Au Contraire by Mark Crawford

by 02 Jun 2008
Why would any one want to invest in a mortgage loan today? Because good loans are made in bad times and bad loans are made in good times. The problem loans the market is currently experiencing were originated in ?good times,? years 2005-early 2007. Today?s loans are different. They are originated at substantially lower property values (15-40% decrease) and loan amounts are typically no more than 65% loan to value. Borrowers are also expected to have the ability to repay the loan as future value appreciation is no longer considered. These loans are an alternative for the real estate investor faced with projected flat equity returns for the foreseeable future. The current credit crunch has excluded many borrowers who have substantial equity in their property and the ability to repay the loan. The increased lending standards by the banks have opened an opportunity for private Trust Deed Investors. Who?s the Borrower? The borrower who turns to private equity includes all types. Some have foreclosures and credit problems but many have other circumstances ranging from cash strapped small business owners, ?cash generating retail? business owners who show little income on tax returns, probate and estate tax expense needs, medical crisis expense needs, investment property owners, etc. Valuation The best time to invest/lend in the real estate cycle is not at the ?top? as we have seen with the current loan problems, but near the bottom with future property declines limited. 10-30% Market declines have already occurred. Historically, down turns level off at 20-30% so the market bottom is near. Additional down side risk is probably no greater 10%. If one has to foreclose on property originated in 2008, the lender should be well positioned in the market if the loan to value is 65% or less. Risk Management Underwriting is the key to managing risk. The collateral value must be appropriately verified and the borrower must have the ability to repay the loan with a future exit strategy to either sell the property or refinance into a lower cost loan once credit is improved. Property valuation is a three step process. First, obtain a full appraisal of the property by a licensed appraiser. Second, perform an in-house evaluation of the property value considering its location and condition. Take market factors into account such as areas with unusually high foreclosure rates or other economic issues, e.g., industry shut downs, seasonal work areas, long commutes to work places, remoteness of property, etc. Third, obtain a Broker Price Opinion of the property. These are free and a local real estate agent familiar with the area can provide it. These three valuations can be used to determine a realistic value. The borrower must have the ability to repay the loan. ?Stated income? loans are a relic of the past. Today?s loans are underwritten in a tradition mortgage banking manner, the borrower must have the ability/capacity to repay the loan. Employment and income should be verified. Burdensome consumer debt should be eliminated out of loan proceeds so that the borrower ends up with lower monthly payments subsequent to the loan. This should effectively increase the borrowers FICO score enhancing the borrowers credit for a future refinance exit strategy into a lower cost loan. Congress passed a relief provision to assist with housing, effective June 1, 2008. HUD loan limits were raised in higher priced communities to more appropriate levels, e.g. from 300,000?s to 700,000?s. This act will allow borrowers with credit issues to obtain government products which were not available to them previously. Consequently, if a borrower can remain current on their mortgage payment for 12 or 24 months?, they can refinance into a HUD loan at lower interest rates. This is powerful exit strategy for private trust deed borrowers. Property Types The property types include single family residences, one to four units, 5+ apartment units and commercial properties, owner occupied or non-owner occupied. Investment Trust Deed Investments yield double digit returns. Typical rates are from 12% on 1st liens to 14% on 2nd liens. Mortgages typically begin at amounts of $50,000+ for 2nd Trust Deeds/ HELOC?s. The average 1st Trust Deed typically begins at amounts of $100,000+. The investor receives monthly payments of interest. The loans average life is 18-24 months. Foreclosure Costs If the borrower fails to pay interest, foreclosure proceedings might have to occur. The costs range from $2,000-$5,000 for a single family home and take approximately 4-6 months. If the lender lent no greater than 65% of the property value, the lender can typically foreclose and emerge with at least collateral preservation. So why would any one want to invest in a mortgage loan today? Because market values have declined and loans made today are made on a lower loan to value. If borrowers have equity in their homes, they do not walk away; they either sell or find a way to make the payments. Article written by Mark Crawford, CEO Crawford Park Financial inc 626-796-7979

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