Is there still a Need for Sub prime Loans..

Is there still a Need for Sub prime Loans.. YES THERE IS!!!

Sub prime residential lending is in vogue again, except that none of the firms funding the loans call the product “sub prime.” Oh, and there’s one other catch: loan amounts are small, but the profit margins are through the roof.  Can you say equity! Take, for example, some of the recent loans made by firms on hardmoneyhunt.com. On average, the notes originated lately have terms of 8.99% and 2 points.  Almost does not sound like hard money.

As for the “risk factor” inherit in the loans, the lenders aren’t losing much sleep at night. The maximum loan-to-value ratio is 65%, which means if the borrower doesn’t pay, the firm can seize the house and sell it for more than just recouping the investment.  Let me be quick to point out that although all this sounds nice on paper, this specialized niche isn’t poised for a boom any time soon.  People are still not always equating hard money with sound investing.  It’s however a way to make a living while home prices slowly, but surely, improve from the Depression-like crater they’ve been in the past three years.

The chief problem the industry faces is raising new investor money. All of the active participants in the “new sub prime”-at least the ones I interviewed for this column-are nonbanks that raise money from a mix of wealthy individuals, investment clubs/funds and institutional money.  So, why would a somewhat wealthy individual put his money at risk?  As more than one of my clients pointed out, “Just look at the yield you can get on CDs these days. It’s nonexistent.”

Again, the production volume numbers are not overwhelming, but the profit-margin figures look enticing enough that there’s been plenty of industry chatter about new entrants.” I see other people looking at doing what I’m doing,” said one Banker. “But the nice thing about it is that banks won’t be getting in this any time soon,” which leaves the business wide open for the nonbanks.

All executives interviewed told me the same thing: that demand is strong and the quality of borrowers is exemplary.Also, the loans these companies make aren’t always totally residential in nature. “We’re making loans to borrowers who can’t get credit because they’re an investor-or they own too many properties and a bank won’t touch them.There’s this growing segment out there of people who won’t or can’t qualify.”