wow.. slick. Mortgage fun financing with options and puts

[ladelfina]

Irvine Housing Blog » Blog Archive » Mortgages as Options

This property is the tale of two parties. The lady who “put” this property to the lender made $116,000 on the deal. She will have to deal with bad credit, and if she has any of this money in liquid assets, the lender may go after it, but in all likelihood, she will get to keep her “profits” from the foreclosure. The lender will not do quite so well on the deal. Their basis is $691.227 plus whatever expenses they incur managing the property through disposition. If they manage to get this selling price and pay a 6% commission, the lender stands to lose $150,821. Let that one sink in for a moment. This lender made a loan, received two payments, and then proceeded to lose $150,000.

interesting in comments:

The reason they made EXACTLY 2 payments before defaulting is to avoid a ‘first payment default’ which is a special category of mortgage fraud (that the bank and federal authorities would come down like a hammer on). Also, it indicates that the lending institution or broker was in on the scam perhaps… since they are the ones who get hammered hard on early payment defaults!

Disturbing the poll.

Would you sacrifice your credit for $40,000?

Yes, that is a lot of money. (13%, 44 Votes)
No, it would require more money than that. (67%, 236 Votes)
No, no amount of money is worth sacrificing my credit. (20%, 72 Votes)

 

[brewer12345]

For decades, modern finance theory has viewed borrowers as having an implicit put to the lenders. This is nothing new.

 

[ladelfina]

Hmm. Maybe what is new is that the borrowers have figured it out!?!

 

[brewer12345]

Hmm. Maybe what is new is that the borrowers have figured it out!?!

I daresay they figure it out again every time the economy goes in the crapper.

 

[twaddle]

I have no plans to default, but I did find it odd that a bank would give me a TON of money when I did a cash-out refi at 4.675%. I'm touched by both their faith in me and in my property's ability to maintain collateral value.

Just think, they could have made a similar return from a US treasury bond with much less hassle, but no -- they gave me the money. I'm a good guy, but I don't think any human is as risk-free as a treasury bond. I'm always astonished that the spread is as skinny as it is. I would never lend a random Joe money at that rate.

 

[tryan]

But the banks are in the game for all those processing/closing fees. Freddie and fannie will be holding the bag in the end.

 

[Hamlet]

Traditionally, banks have protected themselves from this by requiring people to put a substantial down payment into a purchase, and by limiting any cash-out refi to a reasonable LTV ratio.

I'm just amazed that large numbers of banks fell into this foolishness. It really isn't very complicated. Make sure that the asset you are lending against will recoup your loan if you have to foreclose. Give yourself a margin of safety in case the property is damaged or the market is bad.

For decades, modern finance theory has viewed borrowers as having an implicit put to the lenders. This is nothing new.

 

[brewer12345]

I'm just amazed that large numbers of banks fell into this foolishness. It really isn't very complicated. Make sure that the asset you are lending against will recoup your loan if you have to foreclose. Give yourself a margin of safety in case the property is damaged or the market is bad.

Unfortunately, I think a lot of managements eventually buckled under the weight of hordes of investors screaming about them losing market share and not getting a slice of the credit frenzy's spoils.

 

[FIRE'd@51]

I have no plans to default, but I did find it odd that a bank would give me a TON of money when I did a cash-out refi at 4.675%. I'm touched by both their faith in me and in my property's ability to maintain collateral value.

Why is that odd? You don't tell us what the loan-to-value ratio is. If you were refinancing a 600K loan on a property you bought ten years ago for 750K, and that property is now worth 1.5 million, and you did a cash-out refinance of 700K, the LTV would still be under 50% - not much risk to the lender, IMO.