What You Need to Know about Creative Real Estate Financing

The bursting of the “housing bubble” in 2008 and the resulting credit freeze have made it harder for everyday Americans to qualify for residential loans. As a result, many prospective buyers are turning to creative financing options in their quests to purchase homes.

This scenario is not new. According to Arizona State University Professor Anthony Sanders, “Many of the new mortgage products that are surfacing are […] variations of mortgages that were popular during the high-inflation, high-interest-rate period of the late 1970s and early 1980s.” At that time, many people simply couldn’t qualify for a home loan from a traditional banking institution. High mortgage payments required greater cash flow and a larger down payment – not to mention increased mortgage origination fees – which most people, especially first-time home owners, simply couldn’t afford.

In 1982, the Federal Reserve Bank of Atlanta funded a Georgia State University Department of Economics survey of realtors across the American Southeast. These realtors provided information on more than 300 home sales that had closed that year. Upon reviewing the data, the authors of the study, Donald L. Koch, Delores W. Steinhauser, and Keith R. Ihlanfeldt, discovered that a stunning 53 percent of all transactions involved creative financing.

What is creative financing?

A popular choice during economic downturns, creative financing refers to any financial arrangement regarding a real estate transaction that doesn’t involve a traditional financial institution. The most common form of creative financing is a seller carrying a home loan for the buyer at a below-market interest rate.

Sellers who own their home outright and want to finance borrowers themselves can use a mortgage or a trust deed, although laws differ in each state about whether to record a mortgage or a trust deed. For example, in California, people use grant deeds for titles and trust deeds for promissory notes.

History of creative financing

In the 1960s, 1970s, and early 1980s, creative funding scenarios could include a developer or builder, or a buyer’s employer, providing the money. Less frequently, a realtor could hold the mortgage. Sellers could also rent or lease their homes with an option to buy.

The trouble with creative financing during this period was that in providing financing, sellers tended to focus more on just making a sale than they did on making a smart investment. This led them to ignore many of the basic principles of lending when constructing the deals.

However, since the passage of the Dodd-Frank Act in 2010, many creative financing options are no longer legal. Realtors today must possess a mortgage loan originator license in order to arrange a loan. Although sellers can still hold a loan, they must now follow these guidelines:

– Sellers cannot offer financing on more than three homes per year.

– They can’t extend a loan if they built the property.

– The financing terms cannot include a balloon payment. All loans have to be amortized.

– Lenders must first ascertain whether the borrower is capable of paying back the loan.

– Loans must have a fixed rate for at least five years, with sensible annual increases thereafter, as well as a reasonable lifetime cap.

Why people should avoid creative financing

Even with these preventative measures in place, creative financing carries significant risks for both buyers and sellers. Many of these loans have a very slim margin of error and rely upon the home continuing to gain in value in order to qualify for refinancing down the road. However, homes can and do lose value, which can result in a mortgage that is larger than the value of the property.

The quality of these loans can also be questionable because most lenders lack the experience and knowledge to be experts on credit analysis. For example, they often don’t take into account the borrower’s net worth or character. Further, if a borrower defaults on his or her payments, the seller must initiate collection processes or foreclose on the property – both of which involve a significant time period without any payments from the buyer. This can lead to a dire cash-flow problem for the lender, especially if he or she needs this money to pay down a first mortgage.

Sellers can also experience significant losses if they have to foreclose or sell a low-rate home loan on the secondary market. This could happen for a variety of reasons; for example, sellers might experience a life event that requires them to access the loaned money before the loan term is up. They might also decide to recoup their money to invest in a financial instrument with a higher rate of return.

Creative financing also distorts property values. Houses with attractive financing terms tend to sell for a higher price than properties with traditional financing do. Often, these exorbitant sales prices cancel out any savings achieved through cheaper financing terms.

Speakers Focus on the Importance of Our Founding Documents

The Donald Koch Foundation hosted a presentation by Howard Bay and Clark Beim-Esche at the Principia School in St. Louis, Missouri, on April 4, 2017. During the talk, the speakers discussed the history of the Declaration of Independence and the Bill of Rights and why these documents remain important today.

The speakers both have strong ties to the Principia School, as well as a thorough knowledge of American history. A retired teacher of history and economics at the school, Mr. Bay is also a former Principia student. Mr. Beim-Eshce worked in the English and History departments at the Principia Upper School for more than 30 years. A winner of the Mark Twain Boyhood Home and Museum Creative Teaching Award, Mr. Beim-Esche is also an author. His 2015 book, Calling on the Presidents: Tales Their Houses Tell, is available at Barnes & Noble and Amazon.

Mr. Bay spoke first, describing the Declaration of Independence as America’s birth certificate. He went on to say that “no American document has had a greater global impact” than the Declaration of Independence. In fact, over half of today’s United Nations’ member countries have taken inspiration from our founding documents to create their own declarations of independence. All but two of these documents lack the passage from our document’s preamble, which states that “all men are created equal” and have “certain unalienable rights, including ”life, liberty, and the pursuit of happiness.”

Our Declaration of Independence was a radical document, according to Mr. Bay, because it marked the first time that a government was formed on the basis of a set of “truths.” It also asserted that a government’s power comes from the people and not the other way around. This meant that Americans were now “citizens” and not “subjects.”

Toward the end of his presentation, Mr. Bay described the harrowing journey that the Declaration of Independence and the Constitution took during the Revolutionary War and throughout the decades before ending up encased in glass at the National Archives. The fact that we could have easily lost these valuable documents is frightening. According to President Truman, “Liberty … can be lost, and it will be, if the time ever comes when these documents are regarded not as the supreme expression of our profound belief, but merely as curiosities in glass cases.” Mr. Bay concluded his portion of the talk by warning that in order to preserve the principles of liberty, each new generation of Americans must not only understand the truths expressed in our founding documents, but they must also cherish them.

Mr. Beim-Esche begins his portion of the presentation by comparing the Bill of Rights to the Ten Commandments. According to Mr. Beim-Esche, both documents are basically lists of “thou shalt nots.”

Subsequently, Mr. Beim-Esche detailed the timeline of the drafting of the Constitution, from the Declaration of Independence and the release of Thomas Paine’s Common Sense in 1776 to the Constitutional Convention in 1787. He goes on to describe the addition of the Bill of Rights in 1791.

The 10 amendments contained in this document list 24 limitations on government. Among these are restrictions on laws that diminish the freedom of speech, peaceable assembly, religion, press, and petition. The government also cannot force citizens to house soldiers in their homes without their consent or infringe upon people’s right to have and bear arms.

Additionally, the Bill of Rights prevents the government from conducting unreasonable searches and seizures and requires probable cause before issuing a warrant. The Bill of Rights also guarantees citizens freedom from self-incrimination, double trial for the same crime, arrest without indictment, and loss of property without just compensation. When a citizen is arrested, the government must deliver a just and timely trial, an impartial jury, notice of all charges, and legal representation. The accused also has the right to confront any witnesses. In a civil case over a certain dollar amount, citizens are entitled to a jury trial. Moreover, the government cannot impose excessive bail or fines, or any cruel and unusual punishment.

To further secure against government overreach, the 9th Amendment of the Bill of Rights denies the government any powers that the Constitution does not specifically mention. The 10th Amendment takes this one step further by stating that all rights not delegated to the federal government in the Constitution are reserved to the states and the people.

At the end of his presentation, Mr. Beim-Esche pointed to the bottom of a copy of the Bill of Rights that Donald Koch would later hand out to junior students in the audience. He said, “This copy of the American Bill of Rights is a gift to the students of Principia by the Donald L. Koch Foundation as a timeless reminder that the freedom entrusted to their care is a challenge to their generation—a test of them as individuals to preserve and protect or ignobly to lose.”

A Powerful Administrative State – Why You Should Fear It

Neither Democrats nor Republicans realize what the true threat to our liberty is. As a result, both parties spend all their time and resources attacking the wrong things. For example, conservatives complained loudly when President Obama agreed to the Iran nuclear deal and cut the defense budget, citing these actions as proof of his contempt for American exceptionalism. While today, liberals assert that President Trump’s proposed immigration restrictions and his distrust of the national press corps amount to an assault on the Constitution.

However, both sides are ignoring the very large elephant in the room. The biggest danger Americans face is actually the administrative state—a sprawling, executive-branch bureaucracy made up of hundreds of federal agencies, sub-agencies, and departments. Often referred to as the “deep state” or the “regulatory state,” this bipartisan behemoth exercises powers once held only by royalty. These include the authority to create, adjudicate, and enforce laws that affect almost every aspect of our lives.

Americans should fear an overly powerful administrative state for a variety of reasons. First, it is nearly impossible to hold these bureaucrats accountable for their actions. These officials are unelected and thus don’t have to please their constituents to keep their jobs. Adding to the unaccountability of the administrative state is its status as a nebulous entity.

Nobody can even say for sure how many agencies actually exist, because there is no definitive list. The spring 2015 edition of the Unified Agenda of Federal Deregulatory and Regulatory Actions publication, for example, lists 60 federal agencies. However, the Administrative Conference of the United States claims the number is 115. Meanwhile, The United States Government Manual states that there are 316 federal agencies.

If we can’t even figure out how many agencies there are, how can we tell who is making all the rules we must follow, or for that matter, how many rules even exist? To make matters worse, these agencies constantly produce a multitude of what amount to undocumented regulations, otherwise known as “regulatory dark matter,” through their bulletins, memos, and guidance documents. A US House of Representatives Committee on Oversight and Government Reform voiced its alarm over these “non-legislative” rules in 2012, stating

“Guidance documents, while not legally binding or technically enforceable, are supposed to be issued only to clarify regulations already on the books. However . . . they are increasingly used to effect policy changes, and they often are as effective as regulations in changing behavior due to the weight agencies and the courts give them.”

Another reason to fear the administrative state is that it has assumed the powers that were once the exclusive domain of Congress and the courts. The National Labor Relations Board (NLRB), for example, not only creates laws that govern employer-employee relations, it also investigates rule violations, decides the fate of the rule-breakers, and enforces the consequences of its decisions. However, according to Article I, Section I of the Constitution, all legislative powers are supposed to reside with Congress. In fact, the Founding Fathers thought it was extremely important to separate the judicial, legislative, and executive powers into different branches of government. James Madison explicitly states in Federalist No. 47 that

“the accumulation of all powers legislative, executive, and judiciary in the same hands . . . may justly be pronounced the very definition of tyranny.”

In his 2014 book Is Administrative Law Unlawful?, constitutional scholar Philip Hamburger claims that today’s administrative state has essentially “gutted” the Constitution. One supporting example is the use of administrative courts, which deny citizens the right to a fair trial. These proceedings, which judges on the agencies’ payroll oversee, often lack a jury and fail to follow full due-process procedures.

According to Hamburger, the framers of our Constitution would be appalled by the abuses we see perpetuated by today’s administrative state. In fact, they drafted the Constitution specifically to avoid the possibility of a corrupt head of state, like King James I, ever governing America. James Madison even went as far as to say that the Constitution was a means to guard against “the danger to liberty from the overgrown and all-grasping prerogative of an hereditary magistrate.”

King James I believed that his divine right of “absolute power” allowed him to dismiss laws or make them not apply to certain people without having to obtain approval from Parliament. James also made his own laws, bypassing Parliament and the court system. He issued proclamations and established tribunals, which, like modern administrative agencies, commissioned expert reports and issued and enforced decrees.

The federal agencies of today are essentially doing the same thing. The federal Department of Health and Human Services (HHS), for instance, exempted a number of politically important companies, like McDonald’s, from certain Obamacare provisions. However, in place of royal decrees, the administrative state issues rules and sends out “guidance” letters. One particularly infamous letter is the one from an Education Department official in 2011 that stripped college students of due process rights when someone accuses them of sexual misconduct.

So, how do we reign in the administrative state and the overreach of the executive branch? According to Hamburger, there are several practical things we can do. One is to hold agency officials financially accountable for exceeding their constitutional authority. Until the 19th century, the American people could sue these individuals for damages. Today, thanks to a “qualified immunity” doctrine, government officials are safe from repercussions of their actions.

Other ways to restrain the power of the administrative state involve requiring Congress to approve any new laws and to review all existing regulations to decide which ones should become laws. Additionally, the president could make certain agencies try cases in regular courts rather than relying on administrative judges.

Distinguished Daycrofter Award Recognizes Community Contributions

The Daycroft School Foundation continues the mission of the Daycroft School, a Christian Scientist nursery school founded by Sara Pyle Smart in 1928 in Darien, Connecticut. Over the years, the school grew, adding different grade levels until it offered a preschool through high school education. During this period, it also moved locations, first to Stamford and then to Greenwich, Connecticut. Although the school closed its doors in 1991, the Daycroft School Foundation continues to focus on its goal to “provide an educational environment which embraces the teachings of Christian Science, giving opportunity for individual unfoldment and community responsibility.” To accomplish this, the foundation focuses on four core areas: online learning, peer support, grants, and programs for Christian Scientist Educators.

In 2000, the Daycroft School Foundation established its Distinguished Daycrofter Award to recognize former students, faculty, and staff who have contributed to their communities in a way that exemplifies the Daycroft School’s motto of “Perceive Then Demonstrate.” Read on to learn more about what it takes to earn this prestigious recognition.

What are the criteria for receiving the Distinguished Daycrofter Award?

The Daycroft School Foundation instituted this award to recognize members of the Daycroft family who have positively affected other people’s lives. To earn this award, an individual must demonstrate his or her commitment to humanity, as well as an unwavering commitment to achievement by doing the following:

– Making some form of meaningful contribution to society

– Embodying the character traits that Daycroft promoted

– Displaying an appreciation for the school and the principles of Christian Science

Who has won the Distinguished Daycrofter Award?

Since it first instituted the award, the Daycrofter School Foundation has presented it only three times. The following individuals have earned this distinction:

Donald L. Koch—The foundation presented the award to Mr. Koch in 2007 for his charitable work in educating young people. A Daycroft student from elementary school through his junior year of high school, he has stated that he feels indebted to the school for teaching him about hard work and perseverance, as well as for showing him “how to think.”

Utilizing the tools he gained at Daycroft, Mr. Koch created the Donald L. Koch Foundation to help students become better citizens. To this end, it sponsors lectures on America’s founding documents and on how to reach one’s true potential. Some guest lecturers have included Dr. Henry Kissinger, Colin Powell, and David McCullough. The foundation also hands out copies of the Constitution to students at these events.

In addition to the efforts of his foundation, Mr. Koch gives back to his others by volunteering with the Boy Scouts of America, teaching Sunday School, and paying school tuition for young people in need.

Lynn A. London—A former Daycroft faculty member and assistant head, London received the award in 2000. As Daycroft President Trude Harper presented the award to London, he praised her ability to bring “light and warmth” to the school, as well as the broader community.

Over the course of nearly 30 years at Daycroft, Lynn London earned a reputation as being someone with whom students could share their troubles without fear of being judged. After providing students with a sympathetic ear, she would encourage them to do the “right” thing and offer to help, whether they required financial, emotional, or scholastic assistance. She was also a steadfast and patient presence in the lives of everyone she worked with.

Still giving to others today, she immediately steps in to help out as soon as she hears about someone in need. Among the many recipients of her caring heart are older people, her church, and the Girl Scouts of the USA.

Janet and Cobbey Crisler—Known as “two of Daycroft’s dearest friends,” this couple received the Distinguished Daycrofter Award in 2007. Cobbey Crisler, a 1950 graduate of Daycroft, returned to serve as the institution’s president from 1966 to 1976. During Mr. Crisler’s tenure at what he often referred to as “our God-blessed free school,” his wife Janet taught at the Daycroft nursery school program.

Passionate about the Bible, Mr. Crisler began to share his passion for Scripture with others, giving talks throughout the country and guiding others on expeditions to the Holy Land. After his departure from Daycroft, Mr. Crisler focused exclusively on his Bible investigations and lectures. He also co-authored two books: Fishers of Men: The Way of the Apostles and Come See The Place: The Holy Land Jesus Knew. Janet Crisler was a full partner in her husband’s work and even co-authored her own book: Loaves and Fishers: Foods of Bible Times. She also serves the American Schools of Oriental Research as an associate board trustee.

After Cobbey Crisler’s death in 1988, Janet Crisler became an active fundraiser for various initiatives. She also established a biblical research institute to carry on the work her husband started.

One Important Way This Think Tank Is Fighting for Your Rights

To guard against any one bloc of the central government gaining too much influence, the founding fathers installed a system of checks and balances into our founding documents. One aspect of this system is the concept of separation of powers, which means that each of the three branches of government – the executive, the judicial, and the legislative – must operate solely within the boundaries delegated to it by the Constitution.

Also inherent in separation of powers is the idea that those who execute the law are directly accountable to the president. However, many government agencies today are effectively disregarding the strictures of the Constitution. They do so by arguing that in order to efficiently serve the needs of modern society, they must employ powers designated to other branches.

Administrative Law Judges and Conflicts of Interest

There are a number of organizations, however, that are fighting against the creep of the administrative state. The Cato Institute is a research foundation that aims to advance the principles of limited government, free markets, and individual liberty in public policy. It recently filed an amicus curiae, or “Friend of the Court,” brief in support of the defendant in a case involving the US Securities and Exchange Commission (SEC), condemning its use of administrative law judges (ALJs).

Essentially, the SEC claimed that in 2006, the investment advisory firm Timbervest and its four owners committed fraud by arranging to sell a client’s land at an extremely low price to another client before purchasing the property itself without notifying the first client. The SEC also alleged that Timbervest received real estate commissions on these transactions that it failed to disclose. The SEC “tried” Timbervest’s owners in its in-house court, which does not rely on a jury to render a decision, but instead leaves rulings in the hands of ALJs, who the agency considers its “employees.”

After the SEC pronounced Timbervest liable, it ordered the firm to pay back all the fees the initial client paid and permanently barred the owners of Timbervest from engaging with any investment advisers. Timbervest appealed to the DC Circuit Court, arguing that it was innocent of the charges and that, regardless, the matter had surpassed the statute of limitations specified by the Investment Advisers Act of 1940.

The Significance of the Appointments Clause

The Cato Institute filed its amicus brief with the DC Circuit Court on May 2, 2016 because it wanted to “address the implications of core separation-of-powers issues along with the democratic accountability of executive officers – issues that no other amicus brief covers.” Cato argued that ALJs are essentially judicial officers of the executive branch, similar to territorial judges.

However, there are three layers of officials between the SEC’s ALJs and the president. As a result, the president cannot remove them like he or she can remove other officers if they abuse their powers. The ALJ system therefore violates the Appointments Clause in Article II of the Constitution, which grants the president control over “inferior officers” of the executive branch, even if these posts are judicial in nature.

Another issue Cato raised was that the process by which the SEC hires ALJs produces inherent bias. After all, if a judge’s employer chooses him or her to try a case that involves the employer, the judge may (whether consciously or unconsciously) side with the entity that supplies his or her paycheck.

The Supreme Court has even stated that bias is nearly inevitable when “a man chooses the judge in his own cause.” As a testament to how widespread the problem has become, a former SEC ALJ named Lillian McEwen recently publicly revealed how the SEC pressured ALJs to favor the agency in rulings.

Article III Courts Ensure Due Process

In addition, the Constitution specifies that cases involving real estate fraud should be heard before an Article III court, not an administrative one. Congress can assign cases to administrative courts for cases involving new public rights, such as Social Security Disability claims. However, it can’t do this for cases, like the Timbervest one, that address common-law matters that have been argued in courts since the birth of our nation.

The government also can’t eliminate a person’s Constitutional rights without the due process provided by a proper judge. By banning Timbervest’s owners from any kind of association with an investment adviser, the ALJ violated the owners’ First Amendment right to free association. To remove this right requires, at the least, a jury trial held in an Article III, or federal, court.

While the Timbervest case still lingers in the appeals process, a number of other organizations have joined The Cato Institute in supporting Timbervest in its struggle against the ALJ system. The Washington Legal Foundation, a public interest law firm that bills itself as “an advocate for freedom and justice,” and the Securities Industry and Financial Markets Association, which promotes efficient and effective capital markets, have also filed amicus briefs supporting Timbervest’s assertion that the SEC’s ALJ system is inherently unconstitutional.