You're in a bind. You need money, but your credit is blemished. Perhaps you've had a bankruptcy, foreclosure or lost your job.
All that is no problem--if you believe the claims of some hard-money lenders in the San Fernando Valley and Ventura County.
So-called hard-money, or equity, lenders make real estate loans that many conventional lenders wouldn't think of touching. But there's a catch. Borrowers need to have at least 30% equity in their property and they may have to pay as much as 20% in annual interest, as many as 15 loan origination points and plenty of other fees and potential penalties.
It would seem that the term hard money comes from the hard terms offered to hard-up borrowers. In fact, hard money refers to the fact that "B" and "C" grade loans are financed by investor cash vs. "soft-money" grade "A" bank loans.
Today's hard-money lenders prefer to be called "equity lenders." Most of them have also cleaned up their act. The number of high-rate hard-money lenders is shrinking as the industry shuns really troubled borrowers and concentrates instead on people with moderate credit or hard-to-finance properties. There remain, however, some sharks, so consumers should be careful when shopping for a home equity loan.
"Hard money is a term that has outworn its time," insisted Richard Temme, president of R.C. Temme Corp., a Woodland Hills-based equity lender. Most of Temme's loans have a 15-year term and carry only slightly higher-than-average interest rates; borrowers do need to have about 35% equity in the property they are mortgaging, however.
Some equity lenders are still offering one- or two-year balloon loans, but "those loans get a lot of people into a lot of trouble," Temme said. "If someone tries to offer you a balloon loan, walk away."
Temme also advises borrowers to learn about new high-cost mortgage regulations that went into effect Oct. 1. By passing the Home Ownership and Equity Protection Act of 1994, Congress amended the Truth-in-Lending Act to add a variety of disclosure rules, limitations and counseling requirements on certain residential high-cost mortgages.
This includes loans with an annual percentage rate that is more than 10 points higher than U.S. Treasury securities with a similar term or a mortgage with fees and points exceeding 8% of the total loan. Under the Federal Reserve Board's new regulations, default interest rates, negative amortization and less than five-year balloon payments are prohibited. Lenders also can't engage in a "pattern or practice of extending credit based on the consumer's collateral without regard to the consumer's repayment ability." A loan that violates these provisions may be rescinded by a borrower for up to three years.
"We will really have to cross our t's and dot our i's like never before," Temme said.
Although the intent of the new regulations is to aid consumers, some lenders say they will have to turn away more borrowers.
"Many of the high-cost loans are now too much trouble to deal with," said Ted Kolchier, vice president of Track Mortgage Group Inc. in Encino. Kolchier has shifted from being a residential lender of last resort to more of a commercial lender. "We're really not doing the riskier loans," Kolchier said. But interest rates for the "less risky" loans are still a hefty 11% to 13% a year.
Kolchier also requires that borrowers have about 40% equity in their properties. "Equity in the property is still the most crucial factor in making a loan," said Kolchier, a licensed real estate broker. While 40% sounds like a lot, "that equity tends to dissipate very quickly if the borrower doesn't make payments for a couple of months," he said.
Borrowers who don't seem all that able to make regular payments may be required by the lender to place money for such payments in a trust account. That, of course, adds even more cost to an already higher-rate loan.
Interest rates and fees have to be high, Kolchier argued, because finding investors for these loans is like finding buyers for junk bonds. Most investors don't want to risk their money on questionable deeds of trust. Those investors who are willing to take the risk want to see a high rate of return, he explained.
Contrary to what many people think, he said, most hard-money lenders don't want to foreclose on their loans; they want a secured investment, he said. Besides, if lender B forecloses on a second deed of trust, that lender still has to keep up the payments on lender A's first deed of trust to avoid foreclosure by lender A.
Although most equity lenders may not be interested in actually foreclosing, there are some slick operators who seek out injured borrowers like a carnivore seeks prey, said Earl Peattie, president of Mortgage News Co. in Santa Ana.
"A lot of hard-money lenders take advantage of people in a horrible way," he said. Some lenders look for borrowers who are almost sure to default. Before the borrower even knows what's happened, his or her house is gone.