Alternative investment: Private mortgage loans

[Martha]

Martha said "Some of these type of loan companies do not follow all the rules required by lending laws and securities laws. If they are selling you a loan, they are selling you a security. Depending on how many loans they sell, and whether the investors are accredited, they might be violating state or federal securities laws."

- I'm not at all sure the lender is selling us loans - they facilitate them, but the loan is not made if an investor doesn't agree to take the borrower's note in trust. Shoot - I don't know - do the initials CMI, CCS, *** mean anything special?

If you are making the loan directly, then the "facilitator" is a loan broker or mortgage broker. Some states require these types of brokers to be licensed. I would ask if your broker is required to be licensed.

If you are making the loan directly, then you want to have the note payable in favor of you and the mortgage/deed of trust run in your favor. You want title insurance. You want to know that the loan terms comply with state and federal law and all loan disclosures have been made. To make sure that is the case, you should get an opinion of the broker's counsel that the terms comply with state and federal law. To make sure all ducks are in a row, you should have a lawyer look at the loan docs, but that will eat into your profit.

 

[Martha]

What happens if a the borrower defaults. Who pays for all of the legal bills, evictions, real estate agents fees, re taxes, etc...

Generally, the owner of the loan pays for these things.

Anybody have any info on this type of investment

Like what? I used to have clients that would broker these loans, but they would limit the sale to institutional or accredited investors.

 

[chinaco]

Like what? I used to have clients that would broker these loans, but they would limit the sale to institutional or accredited investors.

Just general information for educational purposes. Based on the interest rates (8.5% to 10%) the original poster described I would think the loans were for high credit risk borrowers.

 

[haha]

I imagine Martha knows what she is talking about.

Bummer! What a way to spend one's time!

Ha

 

[Peaceful_Warrior]

In my case, since I work with a 'fund' of these loans, the the company I am investing with handles all of the legal stuff. If it defaults, they sell it themselves.

As Martha points out they are required to be licensed in my state. Every year the company has an independent audit as well. Only loans in first position are taken, and only when there is substantial equity.

All in all, I have been very pleased and happy bringing in my 9-12% returns with minimal risk.

Another nice thing with the fund is that when the interest rates go up, so do my returns!

What happens if a the borrower defaults. Who pays for all of the legal bills, evictions, real estate agents fees, re taxes, etc...

And who takes care of the handling of the property if it defaults? The Bank?

If you have a 40% cushion on the value of the property you may be protected.

I like the idea of investing in a pool of loans for diversification.


Anybody have any info on this type of investment

 

[pedorrero]

I get uneasy whenever I hear about people looking at second trusts and similar "real estate" investments. Especially with subordinate loans, in the case of a foreclosure, they often become worthless. I tend to the pessimist, so I think the mortgage & real estate problem may get a bit worse. Uncle Sam does bail a lot of folks out, but that'll have to stop somewhere. You may want to concentrate on Federally insured interest generating investments, like I do, if you want highest safety.

 

[calmloki]

In my case, since I work with a 'fund' of these loans, the the company I am investing with handles all of the legal stuff. If it defaults, they sell it themselves.

They do require you to be accredited, as Martha points out, and they also are required to be licensed. Every year the company has an independent audit as well. Only loans in first position are taken, and only when there is substantial equity....

This sounds a lot like what my Mom did a bit of - she would buy "shares" of the loan company's loans and if default occurred the loan company handled the legal stuff and sold the property. Sounds like Peacefull's company is doing variable rate higher interest loans, Mom's (and our's) are fixed. When I compared, the interest on the loans we are making was about a point higher than the "share" type at the company Mom used.

I get uneasy whenever I hear about people looking at second trusts and similar "real estate" investments. Especially with subordinate loans, in the case of a foreclosure, they often become worthless. I tend to the pessimist, so I think the mortgage & real estate problem may get a bit worse. Uncle Sam does bail a lot of folks out, but that'll have to stop somewhere. You may want to concentrate on Federally insured interest generating investments, like I do, if you want highest safety.

Granted. The only loans we make put us in a "first" position. What we buy is an account secured by a trust deed. There is a title search done, insurance and taxes are required to be paid, we are listed on the insurance and informed when premiums are due. Taxes are paid incrementally to us with the monthly payments, when due we pay them to the county. In case of a default we are responsible for the foreclosure proceedings, cost of which is added to the debtor's balance.

I spoke with a lawyer who has handled a number of foreclosures connected with this loan company, he said these loan papers normally allow a "notice and sale" procedure and that it rarely goes the full distance to sale: typically other financing is arranged or the debtor sells the property. Rough expences would run ~$3000 and maybe 6 months.

It may be worthy of note that we are located in Oregon, a low foreclosure rate state according to another thread. We haven't had property appreciate at the nosebleed rate of some other areas "cough" SoCal "cough". We have made sub $100k loans rather than a single grande style loan, kinda like our rentals - a number of smaller rentals rather than a single big egg in the basket. We drive out to look at anything we might lend on and I schmooze around to try and get an impression of the borrower - a hint of a litigious nature turns me right off.

While not for everyone, this investment is working for us so far - but our experience is short term. I sure do like the payments showing up in our checking account like clockwork. Kinda like rent, but no plumbing or neighbor complaints.