real estate finance - full book (500 pgs)

With a 70 ratio the lender should not suffer a loss

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Unformatted text preview: at exceed the home value by 25%. It is estimated that $10 billion in these loans were made in 1999. They are considered by some mortgage arrangers as a very hot product. While many of the larger mortgage companies will not touch these products, many mortgage brokers, including some of the larger ones, are Dynasty School (www.dynastySchool.com) 6-5 REAL ESTATE FINANCE actively seeking borrowers and lenders. In some cases, they are using boiler room techniques employing dozens of telemarketers. Consumers are able to use proceeds to pay off relatively short term, high interest credit card debt at interest rates of up to 21% and substitute a second mortgage at 13 to 14% interest. This creates lower monthly payments for the borrower. In addition, the interest on the second mortgage will probably be deductible for income tax purposes while paid credit card interest is not deductible. The net effect is that the effective rate of interest for the borrower is lowered significantly. These loans are risky to the purchaser in that borrowers who fail to cut up their credit cards are likely to get into trouble again. If foreclosure becomes necessary, the lender will have no security for funds lent in excess of the homeowner's equity. A few mortgage–companies are making these loans and packaging them in large bundles. They are then sold on the secondary mortgage market. The large number of loans is believed to reduce the risk. Investors should be made fully aware of the fact that loan funds in excess of borrowers' equity is in reality unsecured loans. These loans are likely being made to persons who, in the past, have spent themselves into debt which they could not handle. CHARACTERISTICS OF HARD MONEY LOANS HIGHER INTEREST RATES Loans made by hard money lenders bear interest rates higher than rates charged by institutional lenders. Risk is related to rate. No one will invest money in a higher risk investment unless the greater risk was compensated for in return. As an example, the most risk free long–term investment is government bonds which also provides the lowest rate of return of any long–term investment. SHORTER TERMS Loans made by hard money lenders are more like...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.

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