowest credit rating of the fifty states. In the current fiscal year of 2009-2010, its budget deficit was expected to be $24 to $28 billion. This is what prompted the recent marathon session of the state legislature. The state’s general fund budget is about $100 billion. The prospective deficit was large both in absolute and in relative terms.
As recently as Fiscal 1998-99, the state’s budget was in balance. A number of reasons have been put forth to explain the state’s ensuing misfortune. All have some merit.
The state’s tax structure is a contributory factor. Voters approved proposition 13 some 30 years ago placing severe limits on property tax increases. Consequently, the state has come to rely more and more on its rather large income tax. Unlike property taxes, income tax receipts tend to follow a boom and bust cycle along with the economy. During the good times, political pressure is applied by the state’s powerful special interests to ramp up benefits. During bad times, there is less wiggle room to reduce expenditures as revenues plummet.
Case in point: California’s state legislature passed SB 400 in 1999 that increased the pensions of state police officers by 50%! The same bill substantially upgraded the pensions and survivor benefits of other state employee Now, ten years later, the governor tried unsuccessfully to roll pension benefits to pre 1999 levels back for new hires.
The state’s constitution has been an impediment to fiscal responsibility. One problem is the requirement that a two-thirds vote of the California legislature is needed to pass the state’s budget and tax increases. There are only a handful of states that require a supermajority. Another problem with California law is the reliance on ballot initiatives to amend its constitution or statutes. These have become ubiquitous in recent years and are typically referred to as “propositions”. Not surprisingly, the popular vote has consistently supported an expansion of services without a commensurate increase in taxes. Direct democracy sounds good in theory but its practice invites deficit spending.
On July 20th, lawmakers approved a budget plan that should close the deficit this fiscal year. It includes spending cuts amounting to 60% of the deficit with the balance financed with short term debt. While some of the cuts were accomplished with accounting gimmicks, most of the state’s residents will be impacted by either a reduction in services or an increase in user fees.
California’s Municipal Bonds
For municipal bondholders, the events of the past several months have raised troubling questions. Could the state of California default on its debt and what would the spillover effects on local California bonds be?
The good news is that California’s bondholders are actually senior creditors. Proposition 98, passed in 1988, mandated that the state allocate 40 percent of its general fund to public elementary and high schools as well as community colleges. Roughly another 5% of education spending is also guaranteed by the state’s constitution. This commitment is senior to the claims of bondholders. However, the state’s bondholders are next in line. Today payments to those bondholders account for another 5% of the general fund as there are about $59 billion outstanding. Below the bondholders contributions. Some very key stakeholders must suffer before the state fails to pay its debt service. Unlike corporations or municipalities, the states cannot file for bankruptcy in an attempt to reorganize their debt obligations. Moreover, California needs continuous unfettered access to the credit markets to fund ongoing infrastructure projects and to cover short term seasonal cash flows.
What about the spillover effect on local issuers of tax-exempt bonds within California? Different local jurisdictions have varying levels of reliance on state funding. School districts and counties are among the most dependent. Most general obligation bonds are secured by local property taxes – a source of revenue that is comparatively stable. While municipalities can declare bankruptcy, they have been loathe to do. The relevant precedents indicate that bondholders are made whole regardless of the financial woe of the local issuer. Orange County CA filed for bankruptcy in 1994 but did not miss any bond payments. The City of Vallejo CA filed for bankruptcy more recently but has thus far continued to service its debt.
Different Living Trust Costs and Options
There are a variety of options when completing a California living trust. After some extensive research to determine the cost of a living trust in California, I’ve summarized my results into 2 categories:
* In-Office Consultation
* Online Living Trusts
The In-Office Consultation is your traditional office visit with an attorney. You see these a lot of these listed in the yellow pages. They offer you a free one-hour consultation in the hopes of earning your business.
The typical charge is $2,500. The services provided will be a complete estate plan, which includes a living trust.
Lawyers in California are required to have you sign a fee agreement. This fee agreement will dictate the terms of payment, document delivery, etc. You will typically need to pay the $2,500 up front. This $2,500 will be deposited into the attorney’s trust account.
These types of contracts typically take 3-4 weeks to complete.
After interviewing several law firms, I found they typically include the following documents in their California estate plan:
* California Living Trust
* California Advance Health Care Directive (Living Will)
* California Power of Attorney for Finance
* California Pour-Over Will
The Advance Health Care Directive is important in case you are incapacitated because it allows you to appoint a health care agent who has the authority to make decisions based on your current wishes.
The Power of Attorney for Finance is needed in case you are incapacitated and need someone to take care of your finances (e.g. file your personal tax returns, etc.).
The Pour-Over Will essentially transfers everything to your living trust that was not formally transferred. Basically, you are naming your California living trust as the sole beneficiary of your property.
However, these $2,500 plans did not include some key elements:
* California Notary Fees
* California Transfer Grant Deeds
California Notary Fees
Notary fees in California run a maximum of $10 per signature (that’s the law). If you are single, there are four signatures or $40. Married couples will pay $80. If you use a mobile notary, their travel fees are excessive. Many banks offer a notary service for free.
California Transfer Grant Deeds
After you complete your living trust in California, you will need to transfer your home (and any rental properties) to your living trust. Essentially, you prepare a transfer grant deed to title the property in the name of your trust.
If you don’t complete these transfer grant deeds, the living trust is invalid.
It’s much simpler on your 401k and life insurance because it’s a simple matter of naming your trust as the beneficiary. However, you cannot name a beneficiary on real estate in California. The only way to name a beneficiary on real estate in California is to use a living trust.
After you notarize the trust and prepare your transfer grant deeds (each parcel requires a separate grant deed), you will need to record them. Each transfer grant deed is recorded at the County where the parcel is located. That transfer grant deed is also accompanied by a county change of ownership report. This county change of ownership report is a document required by all 58 California Counties and is used by the County Assessor to see if the property should be:
* Documentary transfer tax be applied
Since a living trust is EXEMPT from both of these taxes, you must be careful to complete that form properly.
Now that I’ve discussed in-office consultations, let’s examine online offerings.
Online Living Trusts
There were many options for online trusts as well, as this option was gaining popularity. The price for an online living trust ranges anywhere from $297 to $997, so it’s an avenue where you can save a lot of money.
We found, just like in the in-office version, that many did not include the transfer grant deed. In fact, one provider charged an additional $249 per transfer grant deed (if you owned four properties you would pay $249 x 4 or $996).
We also found there were extra hidden fees for other documents. For example, one provider charged another $40 each for both the advance health care directive AND power of attorney (x2 if you are married or domestic partners because separate ones are required for each or $160). Make sure you pay attention to the fine print.
In the in-office consultation, you pick your trust package up in person, but the online version is shipped, so be sure to verify if the shipping charge is included.
Last year the government officials in California passed the “red tag law” which has had a significant affect on the used cars market that consumers can benefit from. For those who are familiar with the logistics of this new law I’ll explain it simply. In its basic understanding the California red tag law requires dealers to place a red sticker on any vehicle that has been salvaged, in a junk yard, or sustained any flood damage.
These vehicles also have to be registered into a federal database that is also open to the public. With this type of law in affect it helps make people who are looking to buy a pre-owned vehicle much more comfortable about acquiring a reliable automobile. There are also people who can get bad credit car loans with the California red tag law as they will be more confident that the vehicle will last throughout the duration of the loan.
Applying for Used Car Loans in California
Most people can still qualify for auto financing in California even with a poor credit score, but very few dealers would be up for the task as they had too much to lose. Before this law if a used car dealer allowed someone to buy and finance a vehicle that had flood damage, and it broke down after a month they would be out of an investment as most lemon laws don’t require you to continue making payments.
Now that dealers can provide more reliable vehicles it will be easier to qualify for bad credit used car loans, since more credit lenders will be more relaxed. It also helps that another part of this new California law allows dealerships to charge the same fees for leases and actual sold vehicles applications. Originally car lots would only charge $45 for leases and add another $10 if you were going to make a full purchase; however, bother prices have shot up to $80 which has made many dealers happy.
The only true downside of auto financing in California under the red tag law is that it has yet to be applied nationwide. It is rumored the United States government will be discussing this, but in order for it to actually go into affect they will need to get the dealerships on board as well. If they are able to accomplish this, we could see a lot more people feeling comfortable about buying used cars and applying for bad credit auto loans.
With a slow housing market trending the real estate world and economic uncertainty glooming over millions, Baja real estate developers may yet attract buyers with purchasing plans very much within their affordable grasp.
The number of housing and condo developments in the Baja California coast increased significantly in these past years; as a result of the boom in constructions and the current market conditions opportunities are arising for the knowledgeable investor who can expect a significant return on the investment after the market has recovered, or the American retiree considering moving to Mexico.
Baja California has been attracting retirees for decades with its perfect weather, affordable beachfront housing and accessibility to U.S. services; in response to this the medical infrastructure has been updated with state-of-the-art hospitals covered by some US insurance companies; assisted living services have been created which combined with the continually increasing purchasing power of the dollar against the Mexican peso, have given these retirees not only a secure economic future but an upgrade on their lifestyle as well while extending their income by 3 years per each 10 of retirement funds.
The number for Americans living in Mexico was reported to have increased by 17 percent from 1990 to 2000 in regards to the previous decade; this number could very well double for this decade since the people looking to relocate to Mexico are not just baby boomers anymore, but people sent by businesses, families, some commuters who could not afford the rising real estate prices in California a few years back chose to live in Baja and work in the U.S.; others such as men and women in their thirties and forties looking for a slower pace of life have started their own companies and also settled here.
The Baja peninsula is currently estimated to have around 250,000 of American expatriates , with approximately 12 percent of them living along the Tijuana – Ensenada corridor and almost half of them choosing Rosarito Beach . For these people neither health concerns nor security issues are enough to drive them away from a place they have come to call home, instead they speak out against the negative publicity Baja has received expressing their likes of life in Baja.
Considering the above reasons of why acquiring Mexican real estate is an appealing option, the question is then, how come the Mexico real estate market and particularly the Baja California region which is one of regions leading the retirement trend are faced with a slow turn out in sales? The answer could be simple: financing. The slow down in the economy has significantly reduced the number and type of loans the financial institutions are issuing, including those who in previous years offered loans for investment in Baja real estate . With fewer institutions providing loans for these kinds of investments qualifying becomes more and more difficult, even serious buyers are sometimes turned down.
In response to this current situation some developers in Baja are starting to offer In-house financing, which alleviates the dependency of this real estate market on financial institutions by providing loans to buyers directly from the developers or the developments. Some of the advantages this type of loan gives buyers are the following:
* It requires no property appraisal.
* There is a higher possibility to of getting customized loan terms not provided by other lenders.
* It is not a rigorous screening process, which makes it available to people with lower credit scores.
* It identifies a financially sound seller.
Not all Mexico real estate developers or developments can offer in-house financing, since in order to provide it they need to have enough money to cover expenses and cash flow.
California real estate investing is a challenging market for seasoned investors, let alone those new to the practice. The Golden State has been in a downhill spiral of foreclosure acquisitions since the banking crisis. However, this has opened the doors for investors to purchase properties well below market value.
California real estate investing can be a profitable practice as long as investors take time to become familiar with the area. Several markets have witnessed housing prices decline by as much as 40-percent. Today, investors can locate affordable houses in areas such as Malibu, where prices were often prohibitive for generating positive cash flow.
Housing prices have actually started to rise in inland areas such as San Diego, Los Angeles, and San Bernardino. Investors who desire properties in these areas should develop strategies now in order to capitalize on reduced prices.
To make money with California investments, investors should take time to learn about market conditions and available properties. This is especially important when investors plan to use properties as rental homes or offer owner will carry financing options.
It is crucial for investors to become educated in landlord/tenant laws, as California has some of the strictest in the nation. A good place to start is the California Department of Real Estate website. Visitors can locate information surrounding rental laws, compliance regulations, and download handbooks and a variety of realty forms.
Investors just starting out should consider working with a real estate attorney to draft leasing or purchase contracts. Those who unknowingly violate laws or are non-compliant with rental codes could be subjected to exorbitant fines.
According to the U.S. Census Bureau, nearly a half million people move to California every year. This provides ample opportunity for investors to generate positive cash flow. The key to success is to understand the needs of new residents.
Investors who plan on renting or selling houses to families should locate properties in highly sought after school districts. Those who focus on renting to white collar workers will want to invest in homes positioned near airports and interstate systems. Taking time to learn what newly transplanted residents want can help investors attract long-term tenants.
Offering owner will carry financing lets investors reach a vast number of people who want to buy a house but cannot qualify for bank loans. Many people believe creative financing is illegal, but this is far from the truth.
Economic conditions have made qualifying for a home mortgage next to impossible unless borrowers have perfect credit. Many California residents want to buy a home, but ineligible for funding due to credit blemishes. Investors can offer solutions by offering properties under a lease purchase option agreement or seller carry back mortgages.
Rent-to-own has become a popular option because buyers can reside in the house as a tenant while working toward the eventual purchase. Investors can sweeten the deal by locking in the purchase price within the contract. Since the average appreciation rate in California is 9-percent, the house will more worth more when buyers are able to obtain financing.
Seller carry back mortgages involve acting as the mortgage financier for partial or whole financing. When partial financing is offered, buyers take out a mortgage loan and sellers carry back the remaining portion of the purchase price. When whole financing is offered, sellers carry the loan for a few years until buyers qualify for a bank loan.
California real estate investing still offers opportunity for profit, but doing so requires ingenuity and awareness of market conditions. It can be advantageous to work with a realtor or network with other investors that possess solid experience with buying houses in the Golden State.
California Land Financing Budget (Example):
Land Purchase Price $300,000 Land Purchase Price
Soft Cost of Construction $ 40,000 Plans and Permits
Hard Cost of Construction $350,000 Construction Costs
Closing Costs $ 22,000 Fees, Title, and Escrow.
5% Misc. Reserve $ 17,500 5% of Construction Costs
Loan Interest Reserve $ 35,000 Interest On Amount Drawn
Total Building Cost $764,500
Appraised Value $800,000 Estimated Value of Land with Building Completed
Down Payment $191,125 25% of $764,500
Benefits of California Land Lenders
Loan officers dealing with California land should be able to assist you with the following information:
Assessment of the estimated yearly taxes, insurances, and HOA fees.
Approximate interest rate for the loan.
Down payment required.
Interpretation of your personal financial statements, credit scores, and income-to-debt ratios to conclude your eligibility.
Utilities Lead to the Path of Finance
One important thing to consider as you look to buy California land is utilities. When construction developers go into the construction stage to build new homes in Southern California then roads and utilities are built for a large number of homes. When the lender knows that a lot has public road access and utilities nearby they are often more willing to supply financing for the land because there is a foreseeable capacity to build on it which increase the California real estate worth and lowers the risk to the lender. The cost of installing utilities on a lot is not considered part of the hard construction costs for building.
Land Loans from a California Lender’s POV
California land loans are more risky to lenders than residential loans. The reason for this is that normally most people do not live on the land they buy since it’s vacant. As a result it is industry practice to not consider land a primary residence until something is built, and so it follows that vacant land is called investment property even if a person intends to build on it in the near future. Also, vacant land is called commercial property in California, that is property used for an investment purpose, even if the land is zoned residential and there are plans in place to build a primary residence. The importance of this categorization for lenders is that their risk increases on lending for land because a person can walk away from a land loan easier than a loan on a primary residence since the borrower has another place to live hypothetically.
Why is California loan modification so popular? The loan mortgage crisis that sparked this whole economic implosion is to blame for most of our problems. The real estate industry, particularly of California, has collapsed because of people’s greed. Lenders kept on lending to anyone without considering the risk factors and real estate kept on selling and developing more areas. As a result, the debt that remains unpaid grew and grew. The economy was running on the illusory wealth created by debt. But soon of course all of this bad debt caught up with the system and soon the banks crashed because there was no more cash sustaining its functions. And as everyone knows, perhaps the major industry of California is the real estate industry. And since that went kaput, the government is trying to create new ways in order to revive it in hopes that reviving that industry will eventually help revive the entire economy that crashed because of it in the first place.
As such, a new California civil code has been created last year. This is called civil code 2923.6. Basically, what this California code does is that it requires the banks and the private lenders of housing loans in California to accept the applications for loan modification in almost every situation where foreclosure is immanent. Thus, if you have a mortgaged house in California which you have bought between first of January 2003 and the last day of December 2007, then you are likely eligible for this program. For those who do not quite know what loan modification is, it is basically a permanent change in the terms of the loan. These changes such as reduction in interest rates as well as in time extensions and such are all aimed at helping the borrower to pay his or her mortgage despite his or her financial problems.
There is also a federal program created by president Obama, the famous Obama bailout program that creates incentives for all lenders in the nation whenever they successfully approve a modification of loan application. However, this State move by the California government proves to be a much more effective solution to the problem that really tries to resuscitate the economy by tending to the root of the problem. It is aimed at the long term goal of improving the economy and though it may be small, analysts are seeing real incremental improvements to the state’s economy.
Every Californian should be aware of this new law. Of course, this law does not condone abuse of mortgage payments. It only makes it more affordable for borrowers who are facing foreclosure. For those who really want their application to pull through, a good advice is to consult a loss mitigation expert.
One must also note that one does not have to have been late in his or her mortgage payments in order to have a California loan modification. Even such people who are still on time with their payments can still talk to their lender about a modification if they can see that they are in danger financially.
A computer graduate and loves to travel. Reading current news in the internet is one of his past times. Taking pictures of the things around him fully satisfies him. He loves to play badminton and his favorite pets are cats and walk with them in the park with some dogs.
Before learning how to get a California Mortgage Company License, we need to first talk about what type of mortgage license your company should get. There are three (3) different types of Mortgage Company Licenses offered in California. The Department of Real Estate offers the California Department of Real Estate (DRE) Corporate License with the Nationwide Mortgage Licensing System (NMLS) Company Endorsement. The Department of Corporations (DOC) offers two different types of mortgage company licenses, the California Finance Lender License (CFL) and the California Residential Mortgage Lender License (CRML). All three of these license types have different requirements for approval and allow different activities. It is very important to decide up front what license type works best for you, so let’s take a look and compare each of them. I will be using a lot of acronyms, so refer to the above paragraph if you’re not sure what each acronym means.
All three license types allow companies to broker, bank/lend, or service residential mortgages. The CRML License is the only license type that allows a company to sub-service residential mortgages, which means to service loans that are owned by another company. The CFL License and DRE License both allow a company to originate commercial mortgage loans. The CFL License is the only license that allows a company to originate non-secured commercial or personal loans.
The CFL License has a major restriction that needs to be pointed out. The CFL License only allows CFL brokers to broker mortgage loans to a CFL Lender. This means that a CFL broker can’t broker to DRE companies, CRML companies, or federally or state chartered banks, unless those companies also hold a CFL License. However, there is no restriction regarding what companies a CFL lender can sell loans to. The restriction solely applies to brokering loans.
Minimum Net Worth
Net Worth is the company’s assets minus the company’s liabilities. Each license type has different minimum net worth required for approval.
The DRE License has no minimum net worth requirement. The CRML License has a $250,000 minimum net worth requirement. The CFL License has a $250,000 minimum net worth requirement if the company is originating residential mortgage loans. If the company is only originating commercial mortgage loans and non-secured loans, then the minimum net worth for the CFL License is only $25,000.
Other Major Requirements
Following are some of the other major requirements and barriers for each license type. You’ll notice that they are all very different in what they require.
The DRE License requires the company to designate an individual with a California Department of Real Estate (DRE) Individual Broker License as the Broker/Officer of the company. In order to get an Individual DRE Broker License, a person must complete 60 hours of education, show proof of 2 years full-time mortgage experience, pass the DRE Broker Test, which is only offered in California, and then submit an application for the Individual DRE Broker License. Since a person can be the Broker/Officer for multiple companies, often companies that don’t have an Individual DRE Broker employed with their company, will contact someone that already holds the Individual DRE Broker License to be their Broker/Officer, and then pay them a monthly fee to act in this capacity. However, this can get expensive. This requirement is the most burdensome part of obtaining a DRE License, and is the reason most companies will consider one of the other two license types.
The CFL License does not have any major requirements that are burdensome other than the minimum net worth mentioned above.
The CRML License requires that the company have a Federal Agency Approval with either FHA, VA, Fannie Mae, or Freddie Mac. FHA, Fannie Mae, and Freddie Mac all require $1million in net worth to get a lender approval from them. However, Veterans Authority (VA) does not have any minimum net worth requirement to get a lender approval from them. And the best part is you never even have to do any VA loans once you get this lender approval from VA. So currently this loophole basically eliminates this major barrier to getting a CRML License. However, there is currently one other major issue to obtaining the CRML License. The CRML License requires that the company has a funding source or is in the process of obtaining a funding source to fund their loans. The regulators that approve the CRML Licenses believe that the CRML License is not for companies that just want to broker mortgage loans. So the regulators will look for liquidity in the company that will allow the company to fund loans with their own money, or the regulators will look for a warehouse line of credit to fund the mortgage loans. The regulators will in most cases accept a letter of explanation and proof that the company is in the process of obtaining cash investors or a warehouse line of credit, but this is somewhat of a grey area and must be handled carefully. Although the CRML License allows a company to broker loans, the regulators interpretation of the CRML law is that the company must plan on using the license to bank mortgage loans also.
Loan Originator Licensing
There are two different types of loan originator (LO) licenses in California. There is the DRE NMLS LO Endorsement issued by the Department of Real Estate, and there is the DOC LO License issued by the Department of Corporations. The DRE NMLS LO Endorsement is used by loan originators working for DRE companies. The DOC LO License is used by loan originators working for CFL or CRML companies.
The DRE NMLS LO Endorsement is much harder to get than the DOC LO License. The DRE NMLS LO Endorsement requires 3 tests, 60 hours of education, and 2 applications. The DOC LO License only requires 2 tests, 20 hours of education, and 1 application. The reason for this difference is that the DRE requires a loan originator to first hold a DRE Individual Salesperson License or Individual Broker License before they can complete the NMLS requirements. To get a DRE Individual Salesperson License, a person needs to complete 40 hours of education, take the Salesperson test that is only offered in California, and submit an application for a DRE Individual Salesperson License. Then the DRE requires the DRE Salesperson to apply for the DRE NMLS LO Endorsement, which requires 2 more tests, 20 more hours of education, and a separate application. The portions through the NMLS for DRE and DOC are virtually identical, but again, the DRE requires the person to hold a DRE Individual Salesperson or Broker License before they can apply for the NMLS Endorsement, making the DRE LO Licensing requirements much more difficult.
Each license type has varying types of costs to consider. The DRE Corporate License application costs $300. And the DRE NMLS Company Endorsement application, which must also be obtained by DRE companies, costs $500. So the total cost under the DRE is $800. However, a company must also take into consideration the costs of licensing and endorsing a DRE broker/officer for the company. Between the education, testing, fingerprinting, and application fee, the cost to get a DRE Individual Broker License can be as much as $1,000 to $1,500. And if the company wants to hire a DRE Individual Broker instead of getting someone within the company licensed, the cost is usually about $500 to $1,000 per month.
The CFL License application costs $400. There is also a surety bond required, which costs about $250. And there is fingerprinting which costs about $50 per officer/owner. So the total cost under the CFL is about $700.
The CRML License application costs $1,100. There is also a surety bond required, which costs about $500. And there is fingerprinting, which costs about $50 per officer/owner. So the total cost under the CRML is about $1,650. However, under the CRML, there are a few other costs to consider. If the company doesn’t already have a Federal Agency Approval, then the cheapest one to obtain is from Veterans Authority. The cost for Veterans Authority Lender Approval is $200. If the company doesn’t already have audited financials, then the company will need to pay a CPA to complete this. The cost ranges from $800 to $1,000 for start-up companies, and goes up to as much as $3,000 to $5,000 for existing companies. Also, another major cost to consider under the CRML License is the cost of renewal. If a company does no business during the year, the cost to renew is $1,000, but if a company closes even just one loan during the year, the cost to renew goes up to $5,000.
Home equity loans are regulated in California to limit fees and caps.
No matter where your financial company is based, they will have to
follow these regulations if you are living in California. By expanding your
search to national financing companies, you can find competitive rates
and terms that still follow California law.
Providing Full Home Equity Disclosure
Many of the basic ideas of the federal “Truth In Lending Act” are based
off of California financing law. By using lenders who follow California
financing laws, you can protect yourself from predatory lending.
For example, one such California principle is the idea of full
disclosure, listing out interest rate, fees, and terms before signing a loan
contract. In California, lenders must offer contract copies before
application and before using the credit.
It is a good idea to look over the fees and terms to be sure they are
fair and meet your needs. For example, if you find a prepayment penalty,
then you may want to negotiate a waiver or find a different lender.
Placing Caps on Home Equity Loan Fees and Terms
California laws also place caps on fees and terms, particularly with
sub prime loans. For example, interest cannot be charged on a loan until
one day after closing. There are also limits on late fees and early
Large financial companies have been prosecuted in California for
failing to meet regulations. So even with the biggest names, look over the
terms to be sure they are not overcharging you.
Shopping Outside of California for Best Home Equity Loan
Even with local laws, you can still search outside of California for
low rates. By expanding your search online, you can find competitive
rates and terms than still meet California law.
Start with a broker site that will link you to several lenders. By
providing your address, financial companies will be aware of the unique
laws related to your loan quote.