Residential Hard Money

"Residential" Hard Money

The Straw that broke our Back

In the wake of the mortgage melt down the term "Residential Hard Money" can send shivers down the neck of a some hard money lenders. In recent years Legislators in Washington have made it very clear that they will not tolerate any preditory lending practices within the residential mortgage arena. While many of the problems of the mortgage crisis did involve preditory lending practices in some way or another it was wall street greed that kept buying mortgage backed securities (MBS) packed with Stated income loans that were eventually deemed fraudulent. These loans were later termed "liar loans" by the media because of the lack of documentation verification that actually took place during the underwriting phase of the loan process. Upper management at large mortgage origination companies like Countywide were conditioned to keep feeding the hungry bulls on Wall Street. If the file had a name and wet signature it was a viable loan that could be included in the portfolio, packed and sold to wall street; and if Wall Street was buying it, you could rest assure that wholesale lenders like Countywide, New Century and Greenpoint would deliver the goods, and delivered they did.

What seemed like and endless pool of liquidity drove real estate values to record highs. Just when the market seemed to be busting at the seems and market correction inevitable, Wall Street turned out new innovative products like the 2/28 adjustable and the Hybrid Negative Amortization Loan otherwise referred to as the "Pick a Payment" loan or the "Pay Option ARM".  The 2/28 loan allowed marginal borrowers purchase with no money down using the stated income qualification method. Borrowers were in essence stating their income and assets (without any scrutiny in most cases) and borrower up to 100%+ at below market rates, usually an interest only payment 1% to 1.5 % below the average 30 year fixed. You see low teaser rate lowered the debt ratio calculation that made the overall loan qualification possible for many borrowers. Once in the house for 2 years, most borrowers ended up refinancing out of those 2/28 mortgages before they would adjust to the much higher interest rate. Property values were increasing at avarage of  2% per month so appraisers could easily justify the increase in value that made the refinance possible.

In about 2006, the heavily marketed Hybrid "Pick a Payment" or "Pay Option ARM" Loan sold by large institutions such as Washington Mutual and Countrywide hit the market in dynamic fashion. The "Pick a Payment" loan was sought after by 1st time buyers and high end buyers just the same. The lower payment option gave borrowers a sense of empowerment but more importantly the 1% pay option allowed borrowers to qualify for a much higher mortgage limit. Once again created demand in a market that was already bursting at the seems.

• 1st - 1% pay option - payment was 1% of the mortgage amount paid monthly, amortized over 30 years or 1.25 gross up. 1.25 gross up allowed the loan to go negative amortization 25% higher than the original principal balance on the loan. So the loan would grow in size as a result of continued payments at this rate. It would typically take approximately 2 years for the loan to fully gross out at 1.25 at which point the borrower could only make the fully amortized payment under scenario #3 and #4 below. 

• 2nd - Interest only fully index rate would not amortize any lower than the principal amount but it would not grow any higher either. 

• 3rd - Principal and interest at the fully indexed rate amortized over 30 years This pay option functioned like a 30 year fully amortized loan. Every payment made would chip into the loan balance until it was paid off in 30 years. 

• 4th - Principal and interest at the fully indexed rate amortized over 15 years. This option like the 3rd option except the payment was based on a 15 yr amortization schedule. 

 Like the 2/28 mortgage the borrower was able to use the lowest payment for qualification purposes make home ownership much more affordable. Now not only were new buyers flooding the markets but you saw a whole new dynamic. Unlike previous years middle to high class borrowers were cashing in on the new affordability index created by the "Negative Amortization" Loan and buying way above their means. This pushed real estate values even higher than previously thought possible. Just when it seemed like it would not end in 2007 the real estate bubble burst in dramatic fashion causing the single largest financial disaster the modern world has ever seen.

Banks were now failing by the hour. Some of the largest brokerage houses on Wall Street were failing as the US tax payers were fed the rhetoric that some of these institutions were too big to fail. Meanaing that if they failed global failure would be enevietble. So politicians did the unthinkable. They proposed the tax payers absorb the single largest bailout of banks, brokerage houses and car manufacturers the US taxpayer has ever seen. The total cost of the financial bailout plan was reported at $700 Billion Dollars.