AB 2501 and AB 828 with Nema Daghbandan #698

Bruce Norris is joined this week by Nema Daghbandan.  Nema is in charge of the real estate finance group there, and he is a partner with the law firm. His practice entails all facets of lending matters across the country. He advises financial institutions on various lending matters, including licensing, usury and foreclosures, which he just helped Aaron with a couple of weeks ago. He is also an expert in default management and leads the firm’s non-judicial trustee group. He got his degree from Miami School of Law; and then before that, his undergrad was at UC Irvine in Political Science.  See below for full video and resources.  

Episode Highlights

• What do AB bills 2501 and 828 cover?
• Have they passed, or are they just being contemplated?
• What has been his view on how things have been handled with the lockdown and the speed of things?
• What is the issue right now with holding a foreclosure auction?
• Under 2501, what are lenders obligated to do if the borrower tells them they cannot pay?
• What would happen if the state of emergency is lifted before these bills are passed?
• Would you suffer credit damage during the one-year period of making no payments?

Episode Notes

Bruce Norris: Hi, thank you for joining us. My name is Bruce Norris, and today our special guest is Nema Daghbandan. The real estate finance group at Geraci LLP is managed by Nema, and he’s a partner with the law firm. His practice entails all facets of lending matters across the country, including but not limited to the preparation of loan documents and addenda in all 50 states, loss mitigation efforts, preparation and negotiation of secondary market documents, including loan sales and participation agreements, line of credit, warehouse facilities, hypothecation in securitizations. He advises financial institutions on various lending matters, including licensing, usury and foreclosure. Mr. Daghbandan is also an expert in default management and leads the firm Non-judicial Trustee Group. So, Nema, we welcome you to our show.

Nema Daghbandan: Thank you very much Bruce. Appreciate it.

Bruce Norris: Is this connected in spirit with what Fannie and Freddie did on March 18th and just extended till June 30th?

Nema Daghbandan: That’s right. You know, we are in an interesting time period where you have this historically high unemployment, and I think a lot of well-meaning people are trying to figure out how to not have a calamity on their hands, in particular in dealing with making sure we don’t have enormous population thrown out into the streets and kicked out of their homes and a repeat, really, of 2008, but on a much grander scale.

Bruce Norris: Yeah, I’ve been really impressed with some of the decisions and the speed of the action to be honest with you. I really thought some of it was very important because it’s almost like you’re on hold. We have almost a 90-day hold to see if we can get back to some normalcy without just having a complete disaster.

Nema Daghbandan: That’s right. What’s interesting this time around, and I feel like the sentiment – we represent mortgage lenders, typically nonbank mortgage lenders, private lenders, mortgage debt funds. So, you know, they’ve always been in this generally less regulated bucket. I’ve been seriously impressed with what I would say is the national sentiment on being forgiving, entrain of forbearances, and really acknowledging that this is a situation that’s not your traditional default situation. It’s something that was brought up. I feel like there’s a more self-regulation than I’ve ever seen before.

Bruce Norris: Yeah, I think the spirit of the group of people on both sides has been extraordinary. I have rentals myself and so, and some of my friends have management of a thousand units or more, and well over ninety-five percent of people are paying their rent without a problem. But, the people that can’t pay are also being worked with by owners because they’ve taken time to understand the circumstance.

Nema Daghbandan: That’s right. Similarly, I’m getting the exact same information back to us. Oftentimes with the clients we represent, they are very much like you. So they are oftentimes either individuals or funds where the participants themselves generated their wealth through property acquisition over time and then started using that money to start lending it as well. So oftentimes they very much understand that real estate in a very dynamic way where they understand that there is an underlying tenant and the tenants hang and there is an upward shift of what happens if the tenant pays or doesn’t pay. How does that affect the landlord? How does that affect the lender? It’s an interesting world view where traditionally, even through the representation of a mortgage lender, I have oftentimes not had to focus as much on a tenant-landlord relationship, but you are really seeing both sides play out there.

Bruce Norris: What’s difficult about a situation like this is let’s say you invested in a loan. You invested in a loan under a set of rules that you thought would probably not change. All of a sudden now, you could have a moratorium on your payments enforced. That’s just something that probably didn’t occur to anybody that owns a loan.

Nema Daghbandan: That’s right. I know we’re gonna be jumping into some legislation here. In my experience when speaking with legislators, they don’t really understand that this industry, meaning in any sort of nonbank lending, exists. If they really exist, it’s irrelevant in their worldview. A most telling moment was I was attending the American Association of Private Lenders conference last year, and they had Barney Frank as the keynote speaker. The name of the association was the Association of Private Lenders. He started in his speech, which was really an interesting speech, he believed or understood that we were just small banks. That’s what he interpreted an association of private lenders to me. He had no idea in the conversation, and I began chuckling The speaker doesn’t understand who we are, and he was the chair of the Finance Committee. It was really demonstrated to your point that the ability to stay at a loss at a bank perspective or the ability to absorb certain things is fundamentally different to your average retail investor and a loan who, you know, this is to say effectively a bond fixed income product for them. Right. They invest in the stock market, and they invest in a variety of sources. This is another investment source, and many of them, particularly those that are older, are just using that as an income source for them that they relied upon. In a normal market, when you have a defaulted loan here or there, that’s OK. They can get by. But if you were to have a complete stoppage of income, you know, you’re really decimating effectively a large elderly population.

Bruce Norris: As a hard money lender, you start thinking about, well, it comes up sometimes: Say you have a trust deed that you own inside of a retirement plan. There was talk about having to have it appraised every year, which I thought was a complete waste of time. Of course, it’s worth the face value of the note. Well, now you throw in the fact that you’re not collecting payments on it. That’s a whole different story.

Nema Daghbandan: The interesting world in which we live in is these private notes are very different in nature. Right. I think that that, one, it’s an election year, so I can understand both on the national level and at the state level that legislatures do not want homeowners losing their homes. I can respect that, and that makes a lot of sense. As a nation, we can decide whether that’s appropriate and to what extent. All that makes sense. The legislation, particularly in California, is so illogical in its application because they are not dividing it on any of the common lines. They don’t care whether there was an investment loan or a spec home or whether you’re buying rental property. They make no delineation between why you are doing this, whether it’s your 60th investment property or whether it’s your home, your primary residence. No distinction being made here. Well, I’m still throwing a bazooka into a knife fight. The pendulum must swing, but in California they’re swinging very, very far whereas the FHA would be a very specific targeted program to make sure that homeowners were not going to get hammered. What we are seeing as a legislative response is far far different and much, much stronger.

Bruce Norris: Yeah. And I think that has unintended consequences because, as a lender, if you thought you knew the rules of engagement, and now you realize those can change at a whim of somebody other than a voter, a voting public, that that gives you a little pause saying, “I’m not sure I’ll continue to do this.”

So we have two pieces of legislation. I think I’ll concentrate on 2501. There’s an 828 too. First of all, have any of these passed or are these just being contemplated?

Nema Daghbandan: Great question. We can briefly eliminate 828 because 828 is effectively folded into 2501. So, you know, there’s this interesting question and dilemma right now, which is many states have either effective moratoriums or quasi-moratoriums on foreclosing on properties. When you look at California, there is no state prohibition in place, stopping foreclosures from a purely legal perspective. There is a challenge right now that the way that our system works here in California is we have a non-judicial foreclosure process, which means that properties are sold at public auction. Because we have the state lockdown orders in place right now, meaning that you’re still not supposed to congregate in groups of 10 or more, and they never truly lifted that aspect of our lockdown, even though you’re having restaurants and other aspects of our life reopen, that particular order had never been left. Technically, you and I are supposed to stay in our homes, we’re not supposed to leave our homes, and we’re definitely not supposed to congregate in large groups. So from a technical perspective, if we can’t actually pull the public auction in California, some foreclosed trust deeds are continuing to do so, and I think at their own peril by doing it, until we can have somewhat larger gatherings, at least publicly. So even though there’s no technical law stopping a foreclosure from happening right now, I think there’s a practical implication, meaning that if you did proceed with a foreclosure, you would have a borrower likely make a claim against the lender about the validity of that foreclosure.

You have executive orders, right. We’re in an interesting place in which governors are kings. They are making proclamations, and those proclamations have the full force effective law. And so they are effectively creating this nationwide patchwork of moratoriums around foreclosures, similar to what’s happening in California. The expectation is that the governors are now relaxing and starting to reopen the economy, so there will be somewhat of a vacuum or a void. So now what you’re seeing in the legislative bodies coming into play is they are saying, Well, we still need to protect these people. What we’re going to do is now legislate what the executive orders appear to be, and we will create a legislative alternate. And that’s what AB 828 and 2501 are.

So 828 in its basic form, well, there’s really two things. One is it’s got a landlord tenant component about the almost requirement to provide tenants some sort of forbearance. If you’ve been watching this 828 or heard about it, there is a lot of really big associations, for example, California Apartment Owners Association and a lot of landlord based associations. This was the bill if you read it in the news that a judge could effectively reduce the rent by 25 percent if they found that the tenant had a need and that the landlord could sustain the loss. So this is the same legislation that had that component. In addition to landlord tenant rights, they had a section in there that completely prohibited foreclosure activity at all in the state of California. You could not file a notice of default. You could not record any notes of sale. You could not hold a trustee sale. Zero activity was permissible for a 180 day period after or whatever the legislation passed. Newsome listed the state of emergency related to COVID. That was 828. That same philosophy dealing with foreclosures all got dumped into 2501. This has the exact same prohibition that 828 did pertaining to foreclosure. So 2501 passed is all-out prohibition on any foreclosure activity in the state of California. You can’t record a note or sale, and you can’t proceed to a trustee sale for the same time period, that 180 day period until after Newsom lifts the state of emergency in California.

Bruce Norris: Did you say if it passed?

Nema Daghbandan: Yeah. Thank you for that follow-up. So it is not passed. So right now, 828 appears to be dead in the water. I think the reason why that’s the case is that 2501 adopted half of the same concept, and it appears 2501 is the one that has the momentum. If you look at the bill pile, like the COVID Relief Act, this is the consumer protection that’s coming out of COVID. 2501 has not passed. Right now they have basically gone through the entire committee process on the assembly side and should be getting, and the next stage here is that it will get an assembly vote, then it will get debated in the Senate, then it would have to go to the governor. It is moving very quickly, so each week we basically have movement through the committees in passing through each stage of committee, but it’s passing with opposition at each state as well. This is not a universal slam dunk, so there’s clearly some opposition all along the way. The expectation is that there will be a lot of opposition in the Senate. I don’t know whether it’s enough to truly end the bill, but I suspect that it’s not going to pass its current form based on how onerous this bill really is.

Bruce Norris: What if the state of emergency actually is over before this bill gets voted on? Does that mean it won’t get considered or that they’ll just go to the 180 day period?

Nema Daghbandan: Unfortunately, this bill would sunset 180 days after. My practical sense is that the governor has no inclination to lift the state of emergency for some time. If this bill passes, it will pass well before then. Even if it does, most of the deadlines are triggered six months after it anyway. The bill, as it’s written, shows a lot of the key provisions are still enacted, even in a state emergency.

Bruce Norris: So as I understand it, you can’t start a foreclosure process. You have to freeze a foreclosure that’s already in process. You cannot start an eviction. You can’t proceed if an eviction was already in process. Is that accurate?

Nema Daghbandan: Interestingly enough, this bill, unlike 828, we’ve had a lot of eviction related remedies to it. This bill is really targeted at mortgage lenders. In addition to mortgage lending, there are also a lot of aspects that deal with vehicle repossessions and automobile lending as well. This one is much more targeted to lenders rather than landlords, and it goes well beyond, unlike 828 with this kind of mono-focus both on a landlord-tenant relationship as well as the foreclosure provision, 2501 is unprecedented, particularly in related to the requirement – so in addition to having this foreclosure moratorium, there is a mandatory for forbearance, and that’s where I never expected to see anything of this grand scale. I don’t think your average lender has any idea of how extreme this is quite yet.

So here’s what is very interesting about the 2501. Even if the foreclosure aspect of it is onerous and I think deprivation of rights, particularly for the individual investors who have invested their life savings in this sort of thing, it’s not ideal if you can’t start a foreclosure. You might go six months or a year or so without getting any ability to realize on your investment. That could really hurt a lot of people. What’s more interesting and I think truly unprecedented is that if a borrower contacts a lender during this time period and simply states to them, “I am unable to pay my mortgage.” If they make that statement to the lender and they attest to it, so they provide for the lender a statement in writing saying “I can’t pay my payment” and they have zero obligation to provide any affirmative documentation, whether it’s true or not does not matter. As long as they put in writing that they cannot make the payment, the lender is obligated to cease requiring payments for a minimum of six months. When that six month period ends, if the borrower comes back and says, “I still can’t make my payments,” you are obligated to give them another six months of no payment. With zero proof.

To your point earlier, 90 to 95 percent of people are paying currently. The law applies to any single natural person, could be a business, could be a rental property, could be a home, a fix-and-flip project. Doesn’t matter. It’s no different. If you call your lender and say, “I can’t pay” and you’re willing to find something that says you can’t pay, if you can’t provide an additional piece of documentation, you don’t have to prove anything as long as you say “I can’t do it.” You are forced to let it stay on the sideline for one year without a payment, and then and only then can you even look at a foreclosure option, assuming that the governor has lifted his order by that time.

Bruce Norris: I did read the bill a couple of times, and I did that because you don’t read that one time and catch a lot of it because it’s difficult reading. But is it true that if it’s a rental, they have to pass on the same forbearance to their tenant?

Nema Daghbandan: Yes. So the statute states that if it’s a rental property and the landlord called the lender and says, “Lender, I can’t pay,” the lender is obligated to give that landlord up to one-year forbearance. If they provide it to the landlord, the landlord is then obligated to give the same forbearance to their tenants during that time frame. But there is nothing the lender can do to require evidence they’ve actually done that. It’s just a requirement that with no enforcement of the landlord, so whether the landlord does it or not, who knows. The party getting penalized is the lender if they don’t offer. Whether the landlord does or not, they have an affirmative obligation, but there’s no regulatory oversight on that.

Bruce Norris: Wow. Now, for this 12 month period of no payments, you suffer no credit damage. Is that accurate?

Absolutely. We have a societal problem, right. We have this really interesting issue, which is high unemployment. Some of that will necessarily be residual for some time. The government is trying to figure out what to do about this. Are we going to kick some people out of our homes? What does that look like? In this effort, the farthest approach you can possibly take is – the way this bill is written says ” after this one-year forbearance period.” The question we’ve asked internally is “Well, what happens then?” Right. The borrower hasn’t paid for a year, and we’ve been advising clients is the responsible thing is some sort of catch up period. Right. Presumably, if the borrower had no ability to pay during your forbearance period, you know, it’s unlikely they will suddenly be sitting on a pile of cash after that one year period. You’ve got to be able to get them to work the things back out. There should be some catch-up period to pay a little bit more than their traditional monthly payment and getting their loan caught up. Well, the way that this legislation is written is is after that one year period, you as the lender are obligated to do one of two things. You either automatically extend the person’s loan for the same amount of the forbearance period. There technically is not a catch-up period. He is paying the same payments, we just simply add another year to your loan. I would love to see a loan service try to implement this. 

Bruce Norris: I want to clarify what you just said. It’s one thing to add a year to the loan. It’s another thing to add a year’s worth of interest to the loan. So which one is that?

Nema Daghbandan: There is no accumulation to it. So the way that it works is that you can add a year to the loan Let’s say, for example, you’ve missed one year of payments, it’s a thousand dollar a month payment. The way that this would be written is we extend your loan for one additional year, starting next month, you’ll pay about $1,000 month, and we add one year to your loan and you’ll pay $1,000 a month for last year’s loan. No default interest related charges or penalties.

Bruce Norris: Not only that, what you’ve just said is let’s say I have a two year loan, the first year goes on this moratorium, and I have one year left and have to extend it for a year, no matter how you look at it, I just got paid two-thirds of the payments I was intending that I was going to get. Is that accurate?

Nema Daghbandan: That’s accurate. Correct.

Bruce Norris: And that’s mandatory.

Nema Daghbandan: Alternatively, you can recap. Instead of adding a year to my loan, I actually just want you to take my new balance, so whatever my deferred amounts were, recapitalize my loan, and then re-spread it over the remainder. Whatever the borrower would like to do, you must consider your options after this one-year period.

Bruce Norris: If it was a two-year loan, I was untroubled for the first year and I’ll make payments on two years normally, you’re out the first-year interest. That’s the borrower’s decision. That’s not a debatable issue. That changes the rules of lending, and that’s a very scary thing.

The California legislature is trying to fix a fault, and I really don’t want this to be political or otherwise. This is a well-intentioned thought process with absolutely no understanding of the consequences of what’s happened. This may make sense and maybe it doesn’t. If you’re Bank of America, it’s going to be an absolute nightmare on the servicing side because, you know, someone once told, and I think this is very true, loan servicers do a great job when people make payments. When they don’t, they fall apart. They don’t have the systems and processes for a large scale default, and they don’t work well when you’re changing the terms of the loan. But I can understand that for homeowners on a 30-year loan. This is probably the right solution for those homeowners. I don’t think I agree they should provide documentation aspects, for example, where the general counsel for America, such as private lenders, and we provide a forum to the association that they provide for all of our members, which is a forbearance request form. Part of the form says, “Please explain your hardship in detail. Whether it’s a rental property, please provide evidence by the bank statements, provide letters from your tenants. Otherwise, give evidence that you’re actually experiencing hardship. That makes practical sense. The circumstance here with the borrower has no obligation to provide anything or any evidence that they are actually affected. It’s the absolute craziest component of what’s happening here.

Bruce Norris: That’s like demanding a short sale just because I don’t want to owe that much.

Yeah. 100 percent. This only applies to consumer loans. I think it’s going to end poorly because I think you have so much institutional inefficiency and inability to manage this kind of default. When you are Wells Fargo, you’ve got to deal with these issues. The IRA investor who put a hundred thousand dollars into a loan – how are they going to manage that? This is effectively a guarantee of no payment for at least a year, probably two years if you aren’t really taking all these periods together. A complete stripping of rights related to that, right. It’s really a crazy place in which people don’t need them to pay their obligations.

Bruce Norris: Yeah, that’s a bad thing to teach society. That’s for sure. Normally, the lender and servicer are different companies. Would that be accurate?

Nema Daghbandan: Yes. And it shows you the way that this bill was written. If I were to give my wishlist, this bill is very easy to modify that I think makes sense. The challenge you have here is really the definition of what is a borrower. A borrower, in this context, is a natural person. When you look at the collateral definitions that relates to one to four-family properties, there’s a nuance because you could technically be a borrower of a multifamily property as well, asking for a forbearance. That is a very atypical definition of a borrower in California law or under federal law related to who are borrowers and what loans are we looking at here. There is almost always this definition where the rules of these laws apply to loans which are primarily for personal, family, or household. That is always the modifier you will find in these loans. This applies to a consumer loan. It’s a loan that would take enough for a consumer purpose. You’re buying your primary residence. You’re taking out money for tuition. You’re doing a cash-out refund. All those are consumer purposes, so that’s normally how a loan like this would be written. It doesn’t have that modifier here. Similarly, when you ask a question to the servicer, they are assuming the large consumer loan because these banks are generally serviced by these very large loan servicers. When you look at the definition of servicer, it is either a third-party service or the lender if there is no third party.

Bruce Norris: The reason I ask that question is because the way I read the legislation is the servicer could do something wrong that could prevent the lender from being able to demand a payment or a payoff.

Nema Daghbandan: Yes, that’s right. Another interesting thing too about the servicer side – I was just reading it before our call. If you wanted a world that makes no sense, if that loan required impounds for taxes and insurance, if there is a forbearance period, you can’t require they pay the impound payment, but here’s where it gets better. The servicer isn’t required to make those impound payments on behalf of the borrower during this one year period, and it gets better. Even after this forbearance period ends, the borrower in their election as it relates to these impound payments that were made, they can either pay them back to the servicer over five years or they could not pay it back and re-amortize it over the loan. So you advance dollars yesterday, but recapped over the remaining twenty-five years of my loan, and that’s how I’m going to repay it back.

Bruce Norris: And no interest either, correct.

Nema Daghbandan: No interest. No fees, nothings on top.

Bruce Norris: This is the problem when you have people write laws that aren’t in the business and don’t understand the ramifications of things. What voice does our industry have? Are we allowed to have a voice and say this is going to cause a lot more problems than you think? Or do they care? Is this really just for a consumer benefit and that’s the way it goes?

Nema Daghbandan: You know, it’s interesting. In a pre-COVID environment, if legislation like this were to ever try to come about, I think it would be pretty swiftly knocked down because you’d have such a concerted effort of every major financial organization, such as the National Mortgage Bankers Association, California Mortgage Bankers Association, California Mortgage Association. You have all these kinds of institutions that really have a strong voice. The challenge you have is that this is happening all across the country. Right now, the sentiment is that those voices probably had a lot more power to them. But right now, I think the legislative bodies are looking at pitchforks, right. They’re saying “We know that if we had anything that even looks kind of like 2008 and we’re kicking people out of their homes, that we’re all losing our jobs.” And, you know, whatever societal upheaval that happens, right. This is truly a response of trying to never make that same mistake again. The challenge you have is that the legislatures are moving fast without position. I’m optimistic that I think these associations will be able to clarify who they should and shouldn’t apply to. T.

The end result that this legislation is modified such that it doesn’t apply to business purpose transactions would save the vast majority of these private investors in much more vulnerable populations and still be able to keep the true intent of keeping homeless in the homes. You can have both, and there are advocates, right? CNBA has lobbyists, and they are attacking this. The California Mortgage Association has their own lobbyists, and they’re raising funds. I’m happy to provide that link over to your audience if they want to participate, which we recommend to people right now. You want your voice heard. The challenge you have is those voices aren’t going to get the same attention they would have before because right now the legislators will come out as heroes. We got those bad lenders and all these letters trying to take advantage of you. Don’t worry. We have your back. They will come out and talk about their superhero status.

Bruce Norris: I’ve just got to ask maybe a silly question, but can you describe a natural person? Is that a human with a pulse, or can that be an LLC?

Nema Daghbandan: No, it’s a good question, and oftentimes, particularly in this world in which definitions don’t line up to what they traditions normally would have, I would read a natural person to mean an individual. Hopefully a lot of private lenders making these business loans, oftentimes they are making them LLCs for corporation or limited partnerships, and so they would not be covered as a borrower under the statute. 

Bruce Norris: Wow. Well, that’s very important to know. I’m glad I asked that. So if you’re a hard money lender and you’re lending to somebody that’s borrowing in the name of an LLC, the legislation doesn’t cover it if they’re borrowing in their own name, even though it’s a rental property, it, in fact, could.

Nema Daghbandan: That’s exactly right.

Bruce Norris: Wow, that’s just really interesting. I’m going to run a loan program by you, and I just want your opinion on it. There’s a lot of upheaval right now, and I think it’s partly because people don’t feel like they have a shot at making progress. So there’s talks about things like affordable housing. Well, about three years ago, we wrote a report. The title was Two Percent Mortgage Rates, $40 Trillion in Debt. We’re there. So we’re going to get the $40 trillion in debt. But we also have a mortgage rate that starts with a two right now. What would be wrong with a loan, a national loan that had one foreclosure process. So it would be an unusual product. You have to qualify, but you don’t have to have a down payment, so like a V.A. loan that’s not connected to being a vet. The reason that’s typically dangerous is you’re going to foreclose on a certain percentage of those loans. That’s a given. But for just this program, let’s only hold a foreclosure sale for the back payments. So you have a mortgage rate that starts with a two. You give somebody a shot at owning a home. 90 percent of them are successful. What that would do to our economy would make building explode in affordable areas. It would make people feel like they were part of the goodies. Their payment would be less than their rent, so they would have extra money in their budget. Let’s say the 10 percent that didn’t make the payment goes to a trustee sale and the opening bid is six months of a grand. Your opening bid is six grand buyable by anybody, and overbid goes to an insurance policy that covers the whole shooting match. To me, it’s a brilliant time to do that.

Nema Daghbandan: I think that’s really the travesty of what’s happening. It’s that one of you have mortgage lenders more flexible than I’ve ever seen before. We have to acknowledge what’s happening in our society. I think there is a forgiving attitude, and I understand that this is a unique situation that was not brought because of a borrower who got themselves in over their head. You have a national sentiment of cooperation that hopefully lasts for some time. That’s the one good thing that comes out of all of this. There are so many great ways to solve these sorts of problems. Rather than completely hammering one side with the assumption that these are bad actors or that they are going to take advantage.

There are so many things that we could be doing to really advance. I’ll give you the practical side of this. When I’m counseling, they won’t ask me, “Well, hey, if this thing passes, it looks like what I need to do is dramatically reduce my loan to value ratio because I may not get a payment for a long time and therefore I can’t end up underwater in my lending. In addition, I probably need to hold back the entire loan’s worth of interest on the front end so that they can’t default because they could theoretically call the next day telling me that they can’t pay anymore and I would have to offer them. In effect of those two things together is less money going out there and a high restriction on the borrowing basis available. So all it’s going to do is massively restrict credit. That’s the repercussions of this action, and it doesn’t take a rocket scientist to figure that out. In the alternative, the win-win is how do you expand credit during the time? That is the ultimate way we get out of this. I’m not a huge fan of that. I live a lifestyle that is almost completely devoid of that. I don’t believe in debt, oddly enough, for being an attorney that practices in finance. But that’s how you like to think about it. It’s getting cheap debt out there. It’s how we got out of the last recession.

Bruce Norris: Well, but giving people a chance at homeownership, I remember being the guy that was a renter. And this is a true story. I was married at 17. I got fired five times in a row. Finally had a little can in the kitchen that I put $20 in. I almost said $20 grand because the numbers have changed these days. But 20 bucks whenever I could; and I got 500 bucks together in two years, and we were able to take over a loan Subject To. I didn’t have to qualify for it. I just had 500 bucks. That changed my whole life. On the Saturday that we moved in, I mowed my own grass for the first time, and I honestly felt like a man. I had joined society as a man. It had a very big impact on me. When you talk about affordable housing, that means governments write checks. We have affordable housing. It’s in the payment.

Nema Daghbandan: That’s what really makes me sad about all of this. The lesson of this is you don’t need to be responsible for your obligation. It’s the exact inverse of what you just said. Right. You saved up, you had an opportunity, and it taught you to be a responsible person because you have ownership missing. This is the exact antithesis of this. This is a victim mentality of, “I can take advantage of somebody and I don’t owe them anything and I have no responsibility.” Even if there was a debate, like, let’s say we didn’t change the business purpose or nonbusiness purpose. At a minimum, the fact that this legislation was written purposely to not require any backup documentation, not provide any proof that you really are experiencing a hardship. It shows how fundamentally flawed the legislative analysis on this issue is. IIf people are going through hardship, I get it. And you know what? Reasonable people can disagree on rent policy on that. But to say that a borrower can call their lender tomorrow and just say “I just don’t feel like paying you,” and that’s OK, and that’s what we are going to legislate? Is that the society we want? 

Bruce Norris: This is a progression because it started with the payments. You had people not make payments last downturn, what, for three or four years? That was pretty common. OK. So that was sort of a lesson. I didn’t pay a price for it. Then it went to sort of student loan things where “how do we get out of this?” So it’s been a progression of, “OK, how do we not pay what we signed up for?”

One of my favorite stories. There was a guy that’s a really great investor in California. It was a pretty young man. This with 1990, a downturn in California. He had a partner and they owned a bunch of land funded by private money. Land just drove to zero, basically. And so Mike was contemplating what to do. His partner, Mick Blackwell, took out the document and read to him what it said. And it said, “We promise to pay.” Pretty cool lesson.

Because there was no back door, there was only a way through. The hardest 18 months he ever worked. He solved all of that, paid all the people back and their interest, and it changed the course of his life because he stood up to something that was really, really difficult. It’s possible. People that don’t understand what causes losses might think, “Oh, nothing down. That’s dangerous.” It’s dangerous if it becomes an REO en masse. There’s not one REO that would come about from this particular loan program because it would be bought at the trustee sale for the opening bid of six grand or eight grand by either another owner occupant, give them the first shot, I don’t care, or a guy that wants a rental with a mortgage that starts with a two. You would you would make so many more people feel like they were part of the goodies. And in fact, they would be. They’d have a fixed rate loan. They’d have a loan that ultimately paid off.

In Florida, we have new houses that are worth $230. Put a two and a half percent mortgage on that, and compare that to rent. It’s ridiculous.

Nema Daghbandan: You’re absolutely right. There are better ways to solve the problem, right? I think that’s the approach that’s being taken. It is so ill informed of what a good collaborator is, and this could be a great weigh lay. You could really reshape our society for all the right reasons.

Bruce Norris: The idea is you have a 30-year benefit for a window that’s probably 12 months long. I just mentioned it to you because you’re definitely a person of influence. I hope we can get an audience in front of somebody at some point that can really contemplate that and go OK. It’s going to seem politically incorrect in a way. Nothing down. We’re going to put some heat on that. But if they really understood this is not how you cause price damage, this is how you make America have equity and spendable money. It would have a huge impact on our economy.

Nema Daghbandan: I agree with you.

Bruce Norris: All right, well Nema, we are out of time. I’ve really enjoyed talking with you for the first time. What a wonderful world we live in. I hope you’re doing well out there. I hope your audience is doing well.

You’re talking about debt. I’m very conservative too, but you realize that even though you think, “OK, all my ducks are in a row,” wow, all of a sudden you realize there’s some stuff that’s changed that I would have never imagined. It’s a good lesson. All right. Nema, you have a you have a great day. Thanks for joining us.

Nema Daghbandan: Thanks. Take care.

Bruce Norris: OK. All right, bye bye.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

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