Sub-Prime Vs Private Mortgages

I am on a deal right now in Brampton. The credit is bad, but income is solid and verifiable. Reasonably low loan to value. Nice brick detached house in good condition. Borrowers are looking for a small loan of $25,000 or so to do some maintenance work on the house, clean up some outstanding debts.

While the credit picture is by no means perfect, we might be able to go sub-prime rather than private. I guess we should be diligent, shop it around?

So let’s take a peek at some B-lenders ….

One lender is suddenly demanding a minimum loan size of $75,000 – quite high on a second mortgage, and in this case three times what the borrower wants. Another demands a minimum loan size of $50,000 – again pretty high for a second mortgage, and double what the borrower wants.

But the rates they offer are so much cheaper than private – we absolutely need to force it institutional, take a larger loan amount than the borrower wants – it will be so much better for the client, right?

Hmmmm … the brokerage suggests a particular B-lender, offering “good” rates in these scenarios. Looking at the Mortgage Broker Information Sheet – 65%+ LTV, Rates of 11%-12%, and a Lender Fee “STARTING” at 3%. These are “good” rates? (I would hate to see what “bad” rates are …)

Oh, here is another B-lender on the brokerage speed-dial – Rates “Starting” at 10%, and then a Lender Fee “Starting” at 4.25%. Again, these are “good” rates? These folks must not be familiar with some of the private money floating around …

But let’s not single out the institutional lenders ….

I get at least a call per week from a new private lender, wanting to lend their own money to my clients. They call & email constantly, and good for them for being so persistent. But as these calls come in, I often wonder how the return they expect can be so out of whack with reality.

My questions to a new lender are always the same:
– What types of property – Single Family, Condo, Townhouse, Rental, Commercial?
– Geographic Boundaries?
– Maximum Loan To Value?
– Power of Sale, Behind on Property Taxes, Mortgage Arrears, Other Judgements?
– Interest Rate?
– Lender Fee?
– Who Does Your Legal Work?

The last question – legal work, always seems to catch the new lender off-guard. Why would I ever want to know who would do the legal? Why – aren’t all lawyers the same?

Sometimes I deal with legal SO BAD that it takes the deal weeks to close! As a result of the legal delay, sometimes the deal drags on so long I am on vacation with my family, but yet I am still working – constantly texting, emailing, calling, gathering documents – because the legal is so awful they don’t seem to know how to close! This is bad for ALL concerned – the lender, the lawyer, me, AND the borrower! It drives up costs on the legal fees, and for repeat offenders I have to charge more on my own fee because it is SO MUCH WORK to get the thing to close!

The lenders I deal with have STUNNING legal. These deals close. They close quickly, efficiently, no fuss, no muss. The legal is so good – I can charge less on my own fee because it takes much less effort on my part to get the deal done. This benefits everyone – lender, me – and certainly the borrower – as the overall costs are lower!

But the main issue that comes up with “new” private lenders, are the rates and fees they seem to think they are going to get … Quite often they are pure fantasy. Maybe 4 years ago you could get what they are asking. Maybe even 3 years ago. But not today. Not with tens of millions of private dollars just sitting there, eagerly waiting to lend – with rates at OR EVEN BELOW what an institutional B-lender demands. And without a multitude of “conditional” hoops for me and borrower to jump through – along with weeks of delay.

Recently I received an email from a mortgage broker, who does a little private lending on the side. You would think he would know what the going rates and fees are? Yet when he lends his own money, suddenly market rates go out the window! When I pushed back, saying “your interest rate is 2%-3% above market rate, and your lender fee is 1%-2% above market rate”, his reply was – “Well – if your client is rate sensitive, I suppose I could go a little lower.”

RATE SENSITIVE??? What is that supposed to mean? So I should just have the client pay more, because they don’t know any better??? What kind of a crappy mortgage broker does that? MY CLIENTS PAY THE LEAST POSSIBLE.

Another lender a few years ago told me that in addition to lending to my clients, he wished to “teach the borrowers a lesson”. So the borrowers could look forward to getting a little sermon from the lawyer as they signed the deal? Lucky them! So part of the lender’s fee is a sermon – I guess the borrowers should expect to pay less then, if they did not have to sit through the “church service”? (OK – so what are your rates then? I guess they better be less than what I already have ….)

I often tell new clients the very first time they call – “Maybe your deal can go sub-prime, maybe it will go private. It probably won’t change what you pay more than about 1%-2% either way.” What is so surprising is that quite often these days, the B-lender is the more expensive option – in time, effort, and even cost.

The obvious question then is – why would any mortgage broker give the B-lender the deal, when they can get it quicker, easier, and even cheaper with purely private money?

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