Rent to Own
Monterey company tries to fix mortgage crisis – and turn a profit.
Wednesday, November 26, 2008
Monterey investors Allen Kaplan and David Wheeler are experimenting with a different way to keep people from losing their homes to foreclosure. Their 8-month-old company, Mortgage Delinquency Solutions LLC, is attempting to buy properties from borrowers behind on payments and turn them into renters. The goal: homeowners avoid eviction, buy back their house at a cheaper price down the road, and the company’s investors turn a profit.
It’s also a gamble – homeowners must pay $5,000 in installments, all hinging on the hope that Mortgage Delinquency Solutions can get the lender to significantly write down the principal of their mortgage.
So far the company hasn’t closed on its seven pending deals, but Kaplan says banks are receptive to their all-cash offer to buy homes approaching default. “When [lenders] are talking to us, they are getting cash,” he says. “When they are talking to the owners, they are still going to end up with a piece of paper.”
Tom Pool, spokesman for the California Department of Real Estate, says he’s generally skeptical of for-profit foreclosure solutions.
“The bottom line is there is nothing compelling lenders to accept loan modifications,” he says. “You pay the money and you are giving up power, and you may still end up in the same place you would have anyway.”
Kaplan, who is also a Monterey attorney, says his company’s strategy is much like completing a short sale – except the homeowner doesn’t get evicted. If the deal fails, he says, borrowers will get six to 12 months of free rent while Mortgage Delinquency Solutions negotiates with lenders.
The company attempts to address a key unpinning of the local mortgage crisis: homeowners owe more than their house is worth and have no equity incentive to stay put. Joe Nocera, business columnist for the New York Times, recently lauded a similar fix that would temporarily turn delinquent homeowners into renters. “We are ahead of the curve here,” Wheeler says.
Here’s how it works: Clients must prove they have enough income to pay market-rate rent, but not enough to pay an inflated mortgage. Additionally, the client must hire an independent attorney to sign off on an agreement before paying the $5,000 and negotiating with the lender. The homeowner will have the option of buying back the home within two years at 160 percent of the price the company bought it for. If the home sells to a third party within five years, the homeowner gets 20 percent of the profit.
State and local regulators, however, caution against handing money over to private companies, given the prevalence of foreclosure scam artists. Deputy District Attorney John Hubanks says there’s a common scheme where an unlicensed broker offers loan modification in exchange for an up-front fee. Once the scammer gets paid, no services are rendered and the homeowner is out thousands of dollars. California law bars mortgage consultants from collecting advance fees if a notice of default has been filed against a borrower.
Mortgage Delinquency Solutions, however, works only with borrowers who haven’t received a notice of default. Kaplan and Wheeler say they merely act as homebuyers, so therefore aren’t regulated by the Department of Real Estate, which allows only approved companies to collect advance fees.
Kaplan and Wheeler say they also encourage their clients to try negotiating with their lender directly, and to also try free foreclosure-prevention counseling. “Only when that doesn’t work,” Wheeler says, “that’s when they come to us.”