Your Mortgage : Discount Mortgage Yields Not Usurious
QUESTION: Some time ago I read with great interest your reference to investments in the purchase of existing, discounted mortgages. But it occurred to me that high yields of 20% and more would violate the usury laws. Why didn’t you discuss this problem?
ANSWER: It is not usurious to purchase an existing mortgage at a discount below its balance even though the investor will earn a yield higher than state usury law allows.
For example, suppose I want to sell my 10-year, $10,000 mortgage that has an 8% interest rate on which the borrower pays $121.33 monthly. Because you are a shrewd investor, you obviously wouldn’t pay me the $10,000 balance of this loan and earn only an 8% yield.
Because you want a 20% yield on your investment, you offer me $6,278.09. If I am desperate to sell the loan, I will accept. But instead I counteroffer at $7,000, which will give you a handsome 16.93% yield. But the borrower will continue making payments of $121.33 at the 8% interest rate so there is no usury violation.
Taking Over Title Gets Messy for Seller
Q: We sold our home about four years ago. The buyer took title “subject to” our VA mortgage. Last year, we received a notice that the lender was foreclosing. We consulted our attorney and she said not to worry. Now the VA has foreclosed and wants us to pay their $14,000 loss on the property. What should we do?
A: Your situation is not uncommon. Home sellers who allow buyers to take over their existing mortgages often learn, to their surprise, the lender can go after the original borrower for any deficiency loss upon foreclosure. Even in states with anti-deficiency laws, such as California, the VA can and does go after the original borrowers.
This problem could have been avoided if you had insisted that your buyer assume your VA mortgage and the lender release you of further liability. Because you failed to do so, the VA can hold you liable for the $14,000 loss after foreclosure. Please consult a real estate attorney for full details.
What Happens When Loan Falls Apart?
Q: We thought we sold our home, as we had a firm sales contract. The only loophole was a contingency for the buyer obtaining a new mortgage. She applied with several lenders and the realty agent said one had made a loan commitment. Then that loan fell apart when the lender backed out over some flaw in her credit report.
I talked to my banker who said he would gladly make the requested loan but by then the buyer had lost interest in our home. Now she wants her $2,500 earnest money deposit back. As we held our home off the market over two months, I think we should keep the $2,500. Also, what legal remedy do we have for breach of contract?
A: If the buyer made a reasonable attempt to obtain a mortgage but was unable to do so, because the offer was contingent on obtaining a specific mortgage, then she is not obligated to complete the purchase if a loan could not be obtained. You should then refund the $2,500.
However, you found a lender willing to make the necessary loan and the buyer then refused to cooperate so it appears she may have breached the purchase contract. Your legal remedy is to sue the buyer for damages, such as having to sell the house for less than the buyer offered. For full details, please consult a real estate attorney.
Carrying a Second Can Be Very Profitable
Q: We own a home in a modest, middle-class neighborhood where people typically buy their first homes. The reason we are selling is we’re moving up to a larger house in a better suburb. But we’re having difficulty selling our old home. The realty agent gets lots of interested young couples but they can’t afford the 20% down payment lenders require.
Getting a 90% mortgage is pretty difficult, the agent tells us. Her suggestion is we carry back a second mortgage for 10% of the sales price. We are not too keen about this idea. What do you think we should do?
A: Listen to your smart real estate agent. Carrying back a second mortgage on your home sale can be very profitable but will also enable you to make a quick sale for top dollar. Seller financing is one of the best ways to sell a home when buyers can’t afford a large down payment.
