by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Hard money is not stupid money. Pragmatic underwriting guidelines are followed so as to insure the principle that the private mortgage really is a temporary loan, designed to solve rather than to perpetuate the underlying problem. I attempted to define this niche in one of my first posts on Bloodhound and followed it up with an hour-long conference call with two private mortgage investors.
Private mortgage loans are not asset-based lending. There must be a demonstrative ability to repay the loan. If the borrower opts to “state” the income, the trust deed broker has an obligation to the investor (and the borrower) to perform due diligence that would suggest that the borrower has that ability. We sometimes eschew traditional underwriting guidelines to demonstrate that ability to repay. Often, we accept a statement of future earnings from the borrower (useful for entrepreneurs). We will review the assets in a retirement plan as reserves to draw upon should that statement of future earnings not materialize.
Private mortgage loans are not a license to jack up the fees. I often turn away brokered business because of originator greed. Lenders charge points to enhance their yield. A common practice in our industry is for the originating broker to increase his/her brokerage fee to equal or better the lender-charged points. The result is an unrealistic fee financed by the lender and subsequent decline. If brokers are charging a borrower 1-2 points for a subprime loan, and the loan turns into a private mortgage loan, brokers should not automatically raise their fees because the borrower is “stuck”.
Values are carefully scrutinized. Appraisals can be manipulated to reflect an approximate opinion of value. It may very well pass the test of a FNMA/FHLMC underwriter but not the careful eye of the private mortgage lender. Originating brokers would do well to check the local MLS for model matches. If you have an appraisal for $650,000 and two model matches are being offered for sale at $599,000 and $580,000, with an average of 45 days on the market, we’re going to suggest a value of $575,000.
Originating private mortgage loans can be a profitable niche and an excellent compliment to your pipeline. Rules identical to most residential loan applications apply. A complete 1003 loan application, accompanied by supporting documentation, insures a legitimate underwriting decision.
Artur Urbanski says:
Brad – thanks for describing the private money lending process. A good broker, like you, can add a lot of value to the process. Unfortunately, I believe that if a borrower is “stuck”, many lenders and brokers will be “at least” tempted to take advantage of him/her. It is not specific to hard money lending. Option ARM loans are a good example. Lenders created a tremendous temptation to loan officers and mortgage brokers by giving up to 4 points back for originating an Option ARM loan. Think about it, $40k rebate on a $1m loan is an awfully big temptation. I met an account exec from a major lender who boasted that their number one reseller in Southern California sold over 1000 Option ARM loans in one year. He got 2 points rebate for each and charged another 2 points at the back. 4 points for each! Whose guidelines did he follow?
The point I am making is that lending industry has a black eye, as we all know, and having more guidelines is certainly not a solution to “clearing the industry name”. I am both, real estate and mortgage broker, so I do not absolve myself from my share of the blame. More regulation is certainly not a solution. More self-policing? I don’t think it will work either. What are other options? I don’t know, but I think it would be worthwhile of a discussion. What do you think?
July 2, 2007 — 9:04 pm