With all of the government bailouts in full swing, consumers are asking, “Where is my government bailout?”
Keep Reading and we will show you the way to prevent home foreclosure…
.
NINJA Loans were made famous by the recent housing meltdown and subsequent U.S. and world economic crisis. NINJA is an acronym for No Income, No Job or Assets.
Until the mid-1990’s, the only NINJA loans in the marketplace were those offered by small finance companies to consumers who needed emergency cash to deal with a temporary financial emergency. In the old days, the amount of money permitted under a NINJA loan never exceeded $3000.
How The Politicians Screwed Things Up
Then came politicians and non-profit groups whose sole interest was to make home purchases affordable to everyone. The seeds were sewn for this current financial crisis in those days in the mid-1990’s. (Am I blaming Bill Clinton? No, I am not. In fact, if you read your history, Bill Clinton recommended that NINJA loans for home buyers was a bad idea. Later, George Bush Jr, echoed Clinton’s reservations, but neither were able to stem the tide of NINJA loans for home purchases.)
In order to enhance the ability of people to borrow money for home loans, the rules of the game were changed to accommodate the needs of the lower-income masses. It was no longer necessary for hopeful home owners to bring 10%-20% cash down to the table, nor was it necessary for hopeful home buyers to ensure that their desired monthly payment did not exceed 40% of their gross monthly income.
To strengthen the hand of potential home owners, the rules were changed to allow people to apply for and obtain a home loan, so long as the home buyer was able to meet the specific fees required in the transaction. Instead of a huge down payment and proof of income that showed the proposed house payment would not exceed 40% of the home buyer’s gross earnings, the hopeful home buyer only needed to bring enough money to cover the transactional fees associated with home buying. This is the structure of the NINJA loan - all that is required is to cover the costs of acquiring the loan, yet it is not a requirement to prove the existence of an income, a job, or money towards the principle of the home being purchased.
I am not going to knock NINJA Loans too hard, because I benefited from the NINJA loans myself. As a small business owner, with less than two years in operation, I would have never afforded the house I bought for closing costs nor the vehicles that I have since bought on signature only - twice.
Even though I benefited from NINJA loans, I have not contributed to the problem. I am up-to-date on both the car I still own and my house.
The problem occurred when too many home buyers and car buyers defaulted on their loans. Unfortunately, since home buyers did not have any equity in their homes, they had nothing to lose when defaulting their loans. Banks also contributed to the problem by letting people get home loans for up to 125% of the homes’ value and to buy homes that were overpriced to begin with.
How Homeowners Got Burned
To give an example, suppose a home was worth $100k and the bank allowed the home buyer to over-borrow by 25%. So the bank has given the borrower $125k on a home that was appraised at only $100k. Even if the bank loaned at 100%, instead of 125%, the other problem kicks in next.
Whenever a block has one foreclosed home, the fact that the home was foreclosed reduces the property values of everyone else who owns a home on that city block.
In Stockton, California, east of San Francisco Bay, one of every 27 homes are in foreclosure, the highest foreclosure rate in the country. This means that the average home in Stockton CA has a foreclosed home on either side or across the street. If one foreclosed home on a city block reduces the value of every other home on that block, imagine how much real estate prices will be depressed when 1-in-4 homes on a block are in foreclosure!
Suppose one foreclosed home pushes the real estates values of all of its neighboring homes down by 15%. Now that home purchased at $100k has a real resale value of $85,000. Even if the home owner had put 10% down on his home purchase, the reduced value of his home puts him or her at a financial loss if he or she wanted to sell the home today. If the bank had permitted a 125% financing of the home, most homeowners may consider walking away from an existing home to be more financially responsible than paying on the house that is now worth only $85,000.
When NINJA loans were written for a $100 or a $3000 payday loan or small loan, finance companies would take a financial hit if that loan was defaulted, but it would not be enough to break the company financially. But since banks were setting up NINJA loans for homes, the banks are reeling under the financial losses created by those loans that were defaulted.
How The Banks Got Screwed
Let us look at this scenario in terms of the bank who loaned the money to purchase the house. For this accounting, we are going to assume that all banks only loaned up to 100% of the homes’ value. We will totally ignore the 125% equation.
So assuming the bank only loaned $90 (10% down payment) or $100k on a $100,000 home, it might seem on the surface that the bank is going to win when they take the home from the homeowner.
This is where most homeowners screw up when they get into financial trouble.
Many people assume that even if the bank only gets the current $85k value out of the home that the bank will only lose about $5k on the foreclosure. But it does not work this way when a bank takes over a home in foreclosure.
If you are a homeowners facing foreclosure, pay really close attention to what I am telling you now.
In order for the bank to get full retail value on the home, the bank would have to hold and maintain the property for a long time. The bank would have to maintain the taxes on the property. And the bank will have to give up the standard 6% to the real estate agent who lists and sells the home, the same as the homeowner would have to do.
But, in order for the bank to get the full retail value on the home, the bank would need to hold onto the property, perhaps for several years.
The bank does not want the expenses of holding and maintaining your property, nor the expenses of keeping the taxes up to date on the property. The bank is in the business to loan money and to collect interest on the loan - not to own the property.
Most banks simply don’t know how to make money on your property even if they owned it outright. But the bank does not own your property outright when they foreclose the property. Do you remember that original $90k to $100k they loaned to help their customer buy the property to begin with? The bank borrowed that money from someone else to finance the loan to their customer. So the bank still has payments to make on the money it borrowed to loan to you.
When a bank forecloses a home or other property, they need to get out of that property as quickly as possible. So, they put the property up for auction. Did you know that investors who flock to the bank sale tend to buy those properties for as little as 40 cents on the dollar as a general rule of thumb?
So the bank loaned you $90k to $100k to buy that home valued at closing at $100k. And now that home has lost some of its value and it is now worth only $85k. But, the bank will only get 40 cents on the dollar at auction. So, once your home is sold at auction, the bank will collect on average $34,000 against their initial outlay of $90,000 to $100,000. Once the auction is done and the bank has sold your house, the bank will have lost $56k to $66k on the deal for having taken a chance on you to help you to buy a home. No wonder a home foreclosure will stain your credit for a minimum of 7-10 years.
If you are facing foreclosure now, you should now realize that your bank has more to lose by taking your home, than to work with you to get a deal that both of you can live with. I know that sometimes it seems that the bank is eager to take your home from you, but they only seem eager when you are unwilling to talk to them to find another solution. The bank cannot work with you, if you are unwilling to talk to the bank.
So, if you are in a financial bind, you need to call your banker and seek to find a solution to your financial problems. Renegotiate with your bank to find a solution that both of you can call a good arrangement.
If you don’t call your bank, you will lose your house and your bank will lose money. If you do call your bank to work out new arrangements, then you could potentially keep your house and your bank will not lose as much money as they would have otherwise.
When you are in financial trouble, it is easy to believe that your bank holds all of the cards. But now that you have an education on your side, you may finally realize that you hold more of the cards in your hand than the bank holds in its hand.
If you are in a financial mess and fear losing your home to foreclosure, pick up the phone and dial your banker right away. Your banker will likely thank you, and you will most probably get to thank your lucky stars that you were able to keep your home.
Tags: bankers, banks, emergency loans, financial advice, foreclosures, home, home foreclosure, Home Foreclosures, Home Loans, house, loans, mortgages, NINJA, NINJA loans, stop foreclosure
One of our readers inquired about a two-month payday loan the other day, as to where to find such a thing. Well, those kinds of loans do exist, if you know where to shop.
There are different regulations that apply to loan companies, depending on the licensing options selected by the loan company. When you understand the differences between loan companies, you will quickly understand where to get the kinds of loan products you actually need.
Types Of Small Loan Lending Companies
It must be noted that while the federal government has some regulatory power over finance companies, most regulations on loan companies are defined at the state level, by state governments.
- Payday Loans / Cash Advances - Generally, payday loans are dictated by the idea that the loan duration is for the amount of time required for the borrower to receive his or her next paycheck. Most states dictate that a payday loan company may set the duration of a loan between 12 days and 45 days. Most payday loan lenders only permit the loan to run until the borrowers next payday period, with no exceptions. While some states permit a payday lender to roll over one loan into another loan, the state where I live - Oklahoma - prohibits payday lenders from rolling over a loan to another payday, and Oklahoma also limits payday loans to a maximum of $500. (As previously noted, regulations on payday loans vary from state-to-state.) Most payday loan lenders charge loan fees, as opposed to interest rates, so as to not violate the Usury Laws that prevent companies from collecting huge interest rates on a loan.
- Small Loan Companies - Small loan companies and finance companies are permitted to collect a higher interest rate than a bank, savings and loan, or credit union. But, small loan companies are limited by the amount of money they can loan. In Oklahoma, the maximum that one of these small finance companies can loan is $1000, and loans can be made for a duration of several months. In Georgia, the maximum that can be loaned by small loan companies is $3000.
- General Finance Companies - Certain finance companies can loan more than the previously stated $1000 and $3000, but because those finance companies fall under different regulations, the amount of interest they can charge for a loan is significantly reduced. As the loan values increase, so does the potential length of the loan.
State Regulations
Some states make exceptions to payday lenders to make loans that are in effect charging in some cases triple-digit interest rates for loans. As a matter of terminology, most payday lenders call their fees “loan fees” to bypass usury laws, and in some states this is an acceptable route for lenders to take. Other states do not see “loan fees” any different than “interest rates”, so many states regard existing state usury laws to be the final word on the matter.
While most states will permit loan companies to charge from 24% to 48% annual interest on a loan, not all states will permit such high interest rates.
For example, New York State draws the line at 25%, declaring that its criminal usury cap is 25% annual interest, which in essence means that any interest rate above 25% is criminal in nature.
Arkansas had set its usury cap at 17% many years ago, and in 2008, the Arkansas Attorney General demanded that payday lenders terminate lending altogether, void existing loans and stop collections on loans currently in default. Recent Arkansas Supreme Court decisions focused on Arkansas’ Constitutional usury limit of 17%, and the potential violations of the Arkansas Deceptive Trade Practices Act.
Getting The Two-Month Loan
As shown in this review of lending company types, it is clear that our reader should not have been focused on searching for a payday lender at all. The reader needed a two-month loan of $600, but the payday lender is restricted to offering loans that will not exceed the length of time required for the borrower to get his or her next paycheck.
If this reader would have wanted to go to a payday lender, he or she will have needed to take the loan and roll it over four times. But if that individual were in a state that had regulations like those found in Oklahoma, then rolling the loan over even one time is a forbidden practice. Besides, rolling a loan over-and-over is a bad idea just from the fee side of the payday lending industry, as explained in more detail here.
The best option of course would be to go to a small loan company for that two-month $600 loan. The small loan companies and small finance companies specialize in loans that can be paid back over anywhere from five months to one year. In addition, the small finance company will charge lower fees and interest rates than the payday loan company, which is an extra bonus.
Some banks even offer their customers two-month loans or six-month loans, for those smaller financial needs. If you have banked at a particular bank, savings and loan, or credit union, don’t forget to check to see if they offer customers small loans for short periods of time. You might be pleasantly surprised at the answer you might receive from them, especially if you live in one of Forbes 2008 strongest metro economies.
In Conclusion…
The final answer for you is that if you need a loan that can be paid back beyond your next payday, then you should be seeking your loan from someone other than a payday loan / cash advance lender.
Payday loans are simply one option for acquiring a short term loan, but it is not the only option, and it is not always the best option.
It is important to understand all of the loan options you might have available to you, so that you can make the best decision regarding your short-term financial needs.
Good luck in your search for funds…
Tags: cash advance, cash advance loans, finance companies, lending, loan companies, payday lenders, payday loans, regulations, short term loans
Editors’ Note: This was originally part of our Playing Chicken With The Train post from September 20, 2008, but we felt it was better as a stand-alone post, so we moved this part of the post here.
.
Cash Advance / Payday Loans are designed for people who need short-term loans (up to two weeks). These loans are similar in nature to the short-term bank-to-bank loans spoke of in this article. You borrow the money today, and in two weeks, when you get paid, you pay back the loan.
Now, the Payday Loan company needs to make money, and a 2% interest rate (the bank-to-bank rate) on a $100 to $500 loan will not allow the Payday Loan company to make enough money to make the service worthwhile to them. The Payday Loan company would not survive financially, if it were only able to collect $2 to $10 on a two week loan.
As such, the Payday Loan company typically charges 15% on a two-week loan. Since there are 26 two-week periods in the course of a year, the 15% rate for a two-week loan translated to 390% APR. That is a lot of money to pay back if the borrower keeps refinancing that loan from paycheck to paycheck.
If you need $100 for two weeks, then a $115 payback is not a bad deal. If you needed a $500 loan for two weeks, then the $575 pay back is not a bad deal either.
It is when the borrower keeps rolling that money back over into itself where it becomes a real problem. If this were the situation, then the compounding payback would reach an incredible percentage in very short order. After all, if you do not pay back the loan in two weeks, then the new loan will be for the amount of the loan and the interest on the previous loan. The second loan will be for $115 on the $100 borrowed, and the rate of the loan will be 15% or $17.25. The third rollover will charge 15% interest on a loan of $132.25, or $19.83 interest. As you can see, this can quickly get out of hand, as in six weeks, a $100 loan will require a payback of $152.08.
When compounding the interest, from loan-to-loan, the interest calculation is figured as an Effective Annual Rate (EAR), which if the interest rate on each loan is 15%, the EAR is 1.1526 - 1 × 100% = 3686%.
With the EAR of 3686%, a $100 loan rolled over again and again, for one year, will require a payback of $3686 !!!
Don’t take a Payday Loan if you do not intend to pay that loan back in two weeks !!! You cannot afford to keep paying that compounding interest !!!
We only recommend Cash Advance Loans or Payday Loans if you are going to be a responsible borrower. Take the two week loan if you need it, but don’t roll the loan over into another loan. If you expect that you will have to do that, get your loan from another source.
The original Playing Chicken With The Train article shows you how the banking industry went belly up, through bad lending practices and bad borrowing practices. Take this lesson from the bankers to figure out how to keep your own personal finances in good working order.
Tags: cash advance loans, interest rates, payday loans, Responsible Borrowing
