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Virgin Money Between Relatives

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It’s Simple

The concept is simple. Aunt Sarah has a lot of money and is willing to lend you some to purchase your home. Virgin Money helps you and Aunt Sarah formalize the deal. This includes servicing the payments, managing the escrow and all the stuff a traditional mortgage servicing company would do. In fact, as Virgin explains it, they have a pretty hands off approach when it comes to how you and Aunt Sarah work out the interest rate and payment schedule. Pretty cool huh, especially if the bank won’t touch your mortgage application.

But what about the idea of not mixing money and family? Thanksgiving dinners can get pretty ugly otherwise. Well, Virgin has already thought of this and promise to help you in that department as well. Here is what they say on their website:

Mixing money and love can be tricky. That’s why we’re here. With Virgin Money managing your private mortgage you don’t need to talk business with your lender unless you want to. Plus, we can help plan, change, or restructure a loan—keeping it, and your relationship, on track. Makes those holiday dinners so much more pleasant.

In today’s credit crunch enabling borrowers to tap into a wealthy relatives cash can potentially help ease the crisis and maybe even be the spark that is needed to boost the real estate market in some areas. However, I’m a bit skeptical of the whole thing. And not from the borrower side either but from from the lender side.

Didn’t We Learn Anything?

This is because the business of lending and borrowing is a complicated business. No matter how much the bigger banks try, mortgage lending is simply not a commodity business. Didn’t we learn anything from the subprime blowup?

When it comes to lending money of the size that is required to close a real estate transaction there is are many factors to consider. Assessing credit worthiness, verifying income/employment, conducting proper appraisal analysis and substantiating liquid reserves are the broader categories a lender looks at when making a credit decision. And we know that fudging any one of these steps can result in loans going south pretty fast. Hence 2008.

I Would Advise

For example, I would strongly advise Aunt Sarah to request a verification of employment the day of closing? Also, she should make sure that any appraisal is conducted by an appraiser in good standing (and not buddies with your borrower). Finally, I would also make sure that Suzie’s son Johnny forward three months of banks statements to ensure that he has enough cash to sustain him through three moths of financial difficulty. And all of these details are really only from the underwriting perspective without even considering the realty perspective.

There are also issues from the servicing side as well. I would also recommend to Aunt Sarah that she figure out her break even point on the loan transaction. Isn’t it fair that she actually get some kind of reward for the risk she has taken. What if her beloved nephew all of a sudden decided to refinance the loan? She’s out the fees she paid (depending on how Virgin Money sets up the fee distribution of course). It it wrong to ask that Aunt Sarah attain some monetary gain from this transaction? If so like any lender she’ll need to carefully balance costs, interest rates, and returns. How does she set aside wanting to help Suzie’s son Johnny with these reasonable goals?

Idle Assets

Quite honestly, I like the idea of tapping to relatives’ idle assets, but I would never do it. It may work for some people. Plus I’m not going to rule out this idea just because it’s new and bold. Also you have to consider that such a transaction may not always involve a savvy cheating borrower and a unsuspecting elderly relative. It could be the other way around. Or, it could be between two very legitimate set of lenders and borrowers.

Regardless of the combination and benefits, I find it very difficult to imagine that the subject would never come into play at family gatherings or what have you. I mean even in a legitimate case lets imagine a situation where the nephew who is borrowing loses his $120K+ engineering job at Intel and stops paying on his mortgage after three months (he had three months reserves). Does Uncle Bob, a financially savvy investor, put his lenders hat on or uncle hat? What about Bob’s brother Charlie – what does he do? See, there was a reason you never mixed family and money.

Risky Business

Am I being too negative? I don’t think so. Aside from the possible family feuds there is considerable financial risk involved in any loan transaction. Banks carefully take these types of worst case scenarios into account when assessing risk and making lending decisions. I just don’t think a clear credit decision can be made when emotions and family relationships are involved. If there is anything we need to learn from the credit crisis of the past few years, its that creative financing which doesn’t properly assess risk is disaster. That you can take to the bank!

Writer for national real estate opinion column AgentGenius.com, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.

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7 Comments

7 Comments

  1. Ken Smith

    June 17, 2008 at 3:50 pm

    It’s an interesting concept. Know a few private lenders that should use the service just to make tracking of the payments easier. Plus it would give the borrow the option of adding escrow services which would help the lender reduce their risk.

  2. Jennifer in Louisville

    June 18, 2008 at 2:45 pm

    Risk is somewhat relative and is everywhere if you take it to an extreme. If you can afford the risk, and can help a family member out to boot – I’d help them. If they didn’t do what they were supposed to – oh well, I fulfilled my part of our agreement and my familial/friendship obligation.

  3. Frank Jewett

    June 18, 2008 at 5:56 pm

    If your nephew and his wife walked away from their Countrywide mortgage (just to pick a name out of a hat – not to single out the largest contributor to the mortgage meltdown), you could still hug them at Thanksgiving. On the other hand, if they walked away from your mortgage after investing $800K of your retirement savings in a Carlsbad McMansion that’s now worth $400K, you might not want to invite them over for turkey. Fulfilling your side of the bargain doesn’t mean the relationship will survive.

    On the upside, you can still retire and attempt to convert the McMansion to a Legoland Bed & Breakfast. What else are you going to do with 4,000 SQ FT in Carlsbad?

  4. Eric Blackwell

    June 18, 2008 at 6:42 pm

    The key to it IMO (as jennifer said) is if you can afford it. If it is a McMansion loan and you will be bitter about it, then you ummm…can’t afford it. (grin)

    @What else are you going to do with 4,000 SQ FT in Carlsbad? (SMILE) exactly so.

  5. Shailesh Ghimire

    June 19, 2008 at 9:41 am

    Jennifer – yes risk is relative, and like I said there will be arragements which can be beneficial to both parties. Just like an Option ARM there is a niche market for it where the loan makes perfect sense. It’s the whole sale dressing up and selling to the masses part that is a bit bothersome. So, for those who can afford it and make it work – all power to you! I would venture to say that for the vast majority of folks it will be difficult to make it work.

    Frank – Great example. I guess you can always move in? 🙂

  6. Don Reedy

    June 19, 2008 at 3:24 pm

    Shailesh,

    >Plus I’m not going to rule out this idea just because it’s new and bold……….

    I think you need to appreciate that this isn’t new, isn’t so very bold, and it is THE way America got built.

    Here in Southern California, for example, this very day, immigrants families are moving in together, combining money, resources, risks and opportunities, and there seems to be no end in sight….nor should there be.

    Whole sections of Orange County are Vietnamese, or Hispanic, or Korean. These families bought together, and sold together, and moved up together, and now are owners of the American dream of home ownership. Sharing money and risks among family members is a bad idea only when expectations are not clearly laid out and implemented.

    I would argue that today’s mortgage lenders do nothing more to reduce risk to the borrower than in a family setting. Does a Good Faith Estimate guarantee the husband won’t become a drunk, lose his job, and abandon the family? Does knowledge of every financial product under the sun insure that a borrower and his family won’t (at the family table, not the settlement table), come to see problems with the product you helped them select? Of course not. You see, lending is a secondary function to the actual commitment made by the family, to other family members, to abide by and work through the buying process’s financial obligations.

    Shailesh, there are immigrant neighborhoods where sharing risk is ALL that provides a sense of community and obligation. If, as you say, we learned nothing else from the subprime fiasco, it should be that PEOPLE and FAMILIES commit to each other first, and the paper on which we mask that commitment (loan documents, etc.) aren’t worth their weight in promises otherwise.

    Would you say I have any point here? Interested in your take.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Economic News

Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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