The story of Nichole Bennet is widely shared. Earlier this year, Nichole Bennet, a social worker, tried to sell her home in Antioch, California, to pay down debt. When Bennett’s mortgage lender, Wells Fargo & Co, turned her down because her loan was too low—it was 600—Bennet turned to one of the alternative commercial moneylenders in the area. In October 2015, Bennet got the nearly $40,000 she needed to pay off $1,900 a month on auto, personal loan, and credit card payments. In return, the company, one of over 700 commercial coin lenders scattered across California’s cities and plains, retained a piece of their property.
Background on the credit situation in California
2012 was the year that Californian banks tightened their requirements. In the years leading up to the housing crash, easy financing helped people buy houses they couldn’t afford and then borrow against their equity as house prices rose. The collapse in home values ripped through the banks and helped trigger the recession. Previously thriving California banks like CitiGroup were squeezed out of their positions, and it took several years of “musical chairs” for banks, credit unions, and other traditional lenders to finally settle down. When they did, they changed direction.
Banks and their ilk largely rejected subprime mortgages, reduced the percentage of cash borrowers they would accept for refinancing, and tightened their lending standards for home equity lines of credit (HELOCs), which require higher FICO scores and full documentation. Traditional lenders only allow the most creditworthy to tap into their home equity. On the other hand, private lenders are allowing more slippage and are also considering guys like Bennett who, for one reason or another, have cracked credit histories and backgrounds. Bennet’s FICO score is hardly low at 600. Commercial coin lenders generally tend to slide all the way down and accept borrowers who have the worst histories and results. your reason? They value the property rather than the borrower’s background or tax preferences.
Forwarding to commercial coin lenders
People like Bennet, with no other choice, turn to unconventional lenders — more specifically, coin lenders (aka “bridges” or “private moneylenders”) — for their funds. For Bennett, that was terrific: it gave her a way out of an otherwise untenable situation. She had to repay her debts and wanted to sell her house. The particular coin lender she chose enabled her to do this. The downside, as Sarah Edelman, director of housing policy at the Center for American Progress, points out is the stricter repayment terms, which are often double those of traditional loans. Some consumers could end up with more expensive products since they have mortgage-plus interest rates that stretch to around 15% per year, comparable to the interest rates on some credit cards or unsecured consumer debt. Commercial moneylenders offer an attractive upfront cash payment – with the borrower typically paying 2 upfront payments (sometimes more, depending on loan type, amount and duration) and money plus interest over the intervening period. The terms can be planned to suit the borrower’s ability. The troubles come at the end with the giant balloon repayment, which currently has about 65% of borrowers in California defaulting on repayments. In these cases, the private lender has no choice but to keep the property so they can sell it to recoup some of their loss.
For Bennett, the situation was perfect. She had the money to pay back, she didn’t have the loan approval from her local bank, she needed one of the smaller loans these commercial coin lenders offered, and she organized her budget to pay back the money in chunks… Not everyone is quite as lucky or have.
More on Commercial coin lenders
If you’re considering following Bennet’s example, commercial bridge/cash lenders may be perfect for you as they accept credit scores as low as 620. (Banks are reluctant to accept values below 680). On the other hand, homeowners must have at least 25 to 30 percent equity in their homes. Although most private lenders used to tend to overlook personal credit history entirely (and instead focused on collateral), government regulations and events are forcing today’s private lenders to do some credit background and research into the borrower’s experience and work performance. After all, they risk lending the money! This is causing some private lenders to adjust the cost of investing in a home based on the owner and the property, taking a larger percentage of the price increase from higher-risk customers. The greater the risk for the lender, the higher the price for the borrower.
Each lender has its own credit limit. Some are limited to 1 year, 5 years, few to 10 years. Some also offer back-to-back loans. Aggressive competition in California’s prime areas is also driving investors to find more creative ways for people to leverage home equity. For example, some lower the estimated home value of their clients to account for risk and get higher returns sooner. Overall, these commercial lenders are attractive to consumers in other ways as well. They operate with less oversight than banks and other traditional lenders because they offer products that are structured as equity rather than debt. As a result, borrowers have far fewer forms to navigate. The process is much simpler and the customer can have funds in their hands in less than a week.
Recently, investors have become more cautious about their transactions, in part due to increased government regulation and also due to escalating California real estate prices. The process is a bit slower as coin lenders need to lay out their calculations and support their trades. They also need to give their client a few days to reflect and refine the system if he or she requests it. But Bennett, the social worker, met her commercial private lenders at a good time. In an interview with Bloomberg reporter Heather Perlberg last week (December 21, 2015), she mentioned how her Springleaf Financial Services personal loan and auto, credit card and payday loans were being repaid with interest rates of up to 110 percent. Even if her house skyrockets in value, the highest annual interest she would have to pay her coin lender is 14.8 percent.
Bennett told the reporter:
“You can pay them back before 10 years is up, so that’s my goal,” she said. “My plan is to pay them back long before that.”