Some excerpts from the latimes.com – thanks daytrip!
Michele and Russell Poland’s credit was shot, but they managed to buy their suburban dream home anyway.
After a business bankruptcy and a home foreclosure, they turned to a rare option in this era of tightfisted banking — a subprime loan.
The Polands paid nearly $10,000 in upfront fees for the privilege of securing a mortgage at 10.9% interest. And they had to raid their retirement account for a 35% down payment.
Most borrowers would balk at such stiff terms. But with prices rising, the Polands wanted to snag a four-bedroom home in Temecula near top-rated schools for their 5-year-old son. By later this year, they figure, they’ll be able to refinance into a standard loan.
“The mortgage is a bridge loan,” said Russ Poland, now working as an insurance investigator. “It was expensive, but we think it’s worth it.”
In the aftermath of the housing crash, there’s no shortage of Americans who, like the Polands, are eager to rebuild their shattered finances. In response, lenders are emerging to offer the classic subprime trade-off: high-priced loans for high-risk customers.
Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.
Among those hoping to reverse the trend is the Polands’ lender, Citadel Servicing Corp. of Orange County. Chief Executive Daniel L. Perl said he has tested the water by making a few dozen subprime loans since late 2011, mostly with his own money rather than investment capital.
The Polands, among the first to receive Citadel loans, are part of a success story, Perl said. None of the loans has gone bad; about a third have already been paid off. With that track record, Perl recently raised $200 million from private investors. He’s hiring 55 employees to help him make loans through mortgage brokers across most of the West, and he’s moving from Citadel’s Aliso Viejo location to larger offices in Irvine.
“We’re looking to build it up over the next 24 months to $30 million to $50 million a month,” Perl said. “It’s a decent business plan in a credit-barren world.”
Perl requires 25% to 40% down, depending on credit scores that can drop as low as 500 on an 850-point scale. His potential customers, who pay a minimum of 7.95% interest, include higher-income as well as lower-income borrowers.
“Quite a few” affluent borrowers are good credit risks, Perl said, even though they had recent short sales — they sold homes for less than they owed on their mortgages. Perl also writes mortgages that exceed the Fannie Mae and Freddie Mac threshold for conventional loans, which varies but tops out at $625,500 in the most expensive areas.
“They come from all walks of life — doctors and lawyers as well as blue-collar workers,” Perl said. “As long as they have the ability to pay and equity in their homes, they are a candidate for one of our loans.”
John C. Williams, president of the Federal Reserve Bank of San Francisco, sees no reason that subprime mortgage bonds can’t reemerge in “plain vanilla” form, as opposed to the complex concoctions that ended up as “toxic assets” in the meltdown.
“I can’t understand why it hasn’t come back sooner,” he said, pointing out that there’s a strong market for bonds backed by subprime auto and credit-card loans.
“California has been famous for devising exotic mortgages,” Williams said. “But the reality is that they held up rather well until we started doing things like giving them to people with no jobs.”
Stones at the Echoplex last night:
Not all subprime created equal. No down, no doc, teaser rate subprime not the same as ultra high down, high rate, risk adjusted.
The Strolling Bones Chemo Tour hard to watch.
Agreed, this is the original LBB e-z qual financing and it’s good that it is available for those who need it.
Judging by the photo, I think this was all his idea!! 😆
Ya unhappy Mommy fer sure.
The rate premium this pilgrim is paying is sacrificing roughly the equivalent of 5% yearly equity appreciation. Jeebus.
And “bridge loan”? Please, is he a hot internet startup? Funny how often “bridge loans” become “pier loans”, hence the punishing risk premium his lender extracted.
As it will be in the future,
it was at the birth of Man
There are only four things certain
since Social Progress began.
That the Dog returns to his Vomit
and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger
goes wabbling back to the Fire;
no mention on what the penalties and costs were associated with raiding the retirement account.
All of this risk and cost for what? Temecula?? Well, people used to say that about Morgan Hill and Gilroy way back in the 80’s…..so what do I know.
low LTV, which makes these loans more like hard money than subprime. it is not rocket science, when their is significant skin in the game, a loan will perform much better than an high LTV FHA these days. worth watching will be if lenders loosen LTV requirements.
for the polands cited in this story, the 35% downpayment coming from an early distribution from a retirement account is probably closer to 50% if the tax penalty is considered. that is a big bet on a rebound in prices.
“After a business bankruptcy and a home foreclosure…”
“…they had to raid their retirement account for a 35% down payment.”
Something seems a bit incongruent here? Am I missing something? So they couldn’t “raid” their retirement account to save the previous property? They weren’t truly broke? Someone pass me the bong, please…
Eh, if Temecula schools are so important, how about simply renting for a few years in the area to rebuild your credit score and save for a down payment? Am I old fashion???
I’m sensing “Suzanne Research This” syndrome at work again and the poor fella probably just cave in:
People making irresponsible financial decisions again. Are we already already in another bubble???
Sounds like another bad decision for a couple obviously experienced in making bad decisions. Fools and their money…
what’s wrong with renting?
Count me in with those that say, “What???” I couldn’t believe they raided their retirement account for the 35% down payment. That IRA could have been a Roth so no tax penalties, but I still think it’s crazy. And their reason is to get near “top-rated schools” for their 5-year old son? He’s in kindergarten! They could have rented in the area until their credit improved…