The past five years has witnessed the institutionalization of sub-prime lending, with the locus of sub-prime loans shifting from small, independent lenders to large mortgage subsidiaries of banks (particularly national banks). Investment banks and their affiliates increasingly are not only underwriting sub-prime securitizations but originating loans in sub-prime loan pools as well.
Because sub-prime loans are generally more expensive than traditional prime loans, advocacy organizations nationwide are urging tighter restrictions on these types of loans. However, sub-prime loans are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. And, without the sub-prime segment, an increasing number of borrowers wouldn’t be able to secure purchase loans or cash out on their home equity with a mortgage refinance or home equity loan (second mortgage).
Like California, the state of Maryland is imposing excessively strict predatory lending laws including the imposition of a max 7.99% annual percentage rate (APR) limit which is lower than that of other states. Maryland also has a finder’s fee law that limits the fee a mortgage broker’s finder’s fee to 8% of the total loan amount brokered, and limits the fee on subsequent loans on the same property in a twenty-four month period to 8% of the amount by which the subsequent loan exceeds the initial loan.
Now, Maryland’s Montgomery County is in the news for its new predatory lending law that has at least 50 national and local lenders making a mass exodus out of that county due to the law’s vague language and exorbitant fines. Weighing the unknowns of the law, many financial companies have preferred to exit the market, meaning it could become increasingly difficult for consumers to find a lender for mortgage loans. Financial officials have said the law could make it difficult to find fixed-rate loans for many of the median-priced to more expensive homes in the county, since many of the lenders that bought such loans on the secondary market decided to stop doing business in the county. “The fixed rate conduit market has basically dried up because of this law,” said Kathleen M. Murphy, president of the Maryland Bankers Association.
This new Montgomery County law is on hold until November, which is a welcome relief to lenders and mortgage brokers as well as consumers seeking purchase loans, mortgage refinancing and second mortgages.
By: Maria Ny
Posts Tagged ‘Mortgage Loans’
Second Mortgage Fee Restrictions in Maryland
December 3rd, 2009Why Second Mortgage Rates Are Higher for Home Equity Loans than 1st Mortgages
November 22nd, 2009
Home equity is the difference between what you owe on your mortgage and the fair market value of your home. Cashing out on home equity for debt consolidation is continuing to gain popularity. The typical way to cash out on home equity is to either refinance an existing first mortgage or take out a second mortgage.
Many people wonder why the interest rates for second mortgages are higher than those for first mortgages. The reason for this is a second mortgage is a subordinate loan secured by the same property as the first mortgage. Thus, if the mortgage isn’t paid and there is a foreclosure on the property, the first lender is paid off before the second lender. As a result, second mortgages entail more risk for the lender. To offset the risk, lenders charge higher interest rates for second mortgages than for first mortgages.
According to BankRate, second mortgage and home equity lines of credit have become increasingly common since the mid-1980s as property values have soared and homeowners have learned about managing personal debt. Among the reasons for this surge in popularity: attractive interest rates and tax deductibility. Many times, home owners can deduct up to 100% of the interest they pay on mortgage loans off their taxes.
If you need to draw equity from your home and the rates on your first home are lower than the current rates, it will probably be cheaper to get a second mortgage even though interest rates are higher. If you have a specific purpose for the loan that requires a specific amount of money, a home equity loan, also known as a home equity installment loan (HEIL), may be your best bet. Home equity lines of credit (HELOCs) are useful for those who have an occasional or on-going need for money because interest is only charged on the amount of equity used.
Compare the annual percentage rate (APR), the cost of credit on a yearly basis, when shopping for a second mortgage. Unlike home equity loans that include the total credit costs for the loan, the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your loan.
By: Maria Ny