Understanding the Market
Pacifica Mortgage Fund’s approach to lending is much safer and more conservative than sub-prime lenders.
The following chart compares some of the differences between Pacifica Mortgage Fund, LLC (an equity lender) and the sub-prime sector:
Neither the Securities Exchange Commission nor any state securities commission has approved or disapproved of the securities sold by Pacifica Mortgage Fund, LLC (“PMF”), or passed upon the adequacy or accuracy of information contained in this website. PMF’s offering is made in reliance on an exemption from registration with the Securities and Exchange Commission provided by Section 4(2) of the Securities Exchange Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
Collateral (the property)
Loan Sales
Loan-to-Value (LTV) Ratio
Appraisal
Income
Pacifica Mortgage Fund
Sub-prime Lenders
Primary source used to evaluate the viability of the loan.
Portfolios its own loans. Profits for the lender depend on the performance
of the loan, so the lender has an incentive to write performing and
secured loans.
No more than 65%; current average is
under 55%
Comprehensive and detailed appraisal process involving an independent licensed appraiser and a detailed evaluation of the appraisal.
The ability of the borrower to pay back
the loan must be verifiable.
Used as a secondary source, with credit score and income being the primary sources.
Heavily reliant on the sale of loans to Wall Street for a premium. Profits for the lender are fee- driven. The lender has incentive to generate many loans, but not necessarily good loans.
As high as 103% LTV
Appraisals often accepted at face value.
Many “no-doc” or “stated income” loans, where neither income nor employment is verified.
There are many different types of real-estate secured loans available in the marketplace.
The principal types are:
1.Conventional loans (also called traditional loans) 2.Government-Insured loans 3.Sub-prime loans 4.Equity/Private-Money loans Pacifica Mortgage Fund is an equity or “private-money” lender (also known as a “hard-money” lender). Our business model is substantially different from both conventional as well as sub-prime mortgage lenders.
Here is some background about the various types of loans:
Conventional Loans:
Conventional loans are made by banks, savings-and-loans, and mortgage companies. Conventional lenders rely heavily on borrowers’ credit scores and income in underwriting a loan. The borrower must have a very good credit rating with a FICO score over 680 and verifiable income. With conventional loans, the principal and interest of the loans are paid in an agreed-upon payment schedule over a fixed amount of time – usually fifteen or thirty years. Most conventional loans are also “conforming” loans, meaning that after origination they can be sold in the secondary mortgage market to the Federal National Mortgage Association (FNMA or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) because they meet certain strict underwriting guidelines.
Government-Insured Loans:
FHA and VA loans are made by private lenders (often mortgage companies) but are federally guaranteed. They are typically used for home purchases. The government’s guarantee decreases a lender’s risk and allows the lender to make loans that might not be made otherwise.
Sub-prime Loans:
The rise of credit scores, computerized lending systems and the ability of banks to bundle low-grade loans and sell them on Wall Street gave conventional lenders a way to offer mortgages to riskier consumers. The idea was to charge a higher interest rate than conventional loans. These types of loans are called “sub-prime.” Sub-prime lenders made loans to borrowers that did not qualify for conventional loans due to issues with their credit scores, income, or ability to prove their income. Sub-prime lenders sold all of their loans to Wall Street investors and got most of their income from up-front fees; and they frequently used very high loan-to-value ratios, leaving very little equity in the properties against which they lent.
During the sub-prime “craze” of the last few years, sub-prime lenders flooded the market with easy-to-obtain (but ultimately, impossible-to-sustain) mortgage products. Borrowers with little or no proof of their ability to pay were given loans of up to 100 percent of their property’s appraised value (and sometimes, even more).
Equity/Private-Money Loans:
Equity or Private-Money loans (also referred to as “hard-money” loans) have different lending standards. They carry higher interest rates and require a higher loan-to-value ratio than traditional or sub-prime mortgages. Unlike traditional or sub-prime mortgages that are defined largely by credit scores and a borrower’s income, equity loans are based predominantly on the value of the underlying asset securing the loan and the borrower’s ability to pay the loan back. Equity lenders protect themselves by requiring that borrowers have substantial equity in their collateral – either their home or investment property. Pacifica Mortgage Fund, for example, has a maximum 65% loan-to-value ratio for each loan. The home-appraisal process is more intense as well. Because equity lenders base their underwriting on the underlying collateral, they analyze property and the local market more intently than do traditional lenders. Though private-money mortgages can stretch to 30 years, borrowers tend to use them as a short-term tool. Most of them are paid off within two or three years as borrowers find lower-cost, traditional mortgages to replace the private-money loans.
Now, with the demise of the sub-prime industry in recent months, equity lenders like Pacifica Mortgage Fund, LLC are seeing a significant increase in loan applications from very desirable borrowers. As reported recently by the Wall Street Journal, the fall of the sub-prime lending business has created “a void” for borrowers, and equity lenders are filling that void. Hard-money lenders are pretty much the only source of capital for many people.” (For a link to this Wall Street Journal article describing the favorable climate for private-money lenders, click here).
To learn more about why the sub-prime mortgage market failed, click on the following links. Each provides a humorous but extremely informative explanation of why the sub-prime mortgage market was doomed to failure:
Why The Sub-prime Mortgage Market Failed:
310-204-5714
scott@pacificafirst.com
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Pacifica Mortgage Fund, LLC. | 11141 W Washington Blvd, Culver City, CA 90232 | 310-204-5714 | scott@pacificafirst.com
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