As many of you know, there has been a major shift in the sub prime mortgage market. In the boom years of the turn of the century, the mortgage market was inundated with exotic sub prime money for borrowers. Never has the mortgage community been so borrower friendly to people with low FICO scores, undocumented income and no employment verification, also known as the NINA loan (No Income, No Asset). Few expected the consequences to hit like a hurricane, but Hurricane NINA has landed and the effects will show to be devastating.
Thousands of sub prime borrowers from coast to coast took advantage of the opportunity to get their piece of the American dream….home ownership. For many, this turned out to be a wonderful opportunity to finally own their own home…except for one small detail…the adjustable rate, negatively amortizing mortgage. Many borrowers decided to gamble with their futures and their homes. Betting that the rates would stay low long enough to allow the home to appreciate sufficiently to refinance was an error in hindsight. To the dismay of many borrowers, the mortgage interest rate began to adjust and the “affordable” initial monthly payment began to rise significantly. Some of the adjustments will come due soon on loans with a 3 or 5 year start rate and slip into the adjustable mode, making the home purchased on a shoestring and a prayer completely un-affordable.
Recently, notice of defaults rise and foreclosure rates hit 20 year all time highs.
To make matters worse, the same mortgage companies that were eager to lend mortgage money to this class of borrower has now said “no more for you”. The mortgage companies are not able to sell the paper to the investors. Wall Street has a very little appetite for a portfolio of mortgages in foreclosure. The NINA loan products have gone away and now the government is getting involved. Regulation has already started being handed down from on high to ‘protect’ the borrower. What this means is that it is very possible that stated income loans may become a thing of the past. This is a death knell for the self employed borrower for whom the product was created as well as the borrowers who abused the privilege to obtain homes they couldn’t qualify to buy.
This is the beginning of a “mortgage meltdown” that may have consequences for many years to come. There is no silver lining here. Borrowers who couldn’t qualify for homes purchased anyway with no money down and a barely affordable initial payment. In some cases, the loan had negative amortization which means the loan balance grew with each payment made. Essentially the payment made (as per agreement as outlined in the note) was insufficient to cover the interest owed and was added to the balance. In a rising market, negative amortization is no where near as detrimental as in a declining market like we are experiencing now. The house was making part of the payment, but with equity dwindling or non-existent, borrowers are upside down. They owe more than the house is worth. Faced with the inability to pay the mortgage, borrowers head into foreclosure. Without options available, some homeowners will walk away from their homes.
There are several opportunities that borrowers can choose from to save their home. The most common approach is obtaining a hard money loan, one that relies on the equity in the home. A hard money loan is not intended to fix a long term problem but to offer a short term solution. Most hard money lenders loan on the value of the property taking in consideration the LTV ratio. Simply put, the hard money lender generally loans up to 70% LTV. The hard money loan gives the borrower options. Rather than lose the property to foreclosure, the borrower has gained a valuable commodity…time. Time gives the borrower the ability to sell, refinance, or rent the property without the impending event of foreclosure hanging over their head.
There are no options for a homeowner who owes more than the property is worth, has low credit scores, and no ability to prove income, which is a vast majority of the borrowers who took advantage of the lax lending standards of recent years.
At least the hard money option is available for the time being. Proposed legislation is written that may prevent viable options from being available to homeowners. Hard money lenders like adjustable rate loans. It keeps their investment at market rate. Hard money lenders also like interest only loans, which is how most loans are structured for ease of servicing. Both of these loan types may become unavailable to homeowners because the California Legislature has decided to revoke the borrower’s right to make decisions that work for them under the guise of consumer protection. The prevalence of the problem created by the sub-prime lending standards shows that homeowners could have used the regulation 3-5 years ago, but to do so now will serve to ‘protect’ many people right out of a home. As these loans come due, adjustments are made, and rates rise, many more homeowners will be unable to make their contracted mortgage payment and go into foreclosure. These same ‘protections’ are not levied against businesses which can obtain interest only and adjustable rate loans without restriction. Why? Business owners are considered more savvy than the average homeowner financing a one-to-four unit property.
At least for now, the option is available if the equity is there. For those with equity, hard money (also known as private equity lending) is available, but it is more expensive than a conforming mortgage rate. The rates for a hard money first trust deed are in excess of 10% in most cases. A hard money HELOC or second mortgage is considerably higher yet, but for those individuals who are considered non-bankable borrowers, the money is a lifesaver at any cost.
Laura Riffel
President
