Thursday, July 21, 2011

Markets in Everything: Hard Money Mortgages

From today's WSJ "Home Loans Via Mom & Pop Inc.":

"Across the nation, a number of mom-and-pop investors are pulling money out of their retirement accounts and safe, but low-yielding, savings to take on the risk of becoming "hard-money" mortgage lenders, who charge high interest rates to borrowers who have been rejected by traditional banks.

Hard-money mortgage lending represents just a tiny slice of the mortgage market, although the activity is growing rapidly. Guy D. Cecala, publisher of trade publication Inside Mortgage Finance, estimates hard-money loans will account for about 1% of the 5.5 million mortgages expected to be originated this year. But he says activity in that sector is up sharply from a few years ago, when very few hard-money loans were originated."

5 Comments:

At 7/21/2011 4:38 PM, Blogger Unknown Blogger said...

It makes me sad that when you post about economic freedom and new markets, and entrepeneurship, my first thought often is "yeah, that's gonna get shut down by law suits or the government."
In this case, I'm fairly sure that someone will cry "USERY!!!!!!" and a law suit claiming some sort of unjust discrimination will be the end of this business model.

I hope I'm wrong.

 
At 7/21/2011 7:16 PM, Blogger Eric H said...

Well, the "hard money" lenders are loaning at a very significant disadvantage to the federally protected banksters, that is if they are actually coughing up the fiat paper to buy the properties to begin with as opposed to fraudulent fractional reserve lending their competition uses. But, it probably pays better than the 1% interest their "king dollar" savings accounts pay.

 
At 7/21/2011 11:53 PM, Blogger randian said...

Hard money lenders lend at much lower loan to value than regular lenders. Regular lenders lend at 90-90% of value, while hard money is typically at 65-70% of value. Hard money has a lot more equity protecting it, so it's safe even in a large downturn.

 
At 7/22/2011 6:51 AM, Blogger geoih said...

It would really be innovative if the mortgage was a 'barter' contract for so many ounces of gold.

 
At 7/22/2011 8:22 AM, Blogger morganovich said...

just another sign of how desperate investors are for yields.

i think you can make better (and lower risk) money arbing cash requirements in states (like California) where you need to pay cash on the courthouse steps for foreclosed property. you buy a $400k home for $200k then flip it to someone who needs a mortgage for $350.

the kind of buyer who want's a $400k home pretty much never has $200k in cash.

you can get far better rates than 14% (more like 20%) lending against structured settlements or life insurance policies (though this takes some legal and actuarial sophistication)

you would need the kind of LTV levels randian mentioned to make this attractive, even at 14%.

i wouldn't touch it.

 

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