Where readers ask and we try to answer:
I’m wondering if anyone has some up-to-date information on where individual TIC loans are headed? I bought in 7/06, my interest rate is 7%.
With mortgage rates dropping, are we likely to see corresponding drops in these individual TIC loan rates? I went to an open house last weekend on some TIC properties on Carl Street just to scope out the financing picture. The rates they were quoting were really high….7.5-8? A recent article in the Chronicle revealed TIC loans were actually a safe risk for lenders, zero defaults…even zero late payments. Borrowers are vetted out very carefully. When is all of this going to translate into lower interest rates? Bottom line is, we would really like to re-finance at a lower rate. Appreciate any feedback.
Thanks,
G.A.
That is a damn good question, and Kelly McCray provides an answer:
I am answering this question assuming the reader is in a fractional TIC, which is a very special kind of loan and is only done by a few lenders and the market for them is relatively small, even here in San Francisco.
The pricing is not just risk based, though there are more risks in these types of loans than a borrower defaulting. Remember, we aren’t talking about a condo, we are talking about a loan that is secured by a percentage of a property. We are also talking about tricky legal and legislative issues that could weaken or kill the security the bank has in the deal. I am very glad that borrowers have performed well, so the banks will keep doing them.
The banks who make these loans have to keep the loans on the books until they are paid off. A more common mortgage is bundled up and sent to Wall Street where it is sold, replacing the money the originating bank laid out so it can lend some more and make more money.
The interest rate that the fractional loan provider offers will be based on the margin between what it is paying for the money and the profit it needs to make. Simply put, if the bank is paying 5% for the money and needs a 3% profit margin the interest rate will be 8%. The good news is that this is related to the Fed rate which has recently been cut, I believe that these cuts could help lower what we are paying for our fractional loans. We’ll see, it takes time for the effect to be felt and seen. Let me reiterate, the rates for the fractional loans will not correspond with rates that are based on the price of mortgage bonds like other mortgages, the rates will correspond to what banks are paying for money + their profit margin.
I would also note that the fractional loan rates went higher after this reader closed with his 7%, about a year ago some projects had rates of over 9%.
If you’d like to contact Kelly, send us a note and we’ll pass it along.
Interesting observation here:
“The banks who make these [fractional TIC] loans have to keep the loans on the books until they are paid off. A more common mortgage is bundled up and sent to Wall Street where it is sold, replacing the money the originating bank laid out so it can lend some more and make more money.”
According to SF Chron article, the fractional loans that the banks have to keep on their books have performed very well during this subprime debacle. It is the “common mortages” that are bundled up, repackaged and repackaged beyond recognition and sold to the investors that have defaulted.
But … the individual franctional loans are charged at a higher interest than the common loans?
I dont know about you… but I had always thought the higher the risk, the higher the interest rate, and vice versa. :)
anon8mizer, the point here is that when the loans are sold off. The issuing bank doesn’t have to deal with the loan and it’s risk is grouped with billions of other dollars in loans. The fractional TICs are kept on the books at the issuing (and smaller local) bank. Some of this is, I think, similar to why jumbo’s cost more than conforming loans.
As I am entering into a fractional TIC loan myself as we speak (7%), I am very curious about the author’s perspective on the future of this loan product. I once heard e-loan was entering the business, but now I understand that is not the case. I also once heard that there might be a future where these loans could be packaged and sold off. Any news on that front?
Anon – currently there are only a few banks that are offering these loans, with Circle Bank and The Bank of Marin being the leaders. I spoke with Circle Bank officials the other day at a CAMB tradeshow and even though they would like very much to have a secondary market for this loan product, it just doesn’t seem likely. We have a big demand here, but on the bigger scale there isn’t much of a need.
there is a secondary market for Jumbo loans, it just isn’t as reliable as the lower loan amounts where Fannie Mae is buying them.
7% is a great rate for a fractional loan, congrats!
Kelly,
Four of us would like to get together in this tough economy and purchase a house together- pool our equities in one property, do a little remodeling and almost own the property free and clear. The problem is that a fractional loan would be the best since we would like to not be tied too closely and come and go without having to refinance the whole property.
Do you know of any programs fannie mae or freddie mac may have hidden in the corners somewhere, that I could present to a local lender. I am hearing this idea taken up more and more as the economy continues to tank. We are all seniors but I think this concept is going to catch on with all age groups of singles and maybe a couple here and there.
Fannie and Freddie do not limit the amount of borrowers on any given loan, so one option would be to split the property in .25% interest and split all fees, payments, etc. in 4.
The loan would be based off the lowest credit score of the 4 borrowers, and the income/asset qualifications would be set in place for the property type, SFR, duplex, etc.
I hope this helps. . .
Jeff,
If you’d like to contact “the banker” to learn more, drop us a line at [email protected], and we’ll put you in touch.