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Ditech 125% Freedom Loan… What!?!? 125%!?
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You would think that given the recent rash of foreclosures and the ripples in the subprime lending industry, lenders would be a little more conservative when it comes to handing out loans. In fact, New Century Financial Services, the poster child of the subprime lending industry, just filed Chapter 11 bankruptcy and will be letting go of 2300 employees. Well, I just saw an advertisement by Ditech in which they were promoting their Freedom Loan. With Ditech’s Freedom loan, you can get up to a 125% loan on the value of your home in the form of a home equity loan.
Do you really need a home equity loan up to 125% of your home’s value? If you have so much debt, you probably want to take a serious look at your debt and the steps your taking to reduce it. If you don’t have so much debt, you should take a serious look at why you would want such a large loan. Either way, pimping out your 125% loan in a time when people are talking about bailing out foreclosures is probably a risky thing to do, especially if the borrowers fall behind… then you’re the company that offered a 125% loan after subprimes went under.
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If people want to borrow 125% the value of their home, and company wants to lend them that – more power to them. There are situations that makes borrowing make sense. The problem is not with the lending itself, but with the underwriting. The risk needs to be avoided or priced in.
For what it’s worth, if you look at the fine print on the bottom of Ditech’s web page, they are using a 12.75% interest rate (13.6% APR). That seems pretty high to me, and I would guess, looking at this from Ditech’s point of view, that this is high enough to cover losses when some customers foreclose.
Likewise, looking at this from the customer’s point of view, if you *do* have thousands or even tens of thousands of dollars of high interest rate credit card debt, 12.75% is a lot better rate than the 18%-24% on a typical card.
You’re against freedom loans? Now the terrorists have won.
Hahaha, touche.
They aren’t the only ones who do this. US Bank also offers a 125% LTV loan, and I’m sure there are others. USB at least doesnt charge such an absurd interest rate.
I have been doing some preliminary info searching on mortgages, and at the bank I am leaning towards they are trying to push me towards a 103% loan that rolls the closing costs into the loan. It seems weird to me when a bank almost seems to discourage a down payment. I won’t be surprised at all to see lenders going under with strategies like that. Now 125%, that seems crazy.
I’m sure that there is some assumption on the part of the lender that the value of the property will go up before too many people have a chance to go under. Even though they lent 125% of the value of the property purchase price, they may be able to get back all of the loan .
Maybe 125% is the interest rate.
I know someone who financed their house at 125%. They have now declared bankruptcy and walked away with only the shirt on their backs. It is the second time they have declared BK.
This is “banking gone wild”. They might as well charge 1,004,302% interest – they are never going to get the money anyway.
The only people I’ve known who did this actually made it work: they did a 125% “mortgage” to help finance the purchase of an apartment building a few years ago. The building generated enough income that they were able to pay the loan down to a reasonable level within four years, and refi’ed into a normal 80% LTV loan. They bought a second building last year.
These loans have been around for several years and actually predate weird “option ARMs” and other things.
Not that I’d ever do one of these; I’d rather sleep at night…
The American Dream is gone, Thanks to Ditech and others
It’s great to know that I can maximize my debt to 125% of my house worth and can get bailed out by another bad idea.
My master plan is almost complete…
I agree on the underwriting issue. Banks will create lending policies that they think will protect them, but in reality it’s just red tape that does no good. For example, bank’s thought that appraisals were the “end all, be all” value of a property. Banks would lend tons of money on these appraised values with no idea what the money was being used for. So when their money went out the door to buy more liabilities (which includes buying new stuff to increase your home’s value), the loans are more likely to go bad, especially when you lend this type of money to sub-prime borrowers.
I truly believe that some banks don’t understand what makes a property worth more or less. That’s why they don’t know which deals to take or leave right now. THEY ARE SCARED!
Providing 125% LTV financing on any property is likely risky lending, but could be profitable for he right type of clients. If you’re going to offer this type of financing, it should only be offered to the most creditworthy 1% of clients in the lender’s existing loan portfolio.