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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2007

Hard Money Made Easy

Brokers who turn to hard-money lenders may increase their businesses while helping borrowers in need

In today’s mortgage environment, brokers must know the borrowers in the market they serve and must provide solutions tailored to that market. With default and foreclosure rates increasing, many brokers are turning to foreclosure- and bankruptcy-bailout loan products.

Hard money is one product that often can help borrowers facing default or foreclosure. It typically has been geared to borrowers who do not qualify for conforming or nonprime mortgages. It is not designed to help those who have been through multiple foreclosures — at least, it shouldn’t be. Rather, it’s a solution for borrowers who have been through a life-changing event, such as illness or divorce, and who cannot pay quickly.

For instance, according to a 2002 report by The Commonwealth Fund, one in five adults are paying off medical debt. The survey also found that 62 percent of adults ages 19 to 64 with medical debt were insured when the debt was incurred. A result of this medical debt has been the surge in personal bankruptcy files, which have almost doubled in the past decade. Most of the people affected by these debts are hard workers — they have jobs and are insured, but because of circumstances beyond their control, they face a heavy debt burden.

The hard-money segment of the mortgage market offers significant growth potential for brokers, and according to most forecasts, it will continue to grow. Homeownership is personal, and through hard-money lending, brokers have the opportunity to truly create long-term relationships with borrowers.

What could be more personal than saving someone’s home? At the core, hard money presents an opportunity for brokers to help save a home, while making money in the process.

Helping today’s borrowers

Today’s market is driven by a potential increase in interest rates, adjustment of interest-only and pay-option ARMs and the sheer volume of mortgages. Hard-money lending should be viewed as a viable alternative to foreclosure.

In the past, many brokers may have been hesitant to enter this market because of its perceived risk. But the bottom line is that hard-money borrowers are not necessarily risky. It’s more likely that they have been faced with extenuating circumstances and need an alternative to help them get back on their feet.

Hard money can help borrowers remain in their homes and preserve their hard-earned equity. And the rates are competitive, often comparable to nonprime products.

The loans are designed to help borrowers correct issues such as medical debt, repair their credit and then refinance into a nonprime or conforming product. For savvy brokers, this provides an opportunity to earn customers for life and close several loans from one borrower in a two- to three-year period.

Turning to hard money

Hard-money loans are not as risky as most people believe. In fact, with lower loan-to-value (LTV) ratios, these loans often are conservative with maximum LTVs of 70 percent. And most lenders would not be in the hard-equity market if they did not expect these loans to be successful.

Brokers should look for a hard-equity lender that has reasonable LTV ratios, as well as a proven track record and experienced underwriters to mitigate risk effectively.

Hard-money loans are based on the valuation of the property, which means that hard-money lenders spend much of their time assessing property value. They do this through more than one vehicle, including automated valuation models, broker price opinions, in-house reviews and state-certified appraisals. A large component of a hard-money lender’s success is its ability to have a superior valuation system.

With surging default rates, brokers should be looking to their lending partners to learn how to maximize this market. In every channel of business, from wholesale to correspondent lending, it’s the lender’s responsibility to provide the tools, resources and education for the brokers. Hard money is no exception, and brokers can benefit from finding a partner whose core competency and sole focus is the hard-money market.

Don’t waste time with a lender that is looking for the next great thing and creating new aggressive products on a daily basis. A hard-money lender with a consistent, proven track record will provide a competitive advantage for brokers in this market. Your lender should direct you to lead-generation sources, such as bankruptcy attorneys or financial planners.

Hard-money lending is not a cookie-cutter business. It is a tailored process, and for brokers entering the market, the goal should be to find lenders that provide consistent funding.

Understanding the market

Because there always will be problem loans and problem properties, hard money is a consistent market. In addition, it’s not an interest-rate-sensitive market. It offers great potential for customer retention.

In fact, in light of the current nonprime issues in the industry, hard money can be a viable alternative. It helps brokers diversify and increase their product offerings, which in turn helps them acquire new customers to grow their businesses.

Underwriters must have significant experience and market expertise to judge the risk factors accurately. And because hard equity is not rate-driven, it typically is not sensitive to fluctuations in the market, so borrowers usually will not face dramatic payment increases when the rates change.

Hard-money loans present tremendous opportunity to brokers. By understanding the market and who it best serves, brokers can potentially see significant growth potential in this arena. 


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