I was at a closing today which is a somewhat rare occasion these days, we got in to a discussion about lending policy and what the Government will seek to control in the future.

There was a mortgage broker, Settlement attorney, buyers and buyers agent (me) at the closing. The buyer said wow there are a lot of fees, escrows, applications charges, credit verification appraisal fees Etc.. Just wait until the new settlement procedure for HUD-1, begins in a few weeks.  We talked about pre-payment options and the lack of penalties in this loan.That's when The closing attorney said he had a deal going on a commercial loan with a principal balance of $200,000 and had requested a pay-off for the closing. The note had a 3 year pre-payment clause, and the amount required to pay-off the loan was $400,000. After the shock wore off, the seller said "what can we do here, there is no where near that amount of money in the sale"? The lender said "hey...you signed the note, with this clause why should we do anything else"?

The Attorney called the bank's director, and said this property owner can't pay this penalty, they are prepared to let you foreclose and the buyer will take their chances at the foreclosure Auction (you will go through all of the expense to get the same pay-off or maybe less).

There are a lot of new rules being considered but the vast majority of them affect residential property...with commercial notes still being part of the free market economy...the wild west, should we be worried about these loans? We will be as people walk away from them with no "modification plans" to right these ships.

There are lots of rural housing, farmers home and other first time home owner plans that impose a penalty if you sell with in the first few years of your ownership. These penalties are based on profit, and many times are used to help fund the capitol of the programs themselves. This is a hand up, and if you are ready to move on sellers know they are giving money back to the next generation of people benefiting from these programs. The commercial penalties are pure profit for profits sake.

Hey the banks are taking the risk let them make a profit...or this isn't fair and represents a usury rate of return?

   People should pay what they owe...but shouldn't there be some common sense?

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11 Comments on Inflicting a mortgage penalty in a down market ... good luck - with that!

DEC
14
2009
424,967 Points 39 Featured Posts Hit Router Called Shot Master

Steve - The other "unknown" with commercial loans is they are often really for a year, with amortization over 15-25 years.  Each year the commercial lender may decide if they will renew!  That is a refined discussion on the commerical usery rate of return.
5:58pm • #1
1,358,739 Points 243 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Steve the pre-payment penalties were put in place for a time period that banks/lenders felt that the loan needed to be on the books in order for them to be able to make a profit on their money.  I understand the principal behind that, but never did like it.  Unfortunately the people that agreed to these pre-payment penalties were willing to do whatever they had to do to get the loan.  And even though I do not like pre-payment penalties and don't do loans with them, it is a contract that both sides agreed to, and no matter how bad the contract it needs to be honored.
6:09pm • #2
800,721 Points 43 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp Called Shot Master

George, The thing that got to me was an attorney saying "the seller will just let it go to foreclosure...and take that", This isn't their home and if the payoff isn't flexible good luck getting another buyer.
7:12pm • #3
1,115,960 Points 101 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

When I was building my new office I got approved for a pretty good rate fixed for 15 years.  When I read the fine print and saw the prepenalty fines I nixed that idea and went with a local bank.  It's fixed only for 3 year periods, but I can live with that better than the prepayment penalty.  That's just WRONG.
8:23pm • #4
800,721 Points 43 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp Called Shot Master

Tammy, It's funny what some people are willing to settle for to get what they want, only to find out the tragedy of their mistake later.
8:45pm • #5
1,402,520 Points 54 Featured Posts Outside Blog Called Shot Master

I expect to see more payoff penalties in the future.  Something i read a while back steve.  I will see if I can find it.  It was Very interesting!
8:47pm • #6
145,997 Points Localism Sponsor Attended Rain Camp

I think the banks are hoping that the buyers that sign for the loan in the first place will see the prepayment clause and think twice... I agree with you though... in this environment...good luck with that.
11:47pm • #7
DEC
15
2009
560,607 Points 18 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

It pays to read the fine print...there might not be a government hand in here...it's business and whether large or small the government doesn't seem to mind putting the screws to them.
5:21am • #8
628,086 Points 41 Featured Posts Localism Sponsor Outside Blog Hit Router Called Shot Master

I have known a seller or two to get hit with the pre-payment penalty - they had NO idea!  Folks, you have to READ what you sign!
8:57am • #9
800,721 Points 43 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp Called Shot Master

Leesa, there is always an excuses...when it doesn't work out.
8:21pm • #10
DEC
16
2009
253,147 Points 23 Featured Posts

that's a pretty hefty penalty for the seller not to be aware of.

commercial buyers/owners should be more sophisticated than to get caught like that.
7:28am • #11


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Steve Loynd/ 800-926-5653, White Mountains NH

Lincoln, NH

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Steve Loynd, Alpine Lakes Real Estate Inc., Loon Mt, NH.

Address: 7 Linwood Plaza, Box 1135, Lincoln, NH, 03251

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