As is the case with many professionals, commercial lenders also have their own particular mortgage jargon. It’s usually reserved for informal discussions among lender colleagues. Terms are often abbreviations, or some form of condensed version of a longer and more accurate description. “Alt A“, (Alternative class mortgage, somewhere between Prime and SubPrime in quality), “VRM” (Variable Rate Mortgage) , and “IO” (Interest Only loan) are but some that come to mind. A loan may require the payment by the borrower of “beeps” or “bps” too, which are basis points, or a hundredth of a percent. A mortgage with a “floor” rate would be a loan which rate cannot fall below a prescribed level.
Skin in The Game?
Some terms are almost self explanatory. A lender may tell their colleague that a particular borrower has “skin in the game“. No surprise, it means the individual has their own money tied up in the project. Another term is a loan that is “under water“. Can you guess? The borrower borrower has debt exceeding the value of the security. The lender would “take a bath” if they had to take over the property! Other terms are less obvious to an outsider, for example; “Balloon” which for the uninitiated, refers to the lump sum that is owing, at the end of the term of the mortgage.
Ninja’s South of the Border!
Our American lender friends have their own distinct dictionary of terms. That took me some getting used to, when I was previously lending south of the border. I had to quickly get to know “Fannie Mae“, and “Freddie Mac“, and know the difference between “Hard Money“, “Jumbo Loan” and a “Piggy Back Mortgage“. During the excesses of the early 2000’s, our southern cousins were entertaining “Ninja” loans too! No Income, No Job, and No Assets. Also known as a “No Doc” loan, lenders did not require any income, asset, or job verification. May those lenders rest in peace!
It’s Got Hair on It!
Perhaps the most unusual term in our mortgage lender lexicon is “It’s Got Hair on It!” It is a term typically used to describe a task or problem that is not clean, or neat, or without some degree of complexity. For a mortgage lender, it quite simply means a deal that will be tough to get approved!
A deal with “hair on it” could be a property in poor condition, a borrower with weak credit, a property with poor leasing, or any combination of factors which will make the lender’s recommendation to their Credit Committee a bit of a tough sell. In these circumstances, lenders, if they are able to move ahead at all, will typically look to “shore up” the deal. This may take the form of additional security (another property, a stronger borrower or partner), or more stringent underwriting. Perhaps a lesser loan amount, shorter amortization, and/or an interest rate more reflective of the additional risk. If your lender tells you your deal has “hair on it”, be prepared because the razor is coming out!
Some deals however, are so difficult to underwrite, that the lender is well advised to politely decline any involvement. I recollect having a lengthy discussion with a gentleman years ago who wanted a commercial mortgage on a Pizza Parlor that he wished to turn into a House of Worship. I am not sure that the lender’s lexicon had a term which adequately described the risk associated with that particular transaction. That was a whole lotta hair and a loan “haircut” wasn’t going to do it!