Real Estate Financing Options in this Economic Crisis-Hard Money Lenders

What is a hard money lender and who is it right for?

A hard money lender is a lending company or investor that specializes in financing the purchase of residential real estate. Most commonly they provide short term loans, often called bridge loans. The amount of funding typically is based on the value of the property being put up for collateral, not income verification or any other financial status or ability of the borrower. Most of these loans don’t meet the criteria of a standard bank loan. Banks use the standards to limit risk and high default rates. Since risk is higher, interest rates are higher with a hard money lender. Hard money lenders play a very important role in the real estate industry; however they are not right for everyone. Individuals and companies that cannot obtain typical mortgage financing because they do not have acceptable credit or other necessary documentation are an example of who it is right for.

Collateral is the security or asset guaranteed in the case that the loan borrower is unable to adhere to the terms of the loan. Real estate is used as collateral for most hard money loans meaning that they have the first lien and would be the first creditor to receive payment upon default.

Hard money lenders structure loans based on the loan-to-value (LTV) ratio which generally ranges between 60-70% of the current market value of the property. The value is based on a quick sale meaning sold in within 4 months of the default. This value differs from a market value appraisal, which assumes neither buyer nor seller is acting under duress.

The credit industry underwent extreme changes in the late 1950s and the hard money lending industry was born in the US. Since then it has been unregulated by state or federal laws, although, some states do restrict interest rates that can be charged, called usury laws.

Due to the lack of regulation and red tape this industry is able to finalize loans quickly and is particularly useful to those in need of a loan NOW. As with any business transaction, use a reputable company or ask for referrals. Be wary of scams that charge exorbitant upfront fees prior to funding. Even though the industry isn’t regulated you still have rights. The state’s attorney general office in which the hard money lender operates investigates on behalf of victims of unfair practices.

Fixing the Ever Flooding Foreclosure Market

It doesn’t seem possible that 2009 will bring any less than 3 million foreclosure filings considering the current steady influx. This downward spiral is likely to continue as foreclosures negatively affect the housing market, leading to more foreclosures.

In a flooded market the banks have no reason to rush to put more houses on the market. It only makes sense, adding more houses to an already flooded market may lead the banks to lose even more money than holding onto the houses and not listing them on the MLS (multiple listing services).

Even so, lenders insist they try to act as swiftly as possible. According to Tom Kelly, a spokesman for Chase Mortgage, their goal is to cut their losses on these homes as fast as possible. At times it can take 6 months up to 1 year before a bank-owned house shows up on the market, it used to take about 1 month. There are a number of issues holding up the process that takes a house from foreclosure filing to “on the market”. The major problem is system overload, lenders are just not prepared to handle the numbers of foreclosures that they have, let alone the new daily filings. The next hurdle is to get the properties prepped to sell, which is also taking longer. Houses are typically in worse shape due to sitting empty while waiting for the foreclosure process to be complete-the process was lengthy even before there were so many jamming up the system. Any house left empty for an extended period of time is going to deteriorate rapidly. Also, homeowners that usually take great pride in caring for their house most likely don’t have the money for repairs if they can’t afford their mortgage. Of course there is always the problem of angry homeowners that trash the house before it is foreclosed.

Another reason banks don’t post foreclosed homes in the MLS right away is because they try to sell them via bulk and auction sales to investors. These foreclosures that aren’t on the market yet are referred to as “ghost inventory”.

The official housing inventory statistics use data from the MLS (maintained by real estate agents) and the numbers were at record highs for 2008. Those record high numbers don’t take into account ”ghost inventory” or that at this point 10% of all home borrowers and 1/3 of subprime borrowers are at least one month behind in their mortgage payments. We’ve all heard it a million times…the housing crisis could be worse than the current numbers let on.

So, how do we fix this?

William Breetz is a lawyer who teaches real estate law at the University of Connecticut School of Law. He has a plan to repair this ailing industry. Since Congress hasn’t dealt with this topic, the states should be given the right to resolve it. State judges are the ones presiding over foreclosure actions daily so they would know best how to repair this crisis. Breetz believes that with Congressional consent, state judges could alter the terms of contracts to decrease foreclosures by about half. The details of his plan are: order an appraisal that will give a real value of the home in today’s market and give the homeowner the opportunity to prove that they have enough income to afford a mortgage at the appraised value. Economist and the federal government suggest the maximum mortgage payment should be 38% of the family’s monthly income. Then do a basic business calculation to see if that monthly payment would be enough to pay the lender the current appraised value plus interest. If the homeowner couldn’t afford it, the house would still be foreclosed. If the homeowner could afford the monthly payment, the terms of the mortgage would be changed by the judge to 30 years, at the current 30 year fixed rate and the foreclosure would be avoided, even if the lender objected. The difference between current market value and the amount of the previous mortgage could be written into a 2nd note and paid to the lender upon the sale of the home.

Obviously the plan isn’t an immediate cure all and there are other legal issues that would need to be resolved. However, at this point every bit helps in turning our economy around.