Virgin Money Between Relatives

Image: Oshendoschen

It’s Simple

The concept is simple. Aunt Sarah has a lot of money and is willing to lend you some to purchase your home. Virgin Money helps you and Aunt Sarah formalize the deal. This includes servicing the payments, managing the escrow and all the stuff a traditional mortgage servicing company would do. In fact, as Virgin explains it, they have a pretty hands off approach when it comes to how you and Aunt Sarah work out the interest rate and payment schedule. Pretty cool huh, especially if the bank won’t touch your mortgage application.

But what about the idea of not mixing money and family? Thanksgiving dinners can get pretty ugly otherwise. Well, Virgin has already thought of this and promise to help you in that department as well. Here is what they say on their website:

Mixing money and love can be tricky. That’s why we’re here. With Virgin Money managing your private mortgage you don’t need to talk business with your lender unless you want to. Plus, we can help plan, change, or restructure a loan—keeping it, and your relationship, on track. Makes those holiday dinners so much more pleasant.

In today’s credit crunch enabling borrowers to tap into a wealthy relatives cash can potentially help ease the crisis and maybe even be the spark that is needed to boost the real estate market in some areas. However, I’m a bit skeptical of the whole thing. And not from the borrower side either but from from the lender side.

Didn’t We Learn Anything?

This is because the business of lending and borrowing is a complicated business. No matter how much the bigger banks try, mortgage lending is simply not a commodity business. Didn’t we learn anything from the subprime blowup?

When it comes to lending money of the size that is required to close a real estate transaction there is are many factors to consider. Assessing credit worthiness, verifying income/employment, conducting proper appraisal analysis and substantiating liquid reserves are the broader categories a lender looks at when making a credit decision. And we know that fudging any one of these steps can result in loans going south pretty fast. Hence 2008.

I Would Advise

For example, I would strongly advise Aunt Sarah to request a verification of employment the day of closing? Also, she should make sure that any appraisal is conducted by an appraiser in good standing (and not buddies with your borrower). Finally, I would also make sure that Suzie’s son Johnny forward three months of banks statements to ensure that he has enough cash to sustain him through three moths of financial difficulty. And all of these details are really only from the underwriting perspective without even considering the realty perspective.

There are also issues from the servicing side as well. I would also recommend to Aunt Sarah that she figure out her break even point on the loan transaction. Isn’t it fair that she actually get some kind of reward for the risk she has taken. What if her beloved nephew all of a sudden decided to refinance the loan? She’s out the fees she paid (depending on how Virgin Money sets up the fee distribution of course). It it wrong to ask that Aunt Sarah attain some monetary gain from this transaction? If so like any lender she’ll need to carefully balance costs, interest rates, and returns. How does she set aside wanting to help Suzie’s son Johnny with these reasonable goals?

Idle Assets

Quite honestly, I like the idea of tapping to relatives’ idle assets, but I would never do it. It may work for some people. Plus I’m not going to rule out this idea just because it’s new and bold. Also you have to consider that such a transaction may not always involve a savvy cheating borrower and a unsuspecting elderly relative. It could be the other way around. Or, it could be between two very legitimate set of lenders and borrowers.

Regardless of the combination and benefits, I find it very difficult to imagine that the subject would never come into play at family gatherings or what have you. I mean even in a legitimate case lets imagine a situation where the nephew who is borrowing loses his $120K+ engineering job at Intel and stops paying on his mortgage after three months (he had three months reserves). Does Uncle Bob, a financially savvy investor, put his lenders hat on or uncle hat? What about Bob’s brother Charlie – what does he do? See, there was a reason you never mixed family and money.

Risky Business

Am I being too negative? I don’t think so. Aside from the possible family feuds there is considerable financial risk involved in any loan transaction. Banks carefully take these types of worst case scenarios into account when assessing risk and making lending decisions. I just don’t think a clear credit decision can be made when emotions and family relationships are involved. If there is anything we need to learn from the credit crisis of the past few years, its that creative financing which doesn’t properly assess risk is disaster. That you can take to the bank!