Upside Down Mortgage

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Mortgage Default Australia

1. Low Doc Loans stands for low documentation loans. These are typically used to purchase property and to be accepted for this type of loan a consumer does not need the same level of documentary proof as required for standard bank loans. Most banks require verification of income, assets and liabilities, and want to see pay slips and tax returns, before they will give the go ahead on a home loan.

2. The low doc loan market accounts for around 5 per cent of Australian home loans and has grown up to service the needs of self employed workers. It also helps people who don’t lodge full tax returns, and people who find it hard to provide proof of earnings to get a home loan. This form of credit approval is known as self verification. Consumers on low incomes and those with poor credit ratings also use low doc loans to purchase homes.

3. This type of loan is characterised by higher interest rates, as lenders charge for the increased risk that comes with not checking pay slips and tax returns. The level of risk lenders take in not checking documents is illustrated by the default rates on low doc loans, which are about 3 times higher than mainstream loans.

4. Other features of low doc loans can include a requirement for extra security, such as a car or other asset, as well as the need to provide a larger deposit towards the cost of a property. Typically low doc customers have to take out mortgage insurance, which often protects the lender rather than the consumer. Fees and charges on this type of credit product are normally higher as well.

5. In the past, low doc loans were provided by non bank lenders, but in recent years the market has become increasingly competitive and mainstream lenders and banks also compete for low doc custom. Long gone are the days when a bank would tell a customer to go away and get a bigger deposit.

6. Predatory lenders have given low doc loans a bad name. Rogue lenders and brokers prey on hard pressed home owners, typically with the intention of enriching themselves at the expense of their victim by setting up unaffordable loans and charging excessive fees.

7. Australian Tax Office officials swooped on a large number of low doc loan customers after they conducted an inquiry into tax evasion. They found that about half of a study sample of 350 people with low doc loans, across 8 different lenders had not lodged tax returns. On average these people were three years outstanding with their returns. Tax office officials took action against this group, making them lodge tax accounts, with 8 finding themselves convicted for tax offences.

8. The future of low doc loans has been thrown into question by plans to reform the way brokers operate. The Australian government’s draft National Finance Broking Bill has put forward plans to make brokers responsible for ensuring consumers have the means to repay their debts. Critics of the draft bill believe this could kill off low doc and no doc loans, as it would be very hard for brokers to meet their requirements if the bill became law.

9. Commentators have predicted Australian home owners with low doc loans could suffer higher repayments as a result of the credit crunch. The credit crunch has left consumers with a poor credit rating vulnerable to higher credit costs.

About the Author:

Tristan Dunston is an independent public relations consultant specialising in finance and privacy matters. He loves whitewater kayaking and photography

Source - Bad Credit Loans – 9 Things You Need to Know About Australian Low Doc Loans

Australia - sets a moral precedent

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Many homeowners who are upside down in their mortgages end up in foreclosure. They first try to keep up with their house payments. Then they realize that it is best to sell. However, when they are upside down, selling means they will get less than what they owe their banks. In order to pay off their mortgages, they put high price tags on their homes. The homes do not sell and soon they can no longer afford to pay monthly payments. The loans go to default and the banks file for foreclosure.

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Mortgage Default Swaps

Commercial mortgage rates are essentially the combination an index and the margin that the bank charges. Borrowers should be careful on how the term sheets are written, in regards to quoted rates. Below are a few suggestions on how you can protect yourself against bait and switch moves that some lenders still use regarding commercila mortgage rates.

First of all, an indexes commonly used in the commercial mortgage industry includes Prime and the 10 Year Treasury. Less well known indexes such as the 5 Year Swap or the FHLB indexes are becoming more popular.

The margin is where the bank makes its spread. It is a very complicated process for banks to figure out what to charge as they basically have to predict the future and take into account the probability of default, adequately cover their costs, and of course try to make a profit. At the same time the industry is highly competitive and they have to price out their loans “skinny” enough to be able to bring in new borrowers.

The combination of the margin and index is commonly referred to as the Effective Rate. It’s what the borrower will use to calculate their payments and what they normally think of when they ask for rate quotes. For example if a bank quoted you Prime plus 1% your Effective Rate would be 6% as prime right now is at 5%.

The main suggestion regarding not having your rate bumped up on you while your loan is in process is to have both the margin and index clearly written on the term sheet. The opposite is to just have the effective rate quoted with no mention as to either the margin or the index. If either or both go down for example, you would not know, and would not know that your rate should be lower. The lender could simply keep your rate the same and you would have no recourse or really any way of knowing.

A worse scenario would be to have your rate increase during process. Rate locks are rare in the commercial mortgage industry so it is possible for the funding bank to call you with the bad news that your rate will be higher. In fact, as of this writing 5/8/8, it’s not that uncommon at all, as banks are constantly rethinking what they can and what they want to lend on – due to the credit crisis. And many will have the attitude of, take it or leave it. More to the point though if the margin and index are not clearly known the lender could mention any margin or index when challenge to “cover” his story.

Get it in writing or assume they will try the bait and switch on your commercial loan rate.

About the Author:

Jeff Rauth is President of Commercial Finance Advisors, Inc 248 885-8797 or at SBA 7a Loans or commercial loan rates or commercial loan calculator

Source - Commercial Mortgage Rates

Cause of Stock Market Crash? Credit Default Swap Scandal