Problems with the FHA will Result in More Profits for Private Mortgage Investors:- In a recent “stress test,” the Federal Housing Administration performed poorly, with potential losses recorded as high as $115 billion.  Should that happen, it will be much more difficult for Americans to obtain mortgages from traditional lenders such as banks,private mortgage notes credit unions, and mortgage brokers.  That will increase the opportunities, and thus the profits, for those funding private mortgage notes.

 Private mortgage notes are loans that investors make for the purchase of real estate.  It can be an individual financing a single real estate transaction, or it could be money from a consortium of investors funding a wide variety of properties.  Private mortgage notes can be very lucrative, with yields as high as 12%, the average annual return reported by Jerry Cohen, President and Founder of EquityBuild, a real estate investment firm.

The Federal Housing Administration does not make loans for properties, but rather guarantees mortgages.  That allows for the borrowers to get in with smaller down deposits, due to the backing of the Federal Government (and thus the American taxpayer).  This is much needed as traditional lenders have greatly tightened the standards for a mortgage as a result of The Great Recession, including the requirement for bigger down payments.  Last year, the Federal Housing Administration provided its government backing for one-third of the mortgages in the United States, as reported in an article in The Wall Street Journal by Nick Timiraos, “FHA Worst-Case Loss: $115 Billion.”

As a result of this burgeoning presence, any future difficulties with the Federal Housing Administration will make it much tougher to obtain a mortgage in the United States.  That will particularly be so for mortgages for second homes and investment properties, which are always more challenging to obtain.  From that market shift, there will be a greater demand for private mortgage lending.

With this increasing demand, those funding private mortgages will be able to register more profits.  The interest rates charged will be higher.  The fee income from loans will also be more lucrative.  This will not drive away business as real estate investors are willing to work with higher costs so long as the deal is completed.

That is why profits from real estate have created about 90% of the world’s millionaires over the last two centuries.  During The Great Recession as stock and bond prices plunged, the level of rental income in the United States actually rose.  Those buying real estate are well aware of the profits from investing in properties, which is why there has always been such a high demand for private mortgages.

For those financing private mortgage notes, this demand will stay high.  As a result, so will the profits.  The real estate market is strongly rebounding: indicators point to it continuing to improve.  But should that reverse as woes arise for the Federal Housing Administration arise that result in fewer being able to obtain mortgages from traditional lenders, it will be private mortgage note investors who benefit from stepping in and providing a needed financial service in funding loans for properties.