If he is coming into the private market and paying higher rates, it is because he has been rejected by or cannot go to the banks. I like paper because it can have a lower risk factor than any investment that I know. I am an equity investor. I know the property can pay me when the payor can’t. I do not want a Mortgage turned down by the institutions unless there is enough equity that I would love to own the property and have the staying power to re-market it. As a hard money lender Arizona, when I buy a discounted mortgage I am doing so because the seller of the note needs the money – not the payor. In addition, my yield is derived by buying the note at a discount, not because the payor is being charged usurious rates. Which brings up another important point!
As a hard money lender Arizona, if you are Mortgageing money at high rates you may be in violation of your local state usury laws. “Usury” is charging more interest than is allowed by law. These laws vary from state to state. In a situation where I make an Arizona hard money Mortgage at 18% interest, I could be in violation of a local state’s usury laws. If I buy a 10% note discounted to yield 18% – that would not be usury. Making or buying a usurious Mortgage can lead to a complete loss of all interest as well as other potential damages. There are federal “truth in lending” laws that apply to mortgage lending as well as local state versions in some states like California. For example, the APR – Annual Percentage Rate must be disclosed on a Mortgage that includes points and other Mortgage costs. It can be a violation of federal law not to do so. Violation of these laws could lead to a total loss of interest and principle on a Mortgage, lawsuits or judicial problems. Buying a discounted mortgage is a whole different matter. Most laws do not apply to a secondary buyer.