Thoughts on 'Predatory Lending'

7 Replies

I posted this 4/1 property a few days ago and the responses were quite interesting. 

The investor is making 12% ROI on this house with owner financing. He paid $20,000 cash, and put $5000 into it. It is occupied and undergoing rehab. I'll post pics when they send to me.

The investor is in the deal for $25,000 (well under FMV), and the owner finance terms are:

  • $3000 down
  • $400 per month PI/TI
  • 30 year amortization
  • 10% interest
  • No prepayment penalty
  • No balloon
  • Final price: $39,900 (FMV)

FMV was determined with sold comps in a 2 mile radius of the address in 78207. Homes of similar condition and size appraise for up to $50,000 in that area, in the current market.

Some were saying this is some type of 'predatory lending.' That's absurd. the owner finance price is FMV and is based upon sold comps in the area. And the cash price was well under FMV.

All Dodd Frank regs were followed for the underwriting. No RMLO required because it is only the first owner fi deal the investor has done in 2015.

Given that the investor paid $25,000 total for this house with repairs, an owner finance price of $39,900 is fair market value for a property of that size, age, and condition in that zip to someone with no credit history (our typical buyer). 

I did find the discussion rather fascinating, but predatory lending? I think not. 

And as always, this type of investing works in my specific market, but may not in yours. Still, I love this type of investing, as we are helping long term renters, who are blue collar handy guys and can fix the houses, become home owners.

It's worth noting that this house is one of the roughest we've had in some time. Most are in the $40,000-60,000 cash range.

Comments and feedback appreciated on this rather interesting subject! :)

I don't see anything wrong.  The investor had a choice to accept the loan.  Nobody twisted their arm to accept the deal.

This needs to be repeated.

I find the discussion rather fascinating, but predatory lending? Give me a break.

In any industry, free market, etc.. The fair market value is established between what a seller is willing to accept and what a buyer is willing to pay.

If you are willing to take the risk of seller financing a home yourself and wait for your $$$, then you deserve to be paid a profit and cover your risk. All this noise about predatory lending is such nonsense. 

A fellow I respect explained low income housing and the seller financing home sale business model a few years ago. Look, most banks don't want to look at homes in every area.. And every price range. If investors weren't willing to step up and do seller financing in these areas there would  be more blight and ghettos around. 

Home ownership gives a person a sence of worth and pride of accomplishment. Seller financing is a blessing in these areas and "MOST" buyers are turned off by the Banks after getting the runaround and turndowns. 

You might not want to live on that block... Or I for that matter.. But someone does.. And a meeting takes place to establish a deal. 

Once again, it's called a free market.

My previous post concerns a Owner Buyer.. Where a buyer will live in the home.

If you provide an investor with financing, that's got nothing to do with Dodd Frank or any consumer transaction.

An investor has to put his big boy pants on and be confident the deal is a good one for him.

Again.. It's called a Free Market!

Originally posted by @Steve Driscoll :

My previous post concerns a Owner Buyer.. Where a buyer will live in the home.

If you provide an investor with financing, that's got nothing to do with Dodd Frank or any consumer transaction.

An investor has to put his big boy pants on and be confident the deal is a good one for him.

Again.. It's called a Free Market!

Well this situation is dealing with an owner occupant. He is wholesaling the home to an investor who appears to be paying him cash while writing an owner financed loan for an owner occupant buyer and apparently putting the investor on the hook for the terms of this loan. He also stated in is other thread that they were primarily targeting Latino buyers that don't speak English. Based on the numbers he's providing they are also selling the house for the full ARV when it needs substantial repairs. Another issue is excessive interest rates, his loans are just above the threshold. Dodd-Frank says prime + 6.5% is the maximum before it becomes a "high cost" loan, prime is currently 3.25 so anything over 9.75% could be considered predatory. Another section of Dodd-Frank would require the lender to get an appraisal at the expense of the creditor for any high risk mortgage, which these definitely seem to be.

Some people on here should read up on Dodd-Frank Title XIV  before they find themselves on the wrong end of the law.

It's free market when you're dealing with qualified investors that are prepared to take a risk, but trying to take advantage of owner occupants that have no other option is when it becomes predatory.  

Everyone has options.

Some should be homeowners.

Some should be renters.

The mistakes of the past made renters homeowners who never should have qualified.

Now it's called predatory lending. 

Tell Washington to make up their minds!

@Steve Driscoll  Thank you for providing more information that hopefully will lead to a more informed discussion. 

Charles...

I appreciate what you are saying.

There are far too many landmines out there when it comes to consumer lending and the old "sub-prime" era.

I believe that when using an RMLO, your note and docs are conforming.

If someone goes it alone, that's a risk I would not take.

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