The melodramas of a bygone age depicted a Simon Legree-type of the mortgagee who wanted nothing more than to wrest the old homestead from Little Nell and her poor elderly parents. The cliché has now become quite familiar: the mustache-twirling villain who says, “Pay the mortgage by five today-or else!” The impression left with the audience was that the cold-hearted man had given the loan solely for the opportunity of stealing the old homestead away from the poor-but-honest landholders.
Then there’s the stereotype of the Western power broker whose goal was to accumulate land so he could exercise political power over the entire community. You probably remember the fellow in those old late-show westerns wearing the black hat. This villain was usually surrounded by a covey of evil-looking henchmen who gloated at the news of blight, fire, or other devastation, gleeful at the opportunity to snatch land from unfortunate farmers. Here, too, the idea was apparently to give the loan only to have the chance to take over the security in case of default.
These stereotypes have been circulated widely; they work much better as entertainment than they do as models for sound financial practice. The conventional sources of mortgage financing-banks and savings and loan institutions are interested in good investment return on good investment risks secured by good investment property. When they are compelled to foreclose and take a property back, that is an indication that a serious mistake has been made. Most businesspeople know from personal experience that mistakes can be quite costly; no one goes out of his way to allow one to occur.
For clarification: There may be a few mortgagees whose interest in granting loans is to await the default and then acquire the property through foreclosure, but they are very much the exception to the rule. Most lenders who loan money under riskier-than-normal conditions are looking for a higher-than-normal rate of return.
This brings us to one of the primary axioms of investing, which goes as follows: The greater the risk, the higher the return. Agencies that grant mortgage loans where the faint-hearted will not are usually referred to as “hard money” lenders. These individuals will take greater risks for a price. They want a markedly higher return on their investment. However, as a broad but reliable rule, they do not want to acquire the property. Too many people forget that banks are selling a commodity. That commodity is called “money.” It may be difficult to think of money as a commodity, but that is nevertheless what it is. Money is bought, sold, traded, exchanged, and assigned.
When we go to the bank, hat in hand, to ask for a loan, what we are doing is asking the bank to permit us to buy the product it sells. Do you walk into a retail store and ask, “Won’t you please take a moment out of your busy schedule and allow me to buy a pound of sugar from your store?” Of course not. Well, that situation is essentially no different from the one you face at the bank when seeking to borrow money. At the end of each day, the loan officer goes into his boss’s office and boasts, “I just gave out two million dollars today!” The boss replies, “That’s great, George. Keep up the good work and we’ll break last month’s record.”
Given the way mortgage banking is set up today, there is no shortage of mortgage money out there. There are a number of reasons for this. Although you make your payment to the Penny Savings Bank, it is not really the mortgagee. Most of the money being loaned today is being sold off in what’s known as the “secondary market.” This is the alphabetical mélange you’ve heard referred to as Fannie Mae and Freddie Mac. These quasi-governmental agencies are the Federal National Mortgage Administration and the Federal Home Loan Mortgage Corporation. These are public offerings sold by public subscription through stockbrokers. You may have heard someone say something along the lines of, “Invest in Ginnie Maes; they’re high-yield investments secured by real property.” What is really being described are the mortgages that are originated by most banks.
The public purchases these offerings; the resulting money is the source for new mortgage agreements. In years past, savings banks could allocate a set amount for mortgage purposes each year. At the beginning of the year, they were more generous in their approvals and amounts being offered. As the year progressed and the allocated sums were being exhausted, the banks would retrench and refuse loans or offer lesser amounts in order to stretch funds further. Today, that problem is alleviated; the mortgages are being sold in the secondary market to Fannie Mae and Freddie Mac. But why, you may ask, are you making your payments to the Penny Savings Bank? The answer is that it has retained the servicing of the mortgage for a fee. That’s why the loan officer is so happy when he tells his boss about two million more dollars going out the door. As a businessperson, how would you feel about your organization receiving one-half percent per month of each new loan, with more loans being made each day? It adds up!
You may also have heard of something called the “float.” That’s the period that money (for instance, your mortgage payment) passes through a bank and does not incur any outside expenses. This, too, adds up and is another reason banks really do want to lend to you: you’re helping them just as much as they’re helping you. However, if you don’t make your payments on time, they have to send their money to Fanny and Freddy; they’re not floating your money, they’re paying your debts.
This should serve to illustrate why the worst thing you can have on a credit report (from a bank’s point of view, at any rate) is a history of chronic late mortgage payments. Banks who see this profile don’t want to know anymore. They can make their decision immediately: No! Many people feel this is unfair. “After all,” they say, “I do pay up. I may not pay right on time, but I’ve never received a lawyer’s letter. They’ve never had to chase after me.” Stop and think, though: If you were a landlord with a mortgage to pay. If you are facing a foreclosure and would like to sell your property directly to us please contact us here