Hard money MORTGAGES?

Although "hard money" is commonly used on the builder/developer side of things to buy land or time to arrange cheaper financing, it's certainly not as common for mortgages. That may be changing, as a Wall Street Journal article last month (and which I just found) suggests that such loans have quickly replaced the now-moribund sub-prime sector:

Once thought of as a last resort for strapped borrowers, these products -- also called "private-money mortgages" -- have different lending standards than traditional mortgages and carry substantially higher interest rates and fees. These days, however, they are attracting a larger, more-affluent group of consumers. No organization tracks statistics in this highly fragmented industry, and many loans are made by private investors who report to no one. But anecdotally, business is booming...

"Now that subprime has basically disappeared, the hard-money lenders are pretty much the only source of capital for many people," says Daniel Yeh, a mortgage-industry analyst at the Scotsman Guide, a trade publication based in Bothell, Wash.

Hard-money lenders range from individuals and small groups of investors who operate independently to small firms like Alliance Portfolio that get their capital from individual investors who pool their cash in search of higher returns. Larger firms, such as Yale Mortgage, rely on bank credit to make loans. These lenders are easily found on the Internet, and mortgage brokers will often know where to find lenders locally.

The industry is lightly regulated, though depending on how a mortgage is structured, lenders can be subject to state and federal caps on interest rates. The Federal Trade Commission's Web site (www.ftc.gov) has links to consumer publications that explain high-rate, high-fee loans -- a category into which hard-money mortgages fall. The agency says it hasn't received many consumer complaints about hard-money lenders.

Unlike a traditional mortgage, which is defined largely by credit scores and a borrower's ability to repay, hard-money mortgages are based almost entirely on the value of the underlying asset. That means a borrower's income and credit score aren't nearly as important as they otherwise might be.

Hard-money lenders protect themselves by requiring that borrowers have substantial equity in their collateral -- either their home, investment property or a business -- of 30% to 40% or more. Moreover, interest rates are generally in the low teens, and fees can be as much as 5% of the loan's value. By comparison, the rates on traditional 30-year fixed-rate mortgages now average around 6%, and fees generally top out at 3%.

Perhaps this is something some builders can add to their mortgage offerings to move some product?