Here is a note from an Oregon mortgage broker:
Hello Everyone- since the new year I have had numerous borrowers, lenders, realtors, and other real estate associates ask me what effect the Dodd-Frank bill will be for private mortgages. I have done quite a bit of research since the new year and jotted down some of the more major points that relate to private mortgages below. Even further down I’ve given the best links that I think will help to educate the majority of interested parties (this would be the “more than you ever wanted to know” part).
First and foremost everything beyond this point of the email (with the exception of the links) is as I understand the current Federal & State mortgage laws.
It is important to realize these points only apply to owner occupied mortgage loans only. The main reasons I found that will discourage private lenders and brokers from making mortgage loans to owner occupants are as follows:
1- Interest rate charged can only be a certain amount as the APR can be no more than 6.5 percentage points above the prime rate (currently around 3.5), meaning the APR cap is 10%. In order to have an APR cap of 10% on a private loan of $100k with fees totaling $5000, the lender would have to agree to a rate of 9% over 12 years. This rule itself has not changed from the previous rule, but the new rule adds that this APR cap must be met with no balloon payment, which brings up point #2.
2- No balloon payments. The way I read the law it indicates that no balloon payment is allowed that is more than twice the dollar amount of the normal monthly payment, so balloon payments on owner occupied loans are pretty much out. Most private lenders are willing to carry a loan for 3 to 5 years, but not 10+ years as I indicated above.
3- No prepayment penalties. Although Expert Mortgage Group does not use prepayment penalties this rule is important to note, as some investors like to be assured of a certain amount of return on their investment before payoff.
While these rules do not prevent private mortgage lenders from offering owner-occupied loans, they certainly don’t offer any advantage over funding a similar sized non-owner/business loan which can have a higher rate (increases yield to investor), can have a balloon payment, and can have a prepay penalty (or guaranteed interest).
When you couple these changes with ever increasing difficulty of actually foreclosing on a default owner occupant (if you can do it in less than a year you’re pretty lucky), it really makes little sense to fund a private mortgage on an owner occupied home, and with that in mind I really don’t see Secure Deeds or myself offering them to investors any longer.
In anticipation of these laws, Expert Mortgage Group stopped originating and funding private mortgages to owner occupants about a year ago. I will continue to offer the standard owner occupied full term bank loans for borrowers that qualify for them (Conventional, FHA, VA, USDA, Rural Housing).
Here are some helpful links about these laws that I found on the CFPB website (Consumer Financial Protection Bureau):
And here is a link that shows all “Final Rules” issued by the CFPB:
I hope that you all find at least one thing in this email (or the links) that was helpful to you or that you learned…there is definitely more out there than any of us want to read through entirely, so my job as a mortgage broker is to inform and educate as much as I can.
Thanks for reading and please respond if you have any questions.
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