Let me start off by saying that I will always do loans to homeowners that are owner occupants. It is an important segment of lending and a heck of a niche for my office. It also has the most regulation by the state and feds who, in their infinite wisdom, have decided that this category of homeowner needs protection. Lots and lots of protection.
I will also tell you that there has not been a foreclosure of an owner occupied loan (that I am aware of) for the last 6 years. This is key.
These are generally very good loans. Most are just shy of getting 30 year fixed rate loans at or under 4% from what we call “A” paper lenders like Wells Fargo, Chase or B of A. Most are turned down due to something in their credit. Second most are turned down due to income. Problem property is the third reason. All the turned down loans that we write have down payments of between 20% and 60%.
Many mortgage brokers have backed off of this type of loan. My guess is they have been run off by the profusion and confusion of regulations. The tragedy is, they have run a lot of investors off of this type of loan. And really, it’s not that tough to know the regulations and comply. Yeah, there has been a lot of regulation, but my viewpoint is that you get your wits around all of it and simply comply with the fed and state mandates and you do these loans. So that’s what I do and that’s why I promote this type of loan.
Almost all of the owner occupied loans that we write have an “exit strategy”. We never used that term before the proliferation of fed and state regulations in response to the recession, but here it is. We write these loans as 15 years loans but I would wager none will go to that term. I looked at the statistics of the owner occupied loans we have written that are serviced and the ones that had paid off lasted an average of 11 months. So we make 15 year loans but they most likely will not last that long. And if they do, hallelujah!
One thing I must mention that I think increases the security of those loans, is the fact that the feds require they be impounded for the payment of property taxes and insurance. The feds did get that one right. You know every month that those items are paid and not accumulating.
The feds also require that the Borrower on an owner occupied loan demonstrates an “ability to repay” the loan. We don’t even write the loans if they cannot prove they can repay the loan. We turn down quite a few requests, even with a ton of equity, because they cannot prove their income.
Last item to mention is that the feds mandate these Borrowers do a consumer credit counseling class before the loan records. The counselor takes the disclosures for the loan and does a budget talk with the borrower. It’s done over the phone and takes about 45 minutes to an hour. This theoretically makes for a more informed Borrower. Makes sense to me.
So, statistically, owner occupied loans don’t get foreclosed upon, the loan to values are good, they have an ability to repay the loan, they have an exit strategy, they pay the property taxes and insurance monthly, they do a consumer credit counseling class and the properties will likely appreciate in the coming months and years.
That’s why these loans are a great investment.