How to Get Private Lenders & Lines of Credit to Fund Your Business

You may have heard, the President signed the “Economic Stimulus Act of 2008″ into law.  Basically, it’s a big hand out to Fannie Mae, and Freddie Mac.  The Banks that caused the whole mortgage meltdown in the first place, are also likely to scoop up some of the cash.

But how will it affect us investors, let alone the homeowners?

Well, for starters, homeowners are still screwed.  You see, the act allows Fannie Mae to underwite mortgages to a higher amount, and it raises the limit for FHA loans requiring a 3% down payment.  Sounds, great, right? 

But think about it?  If you’re selling home and requiring your buyer to obtain financing, what is the major challenge?  It’s not the down payment or the limit on the loan amount–it’s the buyer’s credit qualification.  And as you are probably aware, banks have raised the bar considerably.  The minimum credit score is much higher, stated income loans and no doc loans are virtually non-existent, debt-to-income ratios are lower.  That has pretty much eliminated a large chunk of the buyer pool.

So, selling to owner-occupying buyers is going to remain difficult, and if your potential buyer has to sell their current residence before they can buy yours- well… Let’s just say I would NOT advise a seller to allow a financing contingency in the purchase and sale agreement.

Now, how about another benign sounding provision–a hand out to cities and towns with high foreclosure rates to buy up REO’s, fix them and sell them.  It’s obvious, that if you are an investor competing against one of those grants, your out of luck.  Banks of course, are going to benefit, because they’ll be able recoup practically all their costs on these bad loans, with free money.

And what else will happen?  These grants are going to depress property values in any area they are used.  Why, because the government entity is going to be motivated “as a public service” to sell these houses cheap, so more of their residents can own the American dream.  If you’re in the real estate buying mode, wait for the drop before you buy.  If you’re in the selling mode, you are just going to have to wait even longer to cash out your equity.  Be sure you have a positive cashflow, because you’re going to be waiting for quite a while.

So, as usual, the government has meddled with the economy using our tax money, to support the big campaign donors - the banks and the mortgage establishment.  Everybody else, is just SOL.

The solution to the housing crisis is one heck of a lot simpler and straightforward.  To slow down the foreclosure firestorm, give all homeowners with adjustable mortgages the right to negotiate loan modifications to convert to fixed rate, retroactive to the beginning of first adjustment period.

Second, and most importantly, is get the lending institutions to roll back, some of their stiff borrowing requirements.  The lending criteria were not unsound in the first place.  It was the banks own underwriting sleight-of-hand, that caused the crisis.  Because, they allowed the borrower to qualify for the mortgage based on the artificially lowered 1st year (or 6mos or 2y) payment, instead of the rate when the loan readjusted.  This allowed them to collect big loan origination fees from people who couldn’t possibly afford to pay the mortage payments once they adjusted.

Of course, to implement this, banks would have to admit to their greed and avarice that caused the problem.  That ain’t gonna happen.  Speak about “truth in lending”! Ha.

Posted to Buyer Financing, Institutional Lending, Money & the World
 Email This Post |