Hard-money lenders want to capitalize on distress in commercial real estate and the foreclosures that may hit that market.

Investors, hard-money lenders and mortgage brokers attended a conference last week at the Monte Carlo to discuss the industry and opportunities they are expecting in 2010.

Hard-money lenders are companies, groups or individuals that as investors loan money at higher rates and fees than banks. Hard-money lending is a tool widely used by the real estate industry.

Leonard Rosen, a former anchor at the Financial News Network who hosted the seminar, said the market is imploding with $300 billion of $1.8 trillion in commercial mortgages in arrears in metropolitan areas. Las Vegas has the highest percentage of troubled commercial real estate in the country.

“There is going to be a huge commercial crash, and that’s happening now,” said Rosen, who nevertheless acknowledged more banks are working with property owners. “This is an extremely dynamic and powerful force, and it’s going to impact the overall economy.”

Many hedge funds with real estate portfolios have been under financial pressure, and many have gone out of business as have many large hard-money lenders, Rosen said.

“But for every one going out of business, there are new lenders to take advantage of the current opportunities. Real estate values are becoming more in line with reality.”

The business model has changed for hard-money lenders that are trying to deal with this new environment, Rosen said.

Under previous business models, the lenders would fund commercial real estate deals and sell the paper at a discount to investors. In other cases, lenders would receive a warehouse line of credit from large banks and re-loan the money for commercial projects at a higher rate. That has stopped as well, Rosen said.

Today, the hard-money lenders are becoming portfolio managers. They are creating mortgage funds where they bring in investors who are given dividend yields, Rosen said.

“The portfolio manager business model is much more profitable for the lenders and safer for the investors who are not looking for double-digit returns,” Rosen said.

The funds are spread out among properties, and money would be secured against the property, Rosen said.

Lenders are no longer loaning 65 percent of the value of the property. That is down to 50 percent, he said.

Funds are usually borrowed to buy a home, a business, a car, or vacations on credit; to pay for home improvements, college tuition, or an illness; or for other financial losses. This means that if the credit is dried up, our entire economy will collapse!

Traditionally, mortgage companies using private investors’ funds were, and still are, the alternative solution to borrowing money, because banking institutions routinely reject loans. If the creditworthiness of the borrower, the value of the property, or the purpose of the loan does not fit the bank’s exact, cookie-cutter criteria (even if the loan is secured by real estate), credit may be denied! But that does not mean that mortgage companies specializing in hard money loans do underwriting without due diligence, or without scrutinizing the deal. After all, their money and their investors’ money are on the line.

Hard money lenders can get the borrower the money he needs by offering creative financing with cross collateral properties. Most hard money lender companies service their own loans by adding residual income, as their portfolio of unpaid loans grows in their books. And because they service their own loans, they make their own decisions for workout and forbearance agreements when the borrower falls behind with payments.

Tom Johnson at A.S.K. Investments Inc. in Stanton, Calif. says: “I have never foreclosed on a borrower in the past 14 years in business. I always work with my borrowers to assist them in keeping the loans paid and my investors happy.” This is one of the benefits of dealing with the hard money lender directly, rather than talking to a loan servicing company or a bank.
As the hard money industry evolves, so do the investment vehicles for the private investors, which can be an individual, a company, a pension plan, an Individual Retirement Account, a profit sharing plan, etc.

The most popular format for a hard money loan is to have either a single beneficiary/investor loan or a multi-lender loan with fractionalize interest, where all the investors basically own the promissory note signed by the borrower and are directly assigned on the mortgage or deed with their undivided percentage of ownership. The latest investment vehicle and a more sophisticated form of investing is a ‘pool.’ In plain terms, this ‘pool’ is basically in the form of a Limited Liability Company (LLC), where the founder becomes the managing partner and each investor who brings capital into the LLC becomes a member of the LLC. Since a pool will be selling securities and shares, a proper permit by the U.S. Securities and Exchange Commission must be issued and the founder may need to obtain the proper license from his or her state regulatory agency.

Consulting a securities attorney or one who specializes in the formation of these types of pools and entities in your state is a must for legal compliance. The attorney will draft the pool prospectuses, which outline the type of loans, cost of the management fees and servicing fees the founder will collect, and many other relevant points clearly spelled out for the potential investors to know and understand what they are investing in and what is their approximate return and yield on their monies. In addition, from its inception, it is equally important to bring in a Certified Public Accountant someone who understands pools and their auditing requirements, and can discuss the pros and cons of a cash basis or accrual basis accounting when managing a pool.

The other piece of the puzzle is software one capable of handling the management of the pool assets, investor distribution of dividends as a cash payment or reinvestment, investor account statements, balances, history of distributions, trust accounting and reporting.

Private money offers hope for borrowers and opportunity for brokers
Traditionally, funding private-money loans and investing in mortgages or trust deeds were financial dealings reserved for a select group of people who understood the intricacies of these transactions. Then, private-money funds — also known as hard money — were based primarily on equity. The interest rates on these loans, which were used for refinances and purchases, were more than what banks charged because borrowers were considered high-risk.

Sometimes, hard-money borrowers were unemployed or had incurred a recent foreclosure. Because of the risk, private investors could see annual returns of 10 percent to 15 percent. Moreover, the loans often were secured by real estate with loan-to-value ratios of 80 percent or less. Mortgage brokers who originated these loans often would charge higher points upfront, services would collect fees from investors, and borrowers could receive loan proceeds in as few as three days.

Private money continues to be a major player in today’s mortgage and finance industries. In many cases, today’s private money is used to acquire loans from failing financial institutions. Many of the private-money firms that participate in this type of investing operate as a mortgage pool or mortgage fund in which investors purchase shares.

Mortgage brokers looking to augment their industry participation can start these firms — typically established as limited liability companies — and position themselves as fund-managers. Investors who buy into such a fund become members of the company, while the manager makes day-to-day investment decisions.

Establishing a mortgage fund requires significant research and work. It can, however, lead brokers to increased income and better enable them to help borrowers maintain property-ownership.

Licensing and shares

Different states may require different licenses for the operation of mortgage funds. Brokers must understand the rules for the states in which they plan to work and file the required paperwork. Hiring a competent lawyer with securities experience is typically the first step. The lawyer also should be able to draft and file a private offering with the U.S. Securities and Exchange Commission.

Investors typically make their returns from the interest paid on purchased loans or investments in new loans minus the managing firm’s charges and expenses. Investor payouts can vary depending on the type of shares offered. Guaranteed-rate and non guaranteed-rate shares can be available. Distributions can take the form of cash or can be reinvested in the mortgage pool on a cash or accrual accounting basis. They can be made monthly, quarterly or annually.

The fundamental idea behind many new mortgage funds is to purchase troubled loans at a discount and to establish new payment terms for borrowers when necessary. Usually, the fund-manger decides which loans or groups of loans to buy, what types of modifications to allow and which new loans to invest in. Wise fund-managers carefully study a loan pool before purchase and treat every investor dollar as their own.

The prospectus and software

The attorney for private-money fund-managers drafts a prospectus for potential investors. This document will outline the types of loans to be purchased or originated; the types of investor shares offered; the frequency of distributions; servicing fees; any loss reserve; and information about the fund’s management, performance fees and any other expenses.

Careful selection of a software-provider can increase private-money funds’ chances of success. Software decisions often take place at the fund-establishment phase and can occur in concert with the selection of attorneys and accountants. When software is used, it should provide the calculations necessary for investor distributions. It also should conform to legal requirements and meet general accounting principles.

Questions to ask when making a software decision include:

Is it designed to have one capital account per investor type or entity?
Does it have the ability to handle multiple types of shares and provide a history of shares purchased and sold?
Can it reverse and reprocess transactions to correct user errors?
Can it track accrued expenses and income and automatically include them in the distribution figures?
Can it track funds received and disbursed for each client, borrower and investor?
Financial gain

Although some private-money fundamentals haven’t changed — equity still rules, for example, and the process of establishing a mortgage fund remains complex — brokers might find that the financial gain that can accompany fund management is well worth the effort.

Fund-managers can make money through origination, management, performance fees when the fund reaches a certain yield to investors, servicing fees, late fees from borrower payments, demand fees and others.

Typically, firms that service private investors’ loans have the ability to work out affordable payment plans when loan defaults occur. This helps ensure that investors don’t end up owning real estate they never intended to own.

Large financial institutions could attempt the same thing to avoid foreclosures. They could modify loan terms, reduce interest rates and change adjustable-rate mortgages to fixed-rate. They also could charge a reasonable fee for such modifications. These institutions’ reluctance to do so, however, increases the market for private-money funds. It also allows mortgage brokers to play a more direct role in helping borrowers afford to stay in their homes and keep other properties they own.

* * *
As the number of private-money firms grows, brokers should pay attention and determine what role, if any, they want to play. Now is the time to save borrowers from foreclosure by offering better and more-affordable loan terms. It’s also the time to buy bad loans at great discounts. Private money can help accomplish both goals at the same time.

5 tips from Leonard Rosen, Americas Hard Money Lending Expert

1. What is hard money and how does it work?

Hard Money is money for any type of real estate transaction that does not conform to traditional banking criteria. They are equity based loans in which borrowers credit score is not taken into consideration. It can be used for Residential, Commercial, Construction or Raw Land. The investor/lender does appraisal and borrowed should have 25% equity. Based on value and equity they can borrow against that. It can be used for foreclosures, defaults, etc. It works for Commercial borrowers that do not meet minimum loan requirements.

2. Is hard money predatory or at the very least not moral?

Residential Hard Money allows borrowers more time, breathing room from foreclosure or defaults. Hard Money is more expensive but is a big risk for the investor/lender.

3. How expensive is this type of mortgage?

Average is Residential- 10.5% and if it is a type of 2nd mortgage is averaged to about 15%. Depending on area of the country and how much equity the borrower has.

4. Why would anybody use hard money for a mortgage?

Hard Money is not a solution for everyone. For example on a Commercial Project- stopped because of no funds- the builder has 3 options 1. Stop the project 2. Take on a partner or 3. Hard Money. Hard Money is less expensive then bringing on a partner.

5. What are the benefits of using this type of product?

For residential borrowers- stops foreclosure, gives time, gives options.

For commercial borrowers- paying the high coupon cost is less expensive then bringing on a partner.

Rosen adds, “Hard money is a lifesaver for many families across the country and it helps people going into foreclosure or default by allowing them time to get their house sold or rented out.

With the recent credit crisis, there has been a lot of discussion about mortgage-backed securities, which have said to be a major cause of the crisis. But who really knows what mortgage-backed securities are? That definition usually is not provided adequately and clearly, if it is provided at all.

A mortgage-backed security is ?an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans.? In other words, a mortgage-backed security is an investment that provides returns from the payments made to pay off mortgages. There are a few types of mortgage-backed securities, including:

Pass-through mortgage-backed securities
Collateralized mortgage obligation
Stripped mortgage-backed securities
Additionally, the first and last of these three types of mortgage-backed securities can be divided into subclasses.
There are many risks associated with mortgage-backed securities. Some include:

Unemployment
Changes in laws
Home price inflation
Economic growth (which leads to higher turnover in the housing market)
Demographic changes
Additionally, there is a credit risk, which hinges upon whether or not the individual who took out the mortgage can make her payments on time or not.

What has happened in the current credit crisis is that a lot of large banks, such Fannie Mae, Freddie Mac, and Wachovia, gave out too many risky loans. That is, they allowed high-risk individuals?individuals who very likely would not have been able to pay off their mortgages? to take mortgages.

Unfortunately, many people defaulted on their home loans and their homes had to be foreclosed. In turn, investment banks, such as Goldman Sachs and Lehman Brothers, which invested heavily in mortgage-backed securities, suffered seriously.

Contact Us
If you would like to find out more information about mortgage-backed securities or about what hard money can do for you in the current credit crisis, contact the experts at Pitbull Conference by calling 858-736-7788.

In times of volatile markets, it can be difficult to determine what a safe investment is. Frequently, what is perceived to be a safe investment is not actually safe. For example, government bonds have been guaranteed to lose purchasing power even though the amount put into the bonds and partial interest are guaranteed.

There is no such thing as a guaranteed safe investment. The best way to protect the dollar’s purchasing power is to match the investment to the expenditure. Americans are global senders, so it would make sense that we should be global investors as well.

In recent years, the most effective way to combine safety and growth for investors has been to create a mix of investments in both major and emerging markets. The return on investments from emerging markets beat developed markets in the past seven years.

While this is a good approach, the best way to remain “safe” is to diversify investments. Purchasing stocks or bonds all in one market area is never a good idea. Instead, it is a much better idea to spread stocks around over a variety of sectors. Another good plan is to invest in some consistent stocks and then put some money into an emerging industry or emerging company. This helps to ensure some stability while allowing for extreme growth.

Contact the Hard Money Lenders – Pitbull Conference
To learn about lending and investing in a hard-money environment, contact the hard money lenders of Pitbull Conference at 858-736-7788.

When people apply for a home loan or mortgage, they typically go through a mortgage broker at some point. In fact, in a 2004 study, 68% of home loans originated at the hands of a mortgage broker. A mortgage broker is an intermediary who sources mortgage loans on behalf of individuals or businesses.

Traditionally, banks and other forms of lending institutions have distributed their own products. Due to the steep competition faced in the mortgage market, the role of the mortgage broker has become more popular and more prominent than ever before. Today, mortgage brokers are the largest distributors of mortgage products for lenders in the majority of developed mortgage markets. This is especially true in the United States.

Mortgage brokers do not run around randomly loaning money out. They are, for the most part, regulated to ensure that they comply with the banking and or finance laws of the jurisdiction of the consumer. The extent of regulation depends on the jurisdiction in which the broker is working. All but one state in the United States have laws that govern mortgage lending and mortgage brokers.

The job of a mortgage broker will depend on the depth of their service and liabilities. Some of these services include, but are not limited to:

Undertake tasks, including marketing, to attract clients
Assess the borrower’s circumstances
Assess the market to find a mortgage product that fits the client?s needs
Apply for a lender’s agreement in principle
Contact a Hard Money Lender

For more information on hard money lending and the entire mortgage industry, contact the hard money lenders of Pitbull Conference at 858-736-7788 today.

Hard money loans (HMLs) are a special type of loan backed by real estate collateral. Generally short-term loans with slightly higher interest rates, hard money loans are typically made by private individuals or companies not affiliated with larger banks. Though few people truly understand the hard money lending business from either a lender or a borrower’s perspective, the market represents an important opportunity for investors and borrowers alike.

A borrower usually takes out an HML loan using real estate property as collateral. The hard money lender will provide the loan on a “loan-to-value,” or LTV, basis. The “value” of a given property is defined in the business as the amount that a lender could reasonably expect to receive from the rapid liquidation of the real estate, should the borrower default and force a foreclosure. Generally, the HM lender will offer cash at a 65% to 70% LTV ratio – that is, up to 65-70% of the property’s current value.

HMLs are often more expensive (that is, they carry a higher interest rate) than many other types of bank loans because lenders often accept more risk of default in making the loan. Despite the higher rate of interest, borrowers may find HMLs attractive for several reasons:

They do not require the stringent standards imposed by banks
They are less influenced by a poor credit score or rating
They have less need for acceptable documentation
They can be used as “bridge loans” until other financing can be obtained
They are often faster than traditional loans
Many borrowers choose to take out HMLs because of the lower requirements to qualify. People who face imminent foreclosure or who need money immediately often find that hard money loans are the best – or only – option.

However, because hard money loans have substantially higher default rates than traditional loans (due to less restrictive credit requirements), lenders usually take the first lien on the collateralized property, in addition to attaching higher interest rates. This lien is a legal claim to the real estate which essentially gives the lender first right for compensation from the sale of the property if the borrower should default on the loan.

Regulation of the hard money lending business varies slightly from state to state, but laws are generally non-specific and fairly loose, with a few notable exceptions, where limits on interest rates are set low enough to discourage most hard money lenders from doing business.

Whether it is putting the kids through college or buying a new, fuel efficient car, middle-class America is always struggling with money. Some say it is a curse, while others argue it is the price of living in the modern world. Whatever the case may be, people often turn to the bank to take out a second mortgage in order to solve their money problems.

Taking out a second mortgage is often the ideal solution to the money problems of the middle class. Many middle-class families have cars and a house that they bought with money they took out with their first mortgage. This they pay off gradually, over time, until they are either fortunate enough to pay off the mortgage or are able to make more money by selling their house than they originally paid for it. However, paying off a mortgage takes most families a lifetime.

With this in mind, some reasons for taking out a second mortgage may be that:

It lowers the interest rate on your first mortgage.
Refinancing your first mortgage can help you find a better plan for your life-style and will make you reexamine your monthly payments.
Consolidating your debt could cut your costs.

Consider taking out a second mortgage if you think that it could help you and your family with your financial burdens. If you would like more information on mortgages, contact the Pitbull Conference today by calling 858-736-7788.

Investors Gain
Investors buy participations into mortgage pools and receive income derived from payments on the underlying mortgages. What really reels investors in is the prospect of diversification and liquidity, as well as a relatively large yield.

Diversification is when a lender allocates their assets over a wider group of borrowers to keep asset quality high and credit risk low. The various mortgages that go into the pool help spread out that investment and cushion the loss, should a borrower fall through. Investing in liquid assets is safer than illiquid ones because it is easier for investors to get their money out on short notice.

Fractional Mortgage Pools
These pools consist of mortgages with numerous owners. A group of people, often family members, friends, or business partners, buy a property as a team. The ownership is then divided into portions, splitting both the costs and benefits among the group. Fractional mortgages are a common type of ownership in the hotel market.

Interested in handling your own mortgage pool? Want the best advice on picking a pool that is right for you? If you would like more information on mortgage pools and fractional investment mortgage pools, call Pitbull Conference today by dialing 858-736-7788.