In the case of the example in the article, if she wasn't given the loan, she'd probably have $100k or more in equity in cash from the sale of the home. The entire scenario is sickening and disgusting -- using hope and taking advantage of people's ego and emotional attachment to separate them from their money.
Just don't let the bank then resell this loan as a prime AAA loan to others, so if it bombs someone else gets the shaft.
It's just like organic food. I don't think it should be illegal to sell "conventional" eggs. I only think it should be illegal to sell a tray of organic eggs - where 1-2 of the eggs are "conventional" and hope no one notices. (Especially in a case where the farmer has an inside relation with the FDA inspector that is checking for the organic nature of eggs)
She used the money to fully buy out her grandfather’s house in San Clemente, Calif. She jointly inherited it with other relatives and said she needed a loan to pay them for their shares of the property.
This is a highly unusual situation. She got a great deal on prime beach front Orange County property and could easily charge high rents to cover the mortgage and then some. The property will continue to grow in value. If she were really in a situation where she might default, her family would help her. This is not representative of any trend.
Hardly predatory. Hardly a "high risk" situation for either the bank or the borrower.
Agreed.
>She got a great deal on prime beach front Orange County property and could easily charge high rents to cover the mortgage and then some.
So is she a private homeowner or a business? Is it legal for her to rent? Given that the bank accepts letters from old ladies describing casual labor as proof of income, who knows.
I own investment property that is mortgaged and attracts high rents. The underwriting standards for that property were higher, and required 20% money down for a similar rate premium.
>The property will continue to grow in value.
That has little to do with qualification for the loan. Kind of makes my point -- it's in the banks interest to write a shitty loan to repo this house on default. (ie. predatory behavior)
>If she were really in a situation where she might default, her family would help her.
Are they cosigners?
"Wink and nod" underwriting in banking is a bad thing.
There are predatory operators known colloquially as “loan to own” guys, but they are usually unregulated and operating in the business world where the collateral value is less observable.
For a bank, I believe Other Real Estate Owned (OREO, the balance sheet category where foreclosure properties are carried) is always considered a black mark and a burden, dragging down ROA/ROE.
If I can buy a $550k property for $500k (with no cash down), with the lender not risking much when it gets repossessed and sold, let me.
If the collateral is there, it's fine.
She also took it an ARM loan at 6%. In 5 years it’s very possible it could become unaffordable. Not a good decision either.
In this case it may be a good deal for both parties. What about the other people? The atricle mentions these loans grew by 25% in 2018.
But you're speculating. If it was a good deal in this case, what makes you think it's not in other cases? Can you point to a specific case where you think it's a bad deal?
As long as we don't bail them out again, I don't really care what crazy deals banks and bank customers come up with.
I could care less if it’s a good deal for the banks.
She got a 600K loan against a property she already owned a substantial share of (not a purchase money loan with nothing down) as a working home health aide who is also a nursing student.
> In 5 years it’s very possible it could become unaffordable.
In 5 years it's quite likely that higher income and lower loan to asset value will let her refinance it down, too.
> What about the other people? The atricle mentions these loans grew by 25% in 2018.
Subprime mortgages aren't generally a problem on their own, absent the kind of incentives to misrepresent their quality for sales of securities that existed in the last housing crisis. To the extent that hasn't been corrected, that's a problem, but let's not target subprime lending as the problem (heck, in the last crisis, a lot of the problem loans weren't even subprime.)
Why does, and more importantly should, a lender care?