In this second of a five-part series on the legal side of park ownership, we’re going to discuss the SAFE Act and Dodd-Frank, two pieces of legislation that single-handedly deprived thousands of people the America Dream of homeownership. Learn the history of these laws, how they have altered the manner in which park owners can provide housing to customers, their potential repeal, and why it’s probably too late to really make much of an impact without a significant governmental push. If you own a mobile home park, it’s mandatory that you understand these regulations and learn how to navigate them.
Did the SAFE Act really make you safer? Or did it just hold back the ability of many hard working Americans to obtain affordable housing? We're going to be talking about that a little more on our Mobile Home Park Mastery Podcast. This is the second in a five-part series on the legal side of park ownership and we're going to focus on the SAFE Act and Dodd-Frank, their impact and how you have to navigate around those very carefully as a park owner today.
What is the SAFE Act? Well, what the SAFE Act is, is it's a piece of legislation that came up in 2008 coming off of the great recession and the collapse of single family home loans, mortgages. The government had to point the finger at somebody. Who did they choose? Mortgage companies. Of course, you can't point the finger at the actual consumer because they're voters but mortgage companies, not that many collective votes on that, so let's punish them. That was kind of the general attitude. Everyone knew better at the time. They knew it was ridiculous but nevertheless, it was a ridiculous time in American history on some of the things we did. Lo and behold, here comes the SAFE Act, coming down through Congress.
Here's what it did, it changed forever, at least hopefully not forever, but for the moment, forever, the way that people could enter into mortgages because you could no longer enter into a mortgage under the SAFE Act unless you were SAFE Act licensed and compliant. That means you had to get a license and you had to comply to a giant set of rules and regulations, all with a lot of teeth in them, and be subject to such things as audits and other items.
When that came out, many park owners said, "Now, wait a minute here. I don't deal in mortgages. I deal in installment sales, a completely different item. I'm not like someone doing a mortgage on a single family home. I'm more like someone selling a refrigerator on payments." But the state of Ohio said, "Hey, Mobile Home Park people, we want you to know that an installment contract, as far as we're concerned, is the same as a disguised mortgage." Now, many lawyers raised their hand at that junction and said, "Wait a minute now, you can't do that. That's not actually true. We all know better than that." But nevertheless, no one wanted to really fight the state of Ohio and park owners don't have a lot collective clout or political power, so we just kind of all bowed down and said, "All right, fine. We will not make mortgages anymore unless we're SAFE Act licensed and compliant."
That gave park owners, basically, one of three routes. They could either go and get SAFE Act licensed and try to abide by all these rules that they did not have enough management experience to possibly do, nor did they want to spend the money to figure out even how to do it, or they could simply rent mobile homes or they could sell them for cash. If you didn't want to get a SAFE Act license compliant, you had to basically just rent or sell for cash.
Now, let me tell you a little story, which gives you a feel for my take on the whole SAFE Act thing. I always wanted to get a cat for the backyard of my house in Dallas because houses in Dallas, in some neighborhoods, have a real problem with rodents. A lot of neighbors didn't want to move to the neighborhood was they bought cats and put them in the backyard and that kept the rodent population down. So, I went to a place that sold cats, Humane Society, and said, "Hey, I would like to get a cat." They said, "What do you want to do with the act?" I said, "I want to go ahead and let it free run in my backyard, nice landscape, acre of land and I will go ahead and give it plentiful food and plentiful water. I'll play with it, whatever the case may be. It will be a very, very happy cat."
They said, "No, we won't give you a cat because living in your backyard, outdoors, will be worse than death for a cat." I said, "Well, gosh that makes no sense to me because cats are pretty much feral outdoor animals, aren't they? So why in the world would being an outdoor cat be a terrible existence?" They said, "It would just would. Trust us. We know what's best for cats." So then I said, "Okay. Well, in that case, could you give me a cat that you're going to kill today because I know you have to gas a certain number of cats, I guess, every day as part of overcrowding in the cat population there at these facilities." They said, "Well, no, we won't do that because the cat would be much better off dead than it would be living in your backyard." Well, I begged to differ with them on that. I think that if they'd asked that cat, the cat would've said, "No, you know, actually, I would be much happier living in that nice backyard than being dead."
That's kind of how the SAFE Act was. That whenever you give the government the ability to side things for you, it's a really, really bad situation. What happened overnight, a lot of people that traditionally could've bought mobile homes couldn't buy them anymore. That's really all it accomplished. So all those Moms & Pops, all the park owners, ourselves included, who've been selling homes, we couldn't sell them anymore. All we could do is rent them or you can buy them for cash. But of course, customers in affordable housing rarely have enough cash to buy a mobile home outright, unless it's a very, very inexpensive home.
So, that was the beginning of the problem, is the SAFE Act making it impossible to write mortgages on mobile homes unless you became SAFE Act licensed and compliant. But then things got worse. 2010 came around and they added onto that, what's called, Dodd-Frank. Dodd-Frank was an even crazier set of guidelines in the SAFE Act. Under Dodd-Frank, you had such new items as the ability to repay law. Basically in a nutshell, I'm no expert on it but I've read about it and I've even written articles on it, basically what that one did, the ability to repay law says that, "If I give you a mortgage, if I grant you a mortgage and you default and don't pay me, you have the right to sue me because I should've known better than to give you a mortgage." That's basically what it means.
Even if the person effectively didn't tell the truth on the application, it's still your responsibility as a person providing the mortgage to vet that out and do all of your due diligence. Of course, that's crazy. If someone defaults on paying you for something that they agreed to pay you for, they should not have the right to sue you. You should have the right to sue them. By the time Dodd-Frank came around, with another thousand pages of insanity, park owners at that point were completely convinced we're not going to be following any of these SAFE Act or Dodd-Frank guidelines. We're simply going to rent homes or sell them for cash.
Now, there's another wrinkle to that, that came up. As time progressed, people started doing another policy called rent credit, in which you give the customer retention points, same as dollars, they can use to buy the home. They can save those up. Now you might say, "Well, that's crazy. Why would park owners do that? Why would they give people a pathway to ownership?" Well, it's because when people can be owners, they take better care of the property. Is it economically smart? No. It's probably better just to rent things forever. But park owners don't want to really be home renters, they want to be land renters. What they decided to do was to go ahead and give people a pathway to ultimately owning that, even if it was not in the park owner's best financial interest because operationally, it was far superior and that's how things have trended.
Now, the big problem with the SAFE Act and Dodd-Frank going forward is, it's going to fall apart. As we already know, with the Trump administration, they are probably going to go in and start undoing, in a big way, the CFPB and a lot of the things that they we're doing. To be honest with you, it's probably about time because there's so many thousands of people, maybe millions of people that were unable to buy a home since the great recession began and the SAFE Act came down in 2008. Think of all those folks over the last decade, they couldn't buy a home because of this crazy law. It's just no different than me and the cat. It's not just Mobile Home Parks. It's also single family homes. It's any kind of dwelling that this pertain to.
It's really a horrible, horrible shame. I think a lot of people are now realizing what they actually did was a very wrong idea. Even if you talk to a lot of the congress people that were involved in the passage of the SAFE Act and the Dodd-Frank, most did not realize the ramifications and they certainly would never have voted it in if they'd known the damage it would've truly done to those people who want to achieve the American dream of home ownership. But nevertheless, they did it. Now, they need to undo it. They are starting to undo it. Things are starting to happen. The gears are turning. But the weird ending is, even when they get done, the damage has already been set. Many people are not going to go back to selling their mobile homes, they're going to continue to rent them and the reason is, the courts are still extremely hostile to cause it to a foreclosure.
Back when I got into the business, if you had a mobile home and you sold it and you sold it on an installment sale, rent to own agreement and you didn't make payments, you could get a simple eviction. Later, the judges became concerned, is it something that's an eviction or does it need to be a foreclosure. So in the courts where it became a foreclosure, the park owner was dealt this terrible hand because to get you out of the home that you're not paying on would cost thousands of dollars to go to court to do the foreclosure with a huge delay process. So even though SAFE Act and Dodd-Frank may be taken apart going forward, it may not end the hostility that park owners are going to have against anything they're renting because they're put in this bad position if the customer does not pay.
So SAFE Act and Dodd-Frank's damage may go on even beyond it's ultimate reversal, because if you read, there's a lot of folks out there saying that they need to be ended. But the problem is even if you end that, will it really end the court system and the judicial system, which is now permanently affected in their own thinking on whether what we do when we rent to own or sell an installment say of a mobile home, if that truly is an eviction moment, or a foreclosure moment. That still hangs in the balance.
Now, a lot of park owners, again, have tried to adapt to the SAFE Act and tried to adapt to Dodd-Frank as best they can because really all we want to do is simply rent land. That's our goal. We have no interest in writing mortgages, no interest in renting homes, no interest in any of that. Our perfect utopian world, all the homes are owned free and clear by the folks in them and we simply charge land rent. However, that's not always the case. Often, what you want to do is you want to fill your vacant lots. While the important part of this story is the advent of 21st mortgage and other groups who have started financing mobile homes for the customer. However, the park owner has to be in the loop or they won't do it. So the park owner has to go in there and basically, not co-sign the loan but has to agree to pay the mortgage payment in between customers in the home.
That's a very effective program and it's a win-win for everybody. Thank heavens that it started because finally once again, there's a return, a slight return of credit to the industry for people who want to be home owners. But it's really a horrible tale that we have to go all the way around and work that hard to give people who have the money and the desire to do it, have to go that many steps for them to become a homeowner. But that simply is the way it is.
Now, the other bright spot on the horizon is that under the Duty to Serve Act, Fannie Mae and Freddie Mac are discussing starting the issue of mobile home loans again in 2019. This is a critical step because if they'll only go back to issuing mortgages, real mortgages, SAFE Act compliant mortgages on their own, park owners don't even have to get involved in this anymore. We ourselves, are very happy that they're discussing opening the flood gates again to creating mobile home paper, chattel paper on the part of Fannie Mae and Freddie Mac in 2019. We think it would be great.
Until then, again, every park owner needs to fully understand the SAFE Act and Dodd-Frank regulations. If you're buying a mobile home park, one of your first stops should be to call your state Mobile Home Association and say, "Hey, what's the story in this state? How does it work? What do I do?" Get all the facts and decide for yourself. What makes this thing really difficult is there's really been no case law to go by. I'm unaware of any park owner ever having any kind of lawsuit or interaction with the CFPB on the SAFE Act or Dodd-Frank. I know people have talked about it. But nobody actually physically seen the case. I called someone one time because there was a rumor that they had a problem with it but they didn't, so I've never found someone who has. There's a very good likelihood that nothing will ever transpire going forward. But nevertheless, you don't want to be that pioneer. You don't want to have the problem.
You got to get educated on the SAFE Act and Dodd-Frank. Again, I think in many ways, they're probably going away. But nevertheless, they are still the law today and you cannot own a park without fully understanding them. The good news is most of your state MHAs have a very good handle in their state of how the whole process works. It's not that hard to get the information that you need.
Hope you found this interesting. We'll be back again shortly with the third in our five-part series on the legal side of park ownership, talking all about evictions. Talk to you again soon.