Before the housing crisis in 2008, there were many types of mortgages available to the consumer. There was “A” Paper for those with perfect credit, provable income and a property in good condition.
There was Alt-A (alternative to A paper) was for borrowers who almost qualified for an A paper loan but who had a minor flaw that prevented them from qualifying.
Then there was subprime, which was available for those who didn’t have good credit.
Finally, there was hard money. It was for those whose credit wasn’t good enough for a subprime loan or who needed a small loan, often a 2nd mortgage.
After the market crashed in 2008, the only things left were A paper and hard money. If someone couldn’t get an A paper loan, their only option was hard money.
The result was that many borrowers with reasonably strong profiles were getting hard money loans. In some cases, these people had credit scores well over 700 but either had trouble proving their income or had a property in poor condition.
Investors were funding these loans with rates in the 10-12% range and had little trouble finding opportunities. Then, more investors started lending. This increase in investors drove rates down on many loans, with some going as low as 7% for cleaner deals.
Then non-prime loans started to surface and took a big chunk of the hard money market. Their rates were lower and they could do more of the owner occupied properties. They could also work with lower down payments.
Over the last couple of years, I have had many investors ask me what happened to all the sweetheart deals they used to see. The answer has been that the non-prime loans have eaten lots of them up, leaving the more traditional hard money loans. These were the borrowers who had bad credit (bankruptcies, foreclosures, short sales, late payments, etc.), ugly properties and no provable income.
But with our current scene of having most businesses either closed or operating with reduced volume, non-prime loans have taken a break. Right now, they aren’t lending. You can go to the websites of these companies and see that they have “paused lending activities”.
This does add some uncertainty to the market but we don’t really know how much it will affect values or for how long. My opinion is that I think values will drop but not by a large percentage. Here’s why.
The vast majority of mortgages go through the banks. Since 2010, all mortgages going through banks have required proof of income. They have also required larger down payments on all rental properties along with proof of assets. Additionally, according to Zillow in July 2019, 37% of the homes in America are owned free and clear.
Combining these factors, you can see that this is a much stronger base than the house of cards we were dealing with in 2008. Plus, we don’t have the same problem of rampant mortgage fraud and predatory lending that we had in 2008.
Where do we go from here?
Right now is a good opportunity for private money/hard money investors to lend to borrowers who are stronger than the most common hard money borrowers. In the last couple of weeks, I have been approached by more people who had good credit and strong profiles than usual.
Some of them will wait to make a move because they don’t want to get a hard money loan but others will get the loan that will solve their immediate problem and plan to refinance when things settle down a little. And some will be interested if the rates are a little lower (7-9%).
In looking at these deals, you may need to do lower interest rates than you are used to. But if you can get stronger borrowers with more equity in the property, isn’t that better than having your money sitting in a bank earning effectively no interest? Of course it is. Just make sure you do your due diligence and make sure you have a solid loan.
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