Tom Anderson Chairman and Founder of PENSCO Trust Company (Full Bio)

This week Bruce is joined again by Tom Anderson. Tom is the chairman and founder of PENSCO Trust Company. He is considered by many to be the national expert on the topic of self directed IRAs. He focuses on how investors can increase their wealth-building potential with real estate and private equity investments. He has written articles for nearly all the nation’s and financial magazines. He was recently invited to Washington as part of the “Future of Finance Initiative” for the Obama Administration.

You can loan money to your IRA if you attempting to protect the existence of the IRA. You cannot loan money to your IRA to buy new lots. The loan must also be interest free. If it did have an interest rate, the loan would be considered self dealing, because you would be taking profit out of your IRA. Lastly, if the loan extends more than 60 days, you must provide the custodian with a note explaining that the IRA owes you money.

Tom recently spoke to a member of the Department of Labor who created this exemption, and the member confirmed that you could loan money to your IRA to bail it out of mortgage delinquency.

There are some IRA investments which may or may not be considered illegal depending on which government official is reviewing the investment. For example, Tom once heard of a man who used his IRA to buy a classic car. Because the car is a classic, there is good reason to believe the car will appreciate. However, a government official might consider this self dealing, because they may or may not perceive the classic car to be for personal use. If the government perceives the car to be for personal use, then the car purchase would be labeled self dealing. Depending on which day the car purchase was reviewed, and depending on who reviewed the purchase, this may or may not be a legal IRA purchase. You can perform a large variety of transactions within your IRA, but you must be careful not to purchase anything that the government might perceive as self dealing. If the government believes you are self dealing with your IRA, then your IRA will lose its tax-deferred status.

Bruce’s business is set up to buy and sell real estate. Bruce asks Tom if there is a limit on how much money, or how many houses, he could use for his IRA. Tom believes that this is up for interpretation. In Bruce’s case, he owns a real estate business, so if he performs many transactions through his IRA, the government may possibly perceive Bruce to be running a business through his IRA. All businesses must pay taxes, and if the government determined that Bruce was running his business through his IRA, then he might lose the tax-deferred status of his IRA. Tom believes that if Bruce was both working in his IRA for retirement investments, and out of it for business use, then it would be hard for the government to label Bruce’s IRA as a business. However, if Bruce was retired, and he only purchased and sold properties through his IRA, then the government may perceive Bruce to be running a business through his IRA. You should consult with your CPA to determine whether or not you will be subject to taxes.

A disqualified person is a term in the Internal Revenue Code 4975 which defines certain entities as people you cannot perform transactions with. The government does not want you to touch your IRA assets, because they want your assets to be there when you retire. So you cannot buy a condo in a vacation spot with your IRA, and then use that condo on the weekends. Disqualified persons include yourself, your spouse, your children, and the spouses of your children. Most people in your family are considered disqualified persons, except for siblings, nephews and uncles. If you deal with a sibling or nephew, you should not offer them less than market rates. Giving a member of your family the benefit of low payments through an IRA asset could be considered self dealing.

Bruce heard an unusual example of someone who was taxed for self dealing. An investor owned a commercial building, and his IRA owned the let next to it. The investor would park in the lot next door, and that was considered illegal personal use. You are not allowed to gain a personal benefit from your IRA while the IRA is growing. If a mistake like this occurs, you have 14 days to correct it. However, if the custodian was the cause of the mistake, then you can argue in court that the custodian should be held responsible.

Tom’s company will not accept any member that is not a part of a regulated institution. If he did not check to determine whether or not his members were being regulated, many bad people would have the opportunity to deal through them. A non-regulated company may enter into an agreement with a bank who is a custodian. All banks, credit unions and trust companies are automatically qualified to hold IRAs. If you are not one of those institutions, then you must be authorized by the IRS. There are 257 mutual fund companies, insurance companies, and broker dealers that are licensed by the IRS.

It is good business to protect the consumer, and the government supports that mentality. PENSCO will not help someone enter into a prohibited transaction. If a lender was involved in a prohibited transaction on an IRA, then they would be subject to a 15% tax on the amount of the transaction. So a lender that made a $100,000 bill would receive a $15,000 bill. If the lender was not aware of the prohibited transaction, then they may be exempt from the tax.

When an investor is told that he cannot buy a property from himself with his IRA, he may get the idea of having a friend buy his property, and then re-buying from his friend. However, this is still considered an illegal transaction. This is considered a linked transaction by the IRS. You will not go to jail for performing a transaction like this unless you fail to pay the penalty taxes. However, the IRS tends to not inform you of your mistakes until 3 years later, so you can get caught off guard if you are not careful.

If you buy a property through your IRA while using your brother as a lender, you will not be taxed so long as your brother does not receive more than his regular fee.

A Prohibited Transaction Exemption (PTE) is a request submitted to the Department of Labor when you anticipate that your potential transaction may be prohibited. A PTE is usually granted on the basis that there is no increase or decrease in value because of the transaction. You cannot submit a PTE after the transaction takes place. The exemption comes in writing, so the Good Day rule does not apply.

There are some custodians who offer check book IRAs. Tom believes this practice will probably be extinct soon. There are only two custodians Tom knows of that will do check book IRAs, and PENSCO is one of them.

Tom’s website is www.penscotrust.com

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

R.K. Arnold President and CEO of MERS (Full Bio)

This week Bruce is joined by R.K. Arnold. Arnold serves as the president of MERS. He joined MERS at its inception in 1996, and served as senior vice president and general counsel until his promotion to president in 1998. He is a member of the MERS board of directors. His team has built MERS into the central electronic registry for the mortgage finance industry.

Arnold just met with the Senate Banking Committee on housing. The members of that committee are very busy people, and they probably did not have time to read his testimony prior to the meeting. However, Arnold had been on capital prior to the meeting, to brief the staff of the committee. Arnold does not perceive the current housing problem to be very complicated, but he doesn’t think the committee understood it as well as he hoped.

Currently, there are over 31 million active loans in the MERS system. 66 million loans have been registered through MERS since its inception. Bruce doesn’t think that the MERS problem sneaked up on the system. MERS started in 1997, and it must have been developed because it offered a valuable service. When MERS first started, it had a flow of about 50 loans per day. That number eventually reached 36,000 loans per day.

When MERS began to grow and take on the business of major lenders, it had to go through the filters of certain legal departments.

MERS operates a nationwide database in which members can keep track of loans being serviced. To make this system accurate, MERS is labeled in the land records as the mortgagee. This means that all the legal mail involving the property is sent to MERS. You can think of it as being a trustee of a trust. MERS then turns the mail into an electronic form through high speed scanners. These scanners are then used to email the documents to the companies involved.

MERS also keeps track of who owns a loan. That part of MERS has been open to the public for 18 months now. If someone wants to negotiate a loan modification, a private individual can access MERS and discover who the last owner of the note is. That part of the MERS system is not as standardized as the servicing part. You may discover that a note is held by a trustee, or that it is in a numbered trust. Those are one in the same, except that in one way it is reflected in the name of the trust, and in the other, it is reflected in the name of the trustee. There is an additional person involved in this process known as a custodian. If someone wants to know where the note is being physically held, it is probably with the custodian. So this can become very complicated. On the other hand, the servicing is very straight forward and accurate. When a servicer changes, the old servicer does not want to receive mail anymore, because they will not be paid for it, and the new servicer will want to get that mail.

Recently, a large servicer named Taylor, Bean & Whitaker went out of business. Once the FDIC found the successor to that company, that information could be changed on the MERS system, and the mail will go to the new servicer instantly. In the past, that mail may have never gotten to the right location. MERS is a big benefit to homeowners, financial institutions and regulators.

Part of the concern relating to MERS is that there are two worlds in which things are recorded. It would be similar to having ownership records kept at the county recorders and at a company similar to MERS.

Right now, MERS has no competitors. Part of the reason why MERS has no competitor is because it would not be very useful to have competitors for this service.

When MERS is tracking who services a loan, and when the loan is sold, the system is different from what most people are accustomed to. MERS is in the land records as the common agent for all 3,000 of it’s members. On the mortgage, MERS is labeled as the mortgagee, and there is an 18 digit number with a telephone number. Using that number along with your personal identification, you can log into MERS and discover who the current servicer is. There are no assignments; MERS is always the mortgagee. Before MERS, those assignments frequently had mistakes. Some assignments were recorded in the wrong number, and sometime there was no assignment at all with no intent to record them. This was not a problem with the county recorder, it was the problem with the industry. The industry’s attempt to solve that was to put one company on the land records on behalf of all of them. MERS is the mortgagee, not the servicer. If you look at a mortgage on the MERS system, you can find a clause stating, “MERS is the mortgagee as nominee for the lender and the lender’s successor.” MERS keeps track of where a note is as well as who is servicing the note.

Title companies are involved in all foreclosure processes. Foreclosures are performed by law firms. When the mortgage is recorded in the land records, there is a legal paragraph stating that MERS can foreclose. Less than 10% of mortgages are foreclosed in MERS name. MERS has more strict rules regarding foreclosure than many states. If a loan is to be foreclosed in MERS’ name, the promissory note must be presented in the foreclosure. A last note affidavit will not provide an exception to this rule. If they do not wish to present the note, then they must sign it away from MERS. At that point, it would leave the MERS system, and there would be an assignment recorded in the county land records verifying that they are signing it to themselves.

The raw legal title is reflected in the land records. That title makes sure that no one can prime that in the land records. There is a conveyance of real property in the public land records.

Some attorneys have convinced their clients that they will win the right to a free and clear house. Arnold has not seen this happen yet.

The vast majority of all people who are currently being foreclosed on have not made their payments. People seem to have forgotten that there are rights attached to being a lender.

If MERS was declared to have improperly dealt with title issues, Bruce wonders what the consequences would be. Surely that problem cannot exist. Arnold does not believe there is any question that we have secure loans. The lender and the borrower signed a mortgage or a deed of trust. The money was lent as one transaction. The deed of trust was recorded in the land records. Arnold thinks people are panicking over the idea that robo-signers are signing documents without reading them, but that doesn’t have anything to do with the security of the property.

Lenders have acknowledged that there are some flaws in the process, and that those flaws can be changed. Lawyers are hoping that foreclosures can’t be corrected, which would prevent foreclosures from occurring. If those problems couldn’t be fixed, Bruce and Arnold believe bad things would happen to lending. Lenders will not loan money without having security. Fortunately, Arnold doesn’t see any way to get around the land records.

MERS strongly believes that the note should be produced at the time of foreclosure. MERS does not make any money on a foreclosure, and the decision to foreclose is made by the servicer. Arnold is disappointed that there has been sloppiness in the process, but people are working to fix that problem.

MERS website can be found at www.mersinc.org A copy of Arnold’s testimony can be found there.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Sources:
http://www.nytimes.com/2010/07/09/business/economy/09rich.html?_r=2
http://blogs.wsj.com/wealth/2010/06/29/mansion-foreclosures-surge/
http://latimesblogs.latimes.com/money_co/2010/07/30year-mortgage-rate-edges-down-to-new-record-low.html
http://www.boston.com/business/articles/2010/07/09/banks_fight_changes_to_accounting_rules/
http://www.aba.com/Industry+Issues/FASB_advocacy.htm
http://www.dsnews.com/articles/fannie-mae-adopts-new-rules-for-pre-mod-income-verification-2010-06-28
http://www.lpsvcs.com/NewsRoom/IndustryData/Documents/06-2010%20Mortgage%20Monitor/LPS_Mortgage_Monitor_May_2010_Final.pdf

Today’s News Synopsis:

According to Greg Paquin, Sacramento new home sales decreased by 21.3 percent in the second quarter. Foreign home buyers purchased $66 billion of US residential property during the year ending May 2010. The VP of the Federal Reserve Bank of Cleveland believes that the high foreclosure rate is likely to continue for some time. Multiple economic statistics show that the tax credits may have simply hid an ongoing recession in real estate.

In The News:

Sacramento Bee – “New-home sales plunge in Sacramento area” (7-9-10)

“Second-quarter new-home sales in the Sacramento area fell 21.3 percent from the first quarter and by 50.1 percent from the already dismal second quarter of 2009, said Greg Paquin, a Folsom consultant who issued the sales report.”

Housing Wire – “REITs Raised $22bn for Real Estate Investments in 2010: NAREIT” (7-9-10)

“The US Real Estate Investment Trusts (REITs) raised $22bn in initial, debt and equity capital offerings in 2010, and as a whole the industry owns $500bn of commercial real estate assets, approximately 10% to 15% of total institutionally owned commercial real estate, according to a mid-year report by the National Association of REITs, NAREIT.”

Housing Wire – “International Investment in US Housing Market Rises: NAR” (7-9-10)

“Foreign home buyers — those with residency outside the US as well as recent immigrants and temporary visa holders — purchased $66bn of US residential property, or 7.27% of the market, in the year ending March 2010, according to the National Association of Realtors (NAR). Based on NAR’s existing home sales information, $907bn of residential sales occurred in the 12 months ending March 2010.”

Housing Wire – “DebtX Sees Commercial Mortgage Values Recover Slightly in May” (7-9-10)

“The aggregate value of commercial real estate (CRE) loans that collateralize commercial mortgage-backed securities (CMBS) rose to 76.6% of the original balance in May, from 76.4% in April, according to loan sale advisor DebtX. Values are up from 75.9% in March and 76.5% in February. CRE loan values are down from 77.6% in May 2009, according to DebtX.”

Housing Wire - “High Foreclosure Rate Likely to Persist, Cleveland Fed VP Says” (7-9-10)

“If past recessions are a guide, the nation’s high foreclosure rate is likely to persist, according to authors at the Federal Reserve Bank of Cleveland.”

Housing Wire – “Bank Bailout May Turn a Profit for Treasury, KB&W Report Finds” (7-9-10)

“The Capital Purchase Program, $205bn in financial firm relief funds from the Treasury’s $700bn stimulus package, the Troubled Asset Relief Program (TARP), is nearly repaid in full and likely to turn a profit, according to a report from broker/dealer investment bank Keefe, Bruyette and Woods.”

Housing Wire – “Ginnie Guarantees $33.4bn of MBS in June” (7-9-10)

“The Government National Mortgage Association — or Ginnie Mae — guaranteed more than $33.4bn of mortgage backed securities (MBS) in June.”

Inman - “Tax credits hid ongoing real estate slide?” (7-9-10)

“The economic data that did arrive confirmed a slipping recovery, but not a double-dip. The Institute for Supply Management service-sector report for June followed last week’s pattern: softer than prior month, and well below forecast (May 55.4, forecast 55, actual 53.8). New claims for unemployment insurance came down 21,000 last week to 454,000, but have been stuck in that range all year long. Mortgage refi applications have begun to rise, but purchase ones fell again, by 2 percent last week, now 42 percent below the end of April.”

Looking Back:

One year ago, the government-insured (FHA and VA loans) share of mortgage applications was 35.9 percent. The average 30-year rate dropped to 5.2 percent. UCLA economists predicted that commercial real estate demand would not return to 2006 levels until 2014. The Financial Crimes Enforcement Network reported that suspicious mortgage activities were increasing significantly.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Pete Pannes Senior Vice President, Field Sales and National Accounts, PMI Mortgage Insurance (Full Bio)

Bruce Norris is joined this week by Senior Vice President, Field Sales and National Accounts of PMI Mortgage Insurance Co., Pete Pannes. Bruce and Pete discuss the basic business of PMI, when a borrower in a transaction pays for PMI, the range in cost, when PMI is required on a loan, if sellers can pay for the cost of PMI, competitors in mortgage insurance, what would happen if a mortgage insurer went out of business and its effect on the lenders, current stresses on mortgage insurers, how the industry is structured to handle issues in the market, how insurance changes the amount a consumer can borrow, if PMI is only for first trust deeds, if PMI has gotten more popular in recent years, if property value increases reduce insurance costs, at what point PMI is cancelled, what happens if prices go backwards, can PMI be reinstated if loan to value shifts, what price range of loans PMI covers, variances in PMI by state, if PMI can be used for purchases and refinances, how the market got away from paying PMI with 80% first and 20% second, if more traditional underwriting is taking place and if it includes PMI, how PMI was ignored because of run up of appreciation in previous years, reemergence of FHA and how it compares to PMI, how the consumer benefits from PMI, how lenders benefit from PMI, if PMI makes loan more liquid on Wall Street, how PMI assists bank if foreclosure takes place, what is covered in the policy and for how much, the borrower in foreclosure and recourse against borrowers in default, how do consumers prove they are in a 20% equity position, if late payments or rapid market declines can cause the bank to change its policies, do mortgage seconds or home equity line of credit change the PMI situation going forward, will PMI be required for longer amounts of time, pmigroup.com.

Pete Pannes is Senior Vice President, Field Sales and National Accounts, for PMI Mortgage Insurance Co., responsible for ensuring operational excellence with PMI customers nationwide.

Pannes has more than 18 years combined experience in the mortgage and mortgage insurance industry. He joined PMI in 1990 as an Account Representative and was promoted to Account Executive in 1992. He was a key part of the PMI management team that in 1994 formed CMG Mortgage Insurance Company (CMG MI), PMI’s joint venture with CUNA Mutual serving the growing credit union market. Pannes held several positions at CMG MI from 1994 to 2001, when he joined CUNA Mutual as Senior Vice President and General Manager of CMG MI. In 2004 he rejoined PMI as Vice President of National Sales-Division Manager, responsible for the management of all field sales and select national accounts for the Eastern U.S.

Pannes holds a Bachelor of Science degree in Business Administration from Arizona State University.

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