A mortgage counseling program in Illinois aimed at stopping predatory lending may have unintended consequences for real estate investors, as well as the subprime borrowers the law was created to assist.
The new law requires borrowers in Cook County, the county in which Chicago is located, who want to take out a nontraditional home loan (a.k.a. a “subprime” loan) to undergo mortgage counseling before closing on their properties.
A similar law was enacted in Illinois earlier this year but was vetoed by the governor after only a few months. This followed a heated debate about potential racism caused by the counseling effort’s focus on zip codes with high percentages of minorities. Detractors claimed the bill made it harder for minorities to buy homes, and lawsuits were filed against the state alleging that the program scared away buyers for homes in the affected zip codes.
Detractors may have had a point; a University of Illinois study showed that housing sales in the pilot area had dropped by nearly half, according to The Wall Street Journal. By comparison, a demographically similar area outside the pilot had a 20 percent decline, according to The Wall Street Journal.
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That drop in sales may be significant for investors, who may see a similar pattern emerge in all of Cook County after July 1, 2008, when the newly-signed SB 1167, an amendment to the Mortgage Certificate of Release Act, takes effect. At that point, opportunities for investors could skyrocket.
For instance, investors could assist embattled sellers by offering quick closings. Instead of having to jump through the counseling hoops for a subprime mortgage, an investor using a traditional mortgage could speed up a home sale. If a seller needs a speedy sale, they may have the choice of waiting for a subprime borrower to finish their counseling before closing, or, alternately, working with an investor who can close in a shorter amount of time with a traditional mortgage. Investors could leverage that time differential to potentially get thousands of dollars discounted on a sale from a seller who would prefer not to be paying two mortgages, or who just needs to sell quickly.
Subprime borrowers will take longer to close, both because they are required to undergo the mortgage counseling, and because there may be a shortage of certified counselors available to provide the required counseling. The new program will cover an estimated 19,000 loans per year, according to The Wall Street Journal. The counseling agencies believe a minimum of 25 new counselors would have to be hired and trained—an increase of 60 percent over the current number of 41 counselors at 11 HUD-certified agencies, according to The Wall Street Journal. But the state has failed to make any recommendations or budget allocations for the new counselors the agencies would require. According to one counselor interviewed by The Wall Street Journal, during the pilot program half of her days were spent in these counseling sessions, and she had to work late twice a week and reschedule with regular clients to meet the demands of the pilot law.
Because there would be fewer homebuyers, the pool of potential tenants for investors who want to rent out their properties should grow. That could lead to increased cash flow for rental property investors in affected areas. Additionally, investors could register with The Housing Choice Voucher Program. (For more information on that program, see our article on High Payoffs from Low Income Housing.)
If the new law has the same track record as the previously vetoed pilot law, communities are either going to adjust to these counseling programs, or fight to get the programs dropped. Regardless, this legislation offers investors the opportunity to buy into the market while prices and sales are down, as communities adjust to these new barriers.
The outcome that occurs in Cook County is likely to emerge in other markets as well if similar programs are enacted. With the mortgage industry tightening its belt in the current credit crisis, educational programs for subprime borrowers are being touted as a way to avoid similar crises in the future. In fact, the educational and counseling programs may be the most useful of the programs to come out of the current credit crisis. (See our article on Why Bush’s Bailout Plan Won’t Work.)
Since people have a natural tendency to resist change, however, an adjustment period is to be expected. This time represents a great opportunity for investors to get in while others resist the changes. Of course, investors will want to watch closely how it plays in Chicago to educate themselves on how the adjustment period pans out. There is a good chance that other markets will react in a similar manner if the programs are brought to other areas in the U.S., and those investors who have this information and can see what will likely happen, before it happens, have a notable advantage.