Soft money loans are great! What do I mean by soft money? This is a loan where should the
borrower default, the lender has no other place to go for satisfaction. There is no recourse to the borrowers assets for more money. The product loaned against is all that they can get.
A “hard money” loan is a loan with recourse beyond the product loaned against. If you owe me $100,000 secured by a Porsch and that Porsch is now only worth $80,000, I can go after your other assets to get the missing $20,000 I am owed.
There is a tendency for us to think loans of all types are soft money. Pay attention here! If the loan has a three day period during which you can change your mind, A “Three Day Right of Recission” means that it is a “HARD MONEY” debt.
Oh, oh. You mean when I refinanced my $800,000 home with a $560,000 first and a $160,000
second to invest in the stock market I entered into a hard money transaction? Yes, Charlie Brown, you now have a recourse loan. You see, when you buy a house it is a soft money loan and the house is the only recourse for the lender. When you REFINANCE a house, it is a hard money loan and you have a three day cool down period to reconsider.
In this instance Charlie Brown has a problem. The $800,000 figure was built upon spiraling prices and sub-prime lenders with overvalued appraisals. It true value was 5% below the $800,000 figure at $760,000. So the home he thought was $800,000 in the spring of 2005 was really worth $760,000. The current debt stands at the original $720,000 and Charlie is three months behind in his payments of $4,000 each month for interest on the debt.
Central Contra Costa prices held in 2005 and 2006 but depreciated 6.3% in 2007. This first quarter of 2008 finds Charlie’s home value not at the 2005 value of $760,000, but at $712,000. Before this is done and over, he may owe six or eight months of back payments or more. I’ll use $32,000 for back payments and $8,000 for back taxes and 6% for Realtor fees.
There you have it. Charlie cannot pay, let’s the house get a little shabby. At sale time the debts are $800,000 with a sale of $675,000
In this example, the bank forecloses with a judicial foreclosure. Look out Charlie Brown. That may be the debt collector coming for your other assets…
Will the lender come after him for more?
Place your bets.
Your comments are welcome!
I’ll be listening...
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2 comments:
This is great information Wayne, thank you for taking the time to share your many years of knowledge and expertise with the community. We all sure appreciate your time and efforts in providing this valuable information and Blog! Thanks! :-)
Thanks for listening....
Brad - thank you for commenting. You are a very positive and supportive person. I think it is incredibly neat that you had dinner with the Active Rain head honchos!!! This could open additional career opportunities.
I went to add a character like Charlie Brown. Is this done under elements or where. What free google site did you recommend? I went to Google Analytics but to sign up I needed y google URL. I'm not sure what that is. I do know that when I search for www.halladayhouse.com the result is "cannot display web page". If you have quick answer, great. Otherwise, it will wait a week no problem.
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