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[H345]High Risk Mortgage Lender

by Mark Walters, Mar

This leaves investors scrambling to balance their portfolios. Most refinance with an eye on mortgage products with lower monthly payments. The current product of choice is the interest only mortgage.

This mortgage lets property owners pay the interest part of a loan monthly, while making capital payments at a later date.

However, other factors need to be taken into account, such as closing fees, financing rates, and interest rates. What may seem like a short term solution can turn into a long term nightmare.

If the interest only mortgage will be obtained for more than two years, the investor will pay twice the interest rate for two years, which can add hundreds of dollars to at the mortgage. This type of mortgage flipping also makes it difficult to estimate how quickly the mortgages will be paid off.

The cost of switching mortgages between interest only and fixed rate mortgages can be high. The interest only mortgage does not decrease in value. If the investor takes out a $200 000 mortgage and makes payments for 10 years, the investor still owes $200 000. This means that the early closing fees will be higher, as much as $8 000 to arrange the mortgage twice.

This means that the investor is paying a high price for the privilege of having lower monthly fees for a year or two.

One thing that causes investors concern is that the interest only mortgage forces the investor to lose their profits for a year, or more, until the mortgage is refinanced. This alone should make investors hesitate before signing an interest only mortgage agreement for their investment properties.

The secondary concern with the interest only mortgage is that it doesn't free any equity from the home to create profits for the portfolio, when the property is sold. This makes it difficult to obtain future financing that is needed to continue buying new properties. It also makes it more difficult to sell quickly at a profit. Both of these are vital components of any successful property investment strategy.

There are alternatives. As heart-breaking as it may seem, selling a non-performing property will relieve the cash crunch, and protect future profits. Put some of the profit in a bank account where it can be used to leverage equity, preventing the investor from being forced to consider a dangerous mortgage product.

Another opportunity will be to arrange a rent-to-own option with one of your current renters, or to encourage renters to fill a few properties. The rent-to-own is a bonus for investors. The investor still profits, on an annual basis, even without flipping the property. If the renters leave, the property reverts to the investor's ownership. The investor is not obligated to return any of the money to the renter ? plus the investor still owns the property.

The average person moves once every five years. Combine this with the fact that renters who believe they are purchasing the home will take better care of the property, and the investor has created a win-win situation that increases their income stream while protecting their investments.

Smart investing requires more than understanding market trends. Sometimes an investor can avoid a disaster by taking a good look at alternatives to the traditional methods of investing, arranging financing, and flipping properties.

A ‘subprime borrower' is a person with a bad credit rating. This can range from someone who has missed a few credit card payments to someone who has been declared bankrupt. For banks and mortgage brokers, these types of customers are lucrative because the risk attached to them is justification for charging sky high interest rates. These customers are so lucrative that the market for them is worth £30 bn a year and many new companies are getting into the market. Figures show that the number of mortgages approved in May for new homes went from over 67,000 in April to more than 81,000 one month later in May. Analysts are guessing that those figures are expected to keep on rising.

Investment banks like Deutsche, West LB and Investec are some of the newer players in the subprime market while Lehman, GMAC and Merill Lynch have been in the game for some time.

So because the number of investment banks and brokers lending to these types of people has risen so sharply in recent times, with many new companies getting involved, the Financial Services Authority has its suspicions about what is happening in this part of the money-lending sector and is keeping a close eye on things to make sure that what is going on is all above board.

An FSA spokesperson says the area that the FSA is mostly looking at is whether mortgage advisers are taking the right steps when it comes to getting all the correct information for the customer. Gaining the correct information will help them to gauge whether or not that person is capable to keeping up the mortgage repayments.

“We want to assess whether mortgage advisers are taking reasonable steps to ensure that personal recommendations to enter into sub prime mortgage products are appropriate to the needs and circumstances of consumers. We also want to ensure that mortgage advisers are gathering all information likely to be relevant for the purpose of establishing the suitability of these products.”

Recently, the authority did some digging with respect to the area of subprime borrowers. It examined 31 small mortgage firms and 210 customers who had taken out loans with those companies. As a result, the FSA revealed that 60% of the firms had not obtained enough information from the customer to determine whether they could adequately pay back their mortgage and in 57% of cases, the sale involved consolidation of a customer's existing debts.

Then there was also the 67% of cases where firms could not show that they had taken into account the customer's previous situation with respect to creditors and debts. That is not to mention the fact that most (80%) couldn't justify how the mortgage product could meet the customer's needs.

In fact, the FSA had three cases where brokers appear to have helped customers get a mortgage that they could not afford by inflating the applicant's income on the application form. These firms have been referred to enforcement agencies for further investigation.

It acts as a strong reminder for brokers to keep a checklist for collecting the right information for mortgage applicants. That includes credit history, previous debts, existing mortgage arrangements and income and expenditure. These days most mortgage deals are sold through brokers so they have an important part to play.

The FSA says it will follow this issue up and further assess sales with these sorts of firms to make sure they have changed their procedures for gathering information. This will start with a review of mortgage brokers that are prepared to sell customers home loans who have a poor credit rating. The investigation begins this summer.

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Both Mark Walters & Michael Challiner are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Mark Walters has sinced written about articles on various topics from Marketing, Modelling and Real Estate. Mark Walters is a third generation entrepreneur and author. He offers free training and investing videos designed to speed you towards financial independence at