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

This may sound a bit presumptuous.  And after investing in all levels of real estate for the last 10 years, I believe these insights will be very helpful to the general public suffering from the tightening of credit guidelines and especially our legislators, who could really stimulate the economy by acting on the suggestions in this article.

First, let’s be clear, that the “credit crisis” or “mortgage meltdown” was caused by institutional lenders gaming their own underwriting system by the way they approved adjustable rate mortgages or ARM’s.

You see, one of the primary determinants of whether a borrower gets approved for a mortgage is whether the borrower can afford to make the monthly payments, which in turn depends on income, debt payments and the amount of the monthly payments.  With fixed rate mortgages, the monthly payment is the same from the first payment to the last.  With ARM’s there’s a very low “teaser” rate for the 1st 6mos to 2 yrs, then the rate jumps enormously. 

So, when the banks decided to qualify the borrower based on the “teaser” rate, you had a situation where couples earning as little as $30,000 per year were qualifying to buy a half million dollar house!  Of course, when the rate adjusted, the monthly payment became almost as much as their monthly take home pay and foreclosure was inevitable.

The banks initially got away with this sleight-of-hand, because all these loans were packaged and sold to Wall St, before they defaulted.  It was the “meltdown” of these mortgage-backed securities that threw the market into turmoil.

The banks, decided to look like they were acting more responsibly by “tightening their credit requirements” across the board - basically making much, much harder for individuals, businesses and other credit suppliers to obtain loans.

Predictably, all this did was turn a problem into a huge crisis that is hurting the entire economy, and in particular is actually worsening the problem, the banks need to solve.  That problem is the accumulation of billions of dollars of foreclosed homes in the banks’ inventory–also known as non-performing assets.

Why did the credit tightening worsen the foreclosure issue? Because the only way to get rid of the banks’ inventory is to sell the property.  The tightened credit requirements have greatly shrunk the potential buyer pool for these properties.  And if you think about it, the foreclosures were and are being caused by lack of borrower income to pay the note, not their credit score!

So, what’s the solution that will get all these foreclosed homes off the banks’ books, and return the property to homeowners and relieve the burden on the economy.  It’s not going to be a government bail out, or the ludicrous Economic Stimulus Act, which is just a hand out to Fannie Mae and Freddie Mac.

What needs to be done, is for the banks to sell the properties they’ve accumulated at a sufficient discount so that investors will buy, fix them up, and then sell them to ender users.  Investors are, and have been a massive source of private money for this type of real estate acquisition.  And this is a common practice at most banks that has been going on for years. 

Now, what needs to be done, is that banks need to instruct their Loss Mitigators to sell these properties at whatever discounted price it takes.  And Corporate Management should incentivize them by giving them bonuses based on the number of properties sold.

Second, the banks need to roll back their credit requirements to the pre-2008 standards and tighten up the underwriting of ARM mortgages so that the adjusted payment (based on current interest rates) is used in the calculation of the debt ratio.

Why should the banks agree to do this?  First, they’ve written off these loans already.  Second, divesting themselves of these non-performing assets will increase their borrowing power.  Third, they are not going to recover any amount of their investment any other way, because these unoccupied homes are rapidly declining in value due to vandalism, and neglect.

This is a Perfect Solution, because it would remove the non-performing assets from the lender’s books and restore them to solvency.  Second, loosening up the credit requirements (which did not cause the problem in the first place), would stimulate commerce, and loan approvals which would increase the banks’ income.

And Best of All, it would stimulate the economy by restoring credit availability without costing the government or taxpayers a dime!

Posted to Business Lines of Credit, Buyer Financing, Institutional Lending, Money & the World, Uncategorized
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