…Creative Real Estate Financing Became Alarmingly too Creative; continued from

Although FHA was a creative mortgage program designed by the federal government to increase home ownership among hard working, low-to-moderate income people desirous of home ownership, the program worked well because it was, and still is a federally insured loan and as such protected mortgage loan lenders from loss due to delinquency and subsequent mortgage foreclosure. The VA mortgage loan worked because the Veteran’s Administration (a different arm of the federal government) guaranteed mortgage loan lenders against loss due to mortgage foreclosure, so this was an even more protective blanket for the lender; The federal government, through the Veteran’s Administration, Guaranteed repayment!

The only mortgage type that deviated from the conventional mortgage loan guidelines and was not insured or guaranteed by the federal government or fully insured by the conventional mortgage bank was the PMI (Private Mortgage Insurance) program, and although PMI mortgages met a need in the real estate financing marketplace, there were those who viewed this mortgage type as a model of even more creativity in real estate financing. Soon there were mortgage programs introduced that required 5% down but only 3% of the buyer’s own money; 10% requiring no PMI; 5% down no PMI as long as the home buyer agreed to a small second mortgage (“piggy-back second”); And a number of different variations and new combinations.

Then there was a new term introduced to describe these newly created non-conventional, non-FHA, non-VA, non-PMI mortgage types. The term was Sub prime mortgage or Sub prime mortgage loan! As it turned out the Sub prime mortgage loan was the among most reckless kind of creative real estate financing loans to have been introduced to the modern-day marketplace, and – we now know – was responsible for an almost collapse of our financial system (resulting a recession lasting from late 2007 to late 2010) and near depression.

In hindsight, one can safely conclude that creative real estate financing, when properly insured, was least likely to lead to a mortgage crises. Contrary to several reports during the sub prime melt down, the FHA-insured mortgage loan was not responsible for the 2008 mortgage crises and market melt down; And the VA-guaranteed loan program certainly was not considered the culprit. The PMI mortgage provided insurance to protect conventional mortgage lenders for loan amounts over 80% and up to 95% of the lesser of a home’s purchase price and its appraised value, a clear indication that when lenders’ interests were insured the exposure to loss was greatly reduced.

When there was little or no insurance lenders were opened to huge losses, and when those losses were compounded, many lenders sought help from their rich Uncle Sam and received it via the many $Billions in bail-outs towards the end of 2008. So what purpose did such recklessly creative real estate financing, technically fraudulent-inducing sub prime mortgage types serve? What was the end game? The truthful answer to that question has yet to be determined, and may not be for years to come.

A message to Prime Mortgages readers:

Thank you for the support you have shown. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!

Javeton

For more about 203k, please visit the HUD website

Sponsor’s Message

A Digital Web – Fueling Internet Growth!

What would life on the internet be without the World Wide Web (WWW)? Although it has only been a short eleven (11) years since the creation of WWW it seems as though HTML, HTTP & URLs were a part of internet life for as long as the existence of the internet itself. That’s based in part on the fact that WWW was a driving force in making the internet what it is today. Similarly, digital products have helped to make the Web what IT is today and continue to propel Web use to new heights on a daily basis. Learn how you can be a part of the digital products revolution and make your mark (personal fortune?) with an INDIGITAL WORKS membership.

Click the TOM-SL button to subscribe to 3-in-1mortgage information services. This is a free service!

Add my expertise to your Google search results

humor

If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?

Permissible Creative Financing Options

Creative financing options were readily available just a few years ago and were utilized by just about every real estate and mortgage broker that operated during that time; But the term “Creative Financing” meant different things to different people during the years that immediately preceded the mortgage meltdown. Although most or all of the creative financing techniques employed then are just about extinct now (example, “Stated Income/Stated Asset” or “No Income/No Asset” loans are not used in today’s market).

What isn’t extinct and will probably not be, as long as the US Government continues its support of the FHA mortgage insurance program, is a mortgage loan known as Section 203k Rehabilitation Loan which, in my opinion, was one of the most creative mortgage financing programs to have been introduced by any mortgage agency in modern times, and probably still is today. The 203k rehabilitation program (referred to also as 203k rehab or just 203k by many mortgage professionals), introduced by HUD during the early 1980s was a badly administered loan which presented too many problems for real estate brokers and mortgage lenders and had to be shelved. Industry professionals thrashed the program and called for its improvement.

It wasn’t until the early ’90s that the 203k rehab program was reintroduced to HUD-Approved lenders as a viable financing option for the purchase of one-to-four family homes and owner-occupied mixed-use properties. In fact investor-owners were permitted to purchase residential and mixed-use properties (until that part of the program was discontinued in 1996) as long as the down payment was a minimum of 15% of the purchase price or of the appraised value – whichever was less. This version of the 203k rehab program did in fact provide “creative financing options”, and there were many; All options were encompassed within HUD’s guidelines so they were permissible and therefore eliminated the need to use your own creative ideas.

This excerpt from HUD’s website was particularly encouraging for me:

The Section 203(k) program is the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. Since these are the primary goals of HUD, the Department believes that Section 203(k) is an important program and we intend to continue to strongly support the program and the lenders that participate in it.

I interpret that excerpt to mean that any home buyer who wishes to can utilize the 203k rehab loan program to finance the purchase of a qualifying home and utilize the creative financing options featured in the program as long as s/he applies with a lender that is capable of originating and processing the loan in a manner satisfactory enough to actually bring the transaction to a title closing. Bear in mind that not every lender will offer the program and many lenders that are willing to originate, process and close a 203k loan must still rely on a bigger bank to purahase the paper which has also been – at times – problematic for smaller lenders.

The party who benefits most from a 203k rehab loan is the home buyer in almost every respect except that the home seller gets to walk away from a home that may be in need of considerable repair or rehabilitation without the headache of making those repairs; although in many cases the disrepair state of such a property would have been negotiated in the price (a reduction) thereby eliminating any monetary gain the seller may receive; so the seller benefits only in the sense of not having to complete the work.

The buyer of a 203k financed home benefits in several respects. S/he is able to choose the style of work to be done; Whether room sizes will change or remain the same; Whether the number of units will change or remain the same; From reduced out-of-pocket costs; No loan payments up to six (6) months after closing (if the property is uninhabitable); If a mixed-use property, conduct a business in the retail space; Should the property appraise for less than required value, the ability to increase the loan amount up to 110% of the after-improved value.

Most importantly, the buyer can occupy and live in his/her new home with the security and peace of mind in knowing that there will be no breakdowns of the home’s major working components requiring emergency spending, which in turn creates uninterrupted mortgage repayments. Each of the features mentioned above was also available in the 203k program since its reintroduction in the early ’90s and could have been utilized to a greater extent by many home buyers who ended up with subprime loans – most of which turned out to be their worst nightmares.

Almost every creative manuever that was used to get a home buyer into a subprime mortgage (most of which were fixed for very short terms before adjusting into a “monster” payment), could have been turned into a permissible creative financing option by applying a little patience and a lot of empathy towards the buyers. The Section 203k Rehabilitation Loan program may still be a viable alternative in today’s real estate market, despite its depressed state.

A message to Prime Mortgages readers:

Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!

Javeton

For more about 203k, please visit the HUD website

Sponsor’s Message

A Digital Web – Fueling Internet Growth!

What would life on the internet be without the World Wide Web (WWW)? Although it has only been a short eleven (11) years since the creation of WWW it seems as though HTML, HTTP & URLs were a part of internet life for as long as the existence of the internet itself. That’s based in part on the fact that WWW was a driving force in making the internet what it is today. Similarly, digital products have helped to make the Web what IT is today and continue to propel Web use to new heights on a daily basis. Learn how you can be a part of the digital products revolution and make your mark (personal fortune?) with an INDIGITAL WORKS membership.

Click the TOM-SL button to subscribe to 3-in-1mortgage information services. This is a free service!

Add my expertise to your Google search results

humor

If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?