This article series examines how proactive Department of Real Estate (DRE)-licensed mortgage origination providers — MLOs — will survive the ongoing downturn in originations. Part 2 explains how to work with the evolving base of homebuyers and sellers to earn fees, even as the volume of traditional cash-to-new-loan sales slows to a tepid trickle.

 Look back at Part 1 for how a recession disrupts fees earned by MLOs, and the timing of the mortgage industry’s recovery from what is fast becoming the 2023 recession.

Consumer mortgage originations plummet — so what now?

The rapid mortgage interest rate hikes of 2022 caught homebuyers and sellers completely off balance. With prices toppling traditional sales volume and mortgage rates essentially eliminating financial justification for refinancing, mortgage loan originators (MLOs) are now left to fight over what remains of the scraps of mortgage originations to be arranged and funded.

Mortgage industry institutions forecast consumer mortgage origination volume to nosedive from $4.44 trillion in 2021 to some $2.26 trillion in 2022 — a full half the origination volume in 2022. Mortgage originations are forecasted to fall further to $2.05 trillion in 2023. This includes a (rather optimistic) reduction of:

The natural result is fewer origination fees to go around.

In turn, mortgage industry employment — MLOs as legislated licensees — is forecasted to fall by 25%-30% over the next two years. Already, lenders are reactively cutting staff and even exiting the consumer mortgage industry altogether, according to the MBA.

firsttuesday’s forecast is a more realistic minimum 50% decline in MLO employment — eliminating those MLOs who continue to maintain the same approach to earning fees developed in the recovery since 2010.

In other words, leaning on home refinancing and single family residence (SFR) purchase-assist mortgage originations, i.e., federally controlled consumer mortgages, will leave an MLO to exit the industry — fast.

To survive a decline in consumer mortgage originations, MLOs need to gain the attention of sellers and buyers by preparing themselves to negotiate sales transactions with alternative mortgage products arranged as seller financing. This practice of carryback sales was common throughout the decades in which interest rates last rose, peaking in 1980.

Related chart:

Refinances oppose interest rate movement

Arranging the sale of carryback notes

Heading into 2023, a spiraling housing market has forced sellers to increasingly turn to seller concessions to appeal to buyers who are turned off by the convergence of high prices and rising mortgage rates.

But instead of reducing the profit from the sale of the home by accepting price concessions, paying mortgage points, or kickbacks for down payment or renovations, etc., sellers who want to maximize marketability, uphold their price profit margin, and earn interest in an installment sale can offer seller financing at an acceptable interest rate.

Seller financing is also known and advertised as:

  • an installment sale;
  • a credit sale;
  • carryback financing; or
  • an owner-will-carry (OWC) sale.

Carryback financing generally offers the buyer:

  • a moderate down payment;
  • a competitive interest rate on the carryback trust deed note;
  • less stringent terms for qualification, no appraisal and far less documentation than imposed by institutional lenders; and
  • no mortgage origination costs or lender processing hassle.

For the seller, carryback financing makes their property more marketable, primarily enabling a higher sales price.

Taxwise, the carryback trust deed note allows the seller to defer any tax bite on their profits while earning interest on the amount of deferred tax.

On closing, the rights and obligations of real estate ownership held by the seller shift by grant deed to the buyer. In the carryback sale, the seller receives a trust deed note from the buyer as their primary net proceeds from the sale, taking on the rights and obligations of a secured creditor, called a mortgage holder.

Real estate agents and brokers who are MLO endorsed are perfectly poised to counsel and assist a seller by negotiating a carryback sale. They will find themselves taking a higher number and varied types of property listings and closing more transactions — simply, they will be more competitive in the paradigm of the new market.

Thus, different streams of fee-based earnings using MLO based knowledge will offset MLO income in the down years looming for consumer mortgages as the recession of 2023 takes hold and continues to strangle. [See RPI e-book Creating Carryback Financing]

Market your MLO-related expertise — FARM — for property owners who have not listed their property for sale or whose listings have expired. Emphasize your knowledge acquired negotiating consumer mortgages and, today, expanded by learning the basics for arranging carryback paper.

Further, market your knowledge to other real estate licensees who have any type of property listed for sale, specifically agents and broker-associates who lack an MLO endorsement. Partner with them — team up — to write up purchase agreements and counteroffers with carryback financing provisions for their buyers and sellers to consider. Share in the brokerage fees on carryback sales transactions you help arrange.

Oral agreements with brokers regarding the sharing of fees are enforceable, though a written understanding of the assistance is helpful to avoid confusion or forgetfulness, or worse.

 Related article:

Offering mortgage points? There are better ways to catch a buyer

Then, an investor acquires the carryback notes

Often when arranging seller carryback financing, the MLO needs to locate a trust deed note investor who will purchase the seller’s carryback on close of the sales escrow. This gives the seller a cash-out closing due to the concurrent sale and assignment of the carryback note to a trust deed investor.

Trust deed notes when properly structured — interest, payments, principal, and due dates — are considered profitable investments for trust deed investors, also called private money lenders or hard money lenders. They may also be dealers who buy and sell trust deed notes and who operate under a DRE broker license.

Comparable to a buyer of real estate entering into a purchase agreement with the advice and assistance of their transaction agent (TA), the trust deed investor buying a carryback note does so with the advice and assistance of an MLO as their well-informed trust deed broker. [See RPI Form 241]

Editor’s note — Stay tuned for more about how MLOs can work with investors during a recession in Part 4 of this series.

Short sale negotiator

short sale, also known as a short payoff or discounted payoff (and, humorously, a haircut), is a sale of encumbered property in which the mortgage lender accepts the seller’s net proceeds at closing in full satisfaction — the haircut — of a greater amount of mortgage debt secured by the property sold.

short sale is an alternative to a foreclosure sale for both the homeowner and the mortgage lender when the principal owed on a mortgage is greater in amount than the current market price of the property it encumbers.

Thus, the homeowner with a negative equity or underwater status may sell and relocate, advertised via the multiple listing service (MLS) as a short-sale listing. This listing status is needed to put the buyer and their agent on notice the mortgage holder needs to approve the price the buyer is paying as a condition for closing.

Short sales last resurfaced as a trend midway through the long recovery from the 2008 Great Recession. During the peak in short sales, roughly 25% of MLS sales transactions statewide were short sales. Mortgage lenders had learned that foreclosure was a premature default response for forcing the property to be sold. Mortgage holders and servicers still start foreclosure to demonstrate they have control. In the process, they report the foreclosure to three credit agencies, all of whom oblige lenders by automatically dinging the owner’s credit rating.

As home values plunge in California, likely to continue through 2024 into 2025, recent homebuyers with mortgages who bought within the past couple of years are increasingly falling underwater. When unexpected circumstances intervene — such as job losses or relocation by employers — these underwater homeowners become more likely to default on mortgage payments and are unable to sell their home for a price sufficient to cover the property’s mortgage debt.

Of note: These consumer mortgages are not personal loans imposing a liability on the property owners, but real estate loans which limit the mortgage holders’ recovery to the “value of the encumbered property.”

That’s where an MLO comes in, as a DRE licensee who sandwiches themselves into a transaction for a fee as the licensee who negotiates with the mortgage lender to agree to a discounted payoff.

A short sale negotiator works as an agent authorized by the seller to represent the seller to obtain the mortgage holder’s approval of a discounted payoff. The short sale negotiator may be separate from but working in coordination with the seller’s  agent to complete the sale. Or they may be the buyer’s agent with limited authorization from the seller for short sale negotiations with the seller’s mortgage holder. [See RPI Form 102-1]

Any DRE-endorsed MLO facilitating short sale negotiations with the seller’s lender needs to first thoroughly understand:

  • California anti-deficiency law, which bars a mortgage holder from collecting a loss due to a deficiency in a value of the encumbered property when the mortgage is a nonrecourse debt — such as a consumer mortgage providing purchase-assist funding or refinancing of a consumer mortgagee for a buyer/owner-occupant of a one-to-four unit residence;
  • the trust deed foreclosure process and documentation, as well as time periods for reinstatement and redemption prior to the trustee’s sale and elimination of ownership;
  • negotiations to clear title of any junior financing encumbering the property whether the amount of the first mortgage is either less or more than the short sale net proceeds;
  • the California Homeowner Bill of Rights, which restricts lender dual-track foreclosures, prohibiting the lender from advancing the foreclosure process while the homeowner is concurrently working on a mortgage modification with their servicer;
  • income tax defenses to the relief-of-indebtedness income treatment triggered by the lender voluntarily reporting a loss on the mortgage to the Internal Revenue Service (IRS); and
  • the state of the seller’s income and net worth for insolvency evaluation by the mortgage holder/servicer.

This knowledge — combined with the first-hand experience of an MLO accustomed to working hand-in-glove with lenders to fund home purchases and refinances, now supplemented with short payoff negotiations with a mortgage holder — is the great pedigree of a short sale specialist.

Related article:

Real estate explained: Anti-deficiency

Foreclosure consulting

Foreclosure in California is a codified process, triggered by default on a trust deed or its note – the mortgage documents – to recover dollar amounts owed on a debt by an advertised auction  of the real estate encumbered as security for repayment of the debt.

On the owner’s default, the mortgage holder (the lender or carryback seller) is forced to initiate the foreclosure process by a trustee’s sale or judicial sale procedure. The owner’s control is due to the put option provision contained in all trust deeds and codified by California’s one-action rule as the sole remedy for defaults on a mortgage.

The put option grants an owner the right to default and force the mortgage holder to buy the property — the put — through a foreclosure sale.

The highest bidder acquires the property at a foreclosure sale, which typically is the mortgage lender. Thus, a negative equity homeowner has affirmative steps they can take to rid themselves of the underwater property and the mortgage debt; that is, they simply default on payments.

Functioning in tandem with the put option provision in a trust deed, California is an anti-deficiency state.

Critically, no deficiency judgment is available through the courts or otherwise for the lender to recover their loss on a foreclosure due to a decline in the market price of the buyer-occupant’s one-to-four unit residence below the principal amount of their purchase-money mortgage. All consumer mortgages, with the exception of some refinancing conditions, are purchase-money mortgages subject to the deficiency bar which keeps these mortgage holders who foreclose out of the courts.   

Foreclosure consultants assist defaulting homeowners to navigate the process and seek foreclosure alternatives for a fee.

A foreclosure consultant is any person who, for a fee paid by the seller-in-foreclosure, agrees to:

  • stop or postpone the foreclosure sale;
  • prevent lienholders from enforcing or accelerating their note;
  • help the seller reinstate the loan or negotiate an extension of the reinstatement period;
  • advance funds to the seller; or
  • arrange a loan for the seller. [Calif. Civil Code §2945.1(a)]

Here in California, foreclosure consultants need to first register as a Mortgage Foreclosure Consultant with the Department of Justice and obtain a surety bond for $100,000. [CC §2945.45(a)]

A DRE-licensed broker or agent acting on behalf of an owner-in-foreclosure avoids being labeled a foreclosure consultant when they:

  • receive only a contingency fee (paid on closing) from the owner for negotiating the sale of their residence in foreclosure;
  • receive no advance fees or costs from the owner, an activity which converts the broker into a foreclosure consultant;
  • make a Regulation Z (Reg Z) consumer mortgage as a principal for an amount sufficient to cure defaults, or arrange a Reg Z consumer mortgage as an MLO-endorsed broker employed by the owner; and
  • receive no ownership interest in the property from the owner, except a security interest under a trust deed when acting solely as a principal (lender) making a MLO loan. [CC §2945.1(b)(3)]

Foreclosure consultants will find themselves muddying through a highly regulated foreclosure and mediation business, including competing with U.S. Department of Housing and Urban Development (HUD) advisors available free to the public.

Better, consider the job title of foreclosure consultant as an entry point to working with homeowners to pursue foreclosure alternatives, such as a:

  • short sale;
  • mortgage modification to reduce and/or defer payments to match the homeowner’s reduced income; or
  • deed-in-lieu of foreclosure, commonly called a “friendly foreclosure,” when the property owner voluntarily hands the mortgage holder who accepts a grant deed conveying title to them in exchange for canceling the mortgage debt.

A deed-in-lieu of foreclosure saves the mortgage holder time and money since they don’t have to deal with the costs of an inevitable foreclosure sale when the owner decides, as they may, to retain possession until the foreclosure sale takes place. Further, mortgage holders sometimes will offer relocation assistance to shorten the time for resale of the property and reduce losses.

Buckle up: it’s going to get bumpy

These three strategies will set up MLOs to continue working with a base of sellers, buyers, their agents, and lenders in the recessionary years ahead.

Rather than viewing the sales market as controlled by and primarily for the exclusive benefit of sellers, the attitude and thinking of licensed agents and brokers in a recession needs to shift to a cyclical market with conditions now shaped primarily by buyers, including the prices buyers will pay, and the terms of a purchase that motivates buyers to acquire property.

To read about the timing of the 2023 recession and how it will impact MLO fees, see Part 1 of this series: MLO recession side hustle guide Part 1: Originator fees are slashed.

To learn how to use your MLO experience and mortgage lending contacts to shift your focus regarding the type of services needed when dealing with real estate owned (REO) properties, watch for Part 3 of this series in next week’s Quilix newsletter.

Related article:

Economic recession or not, the housing market recession is here