Failing Lenders & How It Affects You, the Investor

Jun 05, 2009 Comments Off by

As lenders are cutting off borrowers, Wall Street is cutting off lenders from the capital they need to continue making loans.

On Monday, American Home Mortgage Investment filed for bankruptcy protection. AHMI was not a sub-prime lender so the announcement on Monday surprised a lot of brokers. As more lenders are shutting down and the remaining lenders are tightening their underwriting standards.

How will this affect your Real Estate Business?

Line of Credit Issues

One issue for real estate investors, is the HELOC. Home equity line of credit has been a major source of funding for some investors and that seems to be ending.

Additionally, To those of you using any type of Line-of-Credit, read your promissory note and you’ll be surprised to find an Acceleration / Termination Clause which states the lender can call the outstanding balance or demand additional collateral.

The lender can even suspend or reduce the amount of the credit line under very subject terms.

What should you do?

Have an exit strategy if your lender exercises their options on a line-of-credit. Yes, it does happen even though it might not make good business sense.

Consider refinancing the LOC with the equity in an investment property in your portfolio.

How It Is Affecting Your Buyers

Even borrowers with good credit records and a large down payment are finding rates surprisingly steep if they can’t qualify for a loan that can be sold to Fannie or Freddie. Some buyers have had the rug pulled out from under them. And executives at Fannie Mae along with Freddie Mac asked the companies’ government overseer to raise the maximum mount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.

These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie.

Where does this leave you and the homes you have for sale?

Seek out buyers that can qualify for a loan that can be sold to Fannie Mae or Freddie Mac.

Before discounting your selling price, consider owner financing and carry back excellent terms that will be attractive to note buyers.

If you sell at a discount, negotiate a higher interest in exchange. Some buyers will focus more on the purchase price than the interest rate. The higher the rate the better for you when you sell the note.

Financing Strategies

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