What can we learn from the mortage crisis and how are we rebuilding

Our team still remembers the call we got when our bank told us that some of our loans were due earlier than usual. Back at the time we didn’t think much of it – we had been late on some of our loans but it wasn’t a big deal – we had a good relationship with our bank and paying late on some of our receivables helped with cash flow. We also felt entitled to these credit terms because we were big customers of our bank – however that all changed on that fateful day.

A new member of that team had come in and made a formal statement that from now on every bill that was late – not only would it not be acceptable but there would be a 3% monthly interest for every month that a loan repayment was late.

This is the story that we heard from one of our real estate agents – and let me tell you – this was difficult to bear. The property developer in question knew that his time was coming – he could see the forests from the trees much better than we could – and so he hitched his wagon and started a desperate sell off.

This was the story around the country – we had empty houses and rents being raised on our tenants that were simply impossible to pay off. But more importantly there were not many tenants because many tenants began purchasing their own homes. It was a free for all for everybody.

The truth is – is that free money is great if you know what to do with it – but if you don’t it just sits on your conscience and goes nowhere. So many people simply didn’t know how to handle money – they bought homes that were devaluing and in many cases were overvalued by zealous landlords that wanted to rack the price up knowing there would be a great demand for homes in their areas after speaking to lenders in the area.

And so we can say that this is a learning time for everyone – what we have learnt is the importance of frugality and how to ensure that this does not happen again is to understand that there is no such thing as free money and at some point it will have to be repaid.

Our real estate agents are planning on working together – along with the lenders to ensure that the information gets to the right people about not only the people looking to borrow funds but also – our team building sydney erskineville is helping us to also push this into the lending offices in the bank – who missed the big picture and left us with the bill.

Let us not forget the bust of 2008.

Are you eligible for mortgage assistance?

In 2008 the RHA launched a second mortgage program to fill the gap between what families could afford and what home prices were in La Plata County. The program has had tremendous response in the community; to date the RHA and the La Plata Homes Fund have financed more than $2 million in second mortgages, helping 62 families become homeowners.

In cooperation with the La Plata Homes Fund (LPHF), the RHA provides two second mortgage products: 1)  “silent” second mortgage loans ranging from $15,000 to $80,000 for income-qualified homebuyers, or 2) below market amortizing loans (starting at 1%).

The loans are available only to income-qualified homebuyers who have completed RHA’s Homebuyer Education Class and counseling program, and are able to obtain a fixed-rate, 30-year conventional home purchase loan. (Sub-prime loans are not allowed.)

Silent Seconds

To keep homeownership affordable, these loans have no monthly payments and are repaid only upon resale or transfer of the home. At that time, the original principal is due and payable, along with a share of the appreciated home value. (For example, if LPHF loaned 10% fo the purchase price, it receives back 10% fo appreciation, as “loan interest”.)

For example, assume a homebuyer wants to purchase a $250,000 home and is able to come up with $5,000 for the down payment. Working with a local lender, the homebuyer qualifies for a first mortgage in the amount of $195,000. For this example, assume that the homebuyer qualifies for a loan from the RHA for the remaining balance of $50,000. This $50,000 represents 20% of the purchase price ($250K).

RHA Example
Buyer down payment
$5,000
First mortgage
$195,500
RHA second mortgage (20%)
$50,000
Total financing
$250,000

Let’s assume the homeowner sells the house after 10 years for $350,000. After selling expenses and home improvements, the homeowner’s net appreciation is $70,000. In return for initially receiving the 20% loan ($50K) from the RHA, the homebuyer now pays back the $50K plus $20% of the net appreciation ($14,000 = 20% x $70,000) from the sale of the house. The seller is left with the remainder of the net appreciation ($56,000). This method of mortgage assistance is referred to as shared appreciation.

Amortizing Loans

For families that do not need as much gap financing, amortizing loans are a great option. These loans start as low as 1% and require a very low monthly payment. Loans range between $10,000 and $35,000 depending on need and funding availability. These loans are funded by the State of Colorado’s Division of Housing. In some cases, families may qualify for both a silent second loan as well as an amortizing loan. All loans are secured with a deed of trust and promissory note, and require that the home purchased with these loan products be the primary residence for the client.

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