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For those with a bad credit score or history, sometimes the only option for getting finance is to resort to non-traditional lenders that charge higher rates and generally offer not so advantageous loan terms. The loans they feature are called sub-prime loans and due to the bad financial shape of most consumers they are becoming increasingly popular.
There is more to the picture of sub-prime lenders, who of late, have been in bad press for indulging in "predatory practices", as a result of which they have suffered heavy losses in business. Many have been forced to quit. To start with, a sub-prime lender is one who lends money to high-risk individuals. But today, the biggest players, including large banks and insurance companies, are at a risk as they are losing a lot of money at the sub-prime game.
A New Scenario
Over the past several months, most major sub-prime lending companies, have been going through a rough patch. While some struggled to keep going, others simply closed their doors or decided to announce their bankruptcy.
Their investment ratings have been downgraded due to the industry's legal and political risks, not to mention the financial realities of offering money to high risk borrowers, secured only by high risk, high loan-to-low-equity-value properties. But all is not lost yet. There is a strategy to aggressively create loans and then later sell them off in pools of securities, known as "securitization". This has given life to this multi-billion dollar industry, at the expense of profits.
Equity Is Still The King: Spending money to make money might make sense in business investments, but it is not always taken rightly. Financial analysts feel that consolidation in sub-prime lending markets will again make equity the king of business transactions. It will create a situation where the deal makers will be forced to revert to "practical solutions" for real estate financing options, and not always opt for sub-prime borrowers.
Real Estate Business Consequences
One should always remember the cardinal rule that every deal is different and some basics are prerequisite for closing deals in a less fluid environment. Table funding (otherwise known as simultaneous closings) has become one of the hottest techniques in real estate transactions over the past eight years. This technique has been the key in making up an estimated 20% of all private note sales. It is necessary to know, how sellers needing cash could sell a newly created note simultaneously with the sale of their property.
Most Sellers assume that they need all the cash at closing. However, an installment sale can often be a better alternative, both from the point of tax benefits and reinvestment angle. A seller holding existing papers could use them as collateral to secure more assets, while continuing to enjoy higher returns and more tax benefits.
There are many options available, some from the old school, others new devised methods. But all these options come handy. Some worth mentioning: Private seller carry back purchase mortgages; table funding; trading equities; exchanging; substituting collateral; bartering; using land contracts; converting existing notes to cash; and structuring lease options.
The numbers of both super-prime and sub prime borrowers have increased. But there is a different reason for the additional increase in the number of sub prime borrowers has increased as more companies have issued credit cards to them. While such a step has put extra strain on consumers' credit scores, it has also put them in the sub-prime category.
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