Good Intentions

This was a post was copied with the poster's permission from Trulia.com advice.

(A) church orchestrated a purchase of a single family home to be used by the senior pastor. About three years ago the church’s Board of decided to purchase a single family home adjacent to the church. At the time since the church was financially burdened, they decided to purchase the property under a junior pastor’s name. During the no-down payment and no income verification era, a junior pastor who only makes $1,000/month was approved and was able to purchase a $680K home now worth $550K, which he handed over to the senior pastor. For the last three years, the church has been paying the mortgage payment of around $1,700 (option-arm loan.) The church is still paying the payment and is willing to continue making the payment. Now the junior pastor is saying that the Board tricked him into this and wants out. How can the church be able to assume the loan w/o paying the negative equity? What should we ask the lender to do? Isn't the bank better off transferring the loan?



When I initially read this post, thoughts raced thought my head. The poster was in Oakland about 20 minutes from where I do business. Close enough to know what is going on there but far enough away to not be involved. In the heyday when Walnut Creek values were high theirs were out of sight. When we were seeing 10 offers on homes they had 30 offers. Prices were through the roof. It was a sign of the times, good times for the agents but not so much for the buyers.

As the peak neared innocent people started pulling together to find innovative solutions to their individual housing problem. Like this example, they worked together, discovered a solution, and solved the problem. Like life, everything goes well until it doesn’t go well anymore. The irony here, of course, is the innocents are member of the church, who pulled together to help the senior pastor.

Some variation of the proverb “The road to hell is paved with good intentions” was coined by Saint Bernard of Clairvaux (1091-1153). I am sure he wasn’t talking about a real estate transaction but I would suggest he may have been the first church attorney. Let’s examine how these innocents stepped over the line.

Everyone for noble reasons allowed the innocent's to purchase a property without the income to support a loan. This business was a common practice; everyone was doing this sort of business. The innocents put one of their own up to get a loan. A loan broker sold (now this is really ironic) them a liar loan of some kind. Some mortgage bank underwrote the loan. Some agent sold them the property. Some seller made some cash.

Then the chips came falling. Prices fell. Accusations are flying. The loan is no good.

Now they are now caught between the law and the bank. The freely admit to finding a (unqualified) buyer to purchase a property on behalf of a financially burdened entity. This process is called finding a straw buyer. The practice as it is commonly known has to be handled carefully in order to avoid falling into the category of unethical or even illegal. In order for the transaction to function properly, all parties need to be made aware the buyer of record is an intermediary, the intermediary buyer has to be qualified to purchase the property, and paperwork has be in order. At best the church is on the hook for the full amount of the loan, at worst its fraud.

The innocents now need help and are looking for ways to reduce the basis of the property. I advised them to seek counsel.

The point of this post is not really to demonstrate how easy it was to step over the ethical and legal lines. It’s that the characterizations of important people and talking heads do not reflect the reality of the last few years of the real estate boom. These people were permitted by a unregulated and broken system to take a risk; a risk that offered a reasonable upside but returned a whole lot of trouble. They were innocents that had a need, who found a solution, and became a statistic.